Ooma, Inc. (NYSE:OOMA) Q2 2024 Earnings Call Transcript

Ooma, Inc. (NYSE:OOMA) Q2 2024 Earnings Call Transcript August 23, 2023

Ooma, Inc. reports earnings inline with expectations. Reported EPS is $0.14 EPS, expectations were $0.14.

Operator: Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to Ooma’s Fiscal Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Matt Robison, you may begin your conference.

Matthew Robison: Thank you, Emma. Good day everyone and welcome to the fiscal second quarter 2024 earnings call of Ooma, Inc. My name is Matt Robison, Ooma’s Director of IR and Corporate Development. On the call with me today are Ooma’s CEO, Eric Stang; and CFO, Shig Hamamatsu. After the market closed today, Ooma issued its fiscal second quarter 2024 earnings press release. This release is also available on the company’s website, ooma.com. This call is being webcast live and is accessible from a link on the Events & Presentations page of the Investor Relations section of our website. This link will be active for replay of this call for at least one year. A telephonic replay will also be available for a week starting this evening about 8:00 PM Eastern Time.

Dialing information for it is included in today’s press release. During today’s presentation, our executives will make forward-looking statements within the meaning of the Federal Securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today and those risks more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof and we disclaim any obligation to update any forward-looking statements, except as required by law.

Please note that other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non-GAAP basis. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures is included in our earnings press release, which is available on our website. On this call, we will give guidance for the third quarter and full year fiscal 2024 on a non-GAAP basis. Also, in addition to our press release and 8-K filing, the Overview page and Events & Presentations page in the Investors section of our website as well as the Results page of the Financial Info section of our website include links to information about costs and expenses not included in our non-GAAP values and key metrics of our core subscription businesses.

These are titled Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally, our investor presentation slides include GAAP to non-GAAP reconciliation that also provides resolution of GAAP expenses that are excluded from non-GAAP metrics. Now, I will hand the call over to Ooma’s CEO, Eric Stang.

Eric Stang: Thank you, Matt. Hi everyone. Welcome to Ooma’s second quarter fiscal year 2024 earnings call. Thanks for joining us. I’m pleased to report Ooma performed well in Q2. I’m looking forward to reviewing our accomplishments and the progress we’ve made on the several growth initiatives we have underway this year. Financially, Ooma achieved $58.4 million in revenue, $3.8 million in non-GAAP net income, $4.9 million of EBITDA, and $3.6 million in cash flow from operations in Q2. We also managed OpEx spending well in the quarter and reduced our inventory. Regarding growth, our important business subscription services revenue grew 27% year-over-year. Overall, we ended the quarter with $215 million of annualized exit recurring revenue, up 15% versus a year ago.

I believe we executed well in Q2 to drive these results and that Ooma is in a strong position today to pursue its strategy and growth initiatives. During Q2, we continued to invest in Ooma Office, which of course is our award-winning solution specifically designed for small to medium-sized businesses, which seek a combination of advanced features, ease of use, and affordability. We added to Pro Plus, our top service tier, several new features to facilitate collaboration and customer interaction, including online bookings, one to many messaging, team chat, and new CRM integrations with Zoho and Freshdesk. We also improved our Office Desktop app introducing an updated user interface and faster performance for a more cohesive user experience that simplifies interactions.

These feature enhancements continue our strategy to build out the capabilities available in our Pro Plus service tier, which, along with our Pro service tier, allow us to target slightly larger customers and drive higher revenue per user. We feel our Ooma Office strategy is working by allowing us to serve increasingly larger customers, while maintaining our longstanding focus on making communications approachable for businesses of any size. As in past quarters, more than half of our new Office users in Q2 selected one of these two premium tiers as we continue our journey to democratize advanced technology and make it accessible to small and medium-sized businesses. While Ooma Office is targeted at businesses one to 20 users in size, I’m pleased to report our largest Office customer win in Q2 was a 286 user account which valued the flexibility and affordability of our solution.

We’re also seeing interest in Office from potential partners to see Office as a good fit with their products and services. Last quarter, you may recall, we announced a partnership with NexHealth, which focuses on the dental space, and we have additional Office partnerships in progress. For the rest of this year, our plans for Ooma Office are to continue to build out the Pro Plus tier feature set and to enable more partners to integrate with, and in some cases, resell, Ooma Office. We also continue to invest in Ooma Enterprise, our solution targeted at larger-sized businesses in select verticals or in need of customization. One focus for us is hospitality customers, where we continued in Q2 to secure wins with major brand hotels. We also began working recently with a new partner to enable our core telephony and SMS capabilities in their platform in support of an artificial intelligence use case.

