Ooma Inc Q1 FY2024 Earnings Call

Good afternoon. My name is Emma, and I will be your conference operator today. I would like to welcome everyone to Ooma's Fiscal First Quarter 2024 Earnings Conference Call. Matt Robison, you may begin your conference.

Thank you, Emma. Good day, everyone, and welcome to the Fiscal First 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 first 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 second 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.

Thank you, Matt. Hi, everyone. Welcome to Ooma's Q1 Fiscal Year 2024 Earnings Call. Thank you for joining us. I'm pleased to talk with you today about our Q1 accomplishments and our progress executing the many growth initiatives we have underway for FY '24. We accomplished a good start to the year in Q1 with revenue growing to $56.9 million and non-GAAP net income, again outpacing our expectations at $4 million. We also grew cash in Q1 by about $1.5 million while investing in several growth initiatives. And consistent with our growth plans, we increased our headcount and expanded the size of one of our office locations. With no debt and the financial flexibility to pursue our plans, I believe we are well positioned and off to a good start this year to capitalize on our growth initiatives. Starting first with Ooma Office, which is our solution for small- to medium-sized businesses that has consistently been voted number one by users in PCMag's annual user survey, we made good progress in Q1 on our strategy to introduce more advanced features, shift customers to higher tiers of service, increase our average revenue per user, expand the types and sizes of businesses we can serve and increase our market presence and sales reach. Late in Q1, we announced several new features, which helped contribute to our highest ever adoption of our premium service tiers, Office Pro and Pro Plus. Approximately 55% of new customers in Q1, and now 27% of our installed base have selected one of these premium tiers. Our roadmap calls for further feature additions each quarter through the balance of this fiscal year as we continue to execute our strategy. I'm also very pleased to highlight our just announced partnership with NexHealth to drive adoption of Ooma Office at dental and other health care practices. NexHealth helps thousands of dentists and other health care professionals improve front office efficiency, patient engagement and practice growth through a cloud-based patient experience platform that integrates with practice management systems. In partnership with NexHealth, Ooma Office can now sync with patient information, so health care staff can view patient details in real time when taking or making phone calls. Significantly, the combination of our two best-of-breed solutions can bring true competitive advantage compared to other providers that try to do it all but fall short on features and customer experience. Ooma and NexHealth will promote the combined solution and introduce customers to one another. This collaboration is already underway, and Ooma and NexHealth currently have customers using our two solutions together. We estimate there are 500,000 health care practices in the U.S., which represents an exciting and, of course, very sizable market opportunity. Regarding Ooma Enterprise, our strategy, as we've discussed, is to serve select verticals and custom opportunities where we can bring true differentiation versus other solutions and to build stronger channel sales representation to drive our growth. In Q1, we strengthened our channel sales team and deepened our corporate relationships for serving the hospitality vertical. We also made significant progress on the development and launch of a new vertical we are targeting and hope in Q2 to announce this vertical, along with a key partnership we intend to put in place to help address it. Internationally, we grew significantly in Q1 by serving more users at our largest customer, with most of our growth occurring in Europe. As expected, Q1 was a significant quarter for growth with this customer. Looking ahead to Q2, our focus is on completing new development to enable expansion with this customer in Asia. As such, we don't anticipate much growth in users during Q2, but we do expect to drive significant further user growth beginning in the back half of this year. We also intend to expand into additional regions beyond Asia before the end of this fiscal year. Now turning to AirDial, which, of course, is our innovative, integrated solution to replace aging and expensive traditional POTS lines that serve critical business needs. We grow increasingly excited the more we learn and the more we engage with customers. We believe the market is vast, that customers are waking up to the need to act and that we bring true competitive advantage. Our internally designed end-to-end solution allows us to solve difficult use cases and satisfy nearly all customer needs. In fact, it is not uncommon for us to meet customers who have had a bad experience with a competitive product and for whom we can demonstrate success. We set our control over the end-to-end architecture as a key advantage. We also believe we bring unique functionality, including our implementation of remote device management, our efficient cost structure for providing services and our high level of deployment and installation support. We made great progress with AirDial in Q1 as we expanded our sales team and funnel of opportunities, extended the capabilities of our solution, streamlined deployment and installation, added new partnerships and invested in increasing customer awareness. In addition to T-Mobile, AirDial is now also certified by AT&T, Verizon and U.S. Cellular to operate on their wireless networks. I believe we are executing well on our go-to-market strategy, including with our important partner, T-Mobile. And I'm pleased to report that we increased installations and grew our AirDial sales funnel substantially in Q1. I'm also particularly pleased to report that U.S. Cellular has agreed to become a partner for AirDial. U.S. Cellular is the fifth-largest wireless carrier in the U.S. and operates in more than 20 states. They intend to resell AirDial through their sales channels by providing wireless connectivity in combination with the Ooma AirDial service as an integrated solution for customers. We believe this is an important program for them given their desire to grow their fixed wireless business, and we are naturally excited that they have chosen Ooma. Implementation will take some effort, but planning is already underway. We hope and anticipate that U.S. Cellular will be in market and selling sometime this summer. As is evident, we have a lot going on across Ooma, with new features and growth for Ooma Office, new verticals and channel development for Ooma Enterprise, international expansion into new countries and commercialization of AirDial all keeping us busy, but also have us excited about the future. 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.

