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

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the management discussion of the FluentStream acquisition. [Operator Instructions] I would now like to turn the conference over to Matt Robison. You may begin.

Thank you, [ Jericho. ] Good day, everyone, and welcome to our call to discuss the pending acquisition of privately held FluentStream. 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. Before today's trading session, Ooma issued a press release announcing that it entered into a definitive agreement to acquire FluentStream. This release is available on our company's website, ooma.com. This call is being webcast live and is accessible from our link in the Events and Presentations page of the Investor Relations section of our website. This link will be active for replay of this call for 1 year. 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, including the consummation of the transaction 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. Now I will hand the call over to Ooma's CEO, Eric Stang.

Thank you, Matt. Hi, everyone. Welcome to today's special investor call to discuss Ooma's pending acquisition of FluentStream. Thank you for joining us. Before the market opened today, Ooma issued a press release indicating we have signed a definitive agreement to acquire FluentStream for $45 million in cash. We expect the acquisition to close in about 30 days once regulatory approvals and other closing conditions are satisfied. We intend to finance the acquisition through a combination of cash on hand and bank debt financing. FluentStream is a provider of unified communication services with a focus on small- and medium-sized businesses. The vast majority of its customers are of the same type that Ooma targets today, making FluentStream a natural fit with Ooma's current strategy and operations. We view this acquisition, first and foremost, as a cost-effective means to expand our customer base and grow Ooma business. We look forward to welcoming FluentStream's customers and employees to Ooma. Based on current run rates, we expect that FluentStream will add $24 million to $25 million of revenue and $9.5 million to $10.5 million of adjusted EBITDA to Ooma annually. FluentStream has about 5,000 customers and 80,000 users today, most of which are served by its proprietary UCaaS platform. The company grew significantly over the last several years through a series of small acquisitions, and most of their acquired customers have been moved to the FluentStream platform. Through these acquisitions, FluentStream secured a significant number of channel partners and agents, which make up its primary go-to-market strategy today. They also continue to provide a highly responsive level of customer support via their U.S.-based support team. We believe FluentStream is a highly regarded provider in the market today with high customer satisfaction scores and award-winning customer support. Due to the work FluentStream has already performed to integrate its acquisitions, streamline operations and focus on serving customers well, we believe the company is currently performing at a high level. Our focus once the acquisition closes will primarily be to continue FluentStream's business success rather than seek to capture significant synergies. There are, however, a few select areas where we believe synergies are possible. These include bringing Ooma's scale to FluentStream's vendor relationships, combining certain initiatives involving new feature development and leveraging FluentStream's channel relationships to sell other Ooma products, most notably AirDial. Historically, FluentStream has primarily achieved growth through acquisitions rather than through its core business activities. Once the acquisition closes, we intend to optimize our sales and marketing investment across all of Ooma, including FluentStream to achieve the most cost-effective growth possible. We also believe FluentStream's expertise and experience at completing and integrating acquisitions will benefit Ooma going forward. Overall, our plan is to maintain the FluentStream brand and strategy in the marketplace and to leverage our resources across a larger corporate scale. As we've discussed, our strategy includes making smaller-sized acquisitions of businesses that serve our target customers when we can acquire the business at the right price and achieve cost-effective growth. I look forward to welcoming FluentStream to Ooma and believe this will be another strong step forward for us. Thank you, I'll now turn the call over to Shig, after which we will take your questions.

Thanks, Eric. Good afternoon, everyone. As Eric mentioned earlier, we intend to finance cash purchase price of approximately $45 million for this acquisition through a combination of cash on hand and bank debt financing, which is expected to be finalized concurrently with closing of the transaction. Cash transaction purchase price of $45 million reflects approximately 4.5x transaction multiple based on FluentStream's current annual adjusted EBITDA run rate, which compares very favorably to Ooma's EBITDA multiple. We expect FluentStream will add $24 million to $25 million of revenue and $9.5 million to $10.5 million of adjusted EBITDA to Ooma on an annual basis. In terms of the historical revenue composition, substantially all of revenue represents recurring service revenue with a very small portion generated in the product and other revenue category. Financial contribution from FluentStream will start from the closing date of the transaction, which is expected to occur in Ooma's fourth quarter of this fiscal year. We expect to add approximately 80,000 core business users from this acquisition. The average revenue per user per month or ARPU for these users is similar to Ooma's and FluentStream's historical net dollar retention rate has been in the mid-90% range. We expect FluentStream's core user metrics will be incorporated into our quarterly key customer metrics starting in the first quarter of fiscal 2027, which will be the first full quarter after the acquisition. In addition to revenue and adjusted EBITDA contribution, we are also acquiring FluentStream's net operating loss tax benefit of over $20 million that is expected to benefit Ooma's tax position in the future. We are also welcoming approximately 50 employees and contractors from FluentStream in this transaction. With that, we're now opening up this call for questions. Operator?

