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

Hi, and thank you for joining us at the UBS Telecommunications Conference. Happy to have here Eric Stang, CEO; and Ravi Narula, CFO from Ooma. Ooma's a cloud communications company rapidly expanding into small and medium business and enterprises. Eric, Ravi, welcome.

Thank you. Hello.

So would love to get an update on the business and just start with the question that is on everyone's mind and everyone's asking, which is how has COVID been. And how has the impact been to your business with the changes we've all seen this year?

Sure. Happy to talk about that. We had a great Q3. We did well on all fronts, and we're able to exceed our expectations and set some new goals for Q4. So we're pretty excited with the things happening in the business right now. The pandemic this year, if you look at the year, slowed us down, particularly in the first half of the year. Some of our face-to-face sales channels took a bit of a setback. And a large customer opportunity had some delays associated with it. But I think we bounced back very strongly. And as we sit here today, the business is doing well. And we're obviously a little nervous about the increasing closures and such as the pandemic gets worse at the moment. But so far, they haven't affected our business meaningfully, and we feel like we're in a good position as we sit here today.

And any difference between different segments of the business or how they either declined or recovered over the quarters?

Yes. In addition to seeing some of our sales channels a little bit challenged in the first part of this year, we did see the churn go up a little bit in our business, not that much. And we're happy to say that as of later Q3, the increase that we saw on the business side of our business, the business customers, that churn has come back down to close to pre-pandemic levels. So pretty much put that behind us. Residential churn remains a little bit elevated still but not concerning to any degree. We've -- we're also seeing a lot of new business growth in the economy today. A lot of new business is getting started. And our online channels in e-commerce have been very strong as well as each of the other parts of our business. It really was a quarter in Q3 where each of our channels did very well.

. Great. And maybe just more broadly, how do you balance the consumer segment versus the business segment at Ooma? And what are the longer-term trends you're seeing in each and opportunities?

Sure. From a balance perspective, we are very focused in terms of our new development activities. And in terms of a large part of our sales and marketing spend on growing in the business segment. And we're very proud of what we've achieved so far. We started out as a company 12, 15 years ago, focused on the residential segment, I think, did an incredibly good job of that and became the #1 rated solution for the residential segment, and we remain that today. And we trade on that in terms of continuing growth in the Residential segment, which I'll come back to in a minute. But over the last 6, 7 years, we started to focus more and more on the needs of smaller-sized businesses. We think that's a segment that has very unique requirements that are different from larger enterprises. And I would say today that we have really conquered that segment and are #1. Certainly, the users in surveys rank us #1 above all the other competitors as the best solution in the business segment. And today, we're now moving beyond that with Ooma Enterprise. And while we have farther to go, I have every confidence that we're going to have some very unique solutions and do even better things at the enterprise level. In terms of balancing investment, we have cut back most of our sales and marketing spending on residential to the point where most of what we do today is working with our retailers, Amazon, Costco, Best Buy, we'll be in promotions with them. We'll do things with them, but we don't do much more than that. And so the bulk of our spending is on growing on the business side.

Yes. And to that end, we know you've seen strong initial interest in new products like Ooma Office Pro. Are there other pieces you're looking to add to your offering for both the consumer and business perspective?

There are. We've come quite far in the last just 12 months. Ooma Office Pro is just about 12 months old now from launch. And we've brought out in that solution a number of really fundamental capabilities, desktop app so that you can use our solution online from your computer. We've expanded what we do with our mobile apps. We've introduced call recording. And just this last quarter -- or actually weeks ago, we launched Ooma Meet -- Ooma Meetings, which allows our customers to have a video conferencing experience, much like we're doing here today. We're really rounding out that solution. And with that, we're able to move up to a little bit larger customer size and really enable some new opportunities in the market. Today, about 30%, a little over 30% of our new customers step up and pay more to get Ooma Office Pro. And we're really excited about that. If you look at our strategy going forward on the office side, we're going to continue to add more features into Ooma Office Pro. There will be more things that you see coming as we go forward. And ultimately, if you think longer term and now with no specific time line on this, we do think about even having higher levels -- higher tiers of service beyond just what Office Pro is meant to be. This gives us the opportunity to increase the ARPU on our customers and make our sales and marketing activities more efficient because of the return we can get when we get a customer.