Thank you, Eric, and good afternoon, everyone. I'm going to review our first quarter financial results and then provide our outlook for the second quarter and full year fiscal 2024. We delivered another solid quarter with a total revenue of $56.9 million, at the high end of our guidance range of $56.4 million to $56.9 million. On a year-over-year basis, total revenue grew 13% in the first quarter, driven by the strength of Ooma's business as well as the addition of OnSIP. In the first quarter, Business Subscription and Services revenue accounted for 56% of total subscription and services revenue as compared to 50% in the prior year quarter. Q1 product and other revenue came in at $3.8 million as compared to $3.6 million in the prior year quarter. On the profitability front, the first quarter non-GAAP net income was $4 million, above our guidance range of $3.4 million to $3.7 million and represented a 34% increase over $3 million in the prior year quarter. Now some details on our Q1 revenue. Ooma Business Subscription and Services revenue grew 27% year-over-year in Q1, driven by user growth and the addition of OnSIP. Excluding the effect of OnSIP revenue contribution, Ooma Business subscription and services revenue grew 13% year-over-year. On the residential side, Subscription and Services revenue grew 0.3% year-over-year. As mentioned in our last call, the growth in residential subscription and services revenue in the first quarter was negatively impacted by approximately 4,000 Telo users churning during the quarter for a specific customer. Despite this one-time event, our relationship with this customer remains strong as we continue to expand our relationship with Ooma's business offerings for other users. For the first quarter, total subscription and services revenue was $53 million or 93% of total revenue as compared to $46.7 million or 93% of total revenue in the prior quarter. Now some details on our key customer metrics. We ended the first quarter with 1,225,000 core users up from 1,210,000 core users at the end of the fourth quarter. At the end of the first quarter, we had 449,000 business users or 37% of our total core users, an increase from 21,000 from Q4. Our blended average monthly subscription and services revenue per core user, or ARPU, increased 4% year-over-year to $14.28 driven by an increasing mix of business users, including higher ARPU Office Pro and Pro Plus users. During the first quarter, we continued 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 49% 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 $209.8 million and was up 15% year-over-year. A few words about our net dollar retention rate. As mentioned in our last call, effective in the first quarter of this fiscal year, we transitioned to a new calculation methodology for our net dollar retention rate. With the majority of the subscription revenue now generated from Ooma Business customers, we believe the new methodology better reflects our operational performance during the reporting period and is more in line with the reporting practice of our industry peers. Under the new methodology, our net dollar retention rate for the quarter was 99%. Had we used the new methodology in the fourth quarter of last fiscal year, the net dollar retention rate would also have been 99%. There is a detailed disclosure of our new calculation methodology in the supplemental key metrics disclosure schedule that was published along with our press release today. The supplemental disclosure also includes a comparable pro forma net dollar retention rate for the past four quarters using the new methodology. Now some details on our gross margin. Our subscription and services gross margin for the first quarter was 73% as compared to 72% in the prior year. The improvement in subscription and services gross margin was driven by our increase in scale and a greater mix of higher ARPU business customers. Product and other gross margin for the first quarter was