ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. As discussed in the section entitled “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 these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in the section entitled “Risk Factors” included under Part I, Item1A.
This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussion regarding our financial condition and results of operations for fiscal 2022 as compared to fiscal 2021 is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 23, 2023.
Overview
We are a leading provider of AI-driven global enterprise cloud communications, video meetings, collaboration, and contact center software-as-a-service (“SaaS”) solutions. We believe that our innovative, cloud-based communication and contact center solutions disrupt the large market for business communications and collaboration by providing flexible and cost-effective solutions that support mobile and distributed workforces. We enable convenient and effective communications for organizations across all their locations and employees, enabling them to be more productive and more responsive.
Our cloud-based business communications and collaboration solutions are designed to be easy to use, providing a user identity across multiple locations and devices, including smartphones, tablets, PCs and desk phones. Our solutions can be deployed rapidly and configured and managed easily. Our cloud-based solutions are location and device independent and better suited to address the needs of modern mobile and global enterprise workforces than are legacy on-premises systems. Through our open Application Programming Interface (API) platform, we enable third-party developers and customers to integrate our solution with leading business applications to customize their own business workflows.
We have a portfolio of cloud-based offerings that are subscription based, made available at different rates varying by the specific functionalities, services, and number of users. We primarily generate revenues from the sale of subscriptions to our offerings. Our subscription plans have monthly, annual, or multi-year contractual terms. We believe that this flexibility in contract duration is important to meet the different needs of our customers. For the years ended December 31, 2023 and 2022, subscriptions revenues accounted for 90% or more of our total revenues. The remainder of our revenues are primarily comprised of product revenues from the sale of pre-configured phones and professional services. We do not develop or manufacture physical phones and only offer them as a convenience to our customers. We rely on third-party providers to develop and manufacture these devices and fulfillment partners to successfully serve our customers.
We use our direct inside sales force and indirect sales channels to market our brand and our subscription offerings. Our indirect sales channels who sell our solutions consist of:
•Regional and global network of resellers and distributors;
•Strategic partners who market and sell our MVP or other solutions, including co-branded solutions.
•Global Service Providers including AT&T, TELUS, BT, Vodafone, DT, Optus, 1&1 Versatel and Ecotel in Germany, MCM in Mexico, Frontier, Charter Communications and others.
Our revenue growth has primarily been driven by our flagship RingCentral MVP, RingCentral contact center solutions, and recurring license and other fees. Our revenue is derived from sales through our direct and indirect sales channels, including resellers and distributors, strategic partners and global service providers. As of December 31, 2023, we had customers from a range of industries, including financial services, education, healthcare, legal services, real estate, retail, technology, insurance, construction, hospitality, and state and local government, among others. For the years ended December 31, 2023, 2022 and 2021, the vast majority of our total revenues were generated in the U.S. and Canada.
The growth of our business and our future success depend on many factors, including our ability to expand our customer base, expand our indirect sales channels, continue to innovate, grow revenues from our existing customer base, expand our distribution channels, and scale internationally.
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In the fourth quarter of each of 2023 and 2022, our board of directors approved a reduction-in-force plan as part of broader efforts to optimize the Company cost structure. We are actively implementing various measures to enhance operational efficiencies throughout the Company. These include disciplined spending, increased productivity, efficiency gains, and optimizing our go-to-market strategies.
Macroeconomic Conditions and Other Factors
We are subject to risks and exposures caused by the current macroeconomic environment. Macroeconomic factors include increased inflation, increased interest rates, supply chain disruptions, decreased economic output, geopolitical conflict and fluctuations in currency exchange rates, all of which can cause uncertainty. We have experienced more cautious buying behavior from larger customers manifesting itself in smaller initial deployments. We have experienced elevated sales cycle times for our up-market customers, as customers required additional approvals before making purchase decisions. We are also seeing less upsell of additional MVP services within our existing base as customers have slowed hiring and rationalized their employee counts. We anticipate this behavior may persist until the macroeconomic environment becomes less uncertain. If these conditions continue, they could have an adverse impact on our results. We continuously monitor the impact of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. The implications of macroeconomic conditions on our business, results of operations and overall financial position, particularly in the long term, remain uncertain.
Key Business Metrics
In addition to United States generally accepted accounting principles (“U.S. GAAP”) and 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 and free cash flows 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 ARR equals our Monthly Recurring Subscriptions multiplied by 12. Our Monthly Recurring Subscriptions equals the monthly value of all customer recurring charges at the end of a given month. For example, our Monthly Recurring Subscriptions at December 31, 2023 was $194.1 million. As such, our ARR at December 31, 2023 was $2.33 billion compared to $2.10 billion at December 31, 2022.
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 revenue, 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 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, all divided by (ii) 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.
For 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.
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Our key business metrics for the five quarterly periods ended December 31, 2023 were as follows (dollars in billions):
Net Monthly Subscription Dollar Retention Rate >99% >99% >99% >99% >99%
Components of Results of Operations
Revenues
Our revenues for the years presented consisted of subscriptions and other revenues. Our subscriptions revenue primarily includes recurring fixed plan subscription fees, variable usage-based fees for usage in excess of plan limits, one-time fees, recurring license and other fees, derived from sales through our direct and indirect sales channels, including resellers and distributors, strategic partners and global service providers. We provide subscription services to our customers pursuant to contractual arrangements that range in duration typically from one month to five years. Our subscription services are based on the functionalities and services selected by a customer and may automatically renew for additional periods at the end of the initial subscription term. We believe that this flexibility in contract duration is important to meet the different needs of our customers.
We generally bill our subscription fees in advance. We recognize subscription revenue over the term of the agreement. Amounts billed in excess of revenue recognized for the period are reported as deferred revenue on our Consolidated Balance Sheets.
We also generate revenues through sales of our subscriptions and products by resellers, strategic partners, and global service providers. When we control the performance of the contractual obligations, we record the revenues on a gross basis and amounts retained by our resellers are recorded as sales and marketing expense. Our assumption of such control is evidenced when, among other things, we are primarily responsible for the delivery of the service or products, have inventory risk, and have discretion in establishing pricing of the arrangement.
“Other revenues” includes product revenues from the sale of pre-configured phones, and professional services. Product revenue is recognized when the product has been delivered to the customer. Professional services revenue is recognized as and when services are delivered.
Cost of Revenues and Gross Margin
Our cost of subscriptions revenue primarily consists of fees paid to third-party telecommunications providers, network operations, costs to build out and maintain data centers, including co-location fees for the right to place our servers in data centers owned by third parties, depreciation of servers and equipment, along with related utilities and maintenance costs, amortization of acquired technology related intangible assets, personnel costs associated with customer support of the functionality of our platform and data center operations, including share-based compensation expenses, and allocated costs of facilities and information technology.
We define subscriptions gross margins as subscriptions revenue minus the cost of subscriptions revenue expressed as a percentage of subscriptions revenue.
Cost of other revenue is comprised primarily of the cost associated with the purchase of phones, personnel costs for employees and contractors, including share-based compensation expenses, cost of third parties used for professional services, and allocated costs of facilities and information technology.
Operating Expenses
We classify our operating expenses as research and development, sales and marketing, general and administrative expenses, and asset write-down charges.
Our research and development efforts are focused on developing new and expanded features for our solutions, integrations with distributors and other software platforms, and improvements to our backend architecture. Research and development expenses consist primarily of personnel costs for employees and contractors, including share-based compensation
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expenses, and allocated costs of facilities and information technology, software tools, product certification, and the impact of the restructuring activities in 2023 and 2022. We expense research and development costs as incurred, except for certain internal-use software development costs that we capitalize. We will continue to innovate and invest in current and future software development projects while driving efficiencies.
Sales and marketing expenses are the largest component of our operating expenses and consist primarily of personnel costs for employees and contractors directly associated with our sales and marketing activities including share-based compensation expenses, internet advertising fees, television, radio and billboard advertising, public relations, commissions paid to employees, resellers and other third parties, amortization of capitalized sales commissions, trade shows, credit card fees, marketing and promotional activities, amortization of acquired customer relationship intangibles, allocated costs of facilities and information technology, and the impact of the restructuring activities in 2023 and 2022. We expect to incur incremental sales and marketing expenses to support our growth while driving cost efficiencies by further optimizing our go-to-market strategies, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of these expenses.
General and administrative expenses consist primarily of personnel costs, including share-based compensation expenses, for employees and contractors engaged in infrastructure and administrative activities to support the day-to-day operations of our business. Other significant components of general and administrative expenses include professional service fees, allocated costs of facilities and information technology, cost of compliance with certain government-imposed taxes, the costs of legal matters, business acquisition costs, loss contingencies, and the impact of the restructuring activities in 2023 and 2022. We will continue to invest in processes, systems, and personnel to support our anticipated revenue growth while driving efficiencies.
Asset write-down charges consist of write-offs related to our assets, including deferred and prepaid sales commission and acquired intangiblesbalances, whenever events or changes in circumstances have occurred that could indicate the carrying amount of such assets may not be recoverable.
Other Income (Expense), Net
Interest expenses consist primarily of interest costs on our debt arrangements, as well as amortization of the debt discount and issuance costs in connection with our long-term debt.