Ooma Enterprise will be incorporated into the partner solution via a CPaaS-like business model. Our partner already has several alpha customers deployed and is targeting launch this year. While we don’t specifically promote Ooma Enterprise as a CPaaS solution, I believe this one-off use case demonstrates the ultimate power of our platform to adapt to bespoke needs. For the rest of this year, our plans for Ooma Enterprise are to continue our industry-focused strategy, while also growing our network of telecom agents and resellers. We’re also making investments to expand internationally. As planned, we made a major step forward in Q2 with our largest customer by putting in place the capability to serve them in a new region of the world. Over the coming weeks, we will begin rollout in earnest in this new region.

I’m also pleased to report that during Q2, we were able to add more users than we anticipated and we gained visibility for increasing to a 100,000 users or more with this customer. For the balance of this year, we will focus on implementing our service for this customer in the new region plus at least one additional region as well as on continuing to onboard their users. Our largest area of investment at this time is Ooma AirDial, our integrated solution to replace aging and expensive copper lines that serve critical infrastructure and other specialized applications. As you know, we see a massive market opportunity for AirDial, both in the USA and in other countries. Our feature enhancements to AirDial continued in Q2 as we brought out version 2.0 of our Remote Device Manager, implemented network side autodial features to support older emergency phones, and implemented modem support to make remote programming of door access systems more reliable.

There is a long tail of specialized and older equipment relying on copper lines today and we feel our ability to control the total end to end solution is an advantage as we evolve AirDial to meet all the needs of the market. Owning all aspects of our platform end-to-end has allowed us to adapt the AirDial platform to serve the needs of customers with challenging use cases, including in circumstances where those customers have had another provider failed previously. Commercially, we announced earlier this month and UScellular completed its launch planning and began offering AirDial through its sales organization. In fact, I’m pleased to report that UScellular’s first customer win with a customer requiring 136 lines occurred in Q2, even before the formal launch date.

In this case, AirDial displaced a competitor whose products were not working well and we helped UScellular deliver a solution in a situation where the customer needed to maintain compliance in a very short timeframe. As in past quarters, our sales funnel for AirDial continued to build in Q2 and we had some notable wins in the quarter. Our largest Q2 win was a restaurant group, which will deploy over 750 lines. Just days after the end of Q2, we also won a large retailer opportunity, representing approximately 800 lines. Both of these opportunities came through partners of ours who are reselling AirDial. Just this week, we made a further exciting announcement regarding AirDial. I’m pleased to report that the largest REIT in the world, Prologis, will offer both Ooma AirDial and Ooma Office through their Essentials platform.

This platform provides building and other services to Prologis’ large base of customers. We’re thrilled they have chosen Ooma as their featured and only solution for parts replacement and business communications. Bringing on partners is one of our key strategies to drive AirDial growth. Most typically, our partners resell AirDial, but in some cases, they refer customers to us. This last quarter, in addition to UScellular and Prologis, we also established new partnerships with two CLEX, two aggregators, and two other resellers. Our plans for the rest of this year for AirDial are to grow our sales and go-to-market resources significantly, establish more resale partnerships, and further enhance the differentiation of our solution. As I’ve outlined, we have a lot of initiatives underway and it’s an exciting time for us.

I will now turn the call over to Shig, our CFO, to discuss our results and outlook in more detail and then return with some closing remarks.

Shig Hamamatsu: Thank you, Eric and good afternoon everyone. I’m going to review our second quarter financial results and then provide our outlook for the third quarter and full year fiscal 2024. We delivered another strong quarter with a total revenue of $58.4 million, exceeding our guidance range of $57.4 million to $57.9 million. On a year-over-year basis, portal revenue grew 11% in the second quarter, driven by the strength of Ooma business as well as the addition of OnSIP. In the second quarter, business subscription and services revenue accounted for 57% of total subscription and services revenue as compared to 51% in the prior year quarter. Q2 product and other revenue came in at $3.6 million as compared to $4.7 million in the prior year quarter.

