RingCentral(RNG) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents RingCentral's unaudited condensed consolidated financial statements and detailed notes for periods ending June 30, 2022 Item 1. Financial Statements (Unaudited) Presents RingCentral's unaudited condensed consolidated financial statements and detailed notes for periods ending June 30, 2022 Condensed Consolidated Balance Sheets Summarizes RingCentral's financial position, including assets, liabilities, and equity, as of June 30, 2022 | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Total current assets | $739,298 | $650,741 | | Total assets | $2,519,421 | $2,579,039 | | Total current liabilities | $621,963 | $526,270 | | Convertible senior notes, net | $1,636,175 | $1,398,489 | | Total liabilities | $2,357,661 | $2,040,623 | | Total stockholders' equity | $(37,689) | $338,967 | Condensed Consolidated Statements of Operations Details RingCentral's revenues, gross profit, operating loss, and net loss for periods ended June 30, 2022 | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $486,896 | $379,273 | $954,552 | $731,629 | | Gross profit | $328,706 | $274,350 | $640,888 | $529,725 | | Loss from operations | $(107,764) | $(73,381) | $(211,306) | $(115,392) | | Net loss | $(159,515) | $(110,956) | $(310,487) | $(111,142) | | Basic and diluted EPS | $(1.68) | $(1.22) | $(3.27) | $(1.22) | Condensed Consolidated Statements of Comprehensive Income (Loss) Presents RingCentral's net loss and other comprehensive income (loss) for periods ended June 30, 2022 | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(159,515) | $(110,956) | $(310,487) | $(111,142) | | Foreign currency translation adjustments, net | $(8,182) | $1,211 | $(10,244) | $(2,201) | | Comprehensive loss | $(167,697) | $(109,745) | $(320,731) | $(113,343) | Condensed Consolidated Statements of Stockholders' Equity Outlines changes in RingCentral's stockholders' equity, including net loss and share-based compensation | Metric (in thousands) | December 31, 2021 | March 31, 2022 | June 30, 2022 | | :-------------------- | :---------------- | :------------- | :------------ | | Total Stockholders' Equity | $338,967 | $48,783 | $(37,689) | | Net loss | $(748,556) | $(805,702) | $(965,217) | | Share-based compensation | N/A | $98,424 | $98,402 | | Repurchases of common stock | N/A | N/A | $(25,004) | - The company adopted ASU No. 2020-06 effective January 1, 2022, resulting in a decrease to accumulated deficit of approximately $93.8 million, a decrease to additional paid-in capital of $329.3 million, and an increase to convertible senior notes, net of approximately $235.5 million[37] Condensed Consolidated Statements of Cash Flows Reports RingCentral's cash flows from operating, investing, and financing activities | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $109,673 | $61,471 | | Net cash used in investing activities | $(45,711) | $(43,608) | | Net cash used in financing activities | $(21,927) | $(332,236) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $39,335 | $(314,556) | Notes to Condensed Consolidated Financial Statements Provides detailed explanations of significant accounting policies and financial components Note 1. Description of Business and Summary of Significant Accounting Policies Describes RingCentral's SaaS business and outlines key accounting policies, including ASU No. 2020-06 adoption - RingCentral, Inc. is a SaaS provider enabling businesses to communicate, collaborate, and connect, operating in a single reportable segment[28][32] - The company adopted ASU No. 2020-06 on January 1, 2022, simplifying accounting for convertible instruments by eliminating the conversion option separation model, resulting in a reclassification of equity components to debt and a decrease in accumulated deficit and additional paid-in capital[36][37] Note 2. Revenue Details RingCentral's revenue recognition policies, sources, and geographical distribution - Revenues are primarily derived from subscriptions, product sales (pre-configured phones), and professional services, recognized when control is transferred to customers[38][44] Geographical Market | Geographical Market | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | 90 % | 88 % | 90 % | 88 % | | Others | 10 % | 12 % | 10 % | 12 % | - Over 90% of subscription revenues come from RingCentral MVP and customer engagement solutions[39][41] - The company expects to recognize 54% of its $1.9 billion remaining performance obligations over the next 12 months[43] Note 3. Financial Statement Components Breaks down key balance sheet components, including cash, receivables, and intangible assets Asset Components | Asset (in thousands) | June 30, 2022 | December 31, 2021 | | :------------------- | :------------ | :---------------- | | Cash and cash equivalents | $306,497 | $267,162 | | Accounts receivable, net | $253,571 | $232,842 | | Property and equipment, net | $178,240 | $166,910 | | Goodwill | $53,780 | $55,490 | | Acquired intangibles, net | $628,559 | $716,606 | - Amortization expense for acquired intangible assets was $43.7 million and $87.7 million for the three and six months ended June 30, 2022, respectively, significantly higher than the prior year due to acquisitions[47] - Deferred and prepaid sales commission costs amortization was $26.9 million and $50.1 million for the three and six months ended June 30, 2022, respectively[49] - The company believes its deferred and prepaid sales commissions from Avaya are recoverable despite a decline in Avaya's financial results[51] Note 4. Fair Value of Financial Instruments Discusses fair value measurements of RingCentral's financial instruments and investments Fair Value of Assets | Asset (in thousands) | Fair Value at June 30, 2022 | Fair Value at December 31, 2021 | | :------------------- | :-------------------------- | :------------------------------ | | Money market funds | $222,578 | $175,663 | | Long-term investments (Level 3) | $105,287 | $199,965 | | Marketable equity investments (Level 1) | $5,020 | $8,600 | - The fair value of long-term investments in Avaya convertible and redeemable preferred stock decreased from $200.0 million to $105.3 million, resulting in a loss of $96.6 million for the six months ended June 30, 2022, primarily due to changes in Avaya's share price[54] - The fair value of 0% convertible senior notes due 2026 was approximately $488.9 million and 0% convertible senior notes due 2025 was approximately $825.0 million as of June 30, 2022, classified as Level 2 in the fair value hierarchy[57] Note 5. Convertible Senior Notes Provides details on RingCentral's outstanding convertible senior notes and interest expense - The company has $1.0 billion aggregate principal amount of 0% convertible senior notes due 2025 and $650.0 million aggregate principal amount of 0% convertible senior notes due 2026 outstanding[59][60] - Effective January 1, 2022, the company irrevocably elected to settle the principal portion of these notes only in cash[65] Interest Expense Related to Notes | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Total interest expense related to the Notes | $2,232 | $32,082 | - Interest expense related to the Notes significantly decreased due to the adoption of ASU No. 2020-06, which derecognized the unamortized debt discount[70] Note 6. Leases Outlines RingCentral's operating lease arrangements for facilities, including right-of-use assets Lease Components | Lease Component (in thousands) | June 30, 2022 | December 31, 2021 | | :----------------------------- | :------------ | :---------------- | | Operating lease right-of-use assets | $40,515 | $47,294 | | Total operating lease liabilities | $43,311 | $50,498 | | Cash paid for amounts included in the measurement of lease liabilities (Six Months Ended June 30) | $11,348 (2022) | $10,462 (2021) | - The company primarily leases facilities for office and data center space under non-cancelable operating leases expiring between 2022 and 2029[75] Note 7. Commitments and Contingencies Details RingCentral's legal proceedings and commitments, noting unpredictable potential losses - The company is involved in several legal proceedings, including patent infringement (Uniloc), a class action lawsuit under the California Invasion of Privacy Act (CIPA), and a contractual dispute with Bright Pattern, Inc[76][78][81][82] - Due to the early stages and unpredictable nature of these litigations, the company cannot provide an estimated amount or range of potential loss, but intends to vigorously defend or prosecute these lawsuits[80][81][82] Note 8. Stockholders' Equity and Convertible Preferred Stock Covers RingCentral's share repurchase program and preferred stock issuance - The board authorized a $100 million share repurchase program for Class A Common Stock, effective until December 31, 2022[83] - As of June 30, 2022, $25.0 million was used to repurchase 421,041 shares, leaving $75.0 million available[84] - The company issued 200,000 shares of Series A Convertible Preferred Stock for $200 million in November 2021, convertible into Class A Common Stock at $269.22 per share[85] - This preferred stock ranks senior to common stock in liquidation and is classified as temporary equity[86] Note 9. Share-Based Compensation Reports RingCentral's share-based compensation expense, primarily from restricted stock units Share-Based Compensation Expense | Expense Category (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total share-based compensation expense | $100,511 | $95,361 | $198,119 | $150,323 | | Restricted stock units | $98,499 | $92,276 | $193,691 | $145,214 | - As of June 30, 2022, there was $550.0 million of unrecognized share-based compensation expense related to RSUs, to be recognized over approximately 2.9 years[91] - The company issued 196,295 and 277,399 RSUs under Bonus Plans for the three and six months ended June 30, 2022, respectively, with $5.0 million in unrecognized expense over 0.1 years[92][93] Note 10. Income Taxes Discusses