RingCentral, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 7, 2017. Unaudited results. RingCentral provides cloud-based business communications and collaboration software, with subscription services as its principal revenue source.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $119.4m | $91.8m | $231.2m | $178.4m |
| Software subscription revenue | $110.4m | $86.1m | $214.1m | $166.0m |
| Gross profit / margin | $89.9m / 75% | $69.5m / 76% | $174.4m / 75% | $134.3m / 75% |
| Operating loss | $(7.5)m | $(6.3)m | $(14.8)m | $(12.3)m |
| Net loss | $(7.0)m | $(7.8)m | $(14.3)m | $(14.4)m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $17.5m | $14.7m |
Q2 total revenue grew 30% year over year; management said comparable growth excluding the phone-sales model change was 27%. Subscription revenue rose 28% in Q2 and 29% for the first half, principally from new customers, customer upsells, and a higher mix of RingCentral Office. Reported other revenue rose 56% in Q2, primarily because the company switched from earning phone-sales commissions to reselling phones and recording gross sales and related costs beginning January 1, 2017.
Q2 operating expenses increased 29% to $97.4m, led by sales and marketing, which rose 33% to $60.8m. Net loss narrowed in Q2, while operating loss widened. Subscription gross margin improved to 80% from 79%; overall gross margin was 75% versus 76%. The company attributed the overall comparison partly to the direct-sale phone model; it stated comparable gross margin would have been 1.4 percentage points higher year over year absent that model change.
Cash, debt, and liquidity
- Cash and cash equivalents were $167.0m at June 30, 2017, versus $160.4m at December 31, 2016. Current assets were $218.2m and current liabilities $108.6m.
- The company repaid its $14.8m Silicon Valley Bank debt in full on February 10, 2017; no debt remained at quarter-end, and the associated asset lien was released.
- First-half operating cash flow of $17.5m was supported by noncash adjustments, including $19.6m in share-based compensation and $7.8m in depreciation and amortization, as well as working-capital changes. Investing cash use was $11.8m, including $8.8m in property and equipment and $3.5m in capitalized internal-use software. Cash increased $6.7m over the period.
- Deferred revenue was $53.4m, up from $45.2m at year-end. Management said existing liquidity and operations should meet cash requirements for at least the next 12 months.
Business metrics, outlook, and notable items
- Annualized exit monthly recurring subscriptions (ARR, as defined by the company) were $478.0m at June 30, up from $364.0m a year earlier; RingCentral Office ARR was $398.9m, versus $291.9m. Net monthly subscription dollar retention was above 99% in each of the five reported quarters.
- No specific numerical revenue or earnings guidance is given in the provided filing text. Management expects software subscription gross margin to remain relatively consistent, while research and development, sales and marketing, and general and administrative expenses are expected to rise in absolute dollars as the company invests in product development, customer acquisition, international expansion, systems, and personnel.
- The company expanded RingCentral Office availability in 13 European countries in March 2017 and described additional product launches, including Rooms, Webinar, and Live Reports. More than 90% of revenue was generated in the U.S.; the company expects international revenue to grow.
- Revenue standard Topic 606 adoption is planned for Q1 2018, expected under the modified retrospective method. Management does not expect a material effect on total revenue, but anticipates capitalization and amortization of certain sales commissions and additional disclosures.
- Sales-tax exposures include a $3.1m long-term liability and approximately $7.0m of current sales-tax amounts expected to be remitted within 12 months. Management noted estimates could change as facts or regulations develop.
Risks, contingencies, and items to monitor
- The company continued to incur losses and reported an accumulated deficit of $253.8m. It expects losses to continue for the foreseeable future; profitability depends on sustained revenue growth and cost management.
- Competition and channel dependence are material risks. AT&T is both a reseller and competitor; RingCentral reported that new AT&T subscriptions had declined and could decline further or cease, and AT&T could migrate existing customers to its competing service.
- A carrier accounted for 25% of accounts receivable at quarter-end. Larger-customer growth may increase receivables, and management expects more invoicing to customers rather than credit-card collection.
- The SPS TCPA class action was dismissed with prejudice on July 17, 2017; SPS appealed on July 28. Two Uniloc patent-infringement actions concerning Glip were filed in April 2017. The company said loss amounts or ranges could not be estimated for either matter; no loss-contingency accrual was recorded as of June 30.
- Other principal risks include service interruptions or cyberattacks, dependence on third-party network and data-center providers, regulatory and privacy obligations (including the EU GDPR effective in 2018), foreign exchange exposure, and execution risks from rapid growth and international expansion. A hypothetical 10% foreign-exchange movement was estimated to affect the first-half financial statements by approximately $0.5m; the company had no hedging arrangements.
- Share-based compensation was $19.6m in the first half, up from $14.2m. It materially contributes to the difference between GAAP net loss and operating cash generation. Class B shares carry ten votes per share; pre-IPO holders collectively held approximately 67% of voting power, according to the filing.
Investor verification checklist
- Track subscription revenue, ARR, retention, and customer acquisition efficiency against the substantial sales-and-marketing investment.
- Assess the economics and comparability of results under the direct phone-resale model, including its effect on reported revenue and gross margin.
- Verify operating cash generation after working-capital movements, capital spending, capitalized software, and share-based compensation.
- Monitor AT&T channel trends, carrier and customer receivables concentration, and the company’s continued reliance on third-party providers.
- Follow the SPS appeal, Uniloc cases, sales-tax estimates, and implementation of Topic 606 and GDPR-related requirements.