RingCentral, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results; dollar amounts below are in millions unless noted.
Business context and key metrics
RingCentral provides cloud-based business communications and collaboration subscriptions. Subscription revenue accounted for 94% of Q2 revenue and 93% for the first half. Management reported June 30 exit annualized recurring subscriptions (ARR) of $364.0 million, including $291.9 million for RingCentral Office; net monthly subscription dollar retention was above 99%.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $91.8 | $70.7 | $178.4 | $136.0 |
| Subscription revenue | $86.1 | $64.4 | $166.0 | $124.4 |
| Gross profit / margin | $69.5 / 76% | $49.2 / 70% | $134.3 / 75% | $93.9 / 69% |
| Operating loss | $(6.3) | $(9.5) | $(12.3) | $(19.1) |
| Net loss | $(7.8) | $(8.2) | $(14.4) | $(18.8) |
| Basic and diluted loss per share | $(0.11) | $(0.12) | $(0.20) | $(0.27) |
First-half revenue grew 31% year over year, driven mainly by new customers, more users at existing customers, and a larger mix of RingCentral Office subscriptions. Gross-margin expansion reflected infrastructure economies of scale and the shift of most phone sales to an agency model. Operating expenses rose 30% in the first half to $146.6 million, including sales and marketing of $87.5 million, R&D of $31.6 million, and general and administrative expense of $27.5 million. Share-based compensation was $14.2 million for the first half.
Cash flow, debt and liquidity
For the six months, operating cash flow was $14.7 million, versus $0.4 million a year earlier. Investing activities used $7.0 million, including $6.1 million for property and equipment and $1.0 million for internal-use software; financing provided $2.6 million. Cash and equivalents increased $10.2 million to $147.8 million.
At June 30, total debt carrying value was approximately $16.7 million: $5.9 million under the term loan and $10.8 million drawn on a $15.0 million revolving facility, leaving $4.2 million available. The company reported compliance with its debt covenants. Deferred revenue was $42.1 million, up from $36.7 million at December 31, 2015. Management said cash, operations, and available borrowing were expected to meet requirements for at least the next 12 months.
Material changes, outlook and risks
- Phone sales agency transition: RingCentral completed the transition of most direct phone sales to Westcon in Q2. It now records commissions rather than gross phone sales for covered transactions, reducing both reported other revenue and related costs. Carrier-partner phone sales and certain free or discounted phones remain outside the agency model. The presentation change limits direct comparability of “other” revenue with prior periods.
- Outlook: The filing gives no specific revenue or earnings guidance. Management expects R&D, sales and marketing, and G&A expenses to continue increasing in absolute dollars, and expects losses to continue for the foreseeable future. It cited investment in product development, customer acquisition, international expansion, and operating infrastructure.
- Foreign exchange and Brexit: Q2 other expense was $1.2 million, primarily from foreign-exchange losses associated with the British pound’s decline. The company had no currency hedges; a hypothetical 10% exchange-rate move was estimated to affect the financial statements by about $2.0 million.
- Legal contingency: A putative class action alleges TCPA violations and conversion related to customer fax transmissions. Motions to dismiss or stay were pending, discovery had not commenced, and the company said it could not estimate a possible loss range.
- Other exposures: The company recorded a $3.5 million long-term sales-tax liability and noted uncertainty in state tax obligations. It also highlighted competition, customer retention, service reliability and cybersecurity, reliance on network and other third-party providers, regulatory and data-privacy requirements, international and political risks, and dependence on resellers and phone suppliers. The company maintained a full valuation allowance against U.S. deferred tax assets.
Investor verification priorities
- Track subscription growth, Office ARR, retention, and customer acquisition costs alongside GAAP revenue.
- Assess the Westcon agency model’s effect on reported revenue, gross margin, phone availability, and customer experience.
- Monitor operating expense growth, share-based compensation, and progress toward profitability.
- Review operating cash flow quality, capital spending, debt repayment, revolver availability, and covenant compliance.
- Follow developments in the TCPA litigation and sales-tax exposure, neither of which had a clear quantified ultimate outcome in the filing.
- Evaluate foreign-exchange exposure, third-party service continuity, cybersecurity, and regulatory risks as the company expands.