Ooma, Inc. (OOMA) Earnings Call Transcript & Summary

This is Dave Mossberg from Three Part Advisors, and I want to thank everyone for participating in our East Coast IDEAS Conference and for this webcast presentation, we have Ooma. With us today from the company, we have Eric Stang, the CEO; and Ravi Narula, the CFO. And I'm going to turn it over to management to kind of walk through their slide deck. And then I'm going to ask some questions after they get through the deck as well. And with that, I'll go ahead and turn it over to Eric.

Thank you, Dave. Pleasure to be here talking with you today. Ooma is -- why don't we start with our safe harbor statement? Just that the presentation contains forward-looking statements as you can see with the rest of our language here. Ooma is a provider of cloud communication services. We serve businesses and residential users. And to give you a little bit of a general background on the company before I go into some of the special things we're doing, we were founded about 15 years ago. We went public in 2015. We are about $160 million in revenue run rate and have over 1 million core users. These are folks on our business or residential phone service solutions. We have another 1 million-plus mobile-only users that we kind of handle separately in our presentations. We're serving businesses of all sizes, although we have a very big focus on smaller-sized businesses, and we're the leader in serving them, we believe. Over 90% of our revenue is recurring, with very good retention. We're about 800 people globally, headquartered here in Sunnyvale, California. And before I go any further, let me just say upfront. One of the things we're very proud of for Ooma is what customers say about us. In customer surveys, on the business side, we are rated #1, and have been for 7 years in a row. And you can see some of the other names on this slide. We are thrilled to be at the top of that list. And similarly, for residential users, we also stand out at the top as the #1 pick by consumer reports. This is just very important in our philosophy and the kind of company we're trying to build. We get a lot of our business word of mouth. We think happy customers makes a big difference in our ability to grow and succeed. Our solutions span from residential to small to larger business. I'll start with the middle, small to medium businesses. That's our biggest focus today. We have a solution we call Ooma Office. It's created for the needs of a smaller-sized business. Now it's a very complete solution that offers sophisticated call flows, mobile apps for when you're out of the office, an IVR that will answer the phone for you, call recording, a desktop app for using your computer, eFax for faxing, conference bridges. But it's implemented in a way that it's very simple and straightforward for a small business to use, particularly a business that doesn't have an IT department. And this is the fastest-growing part of Ooma today. Overall, in terms of business users, we grew 54% last quarter year-over-year, which we think makes us one of the very fastest-growing players in the space. Our tagline here is, for a small business, you can sound like a big business at a small business price. And I'll talk a little bit more about the superior value we bring for this solution as well. 90% of the businesses in North America are 20 employees or less, and this is a perfect solution for every one of those businesses. We also extend though up to larger-sized businesses with a solution we call Ooma Enterprise. Ooma Enterprise rounds out the capabilities with more sophisticated solutions like call center, interfaces to other solutions, video collaboration solutions and things like that. And while we're very strong in all those areas, what really sets us apart with Ooma Enterprise is our ability to customize the platform to meet special or unique needs that a large business may have. It's very common for us to talk to a larger-sized business, find out they want to do something special in how they run their business, and we're able to enable that for them. This is possible because our platform is API-based in design. And much like some of the other solutions out there like a Twilio or others, we can use these APIs ourselves now to customize for the business. Our largest customer today as a company is over 20,000 users, which I think is as large as just about any customer of any of our competitors can say. And we won that customer because of our ability to customize our solution for them with Ooma Enterprise. And in fact, for that customer, combined it with Ooma Office as well. Ooma Office and Ooma Enterprise are about -- represent about 43% of our revenue today as a company. The other 57% is on the residential side of our business and a small mobile app business called Talkatone. But on the residential side, Ooma Telo today, as I said, is the #1 solution in the space. It starts off with free home phone service, just pay taxes and fees, and is very highly regarded by our customers. We are growing slowly in this segment because of our focus on business, but we are not shrinking and have relatively low churn rates compared to our competitors and what we see in the space. So also a very strong solution. Our #1 feature on Ooma Telo is we block telemarketers from calling you. And our customers just love that. I won't go -- I won't say much here about our platform, but we've been 15 years into