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Section 1: 10-Q (10-Q)

rng-10q_20160331.htm

 

 

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, 2016

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

 

x

  

Accelerated filer

 

¨

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 May 3, 2016, there were 58,880,478 shares of Class A Common Stock issued and outstanding and 13,421,546 shares of Class B Common Stock outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

  

 

  

Page

 

PART I. FINANCIAL INFORMATION

Item 1.

  

Financial Statements (unaudited)

  

5

 

  

Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015

  

5

 

  

Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015

  

6

 

  

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2016 and 2015

  

7

 

  

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

  

8

 

  

Notes to Condensed Consolidated Financial Statements

  

9

Item 2.

  

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

  

19

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

28

Item 4.

  

Controls and Procedures

  

28

 

PART II. OTHER INFORMATION

Item 1.

  

Legal Proceedings

  

29

Item 1A.

  

Risk Factors

  

29

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 success in the enterprise market and with our carrier partners;

 

·

our progress against short term and long term goals;

 

·

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, as well as general macroeconomic conditions;

 

·

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

 

·

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

 

·

our ability to predict software subscriptions revenue, 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 subscriptions to meet those needs, and our ability to successfully monetize them;

 

·

maintaining and expanding our customer base;

 

·

our anticipated benefits from our new sales agency agreement with Westcon Group;

 

·

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;

 

·

our ability to sell, market, and support our products and services;

 

·

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 product and service providers;

 

·

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

 

·

our liquidity and working capital requirements;

 

·

the impact of changes in the regulatory environment;

 

·

our ability to protect our intellectual property and rely on open source licenses;

 

·

our expectations regarding the growth and reliability of the internet infrastructure;

 

·

the timing of acquisitions of, or making and exiting investments in, other entities, businesses or technologies;

 

·

our anticipated benefits from our acquisition of Glip, Inc.;

 

·

our ability to successfully and timely integrate, and realize the benefits of, our acquisition of Glip, Inc. and any other significant acquisitions we may make;

 

·

our capital expenditure projections;

 

·

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

3


 

 

·

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

 

·

the impact of economic downturns on us and our clients;

 

·

our ability to defend our systems and our customer information from fraud and cyber attack;

 

·

our ability to prevent the use of fraudulent payment methods for our products; and

 

·

our ability to retain key employees and to attract qualified personnel.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be significantly 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 significantly 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 significantly from those anticipated in these forward looking statements, even if new information becomes available in the future.

 

 

4


 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

139,074

 

 

$

137,588

 

Accounts receivable, net

 

25,624

 

 

 

19,163

 

Inventory

 

902

 

 

 

2,317

 

Prepaid expenses and other current assets

 

12,949

 

 

 

11,978

 

Total current assets

 

178,549

 

 

 

171,046

 

Property and equipment, net

 

27,489

 

 

 

28,160

 

Goodwill

 

9,393

 

 

 

9,393

 

Acquired intangibles, net

 

3,011

 

 

 

3,266

 

Other assets

 

3,150

 

 

 

2,948

 

Total assets

$

221,592

 

 

$

214,813

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

2,798

 

 

$

5,196

 

Accrued liabilities

 

41,574

 

 

 

34,702

 

Current portion of capital lease obligation

 

276

 

 

 

269

 

Current portion of long-term debt

 

3,750

 

 

 

3,750

 

Deferred revenue

 

39,032

 

 

 

36,657

 

Total current liabilities

 

87,430

 

 

 

80,574

 

Long-term debt

 

13,903

 

 

 

14,840

 

Sales tax liability

 

3,670

 

 

 

3,670

 

Capital lease obligation

 

86

 

 

 

181

 

Other long-term liabilities

 

5,374

 

 

 

5,416

 

Total liabilities

 

110,463

 

 

 

104,681

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock

 

7

 

 

 

7

 

Additional paid-in capital

 

326,860

 

 

 

319,792

 

Accumulated other comprehensive income

 

1,069

 

 

 

527

 

Accumulated deficit

 

(216,807

)

 

 

(210,194

)

Total stockholders' equity

 

111,129

 

 

 

110,132

 

Total liabilities and stockholders' equity

$

221,592

 