negative 61% as compared to negative 42% for the same period last year. As mentioned in our last call, this year-over-year decline in the product gross margin was anticipated primarily due to the impact of certain higher cost components that we procured in the last fiscal year to stay ahead of the pandemic-driven supply chain issues. We continue to expect product and other gross margin for the remainder of fiscal 2024 to be negatively impacted for the same reason and estimate the impact of such one-time excess component costs running through fiscal 2024 P&L to be $2 million to $3 million. On an overall basis, total gross margin for Q1 was 64% as compared to 64% in the prior year quarter. And now some details on our operating expenses. Total operating expenses for the first quarter were $32.6 million, up $3.3 million or 11% from the same period last year. Excluding the impact of OnSIP, the total operating expenses increased $2 million or 7% from the same period last year. Sales and marketing expenses for the first quarter were $16.8 million or 30% of total revenue, up 9% year-over-year, driven by higher marketing and channel open activity for Ooma Business, which includes AirDial, as well as the addition of OnSIP related expenses. Research and development expenses were $10.8 million or 19% of total revenue, up 15% year-over-year from $9.4 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 attributable to the activities related to international expansion with our largest customer and the addition of OnSIP team members. G&A expenses were $5 million or 9% of total revenue for the first 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 first quarter was $4 million or diluted earnings per share of $0.16 as compared to $0.12 of diluted earnings per share in the prior year quarter. Adjusted EBITDA for the quarter was $4.8 million or 8% of total revenue and represented a 24% increase over $3.9 million for the prior year quarter. We ended the quarter with total cash and investments of $28.4 million, which increased from $26.9 million at the end of Q4. Despite the seasonal challenge in the first quarter, we generated cash from operations of $1.3 million, which was up from $0.8 million in the same period last year. On the headcount front, we ended the quarter with 1,078 employees and contractors. Now I will provide guidance for the second quarter and full year fiscal year 2024. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation and amortization of intangibles. We expect total revenue for the second quarter of fiscal 2024 to be in the range of $57.4 million to $57.9 million, which includes $3.5 million to $3.8 million of product revenue. We expect second 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 $0.13 and $0.15. We have assumed 26 million weighted average diluted shares outstanding for the second quarter. For the full year fiscal 2024, we are reaffirming the prior guidance and expect total revenue to be in the range of $235.5 million to $238.5 million. The full year fiscal 2024 revenue guidance assumes a subscription and services revenue growth rate of 18% to 20% for Ooma Business and Subscription and Services revenue growth of 1% for residential. In terms of revenue mix for the year, we expect 92% to 93% of total revenue to come from subscription and services revenue and the remainder from products and other revenue. We expect non-GAAP net income for fiscal 2024 to be in the range of $14.5 million to $16.5 million. Based on this guidance range, we estimate our adjusted EBITDA for fiscal 2024 to be $18.7 million to $20.7 million or approximately 9% of revenue at the upper end. We expect non-GAAP diluted EPS for fiscal 2024 to be in the range of $0.55 to $0.63. That assumes approximately 26.3 million weighted average diluted shares outstanding for fiscal 2024. In summary, we are pleased with our solid start to our fiscal 2024 and remain focused on executing our long-term strategy to achieve profitable growth.

