Fitch Upgrades RingCentral, Inc.'s IDR to 'BB+'; Outlook Stable

Published: 2025-07-09 05:07:13 ET RNG

Published on 07/09/2025 at 05:07

Fitch Ratings has upgraded RingCentral, Inc.'s Long-Term Issuer Default Rating (IDR) to 'BB+' from 'BB'.

The Rating Outlook is Stable. Fitch has also upgraded the company's senior unsecured notes to 'BB+' from 'BB' with a Recovery Rating of 'RR4'.

The upgrades reflect RingCentral's focus on improving profitability in recent years. While the company's exposure to the small- to midsize-business (SMB) and middle markets creates some sensitivity to macroeconomic softening, which may impact near-term results, financial leverage has declined and cash generation has improved significantly. Fitch expects leverage will remain low, at 2.0x or below, over the rating horizon.

RingCentral, Inc.'s ratings are supported by its strong Unified Communications as a Service (UCaaS) and Contact Center as a Service (CCaaS) solutions. Subscriptions to these services result in a large base of recurring revenue, representing around 95% of total revenue. Annualized exit monthly recurring subscriptions show ongoing growth, increasing again in 1Q25.

Key Rating Drivers

Improved Leverage: EBITDA leverage fell to a low 2.6x as of March 2025, as profitability improved over the past year, driven by solid revenue growth and a tighter focus on operating expenses. The company's plan to rationalize costs, implemented in 4Q22 and continued through 2024, should enhance efficiency, leading to an adjusted EBITDA margin in the mid-20s. Fitch believes leverage could trend well below 2.0x by YE 2026 via EBITDA growth and the possibility of repayment of maturing convertible notes in 2026.

Fitch has also reviewed the company on FCF-based leverage metrics, including (CFO-capex)/debt, which has improved in recent years, ranging from negative in 2021 to 23% in 2024 as FCF rose. Fitch projects this leverage metric will stabilize in the mid-30s over the next few years.

Improved FCF Profile: Fitch expects FCF margin to stabilize in the mid to high-teens in the medium term with improving EBITDA to FCF conversion. Fitch forecasts RingCentral will generate at least $450 million of Fitch-defined FCF annually in fiscal years 2025-2027, with the majority going toward investing in innovation, debt reduction and share repurchases. The stable FCF generation provides RingCentral with ample financial flexibility for investments to further strengthen its capabilities around an artificial intelligence-first multi-product strategy.

Significant Recurring Revenue: Approximately 95% of RingCentral's revenue is recurring, providing some visibility into its revenue stream, and its net dollar retention was over 99% at end-1Q25. Annualized exit monthly recurring subscriptions improved to $2.5 billion by YE 2024, from $2.1 billion at YE 2022, further rising by 7% yoy in 1Q25.

SMB Exposure: RingCentral's cloud-based communication solutions have seen significant adoption by SMB customers across its UCaaS and CCaaS business. While the SMB clientele could be more sensitive to economic cycles that could result in higher churn, this is somewhat mitigated by its mission-critical communication and customer engagement platform, which supports the trend towards remote and global workforces.

Competitive Environment: There is intense competition in the UCaaS and CCaaS markets due to fragmentation and limited barriers to entry. The market requires constant product innovation stemming from ever-changing business and consumer needs. RingCentral maintains its strong position for SMB and mid-market customers through its product-led growth and diverse offerings, which provide significant value to users.

Evolving Industry Demand: With hybrid work, RingCentral's user base can use its products to communicate across devices, including smartphones, tablets, PC's and desk phones. This flexible communication method has helped employees become productive in ways that traditional on-premise systems cannot. RingCentral's solutions enable distributed workforces, improving the capability of remote offices through its cloud-based software. Its location-independent nature enables business communication with a single identity, supporting multinational workforces globally, while reducing the complexities of on-premise solutions and private branch exchanges.

Near-Term Maturities: RingCentral has $609 million of convertible notes maturing in March 2026. Fitch believes the company has sufficient sources of liquidity to address these maturities. However, if the company chooses to refinance its debt Fitch expects that it will be able to refinance the debt, absent any material disruptions in the capital markets. Management has indicated its commitment to reduce its gross debt level to below $1 billion by the end of 2026.

Peer Analysis

RingCentral is a publicly traded company that offers cloud-based communications and collaboration software solutions. Its software offerings utilize AI-powered conversation intelligence to improve business outcomes.

RingCentral's 'BB+' IDR reflects its size and scale, as well as its credit profile. RingCentral's rating is the same as Open Text Corporation (OTEX; BB+/Stable Outlook) and Gen Digital Inc. (GEN; BB+/Negative Outlook). Compared with OTEX and GEN, RingCentral has smaller size and lower EBITDA margins.

Fitch expects leverage for OTEX and GEN to decrease over the next several quarters, potentially reaching around 3.5x by end-2025, while we anticipate RingCentral's leverage to fall below 2.5x in the same time frame. Fitch estimates that RingCentral's adjusted EBITDA margins will be around mid-20s%, whereas OTEX may have EBITDA margins in the 30's% and GEN will be around 50s%. GEN is different than RingCentral and OTEX in that it serves consumers.

Key Assumptions

Revenue growth in the mid-single digit range;

EBITDA margins maintained in the mid-20s over the rating horizon;

Capex maintained in the historical range of 3.5% as a percentage of revenues;

Share repurchases continue throughout the rating horizon;

Maturing 2026 convertible notes are partially refinanced with debt;--Fitch assumes tuck-in acquisitions of $100 million in total throughout the rating horizon.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Fitch's expectation of EBITDA leverage above 3.0x on a sustained basis;

--(CFO-capex)/debt below 10% on a sustained basis;

Evidence of negative organic growth driven by elevated churn and erosion of EBITDA and FCF margins;

Significant debt-financed acquisitions or share repurchases that significantly weaken the company's credit profile for a prolonged period.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Increased market share position, evidenced by significant revenue and EBITDA growth, coupled with greater diversification across end market;

A public commitment to sustain EBITDA leverage below 2.5x.

Liquidity and Debt Structure

As of March 31, 2025, RingCentral had liquidity consisting of $154.4 million of cash and cash equivalents, $225 million of revolver availability, and access to $350 million of undrawn capacity on its delayed draw term loan. The company fully repaid its $161 million 2025 convertible notes upon maturity in March 2025. Remaining maturities include $609 million of 2026 convertible notes, $365 million of Term Loan due 2028, and $400 million of senior notes due 2030. RingCentral has publicly stated that it is committed to further reducing its gross debt level to below $1 billion by the end of 2026.

Fitch notes that RingCentral has $200 million of series A preferred that is treated as 100% debt. The preferred equity series include a provision requiring redemption for cash upon a Change of Control. Under Fitch's 'Corporate Hybrids Treatment and Notching Criteria,' this negates equity credit.

Issuer Profile

Ring Central, Inc. offers cloud-based business communications and collaboration software solutions. Its software offerings also utilize AI-powered conversation intelligence to improve business outcomes.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.