 

$

214,813

 

See accompanying notes to condensed consolidated financial statements

 

 

 

5


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

Software subscriptions

$

79,978

 

 

$

59,951

 

Other

 

6,560

 

 

 

5,367

 

Total revenues

 

86,538

 

 

 

65,318

 

Cost of revenues

 

 

 

 

 

 

 

Software subscriptions

 

16,723

 

 

 

15,914

 

Other

 

5,017

 

 

 

4,633

 

Total cost of revenues

 

21,740

 

 

 

20,547

 

Gross profit

 

64,798

 

 

 

44,771

 

Operating expenses

 

 

 

 

 

 

 

Research and development

 

14,926

 

 

 

11,840

 

Sales and marketing

 

41,828

 

 

 

31,969

 

General and administrative

 

14,024

 

 

 

10,531

 

Total operating expenses

 

70,778

 

 

 

54,340

 

Loss from operations

 

(5,980

)

 

 

(9,569

)

Other income (expense), net

 

 

 

 

 

 

 

Interest expense

 

(216

)

 

 

(403

)

Other income (expense), net

 

(367

)

 

 

(556

)

Other income (expense), net

 

(583

)

 

 

(959

)

Loss before provision for income taxes

 

(6,563

)

 

 

(10,528

)

Provision for income taxes

 

50

 

 

 

83

 

Net loss

$

(6,613

)

 

$

(10,611

)

Net loss per common share

 

 

 

 

 

 

 

Basic and diluted

$

(0.09

)

 

$

(0.15

)

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

 

 

 

 

 

 

 

Basic and diluted

 

72,114

 

 

 

68,764

 

See accompanying notes to condensed consolidated financial statements

 

 

 

6


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Net loss

$

(6,613

)

 

$

(10,611

)

Other comprehensive income/(loss)

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

542

 

 

 

340

 

Unrealized loss on available-for-sale securities

 

 

 

 

(50

)

Comprehensive loss

$

(6,071

)

 

$

(10,321

)

See accompanying notes to condensed consolidated financial statements

 

 

 

7


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(6,613

)

 

$

(10,611

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

3,377

 

 

 

3,224

 

Share-based compensation

 

6,737

 

 

 

4,747

 

Non-cash interest expense and other expenses related to debt

 

 

 

 

62

 

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

 

 

 

 

95

 

Provision for bad debt

 

228

 

 

 

47

 

Deferred income taxes

 

(4

)

 

 

14

 

Others

 

17

 

 

 

11

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(6,689

)

 

 

(3,968

)

Inventory

 

1,414

 

 

 

(343

)

Prepaid expenses and other current assets

 

(970

)

 

 

(754

)

Other assets

 

452

 

 

 

614

 

Accounts payable

 

(2,430

)

 

 

485

 

Accrued liabilities

 

6,927

 

 

 

2,812

 

Deferred revenue

 

2,375

 

 

 

2,739

 

Other liabilities

 

(12

)

 

 

139

 

Net cash provided by (used in) operating activities

 

4,809

 

 

 

(687

)

Cash flows from investing activities

 

 

 

 

 

 

 

Proceeds from the maturity of available-for-sale securities

 

 

 

 

6,780

 

Purchases of property and equipment

 

(2,023

)

 

 

(2,859

)

Capitalized internal-use software

 

(439

)

 

 

(439

)

Proceeds from the maturity of restricted investments

 

 

 

 

100

 

Net cash provided by (used in) investing activities

 

(2,462

)

 

 

3,582

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of stock in connection with stock plans

 

281

 

 

 

1,482

 

Repayment of debt

 

(938

)

 

 

(3,330

)

Repayment of capital lease obligations

 

(87

)

 

 

(216

)

Net cash used in financing activities

 

(744

)

 

 

(2,064

)

Effect of exchange rate changes on cash and cash equivalents

 

(117

)

 

 

139

 

Net increase in cash and cash equivalents

 

1,486

 

 

 

970

 

Cash and cash equivalents

 

 

 

 

 

 

 

Beginning of period

 

137,588

 

 

 

113,182

 

End of period

$

139,074

 

 

$

114,152

 