Thanks, Shig. As I mentioned at the outset, we're off to a good start this fiscal year. Our focus is on executing well on our growth initiatives and strengthening our competitive advantage and leadership in each of the segments we target. To that end, we are making strategic investments, especially in sales, marketing, and partnership development and are carefully balancing those investments with our financial goals. We're fortunate to have large opportunities before us and good momentum underway. Thank you. Emma, we can now take questions.

Your first question today comes from the line of Matt Stotler with William Blair.

This is Alex on for Matt. So just maybe one on the partner ecosystem. Could you talk about the partnership with Jazzware and NexHealth? And just the traction you've seen with the Jazzware partnership and any thoughts on how the vertical-specific market approach expands your TAM?

Sure. So Jazzware is a partner of ours in the hospitality space, and that's been a growing area for us all through last year and into this year. And it's an exciting area because there are over 80,000 hotels in North America to go after. Many of them have still stayed on PBXs in the closet because they have complex needs with analog lines to the rooms and different needs at the front desk. Jazzware allowed us to connect to about 80 different property management systems. That's a key advantage to have in that vertical. We get customer referrals from Jazzware, and we refer customers to Jazzware. The ideal customer for us is one that adopts their solution along with ours and basically does a rip-and-replace moving to the cloud for their phone service. We are pursuing certifications with some of the large hotel chains. I made a few remarks in my script about our progress, although I didn't get too specific. We're excited about where we can go with that vertical. It's the kind of thing we do well. It's complex, and we have a great solution. So Jazzware is a key enabler for us in that vertical. We view NexHealth in a similar manner. Some of you may not have heard of NexHealth, but they're no small player in the space. Just citing publicly available data, LinkedIn says they've got 300 employees. Crunchbase claims they've had over $175 million invested in them and they're getting over 800,000 visits a month to their website. Clearly, they have momentum today in serving particularly dental practices. We want to leverage that as we target that vertical. I can tell you we've already got customers that came to us through NexHealth and vice versa. We were both at the California Dental Association Show last week. This is a way to propel yourself faster in the space and ensure that you can provide a very complete solution for the customer. When we benchmark our solution against others in the space, we believe there are features available in Ooma Office that aren't present in competitor solutions. Our partnerships are important, but our success is driven primarily by our own sales and marketing activities and the level of effort we put into targeting the vertical. I hope that answers it for you, Matt.

Yes, that's great. Super helpful. I really appreciate all that color. And then maybe just switching gears a little bit. One other question from me. So office revenue continues to increase as a percentage of the total. What is your view on the potential growth profile for that business in a normalized macro? And what do you guys view as key drivers to get there from where we are today?

Well, I mean, you have our guidance for this year, which reflects our outlook in light of the economy and current circumstances. Bigger picture, we see a space where we have about 7 million small businesses in North America with 1 to 20 employees, and we estimate that two-thirds of them have yet to move to the cloud. That's a tremendous opportunity, especially when we think about expanding beyond servicing our largest customer in Europe and potentially elsewhere. For us, our goal is to keep pushing forward. We're introducing additional features to broaden the appeal of our solution to a wider range of businesses and increase our average revenue per user. Essentially, our office solutions cater to small business needs, targeting customers who don't have an IT professional and need something easy to set up and use reliably that offers good value for what they pay. Moreover, with our low-cost structure in the industry, we believe we can put all of this together in a way that others can't because we focus heavily on that segment, Ooma Office. In terms of Ooma Enterprise, that's more targeted toward specific verticals, allowing us to establish differentiation based on varying customer needs that might involve custom requirements. I'm excited about all these fronts. We've made strategic hiring decisions recently, specifically strengthening our sales capabilities, which is a vital part of our expansion efforts. This last quarter saw significant progress in that regard. With AirDial, we have incredible opportunities ahead, and the future looks bright as we identify large customer prospects alongside small ones as we forge ahead. I think our potential with AirDial will partially depend on successfully landing some of these substantial opportunities.

Your next question comes from the line of Mike Latimore with Northland Capital Markets.

I guess on the NDR number, it's been very stable. I assume you expect it to continue to be stable. That's one question. And then second, on the last call, Eric, you mentioned that November, December was a little slow. January got better. Any general color on February, March, April in that context?

Sure. I'll let Shig take the first question, and I'll take the second.

Yes, Mike, regarding the question on NDR, we anticipate that to remain stable. Looking backwards with the new methodology, it has remained quite stable at 99%, and we expect that will continue.

