RingCentral, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2015; financial statements are unaudited. RingCentral provides cloud-based business communications SaaS, principally through RingCentral Office. Subscription revenue accounted for 92% of quarterly revenue. More than 90% of revenue was from the United States; management reported 98% from the U.S. and Canada.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $65.3 | $48.3 | +35% |
| Subscription revenue | $60.0 | $43.9 | +37% |
| Gross profit / margin | $44.8 / 69% | $30.4 / 63% | Margin +6 percentage points |
| Operating expenses | $54.3 | $42.6 | +28% |
| Operating loss | $(9.6) | $(12.2) | Loss narrowed |
| Net loss | $(10.6) | $(12.9) | Loss narrowed |
| Basic and diluted loss per share | $(0.15) | $(0.20) | Improved |
| Cash used in operating activities | $(0.7) | $(2.5) | Use declined |
At March 31, cash and cash equivalents were $114.2 million and short-term investments were $21.6 million, totaling $135.7 million, versus $141.7 million at December 31, 2014. Current assets were $158.9 million and current liabilities $80.9 million. Debt carrying value was $21.3 million ($14.4 million current; $6.9 million long-term). The company also had $0.8 million of capital lease obligations. Cash increased $1.0 million during the quarter; investing activities provided $3.6 million, principally from securities maturities, while financing activities used $2.1 million.
Material changes and operating trends
- Revenue growth reflected new customers, increased user counts at existing customers, and a higher mix of RingCentral Office subscriptions. Product revenue, mainly phone sales, increased 22%.
- Gross margin improved primarily because of lower per-use telecom fees and operating scale, as well as improved phone inventory management and less discounting.
- Operating expenses rose across functions: research and development +22%, sales and marketing +33%, and general and administrative +17%. Sales and marketing remained the largest expense at $32.0 million.
- Management’s key metrics showed annualized exit monthly recurring subscriptions of $253.7 million, including $185.4 million for RingCentral Office. Net monthly subscription dollar retention was above 99%.
- Accounts receivable increased to $11.6 million from $7.7 million; deferred revenue increased to $28.3 million from $25.6 million. Management attributed higher receivables and deferred revenue in part to growth among larger customers and resellers.
Outlook, risks and unusual items
- Management said existing liquidity should meet cash requirements for at least the next 12 months. It expects research and development, sales and marketing, and general and administrative expenses to continue increasing in absolute dollars. No numerical revenue or earnings guidance was provided.
- The $10.8 million revolving credit balance was due August 13, 2015, with $4.2 million of stated borrowing capacity remaining. The company was in compliance with its SVB credit covenants at quarter-end; substantially all assets other than intellectual property secure the obligations.
- RingCentral continued to report losses and stated it expects losses and negative operating cash flows for the foreseeable future. Growth depends on customer acquisition and retention, larger-customer expansion, product development, channel partners, and international growth. Management noted potentially longer sales cycles and higher costs serving larger businesses.
- Principal risks include competition and pricing pressure; dependence on third-party network, hosting, and service providers; service interruptions and cybersecurity; reliance on resellers; regulatory and emergency-calling obligations; foreign exchange; and political disruption affecting outsourced operations in Russia and Ukraine. The company reported no foreign currency hedging.
- Debt had variable-rate components; management estimated a hypothetical 10% rate change would affect annual interest expense by about $2.1 million. A hypothetical 10% foreign-exchange rate change was estimated to affect the financial statements by about $0.9 million.
- The company recorded a $3.9 million long-term estimated sales-tax contingency at quarter-end, in addition to $4.2 million of current sales-tax liabilities included in accrued liabilities. Management said changes in assumptions could change the estimate.
- A new headquarters lease carries approximately $17.5 million of commitments through 2021, with $1.5 million in lease incentives. The prior San Mateo headquarters lease was terminated early, effective March 9, 2015, with obligations ending April 30, 2015.
- On April 17, 2015, UrgenSync filed a patent-infringement complaint relating to VoIP emergency calls against RingCentral and more than 20 other companies. Damages were unspecified; RingCentral said it would defend the case and recorded no loss provision. No legal loss contingency was accrued as of March 31.
- The company had an accumulated deficit of $188.7 million. A full valuation allowance remained against domestic and most foreign deferred tax assets. The filing also notes adoption planning for the new revenue standard, with impact and transition method still under evaluation.
Important facts for investors to verify
- Whether subscription growth and retention remain strong, and whether the reported recurring-subscription metrics translate into recognized revenue.
- Whether gross-margin gains persist as the company expands infrastructure and serves larger customers, while operating expenses continue to rise.
- Cash conversion and working-capital trends, particularly receivables, deferred revenue, and cash used in operations.
- Repayment or refinancing of the revolving credit facility due August 2015, covenant compliance, and any resulting liquidity needs.
- Developments in the UrgenSync patent case and the adequacy of the sales-tax liability estimate.
- Execution and cost of international expansion, reliance on third parties and resellers, and exposure to service, security, regulatory, and geopolitical risks.