RingCentral, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparative periods ended September 30, 2012. Amounts below are in millions of dollars unless stated otherwise. RingCentral provides SaaS business communications, principally subscription services.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $41.9 | $29.6 | $115.2 | $81.4 |
| Gross profit | $26.0 | $18.4 | $70.8 | $48.9 |
| Gross margin | 62% | 62% | 61% | 60% |
| Operating loss | $(8.2) | $(9.0) | $(30.7) | $(27.5) |
| Net loss | $(8.9) | $(9.6) | $(32.7) | $(28.3) |
| Basic and diluted loss per share | $(0.36) | $(0.43) | $(1.41) | $(1.27) |
- Q3 revenue grew 42% year over year; nine-month revenue grew 41%. Services generated 90% of Q3 revenue and 91% for the nine-month period. Management attributed services growth mainly to more customers and users per customer, and a higher mix of RingCentral Office subscriptions.
- Q3 operating loss narrowed year over year, but the nine-month operating and net losses increased. Sales and marketing spending rose 37% in Q3 and 32% year to date; management cited customer acquisition, brand-building and sales-force investment. R&D spending rose 25% and 38%, respectively.
- For the nine months, operating cash outflow was $20.6, versus $12.0 in 2012; investing cash outflow was $9.2, versus $6.6; financing cash inflow was $17.4, versus $21.8. Cash decreased $12.4 to $25.5.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $25.5, total current assets $41.6, and current liabilities $52.5, implying negative working capital of about $10.9. Deferred revenue was $15.6, up from $11.3 at December 31, 2012.
- Total debt was approximately $37.4: $9.6 current and $27.8 long term. Debt increased from approximately $22.3 at September 30, 2012. Borrowings included an SVB revolving facility and term loans, plus TriplePoint loans; some borrowings bear floating rates and others fixed rates up to 11%. The company pledged its assets, except intellectual property, under the amended SVB agreement.
- The SVB agreement requires minimum cash after the IPO equal to the greater of $5.0 or twice the defined quarterly cash burn. The company reported compliance with its SVB and TriplePoint covenants at September 30, 2013. It also disclosed that an SVB minimum-cash covenant breach at June 30 had been waived in August.
Material developments, outlook and risks
- IPO after quarter end: On October 2, 2013, RingCentral completed its IPO at $13 per share. The company sold 8.545 million shares, including the overallotment, and reported proceeds of $103.3 after underwriting discounts but before approximately $3.9 of offering expenses; net proceeds after those expenses were approximately $99.4. These proceeds were not included in September 30 cash or equity.
- The September corporate reorganization converted preferred and existing common shares into Class B common stock. Class B shares carry 10 votes each versus one vote for Class A; the filing says Class B holders held approximately 98.6% of voting power after the IPO.
- Management provided no specific numerical financial guidance in this filing. It described ongoing investment in customer acquisition, product development, infrastructure and international expansion, and warned that negative operating cash flows and losses were expected to continue for the foreseeable future. Capital expenditures were also expected to increase with growth.
- Contingencies: The company recorded a $4.0 long-term estimated sales-tax liability for historic sales, in addition to $3.0 of current sales-tax liabilities included in accrued liabilities. It cautioned that estimates may change. The CallWave patent matter was settled in September; Q3 G&A included a $1.2 credit reflecting final settlement cost net of insurance recovery. The j2 patent litigation had also been settled; RingCentral obtained non-exclusive rights to the Cronos patent in October.
- Principal risks highlighted include continued losses and cash burn; dependence on third-party network, data-center and service providers; service interruptions, security and emergency-calling exposure; customer churn and competition; intellectual-property claims; regulatory and tax uncertainty; and the company’s ability to scale operations. Management assessed disclosure controls as effective at the reasonable-assurance level.
Important facts for investors to verify
- Cash balance discrepancy: The balance sheet reports September 30 cash of $25.5 and December 31, 2012 cash of $37.9, but the MD&A liquidity paragraph reverses those dates. Confirm the correct figures against the financial statements and subsequent IPO cash disclosures.
- Post-IPO liquidity and burn: Reconcile the IPO’s approximately $99.4 net proceeds after expenses with subsequent cash, operating cash use, capital spending, debt service and the SVB minimum-cash covenant.
- Debt and covenant headroom: Verify current maturities, borrowing availability, interest costs and covenant compliance, particularly given the previously waived June covenant breach.
- Sales-tax exposure and legal costs: Monitor changes to the $4.0 estimated long-term sales-tax liability and any new intellectual-property or regulatory matters.
- Growth quality and shareholder structure: Track customer and user growth, retention, margins and customer-acquisition spending; assess the effects of substantial option awards, Class B voting control and post-IPO share-sale restrictions.