Other income (expenses) consist primarily of the following items:
•unrealized gains and losses from fair value adjustments on our long-term investments;
•Gains and losses on extinguishment of debt relating to the partial repurchase of our convertible notes;
•the realized impact on foreign exchange resulting from the settlement of our foreign currency assets and liabilities as well as unrealized impact on foreign exchange resulting from remeasurement of transactions and monetary assets and liabilities denominated in non-functional currencies; and
•interest income from our investments.
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Results of Operations
The following tables set forth selected 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):
Year ended December 31,
Revenues
Cost of revenues
Operating expenses
Asset write-down charges — 283,689 —
Other income (expense), net
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Percentage of Total Revenues*
Year ended December 31,
Revenues
Cost of revenues
Total cost of revenues 30 32 28
Operating expenses
Research and development 15 18 19
General and administrative 15 15 18
Asset write-down charges — 14 —
Loss from operations (9) (33) (19)
Other income (expense), net
Interest expense (2) 0 (4)
Other income (expense) 4 (11) —
Other income (expense), net 2 (11) (5)
Loss before income taxes (7) (44) (23)
Provision for income taxes — — —
Net loss (8 %) (44 %) (24 %)
* Percentages may not add up due to rounding.
Comparison of Fiscal Years Ended December 31, 2023, 2022, and 2021:
Revenues
Year ended December 31, Year ended December 31,
Revenues
Percentage of revenues
Subscriptions revenue. Subscriptions revenue increased by $212.6 million, or11%, during fiscal year 2023 as compared to fiscal year 2022. The increase was primarily due to the acquisition of new customers, upsells of MVP seats and additional offerings to our existing customer base, derived from sales through our direct and indirect sales channels, including resellers and distributors, strategic partners and global service providers. Although we expect to continue to add new customers and increase the usage of our product for existing customers, we will monitor the impact of macroeconomic factors that could
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have an impact on customer buying behavior and demand, including contract duration, timing of customer purchases, churn, upsell and down-sell, renewals, payment terms, and credit card declines, all of which could cause variability in our revenue.
Other revenues. Other revenues increased by $1.5 million, or 2%, during fiscal year 2023 as compared to fiscal year 2022, primarily due to higher professional services revenue compared to the respective prior year period. Due to evolving hybrid work environments, we continued to see a shift towards using RingCentral apps on laptops and mobile devices over traditional desktop phones which impacted the demand of phones and timing of professional services. We will continue to monitor the impact of the macroeconomic factors on phone and professional services revenue.
Cost of Revenues and Gross Margin
Year ended December 31, Year ended December 31,
Cost of revenues
Percentage of revenues
Other 5 % 6 % 6 % 6 %
Gross margins
Subscription cost of revenues and gross margin. Cost of subscriptions revenues increased by $26.0 million, or 5%, during fiscal year 2023 as compared to fiscal year 2022. The higher cost of subscription revenues was primarily due to an increase in third-party costs of $29.5 million to support our solution offerings, infrastructure support costs of $13.1 million, and personnel and contractor-related costs of $5.7 million, partially offset by $23.3 million decrease in the amortization of our intangible assets.
During fiscal year 2023 as compared to fiscal year 2022, our subscription gross margin improved due to lower amortization of acquired intangible assets and higher subscription revenue.
We expect to continue investing in our infrastructure and capacity to improve the availability of our subscription offerings, supporting the growth of both our new and existing customers.
Other cost of revenues and gross margin. Cost of other revenues decreased by $3.4 million, or (3)%, during fiscal year 2023 as compared to fiscal year 2022, primarily due to decrease in costs associated with sale of phones.
Research and Development
Year ended December 31, Year ended December 31,
Percentage of total revenues 15 % 18 % 18 % 19 %
Research and development expenses decreased by $26.4 million, or (7)%, during fiscal year 2023 as compared to fiscal year 2022, primarily due to a $31.1 million reduction in personnel and contractor costs, partially offset by $5.7 million increase in professional fees. Of the total decrease in personnel and contractor costs, $21.2 million was due to reduction in headcount, and $14.2 million was due to reduction in costs associated with the relocation of our third-party contractors resulting from the Russia-Ukraine conflict, partially offset by $5.1 million due to higher share-based compensation expense primarily driven by equity awards granted to new and existing employees.
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We believe that continued investment in our products is important for our future growth, and we expect our research and development expenses to continue to increase in absolute dollars, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of these expenses.
Sales and Marketing
Year ended December 31, Year ended December 31,
Percentage of total revenues 48 % 53 % 53 % 54 %
Sales and marketing expenses increased by $10.8 million, or 1%, during fiscal year 2023 as compared to fiscal year 2022, primarily due to an increase in third-party commissions of $57.9 million, amortization of deferred sales commission costs of $20.6 million, and professional fees of $6.1 million, partially offset by decrease in advertising and marketing costs of $45.8 million, and decrease in personnel and contractor costs of $26.5 million primarily attributed to reduction in headcount.
We expect to incur incremental sales and marketing expenses to support our growth while driving cost efficiencies by further optimizing our go-to-market strategies.
General and Administrative
Year ended December 31, Year ended December 31,
Percentage of total revenues 15 % 15 % 15 % 18 %
General and administrative expenses increased by $40.2 million, or 14%, during fiscal year 2023 as compared to fiscal year 2022, primarily due to an increase in personnel and contractor costs of $33.2 million, and professional fees of $5.2 million. Of the total increase in personnel and contractor costs, $34.1 million was due to higher share-based compensation expense primarily driven by equity awards granted to new and existing employees including performance stock units (“PSUs”), partially offset by a decrease of $3.2 million due to reduction in headcount.
We put in place PSUs in 2023 to demonstrate alignment between management incentives and company performance. These PSUs are accounted for under graded vesting method which results in higher compensation in the year of the grant compared to restricted stock units.
We will continue to invest in processes, systems, and personnel to support our anticipated revenue growth while driving efficiencies.
Asset Write-Down Charges
Year ended December 31, Year ended December 31,
Percentage of total revenues — % 14 % 14 % — %
nm - not meaningful
Asset write-down charges decreased by $283.7 million during fiscal year 2023 as compared to fiscal year 2022, primarily due to the non-cash write-down of our prepaid sales commission balances in the second half of 2022 in connection with our strategic partnerships with Avaya. Refer to Note 5 – Strategic Partnerships the accompanying notes to the consolidated financial statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of
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this Annual Report on Form 10-K for further information regarding our assessment of our deferred and prepaid sales commission balances with our strategic partners.
Other Income (Expense), Net
Year ended December 31, Year ended December 31,
nm - not meaningful
Other expense, net, decreased by $266.5 million during fiscal year 2023 as compared to fiscal year 2022.
During fiscal year 2023, we recorded a gain of $53.4 million from the partial repurchase of our Convertible Notes, $12.5 million increase in interest income, and $11.5 million gain recognized in connection with our amended agreement with a strategic partner, partially offset by interest expense of $36.0 million, of which $33.9 million is related to our long-term debt. The interest expense has increased by $31.2 million during fiscal year 2023 as compared to fiscal year 2022, driven by interest under our Credit Agreement entered into in February 2023, and 2030 Senior Notes issued in August 2023. Refer to Note 6, Long-Term Debt, in the accompanying notes to the Consolidated Financial Statements for further detail on our interest obligations on these debt facilities.
During fiscal year 2022, we recorded an unrealized loss of $207.7 million from our long-term investments and net write-down charge of $13.9 million primarily due to the non-cash write-down of our prepaid sales commission balances in the second half of 2022 in connection with our strategic partnerships with Avaya. Refer to Note 5 – Strategic Partnerships the accompanying notes to the consolidated financial statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for further information regarding our assessment of our deferred and prepaid sales commission balances with our strategic partners.
Other income and expense, net, can fluctuate in the future due to changes in interest rates on our money market funds, interest expense on our Credit Agreement, asset write-down charges, and fluctuations in currency exchange rates in the current macroeconomic environment.
Net Loss
Net loss decreased by $713.9 million during fiscal year 2023 as compared to fiscal year 2022 driven by reduction in loss from operations and other expenses, net.
Loss from operations during fiscal year 2023 decreased by $450.7 million as compared to fiscal year 2022, primarily driven by $283.7 million due to the non-cash write-down of our prepaid sales commission balances in the second half of 2022 in connection with our strategic partnerships with Avaya, and a reduction in expenses arising from operational efficiencies across the business during fiscal year 2023 primarily due to disciplined spending, increased productivity, efficiency gains, and optimizing our go-to-market strategies.
Other expense, net, decreased by $266.5 million during fiscal year 2023, as compared to fiscal year 2022, primarily due to unrealized loss of $207.7 million from our long-term investments, and net write-down charge of $13.9 million related to accrued interest on our prepaid sales commission balance recognized during fiscal year 2022 that did not recur in 2023. The remaining reduction is driven by a gain of $53.4 million from the partial repurchase of our Convertible Notes, $12.5 million increase in interest income, and $11.5 million gain recognized in connection with our amended agreement with a strategic partner, partially offset by incremental interest expense of $31.2 million recorded during fiscal year 2023.
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Liquidity and Capital Resources
Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations, and debt obligations as they become due.
We finance our operations primarily through sales to our customers, which could be billed either monthly or annually one year in advance. For customers with annual or multi-year contracts and those who opt for annual invoicing, we generally invoice only one annual period in advance and revenue is deferred for such advanced billings. We also have access to additional liquidity from our term loan and revolving credit facility. As of December 31, 2023 and 2022, we had cash and cash equivalents of $222.2 million and $270.0 million, respectively.