Supplemental disclosure of cash flow data

 

 

 

 

 

 

 

Cash paid for interest

$

169

 

 

$

1,267

 

Cash paid for income taxes

$

123

 

 

$

47

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

Change in liability for unvested exercised options

$

3

 

 

$

9

 

Equipment and capitalized software purchased and unpaid at period end

$

496

 

 

$

2,236

 

Unrealized loss on available-for-sale securities

$

 

 

$

50

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

8


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 and Consolidation

The unaudited condensed consolidated financial statements and accompanying notes of the Company reflect all adjustments (all of which are normal, recurring in nature and those discussed in these notes) that are, in the opinion of management, 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, 2016. Certain information and note disclosures normally included in annual consolidated 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 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, 2015 included in the Company’s fiscal 2015 Annual Report on Form 10-K.

Use of Estimates

The preparation of condensed consolidated 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 condensed consolidated financial statements and the reported results of operations during the reporting period. The significant estimates made by management affect revenues, accounts receivable, allowance for doubtful accounts, inventory reserves, intangibles, goodwill, 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, which are adjusted prospectively based upon such periodic evaluation. Actual results could differ from these estimates and such differences may be material to the accompanying condensed consolidated financial statements.

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (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 (IASB) to clarify and converge the revenue recognition principles under U.S. GAAP and International Financial Reporting Standards (IFRS) and to develop guidance that would streamline and enhance revenue recognition requirements. In April 2015, the FASB proposed a one-year deferral of the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the deferral, ASU 2014-09 will be effective for fiscal 2018, including interim periods within that reporting period. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures and has not selected a transition method.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require a lessee to recognize assets and liabilities with lease terms of more than twelve months. Both capital and operating leases will need to be recognized on the balance sheet.  The standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted.  The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).  This standard amends ASU 2014-09 to improve the operability and understandability of the implementation guidance on principal versus agent considerations.  The effective date and transition of this amendment is the same as the effective date and transition of ASU 2014-09.  The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements and related disclosures.  

9


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies the accounting for stock-based compensation related to the accounting for forfeitures, employer tax withholding, excess tax benefits related to awards and cash flow presentations.  The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.  The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements and related disclosures.  

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (Topic 606), which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property.  The effective date and transition of this amendment is the same as the effective date and transition of ASU 2014-09.  The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements and related disclosures.  

 

 

Note 2. Agency Agreement with Westcon Group

In January 2016, the Company entered into a sales agency agreement with Westcon Group, Inc. (Westcon), a global distributor of communications devices, to provide the phones purchased by customers. Under this agreement, the Company is an agent of Westcon and receives a commission for its services, which primarily include referring phone sales to Westcon. Westcon will provide phones directly to the Company’s customers instead of the Company purchasing phones from third-party vendors and reselling the phones to the Company’s customers. Commission revenue from the arrangement is recorded as the Company is the agent for these sales based on the following criteria:

 

·

the Company is not the primary obligor in the arrangement and the customer contracts for the sales of phones are entered into with Westcon;

 

·

the Company does not have latitude to establish pricing with customers as the sales agency agreement restricts the prices at which phones may be sold by the Company;

 

·

the Company does not have collection risk for phones sold under this model since it is entitled to a sales commission regardless of whether the customer pays Westcon;

 

·

the Company does not carry inventory and does not have general inventory risk; and

 

·

warranty responsibility and services are provided by Westcon.

As the Company has not entirely completed its transition to Westcon, it continued to recognize revenue and cost from sales of phones through other distribution partners for the three months ended March 31, 2016.

The Company’s sales of phones that are provided free or significantly discounted to customers are not part of the sales agency agreement with Westcon. The Company recognizes revenue and cost from these sales as the Company is the primary obligor and has latitude in pricing.

 

 

Note 3. Change in Presentation

As a result of the new sales agency model, the Company replaced the product revenue line in its consolidated statements of operations with a line called “other” revenue, which includes the commissions revenue as an agent of Westcon.  This line also includes professional implementation services, phone rentals, and product revenues not sold under the sales agency agreement with Weston. Correspondingly, cost of other revenue includes cost of professional services, cost of rental revenue, and cost of product revenue.

