Ooma, Inc. (NYSE:OOMA) Q3 2023 Earnings Call Transcript

Ooma, Inc. (NYSE:OOMA) Q3 2023 Earnings Call Transcript November 30, 2022

Ooma, Inc. beats earnings expectations. Reported EPS is $0.14, expectations were $0.11.

Operator: Hello, and welcome everyone to the Ooma Third Quarter Fiscal Year 2003 Financial Results Call. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, there will be a question-and-answer session. Thank you. And I would now like to turn the conference over to Mr. Robison. Please go ahead.

Matthew Robison: Thank you, Savannah. Good day, everyone, and welcome to the third quarter fiscal year 2023 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 third quarter fiscal year 2023 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 and 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 08:00 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 of 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 fourth quarter and full year fiscal 2023 on a non GAAP basis. Also in addition to our press release and 8-K filing, the Overview page and Events and Presentations page in the Investors section of our website, as well as the results page or 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.

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Eric Stang: Thank you, Matt. Hi, everyone. Welcome to Ooma’s Q3 Fiscal Year 2023 Earnings Call. Thank you for joining us. It’s my pleasure to talk with you today about our excellent results for the Q3 quarter just ended and the many growth initiatives we have underway for Q4 and next year. I’m delighted to report for Q3 FY ’23 that Ooma outperformed on both the top line and bottom line. Q3 revenue of $56.7 million was up $4 million sequentially and up $7.5 million year over year through a combination of growth across all parts of our business and the acquisition of OnSIP, which we announced last quarter. Similarly, non GAAP net income of $3.5 million was up over previous periods, in line with our plan announced last quarter to trim spending modestly, bolster cash flow from operations and position ourselves better to take advantage of additional inorganic growth opportunities in the future should they come along.

All in, Q3 was an excellent quarter. Turning now to Ooma Office, which, of course, is our solution for serving small to medium sized businesses. We announced during Q3 the addition of five new features to our top service tier plan, the Pro Plus tier. These added features bring even more sophisticated capabilities too small to medium businesses in an intuitive and easy to use way and include enhancements to improve simple call center activities and integration with Microsoft Dynamics 365. These new features represent one step in an ongoing effort we have underway over the next several quarters to add new features to the Pro Plus service tier, allowing us to serve even larger sized businesses with Ooma Office and continue to raise our revenue per user.

I’m happy to report that during Q3, 50% of our new office users adopted a premium service tier, either Pro or Pro Plus. And then about 10% of the users who did select a premium tier chose our highest tier Pro Plus. We believe our strategy to provide even more advanced features for small to medium businesses in an easy and intuitive way is working and we are excited about our plans for Q4 and next year. Regarding Ooma Enterprise, which, of course, is our offering for serving larger sized businesses that need extensive and customized solutions, we continue to make good progress in our targeted verticals. One such vertical is hospitality, where we added more than 40 new properties in the quarter, up from about 25 the quarter before and about 15 the quarter before that.

To further support growth, we are developing relationships with larger hotel groups as part of our strategy to continue to expand in this vertical. We believe our strategy with Ooma Enterprise to target customers who need flexible solutions is finding traction in the market. Now in regard to international expansion with our largest customer, we continued to execute well in Q3. I’m pleased to report we now serve more than 50,000 users with this customer. We have achieved this one quarter ahead of the plan we set at start of this year. Our outlook for growth in Q4 remains robust, but lower than in Q3 given the holiday period in Q4. Looking out to next year, we believe at this time that Q1 will line up to be the highest growth quarter so far with this customer and that we will continue significant growth in users throughout next year.

