RingCentral, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing was dated February 26, 2021. RingCentral provides cloud communications, collaboration, video, and contact-center SaaS; subscription fees generated 92% of revenue. It reports one operating segment.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $1.184 billion | $902.9 million |
| Subscription revenue | $1.086 billion | $817.8 million |
| Gross profit / margin | $860.1 million / 73% | $671.8 million / 74% |
| Operating loss | $113.2 million | $45.7 million |
| Net loss | $83.0 million | $53.6 million |
| GAAP operating cash flow | $(35.2) million | $64.8 million |
| Cash and cash equivalents at year-end | $639.9 million | $343.6 million |
| Debt and financing obligations, carrying value | $1.413 billion | $389.7 million |
| Working capital | $488.1 million | $254.8 million |
Revenue grew 31%; subscription revenue increased 33%, driven by new customers, expansion within existing accounts, and mid-market and enterprise sales. Subscription gross margin fell to 78% from 80%, while total gross margin declined to 73% from 74%. Operating expenses rose 36% to $973.3 million, led by sales and marketing, research and development, and general and administrative spending. Share-based compensation was $189.6 million, up from $101.4 million.
FY2020 net loss included a $77.2 million net unrealized gain on long-term investments (the MD&A cites an $81.1 million gain before related items). Higher share-based compensation, debt-discount amortization, and acquired-intangible amortization also weighed on results. Quarterly revenue was $334.5 million in Q4; Q4 operating loss was $28.7 million and net loss was $1.8 million.
Cash, debt, and liquidity
GAAP operating cash flow was negative despite a net loss being partly offset by noncash expenses and working-capital movements. Management’s non-GAAP free cash flow was $59.7 million, versus $55.1 million in 2019; its calculation adds back strategic-partnership payments and specified debt-repayment amounts, then deducts property/equipment and capitalized software spending. Investing cash outflow was $107.7 million and financing cash inflow was $437.6 million.
The company issued $1.0 billion of 0% convertible notes due 2025 and $650 million of 0% notes due 2026, using proceeds in part to repurchase 2023 notes. Total principal outstanding at year-end was approximately $1.730 billion; carrying value was lower due to unamortized discounts and issuance costs. It reported compliance with note covenants. Management said available liquidity and capital resources were expected to meet requirements for at least 12 months. About $185 million was expected to be paid in Q1 2021 for outstanding 2023-note conversion requests.
Outlook, commentary, and risks
- The filing provides no numerical revenue or earnings guidance. Management expected R&D, sales and marketing, and general and administrative expenses to continue increasing in absolute dollars; it expected subscription gross margin to remain in a relatively similar range.
- Management reported increased bookings amid work-from-anywhere adoption, but higher churn early in 2020 among some small-business customers, later stabilization, customer requests for extended payment terms, and weaker demand for physical phones. The duration and financial effects of COVID-19 remained uncertain.
- Strategic distribution partnerships with Avaya, Atos/Unify, ALE, and Vodafone may expand sales, but their execution and commercial success are uncertain. The company had significant prepaid partnership and customer-acquisition costs.
- Key risks include intense competition and pricing pressure; reliance on partners, carriers, and third-party network, data-center, and technology providers; service outages and cybersecurity/privacy incidents; customer churn and collection risk; regulatory requirements; and continued losses. The company also identified potential dilution and cash-settlement obligations associated with convertible notes.
- Legal matters included a TCPA class action settlement that received final court approval in February 2021, subject to appeal timing; patent litigation by Uniloc; a California privacy putative class action; and litigation with Bright Pattern. For the latter three matters, the company said it could not estimate a loss or range of loss. The filing recorded an immaterial accrual for the TCPA settlement.
- Auditors gave unqualified opinions on the financial statements and internal control over financial reporting. Subscription revenue was identified as a critical audit matter because of transaction volumes and multiple IT systems.
Most important facts for investors to verify
- Whether strong subscription growth and elevated ARR—$1.30 billion at year-end, up from $960.1 million—translate into improving GAAP profitability and operating cash flow.
- How much of the reported investment gain is nonrecurring and how changes in investment valuations affect future earnings.
- The sustainability of gross margins given higher infrastructure, third-party service, and acquired-intangible costs.
- Execution and economics of strategic partnerships, including the Avaya relationship and the recovery of prepaid amounts through sales.
- Convertible-note conversion, repurchase, dilution, and cash-settlement exposure, including the expected Q1 2021 payment.
- COVID-related churn, customer payment extensions, bad-debt expense, and demand for phone devices and implementation services.
- Outcomes and potential exposure from the disclosed litigation and evolving privacy, telecommunications, and data-transfer regulations.