RingCentral, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. RingCentral provides cloud communications, video, collaboration and contact-center SaaS. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods. Subscriptions generated 95% of revenue in both periods.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $486.9M | $379.3M | $954.6M | $731.6M |
| Subscription revenue | $463.0M | $351.2M | $902.9M | $676.4M |
| Gross profit / margin | $328.7M / 68% | $274.4M / 72% | $640.9M / 67% | $529.7M / 72% |
| Operating loss | $(107.8)M | $(73.4)M | $(211.3)M | $(115.4)M |
| Net loss | $(159.5)M | $(111.0)M | $(310.5)M | $(111.1)M |
| Diluted net loss per share | $(1.68) | $(1.22) | $(3.27) | $(1.22) |
- Cash flow: Six-month operating cash flow was $109.7M, versus $61.5M in 2021. Capital spending and capitalized internal-use software totaled $41.7M; reported investing cash outflow was $45.7M. Company-defined non-GAAP free cash flow was $68.0M, versus $37.6M.
- Liquidity and debt: Cash and equivalents were $306.5M at June 30, up from $267.2M at year-end. Current assets were $739.3M and current liabilities $622.0M. Convertible senior notes, net, totaled $1,636.2M; the 2025 and 2026 notes carry 0% interest. The balance sheet also included $199.4M of Series A convertible preferred stock classified as temporary equity.
- Other metrics: Quarter-end ARR, as defined by the company, was $1.981B, up from $1.516B a year earlier. Net monthly subscription dollar retention was above 99% in each of the five reported quarters.
Material changes versus prior periods
- Q2 revenue rose 28% year over year; subscription revenue rose 32%. First-half revenue rose 30%, with subscription revenue up 33%, driven by new customers and expansion within existing accounts, particularly mid-market and enterprise customers.
- Gross margin fell to 68% in Q2 from 72%, and to 67% for the first half from 72%. Higher subscription delivery costs included acquired-intangible amortization, infrastructure and third-party support costs, and personnel costs.
- Operating expenses increased 25% in Q2 and 32% in the first half, led by sales and marketing investment. Operating and net losses widened.
- Q2 other expense included a $50.1M loss on Avaya investments; first-half other expense included a $96.6M loss on those investments and a $3.6M loss on marketable equity investments. The company reported total investment-related losses of $100.2M for the first half, compared with a $33.4M gain in 2021.
- Adoption of convertible-instrument accounting guidance on January 1, 2022 increased reported convertible-note liabilities by approximately $235.5M and reduced additional paid-in capital by $329.3M, with a $93.8M decrease in accumulated deficit. Prior periods were not restated; the change also reduced noncash interest expense.
- First-half operating cash flow increased by $48.2M year over year. Financing outflow was substantially lower than in 2021, when the company paid $333.6M to repurchase or redeem convertible notes. RingCentral repurchased $25.0M of shares in Q2, leaving $75.0M under its $100M authorization.
Outlook, commentary and risks
- The filing provides no quantitative revenue or earnings guidance. Management said it expects research and development, sales and marketing, general and administrative expenses, and capital expenditures to continue increasing in absolute dollars.
- Management reported more cautious buying by larger customers, smaller initial deployments and sales cycles normalizing to pre-COVID patterns. A stronger U.S. dollar and macroeconomic uncertainty could affect near-term results, customer demand, churn, contract terms and collections.
- Relocation efforts for third-party contractors affected by the Russia-Ukraine conflict cost $14.4M in Q2 and $18.7M in the first half. The company said it does not store customer data in Russia or Ukraine and is not currently dependent on operations there to provide service.
- Avaya is a significant exposure: the company held $105.3M of Avaya preferred-stock investments at fair value, down from $200.0M at year-end, and had prepaid/deferred commissions associated with the partnership. Management stated it believed those commission assets remained recoverable, while noting continued evaluation.
- Key risks include ongoing losses, intense competition, execution and reliance on strategic partners and indirect channels, cybersecurity and service continuity, macroeconomic and foreign-exchange pressures, and the Russia-Ukraine conflict. The company also disclosed Uniloc patent litigation, a California privacy class action, and litigation with Bright Pattern; it could not estimate potential losses or ranges for these matters.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of June 30, 2022; no significant change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether subscription growth can continue while gross margins decline and operating expenses rise.
- The valuation and recoverability of the Avaya investment and related deferred commission assets, including the effect of further changes in Avaya’s financial condition or market value.
- Cash generation, liquidity and capacity to meet the cash-settlement and maturity obligations of the 2025 and 2026 convertible notes.
- Customer retention, enterprise deployment size and buying behavior amid macroeconomic uncertainty and currency movements.
- Progress and costs associated with contractor relocation, strategic partnerships, and the disclosed legal matters, for which potential losses were not estimable in the filing.
- The distinction between GAAP results and company-defined non-GAAP free cash flow, and the effects of noncash investment losses, acquired-intangible amortization and the accounting-standard adoption.