Makes sense and sounds great. Have you seen the competitive landscape shift over the past year?

Yes. Let me look at it across the board. We don't talk that much about residential, but residential for us is a very solid, profitable and still growing business. And we believe there's 50 million-plus households in North America that could save money and get a better quality of service if they switch to Ooma. It's still a big opportunity for us. And if anything, we've seen competition pull back in that segment, magicJack got purchased from a private equity buyer and has, I think, spent less in the market. And Vonage has got its residential business. They've announced it's up for sale. And we just keep chugging along, and we're very excited about with very little effort on being able to continue to maintain our residential business or even grow it to whatever degree we decide to invest in it. So we feel very strongly about that part of our business. But it is our goal to move our business revenue, our revenue from business customers up to be more than 50% of our revenue. And today, we're about 44%. And -- so in that space, yes, we see competition. But interestingly, again, you have to think of it by segment. In the small business segment, where we're so strong and where we can offer really a turnkey experience for the customer, easy onboarding, great value, they can configure the solution themselves. They don't need a VAR or professional involved. In that segment, We don't see competition that often. That's -- those customers, call them 20 users and less, are 90% of the businesses in North America. And we've seen most of our larger competitors move up and away from that segment towards larger-sized businesses. Our biggest competition in that segment is usually the cable company who's trying to do a bundle. And some of the new things we're doing in that segment allow us to kind of come back with similar-type solutions. We have Ooma Connect that we launched recently, which can provide internet alongside the phone service to be a more of a total solution for that small business customer. But honestly, we haven't really seen competition do much in the small business segment other than maybe be less focused on it. When you move up to enterprise, there, I would say some of the competitive dynamics are changing, and they'll continue to change. With the pandemic this year, I think it's fair to say that competitors have gotten a little bit more price-competitive in certain areas. And there, we also see Zoom offering phone service today. We see Microsoft growing very significantly with Teams. You've seen a number of companies come out with solutions to integrate with Teams. That is a way that you can bring the capabilities of a more complete UCaaS solution to work alongside Teams. And that's something we think about as we look forward as well. In the enterprise area, though, our strategy is around focusing on certain segments and certain capabilities that we think differentiate us in the marketplace. And we see ourselves winning all the time with these -- with this focus and the capabilities we bring. And it's a big market, and I think we see segments where we can really be the leader, and that's the way we're thinking about it today.

Thanks. That's helpful. You touched on it a bit, but any other ways you'd highlight that you continue to differentiate Ooma from competitors in UCaaS?

Sure. In UCaaS, I talked a little bit about it at the small business level with Ooma Office. And just continue to fill out the features there, but maintain this curated, small business-focused type solution is key for us. We ship out our products preconfigured, ready to plug in and use. We have setup wizards and other very easy ways for our customers to onboard. We offer a very complete solution for the money. I mean for just $20 a month for a user, we're giving you a complete PBX in the cloud along with very sophisticated mobile apps and eFax and conferencing and a variety of ways to use the solution. We can use analog phones. We can connect up wirelessly We can marry up Ooma Connect and now Ooma WiFi into a more complete solution for a new business that's getting started. It's really pretty compelling. But when you move up to Ooma Enterprise, we have certain segments that we're focused on. These tend to be businesses where we believe the capabilities of our solution can bring some extra value. And we also think a lot about and focus a lot on the fact that our solution is very customizable. And we will enable specific features for customers that bring them some capabilities they might not have already had. Our largest customer today, and this is something we're very proud of is over 25,000 users. Think about that. That's one of the largest customers in the industry for any company in the industry. And we were able to secure that customer by being able to customize our Ooma Enterprise solution for some of their needs and to integrate our small business, Ooma Office solution for the rest of their needs into a total package that they just loved. So using that capability to customize is one of our core strengths. Another is the fact that we will enable very flexible deployments. We will bring in the internet, the security, the other things that might need to go around a solution so that we can take care of the customer in a complete way. And we enabled some of that capability with our acquisition of Broadsmart about 1.5 years ago. They were a very nice team that was very good at doing these kinds of things. So we can be more of a complete solution for our customer with our enterprise solution as well. We're excited about what we see in enterprise and where we can go with it. A lot of our enterprise business goes through VAR and reseller channels as does some of our Ooma Office business. We were able to -- growing with sales through resellers and bars has been a focus for us. And we were able in Q3 to talk about how we've now moved up to a little over 40% of our business revenue coming through those types of channels. And I think the fact that our VARs and resellers are growing with us, and we're adding more of those partners all the time helps show that we're bringing something special to the market for certain customers in certain needs.