building this, and we believe we've built some very sophisticated solutions that are very dependable, ensure high-quality voice even in difficult Internet circumstances and which can be very reliable for the customer as well. I mentioned our disruptive cost structure. Our average ARPU, revenue per user, today is about $11.50. That's a blend of a higher number for business and a lower number for residential. But even with that relatively low ARPU, we can drive a 70% margin on the 90% of our revenue that's recurring. That to me is just incredible. And it shows how we've engineered our platform to be the, what we think, is the lowest cost in the industry. Part of the way we've been able to do that is we design our solution end-to-end, including the CPE that goes on-site with the customer. And that's allowed us to be very dynamic in how we manage costs. I think it's a key advantage for the company and represents the fact that we're the disruptor in the market from a price and value standpoint. Our business also has great scope spanning from our earlier days when we were focused just on residential for the last 5 or 6 years when we focused more so on serving our business customers. We get a lot of strength out of our scope and range. We have over 2 million users total for the company, which creates tremendous scale. Again, that benefits our cost structure. We have a significant brand name that we developed from the retail activities we've done. We find that carries over, particularly for smaller businesses who tend to purchase much more like a consumer than, say, a larger business might do. We're also excited that our reach, our activities extend with new opportunities. One key new development for us as of about the middle of last year is our partnership with Sprint. Sprint partnered with us, they -- we sell our Ooma Office small business solution today under the name Sprint Omni. And they also power our wireless Internet solutions shown below that on this chart. We have developed something we call Ooma Connect, which it marries up a custom-designed wireless antenna with an enhanced base station from us to provide wireless Internet into a business. This is a new product that just launched for us in April this year. We're very excited about it. We can give cost effective backup or even primary Internet into a smaller business with this, and really excited to be in the market with us now with -- partnered with Sprint. We're great at working with resellers, particularly resellers who want to white label or who customize the solution for their own. That speaks back to our ability to customizing their enterprise platform. And with our residential customers, we've even brought out some security solutions: motion sensors, window/door, water sensors, creates a little more ARPU for us and makes our customers a little stickier on the residential side. So these are some of the ways in which we've be able to expand as a business over time. We see a massive market out there. There's no question. There's a big shift in the market going on from traditional solutions to cloud-provided communications solutions. Cloud is more flexible. It is more dynamic. It can support you wherever you are. And in some ways, we and all the companies in our space are riding this wave, which has got 10-plus years to go in terms of seeing this market convert. But as I said, we have a very specific focus around smaller businesses and around customizing when it comes to larger-sized business that I think set us apart in the industry from others. Our go-to-market strategy is very integrated. We do both direct sales and also sell through resellers and partners. We even sell through retailers. That's primarily our residential activities, that we sell some of our business customers even to retailers. We do primary advertising, whether it be radio or TV, but also a lot of online advertising, customer referrals. We leverage our Net Promoter Score heavily for that. And with the expansion we're doing in services, we're able to drive up our ARPU, and that is also very good for our business model, as Ravi will describe. So putting it all together, we have a number of key drivers for growth as we look forward. The first is just small businesses out there with underserved needs. It's a vast market opportunity. We do not tend to run into our other large cloud competitors when we serve that segment. And as I said, I think we are leading that segment today with our solution. Our larger businesses with customer requirements where we can bring them something different from what others would provide. Resellers, particularly those that want to own brand, have their own brand on their solutions. We enable that with our platform. Spanning into new adjacent services like Ooma Connect. We also have an enhanced version of our Ooma Office called Ooma Office Pro and other things to come in terms of new adjacent services that we're developing. And finally, geographic expansion. Something I haven't mentioned. We are largely North America today, but our largest customer is doing a pilot with us right now in a new geographic area of the world, and we'd like to see us roll out on a large scale with them in that new geographic area. And that is a great foundational customer opportunity to expand beyond North America for Ooma, and we are excited to be pursuing that today. So with that, let me turn it over to Ravi who will take us through the financials.

