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

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ooma Management Discussion of the Phone.com acquisition. [Operator Instructions] I would now like to turn the conference over to Matthew Robison. You may begin.

Thank you, Desiree. Good day, everyone, and welcome to our call to discuss the pending acquisition of privately held Phone.com. My name is Matt Robison. I am the 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 Phone.com. This release is available on the company's website, ooma.com. This call is being webcast live and is accessible from a link on 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 confirmation 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, and welcome to today's special investor call to discuss Ooma's pending acquisition of Phone.com. Thank you for joining us. Before the market opened today, Ooma issued a press release communicating we have signed a definitive agreement to acquire Phone.com for $23.2 million in cash. We expect the acquisition to close in about 30 days once required 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. Phone.com is a provider of unified communication services with a focus on small- and medium-sized businesses. The company maintains the memorable Phone.com URL and website and acquires most of its customers through e-commerce and inside sales activities. As is the case for Ooma Office, many of its customers are Main Street businesses who value the powerful features of a UCaaS solution but require it to be simple to use, flexible and affordable. We believe Phone.com represents a natural fit for Ooma and 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 Phone.com's customers and employees to Ooma. Based on current run rates, we expect that Phone.com will add $22 million to $23 million of revenue and $1 million to $1.5 million of adjusted EBITDA to Ooma annually before synergies. Phone.com has about 36,000 customers and about 87,000 users today in North America, all served by its proprietary UCaaS platform. The company offers a complete solution for smaller-sized businesses to enable them to take advantage of advanced calling, texting, video meetings, receptionist solutions and more through Phone.com's desktop and mobile applications and available IP desk phones. Phone.com utilizes the Phone.com URL and website along with online marketing, inside sales, and specialized features designed for smaller sized businesses to attract new customers. We believe Phone.com is a solidly performing business today and are glad to mention that the company won the 2025 Internet Telephony Excellence Award from TMC. This award is primarily based on customer success stories and is intended to represent companies who are setting the standard for excellence in IP communication. Phone.com's current level of profitability reflects the company's small scale and continued investment in platform development and marketing. As such, we believe the combination of Phone.com and Ooma can afford significant synergies over time. Our focus once the acquisition closes, will be to leverage our vendor relationships, R&D activities, customer support systems and G&A processes to make Phone.com both stronger and more profitable. Our focus will also be to strengthen the Phone.com brand in the market. We believe Phone.com's memorable URL and website, they're focused on providing a streamlined and relevant e-commerce experience and their specialized features for smaller sized businesses represent an attractive opportunity for Ooma. 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. Our announcement today comes on top of our announcement just 3 weeks ago that we signed a definitive agreement to acquire FluentStream. Together, Phone.com and FluentStream have the potential to add over $45 million of revenue and over $10 million of adjusted EBITDA to Ooma next year. I look forward to welcoming Phone.com to Ooma and believe this will be another strong step forward for us. Thank you. I will now turn the call over to Shig, after which we'll take your questions.

Thanks, Eric. Good afternoon, everyone. As Eric mentioned earlier, we intend to finance a cash purchase price of approximately $23.2 million for this acquisition through a combination of cash on hand and bank debt financing. Cash transaction price reflects approximately 1x transaction multiple based on Phone.com's current annual revenue run rate. We expect Phone.com will add $22 million to $23 million of revenue and $1 million to $1.5 million of adjusted EBITDA to Ooma on an annual basis before synergies. In terms of historical revenue composition, substantially all of revenue represents recurring service revenue. Financial contribution from Phone.com 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 87,000 core business users from this acquisition. The average revenue per user per month or ARPU for these users is around $20 and Phone.com's historical net retention rate has been in the mid-90% range. We expect Phone.com'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 Phone.com's net operating loss tax benefit of over $8 million, and that is expected to benefit Ooma's tax position in the future. We are welcoming approximately 100 employees and contractors from Phone.com in this transaction. With that, we're now opening up this call for questions. Operator?

[Operator Instructions] And our first question comes from the line of Eric Martinuzzi with Lake Street Capital Markets.

Congratulations on the transaction. Eric, I was just curious to know the business that you're acquiring. Is Phone.com a growing business? And can you put a growth rate on it if it is?

Yes. Eric, it is a growing business, although slowly today. They have not had a lot of capital to invest in sales and marketing, but they have a great solution and a really great URL and website with Phone.com, and we're optimistic about what we can do together with them. But no, as you look at them today, they are slowly growing.

Okay. And then the technology plan, I know 3 weeks ago when you talked about FluentStream, it was that, "Hey, we're going to leave the acquired entity technology platform untouched." What's the thinking here with Phone.com?

