Ringing Wall Street

Contact:Tejas Venkatesh Scott Denne

Virtual phone systems vendor RingCentral revealed its prospectus earlier this week, likely setting up an IPO for next month for the 14-year-old company. The offering comes as RingCentral continues to evolve from a hosted answering machine service to a full virtual phone systems provider. RingCentral now enables voice, text and fax communication across multiple devices, including smartphones, tablets, PCs and desk phones.

The four-year-long transition is paying off. RingCentral generated $73m in revenue in the first six months of the year, up nearly 40% from the same period last year. Advances in broadband communications have resulted in rapid growth of the number of business lines hooked up with VoIP. According to the Federal Communications Commission’s latest local telephone competition report, VoIP business lines grew 106% between the end of 2009 and last summer. Further, there’s still a lot of room for growth, as only 10% of business lines are currently VoIP-enabled.

In addition to expanding its product portfolio, RingCentral is also looking to move upmarket. The company, which counts 300,000 customers, mostly caters to businesses that have less than 10 employees. As it continues to grow, RingCentral is looking to land larger customers. That strategy makes sense because small businesses are more likely to disappear, and are more expensive to support than bigger companies with an in-house IT team.

When RingCentral hits the market, we figure it will command a premium valuation compared with rivals due to its superior growth. Its primary competitor 8×8 currently trades at roughly 6x trailing sales. But that company, which is smaller than RingCentral, only grew 19% in the first six months of the year – just half of RingCentral’s rate over the same period. As a result, we believe 7-8x trailing sales would be a good starting point for RingCentral’s valuation. Slapping that range on RingCentral, which generated $136m in sales for the year ended June 2013, would value the company at about $1bn.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.