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Section 1: 10-Q (10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-36089

 

RingCentral, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

94-3322844

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

20 Davis Drive

Belmont, California 94002

(Address of principal executive offices)

(650) 472-4100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

Non-accelerated filer

 

¨  (do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of April 28, 2015, there were 54,537,338 shares of Class A Common Stock issued and outstanding and 14,531,831 shares of Class B Common Stock outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

  

 

  

Page

 

PART I. FINANCIAL INFORMATION

Item 1.

  

Financial Statements:

  

4

 

  

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 (unaudited)

  

4

 

  

Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (unaudited)

  

5

 

  

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2015 and 2014 (unaudited)

  

6

 

  

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)

  

7

 

  

Notes to Condensed Consolidated Financial Statements (unaudited)

  

8

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

17

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

26

Item 4.

  

Controls and Procedures

  

27

 

PART II. OTHER INFORMATION

Item 1.

  

Legal Proceedings

  

28

Item 1A.

  

Risk Factors

  

28

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

56

Item 3.

  

Default Upon Senior Securities

  

56

Item 4.

  

Mine Safety Disclosures

  

56

Item 5.

  

Other Information

  

56

Item 6.

  

Exhibits

  

56

Signatures

  

58

 

 

 

2


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in, but not limited to, the sections titled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts”, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements include, but are not limited to, statements about:

our future financial performance;

our anticipated growth and growth strategies and our ability to effectively manage that growth and effect these strategies;

anticipated trends, developments and challenges in our business and in the markets in which we operate;

our ability to anticipate and adapt to future changes in our industry;

our ability to predict subscription revenues, formulate accurate financial projections and make strategic business decisions based on our analysis of market trends;

our ability to anticipate market needs and develop new and enhanced products and services to meet those needs, and our ability to successfully monetize them;

maintaining and expanding our customer base;

maintaining, expanding and responding to changes in our relationships with other companies;

maintaining and expanding our distribution channels, including our network of sales agents and resellers;

the impact of competition in our industry and innovation by our competitors;

our ability to sell our products;

our ability to expand our business to medium-sized and larger customers and internationally;

our ability to realize increased purchasing leverage and economies of scale as we expand;

the impact of seasonality on our business;

the impact of any failure of our solutions or solution innovations;

our reliance on our third-party service providers;

the potential effect on our business of litigation to which we may become a party;

our liquidity and working capital requirements;

our capital expenditure projections;

the estimates and estimate methodologies used in preparing our condensed consolidated financial statements; and

the political environment and stability in the regions in which we or our subcontractors operate.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward looking statements, even if new information becomes available in the future.

 

 

3


 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

114,152

 

 

$

113,182

 

Short-term investments

 

21,554

 

 

 

28,479

 

Accounts receivable, net

 

11,572

 

 

 

7,651

 

Inventory

 

2,054

 

 

 

1,710

 

Prepaid expenses and other current assets

 

9,521

 

 

 

8,767

 

Total current assets

 

158,853

 

 

 

159,789

 

Property and equipment, net

 

26,697

 

 

 

25,527

 

Other assets

 

2,609

 

 

 

3,021

 

Total assets

$

188,159

 

 

$

188,337

 

Liabilities and Stockholders' Equity:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

4,923

 

 

$

4,181

 

Accrued liabilities

 

32,804

 

 

 

29,236

 

Current portion of capital lease obligation

 

377

 

 

 

509

 

Current portion of long-term debt

 

14,434

 

 

 

16,764

 

Deferred revenue

 

28,325

 

 

 

25,586

 

Total current liabilities

 

80,863

 

 

 

76,276

 

Long-term debt

 

6,875

 

 

 

7,813

 

Sales tax liability

 

3,887

 

 

 

3,953

 

Capital lease obligation

 

450

 

 

 

535

 

Other long-term liabilities

 

3,660

 

 

 

3,255

 

Total liabilities

 

95,735

 

 

 

91,832

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock

 

7

 

 

 

7

 

Additional paid-in capital

 

281,083

 

 

 

274,844

 

Accumulated other comprehensive gain/(loss)

 

40

 

 

 

(251

)

Accumulated deficit

 

(188,706

)

 

 

(178,095

)

Total stockholders' equity

 

92,424

 

 

 

96,505

 

Total liabilities and stockholders' equity

$

188,159

 

 

$

188,337

 

See accompanying notes to condensed consolidated financial statements

 

 

4


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

Subscriptions

$

59,951

 

 

$

43,850

 

Product

 

5,367

 

 

 

4,412

 

Total revenues

 

65,318

 

 

 

48,262

 

Cost of revenues:

 

 

 

 

 

 

 

Subscriptions

 

15,914

 

 

 

13,714

 

Product

 

4,633

 

 

 

4,189

 

Total cost of revenues

 

20,547

 

 

 

17,903

 

Gross profit

 

44,771

 

 

 

30,359

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

11,840

 

 

 

9,673

 

Sales and marketing

 

31,969

 

 

 

23,957

 

General and administrative

 

10,531

 

 

 

8,967

 

Total operating expenses

 

54,340

 

 

 

42,597

 

Loss from operations

 

(9,569

)

 

 

(12,238

)