During the year ended December 31, 2023, we raised $788.6 million, net of debt discount and issuance costs from our Term Loan and 2030 Senior Notes. We used these proceeds, along with $29.1 million of our available cash to repurchase $879.6 million principal amount of our outstanding 2025 and 2026 Convertible Notes. Refer to Note 6, Long-Term Debt, in the accompanying notes to the Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information. We were in compliance with all debt covenants as of December 31, 2023.
As of December 31, 2023, we have $75.0 million remaining under our delayed draw-down Term Loan and $225.0 million remaining under our revolving credit facility. We expect to utilize the remaining commitment under our Term Loan and a portion of future free cash flows we expect to generate to address the remaining $161.3 million of our 2025 Convertible Notes that will mature in March 2025.
In February, May and November 2023, our board of directors authorized a share repurchase program up to an aggregate of $400.0 million of our outstanding shares of Class A Common Stock, subject to certain limitations. During fiscal year 2023, we repurchased and subsequently retired 10 million shares of our Class A Common Stock, for an aggregate amount of approximately $315 million. As of December 31, 2023, approximately $85.0 million remained authorized and available under our share repurchase programs for future share repurchases. In February 2024, our board of directors authorized an incremental $150 million share repurchase, subject to certain limitations.
In July 2023, we completed the acquisition of certain assets of Hopin, Inc. (“Hopin”), a virtual events platform. We paid a total purchase price consideration of $22.2 million, which included $14.7 million in cash, and acquisition date fair-value of contingent consideration of $7.5 million, capped at $35.0 million based on the achievement of specified performance targets over multiple years, paid quarterly in cash.
We believe that our operations, existing liquidity sources as well as capital resources and ability to raise cash through additional financing will satisfy our future cash requirements and obligations for at least the next 12 months. Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support customer growth, acquisitions and expansions, sales and marketing, research and development, increased general and administrative expenses to support the anticipated growth in our operations, and capital equipment required to support our headcount and in support of our co-location data center facilities, our interest payments for both our Term Loan and 2030 Senior Notes, the repurchase, repayment or otherwise settlement of a portion of our 2025 Convertible Notes and/or our 2026 Convertible Notes, as well as the impact of the global macroeconomic conditions. Our capital expenditures in future periods are expected to grow in line with our business. We continually evaluate our capital needs and may decide to raise additional capital to fund the growth of our business for general corporate purposes through public or private equity offerings or through additional debt financing. The timing and amount of any such financing requirements will depend on a number of factors, including the maturity dates of our existing debt. We may from time to time seek to refinance certain of our outstanding debt through issuances of new notes or convertible debt, term loans, exchange transactions or repurchases. Such issuances, exchanges or repurchases, if any, will depend on prevailing market conditions, our ability to negotiate acceptable terms, our liquidity position and other factors. There can be no assurance that any financing will be available on acceptable terms due to uncertainties resulting from rising interest rates, higher inflation, economic uncertainty, instability in the banking sector, or other factors, and any additional equity financing would result in incremental ownership dilution to our existing stockholders. In the future, we may also make investments in or acquire businesses or technologies that could require us to seek additional equity or debt financing. Access to additional capital may not be available or on favorable terms. The uncertainty created by the global economic conditions, including concerns about rising inflation and an associated economic downturn, may also impact our customers’ ability to pay on a timely basis, which could negatively impact our operating cash flows.
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Cash Flows
The table below provides selected cash flow information for the periods indicated (in thousands):
Year ended December 31,
Net Cash Provided by Operating Activities
Cash provided by operating activities is driven by the timing of customer collections, as well as the amount and timing of disbursements to our vendors, the amount of cash we invest in personnel, marketing, and infrastructure costs to support the anticipated growth of our business, and payments under strategic arrangements.
Net cash provided by operating activities was $399.7 million for the year ended December 31, 2023. The cash flow from operating activities was driven by timing of cash receipts from customers and global service providers, primarily offset by cash payments for personnel-related costs and to vendors and interest expense on our debt obligations.
Net cash provided by operating activities for the year ended December 31, 2023, increased by $208.4 million as compared to the year ended December 31, 2022. This change reflects working capital impacts resulting from the timing of payments and collections as well as higher operating margin driven by cost efficiencies.
Net Cash Used In Investing Activities
Our primary investing activities have consisted of our capital expenditures and expenditures for internal-use software, intellectual property assets, and cash paid for business acquisitions.
Net cash used in investing activities was $90.4 million for the year ended December 31, 2023, primarily due to capital expenditures including personnel-related costs associated with development of internal-use software of $75.7 million, and net cash paid of $14.7 million to acquire Hopin.
Net cash used in investing activities for the year ended December 31, 2023 increased by $3.2 million as compared to the year ended December 31, 2022. The increase was primarily due to net cash paid of $14.7 million to acquire Hopin, partially offset by $10.7 million from lower capital expenditures and costs associated with internal-use software development.
Net Cash Used In Financing Activities
Our primary financing activities have consisted of raising capital through the issuance of stock under our stock plans and incurrence of debt including from the drawdown of our Term Loan in connection with our Credit Agreement, and the offering of our 2030 Senior Notes, offset by repurchases of our Class A Common Stock and the partial repurchase of our Convertible Notes.
Net cash used in financing activities was $358.0 million for the year ended December 31, 2023, primarily due to payments of approximately $311.1 million to repurchase and retire 10 million shares of our Class A Common Stock pursuant to our share repurchase program, and $821.0 million paid toward the partial repurchase of our Convertible Notes from $785.7 million of proceeds, net of debt issuance costs, from the issuance of both our Term Loan and 2030 Senior Notes in fiscal year 2023.
Net cash used in financing activities for the year ended December 31, 2023, increased by $259.8 million as compared to the year ended December 31, 2022. This decrease was primarily due to higher payments of $211.3 million to repurchase and retire shares of our Class A Common Stock, and $821.0 million paid, including third-party costs for partial repurchase of our
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Convertible Notes and $785.7 million of proceeds net of debt issuance costs, from the drawdown under our Term Loan and the offering of our 2030 Senior Notes.
Non-GAAP Adjusted, Unlevered Free Cash Flow
To supplement our statements of cash flows presented on a GAAP basis, we use non-GAAP measures of cash flows to analyze cash flow generated from our operations. We define adjusted, unlevered free cash flow, a non-GAAP financial measure, as GAAP net cash provided by (used in) operating activities adjusted for capital expenditures including purchases of property and equipment and capitalized internal-use software, strategic partnerships, repayment of convertible notes attributable to debt discount, restructuring and other non-recurring payments, and cash paid for interest. We believe information regarding adjusted, unlevered free cash flow provides useful information to management and investors in understanding the strength of liquidity and available cash. A limitation of the use of adjusted, unlevered free cash flow is that it does not represent the total increase or decrease in our cash balance for the period. Adjusted, unlevered free cash flow should not be considered in isolation or as an alternative to cash flows from operations and should be considered alongside our other GAAP-based financial liquidity performance measures, such as net cash provided by operating activities and our other GAAP financial results.
The improvement in our adjusted, unlevered free cash flow is driven by operating leverage and efficiencies throughout the business. Our adjusted, unlevered free cash flow generation allows us to employ our capital allocation strategy that includes evaluating organic and inorganic investments, repurchasing shares, and addressing our convertible debt maturities.
The following table presents a reconciliation of adjusted, unlevered free cash flow to net cash provided by operating activities, the most directly comparable GAAP measure, for each of the periods presented (in thousands):
Year EndedDecember 31,
Less:
Add:
Repayment of convertible notes attributable to debt discount — — 10,131
Cash paid for interest, net of interest rate swap 16,629 347 309
(1)During the year ended December 31, 2022, the Company updated the terms of its arrangement with certain strategic partners and, in connection with these changes, a portion of the original advance payments were refunded.
Backlog
We have generally signed new customers contracts with varying length, from month-to-month to multi-year terms for our subscription services. At any point in the contract term, there can be amounts allocated to services that we have not yet contractually performed, which constitute a backlog. Until we meet our performance obligations, we do not recognize them as revenues in our consolidated financial statements. Given the variability in our contract length, we believe that backlog is not a reliable indicator of future revenues and we do not utilize backlog as a key management metric internally.
Deferred Revenue
Deferred revenue primarily consists of the unearned portion of monthly or annual invoiced fees for our subscriptions, which we recognize as revenue in accordance with our revenue recognition policy. For customers with multi-year contracts, we generally invoice for only one monthly or annual subscription period in advance. Therefore, our deferred revenue balance does not capture the full contract value of multi-year contracts. Accordingly, we believe that deferred revenue is not a reliable indicator of future revenues and we do not utilize deferred revenue as a key management metric internally.
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Contractual Obligations
The following summarizes our contractual obligations as of December 31, 2023 (in thousands):
Payments due by period
Up to1 year 1 to 3 years 3 to 5 years More than5 years Total
(1)Represents obligations under non-cancellable lease agreements for our corporate and worldwide offices, and colocation data centers. For more information regarding our lease obligations, refer to Note 9 - Leases included in Part II, Item 8, in this Annual Report on Form 10-K for additional information.
(2)Amounts include established financing arrangements with certain third-party financial institutions and participating suppliers. For more information regarding our supplier financing arrangements, refer to Note 1 - Description of Business and Summary of Significant Accounting Policies included in Part II, Item 8, in this Annual Report on Form 10-K for additional information.
