Earnings Call Transcript - OOMA Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Ooma, Inc. first quarter fiscal 2022 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. I would now like to turn the conference over to your host, Mr. Matthew Robison. Please go ahead.

Matthew Robison, Director of IR and Corporate Development

Thanks, Alexander. Good day everyone and welcome to the first quarter of fiscal year 2022 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, Ravi Narula. After the market close today, Ooma issued its first quarter fiscal year 2022 earnings press release. The 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 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 regarding future events or financial or operating performance. Our expectations and beliefs may not materialize and actual results may differ materially from those projected, subject to risks and uncertainties described in our filings with the Securities and Exchange Commission. Forward-looking statements are based on information available as of today, and we disclaim any obligation to update these statements except as required by law. Please note that financial measures disclosed on this call will be on a non-GAAP basis. A discussion of why we present non-GAAP measures and a reconciliation of these measures to the most directly comparable GAAP measures is included in our earnings press release. We will provide guidance for the second quarter and full year fiscal 2022 on a non-GAAP basis. Additionally, our investor presentation slides include GAAP to non-GAAP reconciliation. Now, I will hand the call over to Ooma's CEO, Eric Stang.

Eric Stang, CEO

Thanks, Matt. Hi everyone. Welcome to Ooma's Q1 fiscal year 2022 earnings call. Thanks for joining us today. I am excited to share with you the strong start we have made to this year and I look forward to updating you on our key growth initiatives and outlook. For fiscal Q1, our results again have outpaced our guidance with revenue of $45.6 million and non-GAAP net income of $2.8 million. Our Q1 revenues grew 13% year-over-year, comprised of 24% year-over-year growth in business revenue and 5% year-over-year growth in residential revenue. We also once again generated positive cash flow from operations while investing in new growth initiatives including international expansion. Across our business, I believe we executed well and we are on a good trajectory to realize our plans for this year. You may recall I mentioned last quarter that 76% of small businesses, defined as those with less than 100 employees, say they have yet to invest in IP-based communications solutions. Ooma Office is our uniquely designed solution for these small business customers who desire advanced features but do not have an IT department to implement them. We believe Ooma Office brings productivity improvements and savings that drive compelling value. Our strategy is to target this vast market opportunity, primarily by scaling our sales and marketing programs, adding features that drive increased customer adoption and raise our revenue per user, and expanding internationally. On the first of these, scaling our sales and marketing programs, we executed well in Q1 and established several important new reseller relationships to support future channel sales growth. For the quarter, sales through channel resellers contributed approximately 40% of business sales. On the marketing front, we increased our intent-based marketing and enhanced the targeting of our marketing programs. Direct sales, particularly e-commerce sales, performed well in Q1. Some of our notable Ooma Office new customer wins included a 67 user implementation for a multilocation restaurant group and a 55 user implementation for a medical group. We also continued expansion with a large national brand through the addition of over 150 new locations. Scaling our sales and marketing programs will continue to be a priority for us this year. We launched exciting new features in Q1 to support our strategy to serve more small business customers and increase revenue per user. Most notably, we just recently added two new features to our Ooma Office Pro tier of service. The first, which we call Caller Info Search, enables caller information from CRM systems, such as Salesforce, HubSpot, and Zoho, and from websites such as LinkedIn, Google, and Facebook to pop up automatically in our desktop app when a call comes in. The second feature is integration with Google Workspace, specifically an add-on in the Google Workspace Marketplace, which enables calendar integration, for example, to schedule an Ooma video meeting and automatically populate meeting details in Google Calendar. Further integration with Google Contacts, the Chrome browser, and more are planned, along with similar capabilities for integration with Microsoft 365. These new developments will improve productivity for small businesses and further grow adoption of our Office Pro tier of service. In Q1, approximately 43% of new Office users stepped up to our Pro tier of service at $5 more per month. Internationally, as we discussed last quarter, we are expanding this year to more than a dozen new countries, planning to capitalize on the opportunity to serve our largest customer in these new locations. We made good progress on this goal during Q1 and now are serving or have the capability to serve users in nine Western European countries. In Q2, we expect to launch in more European countries and at least one country in Asia. The rollout of additional users with our largest customer has just recently started, and we expect significant progress to occur during Q2. In addition to our strategy to target the vast market opportunity afforded by small businesses that have yet to move to the cloud, we also have a second strategy underway to serve larger businesses which have custom needs in verticals where we believe we can bring unique value. To this end, we continued our investment in Ooma Enterprise during Q1 and are excited about winning a new opportunity with a reseller that we believe will lead to the addition of more than 1,000 new users. We also secured several new customer wins in one of the key verticals we are targeting. We scaled up sales efforts for our direct routing for Microsoft Teams solution and implemented direct routing for Teams for our initial customers during the quarter. We intend to continue to invest in Ooma Enterprise this year to develop new opportunities. Our longer-term vision extends to providing a more complete infrastructure solution to small businesses and distributed enterprises. As a start to this vision, we launched Ooma Connect last year to provide business wireless Internet services, both for Internet backup and primary use. Since the launch, we have learned about the connectivity needs of small businesses and enhanced our value proposition. In Q1, we extended our capabilities to include the use of the T-Mobile network to enable both user and Ooma-controlled speed options to make our unique continuous voice technology available to all Ooma Connect customers and to introduce unlimited data plans. We are excited about the potential to provide increasingly extensive and integrated solutions that bring more value to small business customers. Finally, I am pleased to report our residential business also performed well and increased in revenue, in line with our expectations. During Q1, we expanded our retail distribution of Ooma Telo. We also extended the power of our residential mobile app to include cellular mode calling. This mode uses the mobile device's voice network to provide a new option for completing calls. Many of our residential customers take advantage of our very low-cost international calling rates to make calls overseas while on the go. In such circumstances, cellular mode can enable more reliable calls. We continue to see a strong outlook for our residential business. Overall, we are excited to be off to a good start this year and look forward to driving further growth in the quarters ahead. I will now turn the call over to Ravi to discuss our results and outlook in more detail and then return with some closing remarks.

