Ooma, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended January 31, 2017; comparisons are to fiscal 2016 unless stated otherwise. Ooma provides cloud-connected communications and related services to home, small-business, and mobile users, with revenue from recurring subscriptions and sales of appliances and endpoint devices. The filing reports one operating segment. Figures below are in U.S. dollars; financial amounts are in millions unless noted.
Key financial metrics
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Total revenue | $104.5 | $88.8 | Up 18% |
| Subscription and services revenue | $91.1 | $73.1 | Up 25%; 87% of revenue, versus 82% |
| Product and other revenue | $13.4 | $15.7 | Down 15%; 13% of revenue |
| Gross profit / gross margin | $59.3 / 57% | $46.9 / 53% | Improved with the higher recurring-revenue mix |
| Operating loss | $(13.3) | $(12.7) | Loss widened slightly as operating expenses rose 22% |
| Net loss | $(12.9) | $(14.1) | Loss narrowed; basic and diluted loss per share was $(0.74), versus $(1.38) |
| Adjusted EBITDA (non-GAAP) | $(1.4) | $(6.5) | Improved; not a substitute for GAAP results |
| Cash from operating activities | $0.4 | $(0.5) | Improved to positive cash flow |
| Cash and short-term investments | $53.2 | $55.4 | Down $2.2; FY2017 included $23.0 of net investing cash outflow, largely investment purchases |
| Debt | None | $0.6 capital lease | Capital lease repaid in FY2017; prior credit-facility debt was repaid in July 2015 |
| Working capital | $34.3 | $35.9 | Positive; current assets were $67.3 and current liabilities $33.0 |
Operating expenses totaled $72.6 million, including sales and marketing of $33.8 million, research and development of $24.2 million, and general and administrative of $14.6 million. Stock-based compensation was $9.8 million, more than double FY2016’s $4.7 million. The company reported an accumulated deficit of $77.8 million.
Material changes and operating indicators
- Core users grew to approximately 933,000 from 800,000, up about 17%. Management reported average annual core-user churn of approximately 7%, excluding Business Promoter.
- Annualized exit recurring revenue was $89.4 million, up from $76.9 million. Annual net dollar subscription retention fell to 91% from 94% (102% in FY2015), primarily because Business Promoter revenue per user declined.
- Subscription growth reflected user growth and expansion in Ooma Office. Product revenue declined because fewer appliances were sold and average selling prices were lower. Ooma Telo represented approximately 72% of FY2017 revenue.
- Subscription and services gross margin increased to 67% from 65%. Product and other gross margin was negative 16%, compared with negative 3%; management says appliances are priced aggressively to encourage platform adoption.
- Operating cash flow improved, but remained modest relative to the GAAP net loss. The company attributed much of the reconciliation to non-cash charges, including stock compensation and depreciation and amortization.
Outlook, risks, and unusual items
- Management expects subscription and services revenue to continue growing as users are added, existing users retained, and new connected services introduced. It expects product and other revenue to remain relatively flat year over year, and product margins to remain negative for the foreseeable future.
- The company expects continued investment in sales and marketing and research and development; both expenses were expected to increase in absolute dollars. It stated existing cash and short-term investments should meet cash needs for at least the next 12 months. No quantified FY2018 revenue or earnings guidance is provided in this filing.
- Key business risks include competition and bundled low-cost offerings, customer churn, reliance on retail/reseller channels and app stores, dependence on third-party manufacturers and network providers, service outages and cybersecurity, and regulatory changes affecting VoIP, emergency calling, taxes, and fees.
- Pending matters included Oregon emergency-communications tax assessments, a Pennsylvania 911-fee lawsuit, a patent-infringement suit, and IPO-related securities litigation. The company said reasonably possible material losses were not estimable and recorded no material reserves for these proceedings. The Alabama 911-fee lawsuit was dismissed with prejudice under a confidential settlement without material loss.
- Ooma disclosed it was not compliant with all applicable technical PCI Data Security Standard requirements and was working toward compliance. It also disclosed accrued regulatory fees and taxes of $4.3 million; the filing discusses uncertainty and disputes over certain state and local tax and surcharge obligations.
- Other notable items: the company raised $56.9 million net in its July 2015 IPO and used about $10.3 million to repay debt. A January 2017 secondary offering by existing stockholders generated no proceeds for Ooma. In March 2017, Worldview Technology Partners sold shares and held less than 1% afterward. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether recurring-revenue growth and customer retention can continue, particularly given the decline in net dollar retention and the contribution of Business Promoter.
- Whether operating expense growth, stock-based compensation, and ongoing losses can be managed while pursuing growth; assess GAAP results alongside management’s non-GAAP measures.
- How much cash is readily available and how operating cash flow develops; distinguish cash balances from short-term investments and investment-related cash flows.
- Updates on the unresolved state tax/911-fee and securities and patent litigation, including potential exposure, legal costs, and any reserve changes.
- Progress on PCI compliance and the company’s ability to maintain service reliability, cybersecurity, emergency calling, and key vendor and channel relationships.