RingCentral, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results; monetary amounts below are in U.S. dollars.
Business context
RingCentral provides cloud-based business communications and collaboration software, with subscription services as its primary revenue source. The company cited growth from new customers, existing-customer upsells, mid-market and enterprise sales, and channel partners. It also entered a strategic partnership with Alcatel-Lucent Enterprise (ALE) in July and paid $100 million upfront.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $303.6m (+30%) | $233.4m | $849.1m (+31%) | $650.0m |
| Subscription revenue | $279.6m (+33%) | $210.9m | $779.8m (+33%) | $588.4m |
| Gross profit / margin | $221.3m / 73% | $173.6m / 74% | $616.7m / 73% | $485.8m / 75% |
| Operating loss | $(29.7)m | $(10.7)m | $(84.5)m | $(25.3)m |
| Net loss | $(21.0)m | $(12.7)m | $(81.2)m | $(28.4)m |
| Diluted loss per share | $(0.24) | $(0.15) | $(0.92) | $(0.34) |
Q3 subscription gross margin was 78%, down from 81%; total gross margin was 73%, down from 74%. Operating expenses rose to 83% of revenue from 79%. Management attributed subscription margin pressure largely to acquired-intangible amortization and share-based compensation, alongside investment in infrastructure and service capacity.
- Cash and liquidity: Cash and cash equivalents were $745.6 million at September 30, 2020, up from $343.6 million at year-end 2019. Long-term investments were $173.6 million, valued using Level 3 inputs.
- Debt: Convertible senior notes had a combined net carrying value of approximately $1.41 billion: $89.2 million for 2023 notes, $815.5 million for 2025 notes, and $504.4 million for 2026 notes. The notes carry a 0% stated coupon. The company reported covenant compliance.
- Cash flow, nine months: Operating cash flow was negative $32.7 million versus positive $71.0 million in 2019; investing cash flow was negative $62.0 million; financing cash flow was positive $496.4 million. Non-GAAP free cash flow was $37.9 million versus $38.2 million. The filing’s free-cash-flow measure adds back strategic-partnership payments and debt-discount repayments, then subtracts capital expenditures and capitalized software.
- Business metrics: September ARR was $1.179 billion, including Office ARR of $1.092 billion; both were up from September 2019. Net monthly subscription dollar retention was reported above 99%. Contracted remaining performance obligations were approximately $1.2 billion, excluding contracts with an original term under one year; 54% was expected to be recognized within 12 months.
Material changes and unusual items
Revenue grew strongly, but losses widened as sales and marketing, research and development, and general and administrative costs increased. Nine-month share-based compensation was $137.4 million, up from $71.7 million. Interest expense increased with the 2025 and 2026 note issuances and related debt-discount amortization. Other income included substantial unrealized gains on long-term investments; management cited $26.4 million for Q3 and $47.8 million net for the nine-month period, partly offset by losses on repurchases of 2023 notes. These investment gains are non-cash and depend on valuation inputs.
The company issued $1.0 billion principal of 2025 notes and $650 million principal of 2026 notes during 2020, and used proceeds in part to repurchase 2023 notes. The 2023 notes became convertible for Q4 2020 after the stock-price condition was met. The company classified $14.2 million of their carrying value as current and said it intended to settle principal in cash. It also received additional conversion requests after quarter-end.
Outlook, commentary, and risks
No specific company-wide revenue or earnings guidance is provided in the supplied filing text. Management expected research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars, and subscription gross margin to remain in a relatively similar range. It believed available liquidity and capital resources would meet requirements for at least the next 12 months.
Management said remote-work demand supported new bookings and churn had stabilized after rising earlier in the year, particularly among small-business customers in some verticals. It also reported customer requests for extended payment terms and reduced demand for desk phones as customers shifted to laptop and mobile apps. COVID-19’s future effects on demand, churn, collections, sales cycles, partners, and the broader economy remained uncertain.
Notable risks include continued losses and negative operating cash flow, execution of strategic partnerships, competition, reliance on third-party network and technology providers, cybersecurity and service interruptions, customer payment and retention risks, and potential dilution or cash requirements related to convertible notes. Disclosed legal matters include a tentative, court-approval-dependent TCPA settlement with an immaterial accrual; patent and California privacy class actions for which losses could not be estimated; and litigation with Bright Pattern, also not estimable, with trial set for March 2022.
Investor verification priorities
- Track whether revenue growth converts into improving operating margins and cash generation, given rising operating costs and ongoing GAAP losses.
- Assess cash flow alongside management’s non-GAAP free-cash-flow adjustments, especially the $100 million ALE payment and convertible-note transactions.
- Review the valuation and sensitivity of the $173.6 million Level 3 investment balance and the effect of unrealized gains on reported other income.
- Monitor 2023-note conversion settlements, cash needed for note obligations, and potential dilution despite capped-call arrangements.
- Check subsequent disclosures on COVID-19-related churn, payment extensions, collections, and strategic-partner sales performance.
- Follow the status and financial exposure of the disclosed legal proceedings; several loss amounts were not estimable in this filing.