Thank you, Eric. As Eric mentioned earlier, we are around $160 million run rate business, a mixture of both B2B and B2C. Revenue growth primarily was -- has been driven by growth in business users and business revenue. So now 43% of our revenue is coming from business customers. And as you will see, 90% of our revenue is subscription services revenue, which gives us high visibility about our business. So pretty happy with the visibility and the growth in business there. If you look at subscription services here, we have more than 1 million subscribers, core users in the business, with 23% of those core users are business users. They've been growing pretty fast. And that 23% business users gives us roughly 43% revenue. And we had -- in Q1 of fiscal '21, our growth rate for our Ooma Business, including one of the acquisitions we made a year ago, gave us business revenue growth of 54%. And organically, it has been growing very well also. So we grew 33% organically year-over-year on the Ooma Business side. One of the key things Eric also mentioned was our ARPU. It has been improving. It's $11.56 blended now. Our monthly ARPU for a business user is around $20 a month. And for a residential user, a customer is around $8. And typically, we may have -- sometimes a business customer may have 2 or 3 users. Sometimes, they may have 20-plus users. And we have -- the largest customer has more than 20,000 users. So blend of all of those combined has helped us improve our ARPU significantly over the last 3 or 4 years now. And along with the high ARPU growth, we have seen the user growth, and which gives us increased -- ever increasing annual exit recurring revenue, or AERR, which is now $146 million at the end of Q1. And it grew 20% year-over-year. So we have low churn, very good ARPU and growth in AERR, which is actually positioning us well for an improvement in gross margins. As ARPU goes up and with a low-cost structure, we are seeing margin improvement. At the end of Q1, our overall gross margins for the company was 63%. If you look at fiscal '19 and fiscal '20, they were 60% and 62%. And subscription services margins at the end of Q1 were 71%, and our long-term target model is 75% to 80% for subscription services. And I think we are well -- I'm confident about getting to our long-term target model by a number of factors. One is low cost structure. And then beyond that is adding more business users, which gives us a higher ARPU. And we have brought in services like Office Pro where we can upsell to our existing customer base, which will help improve margins because these new services provide us good gross margins for the business. And as we grow, I think we also expect to get scale benefits from higher users and getting benefits there. If you look at Slide 19, with improving EBITDA. This is 8 quarters of EBITDA. And if you look at the first 5 quarters, we were running the business slightly negative EBITDA, but for the last 3 quarters, we have turned positive. And we had a 1- to 3-year target model of 5% of revenue as EBITDA. And in Q1 fiscal '21, we achieved that goal. We actually were close to 8% of revenue so -- and along with that, in Q1, for the full year fiscal '21, we raised our net income guidance by $3 million. So now our net income guidance for fiscal '21 at the end of -- as we guided for the full year was $5 million to $7 million. So we feel we are well positioned to continue to improve our EBITDA going forward there. We have a strong financial position with $23 million of cash, with no debt. And we -- in Q1, we had $2.8 million of cash used in operations. But for the full year fiscal '21, I expect the cash used in operations to be at least breakeven or positive on a full year basis. And as you will see, capital spending is also pretty minor and low for us as a business, given we have a very scalable network infrastructure which is actually helping us grow and scale. Last, long-term target model. We talked about gross margins. I'm pretty happy with the progress we have made over the last couple of years in improving our subscription services' gross margin as well as our overall gross margins. And you will see R&D and G&A. We are starting to see leverage now on those as we get bigger scale. R&D at the end of Q1 was 19% of revenues. And just a year ago, was 21%, 23%. So it is -- we are seeing the benefits of R&D as we finish up some products and we focus on growth of Ooma Business there. And G&A, we -- as we grow, we are seeing some leverage. Now it's 9% of revenue versus previously was 10% and even 11% previously. And we have a very good unit economics to get a customer. It's customer acquisition costs or payback period. So our goal is to continue to invest into sales and marketing so we can get more and more users, because we have very low churn and the customers actually stick around with us for quite some time. So very happy with how our unit economics is working and pretty confident -- given these factors, we are pretty confident with our long-term target model also. With that, we'll open it for Q&A.

Really a great overview. I just have some questions I wanted to walk through. Really, as you saw in the presentation, you have over 1 million subscribers, 800,000, residential; 200,000, business. And maybe if you could just kind of give us a little bit of background on how you've been able to establish the position in the market.