The prior year Q2 product revenue included certain accessory sales that did not recur this year. On the profitability front, the second quarter non-GAAP net income was $3.8 million at the high end of our guidance range of $3.5 million to $3.8 million and represented 26% increase over $3 million in the prior year quarter. Now, some details on our Q2 revenue. Ooma business subscription and services revenue grew 27% year-over-year in Q2, driven by user growth and the addition of OnSIP. Excluding the effect of OnSIP revenue contribution, Ooma business subscription and services revenue grew 15% year-over-year. On the residential side, subscription and services revenue were flat year-over-year. As a reminder, we had a one-time churn event during the first quarter with a particular customer with an unusual application where we lost approximately 4,000 fellow users and we saw a full quarter impact of it in Q2.

We expect Residential subscription revenue growth to resume at the low single-digit percentage on a year-over-year basis in the second half of this fiscal year. For the second quarter, total subscription and services revenue was $54.7 million or 94% of total revenue as compared to $48 million or 91% of total revenue in the prior year quarter. Now, some details on our key customer metrics. We ended the second quarter with 1.237 million core users, up from 1.225 million core users at the end of the first quarter. At the end of the second quarter, we had 467,000 business users or 38% of core — total core users, an increase of 18,000 from Q1. Our blended average monthly subscription and services revenue per core user or ARPU increased 5% year-over-year to $14.51, driven by an increase in mix of business users including higher ARPU Office Pro and Pro Plus users.

During the second quarter, we continue to see a healthy Office Pro and Pro Plus take rate with 55% of new Office users opting for these higher tier services, which was up from 47% in the prior year quarter. Overall, 27% of Ooma Office users have now subscribed to our Pro or Pro Plus tier. Our annual exit recurring revenue grew to $215.4 million and was up 15% year-over-year. Our net dollar subscription retention rate for the quarter was 99% as compared to 99% in the first quarter. Now, some details on our gross margin. Our subscription and services gross margin for the second quarter was 72% as compared to 74% in the prior year. As a reminder, subscription and services gross margin for the second quarter this fiscal year included the impact of OnSIP gross margin, which is running lower relative to Ooma’s subscription gross margin of 73% when OnSIP is excluded.

Q2 subscription and services gross margin this year was also impacted by certain upfront investments we made for our largest customer as we prepare for further expansion into new regions in the second half of this fiscal year. Product and other gross margin the second quarter was negative 73% as compared to negative 31% for the same period last year. As mentioned on our last call, the decline in Q2 product gross margin this year versus last year was anticipated and was primarily due to the following three factors. First, we saw the sell through impact of certain higher cost components that we had procured in the last fiscal year to stay ahead of pandemic driven supply chain issues. Second, that prior year Q2 product gross margin benefited from certain accessories sales that did not recur this year.

And third, we incurred non-recurring facility cost as we completed our move to a new warehouse facility during the quarter. We continue to expect product and other gross margin for the remainder of fiscal 2024 to be negatively impacted by one-time excess component costs running through the P&L and currently estimate product and other gross margin for the second half of this fiscal year to be in the neighborhood of negative 65%. On an overall basis, total gross margin for Q2 was 63% as compared to 65% in the prior year quarter. And now some details on operating expenses. Total operating expenses for the second quarter were $33.2 million, up $2.1 million or 7% from the same period last year. Excluding the impact of OnSIP, the total operating expenses increased $1.1 million or 4% from the same period last year.

Sales and marketing expenses for the second quarter was $17.7 million or 30% of total revenue, up 7% year-over-year, driven by higher marketing and channel development activity for Ooma Business, which includes AirDial as well as the addition of OnSIP-related expense. Research and development expenses were $10.6 million or 18% of total revenue, up 7% on a year-over-year basis from $9.9 million, driven by investments in new features for both Ooma Office and Ooma Enterprise as well as new products such as AirDial. A portion of the year-over-year increase in R&D expense was also for the activities related to international expansion with our largest customer and the addition of OnSIP team members. G&A expenses were $4.9 million or 8% of total revenue for the second quarter compared to $4.5 million for the prior year quarter.

