RingCentral Announces Second Quarter 2017 Results

Software Subscriptions Revenue up 28%

RingCentral Office® ARR up 37%

GAAP Software Subscriptions Gross Margin of 80.3%; Non-GAAP: 81.3%

BELMONT, Calif.--(BUSINESS WIRE)--RingCentral, Inc. (NYSE: RNG), a leading provider of global enterprise cloud communications and collaboration solutions, today announced financial results for the second quarter ended June 30, 2017.

Second Quarter Financial Highlights

• Software subscriptions revenue grew 28% year-over-year to $110.4 million.
• Total revenue grew 30% year-over-year to $119.4 million.
• RingCentral Office® annualized exit recurring software subscriptions (ARR) grew 37% year-over-year to $398.9 million.
• Total annualized exit recurring software subscriptions (ARR) grew 31% year-over-year to $478.0 million.
• GAAP software subscriptions gross margin was 80.3%, up 1.4 points year-over-year, while Non-GAAP software subscriptions gross margin was 81.3%, up 1.3 points year-over-year.
• GAAP operating margin was (6.3%), up 0.6 points year-over-year, while Non-GAAP operating margin was 2.9%, up 1.0 point year-over-year.
• Net monthly subscriptions dollar retention: RingCentral Office over 100% and overall subscriptions over 99%.

“We delivered another great quarter of results driven by strength in our mid-market and enterprise segments, as well as breakout growth from our channel partners,” said Vlad Shmunis, RingCentral’s Chairman and CEO. “The struggles of legacy on-premise system vendors are becoming well documented. At the same time, cloud based solutions are gaining acceptance and RingCentral is increasing its market share. Put simply, cloud is winning and RingCentral is winning in the cloud.”

Financial Results for the Second Quarter 2017

• Revenue and Gross Margin: Total revenue was $119.4 million for the second quarter of 2017, up from $91.8 million in the second quarter of 2016, representing 30% growth. Total gross margin was 75.2% for the second quarter of 2017, 0.5% lower compared to 75.7% in the second quarter of 2016.
  
  As of January 1, 2017, RingCentral transitioned from an agency model to a direct phone sales model, under which RingCentral will be recognizing the full sale price and cost of the product instead of receiving a commission for phone sales. Adjusting for the new direct model on a comparable basis, total revenue grew 27% year over year and the total gross margin would have been 1.4% higher year over year.

• Net Income (Loss) Per Share: GAAP net loss per share was ($0.09) for the second quarter of 2017 compared with ($0.11) for the second quarter of 2016. Non-GAAP net income per diluted share was $0.04 for the second quarter of 2017, compared with $0.02 per diluted share for the second quarter of 2016.
• Balance Sheet: Total cash and cash equivalents at the end of the second quarter of 2017 was $167.0 million, compared with $149.7 million at the end of the first quarter of 2017.

Recent Business Highlights

• Recognized by Synergy Research Group, an independent market research firm, as the #1 worldwide market share leader in both revenue and subscriber seats for Unified Communications as a Service (UCaaS).
• Recognized as a market leader by IHS Markit in the 2017 North American UCaaS Scorecard.
• Signed seven customer accounts which each have total contract value (TCV) of seven digits, including ChenMed and ExtraSpace Storage.
• Expanded TELUS’ cloud communications portfolio for Canadian businesses with the introduction of TELUS Business Connect Mobile which makes the features of an enterprise-grade PBX phone system available on smartphones and tablets.
• Released RingCentral Live Reports which enables RingCentral Office customers to monitor in real time the service quality being delivered to their customers.
• Launched Business Multimedia Messaging Service (MMS) capabilities enabling customers to send and receive images and multimedia files from their RingCentral business numbers. This capability is unique among our largest competitors.
• Expanded RingCentral Connect^TM open platform with new integrations including Microsoft Dynamics and additional integrations with G Suite.

Conference Call Details:

• What: RingCentral financial results for the second quarter of 2017 and outlook for the third quarter and full year of 2017.
• When: Wednesday, August 2, 2017 at 1:30PM PT (4:30PM ET).
• Dial in: To access the call in the United States, please dial [phone], and for international callers dial [phone]. Callers are encouraged to dial into the call 10 to 15 minutes prior to the start to prevent any delay in joining.
• Webcast: http://ir.ringcentral.com/ (live and replay).
• Replay: A replay of the call will be available via telephone for seven days, beginning two hours after the call. To listen to the telephone replay in the U.S., please dial [phone] from the United States or [phone] internationally with recording access code 13666007.