Other income (expense), net:

 

 

 

 

 

 

 

Interest expense

 

(403

)

 

 

(601

)

Other income (expense), net

 

(556

)

 

 

(37

)

Other income (expense), net

 

(959

)

 

 

(638

)

Loss before provision for income taxes

 

(10,528

)

 

 

(12,876

)

Provision for income taxes

 

83

 

 

 

28

 

Net loss

$

(10,611

)

 

$

(12,904

)

Net loss per common share:

 

 

 

 

 

 

 

Basic and diluted

$

(0.15

)

 

$

(0.20

)

Weighted-average number of shares used in computing net loss per

   share:

 

 

 

 

 

 

 

Basic and diluted

 

68,764

 

 

 

63,800

 

See accompanying notes to condensed consolidated financial statements

 

 

5


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Net loss

$

(10,611

)

 

$

(12,904

)

Other comprehensive gain/(loss):

 

 

 

 

 

 

 

Foreign currency translation adjustments, net

 

340

 

 

 

(100

)

Unrealized loss on available-for-sale securities

 

(50

)

 

 

-

 

Comprehensive loss

$

(10,321

)

 

$

(13,004

)

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements

 

 

6


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(10,611

)

 

$

(12,904

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

3,224

 

 

 

2,119

 

Share-based compensation

 

4,747

 

 

 

3,177

 

Noncash interest expense related to debt

 

62

 

 

 

73

 

Net accretion of discount and amortization of premium on available-for-sale securities

 

95

 

 

 

 

Loss on disposal of assets

 

11

 

 

 

4

 

Deferred income tax

 

14

 

 

 

1

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(3,921

)

 

 

(828

)

Inventory

 

(343

)

 

 

(190

)

Prepaid expenses and other current assets

 

(754

)

 

 

(1,561

)

Other assets

 

614

 

 

 

(188

)

Accounts payable

 

485

 

 

 

(1,353

)

Accrued liabilities

 

2,812

 

 

 

7,009

 

Deferred revenue

 

2,739

 

 

 

1,763

 

Other liabilities

 

139

 

 

 

415

 

Net cash used in operating activities

 

(687

)

 

 

(2,463

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(3,298

)

 

 

(3,509

)

Proceeds from the maturity of available-for-sale securities

 

6,780

 

 

 

 

Proceeds from restricted investments

 

100

 

 

 

 

Net cash provided by (used in) investing activities

 

3,582

 

 

 

(3,509

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Net proceeds from secondary public offering of common stock

 

 

 

 

57,167

 

Repayment of debt

 

(3,330

)

 

 

(2,330

)

Repayment of capital lease obligations

 

(216

)

 

 

(113

)

Payment of offering costs

 

 

 

 

(246

)

Proceeds from issuance of stock in connection with stock plans

 

1,482

 

 

 

1,943

 

Net cash provided by (used in) financing activities

 

(2,064

)

 

 

56,421

 

Effect of exchange rate changes on cash and cash equivalents

 

139

 

 

 

(1

)

Net increase in cash and cash equivalents

 

970

 

 

 

50,448

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

113,182

 

 

 

116,378

 

End of period

$

114,152

 

 

$

166,826

 

Supplemental disclosure of cash flow data:

 

 

 

 

 

 

 

Cash paid for interest

$

1,267

 

 

$

299

 

Cash paid for income taxes

 

47

 

 

 

18

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Change in liability for unvested exercised options

$

9

 

 

$

19

 

Accrued liability for deferred offering costs

 

 

 

 

1,123

 

Equipment purchased and unpaid at period end

 

2,236

 

 

 

1,867

 

Unrealized loss on available-for-sale securities

 

50

 

 

 

 

See accompanying notes to condensed consolidated financial statements

 

7


 

RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1. Description of Business and Summary of Significant Accounting Policies

Description of Business

RingCentral, Inc. (the “Company”) is a provider of software-as-a-service (“SaaS”) solutions for business communications. The Company was incorporated in California in 1999 and was reincorporated in Delaware on September 26, 2013.

Basis of Presentation

The unaudited condensed consolidated financial statements and accompanying notes of the Company reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2015. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (the “SEC”).

The unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the fiscal year ended December 31, 2014 included in the Company’s fiscal 2014 Annual Report on Form 10-K. There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2014.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates made by management affect revenues, accounts receivable, the allowance for doubtful accounts, inventory and inventory reserves, share-based compensation, deferred revenue, return reserves, provision for income taxes, uncertain tax positions, loss contingencies, sales tax liabilities and accrued liabilities. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation. Actual results could differ from those estimates.