Ravi Narula, CFO

Thank you, Eric, and good afternoon everyone. I will start with a review of our financial results for the first quarter and then provide our outlook for the second quarter and full year fiscal 2022. We delivered strong financial results, achieving record revenues of $45.6 million, which was above the high end of our previously issued guidance range of $44 million to $44.8 million. On a year-over-year basis, total revenue grew 13%, driven by the strength of Ooma Business. Ooma Business now accounts for 47% of total revenue compared to 43% in the prior year quarter. Net income for the first quarter of fiscal 2022 was $2.8 million, above our previously issued guidance range of $1.8 million to $2.4 million. Our strong revenue growth and profitability demonstrate the strength of our large and diversified customer base as well as our solid execution. Now some details on our Q1 revenue results. Our overall subscription and services revenue grew 12% year-over-year to $42 million, with Ooma Business subscription and services revenue growing 22% year-over-year and 5% sequentially from Q4. Our residential subscription and services revenue for Q1 grew 4% year-over-year, an improvement from the 3% growth we saw in the first quarter of last year. Subscription and services revenue as a percentage of total revenue was 92%, compared to 93% for the prior year quarter. During the first quarter, we saw our product and other revenue increase 34% to $3.6 million, compared to $2.7 million for the same period last year. This strong growth in product and other revenue was driven by increased sales of IP phones as well as higher activation revenue from business users. Now some details on key customer metrics. We ended the first quarter with 1,083,000 core users, up from 1,049,000 at the end of the first quarter last year, driven by growth in business users through various sales and marketing activities. I am excited to report we now have over 281,000 business users, a 19% increase on a year-over-year basis. Our average monthly subscription and services revenue per core user, or ARPU, increased 10% to $12.68, up from $11.56 in the prior year quarter due to an increasing mix of business users, including higher ARPU Office Pro users. Accordingly, our business ARPU is now approximately $24 per user. We are pleased with the growth of our annual exit recurring revenue, which has now increased to a record $165 million, growing 13% year-over-year. Our net dollar subscription retention rate for the first quarter improved to 98%, a two-point improvement on a sequential basis. Now some color on gross margins. Subscription and services gross margin for the first quarter was 71.3%, an increase of 70 basis points year-over-year and down 60 basis points sequentially, primarily due to investment being made for future growth. Product and other gross margins for the first quarter were negative 41% compared to negative 39% for the same period last year and improved sequentially from the negative 58% in Q4. Our overall gross margins were 62% for the quarter, compared to 63% in the prior year period, driven by a higher proportion of product revenue in the quarter. Now some details on our operating expenses. Operating expenses for the first quarter of fiscal 2022 were $25.8 million, an 11% increase on a year-over-year basis. Sales and marketing expenses were $13.3 million or 29% of total revenue. This 13% year-over-year increase was driven by higher marketing and channel development activities for Ooma Business. Research and development expenses were $8.2 million or 18% of total revenue, an increase of 6% year-over-year, driven by investments in new products and features including launching our service in several international countries. G&A expenses were $4.3 million or 9% of total revenue compared to $3.8 million for the prior year quarter due to higher personnel-related costs. Net income for the first quarter was $2.8 million, resulting in diluted earnings per share of $0.11, comparable to the $0.11 EPS for the prior year quarter. Adjusted EBITDA earnings for the first quarter improved to $3.5 million or 8% of total revenue, as compared to $3 million in the prior year quarter. We ended Q1 with cash and investments of $29 million, compared to $23.3 million at the end of Q1 in the prior year. Even though the first quarter had a number of annual payments, we generated approximately $400,000 in cash from operations, a significant improvement from the $2.8 million of cash used in operations in the prior year quarter. This was our fourth consecutive quarter of positive cash flow from operations. On the personnel front, we ended the first quarter with 983 employees and contractors, up from 799 at the same time last year. Now I will provide guidance for the second quarter and full year fiscal 2022. Again, our guidance is non-GAAP 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 2022 to be in the range of $46 million to $46.8 million. We expect second-quarter non-GAAP net income to be in the range of $1.9 million to $2.4 million. Non-GAAP diluted EPS is expected to be between $0.08 and $0.10. We have assumed 23.4 million weighted average basic shares and 24.6 million weighted average diluted shares outstanding for Q2. For the full year fiscal 2022 guidance, we expect total revenue to be in the range of $185 million to $187 million, an increase from the previously issued guidance range of $182.5 million to $185.5 million. We believe we are tracking well towards our objective of business revenue crossing 50% of total revenue by the end of this fiscal year. We expect non-GAAP net income for fiscal 2022 to be in the range of $7.5 million to $9.5 million, versus the previously issued guidance range of $6.5 million to $8.5 million. Non-GAAP diluted EPS is expected to be in the range of $0.30 to $0.38. We have assumed approximately 23.5 million weighted average basic shares and 25 million weighted average diluted shares outstanding for fiscal 2022. From a cash flow perspective, we expect to continue to generate positive cash from operations for the full year fiscal 2022.

