RingCentral, Inc. — FY 2022 Form 10-K
Business context and reporting period. RingCentral provides cloud communications, video, collaboration and contact-center software, primarily through subscriptions. This annual report covers the year ended December 31, 2022; comparisons below are to FY 2021 unless stated otherwise. Subscription revenue represented 95% of total revenue. The company reports one operating segment.
Financial performance
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Total revenue | $1.988 billion (+25%) | $1.595 billion |
| Subscription revenue | $1.888 billion (+27%) | $1.482 billion |
| Gross profit / margin | $1.347 billion / 68% | $1.146 billion / 72% |
| Operating loss | $649.5 million | $301.8 million |
| Net loss | $879.2 million; $9.23 per diluted share | $376.3 million; $4.10 per diluted share |
| Cash from operating activities | $191.3 million | $152.2 million |
| Non-GAAP free cash flow | $74.9 million | $89.6 million |
Subscription gross margin fell to 72% from 77%, principally reflecting $108.2 million of incremental acquired-intangible amortization and higher third-party and infrastructure costs. Other revenue was $100.6 million, down 11%; its gross margin was negative 10%, versus positive 9% in FY 2021.
Cash and cash equivalents were $270.0 million at year-end, versus $267.2 million. Current assets were $796.0 million and current liabilities $652.6 million. Total liabilities were $2.357 billion; stockholders’ deficit was $482.8 million. The company had $1.650 billion principal amount of 0% convertible notes outstanding: $1.0 billion due 2025 and $650 million due 2026. Net carrying value was $1.638 billion.
Capital spending and capitalized internal-use software totaled $86.4 million. Investing cash outflow was $87.2 million; financing cash outflow was $98.2 million, including approximately $99.8 million of share repurchases.
Changes and key operating indicators
- Revenue growth slowed to 25% from 35% in FY 2021. Management attributed growth to new customers, customer expansion and increased recurring fees, particularly among mid-market and enterprise customers.
- Annualized exit monthly recurring subscriptions (ARR) rose to $2.100 billion at December 31, 2022, from $1.800 billion a year earlier. Net monthly subscription dollar retention remained above 99% in each of the five reported quarters.
- GAAP net loss increased by $502.9 million. Major drivers included Avaya-related asset write-downs, investment losses and higher acquired-intangible amortization.
- Sales and marketing expense rose 24% to $1.057 billion; research and development rose 17% to $362.3 million. Share-based compensation was $386.0 million, up from $358.0 million.
Outlook, unusual items and risks
- Avaya: RingCentral recorded a $279.3 million non-cash write-down related to its Avaya partnership assets, including $21.7 million of accrued interest recorded in other expense. Avaya commenced a prepackaged Chapter 11 restructuring on February 14, 2023. The companies entered into an extended partnership with minimum volume commitments and a revised incentive structure; Avaya’s plan contemplated cancellation of RingCentral’s Avaya preferred shares without consideration.
- Investments: Net unrealized losses on long-term investments were $202.3 million in FY 2022, versus $14.2 million in FY 2021. The filing identifies Avaya’s financial condition and market uncertainty as valuation factors.
- Cost actions and macro conditions: A reduction-in-force plan was expected to reduce worldwide employees by about 10%; $18.2 million of restructuring costs were recorded in 2022. Management reported more cautious buying, smaller initial deployments and longer enterprise sales cycles, and an adverse foreign-exchange impact of about 2% on subscription revenue. It expects research and development, sales and marketing, and general and administrative expenses to rise in absolute dollars, while noting uncertainty around macroeconomic conditions.
- Financing after year-end: A February 2023 credit agreement provides a $200 million revolving facility and a $400 million delayed-draw term facility; none was drawn as of the filing date. The term facility is designated for settling a portion of the 2025 and/or 2026 notes. Borrowings are secured and subject to financial and other covenants. The board also authorized up to $175 million in additional repurchases, subject to a minimum cash balance; the program is discretionary.
- Principal risks and contingencies: The filing highlights competition and pricing pressure, customer churn and downsell, partner and channel dependence, service availability and cybersecurity, privacy and communications regulation, foreign-exchange and macroeconomic exposure, and reliance on third parties. Several lawsuits remain unresolved, including patent and privacy matters; the filing says potential losses or ranges cannot be estimated for the described matters.
- Accounting and controls: The company adopted ASU 2020-06 for convertible debt in 2022, increasing the notes’ carrying amount by approximately $235.5 million at adoption and reducing reported non-cash interest expense. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; the audit identified subscription revenue evidence sufficiency as a critical audit matter.
Investor verification priorities
- Review the Avaya restructuring outcome, recovery of prepaid commissions and investment value, and the assumptions underlying the $279.3 million write-down.
- Assess the drivers and sustainability of subscription growth, retention above 99%, enterprise sales-cycle length and gross-margin decline.
- Reconcile GAAP losses with operating cash flow and non-GAAP free cash flow, including the effects of non-cash charges, capitalized commissions and share-based compensation.
- Check liquidity and covenant headroom against the 2025/2026 note maturities, and monitor any draws under the new credit facilities or repurchases under the $175 million authorization.
- Track unresolved litigation, cybersecurity and regulatory exposures, and the effects of foreign exchange and economic conditions on customer demand.