The year-over-year increase in G&A expenses was primarily due to an increase in personnel costs and the addition of OnSIP. Non-GAAP net income for the second quarter was $3.8 million or diluted earnings per share of $0.14 as compared to $0.12 in the prior quarter. Adjusted EBITDA for the quarter was $4.9 million or 8% of total revenue and represented 22% increase over $4 million for the prior year quarter. We ended our quarter with total cash and investments of $29.5 million, which increased from $28.4 million at the end of Q1. We generated cash from operations of $3.6 million, which was up from $2.2 million in the same period last year. On the headcount front, we ended a quarter with 1,108 employees and contractors. Now, I’ll provide a guidance for the third quarter full fiscal year 2024.

Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization of intangibles, and certain non-recurring expenses. We expect total revenue for the third quarter of fiscal 2024 to be in the range of $59 million to $59.6 million, which includes $3.7 million to $4 million of product revenue. We expect third quarter net income to be in the range of $3.8 million to $4.1 million. Non-GAAP diluted EPS is expected to be between $0.14 to $0.16. We have assumed 26.3 million weighted average diluted shares outstanding for the third quarter. For full year fiscal 2024, we expect total revenue to be in the range of $235.5 million to $237 million. The adjustment to the high end of the guidance range is related to our expectation around the timing of AirDial product revenue within this fiscal year.

While we are very excited about growing pipeline of AirDial opportunities, we believe some shipments of AirDial hardware will be deferred to next fiscal year, primarily due to customer-driven timeline. As for business subscription and services revenue for the year, we expect a year-over-year growth rate of 18% to 20%, which is unchanged from our prior expectation. In terms of revenue mix for the yea, we expect approximately 93% of total revenue to come from subscription and services revenue and the remainder from products and other revenue. In terms of profitability, we are raising the bottom end of our prior guidance range. We expect non-GAAP net income for fiscal 2024 to be in the range of $15.5 million to $16.5 million. Based on this guidance range, we estimate our adjusted EBITDA for fiscal 2024 to be $19.5 million to $20.5 million or approximately 9% of revenue at the upper end of the range.

We expect non-GAAP diluted EPS for fiscal 2024 to be in the range of $0.59 to $0.63. We have assumed approximately 26.4 million weighted average diluted shares outstanding for fiscal 2024. In summary, we are pleased with a solid performance in the second quarter and remain focused on executing to our long-term strategy to achieve profitable growth. I’ll now pass it back to Eric for some closing remarks. Eric?

Eric Stang: Thank you, Shig. This month marks 20 years since the original two founders of Ooma hired a small team and got to work. In that time since, we have developed into a successful growing public company with over 2 million users and over 1,100 employees and contractors. Over the last 20 years, we believe we have saved our customers billions of dollars in the aggregate compared to what they would have paid with traditional phone service solutions, while also bringing them advanced features previously unavailable to smaller businesses and consumers. Perhaps most exciting for us, that we have become a leader in the disruptive change underway in communications made possible by cloud technology. With the strong market position we have built over the last 20 years and the multiple growth initiatives we have underway, we’re excited about our outlook. Thank you. we’ll now take your questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Mike Latimore with Northland Capital. Your line is open.

Mike Latimore: Great. Thanks gents. Congrats on the good solid results there. So, the Prologis partnership is interesting. What are the next steps there in terms of getting that fully launched?

Eric Stang: It will take at least a few weeks, maybe a little longer, it depends on how fast they move. They have to put us into their Essentials platform, which is a web-based solution for their customers to draw on. They have certain categories of capabilities they have in that platform. We’ll be kind of a new area for them with communications, but I think it’s not only important for being part of the Essentials platform, but also I think it demonstrates the whole REIT community what Ooma can bring. And I know many REITs out there look to Prologis because they’re clearly the leader in the world in that space. So, I think it was important for us to get the press release out and just continue the awareness building that we’re trying to do for that space.

Mike Latimore: Great. And then on your largest customer, you talked about being a path towards a 100,000 users there. Can you just mention, like, what is the user count presently? And, also, just, why did some of your AirDial customers push out their timing?

Eric Stang: So, with our largest customer, that’s a — they’re obviously taking com combination of Ooma Office and Ooma Enterprise from us. We’re over 80,000 users with them today, and, I can see us being at a 100,000 or more by fiscal year end. And we’ve always thought we’d get there, but I feel — I have you more visibility now than we’ve had about our path there. It’s great to have our new node up and running in a new region of the world and to have some customers on it already and be planning the major rollout that now comes with that. And having got that one up and running, I think we’ve worked out the kinks a fair bit in terms of putting up the next one and the next one. So, I feel like we did some lifting in Q2, and we’re in a great position as we go forward to Q3.