Eric Stang, CEO

Thank you, Ravi. Our priorities for this year remain as we outlined them just a quarter ago, namely to increase our sales and marketing both for direct and through channel resellers, to add new features to Ooma Office that can build our revenue per user, to focus on Microsoft Teams direct routing, feature customization in select verticals to drive growth of Ooma Enterprise, to evolve our Ooma Connect and Ooma managed Wi-Fi solutions, and to expand geographically to serve users in more than a dozen new countries. We believe these actions will allow us to capture the large market opportunity before us and drive significant expansion of our business. We are excited about the opportunities ahead. Thank you. In a moment, we will take your questions, and then at the very end after the Q&A session, Ravi and I will have some final remarks.

Operator, Operator

We have your first question from Mike Latimore with Northland Capital. Your line is open.

Mike Latimore, Analyst

Excellent. Yes. Thanks a lot. Great quarter. The revenue retention rate up to 98% from 96%. Was that largely driven by improvements in the business segment?

Ravi Narula, CFO

That is right, Mike. There's a lot of things with moves in there but if you look at it, primarily it was the growth of improvement in the net dollar retention rate because of improved ARPU as well as churn improving too.

Mike Latimore, Analyst

Got it. And then maybe just a macro comment on the small businesses environment. How does the pipeline look? How is new lead activity? Do you feel like as the economy opens, you are seeing more deals on the horizon?

Eric Stang, CEO

Hi Mike. When we talked a quarter ago about positive tailwinds for this year coming out of COVID, it's hard to talk too much about pipeline because a lot of our small business customers purchase relatively quickly once they connect with us and find out what we can offer. But I will note that in Q1, e-commerce sales were very strong as were direct sales in general. So we are seeing those positive signs.

Mike Latimore, Analyst

Got it. Thanks. And then maybe just on your large customer that's expanding internationally that you expect deployments to start in the second quarter?