Product revenue and product cost of revenue were $4.6 million and $4.5 million for the three months ended March 31, 2016, respectively.  Product revenue and product cost of revenue were $5.1 million and $4.5 million for the three months ended March 31, 2015, respectively.

 

 

10


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 4. Financial Statement Components

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

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Cash

$

19,926

 

 

$

18,522

 

Money market funds

 

119,148

 

 

 

119,066

 

Total cash and cash equivalents

$

139,074

 

 

$

137,588

 

 

 

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

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Accounts receivable

$

19,507

 

 

$

15,509

 

Unbilled accounts receivable

 

6,470

 

 

 

4,031

 

Allowance for doubtful accounts

 

(353

)

 

 

(377

)

Accounts receivable, net

$

25,624

 

 

$

19,163

 

 

 

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

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Computer hardware and software

$

50,236

 

 

$

49,774

 

Internal-use software development costs

 

7,965

 

 

 

7,432

 

Furniture and fixtures

 

4,224

 

 

 

3,610

 

Leasehold improvements

 

2,443

 

 

 

2,412

 

Total property and equipment

 

64,868

 

 

 

63,228

 

Less: accumulated depreciation and amortization

 

(37,379

)

 

 

(35,068

)

Property and equipment, net

$

27,489

 

 

$

28,160

 

 

 

Accrued liabilities consisted of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Accrued compensation and benefits

$

12,751

 

 

$

10,128

 

Accrued sales, use and telecom related taxes

 

5,771

 

 

 

5,243

 

Other accrued expenses

 

23,052

 

 

 

19,331

 

Total accrued liabilities

$

41,574

 

 

$

34,702

 

 

 

Note 5. Fair Value of Financial Instruments

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.  The Company measures and reports certain cash equivalents, including money market funds and certificates of deposit, at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements.  This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1:

Valuations based on observable inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2:

Valuations based on 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.

11


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Level 3:

Valuations based on 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 financial assets carried at fair value were determined using the following inputs (in thousands):

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

119,148

 

 

$

119,148

 

 

$

 

 

$

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

530

 

 

$

 

 

$

530

 

 

$

 

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

119,066

 

 

$

119,066

 

 

$

 

 

$

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

530

 

 

$

 

 

$

530

 

 

$

 

 

 

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 March 31, 2016 and December 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. The estimated fair value of the Company’s current and non-current debt obligations was $17.6 million at March 31, 2016, compared to its carrying amount of $17.7 million at that date. The estimated fair value of the Company’s current and non-current debt obligations was $19.0 million at December 31, 2015, compared to its carrying amount of $18.6 million 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 6. Business Combinations

On June 4, 2015, the Company acquired Glip, Inc. (Glip), a cloud messaging and collaboration company based in Boca Raton, Florida. Glip is a provider of team messaging services, integrated with project management, group calendars, notes, annotations, and file sharing. The consideration for this acquisition, net of cash acquired and including the fair value of contingent consideration payable in cash upon achievement of certain earn out milestones and the fair value of common stock issuable to the sellers was $11.9 million. The initial fair value of the milestone based earn out liability was determined to be $2.3 million using various estimates, including probabilities of success and discount rates. Based on the completion of milestones for the quarter ended March 31, 2016 and the estimated probability of completing of the remaining milestones, the estimated fair value of the milestones based earn out liability was $2.4 million at March 31, 2016, of which $2.0 million and $0.4 million is classified as a current and non-current liability, respectively, in the condensed consolidated balance sheets. Under the terms of the acquisition, the Company may also pay up to $2.0 million in payments at the end of a two-year period to certain Glip employees, who continue to be employees of the Company, which are accounted for as a post-combination expense. At March 31, 2016, the contingent payment liability was $0.8 million and classified as a non-current liability in the consolidated balance sheets.

Acquired intangible assets as of March 31, 2016 were as follows (in thousands):

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Acquired

Intangibles, Net

 

Customer relationships

$

840

 

 

$

345

 

 

$

495

 

Developed technology

 

3,010

 

 

 

494

 

 

 

2,516

 

Total acquired intangible assets

$

3,850

 

 

$

839

 

 

$

3,011

 

 

12


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Amortization expense from acquired intangible assets for the three months ended March 31, 2016 was $0.3 million.  Amortization of developed technology is included in cost of revenues and amortization of customer relationships is included in sales and marketing expenses in the condensed consolidated statements of operations.