About RingCentral

RingCentral, Inc. (NYSE:RNG) is a leading provider of global enterprise cloud communications and collaboration solutions. More flexible and cost-effective than legacy on-premises systems, RingCentral empowers today’s mobile and distributed workforce to communicate, collaborate, and connect from anywhere, on any device. RingCentral unifies voice, video, team messaging and collaboration, conferencing, online meetings, and integrated contact center solutions. RingCentral’s open platform integrates with leading business apps and enables customers to easily customize business workflows. RingCentral is headquartered in Belmont, California, and has offices around the world.

©2017 RingCentral, Inc. All rights reserved. RingCentral, RingCentral Office, RingCentral Connect and the RingCentral logo are trademarks of RingCentral, Inc.

Forward-Looking Statements

This press release contains “forward-looking statements,” including but not limited to, statements regarding our future, our GAAP and non-GAAP guidance, our strength in our mid-market and enterprise segments, our growth from our channel partners, our increasing market share, and our anticipated success in the cloud communications and collaboration market. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on assumptions that may prove to be incorrect, which could cause actual results to differ materially from those expected or implied by the forward-looking statements. Among the important factors that could cause actual results to differ materially from those in any forward-looking statements are: our ability to grow at our expected rate of growth; our ability to add and retain larger and enterprise customers and enter new geographies and markets; our ability to continue to release, and gain customer acceptance of, new and improved versions of our services; our ability to compete successfully against existing and new competitors; our ability to enter into and maintain relationships with carriers and other resellers; our ability to manage our expenses and growth; and general market, political, economic, and business conditions, as well as those risks and uncertainties included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-Q for the quarter ended March 31, 2017, filed with the Securities and Exchange Commission; and in other filings we make with the Securities and Exchange Commission from time to time.

All forward-looking statements in this press release are based on information available to RingCentral as of the date hereof, and we undertake no obligation to update these forward-looking statements, to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of the current financial quarter.

Non-GAAP Financial Measures

Our reported financial results include certain Non-GAAP financial measures, including Non-GAAP operating income (loss), Non-GAAP operating margin, Non-GAAP software subscriptions gross margin, Non-GAAP net income (loss), and Non-GAAP net income (loss) per diluted share. Non-GAAP operating income (loss) is defined as operating income (loss) excluding share-based compensation, amortization of acquisition intangibles, and acquisition related matters. Non-GAAP operating margin is defined as Non-GAAP operating income (loss) divided by total GAAP revenue. Non-GAAP software subscriptions gross margin is defined as Non-GAAP subscriptions gross profit divided by GAAP subscription revenue. Non-GAAP net income (loss) is defined as net income (loss) excluding stock-based compensation, intercompany remeasurement gains or losses, acquisition related matters, amortization of acquisition intangibles, and the related income tax effect of these adjustments.

We have included Non-GAAP operating income (loss), Non-GAAP operating margin, Non-GAAP software subscriptions gross margin, Non-GAAP net income (loss), and Non-GAAP net income (loss) per diluted share in this press release because they are key measures used by us to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short and long-term operational plans. In particular, the exclusion of certain expenses in calculating Non-GAAP operating income (loss), Non-GAAP operating margin, Non-GAAP software subscriptions gross margin, Non-GAAP net income (loss), and Non-GAAP net income (loss) per diluted share can provide a useful measure for period-to-period comparisons of our core business.

Although Non-GAAP operating income (loss), Non-GAAP operating margin, Non-GAAP software subscriptions gross margin, Non-GAAP net income (loss), and Non-GAAP net income (loss) per diluted share are frequently used by investors in their evaluations of companies, these non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Because of these limitations, these non-GAAP financial measures should be considered alongside other financial performance measures. Reconciliations of the Company’s historical non-GAAP financial measures and key metrics to their most directly comparable GAAP measures has been provided in the financial statement tables included in this press release.

Other Measures

Our reported results also include our total annualized exit monthly recurring subscriptions, RingCentral Office® annualized exit monthly recurring subscriptions, and net monthly subscriptions dollar retention. We define our total annualized exit monthly recurring subscriptions as our total monthly recurring subscriptions multiplied by 12. Our total monthly recurring subscriptions equal the monthly value of all customer subscriptions in effect at the end of a given month. We believe this metric is a leading indicator of our anticipated subscriptions revenue. We calculate our RingCentral Office® annualized exit monthly recurring subscriptions in the same manner as we calculate our total annualized exit monthly recurring subscriptions, except that only customer subscriptions from RingCentral Office® customers are included when determining monthly recurring subscriptions for the purposes of calculating this key business metric. We define Dollar Net Change as the quotient of (i) the difference of our Monthly Recurring Subscriptions at the end of a period minus our Monthly Recurring Subscriptions at the beginning of a period minus our Monthly Recurring Subscriptions at the end of the period from new customers we added during the period, (ii) all divided by the number of months in the period. We define our Average Monthly Recurring Subscriptions as the average of the Monthly Recurring Subscriptions at the beginning and end of the measurement period.

