Ooma, Inc. — Q3 Fiscal 2018 Form 10-Q
Business context and reporting period. Ooma provides cloud-based communications and connected services to residential, small-business and mobile customers. This unaudited quarterly report covers the three and nine months ended October 31, 2017; the comparable periods ended October 31, 2016. The company sold its Business Promoter service in August 2017 to focus on Ooma Telo and Ooma Office (Small Business).
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $28.5m | $27.0m | $84.3m | $77.0m |
| Gross profit / margin | $17.2m / 60% | $15.3m / 57% | $49.8m / 59% | $43.5m / 57% |
| Operating loss | $(3.3)m | $(2.9)m | $(10.6)m | $(10.4)m |
| Net loss | $(3.2)m | $(2.8)m | $(10.2)m | $(10.1)m |
| Adjusted EBITDA | $(0.04)m | $0.08m | $(0.04)m | $(1.59)m |
| Basic and diluted loss per share | $(0.17) | $(0.16) | $(0.55) | $(0.58) |
Revenue mix and growth. Subscription and services revenue was $25.5m in Q3, up 10%; product and other revenue was $3.0m, down 22%. For the nine months, subscription and services revenue rose 12% to $74.8m, while product and other revenue declined 4% to $9.4m. Management attributed subscription growth mainly to core-user growth and Small Business revenue; Q3 Small Business revenue increased 59% and Ooma Telo revenue increased 11%. The company reported approximately 914,000 core users, up 10% year over year, annualized exit recurring revenue of $96.8m, and annual net dollar subscription retention of 99%.
Margins and expenses. Q3 subscription and services gross margin improved to 70% from 68%; product and other gross margin was negative 25%, versus negative 12%. For the nine months, the respective margins were 69% versus 67% and negative 20% versus negative 15%. Management said Q3 subscription margin benefited partly from credits that are not expected to recur in Q4. Operating expenses increased 12% in both comparison periods; research and development rose 20%, reflecting personnel and infrastructure investment.
Cash flow, liquidity and obligations. For the nine months, operating cash flow was $2.4m, compared with cash used of $0.2m a year earlier; investing activities used $1.3m and financing activities used $0.1m. Cash and cash equivalents were $4.9m and short-term investments $48.6m at October 31, 2017, totaling $53.5m. Current assets were $67.5m and current liabilities $35.0m. The balance sheet reports no outstanding debt; operating lease commitments totaled $4.5m and purchase commitments were $1.9m. Management said available cash, cash equivalents and short-term investments should meet cash needs for at least 12 months.
Material changes and unusual items
- Quarterly net loss widened to $3.2m from $2.8m despite higher revenue and gross margin; nine-month net loss was broadly unchanged. Operating losses increased as operating expenses grew faster than gross profit.
- Q3 revenue included no ongoing Business Promoter revenue following its sale; the comparable prior-year quarter included approximately $1.2m from the service. The nine-month comparison included approximately $1.8m versus $4.4m of Business Promoter revenue. Ooma received no cash proceeds at sale and may receive quarterly earn-outs over five years, up to $4.5m; the Q3 earn-out was not material.
- Stock-based compensation was $8.7m for the nine months, compared with $7.2m a year earlier. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- Cash and investments were nearly unchanged from January 31, 2017, while the accumulated deficit increased to $88.0m. No income-tax provision or benefit was recorded; deferred tax assets remain fully valuation-allowanced.
Outlook, risks and contingencies
Management provided no specific numerical revenue or earnings guidance in this filing. It expects subscription and services revenue to grow with core users, particularly Small Business, and expects product and other revenue to continue declining year over year. It anticipates continued investment in sales and marketing, research and development, network capacity and customer support; product margins are expected to remain negative for the foreseeable future. These are expectations, not guaranteed results.
- Accounting change: Ooma expects to adopt the new revenue standard in fiscal 2019. Channel product revenue is expected to move from recognition on partner resale (sell-through) to initial sale to partners (sell-in); sales incentives will reduce transaction price. The company expects to capitalize a significant portion of sales commissions, increasing deferred costs. It had not determined whether the revenue effect would be material.
- Litigation and regulatory exposure: Material matters include Oregon emergency communications tax litigation, Deep Green Wireless patent litigation, IPO securities litigation and Berks County, Pennsylvania 911-fee litigation. The company said reasonably possible material losses or ranges were not estimable for these matters. The Securities Litigation court dismissed certain claims with prejudice on November 29, 2017, while other motions were denied.
- Business risks: The filing highlights competition, customer churn, dependence on retail/reseller channels and third-party manufacturers and network providers, service outages, cybersecurity and privacy risks, and the costs and uncertainty of expanding internationally.
- Regulatory and tax risks: Changes to VoIP, emergency-calling, net-neutrality, privacy and indirect-tax requirements could increase costs or affect service availability. Accrued regulatory fees and taxes were $5.4m at October 31, 2017.
Most important facts for investors to verify
- Whether core-user, recurring-revenue and retention growth continues, particularly in Small Business, and whether it converts into sustained GAAP profitability.
- Whether subscription margin gains persist after the Q3 credits that management said would not recur in Q4, and how product mix affects total margin.
- The timing and financial-statement effects of adopting the new revenue and commission accounting standard, including the sell-in revenue transition and commission capitalization.
- Developments, potential costs and insurance coverage for the disclosed litigation and tax disputes; the filing does not provide estimable loss ranges for the identified cases.
- Whether cash generation remains positive as operating investment continues, and how lease, purchase and regulatory-fee obligations evolve.