 

 

8


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance is a result of a joint project with the International Accounting Standards Board (the “IASB”) to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

 

Note 2. Financial Statement Components

Cash and cash equivalents consisted of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

Cash

$

11,866

 

 

$

12,800

 

Money market funds

 

102,286

 

 

 

100,382

 

Total cash and cash equivalents

$

114,152

 

 

$

113,182

 

 

 

Accounts receivable, net consisted of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

Accounts receivable

$

9,753

 

 

$

5,935

 

Unbilled accounts receivable

 

1,969

 

 

 

1,841

 

Allowance for doubtful accounts

 

(150

)

 

 

(125

)

Accounts receivable, net

$

11,572

 

 

$

7,651

 

 

 

Property and equipment, net consisted of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

Computer hardware and software

$

45,360

 

 

$

43,805

 

Internal-use software development costs

 

5,773

 

 

 

5,335

 

Furniture and fixtures

 

2,224

 

 

 

2,020

 

Leasehold improvements

 

2,803

 

 

 

2,870

 

Property and equipment, gross

 

56,160

 

 

 

54,030

 

Less: accumulated depreciation and amortization

 

(29,463

)

 

 

(28,503

)

Property and equipment, net

$

26,697

 

 

$

25,527

 

 

 

 Accrued liabilities consisted of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

Accrued compensation and benefits

$

10,542

 

 

$

7,596

 

Accrued sales, use and telecom related taxes

 

5,729

 

 

 

5,277

 

Other accrued expenses

 

16,533

 

 

 

16,363

 

Total accrued liabilities

$

32,804

 

 

$

29,236

 

9


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 3. Fair Value of Financial Instruments

The Company carries certain financial assets consisting of money market funds, certificates of deposit, commercial paper and corporate debt securities at fair value on a recurring basis. Fair value is based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1: Observable inputs which include unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3: Unobservable inputs that are supported by little or no market activity and that are based on management’s assumptions, including fair value measurements determined by using pricing models, discounted cash flow methodologies or similar techniques.

The fair value of assets carried at fair value was determined using the following inputs (in thousands):

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

102,543

 

 

$

101,247

 

 

$

1,296

 

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

20,554

 

 

$

20,554

 

 

$

 

 

$

 

Commercial paper

$

1,000

 

 

$

 

 

$

1,000

 

 

$

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

530

 

 

$

 

 

$

530

 

 

$

 

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

100,570

 

 

$

94,274

 

 

$

6,296

 

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

26,481

 

 

$

26,481

 

 

$

 

 

$

 

Commercial paper

$

1,998

 

 

$

 

 

$

1,998

 

 

$

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

630

 

 

$

 

 

$

630

 

 

$

 

 

 

At March 31, 2015, all short-term investments were designated as available-for-sale and reported at fair value based either upon quoted prices in active markets, quoted prices in less active markets, or quoted market prices for similar investments, with unrealized gains and losses, net of related tax, if any, included in other comprehensive loss. We may sell these short-term investments at any time for use in current operations or for other purposes, such as consideration for acquisitions, even if they have not yet reached maturity. As a result, all of our short-term investments held at March 31, 2015, including securities with maturities beyond twelve months, were classified as current assets in the accompanying condensed consolidated balance sheet.

 

At March 31, 2015, available-for-sale securities consisted of the following (in thousands):

 

 

Available-for-Sale Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Estimated Fair Value

 

Corporate debt securities

$

20,823

 

 

$

 

 

$

(269

)

 

$

20,554

 

Commercial paper

 

998

 

 

 

2

 

 

 

 

 

 

1,000

 

Total

$

21,821

 

 

$

2

 

 

$

(269

)

 

$

21,554

 

10


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

The Company does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of March 31, 2015. The Company expects to receive the full principal and interest on all of these marketable securities.

 

 

The expected maturities of our short-term investments in available-for-sale securities at March 31, 2015 are shown below (in thousands):

 

Available-for-Sale Securities

Amortized Cost

 

 

Estimated Fair Value

 

Due in less than one year

$

21,821

 

 

$

21,554

 

Total

$

21,821

 

 

$

21,554

 

 

The Company’s other financial instruments, including accounts receivable, accounts payable and other current liabilities, are carried at cost which approximates fair value due to the relatively short maturity of those instruments.

 

At December 31, 2014 and March 31, 2015, the Company estimated the fair value of its debt primarily using an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. The estimated fair value of the Company’s current and non-current debt obligations was $25,671,000 at December 31, 2014, compared to its carrying amount of $24,577,000 at that date. The estimated fair value of the Company’s current and non-current debt obligations was $21,344,000 at March 31, 2015, compared to its carrying amount of $21,309,000 at that date. If the debt was measured at fair value in the condensed consolidated balance sheets, the Company’s current and non-current debt would be classified in Level 2 of the fair value hierarchy.

 

Note 4. Debt

As of March 31, 2015, the Company’s debt is comprised of borrowings under loan agreements (“SVB Agreement”), as amended, with Silicon Valley Bank (“SVB”).

SVB Loan Agreement

Under the SVB agreement, at March 31, 2015, the Company has one outstanding growth capital term loan (i.e., “the 2013 term loan”) and a revolving line of credit. The Company borrowed an additional growth capital loan in March 2012 (the “2012 term loan”) that has since been repaid.

The 2012 term loan was in the principal amount of $8,000,000, which was to be repaid in 36 equal monthly installments of principal and interest. Under the 2012 term loan, interest was paid monthly and accrued at a floating rate based on the Company’s option of the (i) prime rate plus a margin of 0.25% or 0.50% or (ii) adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin of 3.25% or 3.50%, in each case such margin being determined based on cash balances maintained with SVB. The Company elected the prime rate option and, based on cash balances maintained with SVB, the interest rate was 3.5%. In addition, a final terminal payment equal to 0.5% of the original loan principal, or $40,000, was due at maturity. The 2012 term loan matured in March 2015 and was repaid in full.

