RingCentral, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing was signed November 8, 2018. RingCentral provides cloud-based business communications and collaboration software, primarily through subscriptions. Comparative 2017 figures are adjusted for the company’s retrospective adoption of ASC 606.
Financial results and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $173.8m | $130.3m | $485.0m | $362.4m |
| Software subscription revenue | $158.1m | $119.9m | $441.0m | $334.9m |
| Gross margin | 77% | 76% | 77% | 76% |
| Operating loss | $(7.0)m | $(0.3)m | $(13.0)m | $(5.1)m |
| Net income (loss) | $(9.5)m | $0.3m | $(20.5)m | $(4.1)m |
| Operating cash flow | — | $49.1m | $30.9m |
Amounts in U.S. dollars. Subscription revenue represented 91% of revenue in Q3 and the nine-month period. Q3 and nine-month revenue grew 33% and 34%, respectively. Management attributed subscription growth chiefly to new customers, expansion sales, and increased sales to mid-market and enterprise customers. Core subscription revenue, excluding the AT&T legacy customer base, grew 38% in Q3 and 37% year to date.
- Costs and margins: Q3 operating expenses rose 42% to $141.6m; sales and marketing increased 40% to $86.3m. Gross margin improved one percentage point year over year. Management expects gross margin to remain fairly consistent and operating expenses to rise in absolute dollars as the company invests in growth.
- Cash and liquidity: Cash and cash equivalents were $577.3m at September 30, 2018, up from $181.2m at year-end 2017. Nine-month investing cash outflow was $44.4m, including $25.7m of capital expenditure and capitalized software and $18.5m paid for the AT&T customer-base acquisition. Management stated existing liquidity and operations should meet cash requirements for at least 12 months.
- Debt: In March, RingCentral issued $460m principal amount of 0% convertible senior notes due 2023, generating $449.5m net proceeds. The September carrying amount was $361.6m after discounts and issuance costs; disclosed fair value was approximately $577.1m. Debt-discount and issuance-cost amortization contributed $11.0m to nine-month interest expense. The company also spent $49.9m on capped calls and repurchased $15.0m of shares. Management said it intended to settle note principal in cash and was in compliance with note covenants at quarter-end.
- Operating indicators: September-quarter-end ARR was $673.6m, including Office ARR of $591.7m; both increased from September 2017. Net monthly subscription dollar retention was above 99% in each of the five quarterly periods shown.
Material changes and notable items
- Operating loss and net loss increased year over year as operating costs, particularly sales and marketing, grew faster than revenue. Nine-month share-based compensation was $49.4m, compared with $30.5m a year earlier.
- ASC 606 adoption, applied retrospectively, materially changed reported deferred sales commissions and prior-period results: commissions are capitalized and amortized over an estimated five-year benefit period. The company said the effect on total revenue was not material; the largest impact was commission deferral.
- The AT&T customer-base arrangement was revised in August. AT&T retained the $20m previously paid and resumed reselling RingCentral solutions; amounts attributed to the non-transitioned customer base are treated as prepaid services. The company estimated approximately $2m in potential future payments under the revised agreement.
- On October 22, 2018, after quarter-end, RingCentral acquired Dimelo, a digital customer-engagement platform provider, for approximately $37m net of cash acquired, including up to $10m contingent consideration, and expected to issue about $3m in restricted stock units.
Outlook, risks, and contingencies
No specific revenue or earnings guidance is provided in the supplied filing text. Management discussed continued investment in product development, sales and marketing, infrastructure, international expansion, and systems to support growth. It expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars; it expects subscription gross margin to remain relatively consistent.
- The company expects continuing losses for the foreseeable future and identifies competition, customer retention and acquisition costs, execution in larger-customer and international markets, and the ability to scale operations as significant business risks.
- Service continuity depends on third-party networks, data centers, and service providers. The filing also highlights cybersecurity, fraud, privacy and data-protection regulation, including GDPR, and changing telecommunications and internet-access rules.
- Legal matters include TCPA putative class actions, patent-infringement claims involving Glip, and a former employee overtime class and collective action. Outcomes and potential losses for several cases were not estimable. The filing’s descriptions of whether a loss contingency was accrued are not fully consistent; see investor verification points below.
- The company recorded $1.5m of long-term sales-tax contingency liability at September 30, 2018 and $12.2m of current sales-tax liabilities. It noted estimates may change as facts and regulatory interpretations develop.
- Management reported effective disclosure controls as of September 30, 2018 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track whether revenue and ARR growth translate into improved operating leverage, given rising sales and marketing costs and continued GAAP losses.
- Review the convertible notes’ cash-settlement obligations, conversion and repurchase terms, and the potential effects of dilution and capped-call limits.
- Reconcile the legal-contingency disclosures: the employment-matter note says an estimated loss was accrued, while Part II states no accrued liabilities were recorded for loss contingencies as of September 30, 2018.
- Monitor the AT&T resale agreement, customer transitions, and the accounting and performance of the subsequent Dimelo acquisition.
- Assess the effect of deferred sales commissions, share-based compensation, and working-capital needs on cash generation and comparability of reported results.