RingCentral(US:RNG)2024-05-07 21:02markdown PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents RingCentral, Inc.'s unaudited condensed consolidated financial statements as of March 31, 2024, including balance sheets, statements of operations, and cash flows, along with detailed notes Condensed Consolidated Financial Statements The core financial statements show a **9% increase in total revenues to $584.2 million** for Q1 2024, a **net loss of $28.5 million**, and **$96.1 million in net cash from operating activities**, with total assets at **$1.87 billion** Q1 2024 vs Q1 2023 Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | **Total Revenues** | $584,211 | $533,689 | | **Gross Profit** | $413,732 | $373,013 | | **Loss from Operations** | $(10,899) | $(54,531) | | **Net Loss** | $(28,494) | $(54,399) | | **Net Loss Per Share (Basic & Diluted)** | $(0.31) | $(0.57) | Balance Sheet Highlights (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | **Cash and cash equivalents** | $203,130 | $222,195 | | **Total Assets** | $1,873,103 | $1,944,913 | | **Total Liabilities** | $2,196,022 | $2,248,033 | | **Total Stockholders' Deficit** | $(522,368) | $(502,569) | Cash Flow Highlights (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $96,094 | $108,533 | | **Net cash used in investing activities** | $(19,409) | $(21,319) | | **Net cash used in financing activities** | $(94,665) | $(82,726) | | **Net (decrease) increase in cash** | $(19,065) | $4,820 | Notes to Condensed Consolidated Financial Statements The notes detail revenue recognition, with **90% from North America**, the **$1.56 billion long-term debt** composition, significant share repurchase authorizations, and legal matters including a patent settlement and privacy lawsuit - North America accounted for **90% of total revenues** in Q1 2024, down slightly from 91% in Q1 2023[42](index=42&type=chunk) - As of March 31, 2024, the company had approximately **$2.5 billion in remaining performance obligations**, with **52% expected to be recognized as revenue over the next 12 months**[44](index=44&type=chunk) Long-Term Debt Principal as of March 31, 2024 (in thousands) | Debt Instrument | Principal Amount | | :--- | :--- | | 2025 Convertible Notes | $161,326 | | 2026 Convertible Notes | $609,065 | | Term Loan under Credit Agreement | $385,000 | | 2030 Senior Notes | $400,000 | | **Total Principal Amount** | **$1,555,391** | - In February 2024, the Board authorized an additional **$150.0 million for share repurchases**, and on May 1, 2024, a further **$250 million was authorized**. In Q1 2024, the company repurchased **2.4 million shares for $80.3 million**[117](index=117&type=chunk)[121](index=121&type=chunk)[149](index=149&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=28&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2024 financial performance, noting a **9% revenue increase to $584.2 million**, a narrowed net loss, and **Annualized Recurring Revenue (ARR) growth to $2.37 billion**, emphasizing operational efficiency Overview and Key Business Metrics RingCentral provides AI-driven cloud communications solutions, with **Annualized Exit Monthly Recurring Subscriptions (ARR) reaching $2.37 billion** and Net Monthly Subscription Dollar Retention Rate remaining **above 99%** - The company's multi-product portfolio includes RingEX (UCaaS), Contact Center as a Service (CCaaS), RingCentral Video, RingCentral Events, and the RingSense AI platform[154](index=154&type=chunk) Key Business Metrics (Quarterly) | Metric | March 31, 2024 | Dec 31, 2023 | Sept 30, 2023 | June 30, 2023 | March 31, 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Net Monthly Subscription Dollar Retention Rate** | >99% | >99% | >99% | >99% | >99% | | **Annualized Exit Monthly Recurring Subscriptions** | $2.37B | $2.33B | $2.26B | $2.22B | $2.16B | Results of Operations For Q1 2024, total revenues grew **9% to $584.2 million**, driven by a **10% increase in subscription revenue**, with gross margin improving to **71%** and operating loss significantly reduced to **$10.9 million** Revenue Comparison (in thousands) | Revenue Type | Q1 2024 | Q1 2023 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Subscriptions | $557,487 | $508,294 | $49,193 | 10% | | Other | $26,724 | $25,395 | $1,329 | 5% | | **Total Revenues** | **$584,211** | **$533,689** | **$50,522** | **9%** | - Research and development expenses decreased by **6% to $80.5 million**, primarily due to reduced personnel and contractor costs from headcount reductions[175](index=175&type=chunk) - Sales and marketing expenses increased **5% to $272.7 million**, driven by higher third-party commissions and amortization of deferred sales commissions, though partially offset by lower personnel costs[177](index=177&type=chunk) - General and administrative expenses decreased **13% to $71.4 million**, mainly due to a **$9.2 million reduction** in professional fees and lower personnel costs[179](index=179&type=chunk) Liquidity and Capital Resources As of March 31, 2024, the company held **$203.1 million in cash**, generated **$96.1 million in net cash from operating activities**, and reported **$76.7 million in Non-GAAP free cash flow** Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $96,094 | $108,533 | | Net cash used in investing activities | $(19,409) | $(21,319) | | Net cash used in financing activities | $(94,665) | $(82,726) | Reconciliation to Non-GAAP Free Cash Flow (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $96,094 | $108,533 | | Capitalized expenditures | $(19,409) | $(21,319) | | **Non-GAAP free cash flow** | **$76,685** | **$87,214** | [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks include foreign currency, interest rates, and inflation, with foreign currency risk limited by U.S. dollar sales and interest rate risk mitigated by a swap agreement - The majority of sales contracts are denominated in U.S. dollars, limiting significant foreign currency risk to net revenue[213](index=213&type=chunk) - To manage interest rate risk on its **$385.0 million variable-rate Term Loan**, the company entered into a five-year floating-to-fixed interest rate swap, fixing the rate at **3.79% plus a margin**[217](index=217&type=chunk) - The company does not believe that inflation has had a material effect on its business, results of operations, or financial condition[219](index=219&type=chunk) [Controls and Procedures](index=40&type=section&id=Item%204.