(3)Represents our principal and contractual interest payments on our long-term debt. For more information regarding our long-term debt, refer to Note 6 - Long-Term Debt included in Part II, Item 8, in this Annual Report on Form 10-K for additional information.
(4)Purchase obligations are primarily related to third-party managed hosting services and represent our non-cancellable open purchase orders and contractual obligations for which we have not received the goods or services as of December 31, 2023.
Indemnification Obligations
Certain of our agreements with sales agents, resellers and customers include provisions for indemnification against liabilities if our products infringe a third party’s intellectual property rights. To date, we have not incurred any material costs as a result of such indemnification provisions and have not accrued any liabilities related to such obligations in the consolidated financial statements as of December 31, 2023.
Contingencies
We are and may be in the future subject to certain legal proceedings and from time to time may be involved in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters, and other matters relating to various claims that arise in the normal course of business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount of loss. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a significant impact on our results of operations, financial position, and cash flows.
Refer to Note 10 – Commitments and Contingenciesof the notes to the consolidated financial statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. In other cases, management’s judgment is required in selecting among available alternative accounting standards that provide for different accounting treatment for similar transactions. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenues, costs, and expenses, and affect the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, our
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actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. A summary of our significant accounting policies is included in Note 1 of the notes to the consolidated financial statements included in Part II, Item 8, which is incorporated herein by reference. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
We primarily derive our revenues from subscriptions, sale of products, and professional services. Subscriptions revenue is generally recognized over the period of the subscription contract. Subscription contracts generally allow the customers to terminate their services at any time during the first 30 to 60 days of the subscription period and are charged for the term of usage. Upon cancellation during the termination period, customers receive a pro-rata refund for any amounts paid. After the end of the termination period, the contract is non-cancellable and the customer is obligated to pay for the remaining term of the contract. For sale of products, revenue is recognized when control is transferred. For professional services, revenue is recognized as and when services are rendered.
Recent Accounting Pronouncements
For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements, see Note 1 to the consolidated financial statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” in this Annual Report on Form 10-K, which is incorporated herein by reference.
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ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.
Foreign Currency Risk
The majority of our sales and contracts are denominated in U.S. dollars, and therefore our net revenue is not currently subject to significant foreign currency risk. As part of our international operations, we charge customers in British Pounds, European Union (“EU”) Euro, Canadian Dollars and Australian Dollars, among others. Fluctuations in foreign currency exchange rates and volatility in the market due to global economic conditions could cause variability in our subscriptions revenues, total revenues, annualized exit monthly recurring subscriptions revenues and operating results. Our operating expenses are generally denominated in the currencies of the countries in which our operations are located, which are primarily in the U.S., and to a lesser extent in Canada, Europe, and Asia-Pacific. The functional currency of our foreign subsidiaries is generally the local currency. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign currency exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk. During fiscal 2023, a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements. As our international operations continue to expand, risks associated with fluctuating foreign currency rates may increase. We will continue to reassess our approach to managing these risks.
Interest Rate Risk
As of December 31, 2023, we had cash and cash equivalents of $222.2 million. We invest our cash and cash equivalents in short-term money market funds. The carrying amount of our cash equivalents reasonably approximates fair values. Due to the short-term nature of our money-market funds, we believe that exposure to changes in interest rates will not have a material impact on the fair value of our cash equivalents. Interest income may further fluctuate in the future due to interest rate volatility in the current macroeconomic environment. During fiscal year 2023, a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income.
As of December 31, 2023, we had $161.3 million and $609.1 million outstanding from our 2025 Convertible Notes and 2026 Convertible Notes, respectively. We carry the Convertible Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only. The Convertible Notes have a zero percent fixed annual interest rate and, therefore, we have no economic exposure to changes in interest rates. The fair value of the Convertible Notes is exposed to interest rate risk. Generally, the fair value of our fixed interest rate Convertible Notes will increase as interest rates decline and decrease as interest rates increase. In addition, the fair values of the Convertible Notes are affected by our stock price. The fair value of the Convertible Notes will generally increase as our Class A common stock price increases and will generally decrease as our Class A common stock price decrease in value.
As of December 31, 2023, we had no amounts outstanding under our Revolving Credit Facility and $390.0 million outstanding under our Term Loan under our Credit Agreement. Borrowings under our Credit Agreement will bear interest under a floating rate mechanism, which exposes us to interest-rate risk. To address this risk, we entered into a five-year floating-to-fixed interest rate swap agreement with the objective of reducing exposure to the fluctuating interest rates associated with our variable rate borrowing program by paying a fixed interest rate of 3.79%, plus a margin of 2% to 3%. The interest rate swap agreement was effective beginning June 30, 2023, and terminates on February 14, 2028, consistent with the duration of the maturity of the Term Loan. Our interest rate swap agreement is designated as cash flow hedge and highly effective in offsetting changes in our future expected cash flows due to the fluctuation of our variable rate debt.
As of December 31, 2023, we had $400.0 million outstanding under our 2030 Senior Notes. The 2030 Senior Notes have fixed annual interest rates, and therefore we do not have economic interest rate exposure on these debt obligations. However, the fair values of the 2030 Senior Notes are exposed to interest rate risk. Generally, the fair values of the Senior Notes will increase as interest rates fall and decrease as interest rates rise.
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Inflation Risk
We do not believe that inflation has had a material effect on our business, results of operations, or financial condition. Nonetheless, if our costs in connection with the operation of our business were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RINGCENTRAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 185) 77
Consolidated Balance Sheets 79
Consolidated Statements of Operations 80
Consolidated Statements of Comprehensive Loss 81
Consolidated Statements of Stockholders’ (Deficit) Equity 82
Consolidated Statements of Cash Flows 83
Notes to Consolidated Financial Statements 84
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
RingCentral, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of RingCentral, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders’ (deficit) equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for convertible debt as of January 1, 2022 due to the adoption of Financial Accounting Standards Board’s Accounting Standards Update No. 2020-06.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
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preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of the Sufficiency of Audit Evidence Over Subscriptions Revenue
As discussed in Note 1 to the consolidated financial statements, and disclosed in the consolidated statements of operations, the Company recorded $2,202.4 million of total revenues for the year ended December 31, 2023, of which $2,100.3 million related to subscriptions. There are high volumes of subscription transactions processed across multiple information technology (IT) systems.
We identified the evaluation of the sufficiency of audit evidence over subscriptions revenue as a critical audit matter. This matter required especially subjective auditor judgment because of the number of IT applications involved in the subscriptions revenue recognition process. This matter also included determining the nature and extent of audit evidence obtained over subscriptions revenue, and the need to involve IT professionals to assist with the performance of certain procedures.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s subscriptions revenue process, including associated IT controls. We applied auditor judgment to determine the nature and extent of procedures to be performed over subscriptions revenue, including the determination of the IT applications subject to testing. We assessed the recorded subscriptions revenue by selecting transactions and comparing the amounts recognized for consistency with underlying documentation, including contracts with customers. We also involved IT professionals with specialized skills and knowledge, who assisted in testing certain IT applications that are used by the Company in its subscriptions revenue recognition process. We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the appropriateness of such evidence.
/s/ KPMG LLP
We have served as the Company’s auditor since 2010.
San Francisco, California
February 22, 2024
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RINGCENTRAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value per share)
Assets
Current assets
Prepaid expenses and other current assets 77,396 55,849
Deferred and prepaid sales commission costs, non-current 395,724 438,579
Liabilities, Temporary Equity, and Stockholders’ Deficit
Current liabilities
Current portion of long-term debt, net 20,000 —
Commitments and contingencies (Note 10)
Stockholders’ deficit
Accumulated other comprehensive loss (8,223) (8,781)
See accompanying notes to consolidated financial statements
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RINGCENTRAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
Revenues
Cost of revenues
Operating expenses
Asset write-down charges — 283,689 —
Other income (expense), net
Net loss per common share
Weighted-average number of shares used in computing net loss per share
See accompanying notes to consolidated financial statements
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RINGCENTRAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year ended December 31,
Other comprehensive income (loss)
Foreign currency translation adjustments 3,070 (9,425) (6,162)
Unrealized loss on derivative instruments (2,512) — —
Total other comprehensive income (loss) 558 (9,425) (6,162)
See accompanying notes to consolidated financial statements
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RINGCENTRAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(in thousands)
Common stock
Shares Amount
Temporary equity reclassification, convertible notes — — 3,787 — — 3,787
Other comprehensive loss — — — (6,162) — (6,162)
Other comprehensive loss — — — (9,425) — (9,425)
Other comprehensive income — — — 558 — 558
See accompanying notes to consolidated financial statements
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RINGCENTRAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash provided by operating activities:
Asset write-down and other charges — 305,351 —
Amortization of debt discount and issuance costs 4,566 4,468 64,063
Loss (gain) on early extinguishment of debt (53,400) — 1,736
Repayment of convertible notes attributable to debt discount — — (10,131)
Changes in assets and liabilities:
Cash flows from investing activities
Cash paid for business combination, net of cash acquired (14,709) — —
Purchases of intangible assets and long-term investments — (3,990) (324,178)
Proceeds from sale of marketable equity investments — 3,223 —
Cash flows from financing activities
Payments for repurchase of common stock (311,088) (99,793) —
Proceeds from issuance of long-term debt, net of issuance costs 785,749 — —
Payments for the repurchase of convertible notes (820,960) — (333,632)
Repayments of principal on term loan (10,000) — —
Cash, cash equivalents, and restricted cash
Supplemental disclosure of cash flow data:
Cash paid for interest, net of interest rate swap $ 16,629 $ 347 $ 309
Cash paid for income taxes, net of refunds $ 10,940 $ 3,726 $ 1,388
Non-cash investing and financing activities
Common stock issued for acquisition of intangible assets $ — $ — $ 302,600
Acquisition of intangibles $ 3,629 $ — $ —
Equipment acquired under financing obligations $ 2,997 $ — $ 6,898
See accompanying notes to consolidated financial statements
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RINGCENTRAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
RingCentral, Inc. (the “Company”) is a leading provider of AI-driven global enterprise cloud communications, video meetings, collaboration, and contact center software-as-a-service solutions. The Company was incorporated in California in 1999 and was reincorporated in Delaware on September 26, 2013.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the consolidated accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of 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, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant estimates made by management affect revenues, the allowance for doubtful accounts, deferred and prepaid sales commission costs, goodwill, useful lives of intangible assets, share-based compensation, capitalization of internally developed software, return reserves, derivative instruments, provision for income taxes, uncertain tax positions, loss contingencies, sales tax liabilities and accrued liabilities. Management periodically evaluates these estimates and will make adjustments prospectively based upon the results of such periodic evaluations. Actual results may differ from these estimates.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as part of a separate component of stockholders’ equity and reported in the Consolidated Statements of Comprehensive Loss. Foreign currency transaction gains and losses are included in net loss for the period. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at fair value.