Yes. This is Eric speaking. It comes back to the very early days of Ooma when we said we're going to architect our platform differently. We recognize that for residential and small business users, they don't have the best Internet all the time. And when the Internet gets busy, you get packet delays and voice breaks down. So we built a platform that includes the end point CPE with redundancy and other technologies to ensure great voice quality even under stressed conditions. As part of building the platform that way, we're also able to architect a lower cost structure. Our end point devices make the final call routing decisions in our network, and we're very dynamic about how we do that. But those core capabilities are what we've built on ever since. And they're why we were able to break through with residential customers with some unique features, but also great value, and why we've also been able to be so successful with smaller businesses. The DNA it takes to serve a residential customer, product has to be really simple, has to work all the time and be good value, is the same DNA you need for a small business owner, who listens to an IT professional and just wants to get things done. And so we've made our solution very capable for the small business unit owner. They can set it up and configure it themselves. There are wizards and screens to walk them through. We can monitor their internet connections and even change settings for them remotely from our customer service department if we need to as well. And that's just giving us a total package for the small business customer. We were seeing so many of our sales and marketing activities that will also come across larger-sized customers who wanted our solutions but maybe needed something more. And that was what led us to branch out into Ooma Enterprise for larger businesses. And we wouldn't have won this largest customer that we have that's over 20,000 users if we hadn't been able to bring Ooma Enterprise together with Ooma Office. So I think the strategy is working and gives us a lot of capability in the market today.

Yes. So I think we -- my next question is really to talk just kind of about how you differentiate relative to alternative solutions. I think you covered a lot of that. Was there anything else that we didn't cover?

Yes. I mean we can get into more detail on a question like that. But I think at a high level, we view the market differently from others. We see the small business customer as a different segment with different needs from the larger business customer. And we -- through our focus on that small business segment, we've done things differently from others. And I think that sets us apart and means we can be successful. Even if others are successful in other segments of the market, we don't have to go beat a lot of competitors to continue to execute and grow in the small business segment. In the larger enterprise segment, I think our differentiations come through with my comments about our ability to customize. We find a lot of large businesses need special analytics. Maybe they have a homegrown CRM solution they want to tie into. Maybe they just want text messages to go 3 places at once. I mean we've done all these different kinds of things for customers. And the ability to sit down the large customers and say, "How does your business work? What do you want? What will make your business better?" gives us a real leg up in those conversations.

That's great. Very helpful. Just to kind of move on to another topic. Everybody in mind right now is COVID-19, one of the reasons why we're doing this conference virtually. And then kind of guidance. Maybe you can kind of give an overview of what you're doing. The economy is beginning to reopen. What you're doing right now to kind of position yourself for opportunities as the economy begins to reopen?

Sure. Happy to.

Yes. It's a good question.

Sorry?

No. Go ahead, Eric.

Thank you. We're very proud of the fact that we had a great Q1 result even under these conditions. I think it sticks to the resiliency of our business model because about 30% of our sales go through some kind of form of face-to-face sales process, whether it's through resellers and partners or otherwise. And we had to shift and adapt with our online and other indirect sales methods. And I think we did a fantastic job of it. But I will say that as we come out of shelter-in-place, and we turn back on or start to work with our more face-to-face channels, we're seeing very good results. I think this whole pandemic has helped businesses realize that maybe the solutions they had were not that flexible or not going to meet all their needs in the future. And I think, if anything, customers are more receptive to talking about making the shift to a cloud solution. Ravi, did you want to add to that?

I'll just add 1 or 2 other things. We did see slightly higher churn, especially when we have small businesses. Some of those businesses were more impacted due to COVID-19. And in my guidance, I also assumed there could be unknowns in the future, whether it's the second wave of COVID-19 coming in or a bigger impact on the small businesses due to recession and other aspects. So we looked at all the factors which were in front of us and what we could have assumed. And we wanted to make sure we have guidance which reflects some of those potential concerns also. So we feel we have a very good -- as I mentioned earlier, we have pretty good visibility, given 90% plus of our revenue is recurring revenue. And so far, we have been very happy with the churn we have. So we are well positioned to deal with it, but there's a lot of unknowns, so we wanted to be just cautious about those unknowns also.

Okay. And then some of the -- maybe some of the churn. You had some challenges with the installed base. Maybe some delays with new deals. Clearly, this kind of distributed works environment would be a good environment for the value that Ooma has. Can you maybe kind of see what you're seeing, really, more recently related to that trend?

