RingCentral, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; year-over-year comparisons are with Q1 2015. Balance-sheet comparisons are with December 31, 2015. Financial amounts are in U.S. dollars; statement amounts below are in millions unless noted.
Business context and performance
RingCentral provides cloud-based business communications software-as-a-service. Subscription revenue—principally from RingCentral Office—accounted for 92% of Q1 revenue. Management attributed subscription growth to new customers, additional users at existing customers, and a larger mix of RingCentral Office customers.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $86.5 | $65.3 | +32% |
| Software subscription revenue | $80.0 | $60.0 | +33% |
| Gross profit / gross margin | $64.8 / 75% | $44.8 / 69% | Margin +6 percentage points |
| Operating expenses | $70.8 | $54.3 | +30% |
| Operating loss | $(6.0) | $(9.6) | Loss narrowed |
| Net loss | $(6.6) | $(10.6) | Loss narrowed |
| Net loss per share, basic and diluted | $(0.09) | $(0.15) | — |
Net loss was about 8% of revenue, versus about 16% in Q1 2015. Subscription gross margin rose to 79% from 73%, which management mainly attributed to infrastructure economies of scale. Sales and marketing remained the largest operating expense at $41.8 million, up 31%; research and development rose 26% to $14.9 million, and general and administrative expense rose 33% to $14.0 million. Management expects these expense categories, including R&D and sales and marketing, to continue increasing in absolute dollars.
Cash flow, liquidity and debt
- Operating cash flow was positive $4.8 million, compared with cash used of $0.7 million in Q1 2015. Investing activities used $2.5 million; financing activities used $0.7 million. Cash increased by $1.5 million during the quarter.
- Cash and cash equivalents were $139.1 million at March 31, up from $137.6 million at year-end. Current assets were $178.5 million and current liabilities $87.4 million.
- Debt carrying value totaled $17.7 million: $6.9 million under the term loan and $10.8 million drawn on the revolving facility. The facility had $4.2 million of remaining availability. The company reported compliance with its loan covenants.
- Deferred revenue was $39.0 million, up from $36.7 million at December 31. Management said existing liquidity and available borrowing capacity should meet cash requirements for at least the next 12 months.
Material changes and management commentary
- In January 2016, RingCentral began transitioning phone distribution to Westcon Group under a sales-agency arrangement. RingCentral generally earns commission revenue as agent rather than recording phone sales gross and bearing associated product costs. The transition was incomplete during Q1; discounted or free phones and some sales through prior partners remained outside the agency model. Product revenue and product cost were $4.6 million and $4.5 million, respectively, in Q1 2016.
- The presentation of phone-related activity changed: “other” revenue now includes agency commissions, professional services, rentals and certain direct phone sales. This affects comparability of the “other” revenue line between periods.
- Exit annualized recurring subscriptions were $340.3 million at March 31, 2016, versus $253.7 million a year earlier; RingCentral Office exit annualized recurring subscriptions were $269.3 million versus $185.4 million. Net monthly subscription dollar retention was reported as greater than 99% in each of the five quarters shown.
- Management cited investment in customer acquisition, product development, infrastructure and international expansion as priorities. It also cautioned that results may fluctuate and that interim results are not necessarily indicative of full-year performance. The filing provides no specific numerical revenue or earnings guidance.
Risks, contingencies and unusual items
- An April 21, 2016 putative class action alleges conversion and Telephone Consumer Protection Act violations related to fax cover sheets used by customers. The company intends to defend the case; it said the outcome and any loss range could not yet be estimated.
- The company recorded a $3.7 million long-term sales-tax liability, unchanged from year-end, and $4.5 million of current sales-tax liabilities within accrued liabilities. Management noted that changes in assumptions or tax interpretations could lead to adjustments.
- One reseller represented 42% of accounts receivable at March 31, 2016. More than 90% of revenue was derived from the U.S.; the company also relies on resellers, third-party network and data-center providers, and outside service providers.
- Key disclosed risks include continued operating losses, intense competition, customer retention and acquisition costs, service availability and cybersecurity, regulatory and privacy changes, foreign-exchange exposure, and execution of the Westcon distribution transition. The company had an accumulated deficit of $216.8 million and a full valuation allowance against U.S. deferred tax assets.
- Share-based compensation expense was $6.7 million, compared with $4.7 million a year earlier. Potential equity awards were excluded from diluted loss per share as anti-dilutive.
Important facts for investors to verify
- Whether subscription growth and the reported greater-than-99% retention metric persist, and how recurring-revenue metrics reconcile with recognized revenue.
- Whether Westcon transition execution, commissions and phone-related gross margins develop as expected, bearing in mind the change in revenue presentation.
- Whether operating cash generation continues while expenses and customer-acquisition investments rise, and whether covenant compliance and revolving-credit availability are maintained.
- Developments in the SPS lawsuit and the sales-tax liability, neither of which had a determinable litigation loss estimate in the filing.
- The concentration of receivables with the leading reseller and the effect of growth in larger, invoiced customers on collections and working capital.