The 2013 term loan was borrowed on December 31, 2013 with a principal amount of $15,000,000, which is being repaid in 48 equal monthly installments of principal and interest. Interest is due monthly and accrues at a floating rate based on the Company’s option of an annual rate of either the (i) prime rate plus a margin of 0.75% or 1.00% or (ii) adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin of 3.75% or 4.00%, in each case such margin being determined based on cash balances maintained with SVB. The Company elected the prime rate option and based on cash balances maintained with SVB at March 31, 2015, the current interest rate is 4.0%. As of March 31, 2015, the outstanding principal balance of the 2013 term loan was $10,625,000. Approximately $6,875,000 of the remaining principal balance is classified as non-current liabilities in the accompanying condensed consolidated balance sheet as this portion of the remaining principal balance is due beyond March 31, 2016.

11


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The revolving line of credit provides for a maximum borrowing of up to $15,000,000 in principal amount, subject to limits based on recurring subscription revenue amounts as defined in the agreement. The recurring subscription revenue requirement is not expected to limit the amount of borrowings available under the line of credit. Under the line of credit, interest is paid monthly and accrues at a floating rate based on the Company’s option of the (i) prime rate plus a margin of 0.25% or 0.50% or (ii) adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin of 3.25% or 3.50%, in each case such margin being determined based on cash balances maintained with SVB. The Company elected the prime rate option and based on cash balances maintained with SVB at March 31, 2015, the current interest rate is 3.5%. All outstanding principal and unpaid interest under the revolving line of credit must be repaid by August 13, 2015. The outstanding principal balance is classified as a current liability in the accompanying condensed consolidated balance sheet because the loan matures August 2015. As of March 31, 2015, the outstanding principal balance and the available borrowing capacity of the line of credit were $10,778,000 and $4,222,000, respectively. As of March 31, 2015, the unamortized discount on the revolving line of credit was $94,000 which is recorded in the current portion of long-term debt line in the accompanying condensed consolidated balance sheet.

The Company has pledged substantially all of its assets, excluding intellectual property, as collateral to secure its obligations under the SVB agreement. The SVB agreement contains customary negative covenants that limit the Company’s ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets and merge or consolidate. The SVB agreement, as amended, also contains customary affirmative covenants, as well as financial covenants that require the Company to (i) maintain minimum cash balances of $10,000,000, as defined in the amended agreement, and (ii) maintain minimum EBITDA levels, as determined in accordance with the agreement. On March 30, 2015, the Company adjusted certain financial covenants to expand its ability to invest in certain foreign subsidiaries and property and equipment. The Company was in compliance with all covenants under its credit agreement with SVB as of March 31, 2015.

TriplePoint Loan Agreement

Under the equipment loan and security agreement with TriplePoint, the Company borrowed equipment term loans with aggregate principal of $9,691,000 in August 2012. The equipment term loans were being repaid in 36 equal monthly installments of principal and interest, which accrued at an annual fixed rate of 5.75%, however, the Company repaid the equipment term loans in full in March 2015. In addition, a final terminal payment was due upon repayment equal to 10% of the original loan principal, or $970,000.

 

 

12


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 5. Commitments and Contingencies

Leases

The Company leases facilities for office space under non-cancelable operating leases for its U.S. and international locations and has entered into capital lease arrangements to obtain property and equipment for its operations. In addition, the Company leases space from third party datacenter hosting facilities under co-location agreements to support its cloud infrastructure. On September 25, 2014, the Company entered into a new lease for its headquarters for a total lease commitment of $17,497,000 through 2021 and lease incentives totaling $1,486,000. The Company took full possession of the building in the first quarter of fiscal 2015. On February 25, 2015, the Company signed an agreement that accelerated the termination date of the lease for its old headquarters office located in San Mateo, California from May 31, 2017 to April 30, 2015. The effectiveness of the early termination of the lease was contingent upon a third party entering into a lease agreement with the landlord for the San Mateo office space by February 28, 2015, and obtaining by March 30, 2015 the consent of the landlord’s lender to the early termination. The early termination of the lease was deemed effective on March 9, 2015 as both conditions were met. No additional lease payments are imposed by the early termination agreement and the Company’s future lease obligation ends on April 30, 2015. All agreements contain escalating monthly rental payments over the lease term, which will be amortized to rent expense on a straight-line basis over the lease term.

Sales Tax Liability

During 2010 and 2011, the Company increased its sales and marketing activities in the U.S., which may be asserted by a number of states to create an obligation under nexus regulations to collect sales taxes on sales to customers in the state. Prior to 2012, the Company did not collect sales taxes from customers on sales in all states. In the second quarter of 2012, the Company commenced collecting and remitting sales taxes on sales in all states so a loss contingency related to sales taxes exists for sales and marketing activities in 2010, 2011 and the six months ended June 30, 2012. As of March 31, 2015 and December 31, 2014, the Company had a balance for a long-term sales tax liability of $3,887,000 and $3,953,000, respectively, based on its best estimate of the probable liability for the loss contingency incurred as of those dates. The Company’s estimate of a probable outcome under the loss contingency is based on analysis of its sales and marketing activities, revenues subject to sales tax, and applicable regulations in each state in each period. No significant adjustments to the long-term sales tax liability have been recognized in the accompanying condensed consolidated financial statements for changes to the assumptions underlying the estimate. However, changes in management’s assumptions may occur in the future as the Company obtains new information which can result in adjustments to the recorded liability. Increases and decreases to the long-term sales tax liability are recorded as general and administrative expense.

