RingCentral, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. RingCentral provides cloud-based business communications and collaboration SaaS, with subscription revenue as its primary source of sales.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $215.2 million | $160.8 million | $416.6 million | $311.2 million |
| Gross margin | 75.1% | 76.3% | 74.9% | 76.3% |
| Operating loss | $(7.2) million | $(4.7) million | $(14.6) million | $(6.0) million |
| Net loss | $(9.2) million | $(8.3) million | $(15.6) million | $(11.0) million |
| Net loss per share, diluted | $(0.11) | $(0.10) | $(0.19) | $(0.14) |
- Q2 revenue rose 34% year over year; software subscriptions, 91% of revenue, increased 33%. Management attributed growth primarily to new customers, expansion within existing accounts, mid-market and enterprise sales, and channel partners.
- Q2 subscription gross margin was 80.5%, down from 81.7%; total gross margin declined 1.2 percentage points. The company expects subscription gross margin to remain relatively consistent.
- Operating expenses rose 32% in Q2, led by sales and marketing, which increased 31%. Management expects research and development, sales and marketing, and general and administrative expenses to continue increasing in absolute dollars.
- Cash and cash equivalents were $567.7 million at June 30, 2019, versus $566.3 million at December 31, 2018. Six-month operating cash flow was $44.2 million, investing cash flow was $(50.5) million, and financing cash flow was $7.5 million.
- Operating cash flow included substantial non-cash adjustments, including $44.3 million of share-based compensation. Investing cash outflows included $27.9 million net cash paid for Connect First and $22.6 million in capital expenditures and capitalized internal-use software.
- Convertible senior notes due 2023 had $460.0 million principal and a $376.6 million net carrying value; disclosed fair value was approximately $685.6 million. The notes carry 0% regular interest. The company stated it currently intends to settle principal in cash.
- Current assets were $735.1 million and current liabilities were $245.6 million. Deferred revenue was $103.4 million, up from $88.5 million at year-end. Management believes existing liquidity and operations will meet cash requirements for at least 12 months.
Material changes and notable items
- Annualized exit monthly recurring subscriptions (ARR) reached $830.8 million, up from $629.6 million a year earlier; RingCentral Office ARR was $749.2 million versus $548.0 million. Net monthly subscription dollar retention remained above 99% in each of the five reported quarters.
- Connect First was acquired in January 2019 for approximately $36.4 million in total consideration, including $29.3 million cash and $7.1 million held for indemnity claims. The acquisition added $24.5 million of goodwill and $13.3 million of acquired intangibles in the preliminary purchase-price allocation.
- Adoption of lease accounting on January 1, 2019 added approximately $33.5 million to both assets and liabilities. At June 30, operating lease liabilities totaled $38.0 million, including $13.1 million classified in accrued liabilities.
- A one-time $3.2 million tax benefit in the first half followed a partial release of the valuation allowance related to deferred tax assets arising in connection with the acquisition. The company continued to maintain a full valuation allowance on U.S. net deferred tax assets.
Outlook, risks and contingencies
- The filing provides no numerical revenue or earnings guidance. Management described continued investment in product development, infrastructure, customer acquisition, larger-customer sales and international expansion; it expects related operating expenses and capital expenditures to increase.
- Management cited competition and pricing pressure, customer retention and acquisition costs, execution of the move up-market, reliance on carrier/channel partners and third-party networks, service availability, cybersecurity and privacy, and regulatory changes as risks to growth and profitability. The company expects losses to continue for at least the foreseeable future.
- The 0% notes became convertible during the quarter ending September 30, 2019 after the stock-price conversion condition was met in Q2. Conversion, cash settlement and potential dilution are relevant considerations; capped calls are intended to offset dilution only within their terms and cap.
- In the Hurley putative TCPA class action, a class-certification petition was filed in July 2019; discovery was ongoing, and the company said the outcome and any loss range could not be estimated. The Uniloc patent litigation remained stayed pending third-party patent-review proceedings, with no loss estimate provided. The SPS TCPA lawsuit was dismissed in the company’s favor, and the Supreme Court denied certiorari in June 2019.
- The company reported effective disclosure controls as of June 30, 2019. It identified no other material change in internal control over financial reporting during the quarter beyond process and control changes for lease-accounting adoption.
Important facts for investors to verify
- Whether subscription growth and ARR expansion continue, and whether retention remains above 99%.
- Whether gross-margin pressure and rising operating costs affect the path to profitability and cash generation.
- The timing and cash or share settlement of convertible-note conversions, and the effect of the notes’ market value and capped calls.
- Connect First integration, acquisition-related costs, and the contribution of acquired products to growth.
- Developments in the Hurley and Uniloc matters, as well as any new litigation, regulatory, cybersecurity or service-continuity events.
- Whether cash resources remain adequate amid continued investment, acquisitions, lease commitments and potential note-related cash obligations.