RingCentral Announces Fourth Quarter and Full Year 2017 Results
RingCentral, Inc. (NYSE: RNG), a leading provider of global enterprise cloud communications and collaboration solutions, today announced financial results for the fourth quarter and full year ended December 31, 2017.
Fourth Quarter Financial Highlights
- Total revenue grew 34% year over year to $140.5 million.
- Software subscriptions revenue grew 32% year over year to $129.7 million.
- Software subscriptions annualized exit recurring software subscriptions (ARR) grew 32% year over year to $546.4 million.
- RingCentral Office® ARR grew 36% year over year to $466.2 million.
- GAAP software subscriptions gross margin was 81.3%, up 1.1 points year over year, while Non-GAAP software subscriptions gross margin was 82.1%, up 0.9 points year over year.
- GAAP operating margin was (4.4%), up 1.9 points year over year, while Non-GAAP operating margin was 3.9%, up 1.8 points year over year.
- Net monthly subscriptions dollar retention: RingCentral Office over 100% and overall subscriptions over 99%
“The fourth quarter was an outstanding finish to a great year. This was led by our mid-market and enterprise business and further supported by continuing momentum from our channel partners. And we capped off the year with a record 15 deals with total contract value (TCV) of more than $1 million, up from 10 deals last quarter,” said Vlad Shmunis, RingCentral’s Chairman and CEO. “We further extended our leadership position in the UCaaS market driven by our relentless focus on innovation and commitment to customer success. We believe we are well positioned heading into 2018 and look forward to an exciting year ahead.”
Financial Results for the Fourth Quarter 2017
Revenue and Gross Margin: Total revenue was $140.5 million for the fourth quarter of 2017, up from $104.5 million in the fourth quarter of 2016, representing 34% growth. Total gross margin
was 76.1% for the fourth quarter of 2017, down 0.3% points compared to 76.4% in the fourth quarter of 2016.
As of January 1, 2017, RingCentral transitioned from an agency model to a direct phone sales model, under which RingCentral is recognizing the full sale price and cost of the product instead of receiving a commission for phone sales. Adjusting for the direct phone sales model on a comparable basis, total revenue in the fourth quarter grew 31% year over year and the total gross margin would have been 1.5% higher year over year.
- Net Income (Loss) Per Share: GAAP net loss per share was ($0.08) for the fourth quarter of 2017 compared with ($0.09) for the fourth quarter of 2016. Non-GAAP net income per diluted share was $0.07 for the fourth quarter of 2017, compared with $0.03 per diluted share for the fourth quarter of 2016.
- Balance Sheet: Total cash and cash equivalents at the end of the fourth quarter of 2017 was $181.2 million, compared with $172.3 million at the end of the third quarter of 2017.
Financial Results for the Full Year 2017
Revenue and Gross Margin: Total revenue was $501.5 million for the full year of 2017, up from $379.7 million in the full year of 2016, representing 32% growth. Total gross margin was 75.8%
for the full year of 2017, up 0.1% points compared to 75.7% in the full year of 2016.
Adjusting for the direct phone sales model on a comparable basis, total revenue for the full year of 2017 grew 29% year over year and the total gross margin would have been 1.7% higher year over year.
- Net Income (Loss) Per Share: GAAP net loss per share was ($0.34) for the full year of 2017 compared with ($0.40) for the full year of 2016. Non-GAAP net income per diluted share was $0.20 for the full year of 2017, compared with $0.09 per diluted share for the full year of 2016.
- Balance Sheet: Total cash and cash equivalents at the end of 2017 was $181.2 million, compared with $160.4 million at the end of 2016.
Recent Business Highlights
- Achieved compliance in security controls established by the Financial Industry Regulatory Authority, Inc. (FINRA) for cloud service providers. Through compliance with applicable FINRA cyber security controls, RingCentral’s financial customers, including banks, brokers, and traders, can trust that RingCentral Office® and RingCentral Glip® products meet regulatory requirements for security and reliability.
- Earned Certified status for information security by the Health Information Trust (HITRUST) Alliance. Certified status indicates that RingCentral Office and RingCentral Glip have a comprehensive framework of prescriptive and scalable security controls for our healthcare customers that met HITRUST requirements for protecting and securing sensitive private healthcare information.
- Announced Amazon® Alexa for Business integration that enables the use of voice commands to join meetings, send text messages, listen to voicemails, and make calls in an easy and intuitive way. In addition, RingCentral users can join any meeting scheduled in other Amazon Alexa–compatible third-party meeting applications without the need to download those applications.
