RingCentral, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results; amounts below are in millions except per-share data and percentages. RingCentral provides cloud-based business communications and collaboration software, with subscriptions generating over 90% of revenue.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $278.0 (+29%) | $215.2 | $545.5 (+31%) | $416.6 |
| Subscription revenue | $257.0 (+32%) | $194.8 | $500.1 (+32%) | $377.5 |
| Gross profit / margin | $201.3 / 72% | $161.5 / 75% | $395.4 / 72% | $312.2 / 75% |
| Operating loss | $(29.3) | $(7.2) | $(54.8) | $(14.6) |
| Net income (loss) | $0.5 | $(9.2) | $(60.2) | $(15.6) |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $40.1 | $44.2 |
| Non-GAAP free cash flow | Not stated quarterly | Not stated quarterly | $21.7 | $21.7 |
- Q2 earnings were not driven by operating profitability: the $0.5 million net income included a $41.5 million unrealized gain on long-term investments. The company reported a $29.3 million operating loss. For the first half, the $60.2 million net loss reflected higher operating costs, share-based compensation and convertible-note expense, partly offset by investment gains.
- Expenses and margins: Q2 operating expenses rose to $230.7 million from $168.7 million. Subscription gross margin declined to 78% from 80%; total gross margin fell to 72% from 75%, including higher infrastructure costs and amortization of acquired intangible assets.
- Cash and liquidity: cash and cash equivalents were $773.8 million at June 30, versus $343.6 million at year-end 2019. First-half investing cash outflow was $32.6 million; financing cash inflow was $423.1 million, chiefly reflecting the 2025 notes issuance. Management said available liquidity and capital resources were expected to meet requirements for at least 12 months.
- Debt: RingCentral issued $1.0 billion of 0% convertible senior notes due 2025, receiving net proceeds of approximately $986.5 million. It also partially repurchased its 2023 notes. At quarter-end, net carrying values were $806.2 million for the 2025 notes and $246.7 million for the 2023 notes. The 2023 notes’ conversion condition was met; $51.2 million of conversion requests remained unsettled at June 30 and were expected to be settled in Q3, with principal intended to be paid in cash. The company reported compliance with note covenants.
- Operating indicators: June 30 annualized exit monthly recurring subscriptions were $1.11 billion, including $1.02 billion for RingCentral Office. Net monthly subscription dollar retention remained above 99%. Remaining performance obligations were approximately $1.1 billion, excluding contracts originally shorter than one year; 55% was expected to be recognized within 12 months.
Changes versus the prior comparable period
- Revenue growth was led by new customers, customer upsells, mid-market and enterprise sales, and channel partners. Subscription revenue grew 32% in both the quarter and first half.
- Operating losses widened as research and development, sales and marketing, and general and administrative expenses increased. Share-based compensation for the first half rose to $85.8 million from $44.3 million.
- Operating cash flow declined $4.1 million year over year for the first half, while free cash flow was broadly unchanged. Cash increased substantially mainly because of the 2025 notes financing.
- Other income included significant unrealized gains on long-term investments; first-half results also included a $7.2 million loss on early extinguishment of debt.
Outlook, management commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management expected research and development, sales and marketing, and general and administrative expenses to rise in absolute dollars, and subscription gross margin to remain in a relatively similar range.
- Management cited new bookings as businesses shifted toward work-from-anywhere, while noting higher early-quarter churn among small businesses in some verticals that improved later in the quarter. Customers increasingly chose laptop and mobile apps over desk phones; the company also saw requests for extended payment terms.
- COVID-19 could affect customer spending, churn, contract duration, collections, credit-card declines, sales cycles, implementation timing, phone demand, partners and vendors. The duration and financial impact were uncertain.
- In July, after quarter-end, the company paid $100 million cash under a European strategic partnership for exclusive access to a provider’s customer base and prepaid future commissions. This reduces liquidity after the reporting date.
- Material exposures include execution of Avaya, Atos/Unify and other partnerships; competition; reliance on third-party networks, software and data centers; cybersecurity and service availability; regulatory and privacy requirements; and potential cash obligations or dilution from convertible notes.
- Legal matters include a TCPA class action with a tentative settlement subject to court approval, patent litigation for which loss could not be estimated, a newly filed California privacy class action for which loss could not be estimated, and cross-claims relating to a failed acquisition negotiation. The company intends to defend or prosecute the matters; it recorded an immaterial accrual for the TCPA matter.
- The company reported effective disclosure controls as of June 30, 2020, and no significant change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether subscription growth and retention remain strong as pandemic-related churn, payment extensions and customer credit risks evolve.
- How much of reported earnings and investment value depends on unrealized gains in Level 3 investments, including sensitivity to valuation assumptions and market conditions.
- The cash impact and timing of the outstanding 2023-note conversions, and the company’s capacity to meet future conversion, repurchase and maturity obligations.
- Whether gross margins stabilize despite rising infrastructure costs, amortization, and substantial share-based compensation.
- Execution and returns from strategic partnerships, including the $100 million post-quarter European payment and the larger Avaya investment and prepaid commercial arrangements.
- Developments in the disclosed litigation, privacy and regulatory risks, including the July 2020 invalidation of the EU-U.S. Privacy Shield noted in the filing.