[Operator Instructions] Our first question comes from Alinda Li from William Blair.

First question is, can you elaborate more on how Ooma can leverage FluentStream's channel partner program to accelerate its growth?

Sure. Most of Ooma's business today on the business side of our revenues is done through online marketing and inside sales. We do have a channel program, and we sell primarily Ooma Enterprise and increasingly AirDial through that program. But it's not been the first focus of Ooma. FluentStream is built almost entirely off a very strong channel and partner base. And that base was built through the many acquisitions they've done over the years. And we think that's a key asset. We will be able to leverage that primarily for AirDial, which we think would be a very synergistic addition into that network of channel partners and agents. But over time, we'll have to see where we build from there. One of the nice things about FluentStream's model is selling through channel agents like they do, they don't have a lot of marketing costs, in particular, in their P&L, and that helps their bottom line results. And most of their business is sold on contract. Usually, I believe, 3-year customer contracts. So we believe we bought a well-performing stable business. And as you said, with the opportunity to leverage with some of the other things Ooma is doing.

Got it. That's helpful. And you mentioned optimizing sales and marketing across Ooma's platform also with FluentStream. Can you give more color in terms of what that could look like after the acquisition here?

Sure. We do this throughout our business today. We've made acquisitions in the past of you'll recall OnSIP and Broadsmart and others. We're always evaluating where we spend our sales and marketing dollars and the return we get on them. And we track that pretty carefully. We're going to keep the FluentStream brand name in the market and continue to invest in the business. And we'll -- obviously, we'll weigh the results of those investments versus other parts of Ooma to steer our spending to the most successful areas. We do think, too, that we can strengthen Ooma's -- sorry, FluentStream's solution in the market with some of the features we have on the Ooma side that we can also either leverage to their solution or jointly develop over time. So time will tell whether we grow more on the FluentStream side, grow more on the Ooma side or other parts of our business. But really, I made the point to say that we have the opportunity here to optimize amongst all the different parts of our business.

Our next question comes from Josh Nichols from B. Riley.

Just a little bit curious if you could elaborate a little bit on how you came about this opportunity. Was this something that they were going through a competitive bid process or something that you kind of found out about through your industry relationships and context overall. So a little bit of background would be helpful maybe.

Sure. So I've actually known the team at FluentStream for years. And in fact, the current CEO of FluentStream is someone that Ooma has had business dealings with in the past. We think very highly of that team and the leadership at FluentStream. And so having known them well over years, this -- that made this an easier decision for us. We have a lot of confidence in the management team that's coming over with this. That said, FluentStream did go through a competitive process. I think there's some real things to like about selecting Ooma as your partner for a transaction like this, given our size and our ability to close a deal like this and ability to really strengthen the business after doing so. So I feel like we put a very good foot forward. But yes, I do believe they went through a process in completing this transaction.

And then just one follow-up for me. One, I mean, clearly, they got pretty attractive EBITDA margins, a lot less on sales and marketing as you kind of touched on. Is the gross margin profile comparable given that most of it's recurring? And is there opportunities for you guys to maybe take their distribution relationships and maybe with that, save a little bit on your sales and marketing over time by using those relationships instead of just internal and online marketing that you do today more so?

Yes. In terms of gross margin, Josh, it's very comparable to Ooma's recurring margin. And I think in the sales and marketing, as Eric said earlier, in the short term, I think we want to work with them, integrate with them fully and look at how we can work together to optimize sales and marketing. Perhaps the longer term, there's maybe some synergy there. But I think short term, we're focused on ensuring the smooth transition with them and then with their customers. So that's what I would say about the sales and marketing.

