RingCentral, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited results. RingCentral provides cloud-based SaaS business communications; subscription services, primarily RingCentral Office, generated over 90% of revenue. Figures below are in millions except per-share data and percentages.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $56.9 | $41.9 | $158.0 | $115.2 |
| Gross profit / margin | $37.5 / 66% | $26.0 / 62% | $101.1 / 64% | $70.8 / 61% |
| Operating loss | $(10.8) | $(8.2) | $(35.9) | $(30.7) |
| Net loss | $(12.0) | $(8.9) | $(38.2) | $(32.7) |
| Net loss per share, basic and diluted | $(0.18) | $(0.36) | $(0.58) | $(1.41) |
Revenue rose 36% in Q3 and 37% year to date, driven mainly by new customers, additional users at existing customers, and a greater mix of RingCentral Office subscriptions. Services revenue grew 37% in both comparisons. Gross margin improved, which management attributed to lower per-use telecom costs and operating scale, partly offset by low-margin phone sales. Operating expenses increased 42% in Q3 and 35% year to date; sales and marketing was the largest expense and rose 41% and 46%, respectively. The net loss widened despite faster revenue growth. Per-share loss comparisons are affected by the substantially higher weighted-average share count following the IPO and subsequent offerings.
Cash flow, liquidity and debt
- For the first nine months, operating cash use was $7.1 million, versus $20.6 million in 2013; investing cash use was $43.9 million versus $9.2 million; financing provided $55.3 million versus $17.4 million.
- Operating cash use improved primarily with higher accrued liabilities and deferred revenue, and noncash expenses; the company still reported a $38.2 million net loss. Investing outflow included $15.2 million of property and equipment purchases and $28.7 million of available-for-sale securities purchases.
- At September 30, cash and equivalents were $120.7 million and short-term investments were $28.7 million, totaling $149.4 million. Current assets were $167.2 million and current liabilities $79.9 million. Deferred revenue was $23.4 million.
- Debt carrying value was approximately $27.2 million: $18.5 million current and $8.8 million long term. The SVB revolving facility had $10.8 million outstanding and $2.9 million available. The company reported covenant compliance at quarter-end.
- Cash increased $4.3 million from year-end 2013, including $56.1 million net proceeds to the company from its March 2014 secondary offering. Operating cash flow remained negative.
Changes, outlook and notable items
- Annualized exit monthly recurring subscriptions were $219.8 million at quarter-end, up from $160.6 million a year earlier; RingCentral Office subscriptions were $153.7 million versus $100.5 million. Net monthly subscription dollar retention was above 99%.
- Management expects research and development, sales and marketing, and general and administrative expenses to continue increasing in absolute dollars, reflecting product development, customer acquisition, international expansion, growth support and public-company costs. The filing gives no specific revenue, earnings or margin guidance.
- Approximately 90% of customers were on monthly contractual terms, which may be terminated without penalty. The company said it expects to use cash in operating activities as it continues investing; it believes existing liquidity will cover requirements for at least the next 12 months.
- New office leases entered in 2014 include approximately $4.7 million in Denver through 2019, $1.9 million in London through 2019, and $17.5 million for headquarters through 2021. The headquarters lease includes incentives of $1.5 million; the company expected to take possession of the remaining space in Q1 2015.
- A $4.0 million long-term sales-tax contingency liability was recorded at quarter-end, in addition to $4.4 million of current accrued sales-tax amounts expected to be remitted within 12 months. Management reported no significant ongoing legal matters and no accrued legal loss contingencies.
- Key risks include sustained losses and negative operating cash flow, competition and customer churn, dependence on third-party networks and service providers, service availability and cybersecurity, international and regulatory exposure, and potential intellectual-property claims. Management concluded disclosure controls were effective at a reasonable-assurance level; it reported no material change in internal control during the quarter.
Important facts for investors to verify
- Whether recurring-subscription growth and retention above 99% continue to translate into revenue growth and improved operating leverage.
- How sales and marketing investment, share-based compensation, and other operating expenses affect the path toward profitability.
- Operating cash use, capital spending, cash and investments, debt maturities, covenant requirements, and remaining revolving-credit availability.
- The adequacy of the recorded sales-tax contingency and the financial impact of new lease commitments.
- Execution and costs of expansion into larger customers and international markets, including reliance on resellers and third-party infrastructure.