Allowance for Doubtful Accounts
For the years ended December 31, 2023 and 2022, a portion of revenues were realized from credit card transactions while the remaining revenues generated accounts receivable. The Company determines provisions based on historical loss patterns, the number of days that billings are past due, and an evaluation of the potential risk of loss associated with delinquent accounts.
Below is a summary of the changes in allowance for doubtful accounts for the years ended December 31, 2023, 2022 and 2021 (in thousands):
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Derivative Instruments and Hedging
The Company measures its derivative financial instruments at fair value and recognizes them as assets and liabilities in the Consolidated Balance Sheets. The Company records changes in the fair value of derivative financial instruments designated as cash flow hedges in other comprehensive income (loss). When a hedged transaction affects earnings, the Company subsequently reclassifies the net derivative gain or loss within earnings into the same line as the hedged item on the Consolidated Statements of Operations to offset the changes in the hedged transaction.
The cash flow effects related to derivative financial instruments designated as cash flow hedges are included within operating activities on the Consolidated Statements of Cash Flows.
Internal-Use Software Development Costs
The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage, provided that management with the relevant authority authorizes and commits to the funding of the project, it is probable the project will be completed, and the software will be used to perform the function intended. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized internal-use software development costs are included in property and equipment and are amortized on a straight-line basis over their estimated useful lives.
For the years ended December 31, 2023 and 2022, the Company capitalized $56.0 million and $59.2 million, net of impairment, of internal-use software development costs, respectively. The carrying value of internal-use software development costs was $131.6 million and $119.4 million as of December 31, 2023 and 2022, respectively.
Property and Equipment, net
Property and equipment, net is stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of those assets as follows:
Computer hardware and software 3 to 5 years
Internal-use software development costs 3 to 5 years
Furniture and fixtures 1 to 5 years
Leasehold improvements Shorter of the estimated lease term or useful life
The Company evaluates the recoverability of property and equipment and intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets or asset groups may not be recoverable. Recoverability of these assets or asset groups is measured by comparing the carrying amounts of such assets or asset groups to the future undiscounted cash flows that such assets or asset groups are expected to generate. If this evaluation indicates that the carrying amount of the assets or asset groups is not recoverable, the carrying amount of such assets or asset groups is reduced to its estimated fair value.
Maintenance and repairs are charged to expense as incurred.
Business Combinations
The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed as of the acquisition date. The excess of the fair value of purchase consideration over the fair values of the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. These estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Leases
The Company determines if a contract is a lease or contains a lease at the inception of the contract and reassesses that conclusion if the contract is modified. All leases are assessed for classification as an operating lease or a finance lease. Operating lease right-of-use (“ROU”) assets are presented separately on the Company’s Consolidated Balance Sheets. Operating lease liabilities are separated into a current portion, included within accrued liabilities on the Company’s Consolidated Balance Sheets, and a non-current portion included within operating lease liabilities on the Company’s
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Consolidated Balance Sheets. The Company does not have significant finance lease ROU assets or liabilities. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. The Company does not obtain and control its right to use the identified asset until the lease commencement date.
The Company’s lease liabilities are recognized at the applicable lease commencement date based on the present value of the lease payments required to be paid over the lease term. Because the rate implicit in the lease is not readily determinable, the Company generally uses an incremental borrowing rate to discount the lease payments to present value. The estimated incremental borrowing rate is derived from information available at the lease commencement date. The Company factors in publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates. The Company’s ROU assets are also recognized at the applicable lease commencement date. The ROU asset equals the carrying amount of the related lease liability, adjusted for any lease payments made prior to lease commencement and lease incentives provided by the lessor. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable ROU asset or lease liability.
The term of the Company’s leases is equal to the non-cancellable period of the lease, including any rent-free periods provided by the lessor, and also include options to renew or extend the lease (including by not terminating the lease) that the Company is reasonably certain to exercise. The Company establishes the term of each lease at lease commencement and reassesses that term in subsequent periods when one of the triggering events outlined in Topic 842, Leases, occurs. Operating lease cost for lease payments is recognized on a straight-line basis over the lease term.
The Company’s lease contracts often include lease and non-lease components. For facility leases, the Company has elected the practical expedient offered by the standard to not separate lease from non-lease components and accounts for them as a single lease component. For the Company’s other contracts that include leases, the Company accounts for the lease and non-lease components separately.
The Company has elected, for all classes of underlying assets, not to recognize ROU assets and lease liabilities for leases with a term of twelve months or less. Lease cost for short-term leases is recognized on a straight-line basis over the lease term. Additionally, for certain facility leases, the Company applies a portfolio approach, whereby it effectively accounts for the operating lease ROU assets and liabilities for multiple leases as a single unit of account because the accounting effect of doing so is not material.
Goodwill and Intangible Assets
Goodwill is tested for impairment at the reporting unit level at a minimum on an annual basis or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The Company conducted its annual impairment test of goodwill in the fourth quarter of 2023 and 2022 and determined that no adjustment to the carrying value of goodwill was required.
Intangible assets consist of purchased customer relationships and developed technology. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from two to five years. No residual value is estimated for intangible assets.
Convertible Debt
Prior to the adoption of ASU 2020-06, the Company bifurcated the debt and equity (the contingently convertible feature) components of its convertible debt instruments in a manner that reflects its nonconvertible debt borrowing rate at the time of issuance. The equity components of the convertible debt instruments were recorded within stockholders’ (deficit) equity net of allocated issuance discount. The debt issuance discount was amortized to interest expense in the Consolidated Statements of Operations using the effective interest method over the expected term of the convertible debt.
Upon adoption of ASU 2020-06 on January 1, 2022, the Company is no longer recording the conversion feature of its convertible notes in equity. Instead, the Company combined the previously separated equity component with the liability component, which together is now classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. Similarly, the portion of issuance costs previously allocated to equity was reclassified to debt and amortized as interest expense. Accordingly, on January 1, 2022 opening balance sheet, the Company recorded a decrease to accumulated deficit of approximately $93.8 million, a decrease to additional paid-in capital of $329.3 million, and an increase to convertible notes, net of approximately $235.5 million.
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Supplier Financing Arrangements
The Company has established financing arrangements with certain third-party financial institutions and participating suppliers to be repaid over different terms ranging up to five years. Some of these financing arrangements are collateralized against property and equipment. As of December 31, 2023 and 2022, the Company’s outstanding financing obligations related to such arrangements included in accrued liabilities and other long-term liabilities were $4.2 million and $6.6 million, respectively.
Concentrations
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits. The Company’s accounts receivable are primarily derived from sales by resellers and to larger direct customers. The Company maintains an allowance for doubtful accounts for estimated potential credit losses. As of December 31, 2023, 2022 and 2021, and for the years then ended, none of the Company’s customers accounted for more than 10% of total accounts receivable, total revenues, or subscription revenues.
Long-lived assets by geographic location is based on the location of the legal entity that owns the asset. As of December 31, 2023 and 2022, approximately 94% of the Company’s consolidated long-lived assets were located in the U.S. No other single country outside of the U.S. represented more than 10% of the Company’s consolidated long-lived assets as of December 31, 2023 and 2022.
Revenue Recognition
The Company derives its revenues primarily from subscriptions, sale of products, and professional services. Revenues are recognized when control is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or products.
The Company determines revenue recognition through the following steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, the Company satisfies a performance obligation.
The Company recognizes revenues as follows:
Subscriptions revenue
Subscriptions revenue is generated from fees that provide customers access to one or more of the Company’s software applications and related services. These arrangements have contractual terms typically ranging from one month to five years and include recurring fixed plan subscription fees, variable usage-based fees for usage in excess of plan limits, one-time fees, recurring license and other fees, derived from sales through our direct and indirect sales channels, including resellers and distributors, strategic partners and global service providers.