Eric Stang, CEO

Yes. We put a lot of work into preparing for the expansion and we expect that expansion to engage, so to speak, to start in Q2. It will roll out through the whole year. But we do expect to see some significant progress in Q2.

Mike Latimore, Analyst

Great. Thanks a lot.

Eric Stang, CEO

Thank you.

Ravi Narula, CFO

Thank you.

Operator, Operator

We have your next question from Matt Stotler with William Blair. Your line is open.

Matt Stotler, Analyst

Hi guys. Thanks for taking my questions. Just maybe the first one here on the direct routing for Teams. I would love to drill down on where you are seeing the demand there. I see the direct routing opportunity as being more of an upmarket opportunity. But clearly, you are seeing some good traction here, some good interest. I would love to just better understand what you are seeing on that front. Where that demand is coming from?

Eric Stang, CEO

Sure. So our data from last quarter, which we talked about, suggests that 70% of the businesses installing Teams are going to turn to a direct routing solution for more flexibility and better cost. And you are right; it is larger-sized entities. We tend to think about 100 users and up for this type of application. It's part of our Ooma Enterprise platform. This capability is largely sold through channel resellers that we are connected to. There has been a very favorable reception by channel resellers to what we have done with our Teams direct routing, and it's certainly developing. We also learned that for these larger-sized companies, there is a pipeline and time until they make their decisions and install. We have been building our pipeline for four, five months since we launched this, and we have a good outlook for it, but it does take time.

Matt Stotler, Analyst

Got it. That's helpful. And then second question, just looking at the international opportunity. You were very clear about the primary focus being supporting your large customer and the expansion there. Can you walk through what kind of investments will be left on the go-to-market front and getting that infrastructure set up internationally?

Eric Stang, CEO

Yes. You are right that this year is all about serving our large customer. We talked a quarter ago about having the potential this year to double the number of users with that customer from 25,000 or so today to 50,000. That's our primary focus this year. It’s too soon to discuss what our plans will be next year. I can tell you that this large customer will have the potential for significant further growth next year. We will balance that with trying to go beyond this customer and serve the market generally. Many of our small business customers approach us through direct sales activities, marketing, and inside sales; those things should be relatively easy to ramp up in new locations. We'll also consider different opportunities to optimize our efforts as we get to planning next year. It’s a bit more to come.

Matt Stotler, Analyst

Got it. That's helpful. Thanks again.

Operator, Operator

We have your next question from Josh Nichols with B. Riley. Your line is open.

Josh Nichols, Analyst

Yes. Thanks for taking my question and great to hear the company is on track for business revenue to cross that key 50% threshold at the end of this fiscal year. It looks like you are getting good traction on the reseller market as well. What do you think is driving that as far as the company's core value proposition? And how long until that could get from around 40% of sales today to close to 50%? I am trying to think about the opportunity there.

Eric Stang, CEO

Yes. So what's driving it a little bit is our investment in developing those channels. We historically focused more on direct sales. We have been building the team, relationships, and solutions to serve larger businesses through channels. It’s been going well. We have an extensive runway ahead of us; a lot farther we can go with it. One of the channel reseller relationships we established in Q1 could be quite impactful for us as we look forward. How fast it gets to 50% depends on how fast the other half of business grows as well. We haven't set a target on that, but we do want to develop that area as we see channel resale as an untapped opportunity.

Josh Nichols, Analyst

Thanks. Last question for me. What's the mix right now between office and enterprise? Could you elaborate a little on what you're seeing in terms of the current growth trajectory and outlook generally?

Eric Stang, CEO

Keeping in mind that we launched our first office solutions a number of years ago, I like to say that we set out over ten years ago to conquer residential, and we did it. We established the number one solution in the market in terms of success and customer ratings. We set out to do the same in small business years ago, and I think we are there today. Our growth is above others, and we are rated as the number one solution in third-party surveys. Enterprise is still a work in progress; it is much smaller. We started this effort with an acquisition a couple of years ago that combined what we do with enterprise along with office to serve our largest customer and enable that opportunity. A lot of our early efforts with enterprise were around that. Today, as I said in my remarks, we are focused on what we consider a differentiated strategy against the larger players, one centered on unique capabilities in direct routing for Teams, customized solutions in select verticals, and the ability to tailor our service for large customers, which others can't match. This will allow us to chart a course, but it is a longer-term strategy.