TABLE 1 RINGCENTRAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands)
	June 30,			December 31,
	2017			2016
Assets
Current assets
Cash and cash equivalents	$	167,015		$	160,355
Accounts receivable, net		33,264			30,243
Prepaid expenses and other current assets		17,936			15,313
Total current assets		218,215			205,911
Property and equipment, net		36,613			31,994
Goodwill		9,393			9,393
Acquired intangibles, net		1,763			2,244
Other assets		2,633			3,087
Total assets	$	268,617		$	252,629
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	5,556		$	7,810
Accrued liabilities		49,720			48,322
Current portion of capital lease obligation		—			181
Current portion of long-term debt		—			14,528
Deferred revenue		53,367			45,159
Total current liabilities		108,643			116,000
Long-term debt		—			312
Sales tax liability		3,077			3,077
Other long-term liabilities		3,175			3,199
Total liabilities		114,895			122,588
Stockholders' equity
Common stock		8			7
Additional paid-in capital		404,742			366,800
Accumulated other comprehensive income		2,815			2,737
Accumulated deficit		(253,843	)		(239,503	)
Total stockholders' equity		153,722			130,041
Total liabilities and stockholders' equity	$	268,617		$	252,629

TABLE 2 RINGCENTRAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share data)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Revenues
Software subscriptions	$	110,413		$	86,067		$	214,100		$	166,045
Other		9,023			5,777			17,127			12,337
Total revenues		119,436			91,844			231,227			178,382
Cost of revenues
Software subscriptions		21,795			18,173			42,058			34,896
Other		7,766			4,191			14,809			9,208
Total cost of revenues		29,561			22,364			56,867			44,104
Gross profit		89,875			69,480			174,360			134,278
Operating expenses
Research and development		18,617			16,681			35,704			31,607
Sales and marketing		60,794			45,662			119,688			87,490
General and administrative		18,007			13,441			33,812			27,465
Total operating expenses		97,418			75,784			189,204			146,562
Loss from operations		(7,543	)		(6,304	)		(14,844	)		(12,284	)
Other income (expense), net
Interest expense		(9	)		(193	)		(88	)		(409	)
Other income (expense), net		578			(1,217	)		700			(1,584	)
Other income (expense), net		569			(1,410	)		612			(1,993	)
Loss before income taxes		(6,974	)		(7,714	)		(14,232	)		(14,277	)
Provision for income taxes		57			57			108			107
Net loss	$	(7,031	)	$	(7,771	)	$	(14,340	)	$	(14,384	)
Net loss per common share
Basic and diluted	$	(0.09	)	$	(0.11	)	$	(0.19	)	$	(0.20	)
Weighted-average number of shares used in computing net loss per share
Basic and diluted		75,867			72,649			75,278			72,380

TABLE 3 RINGCENTRAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
	Six Months Ended
	June 30,
	2017			2016
Cash flows from operating activities
Net loss	$	(14,340	)	$	(14,384	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		7,842			6,953
Share-based compensation		19,562			14,214
Foreign currency remeasurement (gain) loss		(463	)		1,708
Provision for bad debt		1,003			388
Deferred income taxes		(12	)		(4	)
Other		113			113
Changes in assets and liabilities:
Accounts receivable		(4,024	)		(5,395	)
Prepaid expenses and other current assets		(2,623	)		(452	)
Other assets		501			131
Accounts payable		(1,427	)		(3,911	)
Accrued liabilities		3,136			11,492
Deferred revenue		8,208			5,448
Other liabilities		(24	)		(1,620	)
Net cash provided by operating activities		17,452			14,681
Cash flows from investing activities
Purchases of property and equipment		(8,814	)		(6,056	)
Capitalized internal-use software		(3,488	)		(961	)
Restricted investments		530			—
Net cash used in investing activities		(11,772	)		(7,017	)
Cash flows from financing activities
Proceeds from issuance of stock in connection with stock plans		17,449			6,168
Payment of holdback from Glip acquisition		—			(1,500	)
Taxes paid related to net share settlement of equity awards		(1,118	)		—
Repayment of debt		(14,840	)		(1,875	)
Repayment of capital lease obligations		(181	)		(177	)
Net cash provided by financing activities		1,310			2,616
Effect of exchange rate changes on cash and cash equivalents		(330	)		(77	)
Net increase in cash and cash equivalents		6,660			10,203
Cash and cash equivalents
Beginning of period		160,355			137,588
End of period	$	167,015		$	147,791

