RingCentral, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. RingCentral provides cloud-based business communications and collaboration software, with subscription revenue as its primary source of sales.
Financial and operating performance
- Revenue: $111.8 million, up 29% year over year. Software subscription revenue was $103.7 million, up 30%, and represented 93% of revenue. Management said comparable total revenue growth, adjusting for the phone-sales model change, was 27%.
- Profitability and margins: Gross profit was $84.5 million; gross margin was 76%, versus 75% a year earlier. Operating loss was $7.3 million, compared with $6.0 million. Net loss was $7.3 million, or $0.10 per diluted share, versus $6.6 million, or $0.09 per share.
- Expenses: Operating expenses rose 30% to $91.8 million. Sales and marketing increased 41% to $58.9 million, reflecting investment in customer acquisition and larger markets; research and development rose 14% to $17.1 million.
- Cash flow: Operating activities provided $8.7 million, compared with $4.8 million. Investing activities used $6.8 million, including $5.2 million for property and equipment and $1.6 million for internal-use software. Financing activities used $12.6 million, principally for debt repayment. Cash decreased $10.7 million.
- Liquidity and debt: Cash and cash equivalents were $149.7 million at quarter-end, down from $160.4 million at December 31, 2016. Current assets were $198.4 million and current liabilities $106.0 million. The company repaid its $14.8 million of debt in February and reported no debt at March 31.
- Recurring-revenue indicators: Annualized exit monthly recurring subscriptions were $450.8 million, up from $340.3 million a year earlier; Office ARR was $373.0 million, versus $269.3 million. Net monthly subscription dollar retention remained above 99% in each of the five reported quarters.
Changes, outlook, and material matters
- Effective January 1, 2017, RingCentral shifted phone sales through Westcon from an agency arrangement to direct resale. This increased reported phone revenue and associated costs and reduced the reported gross margin on other revenue; management said comparable gross margin would have been 1.9 percentage points higher year over year absent the change.
- Management expects subscription gross margin to remain relatively consistent and other-revenue gross margin to decline under the direct-sale model. It expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars. The filing provides no specific quarterly or full-year revenue or earnings guidance.
- Management said existing liquidity should meet cash requirements for at least the next 12 months. Future capital needs depend on growth, international expansion, litigation, and infrastructure investment; additional financing may be needed if existing cash is insufficient.
- The company expanded RingCentral Office into 13 European countries in March 2017. It identified growth in larger customers, continued innovation, channel expansion, and international scaling as opportunities, while noting execution and cost risks.
- Contingencies: A putative class action alleging Telephone Consumer Protection Act violations and conversion remained pending; the company said it could not estimate a possible loss. Two patent infringement actions concerning Glip were filed on April 25, 2017, after quarter-end; the company had not been served and could not estimate a loss. No loss-contingency accrual was recorded as of March 31.
- Other items: A $3.1 million long-term sales-tax liability was recorded at quarter-end. Share-based compensation was $8.9 million, up from $6.7 million. Management reported effective disclosure controls and procedures.
Important facts for investors to verify
- Whether subscription growth and ARR continue to translate into revenue growth and improved operating leverage, given the larger increase in sales and marketing expense.
- How the direct phone-resale model affects reported revenue, other-revenue margins, inventory exposure, and cash requirements.
- Whether operating cash generation remains adequate after capital spending and investment in internal-use software.
- Developments and potential financial exposure in the TCPA class action, the newly filed patent actions, and sales-tax matters.
- Progress and costs associated with European expansion, customer acquisition, and the planned 2018 adoption of the new revenue-recognition standard, including capitalization of certain sales commissions.