We do see some of that. We offer a video collaboration solution with Ooma Enterprise, and we've seen increased interest in that. We recently launched a desktop app to go on our small business office solution so that people can -- who are working from home can do everything right from their desktop without needing an IP phone next to them. But we also made it possible to have a second IP phone at home. And it works just like you're in the office and you have capability either location to use it. We have great mobile apps. Our mobile apps include SMS and MMS. And you can use both cellular-based calling and data-based calling on them, and they're very robust. So that's also been great for our customers. And the use of our IVRs allows customers, too, to direct customers if they're not able to answer the phone. So there's a lot of added benefits, especially for a small business that maybe before Ooma just had a few lines from a traditional provider, maybe a Ring Group, but none of what I just described. And so we can really enable a business to work remotely and work with calls waiting and lots of -- lots more calls than they may have had before. So we're leveraging all that as we look forward.

Okay. Great. And kind of moving on to a new topic, and just kind of some of the customer targets, particularly the large customer that you were talking about earlier on this webcast, and also some of the times, is it the same one that you've mentioned in the last couple of quarters with customized deployment? And what I'm curious about is how does that affect scalability on using that approach where you have to do customized deployment for these -- for the larger customers? How do you think about that going forward?

Well, actually, that's the key. And I'm glad you raised it. It doesn't affect scalability very much. We have a multi-tenant software platform that can operate differently for every single customer on it if we choose to go that far. And because it’s API-based in design, our ability to change it and customize it is very quick and easy for our team. We have people on board set to do that. Now I don't want to mislead you. A lot of our customers just take our standard solution, too. And their -- that meets their needs, and that's terrific. But we always work with a customer to find out how their business processes work and see if we can't better enable what they're trying to do. It builds a better customer relationship, a stickier customer relationship. And in the case of this large customer that we've been talking about, it's leading to further rollouts, further expansion, which is also just thrilling to see. We've done something special for them, and they want to leverage it as much as they can. So I think on the business strategy, it works well for us to give us our own unique position in the market versus the other several UCaaS competitors that you might think of.

And then maybe just kind of talk about what's -- are there additional large opportunities like that? And what the pipeline looks like?

Yes. I'll mention one thing. We have this new solution, Ooma Connect. It's a great way to create backup Internet into a business. You can hook up your primary Internet into our box. And your -- all your business will run on that until that goes down, and then the box will automatically and seamlessly fail over to wireless for backup. And there are a lot of large companies in the United States with distributed locations, particularly companies with a lot of retail locations, where they can't afford for a credit card reader or a phone solution to go down. And a lot of those companies today already put in some form of backup Internet. It can be costly. And so the combination of Ooma's solutions for a phone service along with Ooma Connect can be -- we think can be a compelling combination. And it isn't just for individual small business we might talk to, but it can also be relevant to some very large players out there. That's the kind of thing that we look for. We look for opportunities where we can bring something special. And we have a small team today that's focused on looking for those kinds of opportunities.

That's great. Obviously, channel is really important for customers or for suppliers in this segment, particularly the business segment, sorry. And maybe you could kind of go through the factors driving your channel expansion and what you're seeing for Ooma Business.

Yes. I think first of all, I think relative to other competitors of ours, we probably sell a little bit less through channels, through resellers, than others. As I mentioned, about 30% of our revenues, we think, have some face-to-face sales component. I think it's higher for our competitors. So this has been an area of focus and development for us. And we're very excited about some of the new things we're doing to build in that area. And -- but I think it's an area of long-term growth for us as we do more there. Yes. We -- our resellers really value the extra capabilities we can do for them, even those -- including those who want to go to a full white label solution, which we can enable.

And to give you one perspective...

Just give my #1 quick question -- I'm sorry.

Yes. I was just going to add on one thing on the channel partner side. We started this VAR channel relationship process just 3 years ago. So we are pretty happy with where we are today. But we started, and now, as Eric said, we are close to 30% of our revenue coming from channel relationships.

Okay. Great. Just a quick question on the balance sheet and kind of cash needs. You've got $23 million in cash and investments on the balance sheet at the end of April. If I'm correct, I think you said that you were increasing your expectations from breakeven to generating positive cash flow for the year. And maybe just kind of go over quickly what your perspective for future cash needs would be?