Arrangements with customers do not provide the customer with the right to take possession of the Company’s software at any time. Instead, customers are granted continuous access to the services over the contractual period. The Company transfers control evenly over the contractual period by providing stand-ready service. Accordingly, the fixed consideration related to subscription is recognized over time on a straight-line basis over the contract term beginning on the date the Company’s service is made available to the customer. The Company may offer its customer services for no consideration during the initial months. Such discounts are recognized ratably over the term of the contract.
Fees for additional minutes of usage in excess of plan limits are deemed to be variable consideration that meet the allocation exception for variable consideration as they are specific to the month that the usage occurs.
The Company’s subscription contracts typically allow the customers to terminate their services within the first 30 to 60 days and receive a refund for any amounts paid for the remaining contract period. After the end of the termination period, the contract is non-cancellable and the customer is obligated to pay for the remaining term of the contract. Accordingly, the Company considers the non-cancellable term of the contract to begin after the expiration of the termination period.
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The Company records reductions to revenue for estimated sales returns and customer credits at the time the related revenue is recognized. Sales returns and customer credits are estimated based on the Company’s historical experience, current trends and the Company’s expectations regarding future experience. The Company monitors the accuracy of its sales reserve estimates by reviewing actual returns and credits and adjusts them for its future expectations to determine the adequacy of its current and future reserve needs. If actual future returns and credits differ from past experience, additional reserves may be required.
Other revenue
Other revenue primarily includes revenue generated from sale of pre-configured phones and professional implementation services.
Phone revenue is recognized upon transfer of control to the customer which is generally upon shipment from the Company’s or its designated agents’ warehouse.
The Company offers professional services to support implementation and deployment of its subscription services. Professional services do not result in significant customization of the product and are generally short-term in duration. The majority of the Company’s professional services contracts are on a fixed price basis and revenue is recognized as and when services are delivered.
Principal vs. Agent
A portion of the Company’s subscriptions and product revenues are generated through sales by resellers, strategic partners, and global service providers. When the Company controls the performance of contractual obligations to the customer, it records these revenues at the gross amount paid by the customer with amounts retained by the resellers recognized as sales and marketing expenses. The Company assesses control of goods or services when it is primarily responsible for fulfilling the promise to provide the good or service, has inventory risk and has discretion in establishing the price.
Deferred and prepaid sales commission costs
The Company capitalizes sales commission expenses and associated payroll taxes paid to internal sales personnel and resellers, who sell the Company’s offerings. The resellers are selling agents for the Company and earn sales commissions which are directly tied to the value of the contracts that the Company enters with the end-user customers. These sales commissions are incremental costs the Company incurs to obtain contracts with its end-user customers. The Company pays sales commissions on initial contracts and contracts for increased purchases with existing customers (expansion contracts). The Company generally does not pay sales commissions for contract renewals.
These sales commission costs are deferred and then amortized over the expected period of benefit, which is estimated to be five years. The Company has determined the period of benefit taking into consideration the expected subscription term and expected renewal periods of its customer contracts, the duration of its relationships with its customers considering historical and expected customer retention, technology and other factors. Amortization expense is included in sales and marketing expenses in the accompanying Consolidated Statements of Operations. The Company evaluates its deferred and prepaid sales commission costs for possible recoverability whenever events or changes in circumstances have occurred that could indicate the carrying amount of such assets may not be recoverable.
Cost of Revenues
Cost of subscriptions revenue primarily consists of costs of network capacity purchased from third-party telecommunications providers, network operations, costs to build out and maintain data centers, including co-location fees for the right to place the Company’s servers in data centers owned by third parties, depreciation of the servers and equipment, along with related utilities and maintenance costs, amortization of acquired technology related intangible assets, personnel costs associated with customer care and support of the functionality of the Company’s platform and data center operations, including share-based compensation expenses, and allocated costs of facilities and information technology. Cost of subscriptions revenue is expensed as incurred.
Cost of other revenue is comprised primarily of the cost associated with purchased phones, personnel costs for employees and contractors, including share-based compensation expenses, shipping costs, costs of professional services, and allocated costs of facilities and information technology related to the procurement, management and shipment of phones. Cost of other revenue is expensed in the period product is delivered to the customer.
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Asset Write-down Charges
Asset write-down charges consist of write-offs related to our assets, including deferred and prepaid sales commission and acquired intangiblesbalances, whenever events or changes in circumstances have occurred that could indicate the carrying amount of such assets may not be recoverable.
Share-Based Compensation
Share-based compensation expense resulting from options, restricted stock units (“RSUs”), performance-based awards (“PSUs”), and employee stock purchase plan (“ESPP”) rights granted is measured at the grant date fair value of the award and is generally recognized using the straight-line attribution method over the requisite service period of the award, which is generally the vesting period. The Company estimates the fair value of stock options and ESPP rights using the Black-Scholes-Merton option-pricing model. The Company estimates the fair value of RSUs as the closing market value of its Class A Common Stock on the grant date. The Company estimates the fair value of its market condition performance stock units (“PSUs”) using the Monte Carlo simulation model. For awards with performance-based and service-based conditions, compensation cost is recognized over the requisite service period if it is probable that the performance condition will be satisfied. The expense for performance-based awards is evaluated each quarter based on the achievement of the performance conditions. The effect of a change in the estimated number of performance-based awards expected to be earned is recognized in the period those estimates are revised. Compensation expense is recognized net of estimated forfeiture activity, which is based on historical forfeiture rates.
Research and Development
Research and development expenses consist primarily of third-party contractor costs, personnel costs, technology license expenses, and depreciation associated with research and development equipment. Research and development costs are expensed as incurred.
Advertising Costs
Advertising costs, which include various forms of e-commerce such as search engine marketing, search engine optimization and online display advertising, as well as more traditional forms of media advertising such as radio and billboards, are expensed as incurred and were $97.0 million, $125.6 million, and $88.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Restructuring Costs
Restructuring costs generally include employee-related severance charges which are largely based upon substantive severance plans, while some are mandated requirements in certain foreign jurisdictions. Severance costs generally include severance payments, outplacement services, health insurance coverage and legal costs. One-time employee termination benefits are recognized when the plan of termination has been communicated to employees and certain other criteria are met. Other severance and employee costs, primarily pertaining to ongoing employee benefit arrangements, are recognized when it is probable that the employees are entitled to the severance benefits and the amounts can be reasonably estimated.
Segment Information
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 reportable segment.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. The Company records a valuation allowance to reduce its deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. As of December 31, 2023, except for deferred tax assets associated with certain foreign subsidiaries, the Company recorded a full valuation allowance against substantially all of its net deferred tax assets due to its history of operating losses. The Company classifies interest and penalties on unrecognized tax benefits as income tax expense.
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Related Party Transactions
All contracts with related parties are executed in the ordinary course of business. There were no material related party transactions in the year ended December 31, 2023, and no material amounts payable to or amounts receivable from related parties as of December 31, 2023. During 2022 and 2021, the Company made purchases from Google Inc. in the ordinary course of business, which one of the Company’s directors previously served as President, Americas. Total payables to Google Inc. as of December 31, 2022 was $1.9 million, and total expenses incurred for the years ended December 31, 2022 and 2021 were $24.3 million and $24.7 million, respectively.
Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07 Segment Reporting - Improving Reportable Segment Disclosures (Topic 280). The update is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The ASU requires disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker (CODM), a description of other segment items by reportable segment, and any additional measures of a segment’s profit or loss used by the CODM when deciding how to allocate resources. The ASU also requires all annual disclosures currently required by Topic 280 to be included in interim periods. The update is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted and requires retrospective application to all prior periods presented in the financial statements. The Company is currently assessing the timing and impact of adopting the updated provisions.
Recently Adopted Accounting Pronouncements
In September 2022, the FASB issued ASU No. 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”), which requires buyers that use supplier finance programs in connection with the purchase of goods and services to make certain annual disclosures regarding the programs’ key terms and information about the obligations at the end of a reporting period, including a roll-forward of those obligations. The adoption of this ASU, which was adopted by the Company on January 1, 2023, did not have a material impact on the Company’s consolidated financial statements.
Note 2. Revenue
The Company derives its revenues primarily from subscriptions, sale of products, and professional services. Revenues are recognized when control is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or products.
Disaggregation of revenue
Revenue by geographic location is based on the billing address of the customer. The following table provides information about disaggregated revenue by primary geographical markets:
Year ended December 31,
Primary geographical markets
The Company derived over 90% of subscription revenues from RingCentral MVP and RingCentral contact center solutions for the years ended December 31, 2023, 2022, and 2021. For the years ended December 31, 2023 and 2022, RingCentral contact center solutions represented over 10% of total revenues.
Deferred revenue
During the year ended December 31, 2023, the Company recognized approximately all of the corresponding deferred revenue balance at the beginning of the year as revenue.
Remaining performance obligations
The typical subscription term ranges from one month to five years. Contract revenue as of December 31, 2023 that has not yet been recognized was approximately $2.4 billion. This excludes contracts with an original expected length of less than
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one year. Of these remaining performance obligations, the Company expects to recognize revenue of 52% of this balance over the next 12 months and 48% thereafter.