RingCentral's income tax provision, valuation allowances, and tax law changes Provision for Income Taxes | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Provision for income taxes | $1,048 | $410 | $2,027 | $850 | - The provision for income taxes primarily consists of foreign income and state minimum taxes[94] - The company maintains a full valuation allowance against its U.S. and most foreign net deferred tax assets due to current year losses and uncertainty of realization[95] - New tax provisions from the 2017 Tax Cuts and Jobs Act and final FTC regulations are not expected to materially impact financial statements due to the full valuation allowance and taxable loss position[97] Note 11. Basic and Diluted Net Loss Per Share Presents RingCentral's basic and diluted net loss per common share Net Loss Per Share | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss per common share (Basic and diluted) | $(1.68) | $(1.22) | $(3.27) | $(1.22) | | Weighted-average common shares outstanding (Basic and diluted) | 95,130 | 91,181 | 94,854 | 90,909 | - All potential common stock equivalents (stock options, RSUs, ESPP, convertible senior notes, preferred stock) were excluded from diluted net loss per share calculations as their effect would be anti-dilutive[100][101] - Following the adoption of ASU No. 2020-06, the potential dilutive effect of the 2025 and 2026 Notes is calculated under the if-converted method, considering only amounts settled in excess of principal[102] Note 12. Related Party Transactions Details RingCentral's transactions and payables with related parties, specifically Google Inc Expenses Incurred from Google Inc | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Expenses incurred from Google Inc. | $5,600 | $6,300 | $11,700 | $11,200 | - The company made purchases from Google Inc., where one of its directors serves as President, Americas[104] - Total payables to Google Inc. were $3.8 million as of June 30, 2022, up from $3.0 million at December 31, 2021[104] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses RingCentral's financial condition, operational results, and key metrics Overview Introduces RingCentral as a leading SaaS provider of cloud communications - RingCentral is a leading SaaS provider of cloud communications, video meetings, collaboration, and contact center solutions, disrupting traditional business communications with flexible, cost-effective, and mobile-friendly offerings[106][107] - Subscriptions account for 90% or more of total revenues, driven by RingCentral MVP and customer engagement solutions, with growth primarily in the U.S. and Canada[108][109] - The company utilizes direct inside sales and indirect channels, including resellers and strategic partners (e.g., Avaya, Atos, Mitel, Vodafone, DT, Verizon), to market its solutions[109] Macroeconomic Conditions and Other Factors Examines macroeconomic factors and geopolitical conflicts impacting RingCentral's business - Macroeconomic factors like increased inflation, interest rates, supply chain disruptions, and a strengthening U.S. Dollar are causing sales cycles to normalize and larger customers to exhibit more cautious buying behavior, potentially impacting near-term results[113] - The Russia-Ukraine conflict led to $14.4 million and $18.7 million in direct and incremental relocation expenses for outsourced software development and operations personnel during the three and six months ended June 30, 2022, respectively[114] - The company has adopted a flexible, hybrid work approach post-COVID-19, re-opening offices and implementing employee wellness programs, while continuously monitoring the pandemic's evolving effects on business[115] Key Business Metrics Presents key performance indicators like Net Monthly Subscription Dollar Retention Rate and ARR Key Business Metrics (dollars in millions) | Metric (dollars in millions) | June 30, 2022 | March 31, 2022 | December 31, 2021 | September 30, 2021 | June 30, 2021 | | :--------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Net Monthly Subscription Dollar Retention Rate | >99% | >99% | >99% | >99% | >99% | | Annualized Exit Monthly Recurring Subscriptions | $1,980.7 | $1,894.8 | $1,799.9 | $1,635.6 | $1,516.3 | - Annualized Exit Monthly Recurring Subscriptions (ARR) increased to $2.0 billion at June 30, 2022, from $1.5 billion at June 30, 2021, indicating strong anticipated subscriptions revenue growth[117][121] - The Net Monthly Subscription Dollar Retention Rate remained above 99% across the last five quarterly periods, reflecting the company's ability to retain and grow subscription revenue from existing customers[118][121] Results of Operations Analyzes RingCentral's financial performance, including revenues, costs, and net loss Revenues Details RingCentral's subscription and other revenue streams and growth drivers Revenue by Type | Revenue Type (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change (YoY) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change (YoY) | | :-------------------------- | :------------------------------- | :------------------------------- | :------------- | :----------------------------- | :----------------------------- | :------------- | | Subscriptions | $462,984 | $351,203 | 32% | $902,911 | $676,426 | 33% | | Other | $23,912 | $28,070 | (15)% | $51,641 | $55,203 | (6)% | | Total revenues | $486,896 | $379,273 | 28% | $954,552 | $731,629 | 30% | - Subscriptions revenue increased by 32% and 33% for the three and six months ended June 30, 2022, respectively, driven by new customer acquisition and upsells to existing customers, particularly in mid-market and enterprise segments[126] - Other revenues, primarily from product sales and professional services, decreased by 15% and 6% for the three and six months ended June 30, 2022, respectively, due to timing of professional services contracts and a shift towards RingCentral apps[127][128] Cost of Revenues and Gross Margin Examines cost of revenues and gross margin trends Cost of Revenues and Gross Margin | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change (YoY) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change (YoY) | | :----- | :------------------------------- | :------------------------------- | :------------- | :----------------------------- | :----------------------------- | :------------- | | Subscriptions cost of revenues | $131,022 | $79,243 | 65% | $260,711 | $152,490 | 71% | | Subscriptions gross margin | 72% | 77% | -5 pp | 71% | 77% | -6 pp | | Total gross margin % | 68% | 72% | -4 pp | 67% | 72% | -5 pp | - Subscriptions cost of revenues increased significantly (65% and 71% YoY for three and six months, respectively) due to incremental amortization from acquired intangible assets ($31.8 million and $64.2 million), third-party costs, increased infrastructure support, and personnel costs[131][132] - Overall gross margin decreased by 4-5 percentage points due to higher subscription cost of revenues, driven by investments in infrastructure and capacity to support growth, and amortization of intangible assets[129][133] Operating Expenses Analyzes trends in R&D, sales and marketing, and G&A expenses Operating Expenses (in thousands) | Operating Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change (YoY) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | % Change (YoY) | | :------------------------------- | :------------------------------- | :------------------------------- | :------------- | :----------------------------- | :----------------------------- | :------------- | | Research and development | $96,518 | $76,161 | 27% | $186,792 | $138,837 | 35% | | Sales and marketing | $265,398 | $203,398 | 30% | $519,853 | $382,647 | 36% | | General and administrative | $74,554 | $68,172 | 9% | $145,549 | $123,633 | 18% | - Research and development expenses increased by 27% and 35% for the three and six months ended June 30, 2022, respectively, primarily due to increased personnel and contractor costs, including $12.5 million and $16.1 million in relocation expenses related to the Russia-Ukraine conflict[136][137] - Sales and marketing expenses rose by 30% and 36% for the three and six months, respectively, driven by higher advertising, marketing, third-party commissions, personnel costs (including share-based compensation), and amortization of deferred sales commission costs[139][140] - General and administrative expenses increased by 9% and 18% for the three and six months, respectively, mainly due to higher professional fees and personnel costs, including $9.9 million in share-based compensation for the six-month period[142][143] Other Income (Expense), Net Details components of other income and expense, net Other Income (Expense), Net (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Other income (expense), net | $(50,703) | $(37,165) | $(97,154) | $5,100 | - Other expense, net, increased by $13.5 million and $102.3 million for the three and six months ended June 30, 2022, respectively, primarily due to significant incremental unrealized losses on long-term and marketable equity investments ($51.9 million and $100.2 million, respectively)[146][147] - This increase in other expense was partially offset by a $14.8 million and $29.9 million reduction in non-cash interest expense from the amortization of debt discount and issuance costs, following the adoption of ASU No. 2020-06[146][147] Net Loss Explains the increase in net loss, driven by non-cash items - Net loss increased by $48.6 million for the three months and $199.3 million for the six months ended June 30, 2022, compared to the prior year[150][151] - The increase in net loss was mainly driven by non-cash items, including increased amortization of acquired intangible assets ($31.7 million for three months, $64.2 million for six months) and combined unrealized losses on investments ($28.7 million for three months, $133.6 million for six months), partially offset by reduced non-cash interest expense from debt discount amortization[150][151] Liquidity