RingCentral, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. RingCentral provides cloud communications, collaboration, video, and contact-center SaaS, primarily through subscriptions. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $509.0m | $414.6m | $1,463.6m | $1,146.3m |
| Subscription revenue | $483.2m | $385.4m | $1,386.1m | $1,061.9m |
| Gross profit / margin | $341.6m / 67% | $304.2m / 73% | $982.4m / 67% | $833.9m / 73% |
| Operating loss | $(182.6)m | $(83.1)m | $(393.9)m | $(198.5)m |
| Net loss | $(284.6)m | $(146.8)m | $(595.1)m | $(257.9)m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $151.9m | $104.5m |
| Non-GAAP free cash flow | Not provided for quarter | Not provided for quarter | $88.5m | $61.9m |
- Q3 subscription revenue increased 25%; total revenue increased 23%. For the nine months, subscription and total revenue rose 31% and 28%, respectively. Other revenue declined 12% in Q3 and 8% year to date.
- Cash and cash equivalents were $305.4m at September 30, 2022, including $5.5m restricted cash. Current assets were $774.6m and current liabilities $639.2m.
- Convertible senior notes had a net carrying amount of $1,637.3m: $993.4m due 2025 and $643.8m due 2026. Both series bear 0% regular interest. Series A convertible preferred stock was $199.4m, classified as temporary equity. Stockholders’ deficit was $244.9m.
- For the nine months, investing cash outflow was $64.2m and financing cash outflow was $44.8m. RingCentral repurchased $45.0m of shares, with $55.0m remaining under its $100m authorization at quarter-end.
Material changes and unusual items
- Gross margin fell to 67% from 73%. Subscription gross margin was 72% in Q3 versus 78% a year earlier; management cited acquired-intangible amortization, third-party and infrastructure costs, and personnel costs.
- Net loss widened substantially, reflecting a $124.9m non-cash Avaya-related write-down (including $21.7m accrued interest recorded in other expense), $174.0m of nine-month unrealized losses on Avaya investments, and higher acquired-intangible amortization. The Q3 income statement separately shows a $103.2m operating asset write-down and $100.0m of other expense.
- Avaya preferred-stock investment fair value declined to $28.9m from $200.0m at December 31, 2021. RingCentral said Avaya continued selling the ACO product but disclosed substantial doubt about its ability to continue as a going concern. The remaining prepaid sales commission balance was $162.2m; further write-downs may result.
- Operating cash flow improved to $151.9m from $104.5m for the nine months, which management attributed mainly to working-capital timing. Capital expenditure and capitalized internal-use software totaled $63.5m.
- Effective January 1, 2022, RingCentral adopted ASU 2020-06 for convertible instruments. The change increased reported notes by approximately $235.5m and reduced additional paid-in capital by $329.3m; prior periods were not restated.
Outlook, commentary, and risks
- No specific revenue or earnings guidance is provided in this filing. Management said it believes available liquidity, operations, and financing resources can meet requirements for at least the next 12 months, while noting that additional financing may be needed and may not be available on acceptable terms.
- Management reported more cautious buying by larger customers, incrementally longer enterprise sales cycles in Q3, and sales cycles normalizing to pre-pandemic patterns. A stronger U.S. dollar and macroeconomic uncertainty may affect results and customer demand. Net monthly subscription dollar retention remained above 99% across the five quarters presented; ARR was $2.05bn at September 30, 2022, up from $1.64bn a year earlier.
- On November 7, 2022, the board approved a workforce reduction expected to affect approximately 10% of full-time employees. Estimated restructuring costs are $10m–$15m, expected mainly in Q4 2022 and Q1 2023; completion is expected substantially by Q1 2023.
- Other stated risks include dependence on channel and strategic partners, service and cybersecurity risks, competition, foreign exchange exposure, and disruption related to Russia’s invasion of Ukraine. Relocation-related expenses for third-party contractors in Ukraine and Russia were $20.4m for the nine months.
- Three disclosed legal matters include patent infringement claims, a California privacy class action, and the Bright Pattern dispute. The company said it could not estimate a potential loss or range for these matters and intends to defend or prosecute them as applicable.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level as of September 30, 2022; no significant change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Avaya’s financial condition, ACO sales, and commission recoverability lead to additional write-downs against the remaining $162.2m balance or further investment losses.
- How subscription growth and retention develop amid longer enterprise sales cycles, cautious customer purchasing, currency effects, and macroeconomic pressure.
- Whether gross margins improve as acquired-intangible amortization and infrastructure costs evolve, and how the planned workforce reduction affects expenses and execution.
- Liquidity and cash requirements related to the $1.65bn principal amount of 2025 and 2026 notes, including potential cash settlement upon conversion, repurchase, or maturity.
- Actual restructuring charges and timing, share repurchases through the program’s December 31, 2022 authorization end date, and any developments in the legal matters for which losses were not estimable.