RingCentral, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2021; comparisons are primarily with the three months ended March 31, 2020. Amounts are in U.S. dollars. The financial statements are unaudited.
Business context
RingCentral provides cloud-based communications, video, collaboration, and contact-center SaaS. Subscription services generated 92% of first-quarter revenue. Management attributed growth to new customers and expansion within existing accounts, particularly mid-market and enterprise customers, alongside a work-from-anywhere shift.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $352.4 million | $267.5 million | +32% |
| Subscription revenue | $325.2 million | $243.1 million | +34% |
| Gross profit / margin | $255.4 million / 72% | $194.1 million / 73% | Margin down 1 percentage point |
| Operating expenses | $297.4 million | $219.6 million | +35% |
| Operating loss | $(42.0) million | $(25.5) million | Loss widened |
| Net loss | $(0.2) million | $(60.7) million | Improved by $60.5 million |
| Operating cash flow | $37.0 million | $13.1 million | Improved by $23.9 million |
| Non-GAAP free cash flow | $23.2 million | $12.7 million | Improved |
The near break-even net result did not reflect operating profitability: it included $58.5 million of other income, primarily unrealized gains on long-term investments. The company reported $56.6 million of net unrealized investment gains for the quarter, versus a net unrealized loss in Q1 2020. Interest expense increased to $16.3 million from $7.5 million, mainly because of amortization of discounts and issuance costs on the 2025 and 2026 convertible notes. Share-based compensation was $55.0 million, up from $36.6 million.
Cash and cash equivalents were $463.1 million at March 31, down from $639.9 million at December 31, 2020. Long-term investments were $270.7 million, valued using Level 3 inputs. Convertible notes had net carrying amounts of $37.1 million due 2023, $834.6 million due 2025, and $516.2 million due 2026; all bear 0% regular interest. The company paid $178.9 million for 2023-note conversions during the quarter and subsequently paid $153.3 million to redeem the remaining 2023 notes on April 30, 2021. Management said available liquidity and capital resources should meet requirements for at least the next 12 months.
Operating cash flow benefited from collections and working-capital timing. Investing used $26.8 million, including $18.5 million for property, equipment, and internal-use software and $8.4 million for acquired intellectual property. Financing used $186.5 million, primarily for 2023-note conversions.
Material changes and operating indicators
- Annualized exit monthly recurring subscriptions rose to $1.407 billion from $1.030 billion a year earlier; RingCentral Office ARR rose to $1.322 billion from $943.3 million.
- Net monthly subscription dollar retention remained above 99% in each of the five reported quarters.
- Remaining performance obligations were approximately $1.5 billion, excluding contracts with an original expected term under one year; 51% was expected to be recognized within 12 months.
- Gross margin eased to 72% from 73%. Subscription gross margin was 77% versus 78%; management attributed higher subscription costs to infrastructure, third-party service, personnel, and acquired-intangible amortization.
- Research and development rose 53%, sales and marketing 37%, and general and administrative expense 17%. Management expects these expense categories to continue increasing in absolute dollars.
Outlook, risks, contingencies, and unusual items
No numerical revenue or earnings guidance is provided in the filing text. Management expects subscription gross margin to remain in a relatively similar range and anticipates continued investment in product development, sales, marketing, personnel, and infrastructure. The company reported ongoing losses historically and said it expects losses for the foreseeable future.
- COVID-19: Management reported new bookings as businesses adopted remote-work solutions, but warned that economic disruption could affect customer spending, contract duration, churn, collections, credit-card payments, and demand for phones and professional services.
- Zoom dispute: Zoom sued RingCentral over their strategic alliance and trademark rights. A court order required Zoom to continue service for RingCentral Meetings customers contracted before January 31, 2021, but did not require service for later customers. RingCentral said it was no longer offering RingCentral Meetings to new customers and was offering RingCentral Video instead. The potential loss was not estimable in the filing.
- Other litigation: Patent and California privacy class-action matters remained unresolved, and the Bright Pattern dispute was scheduled for trial in March 2022. The company said it could not estimate possible losses for these matters. The TCPA settlement became effective in March 2021 and had an immaterial accrual.
- Investment valuation risk: Long-term investments are Level 3 and subject to valuation uncertainty. The filing estimated that a hypothetical adverse 10% change in investee stock price or volatility could have reduced fair value by up to $22.4 million.
- Other key exposures: Risks include competition, dependence on carriers and strategic partners, third-party network and hosting providers, cybersecurity and privacy, regulatory requirements, international operations, and the ability to scale systems and operations. Management reported effective disclosure controls as of quarter-end and no significant change in internal control over financial reporting.
Important facts for investors to verify
- How much of the net-loss improvement and reported earnings reflects volatile, noncash investment gains rather than operating performance.
- Whether revenue growth, ARR growth, and retention remain durable as customer demand and the effects of COVID-19 evolve.
- The cash and dilution implications of convertible notes, including the April 2021 cash redemption of the remaining 2023 notes and potential future conversions.
- The outcome and business impact of the Zoom dispute, including service continuity and customer retention for affected RingCentral Meetings users.
- The assumptions and sensitivity behind Level 3 investment valuations and the reliability of reported free cash flow; the free-cash-flow reconciliation labels its comparison period “2019,” while surrounding filing data presents Q1 2020, so the comparison-year label should be checked.