Other revenues
Other revenues are primarily comprised of product revenue from the sale of pre-configured phones, and professional services. Product revenues from the sale of pre-configured phones were $44.8 million, $46.6 million, and $48.8 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Note 3. Financial Statement Components
Cash and cash equivalents consisted of the following (in thousands):
As of December 31, 2023 and 2022, $1.1 million and $5.5 million in the cash balance above, respectively, represents restricted cash, which is held in the form of a bank deposit for issuance of a foreign bank guarantee.
Accounts receivable, net consisted of the following (in thousands):
Allowance for doubtful accounts (12,472) (9,581)
Prepaid expenses and other current assets consisted of the following (in thousands):
Total prepaid expenses and other current assets $ 77,396 $ 55,849
Property and equipment, net consisted of the following (in thousands):
Less: accumulated depreciation and amortization (333,394) (258,795)
Total depreciation and amortization expense related to property and equipment was $82.9 million, $72.0 million, and $58.9 million for the years ended December 31, 2023, 2022 and 2021, respectively.
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The carrying value of goodwill is as follows (in thousands):
Foreign currency translation adjustments 607
The carrying values of intangible assets are as follows (in thousands):
Amortization expense from acquired intangible assets for the years ended December 31, 2023, 2022 and 2021 was $151.1 million, $174.5 million, and $66.4 million, respectively. Amortization of developed technology is included in cost of revenues and amortization of customer relationships is included in sales and marketing expenses in the Consolidated Statements of Operations.
Estimated amortization expense for acquired intangible assets for the following fiscal years is as follows (in thousands):
Total estimated amortization expense $ 393,767
Accrued liabilities consisted of the following (in thousands):
Accrued compensation and benefits $ 63,009 $ 53,419
Accrued sales, use, and telecom related taxes 43,796 37,836
Operating lease liabilities, short-term 16,707 17,513
Deferred and Prepaid Sales Commission Costs
Amortization expense for the deferred and prepaid sales commission costs for the years ended December 31, 2023, 2022 and 2021 were $138.1 million, $115.2 million, and $74.2 million, respectively. There was no impairment loss in relation to the deferred commission costs capitalized for the periods presented.
During the year ended December 31, 2023, the Company recorded a gain of $11.5 million in other income (expense) in earnings, pursuant to an amended agreement with a strategic partner.
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Note 4. Fair Value of Financial Instruments
The Company measures and reports certain cash equivalents, including money market funds and certificates of deposit, in addition to its long-term investments 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: Observable inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Other 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 financial assets carried at fair value were determined using the following inputs (in thousands):
Fair Value atDecember 31, 2023 Level 1 Level 2 Level 3
Cash equivalents:
Other assets:
Interest rate swap derivatives 3,505 — 3,505 —
Other long-term liabilities:
Interest rate swap derivatives 6,017 — 6,017 —
Fair Value atDecember 31, 2022 Level 1 Level 2 Level 3
Cash equivalents:
Other assets:
The Company’s other financial instruments, including accounts receivable, other current assets, accounts payable, and other current liabilities, are carried at cost, which approximates fair value due to the relatively short maturity of those instruments.
Fair Value of Long-Term Debt
As of December 31, 2023, the fair value of the 0% convertible notes due 2026 (the “2026 Convertible Notes”) was approximately $530.6 million, and fair value of the 0% convertible notes due 2025 (the “2025 Convertible Notes”) was approximately $150.0 million. The fair value for these convertible notes was determined based on the quoted price for such notes in an inactive market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.
As of December 31, 2023, the carrying amount of the Term Loan was $390.0 million. As there are no embedded features, the fair value of the Term Loan approximated its carrying value.
As of December 31, 2023, the fair value of the 8.5% senior notes due 2030 (the “2030 Senior Notes”) was approximately $408.4 million. The fair value for the 2030 Senior Notes was determined based on the quoted price for such notes in an inactive market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.
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Fair Value of Derivative Instruments
The Company’s interest rate swap derivative, which is considered as Level 2 in the fair value hierarchy, is valued using a discounted cash flow model that utilizes observable inputs including forward interest rate data at the measurement date.
Contingent Consideration
The contingent consideration is related to the Company’s acquisition of Hopin in the third quarter of 2023, and represents the future potential earn-out payments based on the achievement of specified performance targets over multiple years, paid quarterly in cash. The fair value of the contingent consideration liability was determined using a Monte Carlo simulation that includes significant unobservable inputs including the discount rate and projected revenues over the earn-out period. This contingent liability was classified as level 3 within the fair value hierarchy. There was no change in the estimated fair value of the contingent consideration in the period from the acquisition date to December 31, 2023.
Note 5. Strategic Partnerships
Avaya Partnership
In October 2019, the Company entered into certain agreements for a strategic partnership with Avaya LLC (“Avaya”), previously known as Avaya Holdings Corp., and its subsidiaries, including Avaya Inc. (collectively, “Avaya”). In connection with the strategic partnership, the Company prepaid Avaya in the Company’s Class A Common Stock predominantly for future sales commissions to be earned for each qualified unit of Avaya Cloud Office by RingCentral (“ACO”) sold during the term of the partnership. Under the terms of the partnership, the unutilized prepaid sales commissions were payable to the Company at the end of the contractual term.
On December 13, 2022, Avaya filed a Form 8-K disclosing ongoing discussions regarding one or more potential financings, refinancings, recapitalizations, reorganizations, restructurings or investment transactions. Further, on February 14, 2023, Avaya initiated an expedited, prepackaged financial restructuring via Chapter 11 with the support of its financial stakeholders. The Company and Avaya entered into a new extended and expanded agreement, which included certain minimum volume commitments and revised go-to-market incentive structure intended to drive migration to Avaya Cloud Office. For the year ended December 31, 2022, the Company recorded a non-cash asset write-down charge of $279.3 million, out of which $21.7 million was accrued interest and was recorded in other income (expense) in the Consolidated Statement of Operations. No portion of the impairment charge related to future cash expenditures.
Other Strategic Partnerships
In 2021, the Company entered into strategic arrangements with Mitel US Holdings, Inc. (“Mitel”) whereby the Company would be Mitel’s exclusive provider of UCaaS offerings and cloud communications applications. Under the commercial arrangement, Mitel earns commissions in the form of cash and/or shares of Class A Common stock in connection with the migration of Mitel customers to RingCentral MVP.
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Note 6. Long-Term Debt
The following table sets forth the net carrying amount of the Company’s long-term debt as of December 31, 2023 and 2022 (in thousands):
Debt Instrument Maturity Date December 31, 2023 December 31, 2022
Revolving Credit Facility under Credit Agreement (3) February 14, 2028 — —
Less: unamortized debt discount and issuance costs (14,909) (11,589)
Less: current portion of long-term debt (4) (20,000) —
(1)The Company repurchased $838.7 million principal amount of the 2025 Convertible Notes during the twelve months ended December 31, 2023 using $396.7 million of net proceeds from the Term Loan, $356.7 million of net proceeds from the 2030 Senior Notes, and $29.1 million of other available cash, resulting in a $48.0 million gain on early debt extinguishment, net of related unamortized debt issuance costs.
(2)The Company repurchased $40.9 million principal amount of the 2026 Convertible Notes during the twelve months ended December 31, 2023 using $35.2 million of proceeds from the 2030 Senior Notes, resulting in a $5.4 million gain on early debt extinguishment, net of related unamortized debt issuance costs.
(3)Of the $225.0 million available for borrowing, the Company has not drawn down any amount under the Revolving Credit Facility.
(4)The current portion of long-term debt is related to the Term Loan, which requires quarterly principal payments equal to 1.25% of the original $400.0 million aggregate principal amount with balance due at maturity.
The following table sets forth the future minimum principal payments for long-term debt as of December 31, 2023 (in thousands):
2025 Convertible Notes 2026 Convertible Notes Term Loan 2030 Senior Notes Total
2030 Senior Notes
On August 16, 2023, the Company issued $400.0 million aggregate principal amount of the 2030 Senior Notes in a private offering. The total net proceeds from the debt offering, after deducting $5.5 million initial purchase discounts and $2.6 million debt issuance costs, were approximately $391.9 million. The 2030 Senior Notes are senior unsecured obligations of the Company and bear interest at a fixed rate of 8.5% per annum payable semi-annually in arrears on February 15th and August 15th of each year. The 2030 Senior Notes will mature on August 15, 2030, unless redeemed or repurchased earlier, and are subject to the terms and conditions set forth in the indenture governing the 2030 Senior Notes (the “Senior Notes Indenture”). As of December 31, 2023, the carrying value of the 2030 Senior Notes, net of unamortized debt discount and issuance costs, was $392.2 million.
The 2030 Senior Notes are or will be, as applicable, fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s existing and future domestic subsidiaries that guarantee indebtedness of the Company under the Credit Agreement.
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The Senior Notes Indenture also requires compliance with certain covenants, including the ability to create certain liens on assets to secure debt, the ability to grant subsidiary guarantees of certain debt without also providing guarantees of the 2030 Senior Notes by such subsidiary and certain change of control transactions, events of default, and other customary provisions. As of December 31, 2023, the Company was in compliance with all covenants under the Senior Notes Indenture.
