RingCentral, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Unless otherwise noted, figures are in millions of dollars. RingCentral provides cloud-based business communications services, principally through RingCentral Office. More than 90% of quarterly revenue came from services; the company reported over 300,000 customers.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $48.3 | $35.5 | +36% |
| Gross profit / margin | $30.4 / 63% | $21.8 / 61% | Margin +2 percentage points |
| Operating expenses | $42.6 | $31.2 | +37% |
| Operating loss | ($12.2) | ($9.4) | Loss widened |
| Net loss | ($12.9) | ($10.3) | Loss widened |
| Net loss per share, diluted | ($0.20) | ($0.45) | Improved; weighted-average shares increased |
| Cash used in operating activities | ($2.5) | ($9.5) | Use of cash decreased |
| Capital expenditure, cash basis | $3.5 | $3.9 | Decreased |
Services revenue rose 36%, primarily from new customers, additional users at existing customers, and a higher mix of RingCentral Office subscriptions. Product revenue, mainly phone sales, also rose 36%. Gross margin improved as per-use telecommunications costs declined and scale improved, partly offset by phone sales, which carry low or negative gross margins. Sales and marketing increased 40%, research and development 29%, and general and administrative expense 37%; management attributed much of the spending growth to hiring, customer acquisition, infrastructure, product development, and public-company costs.
Liquidity, debt and balance-sheet changes
- Cash and cash equivalents were $166.8 million at March 31, versus $116.4 million at December 31, 2013. Current assets were $179.8 million and current liabilities $60.9 million, for a current ratio of approximately 3.0.
- Cash increased primarily because the March secondary offering generated $57.2 million net of underwriting discounts and commissions, before offering expenses; the company reported approximately $56.1 million after offering expenses.
- Debt carrying value was approximately $32.0 million, including current and long-term portions. The company also had capital lease obligations. A $15 million revolving facility had $1.6 million of borrowing capacity available at quarter-end. The company reported compliance with its SVB and TriplePoint covenants.
- Deferred revenue was $18.3 million, up from $16.6 million at year-end. Operating cash use improved partly because of changes in accrued liabilities and other working-capital timing; the company continued to report operating losses and expected to keep using operating cash.
- Accumulated deficit was $142.7 million. The company recorded a $3.95 million long-term sales-tax liability and disclosed a new Denver office lease with a $4.7 million commitment through 2019, plus a headquarters lease expansion.
Outlook, commentary and risks
- Management said existing liquidity should meet cash requirements for at least the next 12 months, but expected continued operating cash use as it invests in personnel, marketing, infrastructure, capacity, and international expansion. No quantified revenue or earnings guidance was provided.
- Growth priorities include winning medium-sized and larger businesses, expanding users and features within the customer base, developing reseller channels, and scaling internationally. Management cautioned that larger-customer sales may involve longer cycles and higher costs; international expansion also carries execution and regulatory risks.
- Key disclosed risks include persistent losses, customer turnover given predominantly monthly subscriptions, intense competition and pricing pressure, dependence on third-party networks, data centers and service providers, service outages and security incidents, intellectual-property claims, and telecommunications, privacy, tax and emergency-calling regulation.
- The company had no recorded accrual for legal loss contingencies at March 31. It disclosed prior patent settlements and a sales-tax contingency for earlier periods. A full valuation allowance remained against domestic and foreign deferred tax assets, so no tax benefit was recognized for current-period losses.
- Disclosure controls were assessed as effective at the reasonable-assurance level. Management noted a previously identified significant deficiency in accounting-process controls remained as of year-end 2013.
Most important facts for investors to verify
- Whether customer, user and subscription growth continues to translate into revenue growth, and whether elevated sales and marketing spending produces sustainable customer acquisition and retention.
- Whether gross-margin improvement persists, particularly given low- or negative-margin phone sales and ongoing network and infrastructure costs.
- How quickly operating losses and cash use improve; distinguish operating cash flow from the cash increase funded by the equity offering and working-capital timing.
- Debt balances, covenant requirements, available revolver capacity, and the effect of variable interest rates on financing costs.
- Potential developments in the sales-tax liability, intellectual-property matters, regulatory obligations, and internal-control remediation.
- Share supply and governance: the filing disclosed lock-up restrictions expected to expire June 2, 2014, and a dual-class structure in which Class B shares carried ten votes per share.