RingCentral, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited results; dollar amounts below are in millions unless stated otherwise. RingCentral provides SaaS business communications services, primarily through subscriptions.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $70.7 | $52.8 | $136.0 | $101.0 |
| Gross profit / margin | $49.2 / 70% | $33.2 / 63% | $93.9 / 69% | $63.6 / 63% |
| Operating loss | $(9.5) | $(12.8) | $(19.1) | $(25.0) |
| Net loss | $(8.2) | $(13.3) | $(18.8) | $(26.2) |
| Basic and diluted loss per share | $(0.12) | $(0.20) | $(0.27) | $(0.40) |
- Subscription revenue was $64.4 million in Q2, up 35%, and $124.4 million in the first half, up 36%. It represented 91% of revenue in both periods. Product revenue increased 27% in Q2 and 24% in the first half.
- Gross margin improved primarily due to lower per-use telecom costs and infrastructure scale; product margin also benefited from inventory management and less discounting.
- Operating expenses rose to $58.7 million in Q2 from $46.1 million, led by sales and marketing, which increased 35% to $34.6 million. Management expects R&D, sales and marketing, and G&A expenses to continue increasing in absolute dollars.
- Net loss improvement includes a one-time $1.4 million tax benefit from releasing part of the valuation allowance following the Glip acquisition. Without that benefit, the filing reports a $42,000 Q2 tax provision and a $125,000 first-half provision.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $120.8 million and short-term investments were $11.9 million, totaling $132.7 million, versus $141.7 million at December 31, 2014.
- First-half operating cash flow was positive $0.4 million, versus cash used of $11.0 million in the prior-year period. The company still recorded an $18.8 million net loss; operating cash flow reflected noncash expenses and working-capital changes, including higher deferred revenue.
- First-half investing cash flow was positive $3.4 million, including $16.3 million of investment maturities, offset by $8.3 million in capital expenditures and $4.7 million paid for Glip. Financing cash flow was positive $3.8 million, mainly from stock-plan proceeds, partly offset by debt repayments.
- Total debt carrying value was $20.4 million: a $9.7 million term loan and $10.8 million drawn on a $15.0 million revolving facility, leaving $4.2 million available. The revolver was due August 13, 2015; the company said it was evaluating an extension. It was compliant with debt covenants at June 30.
- Management believed existing liquidity would meet cash requirements for at least 12 months. The company had $31.0 million in deferred revenue, compared with $25.6 million at year-end.
Changes, outlook and notable items
- Revenue growth reflected new customers, more users at existing customers, and a higher mix of RingCentral Office subscriptions. Exit annualized monthly recurring subscriptions reached $274.6 million, up from $203.7 million a year earlier; RingCentral Office reached $205.4 million, up from $139.2 million.
- Net monthly subscription dollar retention was reported as greater than 99% for each of the five quarters shown through June 30, 2015.
- On June 4, RingCentral acquired Glip, a team messaging and collaboration provider. Acquisition-date consideration was $11.9 million, including cash, 223,190 shares, a holdback and an earn-out. Glip’s results were not material to the period. Management intends to integrate its collaboration tools with RingCentral Office; integration and realization of expected benefits remain uncertain.
- The filing gives no specific numerical revenue or earnings guidance. Management expects continued investment and losses for the foreseeable future, and cites customer growth, larger-customer sales, international expansion and product development as priorities. Larger customers may involve longer sales cycles and higher support and development costs.
- Risks include continued losses and uncertain path to profitability; competition and customer turnover; reliance on third-party network, data-center and service providers; service interruptions and cybersecurity; regulatory and privacy obligations; international and geopolitical exposure; and acquisition integration.
- A $3.9 million long-term sales-tax liability remained for historical activity, in addition to $4.5 million of current sales-tax liabilities included in accrued liabilities. The UrgenSync patent complaint was dismissed with prejudice and released in July 2015, without damages or settlement payment. No liabilities were accrued for other legal loss contingencies.
- The company reported effective disclosure controls based on an evaluation as of March 31, 2015, and no material change in internal control over financial reporting during the quarter. It expected to cease being an emerging growth company at year-end 2015, bringing additional reporting and auditor-attestation requirements.
Most important facts for investors to verify
- Whether the revolving credit facility was extended or repaid by its August 13, 2015 maturity, and any resulting changes to liquidity or borrowing terms.
- Whether subscription growth and retention remain strong, and whether higher sales and marketing spending translates into efficient customer acquisition and improved profitability.
- Progress integrating Glip and the costs, milestones or employee payments associated with the acquisition.
- Whether the recorded sales-tax liability adequately reflects potential exposures, and whether any new material litigation or regulatory matters arise.
- Potential dilution from equity compensation and the Glip shares issued; also note the dual-class structure, under which Class B shares carried ten votes each and pre-IPO holders held approximately 72% of voting power.