We are thrilled to enable a unique solution for this customer and are excited about planning for rollout to new regions next year beyond North America and Europe. We discussed at length on our last conference call that our acquisition of OnSIP affords us an additional opportunity for profitable growth. As a reminder, OnSIP operates its own internally developed UCaaS platform that is used today by approximately 5,000 customers, comprising approximately 50,000 users. The short term goals we laid out last quarter for OnSIP were to maintain low churn, integrate the team, drive cost synergies at the gross margin line and make the acquisition accretive in this Q4. I’m pleased to report that we are ahead on each of these goals and that OnSIP turned EBITDA accretive in Q3 one quarter early.

We’re very appreciative of the hard work that both the Ooma team and the OnSIP team have put into making this acquisition a success. As you know, in addition to our strategic efforts to grow Ooma Office and Ooma Enterprise, integrate OnSIP and expand internationally were heavily engaged in capturing the large opportunity to replace the sun setting of copper lines with our new solution AirDial. We continue to make great progress with AirDial in Q3. As was the case in Q2, AirDial orders outpaced installations as customers require time to test AirDial and to plan equipment installation across multiple sites. Our largest AirDial order in Q3 was for 300 lines to an organization with a large number of locations. As anticipated, AirDial was also opening up new agent relationships and we were able to add more agents in Q3 than in previous quarters.

One particularly exciting development is T-Mobile for Business began reselling AirDial in Q3. Based on the progress we’ve made over the last three months, we’re excited about the potential of this partnership and anticipate that T-Mobile will become a significant reseller of AirDial. One particular benefit of our T-Mobile partnership is that T-Mobile opens up access for AirDial to government entities that procure through special purchasing vehicles. This can be essential in selling to state, local and educational entities. Including T-Mobile, we now have six strategic partners signed up are already reselling AirDial. Looking forward, we are in active discussions with several other potential resale partners, some of whom are national in scope.

Finally, regarding AirDial, it was exciting in Q3 to win several awards. In August, we announced that AirDial won best endpoint product for 2022 and the prestigious UC Awards from the publication UC today. And in November, we announced that TMC named Ooma AirDial as a 2022 TMC Labs Internet Telephony Innovation award winner. There is growing awareness of the sun setting of copper lines and we are committed to building recognition of AirDial, which we believe is the best solution in the market today for serving elevator gate, pool and door phones, fire and burglar alarm panels and other devices that require an analog line connection. I’m also excited to report that Ooma Business was named a UCaaS leader in Frost and Sullivan’s October Frost Radar Report.

The report states that through innovation, organic growth and strategic acquisitions, Ooma has quickly earned a top spot in the North American hosted IP telephony and unified communications market. And the report goes on to say that Ooma’s dedication to removing the complexity of purchasing and using business phone service makes the company particularly well positioned to capitalize on the rise in hybrid work. I’m very happy for the entire Ooma team to see Frost and Sullivan recognize our efforts. Switching now to the residential front, we continue to drive modest growth with subscription and service revenues up 2% year over year, in line with our residential strategy. Our sales made in conjunction with T-Mobile Home Internet were approximately the same as in Q2.

And both we and T-Mobile continue to look for ways to increase the visibility of the Ooma offering for T-Mobile customers. Overall for Q4, we remain excited about our many growth initiatives. Unlike the actions taken by some of our competitors, we are currently not cutting back on key investments and we’re currently not planning any personnel layoffs. As we’ve previously said, in these times, we do believe that customers are sometimes taking longer to make a decision and are sometimes being more careful in what they buy, but we also feel we have leading solutions for the marketplace and there is significant demand for improved communication, especially at the price points we can offer. We’re cautious about our outlook. Most of all for the timing of AirDial installations and revenue, given that AirDial is a new product and market segment for us, but overall for our business, we continue to see significant opportunity and to execute our strategy to drive growth and profitability.

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?

Shig Hamamatsu: Thank you, Eric. And good afternoon, everyone. I’m going to review our third quarter financial results and then provide our outlook for the fourth quarter and full year fiscal 2023. We delivered another strong quarter with a total revenue of $56.7 million, exceeding our guidance range of $56 million to $56.5 million. On a year over year basis, total revenue grew 15% in the third quarter, driven by the strength of Ooma Business, which included a full quarter contribution from OnSIP for the first time. In the third quarter, business subscription and services revenue accounted for 55% of total subscription and services revenue, as compared to 49% in the prior year quarter. Q3 product and other revenue came in at $4.9 million, as compared to $4.5 million in the prior year quarter with accessories sales contributing to growth.