Yes. And I would add, Josh, I mean, sales and marketing is a discretionary expense for us at some level. We decide how much we're going to spend based on our overall goals for the company and also the productivity of the spending. I think FluentStream being part of Ooma will give us an opportunity to improve the productivity of our sales and marketing spending and do more with our dollars. And that's powerful for us. It also gives us just bigger corporate scale. And that can be powerful, too, in vendor relationships and in presence in the market and just channel reach. So it's part of taking Ooma up to the next level of being a larger company.

Our next question comes from Brian Kinstlinger from Alliance Global Partners.

I wanted to follow up on the channel partner question. You mentioned a strong base of partners, but you also highlighted in the PR and your comments that revenue growth is mostly M&A and not organic growth, at least that's the implication. Maybe you can share what organic growth has been for the last year or 2? And how do you evaluate the effectiveness of these channel partners -- of your channel partners?

So the kinds of acquisitions that FluentStream was making were smaller-sized companies that are almost like a channel partner or a reseller in the marketplace. And those -- so FluentStream was able to make those acquisitions and keep those partners and now work with them in a new way, basically running the services that those partners used to run themselves. It's a little bit difficult to give you an answer on the organic side because FluentStream has done a lot of the heavy lifting with these acquisitions to convert the customers over to their core platform. And you're always going to have a little bit of churn when you go through a process like that. That's behind FluentStream now, but it's also part of how they got such strong EBITDA for the business. But we do believe that FluentStream's level of growth going forward will be a function of the level of investment we want to make in marketing and channel support. And that, as I said, will be balanced with what we do across the rest of Ooma to ensure we're driving the most optimal results for our spend. So it's a little bit hard to give you a direct answer on that, but it's clearly an asset to have those relationships. Those companies and partners have worked with FluentStream for many years or at least the previous provider who then became FluentStream for many years. And those are tight relationships and something we can build on. We can also build on that because some of Ooma's most advanced development around contact center capabilities, what's coming in AI, some things like that, I think, can also be leveraged to make FluentStream's offering in the market stronger. So more to come on all that.

How -- I'm just curious, how are they able to complete this rollout strategy? Were they giving pieces of equity? Were they using debt? Did you have to also -- are you taking on any debt or any payables as a result?

Yes, they mostly finance through debt. And we're not taking over the debt from them. The debt they carry will be paid off at closing.

Got it. And [ your net to settle at the ] $45 million?

Yes, correct.

I think it's worth pointing out, too, Brian, for just a moment. FluentStream has developed a very good model for this. They've been very successful at integrating over a dozen acquisitions over the last few years. That capability is, I think, a real asset for us as Ooma continues to be opportunistic for acquisitions in the future.

Well, I would think so, too. I mean you buy something at 5x and you trade at 10 to 11 makes a lot of sense. So the -- are there a number of verticals, they're mostly generating revenue from? Is there any one or two that they've been -- I take a look at their website, but is there one or two that generate the majority? And is it all U.S.-based revenue?

It is all U.S.-based revenue. There are no particular verticals. If you just do the math on what we shared in our scripts, their average customer is about 15, 16 users. And very much like the typical small business space we target.

Yes, last question, I may have missed it, you may have commented on this. Based on their margins, I assume there is no real hardware component where you have that loss leader selling the hardware before you sell the service. Is that right? Or do they also have a hardware component?

Well, they have a hardware component, but it's much, much smaller compared to ours. So my comment earlier, Brian, was substantially all their revenue. So think of it as a high 90%. So it's 97%, 98% of their revenue is recurring service revenue. And a very small portion is hardware, but they don't lose much margin on that small portion of hardware either.

Our next question comes from Josh Nichols from B. Riley.

Just one follow-up question. I agree. I think the industry is ripe for some consolidation. People have been waiting for that for some time, and it looks like an attractive purchase price multiple. One question I did want to ask, whenever you see these acquisitions, ultimately, longer term, there's some synergy opportunities with moving everyone over to the Ooma platform. Presumably, that would be over a longer-term horizon since most of these customers are on like 3-year contracts. I'm not sure what the expiration time line looks like, but ultimately, is the plan to kind of integrate these customers onto the Ooma Business platform over time and that way you don't have to run redundant platforms at some point in the future?

