launch around 2H16. AT&T commented in Q&A that the RNG relationship was “non-core, a specific thing
they do that really was brought on to help us sell mobile phones to small business, and you should
expect that we will not grow that platform.” A bear case would be that AT&T tries to port Office@Hand
customers to its BSFT-enabled solution once it launches. In any case, it seems safe to assume that there
will be little to no growth coming from AT&T once Domain 2.0 launches. Most estimates from AT&T
analysts peg this as a 2H16 rollout.
Bulls in RNG’s stock have suggested that their recent announced partnerships with TELUS and BT in 2014
will provide meaningful upside, which could come to fruition, but it took AT&T 4+ years to reach $25mm
in revenue and become a >10% customer, so the ramp will be relatively gradual and be less impactful
due to the current size of the company. BT and Telus are also in much smaller geographies than AT&T,
with considerably smaller TAMs. At some point, these carriers will also likely go through the decision
process AT&T went through to 1) in-source their VoIP business and 2) consolidate their various VoIP
offerings. Certainly, AT&T’s actions will force sell-side analysts and investors to scrutinize the value of all
of RNG’s wholesale relationships with carriers.
“As we move up market to larger customers and you can look at CIO, Director of IT, and you could say to
him that his employees are going to run on the same network, the same platform as AT&T's customers,
that changes the mind share a lot. And that's why we have so much success moving up market.” - CFO
Clyde Hosein (Bank of America Merrill Lynch Global Tech Conference June 2, 2015)
The relationship with AT&T helped RNG move up-market and created outsized growth in FY2014 and
FY2015. Since we know AT&T was below 10% of revenues in FY2013 and approximately 12% in FY2014
($25.3mm), we can calculate that AT&T revenues grew no less than 66% in FY2014 and boosted total
revenue growth by over 300 bps.
In FY2015, AT&T grew 46% to $37.0mm and boosted revenue growth by another 150 bps. Assuming
AT&T ramps down Office@Hand in anticipation of a 2H16 launch of Domain 2.0, we estimate FY2016
AT&T revenue will likely be $36.3mm when factoring in churn. If this were the case, to meet FY2016
revenue guidance of $357mm, subscription revenue ex AT&T would need to grow by 32% after 34%
growth in FY2015. More importantly, Office revenue (the growth segment) ex AT&T would need to grow
43% after slowing from 57% to 49% growth in FY2015. We are using the high end of guidance for this
analysis, but since this has been a beat and raise story since IPO and they have handily beat guidance
each quarter, we believe they must come in above the high end to sustain its valuation. Furthermore,
unless the Company is able to come in at the high end of their guidance, AT&T will likely dip below a
10% customer, which if disclosed would also scare investors and sell side analysts.
In a bear case where AT&T ports customers to their new Domain 2.0 offering, we see very little chance
of the company meeting guidance.
Sell-side is very keen on comparing RNG to SaaS companies due to its high top line growth and recurring
revenue base. However, most SaaS businesses are providing business-critical services with a high degree
of reliability, with low churn and solid operating margins. RNG’s service scores poorly on these metrics.
Given RNG’s QoS issues – particularly in a service still considered mission-critical to most businesses --
we believe a SaaS multiple is not warranted. Moreover, it is far too soon to call RNG’s business model a
success, as better-capitalized competitors flock to the enterprise VoIP business. With limited barriers to
entry, RNG’s early market leadership is at risk. User economics seem to have been degraded in RNG’s