Ooma, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. Ooma provides cloud-based communications and connected services to small businesses, home users, and mobile users. The quarter ended October 31, 2016; comparisons are with the three and nine months ended October 31, 2015. Amounts below are in U.S. dollars unless stated otherwise.
Financial results and liquidity
| Metric | Three months ended Oct. 31, 2016 | Prior-year quarter | Nine months ended Oct. 31, 2016 | Prior-year period |
|---|---|---|---|---|
| Revenue | $27.0m | $23.5m | $77.0m | $64.5m |
| Subscription and services revenue | $23.2m | $19.5m | $67.1m | $52.5m |
| Product and other revenue | $3.8m | $4.0m | $9.9m | $12.0m |
| Gross profit / gross margin | $15.3m / 57% | $12.5m / 53% | $43.5m / 57% | $33.7m / 52% |
| Operating loss | $2.9m | $3.5m | $10.4m | $9.5m |
| Net loss | $2.8m | $3.5m | $10.1m | $10.9m |
| Adjusted EBITDA (non-GAAP) | $0.08m | $(1.5)m | $(1.6)m | $(5.3)m |
| Basic and diluted loss per share | $(0.16) | $(0.21) | $(0.58) | $(1.38) |
| Cash used in operating activities | Not separately reported for quarter | $0.18m | $0.70m |
- Growth and mix: Quarterly revenue rose 15% and nine-month revenue rose 19%. Subscription and services revenue increased 19% and 28%, respectively, while product and other revenue declined 4% and 18%.
- Margins and costs: Higher subscription revenue mix lifted total gross margin. Product and other gross margin remained negative: 12% in the quarter and 15% for the nine-month period, versus negative 7% and 1% in the comparable periods. Operating expenses increased 14% in the quarter and 25% year to date; research and development was a notable contributor.
- Cash and liquidity: At October 31, cash and cash equivalents were $6.3m and short-term investments were $47.1m, totaling $53.4m. The company reported no outstanding debt; the remaining $0.6m capital lease was repaid in April 2016. Management said available cash and investments should meet cash needs for at least 12 months.
- Cash flow: Nine-month operating cash use improved to $0.18m from $0.70m. Investing used $20.3m, principally reflecting net purchases of short-term investments; financing used $0.6m. Cash and cash equivalents fell $21.1m, while the investment balance increased.
- Balance sheet: Total assets were $72.5m, total liabilities $32.2m, and stockholders’ equity $40.4m at quarter end. Deferred revenue was $14.9m current and $0.5m noncurrent.
Material changes and operating indicators
- Core users increased 19% year over year to approximately 904,000. Annualized exit recurring revenue rose to $86.3m from $74.4m.
- Annual net dollar subscription retention fell to 90% from 97%, primarily due to lower average revenue per user among Business Promoter users.
- Management attributed subscription growth to core-user growth and Ooma Office expansion. Appliance revenue declined amid lower unit volume and average selling prices.
- Nine-month stock-based compensation increased to $7.2m from $2.7m. The company reported an accumulated deficit of $75.0m and continued to incur net losses.
Outlook, risks, and unusual items
- No specific numerical revenue or earnings guidance is provided in this filing. Management expects subscription and services revenue to grow with the user base, and expects product revenue to decrease slightly. It anticipates continued investment in sales and marketing, research and development, network capacity, and customer support; product gross margin is expected to remain negative for the foreseeable future.
- Material risks include customer churn and weaker subscription retention, competition and customer-acquisition costs, service outages and cybersecurity, reliance on third-party networks and manufacturers, and evolving communications regulation and taxes.
- Ooma is contesting Oregon emergency communications tax assessments and is defending patent, IPO-related securities, Pennsylvania 911-fee, and Alabama 911-fee litigation. The company says reasonably possible material losses cannot be estimated and recorded no material reserves for these matters. The Pennsylvania court had overruled defendants’ preliminary objections.
- The company early adopted share-based payment accounting guidance in the quarter, recording a $0.1m cumulative-effect adjustment and electing to account for forfeitures as they occur. The adoption had no material effect on income-tax accounting.
- Management assessed disclosure controls as effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the period.
Investor verification points
- Confirm the trajectory of the 90% subscription retention rate and the revenue contribution from Business Promoter and Ooma Office.
- Assess whether user and recurring-revenue growth can support profitability as operating expenses and stock-based compensation rise.
- Review cash consumption, investment liquidity, and management’s 12-month liquidity assessment; distinguish cash from short-term investments.
- Track outcomes and potential costs of the Oregon, Pennsylvania, Alabama, patent, and securities proceedings; no loss range is currently estimable.
- Monitor product economics, including persistently negative product margins, appliance pricing, and inventory and purchase commitments.