Yes. We previously discussed how the end of last year had a slight slowdown, but Q1 exhibited strong performance throughout. I believe we managed to balance our marketing spend effectively during the quarter, resulting in a substantial uptick in our sales funnel for AirDial. Our opportunities in this area have increased significantly. However, we are somewhat constrained by our sales resources when pursuing all the opportunities that arise. We anticipate some typical fluctuations as summer approaches since more people will be traveling, but we don't foresee any dramatic changes after we rebounded in Q1.

Your next question comes from the line of Brian Kinstlinger with Alliance Global Partners.

Wanted to get a little bit more detail on AirDial in terms of business development, sales cycles, and preparation from the customer side. Particularly, could you provide any number of lines in backlog or booked service lines? Some numerical context would help us understand that aspect better considering your mention of a significant increase in the sales funnel.

We aren't disclosing those specifics for competitive reasons. However, the outlook hasn't fundamentally shifted from what I've communicated in previous quarters. The larger opportunities typically require a proof of concept. We currently have more proof of concepts running than we've ever had, with cycles usually spanning about two to three months before we move into negotiations. Recently, we saw some of our biggest opportunities approach us by signing on for hundreds of lines but not thousands. They plan to return for more lines after the initial installations are completed. That being said, we have been improving our installation processes. We're now able to complete installations within weeks instead of months for customers who are ready to go. The auditing process does take some time, depending on how well customers understand their own needs. Our current focus for Q2 involves implementing deals that were secured in Q1, and the sales we achieve in Q2 will likely be reflected in Q3 and possibly Q4. We’re noticing an increase in customer interest, evidenced by cold leads coming in, indicating that more big customers are doing their research. Overall, we view the next three to five years as critical for rolling out this type of solution as traditional POTS lines phase out.

Your next question comes from the line of Matthew Harrigan. Your line is now open.

I understand that one reason you've been able to expand internationally is you're somewhat leveraging your largest customer without overstressing your resources. Given that hospitality is inherently a global vertical, is there another vertical in which, presumably, your clients' customers are very satisfied with your product? Isn't there likely to be interest from large entrants like Hilton, who might want to engage you on a global level? Can you efficiently do this in the same way you have for your largest customer? I'm curious about your operations in other regions.

I understand your perspective, and that’s a reasonable question. In our experience, while a large brand can endorse and recommend service providers at a corporate level, the actual sales process often involves selling to individual hotels or operators. Many of these establishments are either independently owned or franchised, requiring that we pursue them either one at a time or leverage larger owners who have multiple hotels. Currently, our hospitality efforts are concentrated in North America, and we haven't yet made significant expansions beyond this region.

Your next question comes from the line of Unidentified Analyst with B. Riley.

I'm on for Josh Nichols today. So the first question is, you talked about strengthening your sales team significantly this quarter. Can you comment on the cadence of seat adds you expect throughout the rest of the year?

Yes. We made particular advances last quarter by hiring two senior individuals specifically to drive our channel development and direct sales efforts. These additions are strengthening the team under Rob. Our focus primarily revolves around securing larger customers, driven largely by AirDial and hospitality opportunities. Historically, Ooma has excelled in inside sales, and our expansion into channel development has been fruitful. However, we now aim to bolster our strategic, direct sales capacity, which can assist in capturing larger opportunities. In Q1, we increased our headcount by about 40, most of which were in sales, and this base provides a good foundation for growth without needing to significantly ramp up hiring over the remainder of the year.

Yes, for Q1, Business Subscription revenue was $29.8 million, and Residential was $22.1 million.

There are no further questions at this time. I'll turn the call back to Eric for closing remarks.

Thank you. I thought some of you might ask me about one of the key things I mentioned today that is very new news for us. U.S. Cellular's decision to resell AirDial is a big, big step for us. They have quite a large organization, and they're going to be selling it under the Ooma brand name. I believe that's an excellent next step for us to bring on another key partner for AirDial. I wanted to emphasize that here at the end as we sign off. Thank you, everyone, for joining us today; we appreciate your time.

This concludes today's call. Thank you for attending. You may now disconnect.