RingCentral, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. RingCentral provides cloud-based business communications, collaboration, video, and contact-center SaaS. Figures below are unaudited; dollar amounts are U.S. dollars.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $539.3 million | $486.9 million | $1,073.0 million | $954.6 million |
| Subscription revenue | $513.6 million | $463.0 million | $1,021.9 million | $902.9 million |
| Gross profit / margin | $374.9 million / 70% | $328.7 million / 68% | $747.9 million / 70% | $640.9 million / 67% |
| Operating loss | $(45.1) million | $(107.8) million | $(99.6) million | $(211.3) million |
| Net loss | $(21.5) million | $(159.5) million | $(75.9) million | $(310.5) million |
| Net loss per share, basic and diluted | $(0.23) | $(1.68) | $(0.79) | $(3.27) |
| Cash from operating activities | — | $199.2 million | $109.7 million | |
| Adjusted, unlevered free cash flow, non-GAAP | — | $141.7 million | $69.6 million |
Q2 operating margin was approximately negative 8%, versus negative 22% a year earlier; for the first half it was approximately negative 9%, versus negative 22%. Subscription gross margin was 74% in Q2 versus 72%, and 73% for the first half versus 71%. The company remained loss-making under GAAP.
At June 30, 2023, cash and cash equivalents were $225.4 million, down from $270.0 million at year-end 2022. Current assets were $803.5 million and current liabilities $592.4 million. Total liabilities were $2.233 billion, exceeding total assets of $1.960 billion; stockholders’ deficit was $471.8 million. Operating cash flow increased year over year, while investing activities used $39.1 million and financing activities used $204.8 million in the first half.
Debt principal outstanding totaled approximately $1.589 billion: $539.3 million of 0% convertible notes due March 2025, $650.0 million of 0% notes due March 2026, and a $400.0 million term loan due February 2028. The term loan has quarterly principal payments and a disclosed effective interest rate of 8.2% for Q2. A $200 million revolving facility was undrawn. The company reported compliance with debt covenants at quarter-end. A five-year interest-rate swap was entered into to reduce exposure on the variable-rate term loan.
Changes versus the prior comparable period
- Revenue increased 11% in Q2 and 12% in the first half; subscription revenue grew 11% and 13%, respectively. Management attributed subscription growth primarily to new customers and expansion of existing accounts.
- Gross margin improved, while operating losses narrowed. Lower research and development expense and improved subscription margins contributed; sales and marketing expense was broadly flat in Q2.
- Net loss improved substantially, but comparisons were affected by investment valuation changes and a debt-extinguishment gain. Q2 2023 included a $31.1 million gain from repurchasing 2025 Notes; the prior-year periods included much larger unrealized investment losses.
- Operating cash flow rose by $89.6 million in the first half. Management cited working-capital timing and higher operating margin as contributors.
- The company drew the $400 million term loan and used proceeds, together with available cash, to repurchase $460.7 million principal amount of 2025 Notes for $427.3 million, including third-party costs. It also repurchased and retired 5.5 million shares for approximately $175 million in the first half.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no numerical revenue or earnings guidance. Management said it expects to continue investing in infrastructure and growth while pursuing cost efficiencies. It believes available liquidity and capital resources will meet cash requirements for at least the next 12 months.
- Demand and retention: Management described cautious buying by larger customers, smaller initial deployments, longer sales cycles, and slower upselling as customers moderated hiring and employee counts. It said these trends may persist while macroeconomic uncertainty continues. Net monthly subscription dollar retention was reported as greater than 99% for each of the five quarters presented.
- Growth indicator: Annualized exit monthly recurring subscriptions were $2.219 billion at June 30, 2023, up from $1.981 billion a year earlier. This company-defined metric is based on month-end recurring charges multiplied by 12.
- Cash-flow measure: First-half adjusted, unlevered free cash flow of $141.7 million is non-GAAP and includes company-defined adjustments, including strategic partnerships, restructuring and other payments, and interest. It should not be treated as equivalent to GAAP operating cash flow.
- Costs and compensation: First-half share-based compensation was $202.9 million. Restructuring costs were $8.5 million in the first half. Management cited ongoing efficiency efforts, including headcount reductions, disciplined hiring, automation, and go-to-market optimization.
- Commitments and contingencies: Remaining purchase commitments included $117.8 million from a commercial arrangement extending through January 2029 and a separate $19.8 million incremental commitment through January 2025. The filing describes patent, privacy-class-action, and other litigation; management said it could not estimate possible losses for the specified cases.
- Subsequent events and leadership: On July 31, 2023, RingCentral acquired certain Hopin technology assets and customer relationships for $15 million upfront, plus up to $35 million contingent on performance targets. The filing also disclosed that Tarek Robbiati was appointed CEO effective August 28, 2023, succeeding co-founder Vladimir Shmunis, who would become Executive Chairman; an officer’s planned separation was also disclosed.
- Principal risks: The company identifies continuing losses, competition and pricing pressure, customer churn and downsell, reliance on channel and technology partners, service availability and cybersecurity, regulatory and privacy compliance, geopolitical disruption affecting third-party operations, and debt service and refinancing needs. It also notes that the dual-class share structure concentrates voting power.
Important facts for investors to verify
- Track subscription growth, retention, customer expansion, and the effects of longer enterprise sales cycles and slower upselling.
- Assess the sustainability of improved operating cash flow and non-GAAP free cash flow, including working-capital timing and the adjustments used in the company’s free-cash-flow measure.
- Review debt repayment and refinancing capacity ahead of the 2025 and 2026 note maturities, term-loan covenants, interest costs, and the effectiveness of the interest-rate swap.
- Monitor the impact of share repurchases, substantial share-based compensation, and the potential dilution from equity awards, convertible securities, and preferred stock.
- Follow the Hopin acquisition’s contingent consideration and integration, the leadership transition, and developments in the disclosed legal matters and commercial commitments.