and Capital Resources Assesses RingCentral's ability to meet obligations, including cash and financing - The company finances operations through customer sales, convertible senior notes, convertible preferred stock, and stock plans[153] - Cash and cash equivalents were $306.5 million as of June 30, 2022[154] - A $100 million share repurchase program was authorized in December 2021; $25.0 million was used to repurchase 421,041 shares of Class A Common Stock by June 30, 2022, with $75.0 million remaining[155] - Future capital requirements depend on revenue growth, customer acquisition costs, R&D, G&A, and capital expenditures[156] - The company believes existing liquidity and financing options will cover needs for at least the next 12 months, but global economic conditions pose risks[156] Net Cash Provided By Operating Activities Analyzes the increase in net cash from operating activities Net Cash Provided By Operating Activities (in thousands) | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $109,673 | $61,471 | - Net cash provided by operating activities increased by $48.2 million to $109.7 million for the six months ended June 30, 2022, driven by the timing of customer collections and payments for personnel and vendors[159][160] Net Cash Used In Investing Activities Details the increase in net cash used in investing activities Net Cash Used In Investing Activities (in thousands) | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash used in investing activities | $(45,711) | $(43,608) | - Net cash used in investing activities increased by $2.1 million to $45.7 million for the six months ended June 30, 2022, primarily due to higher capital expenditures and internal-use software development ($41.7 million), partially offset by lower investment in intellectual property assets[162][163] Net Cash Used In Financing Activities Explains the decrease in net cash used in financing activities Net Cash Used In Financing Activities (in thousands) | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash used in financing activities | $(21,927) | $(332,236) | - Net cash used in financing activities decreased by $310.3 million to $21.9 million for the six months ended June 30, 2022, primarily due to the absence of 2023 Notes redemption payments made in the prior year, partially offset by $25.0 million in common stock repurchases[165][166] Non-GAAP Free Cash Flow Presents the company's non-GAAP free cash flow Non-GAAP Free Cash Flow (in thousands) | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $109,673 | $61,471 | | Non-GAAP free cash flow | $67,952 | $37,617 | - Non-GAAP free cash flow increased to $67.9 million for the six months ended June 30, 2022, from $37.6 million in the prior year, reflecting improved operating cash flows[168] Backlog and Deferred Revenue Discusses why backlog and deferred revenue are not reliable future revenue indicators - Backlog and deferred revenue are not considered reliable indicators of future revenues due to variability in contract length and invoicing practices, as multi-year contracts are generally invoiced only one period in advance[169][170] Contractual Obligations and Commitments Notes no significant changes in contractual obligations and commitments - There were no significant changes in contractual obligations and commitments from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021, beyond what is detailed in Notes 3, 5, 6, and 7[171] Contingencies Addresses the company's exposure to legal proceedings and claims - The company is subject to legal proceedings and claims, accruing liabilities when a loss is probable and estimable, but acknowledges the inherent unpredictability of litigation outcomes[172] Off-Balance Sheet Arrangements Confirms the absence of off-balance sheet arrangements - The company did not have any relationships with unconsolidated organizations or financial partnerships for off-balance sheet arrangements during the six months ended June 30, 2022 and 2021[173] Item 3. Quantitative and Qualitative Disclosures About Market Risk Outlines RingCentral's exposure to market risks and their potential financial impact Foreign Currency Risk Assesses RingCentral's exposure to foreign currency fluctuations from international operations - The majority of sales are in U.S. dollars, limiting significant foreign currency risk on net revenue[175] - International operations involve British Pounds, EU Euro, Canadian Dollars, and Australian Dollars, exposing the company to fluctuations[175] - A hypothetical 10% change in foreign currency exchange rates would not have a material impact on financial statements for the reported periods, but risks may increase with international expansion[175] Interest Rate Risk Evaluates RingCentral's exposure to interest rate changes - Cash and cash equivalents of $306.5 million are invested in short-term money market funds, with minimal exposure to interest rate changes due to their short-term nature[176] - The 0% convertible senior notes (2025 and 2026 