Ooma, Inc. — Form 10-Q Summary
Business and period: Ooma provides cloud-based communications and connected services for small businesses, residential users and mobile users. This report covers the three and six months ended July 31, 2017, the second quarter and first half of fiscal 2018, respectively. Financial statement amounts below are in U.S. dollars; dollar figures are in millions unless noted.
Financial performance and position
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $28.19 | $25.49 | $55.77 | $49.95 |
| Subscription and services revenue | $25.21 | $22.42 | $49.31 | $43.91 |
| Gross profit | $16.58 | $14.55 | $32.61 | $28.20 |
| Gross margin | 59% | 57% | 58% | 56% |
| Operating loss | $(3.79) | $(3.41) | $(7.29) | $(7.46) |
| Net loss | $(3.62) | $(3.34) | $(7.02) | $(7.30) |
| Adjusted EBITDA | $(0.07) | $(0.54) | $0.00 | $(1.67) |
- Q2 revenue grew 11% year over year; first-half revenue grew 12%. Subscription and services revenue rose 12% in both periods. Product and other revenue declined 3% in Q2 but increased 7% for the first half.
- Q2 net loss widened year over year despite higher revenue and gross profit, as operating expenses rose 13% to $20.37 million, including a 24% increase in research and development. First-half net loss narrowed.
- Subscription and services gross margin improved to 69% in Q2 from 67%; product and other gross margin remained negative, worsening to (27%) from (14%). Management expects product and other gross margin to remain negative for the foreseeable future.
- Stock-based compensation was $3.12 million in Q2 and $6.09 million in the first half, compared with $2.40 million and $4.87 million, respectively, in the prior-year periods.
- Operating cash flow was $1.43 million for the first half, versus cash used of $0.58 million a year earlier. Capital expenditures were $1.06 million, implying operating cash flow less capital expenditures of approximately $0.37 million. Cash and cash equivalents increased to $10.43 million from $3.99 million at January 31, 2017.
- Cash, cash equivalents and short-term investments totaled $53.8 million at July 31, 2017. Current assets were $67.94 million and current liabilities $34.30 million. The balance sheet reports no debt; total liabilities were $34.80 million.
Changes, outlook and material matters
- Core users increased 11% year over year to approximately 895,000, with growth primarily from Ooma Office small-business users. Annualized exit recurring revenue rose to $92.45 million from $77.69 million.
- Annual net dollar subscription retention was 98%, down from 102%. Management attributed the decrease mainly to an atypical increase in average revenue per user in the prior-year first half that did not recur.
- Management expects subscription and services revenue to grow with the core-user base, particularly small-business growth, and expects product and other revenue to decrease year over year. It anticipates continued investment in sales and marketing and research and development. The filing provides no numeric revenue or earnings guidance.
- Management believes existing cash and investments will fund cash needs for at least the next 12 months. Capital needs may vary with growth, data-center capacity and spending plans.
- On August 15, 2017, Ooma sold Business Promoter without receiving cash proceeds. It may receive quarterly earnout payments over five years, up to $4.5 million; receipts will reduce general and administrative expense.
- Four material proceedings are disclosed: Oregon communications-tax assessments, a patent infringement case, IPO-related securities litigation and Berks County, Pennsylvania 911-fee litigation. The company says reasonably possible losses are not estimable and recorded no material reserves for these matters. The securities-litigation mediation did not resolve the case; plaintiffs moved to amend their complaint on August 28, 2017.
- Ooma also disclosed $2.8 million of non-cancelable purchase commitments and approximately $0.6 million of operating lease obligations. It stated disclosure controls were effective as of July 31, 2017.
Important facts for investors to verify
- Whether user growth, recurring revenue and retention remain durable, particularly as the reported retention rate declined to 98%.
- Whether small-business growth can sustain subscription margins while operating expenses and stock-based compensation increase.
- The outcomes and potential financial exposure of the four disclosed legal proceedings; the filing gives no estimable loss range.
- Whether the Business Promoter earnout generates payments, since no cash was received at sale and the maximum is conditional.
- The company’s subsequent results against its stated expectation of at least 12 months of liquidity and its qualitative outlook; no numeric guidance was provided.