TABLE 4 RINGCENTRAL, INC. RECONCILIATION OF OPERATING INCOME (LOSS) GAAP MEASURES TO NON-GAAP MEASURES (Unaudited, in thousands)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Revenues
Software subscriptions	$	110,413		$	86,067		$	214,100		$	166,045
Other		9,023			5,777			17,127			12,337
Total revenues		119,436			91,844			231,227			178,382
Cost of revenues reconciliation
GAAP Software subscriptions cost of revenues		21,795			18,173			42,058			34,896
Stock-based compensation		(997	)		(780	)		(1,722	)		(1,414	)
Amortization of acquisition intangibles		(150	)		(151	)		(301	)		(301	)
Non-GAAP Software subscriptions cost of revenues		20,648			17,242			40,035			33,181
GAAP Other cost of revenues		7,766			4,191			14,809			9,208
Stock-based compensation		(41	)		(32	)		(73	)		(51	)
Non-GAAP Other cost of revenues		7,725			4,159			14,736			9,157
Gross profit and gross margin reconciliation
Non-GAAP Subscriptions		81.3	%		80.0	%		81.3	%		80.0	%
Non-GAAP Other		14.4	%		28.0	%		14.0	%		25.8	%
Non-GAAP Gross profit		76.2	%		76.7	%		76.3	%		76.3	%
Operating expenses reconciliation
GAAP Research and development		18,617			16,681			35,704			31,607
Stock-based compensation		(2,342	)		(1,857	)		(4,201	)		(3,495	)
Acquisition related matters		(178	)		(242	)		(443	)		(483	)
Non-GAAP Research and development		16,097			14,582			31,060			27,629
As a % of total revenues non-GAAP		13.5	%		15.9	%		13.4	%		15.5	%
GAAP Sales and marketing		60,794			45,662			119,688			87,490
Stock-based compensation		(3,926	)		(2,578	)		(7,451	)		(4,768	)
Amortization of acquisition intangibles		(76	)		(105	)		(180	)		(210	)
Non-GAAP Sales and marketing		56,792			42,979			112,057			82,512
As a % of total revenues non-GAAP		47.6	%		46.8	%		48.5	%		46.3	%
GAAP General and administrative		18,007			13,441			33,812			27,465
Stock-based compensation		(3,321	)		(2,230	)		(6,115	)		(4,486	)
Acquisition related matters		-			(47	)		-			(59	)
Non-GAAP General and administrative		14,686			11,164			27,697			22,920
As a % of total revenues non-GAAP		12.3	%		12.2	%		12.0	%		12.8	%
Income (loss) from operations reconciliation
GAAP loss from operations		(7,543	)		(6,304	)		(14,844	)		(12,284	)
Stock-based compensation		10,627			7,477			19,562			14,214
Amortization of acquisition intangibles		226			256			481			511
Acquisition related matters		178			289			443			542
Non-GAAP Income from operations	$	3,488		$	1,718		$	5,642		$	2,983
Non-GAAP Operating margin		2.9	%		1.9	%		2.4	%		1.7	%

TABLE 5 RINGCENTRAL, INC. RECONCILIATION OF NET INCOME (LOSS) GAAP MEASURES TO NON-GAAP MEASURES (In thousands, except per share data) (Unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Net Income (loss) reconciliation
GAAP Net loss	$	(7,031	)	$	(7,771	)	$	(14,340	)	$	(14,384	)
Stock-based compensation		10,627			7,477			19,562			14,214
Amortization of acquisition intangibles		226			256			481			511
Acquisition related matters		178			289			443			542
Intercompany remeasurement loss (gain)		(435	)		1,258			(478	)		1,596
Income tax expense effects *		-			-			-			-
Non-GAAP Net income	$	3,565		$	1,509		$	5,668		$	2,479
Basic and diluted net income (loss) per share
Reconciliation between GAAP and non-GAAP weighted average shares used in computing basic and diluted net income / (loss) per common share:
Weighted average number of shares used in computing net loss per share		75,867			72,649			75,278			72,380
Effect of dilutive securities		6,192			3,148			5,579			3,128
Non-GAAP weighted average shares used in computing non-GAAP net income per share		82,059			75,797			80,857			75,508
GAAP Net loss per share	$	(0.09	)	$	(0.11	)	$	(0.19	)	$	(0.20	)
Non-GAAP Net income per share	$	0.04		$	0.02		$	0.07		$	0.03

* The non-GAAP adjustments do not have an impact on our income tax provision due to our history of non-GAAP losses and full valuation allowance on our deferred taxes.