The Company may redeem the 2030 Senior Notes, in whole or in part, at any time prior to August 15, 2026 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium and accrued and unpaid interest, if any. The Company may redeem the 2030 Senior Notes, in whole or in part, on or after August 15, 2026, at the redemption prices set forth in the Senior Notes Indenture, plus, in each case, accrued and unpaid interest thereon, if any. In addition, at any time prior to August 15, 2026, the Company may, on any one or more occasions, redeem up to 40% of the aggregate principal amount of the 2030 Senior Notes outstanding under the Senior Notes Indenture with the net cash proceeds of one or more equity offerings at a redemption price equal to 108.5% of the principal amount of the 2030 Senior Notes to be redeemed, plus accrued and unpaid interest thereon, if any, so long as 50% of the original aggregate amount of the 2030 Senior Notes remains outstanding immediately after such redemption.
If the Company experiences a change of control triggering event (as defined in the Senior Notes Indenture), holders of the 2030 Senior Notes may require the Company to repurchase the 2030 Senior Notes at a repurchase price equal to 101% of the principal amount of the 2030 Senior Notes to be repurchased, plus accrued and unpaid interest, if any.
Debt issuance costs were capitalized in the Consolidated Balance Sheets and amortized as interest expense using the effective interest rate method over the term of the 2030 Senior Notes. The effective interest rate on the 2030 Senior Notes, which is calculated as the contractual interest rate adjusted for the debt discount and issuance costs was 8.9% as of December 31, 2023.
Credit Agreement
On February 14, 2023, the Company entered into a Credit Agreement with certain lenders. The Credit Agreement originally provided for a $200.0 million revolving loan facility (the “Revolving Credit Facility”), with a $25.0 million sub-limit for the issuance of letters of credit, and a $400.0 million delayed draw term loan facility (the “Term Loan”). On August 15, 2023, the Company entered into the first amendment to the Credit Agreement to increase the Revolving Credit Facility by $25.0 million to an aggregate principal amount of $225.0 million. On November 2, 2023, the Company entered into the second amendment to Credit Agreement to increase the Term Loan by $75.0 million to an aggregate principal amount of $475.0 million. The proceeds of the loans under the Revolving Credit Facility may be used for working capital and general corporate purposes. The Revolving Credit Facility commitments terminate, and all outstanding revolving loans thereunder are due and payable, on February 14, 2028. The obligations under the Credit Agreement are guaranteed by certain material domestic subsidiaries of the Company, and secured by substantially all of the personal property of the Company and such subsidiary guarantors. As of December 31, 2023, the Company was in compliance with all covenants under the Credit Agreement.
In the second quarter of 2023, the Company fully drew down the then existing Term Loan of $400.0 million and the proceeds were used to repurchase a portion of the Company’s 2025 Notes, in accordance with the terms of the Credit Agreement. As of December 31, 2023, $75.0 million of Term Loan commitments remain available for draw until August 2, 2024. If on any date that is within 91 days prior to the final scheduled maturity date of any series of the Convertible Notes, such series of Convertible Notes is in an aggregate principal amount outstanding that exceeds an amount equal to 50% of last twelve months EBITDA, calculated as set forth in the Credit Agreement, the maturity date of both the Revolving Credit Facility and Term Loan shall automatically be modified to be such date.
Borrowings under the Credit Agreement will bear interest, at the Company’s option, at either: (a) the fluctuating rate per annum equal to the greatest of (i) the prime rate then in effect, (ii) the federal funds rate then in effect, plus 0.5% per annum, and (iii) an adjusted term SOFR rate determined on the basis of a one-month interest period, plus 1.0%, in each case, plus a margin of between 1.0% and 2.0%; and (b) an adjusted term SOFR rate (based on one, three or six month interest periods), plus a margin of between 2.0% and 3.0%. The applicable margin in each case is determined based on the Company’s total net leverage ratio. Interest is payable quarterly in arrears with respect to borrowings bearing interest at the alternate base rate or on the last day of an interest period, but at least every three months, with respect to borrowings bearing interest at the term SOFR rate.
As of December 31, 2023, the Company incurred $6.2 million of debt issuance costs in connection with the Credit Agreement, of which $5.3 million was capitalized in the Consolidated Balance Sheets and amortized primarily using the effective interest rate over the term of the Credit Agreement, while the remaining amount was expensed in the period incurred. The effective interest rate method on the Term Loan, which is calculated as the contractual interest rate adjusted for the debt discount and issuance costs, was 8.5% as of December 31, 2023. As of December 31, 2023, the carrying value of the Term Loan under Credit Agreement, net of unamortized debt discount and issuance costs, was $387.1 million.
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Convertible Notes
In March 2020, the Company issued $1.0 billion aggregate principal amount of 0% convertible notes due 2025 in a private placement to qualified institutional buyers (the “2025 Notes”). The 2025 Notes will mature on March 1, 2025, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the debt offering, after deducting initial purchase discounts and debt issuance costs, were approximately $986.5 million.
In September 2020, the Company issued $650 million aggregate principal amount of 0% convertible notes due 2026 in a private placement to qualified institutional buyers (the “2026 Notes”). The 2026 Notes will mature on March 15, 2026, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the debt offering, after deducting initial purchase discounts and debt issuance costs, were approximately $640.2 million.
The Convertible Notes are senior, unsecured obligations of the Company that do not bear regular interest, and the principal amount of the Convertible Notes does not accrete. The Convertible Notes may bear special interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the respective indentures governing each of the Convertible Notes (collectively, the “Convertible Notes Indentures”) or if the Convertible Notes are not freely tradeable as required by each respective Convertible Notes Indenture.
Partial Repurchase of 2025 and 2026 Convertible Notes
In May 2023, the Company used the entire proceeds from the drawdown of the $400.0 million Term Loan and $27.3 million of other available cash to repurchase $460.7 million principal amount of the 2025 Convertible Notes, resulting in a gain on early debt extinguishment of $31.1 million, net of related unamortized debt issuance costs.
In August 2023, the Company used a portion of the net proceeds from the offering of the 2030 Senior Notes to repurchase $125.3 million and $40.9 million aggregate principal of the 2025 Convertible Notes and 2026 Convertible Notes, respectively, by paying an aggregate amount of $153.6 million in cash, resulting in a gain on early debt extinguishment of $11.8 million, net of related unamortized debt issuance costs.
In December 2023, the Company used a portion of the remaining net proceeds from the offering of the 2030 Senior Notes to repurchase $252.7 million aggregate principal of the 2025 Convertible Notes by paying $241.3 million in cash, resulting in a gain of early debt extinguishment in the amount of $10.5 million net of related unamortized debt issuance costs. As of December 31, 2023, the carrying value of the 2025 and 2026 Convertible Notes, net of unamortized debt issuance costs, was $160.8 million and $605.4 million, respectively.
Other Terms of the Notes
Equivalent initial approximate conversion price per share $ 360.43 $ 424.03
The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a make-whole fundamental change or a redemption period, each as defined in the respective Convertible Notes Indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Convertible Notes in connection with such make-whole fundamental change or during the relevant redemption period.
The Convertible Notes will be convertible at certain times and upon the occurrence of certain events in the future. Further, on or after December 1, 2024 for the 2025 Convertible Notes, and December 15, 2025 for the 2026 Convertible Notes, until the close of business on the scheduled trading day immediately preceding the relevant maturity date, holders of the Convertible Notes may convert all or a portion of their Convertible Notes regardless of these conditions. Pursuant to the terms of the respective Convertible Notes Indenture, effective January 1, 2022, the Company made an irrevocable election to settle the principal portion of the Convertible Notes only in cash, with the conversion premium to be settled in cash or shares.
During the three and twelve months ended December 31, 2023, the conditions allowing holders of the 2025 Convertible Notes and 2026 Convertible Notes to convert were not met. The Convertible Notes of either series may be convertible thereafter if one or more of the conversion conditions specified in the applicable Convertible Notes Indenture is satisfied during future measurement periods.
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The Company may redeem the Convertible Notes at its option, on or after March 5, 2022 for the 2025 Convertible Notes, and March 20, 2023 for the 2026 Convertible Notes, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid special interest to, but excluding the redemption date, subject to certain conditions. No sinking fund is provided for the Convertible Notes.
Upon the occurrence of a fundamental change (as defined in each respective Convertible Notes Indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the 2025 Convertible Notes or 2026 Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid special interest to, but excluding, the fundamental change repurchase date.
As of December 31, 2023, the Company was in compliance with all covenants under each of the Convertible Notes Indentures.
Capped Calls
In connection with the offering of the Convertible Notes, the Company entered into privately-negotiated capped call transactions relating to each series of Convertible Notes with certain counterparties (collectively the “Capped Calls”). The initial strike price of the Convertible Notes corresponds to the initial conversion price of each of the Convertible Notes. The Capped Calls are generally intended to reduce or offset the potential dilution to the Class A Common Stock upon any conversion of the Convertible Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The Capped Calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including changes in law, insolvency filings; and hedging disruptions. The Capped Call transactions are recorded in stockholders’ equity and are not accounted for as derivatives.
The following table below sets forth key terms and costs incurred for the Capped Calls related to each of the Convertible Notes:
2025 Convertible Notes 2026 Convertible Notes
Initial cap price per share, subject to certain adjustments $ 480.56 $ 556.10
Net cost incurred (in millions) $ 60.9 $ 41.8
All of the capped call transactions were outstanding as of December 31, 2023.
The following table sets forth the interest expense recognized related to long-term debt (in thousands):
Twelve Months Ended December 31,
Contractual interest expense, net of interest rate swap $ 29,285 $ — $ —
Amortization of debt discount and issuance costs 4,566 4,468 64,063
Total interest expense related to long-term debt $ 33,851 $ 4,468 $ 64,063