RingCentral(RNG) - 2020 Q4 - Annual Report

Part I Business RingCentral is a leading provider of global enterprise cloud communications, video meetings, collaboration, and contact center software-as-a-service (SaaS) solutions - The company's core business is providing cloud-based communication and collaboration solutions via a SaaS model, with its flagship product being the Message Video Phone (MVP) platform[17][20] Key Product Offerings | Product | Description | | :--- | :--- | | RingCentral Office | A Unified Communications as a Service (UCaaS) platform including team messaging, video meetings, and a cloud phone system. | | RingCentral cloud CCaaS | A Contact Center as a Service solution. | | RingCentral Glip | A smart video meeting solution with team messaging, launched in 2020. | - A key growth strategy involves expanding go-to-market channels through strategic partnerships with established technology and telecommunications companies such as Avaya, Atos, Alcatel-Lucent Enterprise (ALE), and Vodafone to sell co-branded solutions[22][27] - The company has a diverse customer base across many industries, with no single customer accounting for more than 10% of total revenue in 2020, 2019, or 2018[41] - As of December 31, 2020, RingCentral had 3,140 full-time employees, with approximately 30% located outside the United States[60] - The business is subject to significant regulation by the FCC in the U.S. and similar bodies internationally (e.g., Ofcom in the UK, CRTC in Canada), as well as evolving data privacy laws like GDPR and CCPA[62][63][65] Risk Factors The company identifies numerous risks that could materially affect its business, including a history of net losses, reliance on partnerships and third-party infrastructure, intense competition, cybersecurity threats, and complex regulatory environments - The company has a history of significant net losses and negative cash flows and anticipates incurring losses for the foreseeable future, making future profitability uncertain[75][76][77] - The COVID-19 pandemic poses risks through potential disruptions to customer operations, decreased technology spending, and challenges for the company's remote workforce and sales efforts[81] - Future operating results depend significantly on the successful execution of strategic partnerships with Avaya, Atos/Unify, Alcatel-Lucent Enterprise, and Vodafone[86] - The business relies on third-party network service providers (like CenturyLink and Bandwidth.com) and data center hosting facilities (like Equinix and AWS), making it vulnerable to service interruptions or delays from these vendors[94][99] - Cyber-attacks, information security breaches, or denial of service events pose a significant threat, potentially leading to service interruptions, reputational harm, and liability[112][113][114] - The company is subject to complex and evolving regulations in the U.S. (FCC) and internationally, including E-911 service requirements and data privacy laws like GDPR and the California Consumer Privacy Act (CCPA), which could increase costs and liability[163][174][183][188] - The dual-class common stock structure concentrates approximately 56% of voting power with a limited number of stockholders, including founders and executive officers, limiting the influence of other stockholders on corporate matters[212] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - There are no unresolved staff comments[238] Properties RingCentral's corporate headquarters is located in Belmont, California, occupying approximately 110,000 square feet under leases expiring in July 2026, with additional leased office space globally and cloud infrastructure supported by third-party data centers - Corporate headquarters are in Belmont, California, with approximately 110,000 square feet of leased office space[239] - The company leases other offices in locations such as Denver, Charlotte, London, Xiamen, and Paris, and utilizes third-party co-location data centers in the U.S. and Europe[240] Legal Proceedings The company is involved in several legal proceedings, including a settled TCPA class action, ongoing patent infringement lawsuits, a CIPA class action, and litigation related to failed acquisition negotiations - A TCPA class action lawsuit (Hurley v. RingCentral) was settled, with the court granting final approval in February 2021[486] - The company is defending against two patent infringement lawsuits filed by Uniloc related to the Glip application, which are currently stayed[487] - A putative class action lawsuit was filed in California alleging violations of the California Invasion of Privacy Act (CIPA) for allegedly recording communications without consent[488] - The company is engaged in litigation with Bright Pattern, Inc., involving a complaint and cross-complaint stemming from failed acquisition negotiations[490] Mine Safety Disclosures This item is not applicable to the company - Not applicable[242] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities RingCentral's Class A common stock is listed on the New York Stock Exchange under 'RNG', and the company has never declared or paid cash dividends, intending to retain earnings for business operations and growth - The company's Class A common stock trades on the New York Stock Exchange under the symbol 'RNG'[244] - The company has never paid cash dividends and does not anticipate paying any in the foreseeable future[246] Selected Consolidated Financial Data The company presents selected consolidated financial data for the five fiscal years ended December 31, 2020, showing strong revenue growth alongside consistent net losses and substantial asset growth Selected Consolidated Financial Data (2018-2020) | (in thousands, except per share data) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total revenues | $1,183,657 | $902,858 | $673,624 | | Loss from operations | $(113,239) | $(45,675) | $(16,436) | | Net loss | $(82,996) | $(53,607) | $(26,203) | | Net loss per share, basic and diluted | $(0.94) | $(0.64) | $(0.33) | | Total assets (at year-end) | $2,184,597 | $1,450,747 | $894,326 | | Total stockholders' equity (at year-end) | $308,459 | $745,700 | $317,609 | Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2020, RingCentral's total revenues grew 31% to $1.18 billion, driven by subscription revenue, but net loss widened to $83.0 million due to increased operating expenses and share-based compensation, while liquidity was significantly altered by new convertible debt issuance Key Business Metrics (as of Dec 31) | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Annualized Exit Monthly Recurring Subscriptions (ARR) | $1.3 billion | $960.1 million | +35% | | RingCentral Office ARR | $1.2 billion | $876.8 million | +39% | | Net Monthly Subscription Dollar Retention Rate | >99% | >99% | Stable | Revenue Performance (FY 2020 vs. FY 2019) | Revenue Type (in thousands) | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Subscriptions | $1,086,276 | $817,811 | +33% | | Other | $97,381 | $85,047 | +15% | | Total revenues | $1,183,657 | $902,858 | +31% | - Net loss increased to $83.0 million in 2020 from $53.6 million in 2019; the increase was driven by higher non-cash items including share-based compensation (+$88.2M), interest expense from convertible notes (+$28.7M), and amortization of acquired intangibles (+$25.1M), partially offset by an $81.1M unrealized gain on long-term investments[312] - The company's liquidity position was significantly altered in 2020; it issued $1.0 billion of 2025 convertible notes and $650 million of 2026 convertible notes, using a portion of the proceeds to repurchase existing 2023 notes[315] - Net cash used in operating activities was $35.2 million in 2020, a decrease of $100.0 million from 2019, primarily due to $141.6 million paid for strategic partnership agreements and $35.0 million related to debt repayment[319][321][322] - Non-GAAP free cash flow was $59.7 million in 2020, an increase from $55.1 million in 2019[330] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency fluctuations, interest rate changes, and the market value of its investments, though foreign currency impact was not material in 2020 and convertible notes have a fixed interest rate - The majority of sales are denominated in U.S. dollars, but growing international operations in Europe and Asia-Pacific are increasing exposure to foreign currency risk; a hypothetical 10% change in exchange rates would not have had a material impact in 2020[345] - The company's convertible notes have a 0% fixed interest rate, eliminating economic interest rate risk on the debt itself; however, the fair value of the notes is sensitive to changes in market interest rates and the company's stock price[347] - The company holds $213.2 million in long-term investments (convertible and redeemable preferred stock) as of December 31, 2020; these are subject to market risk; a hypothetical 10% adverse change in the investee's stock price or volatility could decrease the investment's fair value by up to $16.8 million[348] Consolidated Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended December 31, 2020, and the independent auditor's report from KPMG LLP, detailing financial position, results of operations, and cash flows, with key notes on revenue, partnerships, debt, and share-based compensation Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting, highlighting the evaluation of subscriptions revenue as a critical audit matter - The auditor, KPMG LLP, issued an unqualified (clean) opinion on the financial statements[352] - A critical audit matter was identified concerning the evaluation of audit evidence for subscriptions revenue, due to the high volume of transactions and the complexity of the multiple IT systems involved[361][362] Consolidated Financial Statements The consolidated financial statements for the year ended December 31, 2020, show significant growth in both