RingCentral, Inc. — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. RingCentral provides cloud-based business communications and collaboration services; subscriptions generated 91% of revenue. The company operates as one reportable segment.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $267.5 million | $201.5 million |
| Subscription revenue | $243.1 million | $182.7 million |
| Gross profit / margin | $194.1 million / 73% | $150.7 million / 75% |
| Operating loss | $(25.5) million | $(7.5) million |
| Net loss | $(60.7) million | $(6.4) million |
| Diluted loss per share | $(0.70) | $(0.08) |
| Operating cash flow | $13.1 million | $20.2 million |
| Non-GAAP free cash flow | $12.7 million | $9.8 million |
Revenue grew 33% year over year, with subscriptions up 33%, attributed primarily to new customers, customer upsells, mid-market and enterprise sales, and channel partners. Subscription gross margin was 78%, down from 81%; total gross margin declined two percentage points. Operating expenses rose 39% to $219.6 million, with general and administrative expense increasing 64% and sales and marketing increasing 32%.
At March 31, 2020, cash and cash equivalents were $762.1 million, versus $343.6 million at year-end 2019; long-term investments were $109.9 million. Current assets were $971.6 million and current liabilities $307.8 million. Convertible senior notes had a combined net carrying amount of approximately $1.042 billion. The company reported operating lease liabilities of $42.1 million, current and noncurrent combined.
Material changes and unusual items
- RingCentral issued $1.0 billion of 0% convertible notes due 2025, receiving $986.5 million net proceeds, and used proceeds to repurchase $172.5 million principal of its 2023 notes for $495.7 million cash. The repurchase resulted in a $7.3 million loss on extinguishment. The company also paid $60.9 million for capped calls.
- The 2023 notes had $287.5 million principal outstanding at quarter-end. A conversion condition was met, permitting holders to convert during Q2 2020; no conversions occurred in Q1. Management said it intended to settle principal of both note series in cash.
- Other expense included a $23.2 million loss on long-term investments, primarily fair-value changes, and increased interest expense from note discount and issuance-cost amortization. The investments are Level 3 fair-value measurements and are exposed to market volatility.
- Share-based compensation was $36.6 million, compared with $19.4 million a year earlier. Net loss increased by $54.4 million year over year, driven mainly by investment-related losses, higher share-based compensation, the debt repurchase loss, and acquired-intangible amortization.
Outlook, commentary and risks
The filing provides no quantified revenue or earnings guidance. Management said existing liquidity and capital resources should meet cash requirements for at least the next 12 months. It expected research and development, sales and marketing, and general and administrative expenses to continue increasing in absolute dollars, and expected subscription gross margin to remain within a relatively similar range.
Management described COVID-19 effects as uncertain and potentially more visible in future periods. The company reported elevated churn in certain customer verticals, requests for extended payment terms, customer collection concerns, and lower demand for desktop phones due to shelter-in-place measures. Risks also include reduced customer spending, shorter contracts, payment failures, delayed implementations, sales-channel disruption, and impacts to partners, suppliers, and employees. Most employees were working remotely; management said this had not impaired, and was not expected to impair, operations or financial reporting controls.
Other important risks include competition, reliance on third-party networks and service providers, execution of Avaya and other strategic partnerships, cybersecurity and service reliability, regulatory and privacy compliance, and litigation. The TCPA class action had a tentative settlement subject to court approval. Patent litigation and the Bright Pattern dispute remained unresolved; the filing did not provide a clear estimate of potential losses for those matters. Management reported effective disclosure controls as of March 31, 2020.
Key facts for investors to verify
- Whether COVID-19-related churn, extended payment terms, collections, and customer demand worsened after quarter-end.
- Whether holders converted 2023 notes in Q2, and the resulting cash, liquidity, and potential dilution effects.
- How the Level 3 Avaya investment’s fair value changes, and whether the Avaya Cloud Office partnership delivers expected commercial benefits.
- Whether margins and operating cash flow can stabilize as infrastructure, sales, marketing, and administrative costs rise.
- The status and potential financial impact of the TCPA settlement, patent case, and Bright Pattern litigation.