RingCentral is facing an increasing debt burden, but - rather than pay it off - it has been plowing its cash into repurchasing its stock at higher prices than it sold them for.
This strategy is not new. It has been buying back its stock for the past two years in the hope that its free cash flow would be enough to repay its debts.
As analyst Michael Wiggins De Oliveira reports in Seeking Alpha, the problem is around $539 million of its debts will mature in two years. One year later - a further $520 million will be due for conversion.
During the company’s Q1 2023 earnings call, Sonalee Parekh, Chief Financial Officer at RingCentral, laid out its growth strategy: "We shared last quarter that we would double free cash flow generation from a normalized level of $140 million in 2022 to at least $280 million by 2024 by fiscal year-end.
"I am now confident we can achieve this level of free cash flow generation much earlier than the end of fiscal year 2024.
And this level of free cash flow generation gives us a lot of flexibility around capital allocation, and importantly, addressing our convertible debt in a cost-efficient manner.
Unfortunately, RingCentral's revenue growth has consistently dropped by between three and six percent for the last five quarters.
Indeed, it has fallen from 33 percent in Q1 2022 to 14 percent in Q1 2023. Next quarter, the vendor estimates this percentage will drop to 11 percent.
At this rate, even if RingCentral succeeds in hitting its revenue targets, it would still not be enough to pay off its debt of over $1 billion.
By its own calculations, therefore, RingCentral is significantly overleveraged - as De Oliveira points out.
To make matters worse, RingCentral has been continuing to dig its debts even deeper.
Although the company announced that it had repurchased around $461 million of its 2025 convertible notes, its balance sheet only held around $275 million, which is $185 million short.
A large portion of this debt must have been paid for by another $400 million loan that it took out in Q4 2022.
8x8 Merger: A Bridge Too Far?
Since 2022, both RingCentral and 8x8 have suffered a 75 percent tumble in their stock prices. For RingCentral, this resulted in a ten percent layoff of its workforce