RingCentral, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. RingCentral provides cloud-based business communications, video, collaboration, and contact-center SaaS solutions. Comparisons are with the three months ended March 31, 2021 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $467.7 million | $352.4 million | +33% |
| Subscription revenue | $439.9 million | $325.2 million | +35% |
| Gross profit / margin | $312.2 million / 67% | $255.4 million / 72% | Margin down 5 percentage points |
| Operating loss | $103.5 million | $42.0 million | Loss increased |
| Net loss | $151.0 million | $0.2 million | Loss increased |
| Operating cash flow | $59.0 million | $37.0 million | Increased $22.0 million |
| Non-GAAP free cash flow | $38.6 million | $23.2 million | Increased $15.4 million |
Subscription revenue was 94% of total revenue, versus 92% a year earlier. Subscription gross margin declined to 71% from 77%; management attributed much of the decline to $32.5 million of incremental acquired-intangible amortization, alongside higher infrastructure, third-party, and personnel costs. Operating expenses rose to $415.7 million from $297.4 million, including higher sales and marketing, research and development, and share-based compensation. Share-based compensation expense was $97.6 million, versus $55.0 million.
Net loss included a $45.2 million net other expense, compared with $42.3 million of net other income in Q1 2021. Management attributed the reversal primarily to unrealized investment losses: losses on long-term and marketable equity investments were $48.3 million, compared with a $56.6 million gain in the prior-year period. The filing also reports lower interest expense following adoption of a new convertible-debt accounting standard.
At March 31, 2022, cash and cash equivalents were $301.9 million, including $5.5 million of restricted cash. Current assets were $720.8 million and current liabilities were $575.7 million. The company reported $1.635 billion of convertible notes, net, on the balance sheet; the 2025 and 2026 notes had aggregate principal of $1.650 billion and carry a 0% stated interest rate. Series A convertible preferred stock of $199.4 million was classified as temporary equity. The company said it was in compliance with note covenants and expected its liquidity and capital resources to meet requirements for at least the next 12 months.
Operating cash flow was $59.0 million; investing cash outflow was $21.9 million, including property, equipment, and internal-use software investment; financing cash outflow was $1.9 million. Management’s non-GAAP free cash flow measure deducts property and equipment purchases and capitalized software from operating cash flow, with adjustments described in the filing.
Material changes and business metrics
- Annualized exit monthly recurring subscriptions (ARR) reached $1.895 billion, up from $1.407 billion a year earlier. RingCentral Office ARR was $1.814 billion, versus $1.322 billion.
- Net monthly subscription dollar retention remained above 99% in each of the five quarters presented.
- Revenue growth was attributed to new customers and expansion within existing accounts, particularly mid-market and enterprise customers, and sales through direct and indirect channels.
- Other revenue grew 2% to $27.7 million. Management noted that customers’ shift from desk phones to laptop and mobile apps affected phone demand.
- Adoption of ASU 2020-06 on January 1, 2022 increased the reported net carrying amount of convertible notes by approximately $235.5 million and reduced additional paid-in capital by $329.3 million, with a $93.8 million decrease to accumulated deficit. Prior periods were not restated.
- Long-term investments declined to $163.8 million from $210.4 million at year-end; investment fair-value changes contributed materially to quarterly earnings volatility.
Outlook, risks, and contingencies
The filing provides no specific quarterly or annual revenue or earnings guidance. Management expected subscription gross margin to remain in a relatively similar range, while research and development, sales and marketing, and general and administrative expenses were expected to continue increasing in absolute dollars. The company stated that it expected to incur losses for the foreseeable future.
Management reported that it was working with contractors to relocate personnel affected by Russia’s invasion of Ukraine and expected direct, incremental fiscal 2022 costs, although their full extent was uncertain. The company also cited potential effects from COVID-19, macroeconomic conditions, inflation, foreign exchange, competition, customer demand, and investment-price volatility. Other disclosed risks include reliance on third-party network, hosting, sales, and support providers; cybersecurity and service continuity; and execution of strategic partnerships.
Material legal matters include patent litigation brought by Uniloc, a putative California privacy class action, and litigation with Bright Pattern. The company said it could not estimate a loss or range of loss for these matters and intended to defend or prosecute them. No shares had been repurchased under the board-authorized $100 million repurchase program as of March 31, 2022.
Key facts for investors to verify
- Whether subscription growth and retention remain strong, and whether ARR growth converts into recognized revenue and sustainable cash generation.
- How much gross-margin pressure persists after the acquired-intangible amortization impact, and whether operating expenses grow faster or slower than revenue.
- The composition, valuation assumptions, and future volatility of long-term investments, given their large effect on reported net income.
- Convertible-note repayment and conversion obligations, preferred-stock rights, and the company’s ability to maintain adequate liquidity.
- The cost and operational effects of relocating Ukraine-affected contractor personnel, and any changes to service delivery or product development.
- Developments in the disclosed legal proceedings, cybersecurity and third-party service risks, and execution of strategic partnerships.