Estimated amortization expense for acquired intangible assets for the following five fiscal years and thereafter is as follows (in thousands):

 

2016 (remaining)

$

767

 

2017

 

782

 

2018

 

602

 

2019

 

602

 

2020

 

258

 

Total estimated amortization expense

$

3,011

 

 

 

Note 7. Debt

As of March 31, 2016, the Company’s debt is comprised of borrowings under the Third Amended and Restated Loan and Security Agreement dated March 30, 2015 (SVB Agreement), as amended, with Silicon Valley Bank (SVB).  Under the SVB Agreement, the Company has one outstanding growth capital term loan (2013 Term Loan) and a revolving line of credit.

The 2013 Term Loan was borrowed on December 31, 2013 with a principal amount of $15.0 million, which was being repaid in 48 equal monthly installments of principal, plus accrued and unpaid 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, 2016, the current interest rate is 4.25%. As of March 31, 2016, the outstanding principal balance of the 2013 term loan was $6.9 million, of which $3.1 million is payable subsequent to March 31, 2017 and is classified as a non-current liability in the accompanying condensed consolidated balance sheet.  

The revolving line of credit provides for a maximum borrowing of up to $15.0 million in principal amount, subject to limits based on recurring software subscription revenue amounts as defined in the SVB Agreement. The recurring software 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 an annual rate of either 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, 2016, the current interest rate is 3.75%. On August 11, 2015, the Company amended the terms of the SVB Agreement extending the maturity of the revolving line of credit from August 13, 2015 to August 14, 2017. As of March 31, 2016, the outstanding principal balance and the available borrowing capacity of the line of credit were $10.8 million and $4.2 million, respectively. The outstanding principal balance is classified as non-current liabilities in the condensed consolidated balance sheet as the principal balance is due beyond March 31, 2017.

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 $10.0 million, as defined in the 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, 2016.

 

 

13


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 8. 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.  The Company leases space for its headquarter in Belmont, California through July 2021.

Sales Tax Liability

The Company regularly increases its sales and marketing activities in the U.S. that may create nexus in those states to collect sales taxes on sales to those customers.  Although the Company is diligent in collecting and remitting such taxes, there is uncertainty as to what constitutes sufficient in state presence for a state to levy taxes, fees, and surcharges for sales made over the Internet. As of March 31, 2016 and December 31, 2015, the Company had a balance for a long-term sales tax liability of $3.7 million at both period ends, 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 non-contingent amounts expected to be remitted in the next twelve months of $4.5 million and $4.4 million, is included in accrued liabilities as of March 31, 2016 and December 31, 2015, 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, 2016 and December 31, 2015, there were no significant ongoing legal matters and the Company did not have any accrued liabilities recorded for such loss contingencies.

 

 

Note 9. 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,

 

 

2016

 

 

2015

 

Cost of revenues

$

653

 

 

$

457

 

Research and development

 

1,638

 

 

 

1,113

 

Sales and marketing

 

2,190

 

 

 

1,844

 

General and administrative

 

2,256

 

 

 

1,333

 

Total share-based compensation expense

$

6,737

 

 

$

4,747

 

 

14


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Options

$

2,547

 

 

$

2,705

 

Employee stock purchase plan rights

 

550

 

 

 

286

 

Restricted stock units

 

3,640

 

 

 

1,756

 

Total share-based compensation expense

$

6,737

 

 

$

4,747

 

 

Equity Incentive Plans

As of March 31, 2016, a total of 10,054,774 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, 2016 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, 2015

 

8,048

 

 

$

10.27

 

 

 

6.2

 

 

$

107,091

 

Granted

 

499

 

 

 

16.01

 

 

 

 

 

 

 

 

 

Exercised

 

(91

)

 

 

3.10

 

 

 

 

 

 

 

 

 

Canceled/Forfeited

 

(200

)

 

 

15.27

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2016

 

