Ooma, Inc. — Form 10-Q Summary
Business context and reporting period
Ooma provides cloud-based communications and connected services for small businesses, home users and mobile users, supported by cloud software, on-premises appliances and endpoint devices. This unaudited report covers the three and six months ended July 31, 2016; the comparable periods ended July 31, 2015.
Financial and operating performance
| Metric | Three months ended July 31, 2016 | Six months ended July 31, 2016 |
|---|---|---|
| Revenue | $25.5 million, up 21% year over year | $50.0 million, up 22% |
| Subscription and services revenue | $22.4 million, up 28% | $43.9 million, up 33% |
| Product and other revenue | $3.1 million, down 17% | $6.0 million, down 24% |
| Gross profit / gross margin | $14.5 million / 57%, versus $11.2 million / 53% | $28.2 million / 56%, versus $21.3 million / 52% |
| Operating expenses | $18.0 million, up 26% | $35.7 million, up 31% |
| Operating loss | $3.4 million, versus $3.1 million loss | $7.5 million, versus $6.0 million loss |
| Net loss | $3.3 million, versus $3.4 million | $7.3 million, approximately unchanged |
| Adjusted EBITDA (non-GAAP) | $0.5 million loss, versus $1.8 million loss | $1.7 million loss, versus $3.7 million loss |
Subscription and services represented 88% of revenue in both 2016 periods. Subscription and services gross margin was 67% for the quarter and 66% for the six months; product and other gross margin was negative 14% and negative 16%, respectively. Management says appliance sales are priced aggressively to encourage platform adoption and expects product gross margin to remain negative for the foreseeable future.
For the quarter, core users increased 21% year over year to approximately 869,000; annualized exit recurring revenue rose to $83.9 million from $66.9 million; and annual net dollar subscription retention was 97%, versus 96%. Quarterly subscription and services revenue per core user, excluding Talkatone, increased to $24.15 from $23.34.
Cash, liquidity and debt
At July 31, 2016, cash and cash equivalents were $6.7 million and short-term investments were $47.1 million, totaling $53.8 million, compared with $55.4 million at January 31, 2016. Current assets were $66.6 million and current liabilities $31.4 million. The company reported no outstanding debt; it repaid a $0.6 million capital lease in April 2016. A $12.0 million revolving credit facility was available at quarter-end, with a maturity extension to August 2016 and subscriber and other covenants. The company reported covenant compliance at July 31.
For the six months, operating cash use was $0.6 million, compared with $0.7 million a year earlier. Investing activities used $20.2 million, primarily reflecting purchases of short-term investments, net of maturities and sales, and $1.0 million of capital expenditures. Financing activities provided $0.1 million. The accumulated deficit was $72.1 million.
Changes, outlook and risks
- Revenue growth was led by subscriptions and services, reflecting a larger user base and higher average recurring revenue per user. Product revenue fell, primarily because fewer appliances were sold and, for the six-month period, partly because of lower average selling prices.
- Operating expenses rose faster than revenue, including increased marketing, research and development, personnel costs and stock-based compensation. Six-month stock-based compensation was $4.9 million, versus $1.3 million a year earlier.
- Management expects subscription and services revenue to grow with the user base; it expects product and other revenue to remain relatively flat. It expects sales and marketing and research and development expenses to increase in dollars, while remaining consistent as a percentage of revenue; general and administrative expenses, excluding stock compensation, are expected to remain relatively flat. These are directional expectations, not quantified earnings guidance.
- Management said available cash, investments and the revolver were sufficient for at least the next 12 months. Future funding needs depend on growth, infrastructure, sales and marketing, research and development and market acceptance. The company also disclosed that losses and negative operating cash flows were expected to continue for the foreseeable future.
- Material uncertainties include four disclosed legal matters: patent litigation, securities class-action litigation related to the IPO, and Pennsylvania and Alabama disputes over 911 fees. The company said potential material losses were not reasonably estimable and recorded no material reserves for these matters.
- Other highlighted risks include customer acquisition and churn, competition, reliance on retail/reseller channels and third-party manufacturers and network providers, service outages and cybersecurity, and changing communications regulation and taxes. Management reported effective disclosure controls as of July 31, 2016 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the status and availability of the $12.0 million revolver after its stated August 2016 maturity extension, including any renewal or replacement financing.
- Track whether subscription growth and retention continue to offset declining appliance revenue and negative product margins.
- Assess the trajectory of operating expenses and stock-based compensation against revenue growth and progress toward profitability.
- Review developments in the four legal proceedings, particularly the 911-fee cases and IPO securities litigation, for potential financial or operating effects.
- Compare actual liquidity and operating cash use with management’s stated expectation that resources would cover at least 12 months.