Notes) have a fixed annual interest rate, meaning no economic exposure to interest rate changes[177] - However, their fair value is affected by the company's stock price[177] Market Risk Discusses market-related risks associated with long-term investments - Long-term investments, including convertible and redeemable preferred stock and marketable equity investments totaling $110.3 million, are subject to market-related risks such as fluctuations in investee stock price, volatility, and financial position[178] - A hypothetical adverse stock price or volatility change of 10% could have resulted in a potential decrease of up to $1.2 million in the fair value of these investments as of June 30, 2022[179] Item 4. Controls and Procedures Details the evaluation of RingCentral's disclosure controls and procedures Evaluation of Disclosure Controls and Procedures Confirms the effectiveness of RingCentral's disclosure controls and procedures - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2022, concluding they were effective at the reasonable assurance level[180] Changes in Internal Control over Financial Reporting Reports no significant changes in internal control over financial reporting - There were no changes in internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that significantly affected, or are reasonably likely to significantly affect, internal control over financial reporting[181] Limitations on Effectiveness of Controls and Procedures Acknowledges that controls provide reasonable, not absolute, assurance - Management acknowledges that disclosure controls and procedures, regardless of design, can only provide reasonable, not absolute, assurance of achieving control objectives, and involve judgment in balancing benefits against costs[182] PART II. OTHER INFORMATION Presents additional information including legal proceedings and risk factors Item 1. Legal Proceedings Refers to Note 7 for detailed information on RingCentral's legal proceedings - Information regarding legal proceedings is incorporated by reference from Note 7, Commitments and Contingencies, in Part I, Item 1 of this Quarterly Report on Form 10-Q[185] Item 1A. Risk Factors Details significant risks and uncertainties affecting RingCentral's business Summary Risk Factors Summarizes key investment risks, including past losses and reliance on third parties - Investing in Class A Common Stock involves a high degree of risk, including significant past and anticipated future losses, fluctuating operating results, and reliance on third parties, particularly in light of the Russia-Ukraine conflict[188][189] - Key risks include global economic conditions, challenges in managing rapid growth and strategic partnerships, intense competition, service interruptions, security incidents, customer turnover, and the impact of the dual-class stock structure and Series A Convertible Preferred Stock on voting control and liquidity[189][195] Risks Related to Our Business and Our Industry Outlines operational challenges, competition, third-party reliance, and security incidents - The company has incurred substantial net losses and expects to continue doing so, requiring sustained revenue growth and cost management to achieve profitability, which is challenged by macroeconomic conditions and competition[192][193] - Reliance on third-party contractors for software development, quality assurance, and customer support, particularly in Ukraine and formerly Russia, poses risks of service quality issues, delays, increased costs, and potential impacts from geopolitical conflicts and sanctions[199][200][201] - The business faces intense competition from traditional and cloud-based communication providers, including strategic partners who also compete, potentially leading to pricing pressures, slower growth, and increased customer turnover[211][212][214] - Security incidents, such as cyber-attacks or data breaches, could interrupt services, harm reputation, and lead to significant liability, especially with increased data storage and remote work, and heightened risks from nation-state actors[231][232][234] Risks Related to Regulatory Matters Addresses risks from evolving telecommunications and data privacy regulations - The company's subscriptions are subject to evolving federal (FCC, TCPA), state, and international telecommunications regulations, including those for privacy, E-911, and number portability, which could increase compliance costs, restrict operations, or expose the company to fines and liability[281][284][285][288] - Processing and storing personal information subjects the company to various evolving data privacy and protection laws globally (e.g., GDPR, 2021 SCCs, UK SCCs, China DSL/PIPL, US HIPAA, CCPA/CPRA, CDPA), increasing compliance costs and liability risks[291][292][294][303] - Emergency and E-911 calling services expose the company to significant liability if calls are misrouted or delayed due to incorrect customer location information or third-party failures, potentially