A current sales tax liability for noncontingent amounts expected to be remitted in the next twelve months of $4,193,000 and $4,178,000, is included in accrued liabilities as of March 31, 2015 and December 31, 2014, respectively.

Legal Matters

The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using reasonably available information. The Company develops its views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. Legal fees are expensed in the period in which they are incurred. As of March 31, 2015 and December 31, 2014, the Company did not have any accrued liabilities recorded for such loss contingencies.

 

On April 17, 2015, UrgenSync, LLC filed a complaint against us and over 20 other companies in the United States District Court for the Eastern District of Texas, Tyler Division. In the complaint, UrgenSync alleges that RingCentral infringes U.S. patent number 8,295,802, which relates to making and/or using communication control apparatuses for emergency calls placed using VoIP.  The complaint seeks unspecified damages. We believe that we have meritorious defenses to UrgenSync’s allegations and intend to defend this matter vigorously. We have not recorded any loss provision in connection with this contingency. However, there can be no assurance that we will be successful in our defense, and our financial position, results of operations and our business could be adversely affected in the event of an unfavorable outcome.

 

13


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 6. Share-Based Compensation

A summary of share-based compensation expense recognized in the Company’s condensed consolidated statements of operations follows (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Cost of subscriptions revenues

$

457

 

 

$

296

 

Research and development

 

1,113

 

 

 

652

 

Sales and marketing

 

1,844

 

 

 

960

 

General and administrative

 

1,333

 

 

 

1,269

 

Total share-based compensation expense

$

4,747

 

 

$

3,177

 

 

A summary of share-based compensation expense by award type follows (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Options

$

2,705

 

 

$

2,454

 

Employee stock purchase plan rights

 

286

 

 

 

505

 

Restricted stock units

 

1,756

 

 

 

218

 

Total share-based compensation expense

$

4,747

 

 

$

3,177

 

 

As of March 31, 2015 and December 31, 2014, there was approximately $24,553,000 and $20,069,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested stock option grants, which will be recognized on a straight-line basis over the remaining weighted-average vesting periods of approximately 2.6 years and 2.4 years, respectively.

Equity Incentive Plans

As of March 31, 2015 a total of 9,309,000 shares remained available for grant under the 2013 Plan. A summary of option activity under all of the Company’s equity incentive plans at March 31, 2015 and changes during the period then ended is presented in the following table:

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Number of

 

 

Weighted-

 

 

Average

 

 

Aggregate

 

 

Options

 

 

Average

 

 

Contractual

 

 

Intrinsic

 

 

Outstanding

 

 

Exercise Price

 

 

Term

 

 

Value

 

 

(in thousands)

 

 

Per Share

 

 

(in Years)

 

 

(in thousands)

 

Outstanding at December 31, 2014

 

9,158

 

 

$

8.23

 

 

 

7.2

 

 

$

61,367

 

Granted

 

1,079

 

 

 

15.69

 

 

 

 

 

 

 

 

 

Exercised

 

(345

)

 

 

4.42

 

 

 

 

 

 

 

 

 

Canceled/Forfeited

 

(50

)

 

 

14.45

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2015

 

9,842

 

 

$

9.15

 

 

 

6.9

 

 

$

62,614

 

Vested and expected to vest as of March 31, 2015

 

9,594

 

 

$

9.11

 

 

 

6.9

 

 

$

61,482

 

Exercisable as of March 31, 2015

 

5,205

 

 

$

6.29

 

 

 

6.5

 

 

$

47,466

 

 

The weighted average grant date fair value of options granted and the total intrinsic value of options exercised were as follows (in thousands, except weighted average grant date fair value):

 

 

Three Months Ended

March 31,

 

 

2015

 

 

2014

 

Weighted average grant date fair value per share

$

6.53

 

 

$

8.66

 

Total intrinsic value of options exercised

$

3,815

 

 

$

27,396

 

14


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

The Company estimated the fair values of each option awarded on the date of grant using the Black-Scholes-Merton option pricing model, which requires inputs including the fair value of common stock, expected term, expected volatility, risk-free interest rate and dividend yield. The weighted-average assumptions used in the option pricing models in the periods presented were as follows:

 

 

Three Months Ended

March 31,

 

 

2015

 

 

2014

 

Expected term for employees (in years)

 

4.8

 

 

 

4.7

 

Expected term for non-employees (in years)

 

7.0

 

 

 

7.0

 

Risk-free interest rate

 

1.47

%

 

 

1.42

%

Expected volatility

 

48

%

 

 

48

%

Expected dividend rate

 

0

%

 

 

0

%

 

Employee Stock Purchase Plan

The ESPP allows eligible employees to purchase shares of the Class A common stock at a discount through payroll deductions of up to the lesser of 15% of their eligible compensation or $25,000 per calendar year, at not less than 90% of the fair market value, as defined in the ESPP, subject to any plan limitations. A participant may purchase a maximum of 3,000 shares during an offering period. The offering period starts on the first trading day on or after May 11th and November 11th of each year. At the end of the offering period, the purchase price is set at the lower of: (i) 90% of the fair value of the Company’s common stock at the beginning of the six month offering period, and (ii) 90% of the fair value of the Company’s common stock at the end of the six month offering period. As of March 31, 2015, there was a total of $131,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to ESPP, which will be recognized on a straight-line basis over the remaining weighted-average vesting period of approximately 0.1 years. At March 31, 2015, a total of 2,191,000 shares were available for issuance under the ESPP.