The thinking here is similar and touched is maybe too strong a word that I may have used last time. We will continue the Phone.com platform in the market. But when it comes to new feature development, we'll coordinate activities so we're not duplicating efforts. So for instance, Ooma has some very significant AI development underway in the company for our customers. I'm sure we'll leverage that in the Phone.com platform and the FluentStream platform so that net-net, we can go faster across the teams we've got doing work.

Okay. And then technology wise, it looks like they have an offering called ProSIM. It seems like they have a heavy percentage of users that use their mobile app. I want to say I read something today that about 60% of users on Phone.com use that mobile app. What's the percent of Ooma kind of installed base users using the Ooma mobile app?

I don't know the exact number here, but I can tell you that we do not have as much as 60% using the mobile app to my knowledge, but we have a substantial portion of our base that does use it. Something about Phone.com a little bit different from Ooma. They are very much e-commerce first and a lot of their new users will start off with the mobile app and then maybe add an IP phone later. Ooma is a little bit more IP phone first. We -- almost all of our customers start off with an IP phone and then may add the mobile app, depending on what their needs are and how they operate. I think this is an opportunity there for each of us to maybe embrace a little bit what the other has done.

Our next question comes from the line of Josh Nichols with B. Riley Securities.

It looks like you guys have been on a little bit of an early Black Friday shopping spree for some of the smaller SMB M&A opportunities. I know you mentioned FluentStream was already very accretive, right, based on the margin profile. This one a little bit more subscale, but you mentioned it's still going to be positive to contributions before. Any synergies? Still really early, deal hasn't closed. But is there any kind of targets over the next 12 or 18 months that you would get that to kind of be in line with at least like Ooma's corporate EBITDA margin profitability over time?

I don't think there are specific targets to share today. But I can say that one of the driving goals of Ooma is to improve or increase our EBITDA as we go forward. We feel we've built a very strong base of loyal customers at high margins, and we want to capitalize on that more as we go forward. Now that can only be inconsistent with the different investments we need to make in the business for growth. But as we get bigger and achieve more scale, we have more flexibility. And in the last 2 years, you've seen our EBITDA go up substantially. And with these 2 acquisitions, even before synergies, we're going to take another nice job, but we do expect and plan to drive more EBITDA as we go forward. I think when we give guidance for next year, we'll give you a more concrete outlook on where we expect to go with this.

And then just about going forward, I mean, historically, you've done some M&A. Clearly, it's becoming a little bit bigger of a focus. Are you seeing a growing number of opportunities to buy some of these subscale SMB operators at what would be much more attractive rates than maybe like a few years ago overall?

I wouldn't say we're seeing a growing number. I do think there's been some swings and roundabouts in the market. For a while, I think these companies were more accessible, then for a while, maybe a little less so. But today, you don't see as much activity by other companies or private equity firms in our space. And I think it does open up the market a little bit to find opportunities like this and others at a fair price. We -- but our strategy is to get to know a company well to make sure they fit with what we do and to make sure that they are solid and they don't need a lot of fixing and then to negotiate a fair price. And sometimes that can take a lot of time. So it's not uncommon for us to talk to the company for well, year or more even before we might come to a mutual agreement. So these things kind of happen when they happen. But it is our strategy each year to try to add inorganic growth through an acquisition to augment what we're doing internally. And ultimately, it's a make-buy decision in a way. If we're going to acquire more companies, then we're going to probably spend a little bit less in sales and marketing, trying to acquire users directly through that channel. So that on balance, we're kind of putting together the business the way we want to go. So this was a great opportunity. We're thrilled to be joining forces with the Phone.com. I believe they are equally excited to be part of Ooma, and it just happened to line up at this time.

Last question for me. Just curious, like a little bit on the background, I know you said you've been in the space a long time, and you probably know a lot of these companies. Was this something that was a little bit more proprietary or a competitive bid situation. And generally, when you were looking at this, is this something that kind of has like margin -- gross margin profile given most of it is recurring is kind of in line with Ooma or a little bit lower given the subscale nature of it?

So I know that there have been other potential acquirers that Phone.com has talked to over time. Some more recently, some lesser recently. I know we were one of them over those times and I think in this instance, things just came together. So it wasn't -- there were bankers involved on Phone.com side of the transaction. Their margin profile is good. I think not as good as ours, gross margin profile, I should say, but we'll get better with our scale economies and as we work together with them.

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to our CEO, Eric Stang for closing remarks.

Well, thanks, everyone, for joining us today. It's an exciting step for us. We expect this will take about 30 days to close, if everything goes according to plan, and we'll be starting off the new year with substantially more revenue and EBITDA in the company and a great outlook for next year. So we believe we'll have a great outlook for next year. So we look forward to talking to you about that in our next earnings release and then again early next year. Thanks, everyone. Bye-bye.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.