Ooma, Inc. — Q3 Fiscal 2016 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2015; comparisons are with the corresponding 2014 periods. Ooma provides cloud-based communications and connected services for small businesses, home and mobile users. The company completed its IPO on July 22, 2015.
Financial performance
| Metric | Three months ended October 31 | Nine months ended October 31 |
|---|---|---|
| Revenue | $23.5 million, up 28% from $18.3 million | $64.5 million, up 26% from $51.3 million |
| Subscription and services revenue | $19.5 million, up 36% | $52.5 million, up 38% |
| Product and other revenue | $4.0 million, up 1% | $12.0 million, down 11% |
| Gross profit / gross margin | $12.5 million / 53%, versus $9.4 million / 51% | $33.7 million / 52%, versus $25.6 million / 50% |
| Operating expenses | $16.0 million, up 47% | $43.2 million, up 55% |
| Operating loss | $3.5 million, versus $1.5 million | $9.5 million, versus $2.3 million |
| Net loss | $3.5 million, versus $1.7 million | $10.9 million, versus $2.3 million |
| Adjusted EBITDA (non-GAAP) | Loss of $1.5 million, versus $0.8 million | Loss of $5.3 million, versus $0.9 million |
| Operating cash flow | Not separately presented in the supplied filing text | Cash used of $0.7 million, versus $3.4 million |
Quarterly subscription growth reflected a 26% increase in core users to approximately 761,000 from 604,000, and higher average quarterly subscription revenue per core user. The nine-month subscription increase was also primarily user-driven. Product and other revenue fell year to date, partly due to lower average selling prices and reduced sales to a reseller. Subscription and services represented 83% of quarterly revenue, compared with 78% a year earlier.
Financial position and liquidity
- Cash and cash equivalents were $57.3 million at October 31, 2015, compared with $9.1 million at January 31, 2015; total assets were $79.8 million.
- Operating cash use was $0.7 million for the nine months. Investing activities used $1.1 million; financing activities provided $50.0 million, including approximately $57.0 million of net IPO proceeds and $5.0 million from preferred stock issuance.
- The company used approximately $10.3 million of IPO proceeds to repay outstanding debt. At quarter end, debt was primarily capital lease obligations: $0.7 million current and $0.1 million long term. The $12.0 million revolving facility was undrawn and available; management said cash and facility availability should cover needs for at least 12 months.
- Current liabilities were $35.4 million, including $15.5 million of current deferred revenue. Stockholders’ equity was $44.1 million, versus a $45.1 million deficit at January 31, 2015, largely reflecting the IPO and preferred-stock conversion.
Material changes and management commentary
- Revenue growth outpaced gross-profit growth, but operating expenses increased substantially, driven by hiring, marketing, research and development, public-company costs and higher stock-based compensation. Nine-month stock-based compensation was $2.7 million, versus $0.2 million.
- Gross margin improved as the revenue mix shifted toward higher-margin subscriptions. Subscription and services gross margin was 66% for the quarter; product and other gross margin was negative 7%. Management expects product margins to fluctuate around low levels or break-even and anticipates subscription margins may improve over the long term, while noting near-term variability.
- Core users reached approximately 761,000 versus 604,000 a year earlier. Annualized exit recurring revenue was $74.4 million versus $57.2 million. Annual net dollar subscription retention declined to 97% from 102%, which management attributed primarily to slower growth in average revenue per user.
- Management expects subscription and services revenue to increase with user growth; product and other revenue is expected to remain relatively flat or decline slightly. Sales and marketing expenses are expected to increase as the company grows its user base; research and development and general and administrative expenses are expected to grow modestly. The filing provides no specific numerical earnings or revenue guidance.
Risks, contingencies and unusual items
- The company continued to report losses and expects investment and negative cash flows to continue; it had an accumulated deficit of $61.6 million. Management cautioned that interim results are not necessarily indicative of full-year results.
- Service continuity is a key risk: the filing describes intermittent outages in April and May 2015, lasting up to approximately eight hours for some customers. Ooma reported corrective actions, but acknowledged that future outages could harm retention, reputation and results.
- Two lawsuits were disclosed: a putative class action alleging unauthorized text messages under the Telephone Consumer Protection Act, and an Alabama lawsuit concerning collection and remittance of 9-1-1 fees. Ooma disputes the claims; potential losses were not reasonably estimable, and no related reserves were recorded. The filing also states no loss-contingency accrual was recorded as of October 31, 2015.
- Other principal risks include customer churn, competition, dependence on retail/reseller channels and third-party manufacturers and network providers, regulatory changes and potential communications taxes or fees, and data-security or privacy incidents.
- Management reported disclosure controls effective as of October 31, 2015. Separately, the filing discusses a previously identified material weakness in internal control over financial reporting for fiscal 2013–2015 and remediation efforts; the company had not yet completed a Section 404 evaluation or auditor attestation.
- The IPO triggered preferred-stock conversion and settlement or reclassification of preferred-stock warrants. Nine-month results also included a $0.3 million non-cash write-off of deferred debt issuance costs following debt repayment and significant IPO-related stock compensation.
Key investor verification points
- Track recurring-revenue growth, core-user additions and retention, particularly the decline in net dollar subscription retention to 97%.
- Assess whether subscription growth and mix improvements can offset low or negative product margins and rising operating expenses.
- Reconcile ongoing cash burn and the path to profitability with management’s liquidity assessment and the availability and terms of the revolving credit facility.
- Monitor the TCPA and Alabama 9-1-1 lawsuits, related regulatory developments and any resulting costs or liabilities.
- Review remediation of the previously identified internal-control material weakness and the effect of equity awards, share issuance and the January 2016 IPO lock-up expiration on dilution and trading supply.