Yes, that makes a lot of sense. Are there other new channels that you will plan to invest in as well?

There are. We're always investing in new areas. I think the biggest area for us, we had plans this year to expand internationally in the new geographic region with our largest customer who can enable that at scale. And those plans because of COVID were delayed. We still don't know when we'll be able to get back on track with that. But we know that customer continues to have a need and that we are their preferred solution. And so we're hopeful that as we look out to next year, at some point, we'll be able to get back on track with that. And that will be a nice expansion and a new dimension for the company to grow that way. So that's one thing we think about as well as the different channels that we that we sell through.

Great. And hopefully, you'll be able to get back on track with those plans soon as we all hopefully get back to normal soon. How do you segment your customer base? And are there particular areas or verticals you're focusing on more than others?

Let me let Ravi take this question, if that sounds good.

Sure.

Yes. So we look at -- [ Rory ], we look at, obviously, as Eric said, SMB business and large businesses on the business side. And within that -- within those, we do look at various verticals like hospitality industry, professional services like accountants', lawyers' offices. We look at independent and other franchises, insurance agents. So we have a very diverse segmentation. And our product is cloud communications. It scales well and addresses the needs of a lot of different types of businesses. So we've been pretty happy with the size. Initially, we started with small businesses. Now we have small, medium and large businesses as customers and a very diverse segmentation also. So as we bring in new features, whether it's the Office Pro features like desktop app, mobile apps, call recording, call recording was an important feature for lawyers, for example. So we have been able to understand our customers' needs and expand the segmentation.

Great. And you've also shown very nice continued growth in ARPU. What's been driving that trend?

I think there are a number of factors there. One is ARPU, what you see is a combination of both residential and business. So business has been growing pretty fast. So that is driving the ARPU growth because business customer gives us roughly $20 a month per user. Residential is slightly -- is $8 or $9 a month per customer. So as business grows much faster than residential, you will see the improvement in ARPU. But more importantly, we would also see ARPU improvements coming from features like Office Pro, the more we can sell Office Pro at $5 a month per user more, and it's high margin and higher ARPU. So we will continue to see improvements in ARPU because of those 2 factors.

Yes. You touched on margins in that particular point, but more broadly, what's been driving the gross margin improvements?

I think business -- when a customer, let's say, if they have 5 or 10 users, and every user gives us roughly $20 a month. So if it's a 5-user customer, we get roughly $100 per month from that customer. Residential was $8 or $9. So as we get more and more business, margins are going to come back because the cost of doing business, the data centers, what we have, a lot of those costs are fixed costs. So as we grow our higher ARPU customers, we expect to see the continuous improvement in gross margins. Office Pro, right, if a same customer is sort of buying Office at $20, they pay us $25 a month per each user. We get $125 from that customer. And we have significant value which we create for the customer as well as Ooma. So gross margins, we expect, will continue to go up because of these new features, which are very interesting and important for our customers there. And then lastly, [ Rory ], scale also plays a big role. As we have been growing our business as we're growing overall Ooma, there is a lot of fixed cost, which we can leverage. For example, during the early part of the pandemic, we saw our call volumes go up significantly. We didn't had to add more servers. So there's huge scale benefits we get as we are expanding into both business and residential side. So scale, new services, they're all helping us with the gross margin improvements here.

Yes. That's interesting on the call volumes going up. Has that leveled back off or any other trends you've seen in call or network data over the last 6 months or a year or so?

