What happened
Shares of cloud-based communications expert RingCentral (RNG 2.10%) played a sad tune on Tuesday. The company reported solid earnings on Monday evening, but the mildly bullish financial update was undermined by a shakeup in the C-suite. RingCentral's stock opened Tuesday's trading session 11% lower and continued to droop throughout the day. The plunge had grown to 18.6% by 3:45 p.m. ET.
So what
Let's do the good news first.
Compared to the year-ago period, RingCentral's top-line sales rose 11% in the second quarter to $539 million. As usual, the more profitable class of mid-market and enterprise clients increased their order volumes faster than other customers.
Hence, adjusted operating margins widened to an all-time high of 19.4%. Adjusted earnings nearly doubled year over year, rising from $0.45 to $0.83 per diluted share. Revenues came in 0.6% above Wall Street's consensus estimates. In addition, analysts expected bottom-line earnings of $0.75 per share, and RingCentral posted a $0.83 profit instead.
Now, the bad news: RingCentral's third-quarter and full-year earnings guidance.
The official revenue estimates aligned with recent growth rates and the current Street view, but the bottom-line guidance aimed just below your average analyst's projections. The company has recently drawn funds from a term loan facility, raising quarterly interest fees.
But we haven't reached the worst part yet. RingCentral will soon run under new management, and nobody saw the change coming. Founder and longtime CEO Vlad Shmunis will step down from the corner suite by the end of August, focusing on a smooth transition and an exclusive role as executive chairman. RingCentral's new CEO will be Tarek Robbiati, CFO of Hewlett Packard Enterprise since 2018.
Now what
RingCentral's incoming CEO is hardly a downgrade, given his decades of top-level experience in a variety of industries. I don't always love to see financial experts taking the wheel of a technology business, but Robbiati is quite the renaissance man, with CFO and CEO stints across the telecom, financial services, and technology consulting sectors.
And it's hard to argue with the technical acumen of a six-language polyglot with a master's degree in nuclear physics. It also helps that he has served on RingCentral's board of directors since last year, getting a feel for the business before taking over.
All things considered, I'm sure Robbiati is a great fit for RingCentral's CEO role.
Still, I understand why this move raises the hackles of RingCentral's investors today. The company was doing fine under the visionary leadership of Shmunis, carving out a respectable share of a booming digital communications market. But Tarek Robbiati is arguably best known for his turnaround stories. For example, he was the CFO that helped Sprint close the $26 billion merger with T-Mobile US.
Therefore, Robbiati's mere presence seems to suggest something wrong under RingCentral's hood. Time will tell, of course, but this unexpected CEO change could mean more than it seems to.