Restricted Stock Units

For the three months ended March 31, 2015, we issued 188,000 restricted stock units of Class A common stock under the 2013 Plan with a weighted average grant date fair value of $15.18 per share. As of March 31, 2015, there was a total of $24,712,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to restricted stock units, which will be recognized on a straight-line basis over the remaining weighted-average vesting period of approximately 3.4 years.

 

Note 7. Concentrations

Revenue by geographic location is based on the billing address of the customer. More than 90% of the Company’s revenue is from the United States during the three months ended March 31, 2015 and 2014. Property and equipment by geographic location is based on the location of the legal entity that owns the asset. At March 31, 2015 and December 31, 2014, more than 87% of the Company’s property and equipment was located in the United States, with no single country outside the United States representing more than 10% of property and equipment.

 

Note 8. Income Taxes

The provision for income taxes for the three months ended March 31, 2015 and 2014, was $83,000 and $28,000, respectively. The provision for income taxes during the three months ended March 31, 2015 and 2014 consisted primarily of state minimum taxes, and foreign income taxes.

For the three months ended March 31, 2015 and 2014, the provision for income taxes differed from the U.S federal statutory amount primarily due to state and foreign taxes currently payable, and the Company realized no benefit for current year losses due to maintaining a full valuation allowance against the U.S. and foreign net deferred tax assets.

15


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The realization of tax benefits of net deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence, the Company does not believe it is more likely than not that the net deferred tax assets will be realizable. Accordingly, the Company has provided a full valuation allowance against the entire domestic and the majority of the foreign net deferred tax assets as of March 31, 2015 and December 31, 2014. The Company intends to maintain the full valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance.

During the three months ended March 31, 2015, there have been no material changes to the total amount of unrecognized tax benefits.

 

Note 9. Basic and Diluted Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture as they are not deemed to be issued for accounting purposes. Diluted net loss per share is computed by giving effect to all potential shares of common stock, warrants to purchase common and preferred stock, stock options and restricted stock units, to the extent they are dilutive. For the three months ended March 31, 2015 and 2014, all such common stock equivalents have been excluded from diluted net loss per share as the effect to net loss per share would be anti-dilutive.

The following table sets forth the computation of the Company’s basic and diluted net loss per share of common stock (in thousands, except per share data):

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

Net loss

$

(10,611

)

 

$

(12,904

)

Denominator

 

 

 

 

 

 

 

Weighted-average common shares for basic and diluted net

   loss per share

 

68,764

 

 

 

63,800

 

Basic and diluted net loss per share

$

(0.15

)

 

$

(0.20

)

 

The following table sets forth the potential shares of common stock that were excluded from diluted weighted-average common shares outstanding (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Shares of common stock issuable upon conversion of warrants

 

 

 

 

70

 

Shares of common stock subject to repurchase

 

13

 

 

 

25

 

Shares of common stock issuable under equity incentive awards

   outstanding

 

11,611

 

 

 

9,999

 

Potential common shares excluded from diluted net loss per

   share

 

11,624

 

 

 

10,094

 

 

 

 

 

16


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed on February 27, 2015 under the Securities Act of 1934, as amended (the “Securities Act”) with the SEC. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below.

Overview

We are a leading provider of software-as-a-service, or SaaS, solutions for the way employees communicate in business. We believe that our innovative, cloud-based approach disrupts the large market for business communications solutions by providing flexible and cost-effective services that support distributed workforces, mobile employees and the proliferation of “bring-your-own” communications devices. We enable convenient and effective communications for our customers, across all their locations, all their employees, all their devices, thus enabling a more productive and dynamic workforce.

We currently offer three products: RingCentral Office, RingCentral Professional, and RingCentral Fax. RingCentral Office is our flagship product, which we sell in three editions: Standard, Premium and Enterprise. Our Standard Edition of RingCentral Office includes call management, mobile applications, voice, business SMS, business analytics and reporting, conferencing capabilities, and integration with other cloud-based business applications such as Box, Dropbox, Google for Work and Microsoft Office and Outlook. Our Premium and Enterprise Editions include the Standard Edition functionality together with additional software integrations with other cloud-based business applications such as Salesforce CRM, Zendesk and Desk.com, high-definition voice, more advanced call routing for our larger customers, and automatic call recording. All editions are feature rich, but vary in the number of included toll-free minutes, number of concurrent conferencing meeting attendees, and by some of the various integrations with third-party business applications. We also offer RingCentral Professional, primarily an inbound call management tool for mobile professionals, and RingCentral Fax, an online fax subscription that permits sending and receiving faxes over the internet.

