Ooma, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended April 30, 2016; comparisons are with the three months ended April 30, 2015. Ooma provides cloud-based communications and connected services for small businesses, home and mobile users. Figures below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Revenue | $24.46 million | $19.85 million |
| Subscription and services revenue | $21.49 million | $15.58 million |
| Product and other revenue | $2.97 million | $4.28 million |
| Gross profit / gross margin | $13.65 million / 56% | $10.02 million / 50% |
| Operating loss | $4.04 million | $2.93 million |
| Net loss | $3.96 million | $3.94 million |
| Adjusted EBITDA (non-GAAP) | $(1.08) million | $(1.89) million |
| Cash used in operating activities | $1.25 million | Cash provided of $1.37 million |
- Subscription and services gross margin was 66%, versus 64%; product and other gross margin was negative 19%, versus positive 2%.
- Stock-based compensation rose to $2.47 million from $0.55 million, contributing to higher operating expenses. Total operating expenses increased 37% to $17.69 million.
- Cash and cash equivalents were $8.98 million and short-term investments were $44.70 million at April 30, totaling $53.68 million. Cash and cash equivalents alone fell by $18.43 million during the quarter, largely as the company purchased short-term investments.
- Investing activities used $17.08 million, principally for short-term investments; financing activities used $0.11 million. Property and equipment purchases were $0.32 million.
- Current assets were $65.96 million and current liabilities $30.49 million. Total liabilities were $30.73 million. The company reported no outstanding borrowings under its revolving credit line; it had $12 million available. A $0.63 million capital lease balance was repaid in April.
Changes and operating indicators
- Revenue grew 23% year over year. Subscription and services revenue increased 38%, while product and other revenue declined 31%.
- Core users increased 23% to approximately 835,000 from 678,000. Annualized exit recurring revenue increased to $81.4 million from $60.8 million; annual net dollar subscription retention improved to 102% from 97%.
- Management attributed subscription growth to more core users and higher average subscription revenue per core user. The prior-year product comparison included a large, non-recurring customer order that was not repeated; lower appliance selling prices also weighed on product revenue.
- Gross margin improved with the greater share of higher-margin subscription revenue. Product revenue was 12% of total revenue, down from 22%.
- Net loss was nearly unchanged despite a larger operating loss, partly because the prior-year quarter included a $0.72 million warrant fair-value expense and greater net interest expense.
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; product revenue to remain relatively flat; and product gross margin to remain slightly negative for the foreseeable future. It expects continued investment in sales and marketing, research and development, network infrastructure and customer support.
- Management stated that cash, short-term investments and the available revolver should meet cash needs for at least the next 12 months. The $12 million revolver matures in July 2016 and includes a subscriber-related financial covenant. The company reported covenant compliance at April 30, 2016.
- Operating cash flow turned negative year over year. Management expects continued losses and negative operating cash flows for the foreseeable future; the filing does not give a profitability timetable.
- Material litigation includes an IPO-related securities class action and lawsuits concerning alleged 911-fee collection and remittance obligations in Pennsylvania and Alabama. A patent-infringement complaint from Deep Green Wireless was filed June 8, 2016, after quarter-end. The company disputes the claims; it says potential losses in these matters are not reasonably estimable and recorded no material reserves for them.
- Other significant risks include customer acquisition and churn, competition, reliance on retail/reseller and third-party network/manufacturing partners, service interruptions and cybersecurity, regulatory and tax exposure, and the company’s history of losses. The filing cites intermittent outages in April and May 2015 and says corrective actions are ongoing.
- The company reported effective disclosure controls as of April 30, 2016, and no material change in internal control over financial reporting during the quarter. It also disclosed $2.6 million of non-cancelable purchase commitments and $2.82 million of operating lease obligations.
Important facts for investors to verify
- Whether recurring-revenue and user growth continue, and whether retention remains above 100%.
- Whether elevated stock-based compensation and operating expenses moderate, and how they affect GAAP losses and cash flow.
- The revolver’s status at its July 2016 maturity, including renewal or replacement and continued covenant compliance.
- Developments in the securities, 911-fee and patent litigation, including any change in the company’s assessment of potential losses.
- Whether product margins recover from the quarter’s negative 19% and how the revenue mix affects total gross margin.