Actually, that's not our direct strategy, Josh. The expense comes in, in developing a platform, not in running it. And we are putting our R&D on the Ooma platform. That's for sure. But as we do that R&D, we do develop capabilities that can be easily extended to other platforms, and we will do that to augment what FluentStream provides today. But we intend to keep most of the FluentStream customers on the FluentStream platform for the foreseeable future. The work to convert them is substantial, and you run the risk of creating customer churn and other issues. We'd rather focus our energies on growth in the new areas that we're building right now. The day may come for that, but we don't actually see much of a financial penalty to just running customers on the FluentStream platform going forward. Now FluentStream had a dozen platforms because they acquired -- they hadn't consolidated all the acquisitions they've done. That would be a different matter. But here, FluentStream has an efficient team in place. They're running their platforms well. And we don't really need to make changes there.

Our next question comes from Eric Martinuzzi from Lake Street.

Yes. I apologize if you went over this, I jumped on late, but the $24 million to $25 million in revenue, is that a -- is there -- can you tell us anything about the growth rate over the prior 12 months?

Yes. So again, the -- their strategy has been, Eric, that they've been acquiring their partners, resellers along the way to grow. So if you look at the, I would say, last 1 year or so, most of that incremental revenue came from the acquisition. So it's a little hard to say the organic growth rate in that context because that's a strategy they employed for, I would say, last 5 to 6 years, quite frankly.

Okay. And then it looks like they're using AWS infrastructure. Is there anything cloud infrastructure-wise that there's the potential to leverage the Ooma infrastructure?

I'm sorry. They are using AWS today. That's correct. That still leaves open the ability to leverage Ooma's vendor relationships and scale for some of the cost structure of completing calls and operating the service from that perspective. But being in AWS, there are some things we can do. But I think over time, it will take us a longer-term time period if we want to make any more significant change than that.

Our next question comes from Brian Kinstlinger from Alliance Global Partners.

Great. Just one follow-up. I thought I heard what you say is there aren't significant revenue synergies other than potentially better economics with vendors. But to get to this 20% EBITDA margin, are there cost synergies assumed in that? And/or is there potential, if not, for some cost synergies as well?

Let me frame this and see if this helps. Applying Ooma's larger scale to their business is a cost synergy, as would optimizing sales and marketing be across our businesses. A revenue synergy would be introducing Ooma AirDial into their channel partner network so that we can expand the sales of AirDial alongside FluentStream's applications. Another revenue synergy would be bringing some of the more advanced capabilities that we've developed in our platform onto their platform so that their platform can offer more features and capabilities. So a little bit of both going on. But in the biggest picture sense, this is a well-run business, driving a strong EBITDA today. And most of the synergies that we might drive if this business were not so well run have already been streamlined and captured by their own activities. So I don't know if that answers your question, but...

Mostly. Just to be sure, I mean, oftentimes, there's cost-cutting opportunities, right? Duplicate staff on the finance side or founders aren't going to stay. Is there any cost coming out that creates this 20% EBITDA margin? Or are they already running at 20% EBITDA margin without you taking out a penny of their expense structure?

So they are already running at 40% -- close to 40% EBITDA margin today without us doing anything, Brian, right? Because we set a $24 million to $25 million run rate and $10 million of EBITDA they are already generating before we acquired them. But to your question -- yes, so -- but to your last point, we do anticipate in the short term, some low-hanging fruit like G&A related. They don't need to be audited anymore, for example, on a stand-alone basis, things like that. So we do anticipate some amount of G&A synergy, for example. I think longer term, that's what Eric is saying that we can evaluate further as we fully integrate given our larger scale and sales and marketing optimization, there may be some opportunity. But the big piece is already done in terms of optimizing.

Yes, to be clear, we believe FluentStream has a strong team, and we're bringing the full team over to Ooma.

That concludes the question-and-answer session. I would now like to turn the call back over to Eric Stang for closing remarks.

Well, thank you, everyone, for joining us today. It's obviously an exciting time for Ooma. We're looking forward to getting through the next 30 days or so through the regulatory steps and closing this and talking with you in December at our next call. Thanks, everyone, for joining us. Bye-bye.

This concludes today's conference call. You may now disconnect.