%20Controls%20and%20Procedures) As of March 31, 2024, management concluded the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period[221](index=221&type=chunk) - No material changes to the company's internal control over financial reporting occurred during the first quarter of 2024[222](index=222&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 9 of the financial statements for details on legal matters, including a patent infringement settlement and an ongoing privacy lawsuit - For details on legal proceedings, the report refers to Note 9, Commitments and Contingencies, in the financial statements[226](index=226&type=chunk) [Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) The company outlines significant business, regulatory, intellectual property, indebtedness, and stock-related risks, including a history of net losses, intense competition, and substantial debt Risks Related to Our Business and Our Industry This section details significant operational risks, including a history of substantial net losses, intense competition, reliance on third-party contractors and strategic partners, and cybersecurity threats - The company has a history of incurring significant losses and may not be able to achieve or sustain profitability in the future[233](index=233&type=chunk) - A significant portion of software development, quality assurance, operations, and customer support is outsourced to third parties in countries like Georgia and the Philippines, creating operational risks[239](index=239&type=chunk) - The business faces intense competition from traditional on-premises providers (Avaya, Cisco, Mitel) and cloud-based providers (Microsoft, Zoom, 8x8, etc.), many of whom have greater resources[252](index=252&type=chunk)[253](index=253&type=chunk)[254](index=254&type=chunk) - Cyber-attacks, security breaches, or denial of service events pose a significant risk, which could interrupt service, harm the company's reputation, and result in significant liability[275](index=275&type=chunk) Risks Related to Regulatory Matters The company's services are subject to complex U.S. and international regulations, including FCC rules for E-911 and Universal Service Fund contributions, and evolving data privacy laws like GDPR and CCPA - The business is subject to regulation by the FCC, including rules for E-911, Universal Service Fund (USF) contributions, and call authentication, with non-compliance potentially leading to fines and enforcement actions[327](index=327&type=chunk) - The company is subject to a variety of evolving international and domestic data privacy laws (e.g., GDPR, CCPA), which may increase costs, decrease adoption of services, and expose it to liability[336](index=336&type=chunk)[338](index=338&type=chunk)[348](index=348&type=chunk) - The requirement to provide E-911 services exposes the company to significant liability, particularly if calls are misrouted due to incorrect customer-provided location data[358](index=358&type=chunk)[360](index=360&type=chunk) Risks Related to Our Indebtedness The company's substantial debt, including convertible notes, senior notes, and a term loan, presents significant risks, with restrictive covenants and the need for substantial cash flow to service obligations - The Credit Agreement contains covenants that limit the company's ability to incur additional debt, make acquisitions, dispose of assets, and pay dividends, among other restrictions[380](index=380&type=chunk) - As of March 31, 2024, the company had approximately **$1.56 billion in aggregate principal amount of notes and term loans outstanding**[382](index=382&type=chunk) - The company may not have the ability to raise the funds necessary to settle conversions of its Convertible Notes in cash or to repurchase them upon a fundamental change, which could lead to a default[389](index=389&type=chunk) Risks Related to Our Class A Common Stock and Our Charter Provisions This section highlights risks for investors in Class A Common Stock, including stock price volatility, a dual-class stock structure concentrating voting control, and anti-takeover provisions - The company's dual-class stock structure concentrates approximately **54% of the voting power** with holders of Class B Common Stock, including founders, limiting the influence of Class A stockholders[402](index=402&type=chunk) - The Series A Convertible Preferred Stock has rights preferential to common stock, including liquidation preference and the right to approve certain corporate actions, which could adversely affect liquidity[407](index=407&type=chunk)[409](index=409&type=chunk) - Anti-takeover provisions in the company's charter and bylaws may delay or prevent a change of control or changes in management, potentially limiting the market price of the stock[411](index=411&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=82&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's repurchases of its Class A Common Stock during Q1 2024, totaling **2,361,202 shares**, with approximately **$154.7 million** remaining authorized for future repurchases Issuer Purchases of Equity Securities (Q1 2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2024 | 1,032,526 | $33.46 | | February 2024 | 183,170 | $32.74 | | March 2024 | 1,145,506 | $34.94 | | **Total Q1 2024** | **2,361,202** | |