On the profitability front, the third quarter non GAAP net income was $3.5 million, above our guidance range of $2.7 million to $3.2 million and was the highest in the company’s history. The team did an excellent job in balancing executing — execution of our growth initiatives and managing expenses during the quarter. Now some details on our Q3 revenue. Ooma Business Subscription and Services revenue grew 30% year over year in Q3, driven by user growth and the full quarter contribution from OnSIP, which performed well with solid customer retention. Excluding the effect of OnSIP revenue contribution, Ooma Business Subscription and Services revenue grew 16% year over year. On the residential side, subscription and services revenue grew 2% year over year.

For the third quarter, total subscription and services revenue was $51.7 million or 91% of total revenue compared to 91% in the prior year quarter. Now some details on our key customer metrics. We ended our third quarter with 1,202,000 core users, up from 1,181,000 core users at the end of the second quarter. As Eric mentioned earlier, we saw another quarter of robust user growth from our largest customer as they continue to deploy our solution. At the end of the third quarter, we had 4,17,000 or 35% of our total core users, an increase of 23,000 from Q2. Our blended average monthly subscription and services revenue per core user or ARPU increased 9% year over year to (ph), up from (ph) in the prior quarter, driven by an increase in mix of business users, including higher ARPU Office Pro and Pro Plus users, as well as inclusion of OnSIP users into this metric for the first time this quarter.

During the third quarter, we continue to see a healthy Office Pro and Pro Plus take rate with 50% of new office users opting for those IoT services, which was up from 48% in the prior year quarter. Overall, 25% of our business users have now subscribed to our Pro or Pro Plus tier. Our annual exit recurring revenue, which included OnSIP in Q3, grew to $207.4 million and was up 19% year over year. Our net dollar subscription retention rate for the quarter improved to 96% as compared to 94% in the second quarter. Now some details on our gross margin. Our subscription and services gross margin for the third quarter was 73%, which was consistent with 73% in the prior year. As expected, subscription and services gross margin dipped slightly from the second quarter as we had a full quarter impact of OnSIP gross margin, which is running lower relative to Ooma subscription gross margin of 74% when OnSIP is excluded.

Good news is that, OnSIP gross margins is improving as expected through our integration effort to leverage Ooma’s infrastructure and we continue to believe it can reach 70% plus range within the next quarter or two. Product and other gross margin for the third quarter was negative 35% as compared to negative 46% for the same period last year. The third quarter product gross margin was favorably impacted by sales of accessories that drove our product revenue higher in the quarter. On an overall basis, total gross margin for Q3 was 64% as compared to 62% in the prior quarter. A higher total gross margin in Q3 this year was primarily due to the improvement in product gross margin. And now some detail on operating expenses. Total operating expenses for the third quarter were $32.8 million, up $5.5 million or 20% from the same period of last year.

Excluding the four quarter impact of OnSIP, the total operating expenses increased $3.8 million or 14% from the same period last year. Sales and marketing expenses for the third quarter were $16.9 million or 30% of total revenue, up 17% year over year, driven by higher marketing and channel development activity for Ooma Business, but sequentially lower on a percentage of revenue basis, in line with our increasing focus on profitability and cash flow we discussed on our last earnings call. Research and development expenses were $11 million or 19% of total revenue, up 31% on a year over year basis from $8.4 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 a four quarter — due to a four quarter impact of OnSIP team members who joined us at the end of Q2.