assets and revenues, alongside continued net losses, reflecting substantial debt increases and negative cash flows from operations Consolidated Balance Sheet Data (as of Dec 31, 2020) | (in thousands) | Amount | | :--- | :--- | | Total current assets | $926,129 | | Total assets | $2,184,597 | | Total current liabilities | $438,068 | | Convertible senior notes, net | $1,375,320 | | Total liabilities | $1,872,351 | | Total stockholders' equity | $308,459 | Consolidated Statement of Operations Data (Year ended Dec 31, 2020) | (in thousands) | Amount | | :--- | :--- | | Total revenues | $1,183,657 | | Gross profit | $860,050 | | Loss from operations | $(113,239) | | Net loss | $(82,996) | Consolidated Statement of Cash Flows Data (Year ended Dec 31, 2020) | (in thousands) | Amount | | :--- | :--- | | Net cash (used in) provided by operating activities | $(35,191) | | Net cash used in investing activities | $(107,686) | | Net cash provided by financing activities | $437,590 | Notes to Consolidated Financial Statements The notes provide critical details underlying the financial statements, including revenue disaggregation, strategic partnership payments, convertible debt status, share-based compensation expense, and net operating loss carryforwards - As of December 31, 2020, the company had approximately $1.3 billion in remaining performance obligations from customer contracts, with 53% expected to be recognized as revenue in the next 12 months[433] - In 2020, the company entered into strategic partnerships with Vodafone and ALE, paying a total of $141.6 million in cash for costs to obtain contracts and $26.6 million for intellectual property rights[448] - The company has three series of convertible senior notes outstanding; as of Dec 31, 2020, the net carrying amount was $71.2M for the 2023 Notes, $825.0M for the 2025 Notes, and $510.3M for the 2026 Notes[475] - Total share-based compensation expense for 2020 was $189.6 million, a significant increase from $101.4 million in 2019[497] - As of December 31, 2020, the company had federal net operating loss (NOL) carryforwards of approximately $1.4 billion and state NOLs of $1.1 billion[512] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[525] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020, with no material changes to internal control over financial reporting despite the shift to remote work due to COVID-19 - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[528] - There were no changes in internal control over financial reporting during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, internal controls[531] - The shift to remote work due to the COVID-19 pandemic has not resulted in any material impact to the company's internal controls over financial reporting[532] Other Information The company reports no other information for this item - None[536] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2021 Proxy Statement, and the company confirms it has a Code of Conduct - The required information is incorporated by reference from the Registrant's Proxy Statement to be filed within 120 days of the fiscal year-end[539][540] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement for the 2021 Annual Meeting of Stockholders - The required information is incorporated by reference from the Registrant's Proxy Statement[543] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's Proxy Statement, detailing securities authorized for issuance under equity compensation plans as of December 31, 2020 - Security ownership information is incorporated by reference from the Registrant's Proxy Statement[544] Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 3,680,993 | $127.15 | 22,051,914 | Certain Relationships and Related Transactions and Director Independence Information regarding certain relationships, related-party transactions, and director independence is incorporated by reference from the company's Proxy Statement for the 2021 Annual Meeting of Stockholders - The required information is incorporated by reference from the Registrant's Proxy Statement[550] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's Proxy Statement for the 2021 Annual Meeting of Stockholders - The required information is incorporated by reference from the Registrant's Proxy Statement[551] Part IV Exhibits and Financial Statement Schedules This section lists the exhibits filed as part of the Annual Report on Form 10-K, including corporate governance documents, debt agreements, material contracts, and certifications, with all financial statement schedules omitted as not applicable or included elsewhere - A list of all exhibits filed with the Form 10-K is provided, including corporate governance documents, debt agreements, material contracts, and required certifications[553][554][555] - All financial statement schedules have been omitted because they are not applicable or the information is already included in the consolidated financial statements or notes[556]