RingCentral, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unless noted, amounts are in U.S. dollars; financial statement amounts below are in millions. The filing was signed November 5, 2015.
Business context
RingCentral provides cloud-based business communications subscriptions, primarily RingCentral Office. Subscription revenue accounted for 92% of revenue in both the quarter and nine-month period. The company acquired team collaboration provider Glip in June 2015 and integrated its messaging and collaboration offering with RingCentral Office. More than 90% of revenue was attributed to U.S. customers in the financial statement note; MD&A states 98% came from the U.S. and Canada.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $76.8 | $56.9 | $212.8 | $158.0 |
| Subscription revenue | $70.3 | $52.0 | $194.7 | $143.7 |
| Gross profit / margin | $54.4 / 71% | $37.5 / 66% | $148.4 / 70% | $101.1 / 64% |
| Operating loss | $(5.8) | $(10.8) | $(24.9) | $(35.9) |
| Net loss | $(6.3) | $(12.0) | $(25.2) | $(38.2) |
| Net loss per share, basic and diluted | $(0.09) | $(0.18) | $(0.36) | $(0.58) |
Revenue grew 35% year over year in both periods. Management attributed subscription growth mainly to new customers, more users within existing accounts, and a higher mix of RingCentral Office subscriptions. Gross margin improved primarily through lower per-usage telecom fees and infrastructure scale benefits; product margin also benefited from inventory management and less discounting.
Operating expenses rose in dollars: Q3 sales and marketing increased 31% year over year, R&D 13%, and G&A 23%. Management said these costs supported customer acquisition, product development, expansion, and public-company requirements. Operating and net losses narrowed versus 2014 despite these investments.
Cash flow, liquidity and debt
- For the first nine months, operating cash flow was $2.2 million, compared with cash used of $7.1 million in 2014. Investing cash flow was positive $8.2 million, including $25.8 million of investment maturities, partly offset by capital spending, software costs, and the Glip acquisition. Financing cash flow was positive $6.2 million, mainly from stock-plan proceeds, offset by debt repayments.
- Cash and cash equivalents were $130.0 million and short-term investments $2.3 million at September 30, 2015; together, $132.3 million, versus $141.7 million at December 31, 2014. The company stated existing liquidity and available borrowing were expected to meet cash needs for at least 12 months.
- Carrying value of debt was $19.5 million: $8.7 million term-loan principal and $10.8 million drawn on a revolving line. The line had $4.2 million available and matures August 14, 2017. Debt is variable-rate; substantially all assets other than intellectual property secure the facility. The company reported covenant compliance at quarter-end.
- Deferred revenue increased to $34.3 million from $25.6 million at year-end. Property and equipment purchases were $11.1 million, with a further $1.8 million of capitalized internal-use software in the nine-month cash-flow statement.
Business metrics and material changes
- Annualized exit monthly recurring subscriptions were $297.5 million, up from $219.8 million at September 30, 2014; RingCentral Office ARR was $227.7 million, up from $153.7 million.
- Net monthly subscription dollar retention was reported as greater than 99% for each of the five quarterly periods shown.
- Glip acquisition consideration was $11.9 million, including $4.7 million cash net of cash acquired, $3.4 million in stock, and contingent consideration. The acquisition added $9.4 million of goodwill and $3.9 million of identifiable intangible assets at acquisition.
- Cash and short-term investments declined year over year from the prior year-end balance, while debt carrying value was $19.5 million versus $24.6 million at December 31, 2014. The revolving credit maturity was extended to August 2017.
Outlook, risks and unusual items
No specific revenue or earnings guidance is provided in the supplied filing text. Management expected R&D, sales and marketing, and G&A expenses to continue increasing in absolute dollars, and capital spending to grow with the business. It cited expansion into larger customers and international markets as opportunities that may also bring longer sales cycles and higher support and development costs.
- The company reported an accumulated deficit of $203.3 million and said it expected losses to continue for the foreseeable future. Future financing may be needed if cash and operating cash flow are insufficient; additional financing may not be available on acceptable terms.
- Key business risks include dependence on third-party network and data-center providers, service outages and cybersecurity incidents, customer churn, intense competition, reliance on resellers, international and regulatory exposure, and intellectual-property claims. The filing also highlights uncertainty around EU-to-U.S. personal-data transfers following the October 2015 EU Safe Harbor ruling.
- A $1.4 million tax benefit was recorded in the first half of 2015 after Glip-related deferred tax liabilities supported release of part of the valuation allowance. The company continued to maintain a full valuation allowance on U.S. deferred tax assets and most foreign deferred tax assets.
- A $3.9 million long-term sales-tax contingency liability was recorded at September 30, 2015 for certain pre-2012 activity; accrued current sales and related taxes were also reported. Management said estimates could change as information develops. No other legal loss-contingency accrual was recorded at quarter-end.
- Management concluded disclosure controls and procedures were effective at a reasonable-assurance level as of September 30, 2015. The company expected to cease being an emerging growth company at year-end and flagged upcoming auditor attestation requirements for internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and ARR growth, retention, and improving gross margin continue, and whether customer-acquisition spending converts into durable cash generation.
- Cash needs, capital expenditures, debt repayment and SVB covenant headroom, including the terms and availability of the remaining revolving capacity.
- Glip integration progress, realized benefits, and the final value and timing of contingent acquisition payments.
- Exposure to the historical sales-tax contingency and any changes in tax-asset valuation allowances or other tax liabilities.
- Developments in service reliability, cybersecurity, third-party provider relationships, regulatory requirements, and data-transfer compliance.
- Potential dilution from equity awards and the dual-class share structure; as of November 1, 2015, 56.8 million Class A and 14.2 million Class B shares were outstanding. Class B shares carry ten votes per share.