Ooma, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended April 30, 2017. Financial statements are unaudited; amounts are in U.S. dollars. Ooma provides cloud-based communications and connected services to residential, small-business, and mobile users.
Financial performance and position
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Subscription and services revenue | $24.1 million | $21.5 million |
| Product and other revenue | $3.5 million | $3.0 million |
| Total revenue | $27.6 million | $24.5 million |
| Gross profit / gross margin | $16.0 million / 58% | $13.6 million / 56% |
| Operating expenses | $19.5 million | $17.7 million |
| Operating loss | $(3.5) million | $(4.0) million |
| Net loss / diluted loss per share | $(3.4) million / $(0.19) | $(4.0) million / $(0.23) |
| Adjusted EBITDA | $0.1 million | $(1.1) million |
| Operating cash flow | $0.2 million | $(1.2) million |
- Revenue grew 13% year over year. Subscription and services revenue rose 12%; product and other revenue rose 17%.
- Subscription and services gross margin improved to 68% from 66%. Product and other gross margin remained negative, improving to (9%) from (19%). Total gross margin increased by 2 percentage points.
- Sales and marketing expense rose 13% and research and development rose 15%; general and administrative expense declined 3%. Stock-based compensation and related taxes were $3.0 million, up from $2.5 million.
- At April 30, cash and cash equivalents were $9.0 million and short-term investments were $44.3 million, totaling $53.3 million. Total current assets were $67.9 million and current liabilities $33.6 million. Total liabilities were $34.1 million; the balance sheet reports no debt balance. Operating lease obligations totaled about $1.0 million, and non-cancelable purchase commitments were $3.5 million.
- Cash increased by $5.0 million during the quarter. Investing cash flow was $4.3 million, primarily reflecting investment maturities and purchases; financing cash flow was $0.6 million. Management said available cash and investments should meet cash needs for at least 12 months.
Changes and business indicators
- Core users increased 13% year over year to approximately 879,000. Annualized exit recurring revenue rose to $88.3 million from $74.0 million.
- Annual net dollar subscription retention was 97%, down from 103%. Management attributed the comparison partly to an atypical increase in average revenue per core user in the prior-year quarter that did not recur.
- Management said subscription growth reflected core-user expansion, while product revenue benefited partly from endpoint-device sales to a telecommunications provider. Subscription margin gains reflected Ooma Office growth and scale; product-margin improvement reflected sales mix.
- Beginning this quarter, the company revised its key business metrics to exclude Business Promoter users and revenue from all periods presented, focusing the metrics on its primary cloud communications business.
- In January and March 2017, existing stockholders completed secondary share offerings. Ooma received no proceeds.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided in this filing. Management expected subscription and services revenue to continue increasing, product and other revenue to remain relatively flat year over year, and continued investment in sales, marketing, research and development, network infrastructure, and customer support. Management cautioned that quarterly results may fluctuate and the reported quarter is not necessarily indicative of full-year results.
- The company reported net losses since inception and an accumulated deficit of $81.2 million. It said it expects continued investment and may incur losses and negative cash flows; profitability is not assured.
- Four material proceedings were disclosed: Oregon emergency communications tax assessments, a patent infringement action, securities class-action litigation related to the IPO, and Berks County litigation concerning Pennsylvania 911 fees. Ooma disputes the claims and is defending them; it said potential material losses are not reasonably estimable and recorded no material reserves for these matters.
- Other notable risks include customer churn and acquisition costs, competition, reliance on retail/reseller channels and third-party manufacturers and network providers, service outages and cybersecurity, evolving telecommunications and privacy regulation, and indirect tax assessments. The filing notes the FCC’s April 2017 proposal to reverse major net-neutrality rules.
- The company recorded no income tax provision or benefit and maintained a full valuation allowance against deferred tax assets. Its $2.0 million of unrecognized tax benefits would not currently affect the effective tax rate, according to the filing.
- Management concluded disclosure controls and procedures were effective as of April 30, 2017; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether core-user growth and recurring-revenue expansion can continue, and whether retention recovers from 97%.
- Whether improved gross margins and near-breakeven Adjusted EBITDA can be sustained as operating expenses rise.
- Cash consumption, inventory growth, purchase commitments, and the adequacy of liquidity under different growth scenarios.
- Developments and potential financial effects of the four legal proceedings and any related tax or regulatory assessments; loss amounts are not estimable in the filing.
- How the revised business metrics exclude Business Promoter activity and affect comparability with prior company disclosures.