leading to lawsuits and reputational harm[308][309][310] Risks Related to Intellectual Property Covers risks of intellectual property infringement and protection challenges - The company faces risks of intellectual property infringement claims, which could lead to significant defense costs, liability, and restrictions on using or selling certain solutions, potentially harming business and reputation[315][316][318] - Limited ability to protect intellectual property rights, both domestically and internationally, through patents, trademarks, copyrights, and trade secrets, could allow competitors to duplicate technology or dilute brand value, requiring costly litigation[319][320][321][322] - The use of open source software in its platform could impose unanticipated conditions or restrictions, potentially requiring the company to make proprietary source code publicly available or discontinue offerings, adversely affecting commercialization[323] Risks Related to Our Class A Common Stock, Our Notes and Our Charter Provisions Discusses volatility of Class A Common Stock, voting control, and convertible note risks - The market price of Class A Common Stock is highly volatile due to operating performance, market conditions, analyst expectations, security incidents, and global economic/political events, potentially leading to stock price declines and class-action lawsuits[324][325] - The dual-class stock structure concentrates voting control with pre-IPO stockholders, including founders and executive officers, limiting other stockholders' influence over corporate matters and potentially adversely affecting the Class A Common Stock market price[326][328][329] - The company may lack the funds to settle convertible notes in cash or repurchase them upon a fundamental change, and future debt agreements could impose limitations, potentially leading to default or adverse liquidity impacts[331][332][333] - The Series A Convertible Preferred Stock grants holders preferential rights (dividends, liquidation) and voting power on an as-converted basis, which could dilute common stockholders' ownership, influence governance, and impact liquidity[338][339][340] General Risk Factors Identifies general risks including tax rate changes and catastrophic disasters - Changes in effective tax rates or adverse outcomes from tax examinations could harm results, influenced by valuation of deferred tax assets, R&D tax credits, international expansion, and changes in tax laws (e.g., digital services tax)[346][347] - Ineffective internal control over financial reporting could adversely affect investor confidence and stock price, potentially leading to SEC investigations or sanctions[348][349] - The company's operations are vulnerable to catastrophic disasters (earthquakes, floods, pandemics, cyber-attacks, war) due to facility locations, potentially causing business interruptions, data loss, and reputational harm, with inadequate insurance coverage[352] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Summarizes RingCentral's Class A Common Stock share repurchase activity for the three months ended June 30, 2022 Share Repurchase Activity | Period | Total number of shares purchased | Average price paid per share | Approximate dollar value of shares that may yet be purchased under the program (in thousands) | | :------------------------ | :----------------------------- | :--------------------------- | :---------------------------------------------------------------------------------------- | | April 1, 2022 to April 30, 2022 | — | — | $100,000 | | May 1, 2022 to May 31, 2022 | 323,241 | $62.17 | $80,001 | | June 1, 2022 to June 30, 2022 | 97,800 | $51.09 | $75,004 | | Total | 421,041 | | | - The company repurchased 421,041 shares of Class A Common Stock for an aggregate of $25.0 million during the three months ended June 30, 2022, as part of a $100 million program authorized until December 31, 2022[355] Item 3. Default Upon Senior Securities Confirms no defaults upon senior securities occurred during the reported period - There was no default upon senior securities during the period[356] Item 4. Mine Safety Disclosures States that there are no mine safety disclosures to report - There are no mine safety disclosures to report[357] Item 5. Other Information Indicates no other information to disclose for the reported period - There is no other information to disclose for the reported period[358] Item 6. Exhibits Provides an index of exhibits filed or incorporated by reference, including certifications - The exhibit index lists documents filed or incorporated by reference, including offer letters, CEO/CFO certifications (Section 302 and 906 of Sarbanes-Oxley Act), and XBRL instance and taxonomy documents[359][362][363] Signatures Contains the duly authorized signatures of RingCentral's Chief Financial Officer and Chief Accounting Officer - The report is signed by Sonalee Parekh, Chief Financial Officer, and Vaibhav Agarwal, Chief Accounting Officer, on August 8, 2022[367]