RingCentral, Inc. — Q3 2017 Form 10-Q
Business context and reporting period: RingCentral provides cloud-based business communications and collaboration SaaS. This unaudited quarterly report covers the three and nine months ended September 30, 2017; comparisons are with the same 2016 periods unless noted.
Key financial results
| Metric | Q3 2017 | Q3 2016 | First nine months 2017 | First nine months 2016 |
|---|---|---|---|---|
| Total revenue | $129.8 million | $96.8 million | $361.0 million | $275.2 million |
| Software subscription revenue | $119.4 million | $91.9 million | $333.5 million | $257.9 million |
| Gross profit / gross margin | $99.0 million / 76% | $73.4 million / 76% | $273.3 million / 76% | $207.7 million / 75% |
| Operating loss | $(6.2) million | $(7.1) million | $(21.1) million | $(19.3) million |
| Net loss | $(5.7) million | $(8.0) million | $(20.1) million | $(22.4) million |
| Basic and diluted loss per share | $(0.07) | $(0.11) | $(0.26) | $(0.31) |
Cash flow and liquidity: For the first nine months, operating cash flow was $30.9 million, investing cash outflow was $20.8 million, and financing cash inflow was $2.5 million. Capital spending included $15.9 million for property and equipment and $5.4 million for internal-use software. Cash and cash equivalents were $172.3 million at September 30, 2017, compared with $160.4 million at December 31, 2016. Current assets were $234.2 million and current liabilities were $121.3 million.
Debt: RingCentral repaid $14.8 million of bank debt in February 2017 and reported no current or long-term debt at quarter-end. Deferred revenue was $57.7 million, up from $45.2 million at year-end 2016.
Material changes and operating trends
- Q3 revenue grew 34%; management said comparable growth excluding the change in phone sales presentation was 31%. Subscription revenue increased 30% in Q3 and 29% for the nine-month period, driven by new customers, upselling, larger customers, and channel sales.
- Other revenue rose 108% in Q3 and 59% for the nine-month period, primarily because the company moved from an agency arrangement to direct resale of phones effective January 1, 2017. This raised reported revenue and related costs and affected gross margin comparisons.
- Software subscription gross margin improved to 81% from 79% in both comparative periods, which management attributed primarily to infrastructure economies of scale. Total gross margin was 76% in Q3 and for the nine-month period.
- Operating expenses increased 31% in Q3 and 30% for the nine-month period. Sales and marketing rose 33% and 36%, respectively; management cited investment in sales capacity, channel commissions, customer acquisition, and expansion. Research and development and general and administrative costs also rose.
- Share-based compensation was $30.5 million for the first nine months, up from $22.6 million. Management expects research and development, sales and marketing, and general and administrative expenses to continue increasing in absolute dollars.
- At September 30, annualized exit monthly recurring subscriptions were $513.7 million, including $433.7 million for RingCentral Office. Net monthly subscription dollar retention exceeded 99% in each of the five quarters presented.
Outlook, risks, contingencies, and unusual items
- No specific quarterly or annual revenue or earnings guidance is provided in the supplied filing text. Management said existing liquidity and operations should meet cash requirements for at least the next 12 months, while noting future capital needs depend on growth, infrastructure, international expansion, and other spending.
- The company expects subscription gross margin to remain relatively consistent and other-revenue gross margin to be affected by the direct phone resale model. It anticipates continued investment and expense growth.
- Revenue recognition standard Topic 606 was planned for adoption in Q1 2018 using the full retrospective method. The company did not expect a material effect on total revenue, but anticipated capitalization and later amortization of certain sales commissions and additional disclosures.
- RingCentral reported a $2.8 million long-term sales tax liability and $8.2 million of current sales tax liabilities. Estimates may change as laws and assessments evolve.
- A putative class action alleging TCPA and conversion violations was dismissed with prejudice; the plaintiff appealed. Two patent infringement actions concerning the Glip application were in early stages. The company said it could not estimate a loss or range for either matter and reported no significant accrued liabilities for loss contingencies.
- Key disclosed risks include continued losses (accumulated deficit of $259.6 million), intense competition, dependence on third-party networks and data centers, service reliability and cybersecurity, customer retention, reliance on resellers, regulatory and privacy obligations, foreign exchange exposure, and execution of growth and international expansion. The company also noted AT&T’s competing service and that new AT&T-sold subscriptions had declined to an immaterial level.
- Management concluded disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2017; no significant change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether subscription growth, ARR expansion, and retention above 99% continue, particularly as the business moves up-market.
- How much reported growth and margin movement reflects underlying demand versus the direct phone resale presentation change.
- Whether expense growth and substantial share-based compensation can be balanced against revenue growth to improve operating profitability.
- Whether operating cash flow remains adequate as capital expenditures and internal software investment increase.
- Developments in the TCPA appeal, Glip patent litigation, and sales-tax exposure; the filing provides no estimable loss ranges for the lawsuits.
- Progress and financial-statement effects of Topic 606 implementation, including retrospective comparative adjustments and commission capitalization.