We primarily generate revenues by selling subscriptions of our RingCentral Office, RingCentral Professional, and RingCentral Fax offerings. RingCentral Office is offered at monthly subscription rates, varying by the specific functionalities and services and the number of users. RingCentral Office customers generally pay higher monthly subscription rates than customers of our other service offerings. RingCentral Professional is offered at monthly subscription rates that vary based on the desired amount of minutes usage and extensions allotted to the plan. RingCentral Fax is offered at monthly subscription rates that vary based on the desired number of pages and phone numbers allotted to the plan.

Our subscription plans have historically had monthly or annual contractual terms, although we also have subscription plans with multi-year contractual terms, generally with larger customers. We believe that this flexibility in contract duration is important to meet the different needs of our customers. Generally, most of our fees for subscription plans have been billed in advance via credit card. However, as the number of larger RingCentral Office customers grows, we expect to bill more customers through commercial invoices with customary payment terms and, accordingly, our levels of accounts receivable may increase. We also expect our level of prepayments by larger customers to increase, accordingly our level of deferred revenue may increase. For the three months ended March 31, 2015, fiscal 2014, 2013 and 2012, subscriptions revenues accounted for more than 90% of our total revenues. The remainder of our revenues is primarily comprised of product revenues from the sale of pre-configured office phones, which we offer as a convenience for a total solution to our customers in connection with subscriptions to our services.

We make significant upfront investments to acquire customers. Until 2010, we acquired most of our customer subscriptions through direct transactions on our website driven by online marketing channels. Beginning in 2010, in connection with our introduction of RingCentral Office, we established a direct, inside sales force. Since then, we have continued investing in our direct, inside sales force while also developing indirect sales channels to market our brand and our subscription offerings. Our indirect sales channel consists of a network of over 2,200 sales agents and resellers, including AT&T, which we refer to collectively as resellers. We intend to continue to foster this network and to expand our network with other resellers. Beginning in 2011, we also began expanding into more traditional forms of media advertising, such as radio and billboard advertising.

17


 

Since its launch, our revenue growth has primarily been driven by our flagship RingCentral Office product offering, which has resulted in an increased number of customers, increased average subscription revenues per customer, and increased retention of our existing customer and user base. We define a “customer” as one individual billing relationship for the subscription to our services, which generally correlates to one company account per customer. We define a user as one person within a customer who has been granted a subscription license to use our services, such that the number of users per customer generally correlates closely to the number of employees within a customer account. As of March 31, 2015, we had customers from industries including advertising, finance, healthcare, legal services, non-profit organizations, real estate, retail and technology, and ranging in size from businesses with fewer than 10 to more than 1,500 RingCentral users. In October of 2013, we launched our United Kingdom operations, however for the three months ended March 31, 2015 and 2014, 98% of our total revenues were generated in the U.S. and Canada, although we expect the percentage of our total revenues derived outside of the U.S. and Canada to grow as we expand internationally in the United Kingdom and beyond.  

The growth of our business and our future success depend on many factors, including our ability to expand our customer base to medium-sized and larger customers, continue to innovate, grow revenues from our existing customer base, expand our distribution channels and scale internationally. For example, as a result of our efforts to expand our customer base to target medium-sized and larger businesses, we expect to incur additional research and development and support and professional services costs and may experience longer sales cycles that may delay revenues associated with these costs. Furthermore, because we have limited experience selling to larger businesses and international customers, our investment in marketing our subscriptions to these potential customers may not be successful, which could materially and adversely affect our results of operations and our overall ability to grow our customer base. While these areas represent significant opportunities for us, they also pose risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results.

We have experienced significant growth in recent periods, with total revenues of $114.5 million, $160.5 million and $219.9 million in 2012, 2013 and 2014, respectively, generating year-over-year increases of 40% and 37%, respectively. We have continued to make significant expenditures and investments, including those in research and development, infrastructure and operations and incurred net losses of $35.4 million, $46.1 million and $48.3 million, in 2012, 2013 and 2014, respectively. For the three months ended March 31, 2015 and 2014, our total revenues were $65.3 million and $48.3 million, respectively, representing a year-over-year increase of 35%. For the three months ended March 31, 2015 and 2014, our net loss was $10.6 million and $12.9 million, respectively.

Key Business Metrics

In addition to generally accepted accounting principles, or U.S. GAAP, financial measures such as total revenues, gross margin and cash flows from operations, we regularly review a number of key business metrics to evaluate growth trends, measure our performance, and make strategic decisions. We discuss revenues and gross margin under “Results of Operations” and cash flow from operations under “Liquidity and Capital Resources.” Other key business metrics are discussed below.

Annualized Exit Monthly Recurring Subscriptions

We believe that our Annualized Exit Monthly Recurring Subscriptions is a leading indicator of our anticipated subscriptions revenues. We believe that trends in revenue are important to understanding the overall health of our marketplace, and we use these trends in order to formulate financial projections and make strategic business decisions. Our Annualized Exit Monthly Recurring Subscriptions equals our Monthly Recurring Subscriptions multiplied by 12. Our Monthly Recurring Subscriptions equals the monthly value of all customer subscriptions in effect at the end of a given month. For example, our Monthly Recurring Subscriptions at March 31, 2015 were $21.1 million. As such, our Annualized Exit Monthly Recurring Subscriptions at March 31, 2015 were $253.7 million.