G&A expenses were $4.9 million or 9% on total revenue for the third 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 four quarter impact of OnSIP. Non GAAP net income for the third quarter was $3.5 million or a diluted earnings per share of $0.14 as compared to $0.13 in the prior year quarter. In addition to stock based compensation and intangible amortization expenses, non GAAP net income for the third quarter excludes approximately $0.6 million of acquisition related costs, as well as $1.4 million of facility consolidation costs incurred in connection with the OnSIP transaction. Adjusted EBITDA for the quarter $4.5 million, a record for the company or 8% of total revenue as compared to $4 million for the prior year quarter.

We ended the quarter with total cash investments of $24.5 million. Cash generated from operations for the third quarter was strong at $2.5 million compared to $1.9 million in the same period last year. On the headcount front, we ended the quarter with 1,082 employees and contractors. Now I’ll provide guidance for the fourth quarter and full year 2023. Our guidance is on a non GAAP basis and has been adjusted for expenses, such as stock based compensation, amortization of intangibles and other acquisition related costs. We expect total revenue for the fourth quarter of fiscal 2023 to be in the range of $56.3 million to $56.6 million, which includes $3.5 million to $3.8 million of product revenue. Product revenue for the fourth quarter is expected to be lower compared to the two previous quarters as we do not expect certain accessory sales we saw in those quarters to recur.

We expect fourth quarter net income to be in the range of $3.5 million to $3.8 million. Non GAAP diluted EPS is expected to be between $0.14 to $0.15. We have assumed $25.7 million with average diluted shares outstanding for the fourth quarter. For full year fiscal 2023 we expect total revenue to be in the range of $216 million to $216.3 million, which is within our previously issued guidance range of $215.5 million to $218.5 million. The adjustments to the high end of our guidance range primarily reflects our current expectation for the timing of our AirDial revenue ramp, which is slower than we originally anticipated in the near term for the reasons Eric said earlier. Despite the pace of revenue ramp in the near term, we remain very excited about our growth prospects for AirDial as its customer demand and engagement as well as channel development activity remained very strong.

In terms of revenue mix for the year, we expect 92% of total revenue to come from subscription and services revenue and the remaining 8% from products and other revenue. We expect non GAAP net income for fiscal 2023 to be in the range of $13 million to $13.3 million. Based on the midpoint of the updated non GAAP net income guidance range, we estimate our adjusted EBITDA for the year to be approximately $17.1 million or 8% of revenue for fiscal 2023, which is an increase from our prior guidance of $15.6 million or 7% of revenue. The updated profitability guidance reflects our continued focus on cash generation and making progress towards our long term profitability model. We expect non GAAP diluted EPS for fiscal 2023 to be in the range of $0.51 to $0.53.

We have assumed approximately $25.3 weighted average diluted shares outstanding for fiscal 2023. In summary, we are pleased with our solid execution in Q3 with a record quarterly revenue and non GAAP profitability, along with strong cash generation. We’re excited about growth opportunities in front of us and remain focused on executing to our long term strategy to achieve profitable growth. I will now pass it back to Eric for some closing remarks. Eric?

Eric Stang: Thanks, Shig. As I said at the outset, we believe Q3 was an excellent quarter for Ooma. We now have over 1.2 million core users and our Q3 annual exit recurring revenue of $207 million is up 19% year over year. We’re proud of this progress and feel our strategy is working. As we look ahead, we believe our investments in feature enhancements for Ooma Office, new verticals and sales channel expansion for Ooma Enterprise, international expansion and AirDial will build Ooma into a larger and more profitable company. Thank you, everyone. We’ll now take your questions.

Q&A Session

Operator: Our first question will come from Matt Stotler with William Blair. Please go ahead.

Matthew Stotler: Hey, there. Thank you for taking the questions. Maybe just one on the updated full year guide. You obviously mentioned AirDial on the revenue side, a little bit of narrowing towards the lower end of the guide. Just double click on kind of the breadth of what you’re seeing in the macro. What’s impacting AirDial that you’re continuing to see kind of what you saw last quarter in terms of lengthening of some sales cycles and things like that. It would be great to kind of double-click on what’s included in that Q4 guidance.