On the AirDial front, the second part of your question, it baffles me a little bit, Mike, because we save our customers so much money compared to what pops [ph] is now costing them. It baffles me sometimes why they don’t move faster. But the savings are clearly compelling and I think that’s what I really turned to in terms of my confidence in AirDial and where we’re going. To be honest, we just need to look forward with what we know and not speculate on what we think we can also achieve. And I can tell you we have a significant pipeline, we have deals out for signing. We have a lot of things that we think are going to come in the back half of this year, but we’ll have to — it’s a little bit harder to predict than our traditional areas of the company that we’ve been at longer and in which are more steady.

So, as things happen, we’ll keep you guys updated and we’ll see where we’re at the end of Q3.

Mike Latimore: All right. Sounds good. Thanks.

Operator: Your next question comes from the line of Matt Stotler with William Blair. Your line is now open.

Alex Vasti: Hey, guys. This is Alex on for Matt. Thanks for taking our questions. Just a first one for me. Maybe could you touch on the progress that’s been made with Jazzware and NexHealth, those partnerships that were announced earlier in the year? How’s the progress going with those rollouts and maybe how those how you see those layering into the overall business going forward?

Eric Stang: Sure. So, on the first one, the progress with Jazzware, they’re a partner of ours for the hospitality space with our Enterprise solution and that, that’s gone well. We continue to grow in that space. Like I was just describing for AirDial, we have some significant opportunities in front of us as well. They’re more of a technology enabler for us because with the Jazzware capability combined with ours, we can make our system do more for the customer. So, I would say that’s rolling well. NexHealth, I think we had slower progress than anticipated in Q2 and that’s turning around now for Q3. As we brought the solution into the market, we realized some additional integrations that we wanted to have with it, we and they together. And so, we have customers using it and things — and all that, but we did some further development in Q2. And I think we’re really just turning up sales efforts on it more this quarter.

Alex Vasti: Got it. Sounds good. Thank you for that. And then, maybe just one on OnSIP, can you give us an update on how the acquired business from OnSIP is integrating with the rest of the Ooma portfolio, alongside maybe any growth contribution you can share to the overall business? Thanks.

Eric Stang: Sure. So, from an integration into our business standpoint, it’s been seamless and everything we planned and more. The members of the OnSIP team have folded into Ooma, some activities have changed for some people, some people are working on what we were doing on the Ooma side before we got together, but nonetheless, the OnSIP platform, we continue to drive development in some — in certain areas and certainly continue to drive sales and marketing for it. I will tell you that when we make our decisions now, we don’t think so much about we want to do this for OnSIP, we’re going to do that for Ooma. We think about customer acquisition cost, payback, and, channels to market, and we’re always measuring what we do. And so I would say that we aren’t spending all that much on growth for the OnSIP platform today.

We found that that some of the things we’re doing more with — under the Ooma brand, if you will, have been, more powerful for us, but we are still investing in OnSIP, and they brought on a meaningful number of users last quarter. But we’re not seeing — we’re not driving a lot of growth in OnSIP per se, but certainly, it’s fungible where we spend the money. With OnSIP here, they’re positively contributing to our bottom-line and we have sales and marketing budget from that and we just allocate where we think we can make the biggest impact. So, that’s kind of how we look at it and, we were fortunate. OnSIP was a very mature platform that runs very, very well. We did bring out — I should say, they are already well along with, but we finished up and brought out a new admin portal that I think is a nice step forward for them.

We’ve made some additions and changes to their mobile app. But really, we can kind of view this as part of the Ooma portfolio now and kind of run our sales and marketing as one company. And that’s how we’re doing it.

Alex Vasti: Got it. Perfect. Thank you. I’ll pass it on.

Eric Stang: Thank you. Thanks Alex.

Operator: Your next question comes from the line of Josh Nichols with B. Riley. Your line is open.

Josh Nichols: Yes. Thanks for taking my question. Just to dig in a little bit more, it’s good to hear about all the new wins and growing funnel for AirDial. But where do we stand today as far as how many units have been installed, if you could kind of, pontificate a little bit about where the backlog is today in terms of number of units, so we could get some idea of what that growth potential should like whenever the deliveries and installations do start to ramp?