RingCentral, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. RingCentral provides cloud-based business communications and collaboration software as a service. Financial amounts below are in U.S. dollars; statement amounts are unaudited.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $233.4m | $173.8m | $650.0m | $485.0m |
| Gross profit / margin | $173.6m / 74% | $134.6m / 77% | $485.8m / 75% | $372.0m / 77% |
| Operating loss | $(10.7)m | $(7.0)m | $(25.3)m | $(13.0)m |
| Net loss | $(12.7)m | $(9.5)m | $(28.4)m | $(20.5)m |
| Diluted loss per share | $(0.15) | $(0.12) | $(0.34) | $(0.26) |
| Cash from operating activities | — | — | $71.0m | $49.1m |
Q3 subscription revenue was $210.9m, up 33%; total revenue rose 34%. For the first nine months, subscription revenue increased 33%. Management attributed subscription growth principally to new customers and expansion within existing accounts, particularly mid-market and enterprise customers and channel sales. Software subscriptions were 90% of Q3 revenue.
Operating expenses rose with investment and scale: Q3 R&D was $35.3m, sales and marketing $109.9m, and general and administrative $39.1m. Q3 share-based compensation was $27.4m; nine-month expense was $71.7m.
Financial position and cash flow
- At September 30, cash and cash equivalents were $582.7m, versus $566.3m at December 31, 2018. Current assets were $765.0m and current liabilities $268.1m.
- Convertible senior notes had a $381.7m net carrying value and $460.0m principal, bear 0% regular interest, and mature in March 2023. Their reported fair value was approximately $743.4m.
- Nine-month investing cash outflow was $60.7m, including $27.9m net cash paid for Connect First and $32.8m in capital expenditures and capitalized internal-use software. Financing cash inflow was $6.4m.
- Operating lease liabilities totaled $44.7m following adoption of the lease accounting standard. Management said it expected existing liquidity and operations to meet cash requirements for at least the next 12 months.
Material developments and outlook
- Q3 gross margin declined to 74% from 77%; subscription gross margin was 81% versus 82%. Management expects subscription gross margin to remain relatively consistent. Other-revenue margin fell to 16% from 28%, which management said fluctuates with services-project timing and phone discounting.
- Management expects R&D, sales and marketing, and G&A expenses to continue increasing in absolute dollars as it invests in product development, customer acquisition, international growth, and operating systems and personnel. The filing provides no specific numerical revenue or earnings guidance.
- Annualized exit monthly recurring subscriptions were $881.4m at September 30, up from $673.6m a year earlier; RingCentral Office ARR was $800.3m versus $591.7m. Net monthly subscription dollar retention was reported as greater than 99% for each of the five quarters shown.
- In January, RingCentral acquired Connect First for approximately $36.4m, including $7.1m held for indemnity claims; the preliminary allocation included $24.5m of goodwill. The acquisition also contributed to a one-time $3.2m tax benefit from a release of valuation allowance during the nine-month period.
- Avaya strategic partnership (subsequent event): Agreements were entered into October 3 and the transaction closed October 31, 2019. RingCentral purchased $125m of Avaya 3% convertible and redeemable preferred stock, representing approximately 6% ownership on an as-converted basis, and agreed to provide a $375m advance, primarily for future commissions and certain licensing rights, payable primarily in RingCentral common stock. The partnership is intended to launch Avaya Cloud Office as Avaya’s exclusive UCaaS offering.
- During Q3, the stock-price condition allowing conversion of the notes was met; holders could convert during Q4 2019. No notes were converted in Q3. RingCentral stated its current intent to settle principal in cash.
- The company adopted the lease standard effective January 1, 2019, increasing assets and liabilities by $33.5m at adoption, primarily for operating lease right-of-use assets and liabilities; management reported no significant income-statement or cash-flow impact.
Risks, contingencies, and unusual items
- RingCentral continued to report losses and expects losses for the foreseeable future. Risks highlighted include intense competition and pricing pressure, customer retention and acquisition costs, scaling infrastructure, reliance on third-party networks and hosting providers, service interruptions and cybersecurity incidents, and evolving telecommunications and privacy regulation.
- The Avaya investment and advance are significant commitments; the filing warns that expected benefits may not be realized, including if Avaya or the channel fails to successfully market the product or if Avaya experiences financial distress.
- Three disclosed legal matters include a TCPA putative class action, a patent-infringement case stayed pending patent review proceedings, and litigation with Bright Pattern involving competing claims over a proposed acquisition. The company said it could not estimate a loss or range of loss for these matters.
- Cash and cash equivalents were substantial, but note conversion, cash settlement or repurchase obligations, planned investment and growth spending, and acquisition activity could affect future liquidity. The company also noted that access to additional financing may not be available on acceptable terms.
Important facts for investors to verify
- How the Avaya partnership performs, and the timing and accounting treatment of the $375m advance and future commission offsets.
- Whether revenue growth can continue while gross margin remains below prior-year levels and operating losses widen.
- Cash generation after investment spending, share-based compensation, and the Avaya-related cash and stock commitments.
- Potential dilution or cash requirements from the convertible notes, including conversion terms and the company’s intended cash settlement.
- Developments in the TCPA, patent, and Bright Pattern matters, for which the filing provides no estimable loss range.