Eric Stang: Sure. Let me start there, and we’ll see if Shig wants to add. We’ve only really been selling AirDial for two quarters now, and we’re very excited about how it’s developing. We have learned that just getting orders and wins doesn’t lead to revenue until we can get these things installed and working and customers do have to test them and get comfortable with them and then plan installation. And so, our revenue ramp is not consistent with our sales or opportunity ramp. I can tell you that the opportunity that we’re going after, what’s in Salesforce.com, for instance, deals that we are — that we can see grew markedly in Q3 versus Q2. We believe that went up something like 40% in Q3 from where it was in Q2. And we’re excited about the size of that opportunity and what we’re trying to do going forward.

But it is going to take some time for AirDial to drive ramp in the revenue, and we’re being a little more cautious about that. We’re just being a little cautious about Q4 in general. With the Thanksgiving and the Christmas holidays, it’s not quite as — there are some things that can get in the way of particularly growing our business sales in the quarter, particularly since a lot of our business is done through inside sales, selling to smaller businesses that can be very busy this time of year. So we’re just mindful of that a little bit. And then I think in my opening remarks, I did talk a little bit about how we see the market generally. We’re still seeing the opportunity for significant growth and believe that with our solutions, we can power it through any minor market weakness that we see.

Shig pointed out that we have about $1 million less of product revenue in Q4. And AirDial particularly affects that number, because if you can — the boxes sell for hundreds of dollars each. And the more you can install and the faster you can install the more you can drive that. We were not able to install all the opportunity we had in Q3. We’re still building up our capabilities to help our customers do that. That’s also part of what’s going on here. But no, we’re excited about our outlook and see if Shig wants to add anything to what I said.

Shig Hamamatsu: No, Eric, I think you summed up pretty well. And that — despite just a near-term pace of the installation revenue ramp, as I said in the script that we’re seeing the increase in customer engagement. And I think you saw that in our press release on T-Mobile relationship on AirDial. We’re very excited about it. So I think it’s more a timing issue near term as customer see our product, which is a great product. And so, we’re still excited about it despite the Q4 guide.

Matthew Stotler: That’s very helpful color. Thank you. And then maybe just one follow-up on the OnSIP integration here. I guess, first, could you just clarify the revenue contribution from OnSIP in the quarter? And then maybe just give a double click on the — what you’re seeing in terms of progress integration, talent retention and kind of the expectation for potential additional synergies going forward?

Shig Hamamatsu: Yes. I think if you sort of follow the — what I said on the organic versus inorganic growth, I think you back into probably about $3 million per quarter kind of run rate on the OnSIP. And as we acquired OnSIP last quarter, we had a pretty conservative assumptions on the churn. I think the team did very well post acquisition retaining customers, and we’re pleased to see that. So I think the $3 million a quarter run rate is what we see. And from a P&L contribution standpoint overall, like I said, they’re making a great gross margin contribution, making improvements. I see them getting closer to Ooma margin in the next few quarters. Yes, so — and made one quarter early on our EBITDA contribution. And so, that’s what I would like to say. I’m not sure Eric, if you want to add anything from the sales and marketing standpoint. But —

Eric Stang: Just one thing. We knew when we acquired OnSIP, we were getting a great team. The folks running OnSIP really know their stuff, and they become really valuable members of Ooma just in the short time they’ve been with the company. And we’re not seeing any turnover issues. In fact, we’re seeing employees excited to be part of Ooma. And together, we’re going to grow the company. And so, I think it’s going extremely well.

Matthew Stotler: Great. Thank you again.

Operator: Our next question will come from Mike Latimore with Northland Capital Markets. Please go ahead.

Mike Latimore: Okay. Thank you. Congrats on the quarter there. The retention rate improved sequentially? Is that because of the acquisition? Or is that organic or both?