8,256

 

 

$

10.58

 

 

 

6.0

 

 

$

45,038

 

Vested and expected to vest as of March 31, 2016

 

7,700

 

 

$

10.22

 

 

 

6.0

 

 

$

44,613

 

Exercisable as of March 31, 2016

 

5,130

 

 

$

7.97

 

 

 

5.8

 

 

$

40,730

 

 

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,

 

 

2016

 

 

2015

 

Weighted average grant date fair value per share

$

6.53

 

 

$

6.53

 

Total intrinsic value of options exercised

$

1,463

 

 

$

3,815

 

 

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 model in the periods presented were as follows:

 

 

Three Months Ended

March 31,

 

 

2016

 

 

2015

 

Expected term for employees (in years)

 

4.7

 

 

 

4.8

 

Expected term for non-employees (in years)

 

6.2

 

 

 

7.0

 

Risk-free interest rate

 

1.11

%

 

 

1.47

%

Expected volatility

 

47

%

 

 

48

%

Expected dividend yield

 

0

%

 

 

0

%

 

As of March 31, 2016 and March 31, 2015, there was approximately $16.0 million and $24.6 million 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 2.5 years and 2.6 years, respectively.  

15


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 the IRS allowable limit per calendar year. 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, 2016, there was a total of $0.2 million 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, 2016, a total of 2,618,416 shares were available for issuance under the ESPP.

Restricted Stock Units

The 2013 Plan provides for the issuance of restricted stock units (RSUs) to employees and consultants.  RSUs issued under the 2013 Plan generally vest over four years.  A summary of activity of RSUs under the 2013 Plan at March 31, 2016 and changes during the period then ended is presented in the following table:

 

 

Number of

 

 

Weighted-

 

 

 

 

 

 

RSUs

 

 

Average

 

 

Aggregate

 

 

Outstanding

 

 

Grant Date Fair

 

 

Intrinsic Value

 

 

(in thousands)

 

 

Value Per Share

 

 

(in thousands)

 

Outstanding at December 31, 2015

 

2,288

 

 

$

16.63

 

 

$

53,972

 

Granted

 

1,088

 

 

 

16.28

 

 

 

 

 

Exercised

 

(175

)

 

 

15.86

 

 

 

 

 

Canceled/Forfeited

 

(79

)

 

 

16.49

 

 

 

 

 

Outstanding at March 31, 2016

 

3,122

 

 

$

16.55

 

 

$

49,196

 

As of March 31, 2016, there was a total of $36.8 million 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 3.14 years.

 

 

Note 10. Segment Reporting

The Company has determined the chief executive officer is the chief operating decision maker. The Company’s chief executive officer reviews financial information presented on a consolidated basis for purposes of assessing performance and making decisions on how to allocate resources. Accordingly, the Company has determined that it operates in a single reporting segment.

Concentrations

Revenue by geographic location is based on the billing address of the customer. More than 90% of the Company’s revenue was derived from the U.S. during the three months ended March 31, 2016 and 2015.

Generally, 88% of the Company’s billings are collected through credit card payments, resulting in a minimal accounts receivable balance.  The Company’s accounts receivable balance primarily consists of receivables due from larger customers and resellers who are billed on invoices at customary payment terms.  As the Company moves up-market and acquires larger customers, the Company expects the accounts receivable balance to increase.  At March 31, 2016 and December 31, 2015, one of the Company’s resellers accounted for 42% and 39% of the Company’s total accounts receivable, respectively.  

Property and equipment by geographic location is based on the location of the legal entity that owns the asset. At March 31, 2016 and December 31, 2015, more than 85% of the Company’s property and equipment was located in the U.S. with no single country outside of the U. S. representing more than 10% of property and equipment.

 

16


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 11. Income Taxes

The provision for income taxes for the three months ended March 31, 2016 and 2015, was $50,000 and $83,000, respectively, which consisted primarily of state minimum taxes and foreign income taxes.

For the three months ended March 31, 2016 and 2015, the provision for income taxes differed from the U.S federal statutory rate primarily due to state and foreign taxes currently payable.  Additionally, the Company realized no benefit for current year losses due to a full valuation allowance against the U.S. and the foreign net deferred tax assets.

