Business context and reporting period
RingCentral, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company provides cloud-based communications, video, collaboration and contact-center SaaS, with subscriptions as its primary revenue source. Subscription revenue represented 93% of total revenue in both the quarter and nine-month period.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Total revenue | $414.6 million | $303.6 million | Up 37% |
| Subscription revenue | $385.4 million | $279.6 million | Up 38% |
| Gross profit / margin | $304.2 million / 73% | $221.3 million / 73% | Margin unchanged |
| Operating loss | $83.1 million | $29.7 million | Loss widened |
| Net loss | $146.8 million | $21.0 million | Loss widened |
| Net loss per share, diluted | $1.60 | $0.24 | Loss per share increased |
For the nine months ended September 30, 2021, revenue was $1.146 billion, up 35%; gross margin was 73%; operating loss was $198.5 million; and net loss was $257.9 million, compared with $849.1 million revenue and $81.2 million net loss in the prior-year period.
Q3 operating expenses rose to $387.3 million from $251.0 million, led by higher sales and marketing, research and development, and general and administrative spending. Share-based compensation was $104.4 million for the quarter and $254.7 million for the nine months, versus $51.6 million and $137.4 million, respectively, a significant contributor to the increased losses.
Investment valuation movements were unusually volatile: Q3 included a $48.7 million unrealized loss on long-term investments, versus a $23.3 million gain in Q3 2020. The nine-month investment loss was $15.3 million, compared with a $38.6 million gain in the prior-year period. These non-cash changes were a major factor in the net loss comparison.
For the first nine months, operating cash flow was positive $104.5 million, compared with negative $32.7 million in 2020. Investing activities used $63.2 million and financing activities used $335.3 million, principally reflecting repayment of the 2023 convertible notes. Company-defined non-GAAP free cash flow was $61.9 million, up from $37.9 million; it is a non-GAAP measure and should be considered alongside GAAP cash flows.
At September 30, cash and cash equivalents were $345.2 million, down from $639.9 million at December 31, 2020; long-term investments were $199.7 million. Current assets were $693.6 million and current liabilities $475.6 million. Convertible notes had a net carrying amount of $1.382 billion, representing $1.650 billion principal across the 2025 and 2026 notes; both bear 0% regular interest. The company reported compliance with their covenants and said available liquidity and resources were expected to meet requirements for at least 12 months.
Material changes and management commentary
- Management attributed subscription growth to new customer additions and expansion of seats and offerings among existing customers, especially in mid-market and enterprise accounts. Net monthly subscription dollar retention remained above 99% in each of the five quarters shown.
- Annualized exit monthly recurring subscriptions reached $1.636 billion at September 30, 2021, compared with $1.179 billion a year earlier; Office ARR was $1.551 billion versus $1.092 billion.
- Operating expenses increased substantially to support hiring, product development, sales capacity, and infrastructure. Management expects R&D, sales and marketing, and G&A expenses to continue increasing in absolute dollars. It expects subscription gross margin to remain in a relatively similar range.
- Management reported that the work-from-anywhere environment contributed to new bookings, while customers’ shift from desk phones to laptop and mobile apps affected physical-phone demand. The pandemic’s effects on customer spending, churn, payment timing, sales cycles, and services remain uncertain.
- Cash declined primarily following the first-half cash redemption of the remaining 2023 notes. Operating cash generation improved year over year, while financing cash flow shifted from proceeds in 2020 to repayments in 2021.
Outlook, risks, contingencies and unusual items
The filing provides no specific quantitative revenue or earnings guidance. Management identifies continued growth as dependent on customer acquisition and expansion, larger-enterprise execution, indirect channels, product innovation, international expansion, and successful strategic partnerships. It cautions that results may fluctuate and that losses are expected to continue for the foreseeable future.
Key risks include intense competition and pricing pressure; reliance on channel and carrier partners and third-party network, cloud, and product providers; service availability and cybersecurity; customer retention and collection risks; execution and scaling challenges; regulation and privacy compliance; foreign-exchange exposure; and continuing COVID-19 and macroeconomic uncertainty. The company disclosed a potential $12.7 million decrease in investment fair value under a hypothetical adverse 10% change in investee share price or volatility.
Legal matters include the Zoom dispute over the parties’ strategic alliance and RingCentral Meetings: the company was not required to stop serving existing contracted customers, but Zoom was not required to serve new customers contracted after January 31, 2021; the Ninth Circuit affirmed denial of RingCentral’s preliminary-injunction request in October 2021. The filing says potential losses for this and several other matters cannot be reasonably estimated. The TCPA matter was settled and concluded; the CIPA class action and Uniloc patent litigation remained unresolved, and the Bright Pattern matter was set for trial in March 2022.
Subsequent events: in October, the company invested $10 million in securities that converted into shares of a publicly traded company following a merger. On November 8, it announced an exclusive UCaaS partnership with Mitel and acquired certain IP rights for consideration of up to $650 million, including $300 million cash, approximately $300 million in Class A shares, and $50 million held back for potential claims and other events. It also issued $200 million of convertible preferred stock to Searchlight at an initial conversion price of $269.22 per share. These transactions occurred after the quarter-end and are not reflected in September 30 balances.
Management concluded disclosure controls were effective at the reasonable-assurance level and reported no significant change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription growth and retention remain strong as the company expands up-market and through strategic partners.
- How operating expenses, particularly share-based compensation and sales and marketing, affect the path to profitability and cash generation.
- Whether the reported investment losses are temporary valuation volatility or signal a change in the underlying investment values.
- Cash use, debt maturities and conversion or cash-settlement obligations under the 2025 and 2026 notes.
- The funding, dilution, integration and expected benefits of the Mitel IP transaction and preferred-stock issuance.
- Developments in the Zoom dispute, CIPA and patent litigation, and other contingencies for which loss estimates were not provided.