IPO Preview: RingCentral

Sep.26.13 | About: RingCentral, Inc. (RNG)

Based in San Mateo, CA, RingCentral (NYSE:RNG) scheduled a $90 million IPO with a market capitalization of $728 million at a price range mid-point of $12, for Friday September 27, 2013.

Twelve IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.

S-1 filed September 13, 2013.

Manager, Joint Managers: Goldman, JPMorgan, BofA Merrill Lynch
Co-Managers: Allen & Company, Raymond James

Summary

RNG is a leading provider of software-as-a-service, or SaaS, solutions for business communications.

RNG's solutions have been developed with a mobile-centric approach and can be configured, managed and used from a smartphone or tablet.

91% of revenue is from subscription-based services, at $20 per month per user. RNG has been selling primarily to small to medium-sized business. The growth plan includes sales and marketing to larger, enterprise-wide customers.

Valuation

Valuation Ratios

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annualizing june 6 mos

Cap (MM)

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$728

5.0

-15.2

12.6

12.4

12%

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Accumulated deficit of -$107.

Conclusion

Buy RNG on the IPO.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

RNG is a leading provider of software-as-a-service, or SaaS, solutions for business communications.

RNG's solutions have been developed with a mobile-centric approach and can be configured, managed and used from a smartphone or tablet.

RNG primarily generates revenues by selling subscriptions for its cloud-based services.

RNG enables convenient and effective communications for customers, across all their locations, all employees, all the time, thus enabling a more productive and dynamic workforce.

RingCentral Office, the flagship service, is a multi-user, enterprise-grade communications solution that enables customers and their employees to communicate via voice, text and fax, on multiple devices, including smartphones, tablets, PCs and desk phones.

Riding the "bring you own" wave

RNG believes that its innovative, cloud-based approach disrupts the large market for business communications solutions by providing flexible and cost-effective services that support distributed workforces, mobile employees and the proliferation of "bring-your-own" communications devices.

Traditionally, businesses have used on-premise hardware-based communications systems, commonly referred to as private branch exchanges, or PBXs.

According to Gartner's April 2013 report entitled "Bring Your Own Device: The Facts and the Future," by 2017, half of employers will require their employees to supply their own devices for work purposes.

RNG believes that this trend will create additional challenges for businesses using legacy communications solutions.

Legacy systems generally require specialized and expensive hardware that must be deployed at every business location and are primarily designed for employees working only at that location and using only their desk phones.

In addition, these systems generally require significant upfront investment and ongoing maintenance and support costs.

Subscription plans

RNG's subscription plans have historically had monthly or annual contractual terms and over 95% of current customers are on monthly contractual terms, although RNG also has subscription plans with multi-year contractual terms, generally with larger customers.

Market

The market for business communications solutions is large. According to Infonetics Research, from 2008 through 2012, there were 61 million PBX lines sold in North America.

Assuming RNG's current base selling price of $20 per user per month, RNG believes that the potential replacement market is $15 billion in North America.

RNG also believes that this estimate significantly understates the potential market opportunity for its cloud-based solutions because a significant number of businesses today have not historically deployed a business communications system due to functionality limitations, cost and other factors.

Customer base

RNG has a diverse and growing customer base comprised of over 300,000 businesses across a wide range of industries, including advertising, consulting, finance, healthcare, legal, real estate, retail and technology. To date, RNG has focused its principal efforts on the market for small and medium-sized businesses, defined by IDC as less than 1,000 employees, in the U.S. and Canada.

RNG is making investments in an effort to address larger customers

Intellectual Property

RNG's intellectual property portfolio includes 18 issued U.S. patents, which expire between 2026 and 2032. RNG also has 49 patent applications pending for examination in the U.S. and 21 patent applications pending for examination in foreign jurisdictions, all of which are related to U.S. applications

Competition includes:

Traditional on-premise, hardware business communications providers such as Alcatel-Lucent, S.A., Avaya Inc., Cisco Systems, Inc., Mitel Networks Corporation, ShoreTel, Inc. and Siemens Enterprise Networks, LLC, any of which may now or in the future also host their solutions through the cloud, and their resellers;

Software providers such as Microsoft Corporation and Broadsoft, Inc. that generally license their software and may now or in the future also host their solutions through the cloud, and their resellers including major carriers and cable companies;

Established communications providers, such as AT&T Inc., Verizon Communications Inc. and Comcast Corporation, that resell on-premise hardware, software and hosted solutions;

Other cloud companies such as j2 Global, Inc. and 8x8, Inc.; and

Other large, Internet companies, such as Google Inc., Yahoo Inc. and Amazon.com, Inc., any of which might launch their own cloud-based business communications services or acquire other cloud-based business communications companies in the future.

5% stockholders pre-IPO

Entities affiliated with Sequoia Capital, 17.1%
Entities affiliated with Vladimir Shmunis, 19.6%
Entities affiliated with Khosla Ventures, 16.%
Vlad Vendrow, 9.1%
Entities affiliated with DAG Ventures, 7.7%

Use of proceeds

RNG expects to net $79.2 million from its IPO. Proceeds are allocated for working capital and general corporate purposes.

RNG may use a portion of the net proceeds to repay the outstanding principal and accrued interest on existing loans with TriplePoint Capital LLC. As of June 30, 2013, the outstanding balance of the equipment line was $6.9 million and bore interest at a fixed rate of 5.75%. The outstanding balance of the growth capital loan was $8.5 million and bore interest at a fixed rate of 8.5%. RNG borrowed an additional $5.0 million in August 2013 under an amended growth capital loan and security agreement with TriplePoint Capital LLC.

RNG may also use a portion of net proceeds to repay the outstanding principal and accrued interest on an existing loan with Silicon Valley Bank. As of June 30, 2013, the outstanding balance of this loan was $4.7 million and bore interest at a floating rate of 2.75% above the prime rate per annum. RNG borrowed an additional $15.8 million in August 2013 under an amended loan and security agreement with Silicon Valley Bank.

Disclaimer: This RNG IPO report is based on a reading and analysis of RNG's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.