RingCentral, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with the three months ended March 31, 2022. Amounts are in U.S. dollars unless stated otherwise. RingCentral provides cloud-based communications, collaboration, video, and contact-center SaaS, primarily through subscriptions.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $533.7 million | $467.7 million | +14% |
| Subscription revenue | $508.3 million | $439.9 million | +16% |
| Gross profit / margin | $373.0 million / 70% | $312.2 million / 67% | Margin +3 percentage points |
| Operating loss | $54.5 million | $103.5 million | Loss narrowed $49.0 million |
| Net loss | $54.4 million | $151.0 million | Loss narrowed $96.6 million |
| Net loss per share, diluted | $0.57 | $1.60 | Loss per share narrowed |
| Operating cash flow | $108.5 million | $59.0 million | +$49.5 million |
| Non-GAAP free cash flow | $54.0 million | $38.6 million | +$15.4 million |
Subscription gross margin was 73%, up from 71%; other-revenue gross margin was 5%, down from 7%. The improvement in subscription and total gross margin mainly reflected lower amortization of acquired intangibles. Operating expenses were $427.5 million, up 3% year over year: R&D fell 6%, sales and marketing rose 2%, and general and administrative expense rose 16%. Share-based compensation was $98.2 million.
Net loss improved partly because other income/expense improved by $49.7 million: the unrealized investment loss was $1.6 million versus $48.3 million a year earlier. Q1 2023 also included a $4.5 million gain tied to an amended strategic-partner agreement. These items make the net-loss comparison less indicative of operating trends.
Cash, debt, and liquidity
- Cash and cash equivalents were $274.8 million at March 31, 2023, including $5.5 million of restricted cash; cash was $270.0 million at year-end 2022.
- Current assets were $851.0 million and current liabilities were $591.2 million, implying working capital of approximately $259.8 million.
- Operating cash flow increased to $108.5 million; management attributed the year-over-year increase primarily to working-capital timing. Investing cash outflow was $21.3 million. Financing cash outflow was $82.7 million, primarily reflecting $74.5 million of share repurchases and $5.2 million of credit-facility issuance costs.
- Non-GAAP free cash flow was $54.0 million after adjustments for strategic partnerships and capital spending. The filing deducts $33.3 million for strategic partnerships in its reconciliation; review the company’s definition and reconciliation when comparing this measure.
- Net carrying value of the 0% convertible notes was $1.6395 billion: $994.8 million due March 2025 and $644.7 million due March 2026. The notes are unsecured; principal is payable in cash under the company’s settlement election. Their disclosed fair values were approximately $528.1 million and $872.5 million, respectively.
- A February 2023 credit agreement provides a $200 million revolving facility and a $400 million delayed-draw term facility. No loans or letters of credit were outstanding at quarter-end, and the company reported covenant compliance. The term facility is intended to help settle some 2025 and/or 2026 notes; borrowings carry floating-rate interest and are secured by substantially all personal property of the company and certain subsidiaries.
- Management stated that operations, existing liquidity, and access to financing should meet cash requirements for at least the next 12 months. This is management’s assessment, not a guarantee.
Material changes and operating metrics
- Subscription revenue accounted for 95% of total revenue and grew through new customers and expansion of existing accounts. Other revenue declined 8%, primarily due to the timing of professional-services contracts and lower phone demand.
- Annualized exit monthly recurring subscriptions were $2.161 billion, up from $1.895 billion a year earlier. Net monthly subscription dollar retention remained above 99% in each of the five reported quarters.
- Remaining performance obligations were approximately $2.2 billion, excluding contracts with an original expected term of less than one year; the company expects to recognize 53% within 12 months.
- The company repurchased and retired 2.16 million Class A shares for $74.5 million under a $175 million authorization; $100.5 million remained available at quarter-end. The program is discretionary and subject to a minimum-cash condition.
- A Q4 2022 workforce-reduction plan had reduced full-time employees by approximately 13% to date. Q1 2023 restructuring expense was $4.9 million; $3.3 million remained accrued at quarter-end.
- In March 2023, RingCentral announced RingSense, an AI platform intended to derive insights from business conversations. The filing cautions that development, accuracy, adoption, and monetization are uncertain.
Outlook, commentary, and risks
- No numerical revenue, margin, earnings, or cash-flow guidance is provided in the filing. Management expects continued investment in infrastructure and product development, and incremental sales and marketing expense to support growth, while pursuing operating efficiencies.
- Management reported cautious buying by larger customers, smaller initial deployments, longer sales cycles, and less upsell as customers slowed hiring and rationalized employee counts. It expects this behavior may persist while macroeconomic uncertainty continues. Future revenue could also be affected by churn, down-sell, renewals, contract terms, and foreign exchange.
- Avaya’s restructuring resulted in a new extended partnership agreement, with Avaya Cloud Office remaining its exclusive UCaaS offering and minimum volume commitments. The agreements were assumed in Avaya’s emergence from Chapter 11 on May 1, 2023, after the reporting date. RingCentral’s Avaya Series A preferred shares were cancelled without consideration. RingCentral had recorded a $279.3 million non-cash Avaya-related asset write-down in 2022.
- New commercial arrangements carry $124.0 million of purchase commitments through January 2029; $122.2 million remained outstanding at March 31, 2023, including $20.4 million due within 12 months.
- Three disclosed legal matters include patent-infringement claims, a putative California privacy class action, and litigation with Bright Pattern. The company says the potential loss or range of loss cannot currently be estimated for these matters and intends to defend or prosecute them.
- Principal risks include continued losses, competition and pricing pressure, macroeconomic weakness, customer churn and slower expansion, reliance on strategic and channel partners and third-party networks, cybersecurity and service interruptions, regulatory and privacy obligations, and debt repayment/refinancing and credit-agreement covenant risks. The company reported effective disclosure controls as of March 31, 2023 and no significant change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether subscription growth, retention, and expansion hold up as larger customers face longer approval cycles and weaker hiring.
- How sustainable operating cash flow and the reported non-GAAP free cash flow are, including the strategic-partnership adjustment and working-capital timing.
- Liquidity and refinancing plans for the 2025 and 2026 notes, including any future use of the delayed-draw term facility, its floating-rate cost, and covenant headroom.
- Performance and economics of the revised Avaya partnership after its May 2023 emergence, and the effect of the cancelled Avaya preferred shares.
- Execution of the repurchase program alongside purchase commitments, debt obligations, and investment needs; also monitor dilution from equity awards and the preferred stock.
- Developments in the legal matters, purchase commitments, and other contingencies for which loss estimates are not clear or are not provided.