RingCentral Office Annualized Exit Monthly Recurring Subscriptions

We calculate our RingCentral Office Annualized Exit Monthly Recurring Subscriptions in the same manner as we calculate our 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. RingCentral Office is our flagship product offering. We believe that trends in revenue with respect to RingCentral Office are also important to understanding the overall health of our marketplace, and we use these trends in order to formulate financial projections and make strategic business decisions. Our RingCentral Office Annualized Exit Monthly Recurring Subscriptions at March 31, 2015 were $185.4 million.

Net Monthly Subscription Dollar Retention Rate

We believe that our Net Monthly Subscription Dollar Retention Rate provides insight into our ability to retain and grow subscriptions revenues, as well as our customers’ potential long-term value to us. We believe that our ability to retain our customers and expand their use of our solutions over time is a leading indicator of the stability of our revenue base and we use these trends in order to formulate financial projections and make strategic business decisions. We define our Net Monthly Subscription Dollar Retention Rate as (i) one plus (ii) the quotient of Dollar Net Change divided by Average Dollar Monthly Recurring Subscriptions.

18


 

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.

As an illustrative example, if our Monthly Recurring Subscriptions were $118 at the end of a quarterly period and $100 at the beginning of the period, and $20 at the end of the period from new customers we added during the period, then the Dollar Net Change would be equal to ($0.67), or the amount equal to the difference of $118 minus $100 minus $20, all divided by three months. Our Average Monthly Recurring Subscriptions would equal $109, or the sum of $100 plus $118, divided by two. Our Net Monthly Subscription Dollar Retention Rate would then equal 99.4%, or approximately 99%, or one plus the quotient of the Dollar Net Change divided by the Average Monthly Recurring Subscriptions.

Our key business metrics for the five quarterly periods ended March 31, 2015 were as follows (dollars in millions):

 

 

March 31, 2015

 

 

December 31, 2014

 

 

September 30, 2014

 

 

June 30, 2014

 

 

March 31, 2014

 

Net Monthly Subscription Dollar Retention Rate

>99%

 

 

>99%

 

 

>99%

 

 

>99%

 

 

~99%

 

Annualized Exit Monthly Recurring Subscriptions

$

253.7

 

 

$

237.5

 

 

$

219.8

 

 

$

203.7

 

 

$

187.7

 

RingCentral Office Annualized Exit Monthly

   Recurring Subscriptions

$

185.4

 

 

$

170.5

 

 

$

153.7

 

 

$

139.2

 

 

$

125.8

 

19


 

Quarterly Revenue Trends

Our subscriptions revenues are primarily driven by recurring subscription services. Historically, we have acquired more new customers in the first and third quarters of our fiscal year. However, we have seen this trend become less pronounced as our business has grown, sales of RingCentral Office have accounted for a higher percentage of our total revenues, and as we move up-market to target and acquire larger customers.

Quarterly Operating Expenses Trends

Operating expenses are primarily driven by headcount and headcount-related expenses, including share-based compensation expenses, and by sales and marketing programs, and have been relatively consistent as a percentage of revenues. We experience some seasonality in spending on sales and marketing as we spend relatively less on marketing programs in the third and fourth quarters because of the summer and year-end vacation periods. However, we cannot assure you that this trend will continue.

 

Results of Operations

The following tables set forth selected condensed consolidated statement of operations data and such data as a percentage of total revenues. The historical results presented below are not necessarily indicative of the results that may be expected for any future period (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

Subscriptions

$

59,951

 

 

$

43,850

 

Product

 

5,367

 

 

 

4,412

 

Total revenues

 

65,318

 

 

 

48,262

 

Cost of revenues:

 

 

 

 

 

 

 

Subscriptions

 

15,914

 

 

 

13,714

 

Product

 

4,633

 

 

 

4,189

 

Total cost of revenues

 

20,547

 

 

 

17,903

 

Gross profit

 

44,771

 

 

 

30,359

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

11,840

 

 

 

9,673

 

Sales and marketing

 

31,969

 

 

 

23,957

 

General and administrative

 

10,531

 

 

 

8,967

 

Total operating expenses

 

54,340

 

 

 

42,597

 

Loss from operations

 

(9,569

)

 

 

(12,238

)

Other income (expense), net:

 

 

 

 

 

 

 

Interest expense

 

(403

)

 

 

(601

)

Other income (expense), net

 

(556

)

 

 

(37

)

Other income (expense), net

 

(959

)

 

 

(638

)

Loss before provision for income taxes

 

(10,528

)

 

 

(12,876

)

Provision for income taxes

 

83

 

 

 

28

 

Net loss

$

(10,611

)

 

$

(12,904

)

 

20


 

Percentage of Total Revenues:

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

Subscriptions

 

92

%

 

 

91

%

Product

 

8

 

 

 

9

 

Total revenues

 

100

 

 

 

100

 

Cost of revenues: