RingCentral beats and raises; its $6.50 profit per share is mostly tax

RingCentral sells subscriptions to business communications software. Most of its revenue comes from RingEX, its flagship business communications platform, and its contact-center software made up over 10% of revenue in the second quarter.¹ In the third quarter, subscriptions were 97% of total revenue. In the second quarter, about 88% of revenue came from North America, and the company says a significant portion comes from small and medium-sized businesses.² It sells directly and through a large network of agents, brokers and resellers. It names Microsoft, Zoom, 8x8, Dialpad, GoTo, Twilio and Amazon among its rivals.³

The October 22 release covers the quarter that ended September 30, 2026.¹ Revenue was $676 million in that quarter, up from $639 million a year earlier, and the company now expects $2.650 billion to $2.657 billion for 2026.² Growth has sat near 6% all year: subscriptions grew about 5.8% in the second quarter and about 6.0% in the third. The company's own risk factors say revenue growth has slowed and that revenue may decline in the future.³

Debt was the worry going into 2026. At the end of 2025, $624.2 million of debt was due within a year.¹ On March 12, 2026, the company borrowed $600.0 million under its term loan, and it paid off the remaining $609.1 million of 2026 convertible notes in cash in March. In February it had set a goal to reduce gross debt to $1 billion by the end of 2026.²

Owners also started getting cash back. The board started the company's first-ever quarterly dividend in February 2026 and raised it to $0.125 a share in July.¹ The company bought back stock in the spring at average prices of $38.74 a share in April and $42.54 in May.²

The tax entry was flagged ahead of time. In its July quarterly report, the company said it held a full valuation allowance against its American net deferred tax assets, and that reversing it in the foreseeable future was reasonably possible.¹ A deferred tax asset is a future tax saving, mostly from past losses that can offset future taxable profit. At the end of 2025 the company had $1.3 billion of federal net operating losses and $1.0 billion of state ones.²

Vlad Shmunis is founder, chairman and chief executive. Class B shares carry 10 votes each against one for Class A, and Class B holders control about 57% of the vote.

The stock climbed into the report: RNG closed at $72.46 on September 15 and at $82.415 on October 21.¹ Officers sold along the way under pre-set trading plans, and 10% holder Vlad Vendrow also filed notices to sell, including 37,281 shares in mid-September, with no trading-plan date given.² His earlier notices covered 18,791 shares on August 21 and 8,738 on September 4.³ Shmunis sold 26,721 shares in early September at $70.322 to $77.001 under a plan meant to comply with the insider-trading safe harbor, and President Kira Makagon sold 36,185 shares at $70.11 in mid-September under a plan adopted June 12.⁴ Separately, the law firm Levi & Korsinsky said on October 8 that it had started an investigation of possible breaches of fiduciary duties at RingCentral. That is a law firm's notice, not a lawsuit or a court finding.⁵

The quarter topped the July ranges for revenue, adjusted operating margin and adjusted earnings, while the GAAP operating margin of 8.0% landed inside the 7.2% to 8.6% guided. Subscriptions revenue of $653 million was $4 million above the top of the July range, and adjusted earnings of $1.33 a share topped the $1.30 high end.¹ Under GAAP, the standard accounting rules, operating margin rose to 8.0% from 4.8%, and operating income rose to $54 million from $31 million. Adjusted operating margin, which leaves out stock-based pay and some other costs, reached 24.7%.²

The gap between those two profit measures is large. Adjusted operating income of $167 million was $113 million more than GAAP operating income of $54 million.¹ The biggest piece is stock-based pay of $66.3 million, about 9.8% of revenue. Restructuring costs added another $12.9 million, against $2.5 million a year earlier.²

Below operating income sits the tax entry that drives the headline number. The third-quarter benefit from releasing part of the valuation allowance was $544.9 million, and net income came to $569.7 million against $17.6 million a year earlier.¹ The deferred tax asset on the balance sheet jumped to $546.9 million from $2.1 million. The stockholders' deficit, meaning negative book equity, shrank to $12.4 million from $588.1 million.² Management called the benefit non-cash and said it does not expect material changes to near-term cash taxes. The adjusted figures leave the benefit out, and the company gives no GAAP per-share guidance because of the inherent uncertainty and complexity.³

Excluding the entry, GAAP earnings were $0.28 a share, up 47.4%.¹ The benefit equals about 7% of the company's roughly $7.5 billion market value at $89.78, and none of it arrived as cash.²

The cash numbers carry the bull case. Cash from operations was $180 million, up 18.8%, and free cash flow, defined as operating cash minus capital spending and capitalized software, was $157 million, up 21.0%.¹ So far this year through September, free cash flow was $477.6 million. The company raised its 2026 free cash flow outlook to $620 to $630 million, from $615 to $625 million in July and $580 to $600 million in February.²

One caution: free cash flow starts from operating cash, where stock pay is added back because no cash is spent. This year through September, that add-back was $176.4 million.¹ Taking the midpoint of the free cash flow outlook and subtracting the midpoint of the $240 to $245 million of expected 2026 stock pay leaves about $383 million.²

Debt is now manageable. At September 30 the company carried $48.9 million of debt due within a year and $961.7 million beyond that, about $1.01 billion in total, against $110.1 million of cash.¹ That is net debt of about $900 million. Management said gross debt was under $1 billion as of the call, ahead of its schedule.²

Management puts net leverage at 1.3 times. Our check agrees: net debt is about 1.3 times adjusted EBITDA over the past year, about $706 million, where adjusted EBITDA is adjusted operating income before depreciation and amortization.¹ Against GAAP operating income of about $196 million over the same span, which still bears stock pay and amortization, net debt is about 4.6 times.² Third-quarter GAAP operating income of $53.9 million covered $17.1 million of interest about 3.1 times, and adjusted EBITDA covered it about 11.1 times.³