Yes. You're right. We have adequate cash to run our business. We don't need to raise cash for our day-to-day business needs. So where we would need the cash if we were to? It's probably for 2 focus areas. One could be if and when we need to make an acquisition. Given the times, there could be an opportunity in the future if we were to -- if we have something which we may need to raise cash at that time. But we don't have anything. At this time, focus on M&A, but that's -- that might be a need for cash. And then as we expand, whether it's internationally or in another area of our solution, we might need cash. But right now, to run our business as we are and continue to grow, we do -- we have adequate cash to run our business there.

Okay. And then I have some other questions. I think we have a few more minutes just to talk about the kind of the market landscape. Large market, it's minimally penetrated. There's been obviously some entry from some adjacent markets from Amazon, Cisco, Google, Microsoft. Some disruptors like Zoom. And you've done a good job of kind of flourishing in that type of environment. So the question is, why is such a territory attractive for Ooma? And how can Ooma scale from the niches where it's established a strong foundation?

Most of the competitors we see out there are focused on larger businesses. And when we're selling to smaller-sized businesses, most often, we're just competing with maybe an AT&T or a cable-type solution. That's 90% of the businesses out there. It's 5 million to 6 million businesses in North America like this with employees. And we're excited about our ability to serve those customers. And I think it's a very large segment for us in a long-term growth opportunity. I feel like our future is largely in our hands in terms of our ability to execute to drive our growth in that opportunity. With larger-sized businesses, we have some unique solutions relative to others, and that's also propelling us as well. But I think that our focus and also our cost structure and the value we bring are real differentiators in the market. And so I don't think of us as a small player. With over 2 million users total, including our mobile-only users, we're as large as the other largest players out there. And we have a cost structure and scale to go with that. So yes, our pricing is lower, and that probably affects the overall revenues to some degree. But I think it's also a very strategic approach for us to build and retain customers over the long term.

Okay. Great. And then I wanted to just kind of get your perspective on convergence, the convergence of cloud PBX, contact center, video meetings, collaboration. What are your views of the convergence concept? And where might the arguments for convergence kind of vary in significance?

Yes. Convergence is -- is something that is what UCaaS and our solutions and our industry is all about, being able to give people a range of tools to do what they need to do wherever they are. I don't think any one company is going to build all of that or control all of that. And so what you see is companies partnering or integrating in different ways to bring a more unified experience with the customer. And we do that as well. And that's -- I think it will evolve like that for an extended time. I do think that with the work from home that we're seeing, tools like Teams and Slack are probably being used a little bit more than they might have even been previously. And I think that some of the video collaboration and other capabilities, certainly, as we all know, are getting used more than they were used in the past. Convergence -- but still, it's the same trends and outlook we've all had for the industry. I think convergence is happening more so for larger-sized businesses as well than it's happening for smaller-sized businesses. Our smaller-sized customers often care more about, can they page in the warehouse. Or can they record a call or things like that. And we're excited to be able to provide those types of capabilities. So yes, convergence is a long-term trend, but I don't think this is a -- one company is going to win and somebody else is going to lose. We're all moving in the same direction.

Great. Just kind of one last question. I appreciate you all for your time. Just kind of in terms of how do you think about the long-term vision for Ooma, and kind of -- how is that reflected in your current investment priorities?

Our long-term vision for Ooma, we believe Ooma can be a very large company someday. The market potential is there, and we believe we have the right solutions for growth. So we're focused increasingly than ever -- more increasingly than ever before on execution. We -- part of that means we were investing, in our peak, 24%, 25% of revenue in R&D. That is now down to about 19%, as Ravi showed. Getting that and other leverage in the business model will help us to spend more on sales and marketing execution while also driving the bottom line. And part of our strategy, too, is, as we expand with Ooma Connect, we've talked about how we're going to be expanding with additional adjacent services that will run in conjunction with Ooma Connect as part of a more complete solution for the smaller business office. And we think that -- that may be, in some ways, is another form of convergence. It's more of an infrastructure view of convergence than a capability on the desktop view. But our longer-term vision is that we will increasingly become an integrated provider of infrastructure capability to smaller-sized businesses. And we're excited about that. In the next couple of years, you'll see new things roll out from us that will put more definition in that strategy.

Well, great. Well, I'm excited to hear more about that when it comes -- when you're ready to talk about it. We are out of time, unfortunately. So I want to thank Eric and Ravi for participating in our conference and for taking the time to do this. I want to thank you all for listening. And this concludes our presentation.

Thank you.

Thank you.