RingCentral, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited. Financial amounts below are in millions of dollars unless otherwise noted. Comparable periods are 2013.
Business context
RingCentral provides cloud-based business communications software, principally through subscriptions to RingCentral Office and related services. Services generated 91% of revenue. The company reported more than 300,000 customers and was expanding its sales channels and operations, including in the U.K.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $52.8 | $37.7 | $101.0 | $73.2 |
| Gross profit | $33.2 | $23.0 | $63.6 | $44.8 |
| Gross margin | 63% | 61% | 63% | 61% |
| Operating loss | $(12.8) | $(13.1) | $(25.0) | $(22.5) |
| Net loss | $(13.3) | $(13.6) | $(26.2) | $(23.9) |
| Net loss per share, basic and diluted | $(0.20) | $(0.60) | $(0.40) | $(1.05) |
- Revenue grew 40% year over year in Q2 and 38% for the first half. Service revenue rose 39% and 37%, respectively; product revenue rose 52% and 44%.
- Q2 operating expenses were $46.1 million, up from $36.2 million. Sales and marketing rose 57% in Q2 and 48% in the first half; management attributed revenue growth chiefly to new customers, additional users at existing customers, and a higher mix of RingCentral Office subscriptions.
- Q2 operating and net losses narrowed slightly year over year, but first-half net loss increased. Q2 net loss margin was approximately 25% of revenue. Per-share comparisons are affected by the much higher weighted-average share count in 2014 following the IPO.
- Cash and cash equivalents were $151.4 million at June 30, up from $116.4 million at December 31, 2013. Current assets were $167.8 million and current liabilities $60.3 million.
- For the first half, operating cash use was $11.0 million, investing cash use was $10.5 million (mainly property and equipment purchases), and financing provided $56.6 million. Financing included $56.1 million in net proceeds from the March secondary offering. Cash increased $35.0 million.
- Debt carrying value was approximately $29.6 million. The SVB revolving line had $10.8 million outstanding and $2.2 million available at June 30; the company reported compliance with its SVB and TriplePoint covenants. Capital lease obligations totaled approximately $1.6 million.
Changes, outlook, and risks
- Gross margin improved by 2 percentage points, which management attributed mainly to lower per-usage telecom costs and operating scale, partly offset by product sales with low or negative margins.
- Management said existing liquidity sources were expected to meet cash requirements for at least the next 12 months. It also expected continued operating cash use and increasing capital expenditures as it invests in personnel, marketing, infrastructure, and capacity. No quantified revenue or earnings guidance is provided in the filing.
- Growth priorities include larger customers, product development, reseller channels, and international expansion. Management cautioned that larger and international sales may involve longer cycles, added costs, and uncertain results; approximately 90% of customers had monthly contract terms, limiting visibility from backlog.
- Material risks include continued losses and negative operating cash flow; customer churn; competition and pricing pressure; reliance on third-party network, data-center, and support providers; service outages and security incidents; execution and international-expansion risks; and regulatory, privacy, and tax exposure.
- The company recorded a $3.9 million long-term estimated liability for potential historical state sales taxes, plus $4.3 million of current sales-tax liabilities. The ultimate historical exposure could differ from the estimate. No legal-contingency liabilities were accrued at June 30; earlier CallWave settlement charges of $4.3 million were paid in 2013.
- New Denver and London office leases added commitments of approximately $4.7 million and $1.9 million, respectively, through 2019. The filing also notes political and operational risks affecting outsourced work in Ukraine and Russia.
Most important facts for investors to verify
- Whether rapid revenue growth can translate into sustained operating leverage as sales and marketing and infrastructure spending rise.
- Cash consumption, capital expenditures, and covenant requirements, including the SVB minimum-cash and minimum-EBITDA covenants and the revolving line’s maturity in August 2015.
- Customer retention, user expansion, reseller contribution, and the economics of targeting larger customers and international markets.
- Potential changes to the $3.9 million historical sales-tax estimate and any future tax or intellectual-property contingencies.
- Execution and reliability of third-party-dependent communications services, and the company’s ability to manage security, regulatory, and international operating risks.
- The implications of the dual-class share structure: Class B shares carried ten votes per share, and the filing said Class B holders collectively held approximately 85% of voting power.