RingCentral, Inc. — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed February 26, 2020. The filing also reports unaudited fourth-quarter results. RingCentral provides cloud-based business communications, collaboration, and customer-engagement services, deriving most revenue from subscriptions.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Total revenue | $902.9 million | $673.6 million | +34% |
| Subscription revenue | $817.8 million | $612.9 million | +33% |
| Gross profit / margin | $671.8 million / 74% | $516.5 million / 77% | Margin down 3 percentage points |
| Operating loss | $(45.7) million | $(16.4) million | Loss widened |
| Net loss | $(53.6) million | $(26.2) million | Loss widened |
| Basic and diluted loss per share | $(0.64) | $(0.33) | Loss per share increased |
| Operating cash flow | $64.8 million | $72.1 million | Down $7.3 million |
- Subscription gross margin was 80%, versus 82% in 2018; other-revenue gross margin was 17%, versus 22%. Management attributed subscription margin pressure mainly to higher third-party service, infrastructure, and personnel costs.
- Fourth-quarter 2019 revenue was $252.9 million, gross profit $186.0 million, operating loss $20.4 million, and net loss $25.3 million. Fourth-quarter 2018 revenue was $188.6 million and net loss $5.7 million.
- Annualized exit monthly recurring subscriptions (ARR, as defined by the company) reached $960.1 million, up from $725.8 million. RingCentral Office ARR was $876.8 million, versus $644.1 million. Net monthly subscription dollar retention exceeded 99% in each reported quarter.
- Cash and cash equivalents were $343.6 million at year-end, down from $566.3 million. Working capital surplus was $254.8 million; total assets were $1.45 billion.
- Net cash used in investing was $296.8 million, including $135.6 million of long-term investments, $89.1 million for acquired intellectual property, $44.3 million of capital expenditures and capitalized internal-use software, and $27.9 million net cash paid for Connect First.
- Convertible notes had $460.0 million principal outstanding and a $386.9 million net carrying value; the balance sheet reported total debt and financing obligations of $389.7 million. Notes bear 0% interest and mature in 2023. The filing says the stock-price conversion condition was met in Q4, allowing holders to convert during Q1 2020; no 2019 conversions occurred.
Material changes and notable items
- Subscription growth reflected new customers, customer expansion, increased mid-market and enterprise sales, and channel-partner sales. No customer exceeded 10% of revenue in 2019 or 2018.
- Operating expenses rose 35% in research and development, 33% in sales and marketing, and 38% in general and administrative expenses. Sales and marketing remained the largest operating expense at $439.1 million.
- Net loss widened by $27.4 million. Management cited higher share-based compensation expense ($33.3 million increase) and non-recurring acquisition and strategic-partnership costs ($24.1 million), partly offset by growth in continuing operations.
- In 2019, RingCentral acquired Connect First and entered strategic partnerships with Avaya and Atos. The Avaya arrangements included a $125 million preferred-stock investment and $345 million in RingCentral common stock paid principally for future commissions; the filing also describes acquired intellectual property and substantial prepaid sales commissions.
- At December 31, remaining performance obligations were approximately $0.9 billion, excluding contracts with an original expected term under one year; the company expected to recognize 55% within 12 months.
Outlook, risks, and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management expects operating expenses to continue increasing in absolute dollars and subscription gross margin to remain within a relatively similar range. The company states it expects losses for at least the foreseeable future.
- Management said existing liquidity and operations should meet cash requirements for at least the next 12 months, while noting that future capital needs depend on growth, infrastructure, sales and marketing, R&D, and acquisitions.
- Principal risks include continued losses; intense competition and pricing pressure; execution of Avaya, Atos, and reseller relationships; dependence on third-party networks, software, and hosting; service outages and cybersecurity incidents; privacy and communications regulation; international expansion; and customer retention and acquisition costs.
- Avaya partnership execution is material: the company warned that it may not realize expected benefits from the investment and prepayment if ACO sales or Avaya’s financial condition disappoint.
- Legal matters included a TCPA class action with a tentative settlement reached in January 2020, subject to court approval; a stayed Uniloc patent case for which loss could not be estimated; and litigation with Bright Pattern for which the company likewise could not estimate a loss range.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded controls were effective, but Connect First was excluded from the control assessment and audit scope.
Investor verification priorities
- Review the Avaya agreements, prepaid commission amortization, ACO launch and sales, and the recoverability and valuation of the Avaya investment.
- Track subscription and total gross margins against the rising cost of service, infrastructure investment, and the company’s expectation of a similar subscription-margin range.
- Assess cash use and liquidity after the large 2019 investment outflows, including the timing and nature of future obligations and acquisition spending.
- Verify convertible-note conversion activity, potential cash settlement needs, and the implications of the 2023 maturity.
- Monitor share-based compensation, which totaled $101.4 million in 2019, and its effect on reported losses and shareholder dilution.
- Follow the court approval and final terms of the tentative TCPA settlement, and developments in the Uniloc and Bright Pattern matters.