- Added Latin America support to RingCentral Global OfficeTM including Brazil, Peru, and Argentina. RingCentral Global Office is now available in 37 countries.
Our guidance reflects the adoption of the new Topic 606 revenue recognition standard that is effective for us beginning January 1, 2018. The comparison period amounts used to calculate growth rates have been restated from previously reported amounts to conform to the requirements of Topic 606.
Full Year 2018 Guidance:
- Software subscriptions revenue between $581 and $589 million or an annual growth of 25% to 27%
- Total revenue guidance between $629 and $639 million, or an annual growth rate of 25% to 27%
- GAAP operating margin between (4.5%) and (3.5%), and Non-GAAP operating margin between 7.8% and 8.2%
- Non-GAAP EPS between $0.56 to $0.60 based on 86.5 million fully diluted shares
First Quarter 2018 Guidance:
- Software subscriptions revenue between $134 and $135 million, or an annual growth of 29% to 30%
- Total revenue between $144.5 and $146.5 million, or an annual growth of 29% to 31%
- GAAP operating margin between (4.4%) and (3.2%), and Non-GAAP operating margin between 7.0% and 7.6%
- Non-GAAP EPS between $0.11 and $0.13 based on 85 million fully diluted shares
For a reconciliation of our forecasted non-GAAP operating margin, see “Reconciliation of Forecasted Operating Margin GAAP Measures to Non-GAAP Measures.” We have not reconciled our forecasted non-GAAP EPS to GAAP EPS because we do not provide guidance on it. We do not provide guidance on forecasted GAAP EPS because of the inherent uncertainty and complexity involved in forecasting the intercompany remeasurement gain (loss), which could be a significant reconciling item between the non-GAAP and respective GAAP measure. The intercompany remeasurement gain (loss) is impacted by the movement in various exchange rates relative to the USD, which is difficult to predict and subject to constant change. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measure is not available without unreasonable effort.
Conference Call Details:
- What: RingCentral financial results for the fourth quarter, full year 2017 and outlook for the first quarter and full year of 2018.
- When: Monday, February 12, 2018 at 2:00PM PT (5:00PM ET).
- Dial in: To access the call in the United States, please dial (877) 705-6003, and for international callers dial (201) 493-6725. Callers are encouraged to dial into the call 10 to 15 minutes prior to the start to prevent any delay in joining.
- Webcast: http://ir.ringcentral.com/ (live and replay).
- Replay: A replay of the call will be available via telephone for seven days, following the completion of the call. To listen to the telephone replay in the U.S., please dial (844) 512-2921 from the United States or (412) 317-6671 internationally with recording access code 13675598.
Investor Presentation Details
An investor presentation providing additional information and analysis can be found at http://ir.ringcentral.com/.
RingCentral, Inc. (NYSE:RNG) is a leading provider of global enterprise cloud communications and collaboration solutions. More flexible and cost-effective than legacy on-premises systems, RingCentral empowers today’s mobile and distributed workforce to communicate, collaborate, and connect from anywhere, on any device. RingCentral unifies voice, video, team messaging and collaboration, conferencing, online meetings, and integrated contact center solutions. RingCentral’s open platform integrates with leading business apps and enables customers to easily customize business workflows. RingCentral is headquartered in Belmont, California, and has offices around the world.
©2018 RingCentral, Inc. All rights reserved. RingCentral, RingCentral Office, RingCentral Global Office, RingCentral Glip and the RingCentral logo are trademarks of RingCentral, Inc.
New Revenue Recognition Standard Under Topic 606
In May 2014, the Financial Accounting Standards Board issued a new standard related to revenue recognition from contracts with customers (Topic 606), which is effective beginning January 1, 2018. Topic 606 supersedes the prior revenue recognition standard (Topic 605). The Company will adopt the requirements of the new standard in the first quarter of 2018, using the full retrospective transition method.
Under the new standard, the Company expects in some cases to recognize revenue earlier for subscription plans when the customer receives services for no consideration during the initial months (i.e., initial period is discounted) as a result of elimination of contingent revenue guidance (i.e., amounts allocated to delivered items are limited to amounts that are not contingent on the provision of future services) in the new standard. The most significant impact of adoption the new standard primarily relates to the deferral of incremental commission costs of obtaining subscription contracts, which previously were expensed as incurred. Under the new standard, the Company will defer all incremental commission costs to obtain the contract and amortize them over the expected period of benefit, which is estimated to be five years.