Josh Nichols, Analyst

Thanks. I will hop back in the queue. And Ravi, best of luck on your future opportunities. It's been great working with you over the years. I'll talk to you guys later.

Operator, Operator

We have your next question from Matthew Harrigan with Benchmark. Your line is open.

Matthew Harrigan, Analyst

Thank you. At Deutsche Telekom Capital Markets Day, T-Mobile emphasized their home Internet project, getting to seven to eight million customers in five years, taking a more business and SME focus overall. Is that anything that has implications for you, positively or negatively? Or is that just basically noise?

Eric Stang, CEO

We are very excited about what we can do with Ooma Connect, our wireless Internet solution, as we move forward. T-Mobile is our partner, and we are looking at not only 4G but also at 5G in the future when it is more ubiquitous and lower-cost. I believe small business Internet can be well served by 5G, with competitive pricing. We are also mindful that when you put Internet together with our Ooma Office phone service solution, you can improve customer experience. T-Mobile is an important partner for us, and we are thrilled to work with them.

Matthew Harrigan, Analyst

Great. Thanks, Eric. Nice working with you, Ravi, as well.

Ravi Narula, CFO

Absolutely. Thank you, Matt. It has been fun. It was a pleasure working with you.

Operator, Operator

We have your next question with Brian Kinstlinger with Alliance Global Partners. Your line is open.

Brian Kinstlinger, Analyst

Thanks so much for taking my question. For three consecutive quarters, you guided roughly a solid 12,000 new business subscribers net during the pandemic. As the business environment improves, do you believe you could increase or accelerate the number of subscribers you add per quarter? The second part is, given your capacity to add users per quarter, can you add 15,000 per quarter outside of your largest customer while continuing to expand within it?

Eric Stang, CEO

Let me take the second part first. We have a lot of capacity to expand with more users. There is nothing holding us back on that front. To realize our growth ambitions, we have to add more users going forward, which is part of our strategy. Honestly, the second wave of the pandemic impacted some of our channels. Not enough to slow us down fundamentally, but we do think as we look forward, those will bounce back. We are seeing a brighter outlook now compared to the early parts of Q1. Yes, it is our intent to grow significantly. There are about six million businesses in North America with one to 20 employees. We have about 100,000, so there is a tremendous opportunity for us.

Brian Kinstlinger, Analyst

Thanks so much. Has management and the Board considered M&A to accelerate enterprise adoption or enhance your entry?

Eric Stang, CEO

We got to where we are partly through two M&A moves: the acquisition of Voxter, which brought us more technical capability, and the acquisition of Broadsmart, which provided an established customer base and relationships. Those moves laid a great foundation for us. We are open to more M&A if it aligns with our direction, but it's not a primary focus right now. We don’t want to distract ourselves from current opportunities.

Brian Kinstlinger, Analyst

Okay. Thanks so much.

Eric Stang, CEO

Thank you.

Operator, Operator

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Eric Stang, CEO, for any closing remarks.

Eric Stang, CEO

Thank you, operator. Yes, we do have some closing remarks. As we announced on April 26, Ravi will be departing Ooma to pursue other opportunities. Upon his departure, Namrata Sabharwal will take over as Interim Chief Financial Officer. We also intend to enter into a consulting agreement with Ravi to assist in the transition. I’ve received many comments since the announcement that we will miss Ravi's presence. I can honestly say he's been like a brother to me over the last 6.5 years and I will dearly miss working with him every day. I am happy to see him move to the next chapter of his career and wish him great success. Ultimately, on behalf of the Board and the company, I want to thank Ravi for his many contributions. Thank you.

Ravi Narula, CFO

Thank you, Eric. This means a lot to me. I would like to take this opportunity to thank Ooma's Board, customers, shareholders, and the entire Ooma team for providing me with such an amazing experience. Over the years, we have seen Ooma mature into a solid public company supported by a strong management team and a culture that enables continuous improvement. Ooma has executed well towards its strategy and is well-positioned for the future. I am forever grateful for the opportunity to be part of something substantial. I have very much enjoyed my time at Ooma; it has truly become a second family to me. I wish Eric and the entire Ooma team the very best. Thank you.

Eric Stang, CEO

Thank you, Ravi. Thank you everyone on this call. A new chapter ahead, but we are looking forward. Thank you everyone. That ends the call.

Ravi Narula, CFO

Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.