RingCentral, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. RingCentral provides cloud-based SaaS communications and collaboration services; software subscriptions generated 91% of quarterly revenue. Financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $201.5 million | $150.3 million |
| Software subscription revenue | $182.7 million | $137.0 million |
| Gross profit / gross margin | $150.7 million / 75% | $114.7 million / 76% |
| Operating loss | $7.5 million | $1.4 million |
| Net loss / diluted loss per share | $6.4 million / $0.08 | $2.7 million / $0.03 |
| Cash from operating activities | $20.2 million | $12.2 million |
| Cash used in investing activities | $38.3 million | $25.8 million |
At March 31, cash and cash equivalents were $549.0 million, versus $566.3 million at year-end 2018. Current assets were $704.4 million and current liabilities were $228.6 million. Convertible notes had a $371.5 million carrying value against $460.0 million principal; the notes bear 0% contractual interest and mature in 2023. Their disclosed fair value was approximately $653.0 million.
Changes and operating trends
- Revenue grew 34% year over year; subscription revenue rose 33%, attributed primarily to new customers and expansion within existing accounts, especially mid-market and enterprise customers and channel sales.
- Gross margin declined to 75% from 76%. Operating expenses rose 36% to $158.1 million, led by sales and marketing, which increased 38% to $99.6 million.
- Annualized exit monthly recurring subscriptions were $776.7 million, up from $589.0 million a year earlier; Office ARR was $694.0 million versus $509.2 million. Net monthly subscription dollar retention remained above 99%.
- Operating cash flow improved year over year, while investing outflows included $27.9 million of net cash paid for the Connect First acquisition and $10.4 million of capital expenditures and capitalized internal-use software. Cash declined $17.3 million during the quarter.
Outlook, risks and unusual items
- Management said it expects gross margin to remain fairly consistent, while research and development, sales and marketing, and general and administrative expenses are expected to continue rising in absolute dollars. The filing provides no clear numerical revenue or earnings guidance.
- Management believes existing liquidity and operations will meet cash requirements for at least the next 12 months, but notes future funding needs could depend on growth, investment and acquisitions; additional financing may not be available on acceptable terms.
- Connect First was acquired in January for approximately $36.5 million of total consideration, including $7.2 million held for potential indemnity claims; the company also granted $4.0 million in acquisition-related restricted stock units. The preliminary allocation included $24.6 million of nondeductible goodwill.
- Adoption of lease accounting on January 1, 2019 increased assets and liabilities by approximately $33.5 million each. At quarter-end, operating lease liabilities totaled $35.6 million; approximately $14 million of additional leases had not yet commenced.
- A $3.2 million one-time tax benefit from releasing part of the valuation allowance reduced the reported tax provision. Share-based compensation was $19.4 million, a substantial noncash expense.
- Legal matters include TCPA claims and patent litigation; the filing says potential losses cannot be reasonably estimated. The SPS plaintiff petitioned the U.S. Supreme Court for review on April 29, 2019. Other principal risks include competition, dependence on third-party networks and service providers, service reliability and cybersecurity, customer retention, international and regulatory exposure, and acquisition integration.
Important facts for investors to verify
- Whether subscription growth and ARR translate into sustained GAAP profitability as operating expenses continue to increase.
- Whether gross margin stabilizes and the company can manage sales and marketing costs while moving up-market.
- Cash conversion, working-capital movements and acquisition-related spending, including the Connect First integration and expected benefits.
- The terms and potential cash settlement obligations of the 2023 convertible notes, alongside their market value and dilution implications.
- Updates on the TCPA and patent matters, and any changes to the company’s assessment of legal contingencies.