Little comes due soon. Management said there are no debt maturities until 2030; the term loan matures on September 11, 2030, and the 8.5% notes on August 15, 2030.¹ The term loan still needs quarterly principal payments, which is why $48.9 million sits in the current portion. Cash of $110.1 million plus $305 million of undrawn credit gives about $415 million of liquidity.² The bank loan has two tests checked at each quarter end, a maximum net leverage ratio and a minimum interest coverage ratio, and the company was in compliance at June 30.³

Both sides of the third-quarter debt moves: the company spent about $156 million, including premiums, buying back senior notes, drew the last $50 million of its term loan, and paid about $12 million of scheduled term-loan principal.¹ Management said repaying the callable 8.5% notes cut gross debt by just over $110 million. The cost included an early-repayment loss of about $8.3 million in the third quarter.² In return the company shed fixed 8.5% debt, while its term loan floats at a benchmark rate plus 1.375% to 2.375% and carried a 5.5% effective rate in June.³

With cash going to debt, buybacks slowed. The company bought about 0.4 million shares for $18 million in the third quarter, after spending $92.1 million in the second quarter.¹ About $309 million of buyback authorization remains.²

The dividend of $0.125 a share costs about $10.5 million a quarter on 83.9 million basic shares, and it is also paid on the convertible preferred as if converted.¹ This year through September, dividends paid were $23.3 million against free cash flow of $477.6 million, so the payout is small. The board can reduce or stop it at any time.²

Dilution still matters. Diluted shares were 87.7 million in the third quarter, down from 92.0 million a year earlier, but fourth-quarter guidance assumes about 88.7 million.¹ Stock pay is guided at $240 to $245 million for 2026, about 9% of revenue, against management's goal of 3% to 4% within three to four years.²

Who is paid first: the bank debt is secured by substantially all of the company's personal property, which puts it ahead of the unsecured notes on that collateral.¹ The $199.4 million of Series A convertible preferred stock ranks ahead of common shares in a liquidation and would be redeemed at $1,000 a share in a change of control. Noteholders can also demand repurchase on a change of control.²

The company's own forward case, which is a set of goals and not results: for the fourth quarter, subscriptions revenue of $653 to $659 million, total revenue of $673 to $680 million and a GAAP operating margin of 13.3% to 14.7%.¹ Much of that jump from 8.0% comes from lower charges, not operations: guidance carries $15 million of acquired-intangible amortization in the fourth quarter, against $34.1 million in the second, and about $1 million of restructuring, against $12.9 million in the third.² For 2026 it guides adjusted earnings of $5.07 to $5.12 a share and a GAAP operating margin of 9.2% to 9.6%. Over the medium term, management targets a 20% GAAP operating margin.³

Management also points to AI products. Customers using a paid AI product account for close to 15% of annual recurring revenue, double a year ago, or over $400 million, and its AI Receptionist has more than 22,000 customers.¹ On the same call, management said AI-answered calls are still a very small share of its traffic and that partners adopt more slowly. It gave no formal 2027 guidance, and the transcript we used is automated and may contain errors.²

At $89.78, RingCentral's market value is about $7.5 billion on 83.9 million basic shares, or about $8.0 billion on the 88.7 million fully diluted shares in its guidance.¹ That is about 17.6 times the midpoint of 2026 adjusted earnings guidance. The midpoint of free cash flow guidance is about 7.8% of fully diluted market value, and adding net debt, the company trades at about 12.6 times adjusted EBITDA over the past year.²

The bull case: the company has raised its free cash flow outlook at each report this year, from $580 to $600 million in February to $590 to $605 million in May, $615 to $625 million in July and $620 to $630 million now.¹ Debt is down to about $1 billion with no maturities until 2030, monthly net retention is above 99%, and a free cash flow yield near 8% leaves room for both dividends and buybacks.²

The bear case, strongest first. Growth is slow at about 6% in a market where Microsoft, Zoom and others compete, and the company warns revenue may decline.¹ The adjusted numbers flatter: stock pay near 9% of revenue is left out, and free cash flow minus stock pay is closer to $383 million than to the $625 million midpoint.² AI cuts both ways, since the company says AI could make some of its products redundant or obsolete, and it depends on NICE Ltd., a vendor whose products it resells.³ Finally, the stock rose about 14% from September 15 to October 21, before the report, and insiders had sold shares in September, some under pre-set plans.⁴

Dated events: the $0.125 dividend goes to holders of record on November 6 and is paid on November 20, and the annual meeting is on December 7.¹ The third-quarter 10-Q was not yet filed on October 22; last quarter's came on July 23, the same day as the results.² Fourth-quarter results should follow in February; last year's came on February 19.³

What would prove the bulls wrong: fourth-quarter subscriptions revenue below the $653 to $659 million guided, or 2026 free cash flow below the $620 to $630 million range, both known at the February report.¹ What would prove the bears wrong: a 2027 outlook with faster growth and stock pay moving toward the 3% to 4% goal.²

The filings describe the bank loan's two quarterly tests, a maximum net leverage ratio and a minimum interest coverage ratio, but not their levels, so the headroom at 1.3 times cannot be measured.

The third-quarter release gives total debt lines but not how much of the 8.5% notes due 2030 remain, or the term loan balance at September 30. Management gave only the roughly $110 million cut from repaying the notes.

Management said multiple years remain on its contract with NICE but has not disclosed the specifics.

Management gave no formal 2027 guidance, so next year's growth and stock-pay plans are not set.

The release does not explain why fourth-quarter guidance assumes about 88.7 million diluted shares, above the third quarter's 87.7 million.

Our price file begins in mid-September, so this report cannot show the stock's high and low over the past year.