The financial information under the heading “Financial Outlook” above is prepared in accordance with Topic 606, and the comparison period amounts used to calculate growth rates are based on amounts that have been restated from previously reported amounts to conform to the requirements of Topic 606 (see Table 6). Unless otherwise indicated, all other financial information in this release is prepared in accordance with Topic 605.
This press release contains “forward-looking statements,” including but not limited to, statements regarding our future financial results, our GAAP and non-GAAP guidance, our strength in the mid-market and enterprise segments, our growth from our channel partners, and our leadership in the UCaaS market. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on assumptions that may prove to be incorrect, which could cause actual results to differ materially from those expected or implied by the forward-looking statements. Among the important factors that could cause actual results to differ materially from those in any forward-looking statements are: our ability to grow at our expected rate of growth; our ability to add and retain larger and enterprise customers and enter new geographies and markets; our ability to continue to release, and gain customer acceptance of, new and improved versions of our services; our ability to compete successfully against existing and new competitors; our ability to enter into and maintain relationships with carriers and other resellers; our ability to manage our expenses and growth; and general market, political, economic, and business conditions, as well as those risks and uncertainties included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-Q for the quarter ended September 30, 2017, filed with the Securities and Exchange Commission; and in other filings we make with the Securities and Exchange Commission from time to time.
All forward-looking statements in this press release are based on information available to RingCentral as of the date hereof, and we undertake no obligation to update these forward-looking statements, to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of the current financial quarter.
Non-GAAP Financial Measures
Our reported financial results and financial outlook include certain Non-GAAP financial measures, including Non-GAAP software subscriptions gross margin, Non-GAAP other gross margin, Non-GAAP operating margin, Non-GAAP operating income (loss), Non-GAAP net income (loss) and Non-GAAP net income (loss) per diluted share. Non-GAAP software subscriptions gross margin is defined as Non-GAAP subscriptions gross profit divided by GAAP subscriptions revenue. Non-GAAP other gross margin is defined as Non-GAAP other gross profit divided by GAAP other revenue. Non-GAAP operating income (loss) is defined as operating income (loss) excluding share-based compensation, amortization of acquisition intangibles, and acquisition related matters. Non-GAAP operating margin is defined as Non-GAAP operating income (loss) divided by total GAAP revenue. Non-GAAP net income (loss) is defined as net income (loss) excluding stock-based compensation, intercompany remeasurement gains or losses, acquisition related matters, amortization of acquisition intangibles, and the related income tax effect of these adjustments.
We have included Non-GAAP software subscriptions gross margin, Non-GAAP other gross margin, Non-GAAP operating margin, Non-GAAP net income (loss) and Non-GAAP net income (loss) per diluted share in this press release because they are key measures used by us to understand and evaluate our operating performance and trends, to prepare and approve our annual budget, and to develop short and long-term operational plans. In particular, the exclusion of certain expenses in calculating Non-GAAP software subscriptions gross margin, Non-GAAP other gross margin, Non-GAAP operating margin, Non-GAAP net income (loss), and Non-GAAP net income (loss) per diluted share provide useful measure for period-to-period comparisons of our business.
Although Non-GAAP software subscriptions gross margin, Non-GAAP other gross margin, Non-GAAP operating margin, Non-GAAP net income (loss), and Non-GAAP net income (loss) per diluted share, are frequently used by investors in their evaluations of companies, these non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Because of these limitations, these non-GAAP financial measures should be considered alongside other financial performance measures.
Reconciliations of the Company’s non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included in this press release.
Our reported results also include our software subscriptions annualized exit monthly recurring subscriptions, RingCentral Office® annualized exit monthly recurring subscriptions, and net monthly subscriptions dollar retention. We define our software subscriptions annualized exit monthly recurring subscriptions as our software subscriptions monthly recurring subscriptions multiplied by 12. Our software subscriptions monthly recurring subscriptions equal the monthly value of all software subscriptions in effect at the end of a given month. We believe this metric is a leading indicator of our anticipated subscriptions revenue. We calculate our RingCentral Office® annualized exit monthly recurring subscriptions in the same manner as we calculate our software subscriptions annualized exit monthly recurring subscriptions, except that only customer subscriptions from RingCentral Office® customers are included when determining monthly recurring subscriptions for the purposes of calculating this key business metric. We define Dollar Net Change as the quotient of (i) the difference of our Monthly Recurring Subscriptions at the end of a period minus our Monthly Recurring Subscriptions at the beginning of a period minus our Monthly Recurring Subscriptions at the end of the period from new customers we added during the period, (ii) all divided by the number of months in the period. We define our Average Monthly Recurring Subscriptions as the average of the Monthly Recurring Subscriptions at the beginning and end of the measurement period.