RingCentral, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. RingCentral provides cloud communications, video, collaboration and contact-center SaaS. This unaudited report covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods. Subscription services generated 93% of Q2 revenue. Management cited customer additions and expansion among existing customers, particularly mid-market and enterprise customers, as growth drivers.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $379.3 million (+36%) | $278.0 million | $731.6 million (+34%) | $545.5 million |
| Subscription revenue | $351.2 million (+37%) | $257.0 million | $676.4 million (+35%) | $500.1 million |
| Gross profit / margin | $274.4 million / 72% | $201.3 million / 72% | $529.7 million / 72% | $395.4 million / 72% |
| Operating loss | $73.4 million | $29.3 million | $115.4 million | $54.8 million |
| Net income (loss) | $(111.0) million | $0.5 million | $(111.1) million | $(60.2) million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $61.5 million | $40.1 million |
| Non-GAAP free cash flow | Not presented quarterly | Not presented quarterly | $37.6 million | $21.7 million |
- Q2 operating expenses rose 51% to $347.7 million. Sales and marketing increased 48%, R&D 75%, and G&A 38%. Management attributed much of the expense growth to hiring, sales commissions and higher share-based compensation.
- Cash and cash equivalents were $325.3 million at June 30, down from $639.9 million at year-end 2020. Long-term investments were $247.9 million. Total current assets were $648.1 million against current liabilities of $446.8 million.
- Convertible senior notes had a net carrying amount of $1.367 billion: $844.2 million of 2025 Notes and $522.3 million of 2026 Notes. Both carry 0% stated interest; the company reported compliance with their covenants. Q2 included cash settlement of the remaining 2023 Notes redemption; first-half cash payments for conversions and redemption totaled $333.6 million.
- Company-defined ARR was $1.516 billion at June 30, versus $1.107 billion a year earlier; Office ARR was $1.431 billion. Net monthly subscription dollar retention remained above 99% in each of the five reported quarters.
- Remaining performance obligations were approximately $1.6 billion, excluding contracts with an original expected term under one year; management expected to recognize half within 12 months and half thereafter.
Changes versus the prior comparable period
- Revenue growth remained strong, but operating losses widened as operating costs grew faster than revenue. Gross margin held at 72%; subscription gross margin was 77%, down from 78%.
- Q2 net results swung from $0.5 million of income to a $111.0 million loss. A $61.6 million year-over-year increase in unrealized losses on long-term investments was a major factor; these valuation changes are volatile and non-cash. Higher share-based compensation also contributed.
- First-half operating cash flow increased $21.4 million year over year. Investing cash use increased to $43.6 million, including spending on equipment, internal-use software and acquired intellectual property. Financing cash flow shifted from $423.1 million provided in 2020 to $332.2 million used in 2021, primarily reflecting note repurchases and redemptions rather than the prior-year note issuance proceeds.
Outlook, commentary and risks
- No specific full-year revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management expects subscription gross margin to remain in a relatively similar range and expects R&D, sales and marketing, and G&A expenses to increase in absolute dollars.
- Management believes operations, liquidity and capital resources, including potential additional financing, will meet requirements for at least the next 12 months. Future cash needs depend on growth, hiring, infrastructure, capital spending, acquisitions and the pandemic’s effects; additional capital may not be available on favorable terms.
- COVID-19 effects remain uncertain. Management noted continued transition toward laptop and mobile apps over desk phones, which affected phone demand, and identified potential customer spending reductions, churn, payment delays and implementation disruption.
- The Zoom dispute concerns the strategic alliance and RingCentral Meetings. The court’s March 2021 order required Zoom to continue serving existing contracted customers but did not require service for new customers contracted after January 31, 2021. RingCentral said it was no longer offering Meetings to new customers and was offering its own RingCentral Video; the litigation and appeal remained ongoing, with no loss estimate available.
- Other disclosed litigation includes an unresolved patent matter, a putative California privacy class action and a dispute with Bright Pattern, for which trial was scheduled for March 2022. The filing says potential losses for these matters could not be estimated; the TCPA class-action settlement became effective in March 2021 and was immaterial to the financial statements.
- Key risks include intense competition, reliance on carriers and strategic partners, third-party network and hosting providers, cybersecurity and privacy exposure, regulatory obligations, customer retention, and substantial continuing losses. The company also identified volatility in its Level 3 investments: a hypothetical adverse 10% change in investee share price or volatility could reduce fair value by up to $19.8 million.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of June 30, 2021; no significant change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether subscription growth and retention translate into improved operating leverage as expenses and share-based compensation remain elevated.
- Cash use, liquidity needs and the ability to fund note cash settlements, growth investments and potential acquisitions; review note maturities and conversion terms.
- Drivers and sensitivity of the $247.9 million long-term investment balance and its effects on reported earnings.
- Developments in the Zoom dispute, the replacement of Meetings for new customers, and execution of the Verizon, Deutsche Telekom and other strategic partnerships.
- Updates to litigation exposure, customer demand and collections, and the operational and financial effects of COVID-19 and other disclosed risks.