I think it is. There was a significant spike in the first 3, 4 months, and it has probably come down slightly, but it's still -- people are working from home, people are making more calls versus being in the office. So there is that elevated ones, but it is not the same level as what we saw in March, April, but it is higher than pre-pandemic.

Got it. And how do you balance going forward, investing in continued growth versus continuing margin improvements?

It's an interesting point. You -- if you look at -- in our investor deck, we have a slide which is about long-term target model. We have 2 models in there: one is midterm and one is long term. Midterm is a 1- to 3-year target model. And in there -- obviously, the #1 focus for the company is to grow the business, grow business and grow within the businesses, the enterprise and the small business side of it. That's the #1 focus we are focusing on. And for that, we have to -- we will continue to invest in sales and marketing. But at the same time, as the company grows, we do expect gross margins to improve further. We do think there will be synergies and leverage we'll get on R&D and G&A. So the goal is to have 5% or so of our EBITDA -- 5% EBITDA as a percentage of revenue in the midterm range and put the rest of the money back in the business in sales and marketing to grow faster. Obviously, we do look at our payback period lifetime value. So we do measure that. We look at -- by each channel, we look at between residential and business. But as long as those metrics of payback period are met by us, we'll continue to invest in sales and marketing while staying profitable and not burning cash.

Makes sense. And then what about inorganic investments? Anything you can share on your M&A strategy going forward?

Sure. So we've done 2 or 3 -- we've made 2 or 3 acquisitions over the last few years. Our Ooma Enterprise today is an acquisition we made of a company called Voxter, very pleased with the foundation that we were able to bring in from that acquisition, and it integrates very well into our core platform. So we are today doing our new development kind of in combination between the 2 solutions and increasingly blending those solutions together as we go forward. We made the acquisition of Broadsmart, I think, a very attractive value. We were able to purchase Broadsmart for a little bit less than 1x revenue and get a base of recurring revenue enterprise customers and a great team, an ability to develop -- bring on board some strong channel relationships as well. That kind of M&A where we can build to move faster with what we're already doing is the kind of M&A we'd like to do, if the right thing comes along. It's opportunistic for us. We don't need to do anything, and it's not our first focus in truth. But I think those acquisitions have proved to be very strong for us. And under the right circumstances, we look at additional ways to continue that trend.

Great. And last question here. How do you think about overall return of capital?

It's a good question. [ Rory ], I think we'll -- as Eric mentioned, a couple of items. We are focused on having the business side of our -- the Ooma business, Ooma Enterprise side, more than 50% of revenue. I think we are focusing on having a good growth rate on that side and increasing our growth rate. And I think the mix of business, small and larger businesses have more diversity of this. We focus on growing our ARPU, gross margins overall. The more we do those things, we think our multiple -- revenue multiple will go up -- should go up. We are roughly 2x revenue multiple while being profitable, growing pretty fast. I think this can go up to 4, 6, 8x very easily. So that's where we feel we are a growth company. We need to see our multiple go up versus paying back dividends or having a 25% EBITDA. I think I would rather use the money to grow faster. As long as sales and marketing, we talked about is -- we are using it efficiently. So we think growth in business overall to more than 50%, 60%, we have expanded our VAR channels as we discussed earlier. I think that's what is going to create a lot of shareholder value in the longer term. Eric, do you have anything else you want to add?

Yes. I would just say that even though we're quite far along, I think this industry is still in early innings, and we see so much market potential. And as we think about what we can do to a greater extent as we move to larger-sized customers, what we can do to a greater extent as we look beyond North America, then what we can do is a greater extent as we think about a more complete solution for our small business customer around their internet connectivity, their Wifi and other things to come, we just see the ability to increasingly differentiate and a long-term opportunity for growth for our business. So we've been building in this company, and we're going to continue to build to capture that. We used to spend as high as 24% of revenue on R&D. Today, we brought that below 20%, and it's our goal to keep it in the teens. But still, we're investing heavily, and we see that opportunity, and we're going to go get it.

Great. Well, I appreciate you guys taking the time to join us here, and look forward to speaking again soon. Thank you.

Thank you. Appreciate it.

Thanks for having us.

Bye-bye.

Bye-bye.