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, 2016 and December 31, 2015. The Company intends to maintain the full valuation allowance on the U.S. net deferred tax assets until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance.

During the three months ended March 31, 2016, there have been no significant changes to the total amount of unrecognized tax benefits.

 

 

Note 12. 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, stock options, restricted stock units, ESPP, stock options related to the non-vested early exercises and stock related to non-vested restricted stock awards, to the extent they are dilutive. For the three months ended March 31, 2016 and 2015, 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,

 

 

2016

 

 

2015

 

Numerator

 

 

 

 

 

 

 

Net loss

$

(6,613

)

 

$

(10,611

)

Denominator

 

 

 

 

 

 

 

Weighted-average common shares for basic and diluted net loss per share

 

72,114

 

 

 

68,764

 

Basic and diluted net loss per share

$

(0.09

)

 

$

(0.15

)

 

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,

 

 

2016

 

 

2015

 

Shares of unvested common stock subject to repurchase

 

 

 

 

13

 

Shares of common stock issuable under equity incentive awards outstanding

 

11,379

 

 

 

11,611

 

Potential common shares excluded from diluted net loss per share

 

11,379

 

 

 

11,624

 

 

 

Note 13. Related Party Transactions

In the ordinary course of business, the Company made purchases from Alphabet Inc. (the parent company of Google Inc.), an entity for which one of the Company’s directors serves as a Vice President. Total payables to Alphabet at March 31, 2016 and December 31, 2015 were $1.2 million and $2.0 million, respectively. Total expenses incurred from Alphabet in three months ended March 31, 2016 and March 31, 2015 were $2.9 million and $2.8 million, respectively.

17


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Note 14. Subsequent Event

On April 21, 2016, Supply Pro Sorbents, LLC (SPS), filed a putative class action against the Company in the United States District Court for the Northern District of California, alleging common law conversion and violations of the federal Telephone Consumer Protection Act (TCPA) arising from fax cover sheets used by the Company’s customers when sending facsimile transmissions over the Company’s system.  SPS seeks statutory damages, costs, attorneys’ fees and an injunction in connection with its TCPA claim, and unspecified damages and punitive damages in connection with its conversion claim.  The Company has not yet responded to the complaint, and discovery has not yet commenced.  The Company intends to vigorously defend itself in this lawsuit.  However, litigation is inherently uncertain, and it is too early in this proceeding to predict the outcome of this lawsuit. Based on the information known by the Company as of the date of this filing and the rules and regulations applicable to the preparation of the Company’s condensed consolidated financial statements, it is not possible to provide an estimated amount of any such loss or range of loss that may occur.

 

 

 

18


 

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 29, 2016 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 significantly 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 and collaboration solutions by providing flexible and cost-effective subscriptions 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 the time, thus enabling a more productive and dynamic workforce.

We primarily generate revenues by selling software subscriptions of our RingCentral Office, RingCentral Professional, RingCentral Fax, and RingCentral Contact Center offerings. RingCentral Office, which offers an integrated communications and collaboration solution, 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. We recently introduced RingCentral Global Office (Global Office) as an expansion to RingCentral Office. Global Office, offered on a monthly subscription, is a single global solution designed for multinational enterprises.  Connecting workforces across multiple countries, Global Office reduces complexity and high costs of maintaining multiple, legacy on-premise PBX systems with a single cloud solution.  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. In addition, RingCentral Contact Center is also offered as a monthly subscription based on three editions with varying features and capabilities.

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 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, 2016 and 2015, software subscriptions revenue accounted for more than 90% of our total revenues. The remainder of our revenues has historically been primarily comprised of product revenue from the sale of pre-configured office phones. We do not develop, manufacture, or otherwise touch the delivery of physical phones and offer it as a convenience for a total solution to our customers in connection with subscriptions to our services.

In January 2016, we entered into a sales agency agreement with Westcon Group, Inc. (Westcon), a global distributor of communications devices, to provide the phones purchased by customers. Under this agreement, we are an agent and receive a commission for our services, which primarily include referring sales to Westcon. Westcon will provide phones directly to our customers instead of us purchasing phones from third-party vendors and reselling the phones to our customers. Commission revenue from the arrangement is recorded as we are the agent for these sales. We continued to generate revenue from sales of phones during the first quarter of 2016 from transactions with our previous distribution partners as we had not completed the transition of all phone distribution rights to Westcon during the first quarter of 2016. In addition, we will at times have sales in which we will provide free or significantly discounted phones to our customers for promotional reasons. As our agency arrangement does not allow for these significant discounts, we will be the seller to these customers and recognize the related revenue and cost from the sale.

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 2,500 sales agents and resellers, including distributors such as Ingram Micro, Tech Data, and Jenne, as well as carrier partners including AT&T, TELUS, and BT, 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.

19


 

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 software subscription revenue 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. In the case of our carrier partners, who resell our product to multiple companies, we consider each reseller to be a single 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, 2016, we had customers from industries including advertising, finance, healthcare, legal services, non-profit organizations, real estate, retail and technology. In October of 2013, we launched our United Kingdom operations, however, for the three months ended March 31, 2016 and 2015, the vast majority 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.

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 $296.2 million, $219.9 million and $160.5 million in fiscal years ended December 31, 2015, 2014 and 2013, respectively, generating year-over-year increases of 35% and 37%, respectively. For the three months ended March 31, 2016 and 2015, our total revenues were $86.5 million and $65.3 million, respectively, representing a year-over-year increase of 32%.  We have continued to make significant expenditures and investments, including those in sales and marketing, research and development, infrastructure and operations and incurred net losses of $32.1 million, $48.3 million and $46.1 million in fiscal years 2015, 2014 and 2013, respectively.  For the three months ended March 31, 2016 and 2015, our net loss was $6.6 million and $10.6 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 (ARR) is a leading indicator of our anticipated subscriptions revenues. We believe that trends in revenue are important to understanding the overall health of our business, 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, 2016 was $28.4 million. As such, our Annualized Exit Monthly Recurring Subscriptions at March 31, 2016 was $340.3 million.

RingCentral Office Annualized Exit Monthly Recurring Subscriptions

We calculate our RingCentral Office Annualized Exit Monthly Recurring Subscriptions (Office ARR) 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 business, 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, 2016 were $269.3 million.

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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.

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, 2016 were as follows (dollars in millions):

 

 

March 31,

2016

 

 

December 31,

2015

 

 

September 30,

2015

 

 

June 30,

2015

 

 

March 31,

2015

 

Net Monthly Subscription Dollar Retention Rate

>99%

 

 

>99%

 

 

>99%

 

 

>99%

 

 

>99%

 

Annualized Exit Monthly Recurring Subscriptions

$

340.3

 

 

$

317.4

 

 

$

297.5

 

 

$

274.6

 

 

$

253.7

 

RingCentral Office Annualized Exit Monthly

   Recurring Subscriptions

$

269.3

 

 

$

247.4

 

 

$

227.7

 

 

$

205.4

 

 

$

185.4

 

Quarterly Revenue Trends

Our subscriptions revenues are primarily driven by recurring software 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 employee-related 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 a percentage of total revenues as we spend relatively less on marketing programs in the third and fourth quarters due to the summer and year-end holiday periods. However, this trend may not continue as we acquire larger customers.

 

 

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Results of Operations

The following tables set forth selected condensed consolidated statements 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,

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

Software subscriptions

$

79,978

 

 

$

59,951

 

Other

 

6,560

 

 

 

5,367

 

Total revenues

 

86,538

 

 

 

65,318

 

Cost of revenues

 

 

 

 

 

 

 

Software subscriptions

 

16,723

 

 

 

15,914

 

Other

 

5,017

 

 

 

4,633

 

Total cost of revenues

 

21,740

 

 

 

20,547

 

Gross profit

 

64,798

 

 

 

44,771

 

Operating expenses

 

 

 

 

 

 

 

Research and development

 

14,926

 

 

 

11,840

 

Sales and marketing

 

41,828

 

 

 

31,969

 

General and administrative

 

14,024

 

 

 

10,531

 

Total operating expenses

 

70,778

 

 

 

54,340

 

Loss from operations