Ooma, Inc.
Q4 2021 Earnings Call Transcript

Published: 1 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Ooma, Inc. Fiscal Fourth Quarter and Year 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I now would like to hand the conference over to your speaker today, Mr. Matt Robison. Please go ahead.

[Matthew Robison:]

Thank you, Gabriel. Good day, everyone, and welcome to the Fourth Quarter and Fiscal Year 2021 Earnings Call of Ooma, Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. On the call with me today are Ooma's CEO, Eric Stang; and CFO, Ravi Narula.

[Eric Stang:]

Thank you, Matt. Hi, everyone. Welcome to Ooma's Q4 Fiscal Year 2021 Earnings Call. Thank you for joining us today. I look forward to reviewing with you our fiscal 2021 accomplishments and our plans and outlook for this coming year. I'm pleased to report that Q4 was another strong quarter and capped off a strong year for Ooma. We again, outpaced our guidance in Q4 by delivering $44.3 million in revenue, $2.8 million in non-GAAP net income and $3.6 million in EBITDA. For the full 2021 fiscal year, we achieved $168.9 million in revenue, while also generating $14 million in EBITDA. Moreover, we exited Q4 with $160.5 million in annual recurring revenue, up from a $143 million a year ago, driven primarily by 27% year-over-year growth in subscription services revenues from business customers. All-in, I'm proud of our performance and excited as I look forward to the year ahead. Diving a little deeper into our progress in Q4, I can share that we again increased the percentage of new customers who adopt our Office Pro higher tier of service. In Q4, 45% of new office customers selected Office Pro. We believe our future additions during the year, including the launch of video meetings and enhancements to our desktop and mobile apps help drive this adoption. Adoption of Office Pro is a driver of our increasing revenue per user. Strategically, we intend to continue to expand the capabilities of Ooma Office to attract larger customers and we have new service enhancements planned for fiscal 2022. I can also share that our sales through channel resellers was our highest yet in Q4 and represented 43% of our business sales. Developing and growing channel resellers and partners is a long-term strategy to expand our sales and marketing reach. This will continue to be a strategic priority for us in fiscal 2022. As we pursue strategies to expand our services in our channel and market reach, we intend to grow our business not only with small business customers, where we believe we are the market leader today, but also with increasingly larger customers. I'm pleased to share that we won a customer in healthcare industry in Q4 that is over 700 users. This customer chose our Enterprise solution, because it fit well with their business needs and will enable them to manage their business more productively across a large number of locations. For Ooma Office, we won a customer in the auto industry in Q4 that is over 175 users spread across 16 locations. This customer valued the simplicity, ease of use and value afforded by Ooma Office. As solution designed specifically for a small business environment, Ooma office simple fit their needs better.

[Ravi Narula:]

Thank you, Eric, and good afternoon, everyone. I'll start with a review of our fourth quarter and full year fiscal 2021 results, and then provide our outlook for first quarter and full year fiscal 2022. We once again delivered a strong financial performance, achieving record revenues of $44.3 million and above the high end of our previously issued guidance range of $43 million to $43.8 million. On a year-over-year basis, total revenues grew 9% driven by the strength of Ooma Business, which grew 16%. On a full year basis, total revenue was $168.9 million, compared $151.6 million of fiscal 2020, reflecting 11% growth year-over-year, including 24% growth in Ooma Business. Fourth quarter fiscal 2021 net income was $2.8 million above our previously issued guidance range of $2 million to $2.6 million. And net income for full year fiscal 2021 was a record $11.5 million compared to a net loss of $700,000 for fiscal 2020 largely driven by increased subscription and services revenues, improved gross margins and expense management. With that, I'll now provide some details about our revenues and customer metrics. Ooma Business subscription and services revenue for Q4 grew 19% on a year-over-year basis and 7% sequentially from Q3. In spite of the pandemic, revenue from Ooma Business subscription and services for fiscal 2021 grew 27% year-over-year, driven by user growth. Ooma Residential subscription and services revenue for both fourth quarter and for full year fiscal 2021 grew 3% year-over-year, we are pleased with the resiliency of our residential business, which demonstrates the value proposition we offer to our customers. Our residential business generates a good amount of cash flow, which enables us to invest that cash back to grow Ooma Business. Ooma Business now accounts for 45% of total revenue as compared to 42% in the prior year quarter. Even this growth, we believe Ooma Business to be generating majority of our revenues within the next 12 to 18 months. Subscription and services revenue as a percentage of total revenue increased to 93% compared to 92% in the prior year quarter. Product and other revenue for the fourth quarter was $3.1 million, up 7% of total revenue, compared to $3.2 million in the prior year quarter. Our core users at the end of the fiscal 2021 are $1,074,000, up from $1,048,000 at the end of the last fiscal quarter, 25% of our core users and our business users up from 22% last year.

[Eric Stang:]

Thank you, Ravi. Like all companies at the start of this year we had to adapt quickly to the changes caused by the pandemic. I want to take this moment to compliment the entire Ooma team for their hard work and success doing so. Our strong results for fiscal 2021 along with our enduring strategy to differentiate our solutions in the marketplace position us well for fiscal 2022. We believe we have an exciting outlook and can't wait to execute on our plans this year to drive further growth and international expansion and build a stronger company for all of our stakeholders. Thank you, all. Operator, we can take questions.

[Operator:]

Absolutely. Your first question will come from the line of Mike Latimore of Northland. Please go ahead.

[Michael Latimore:]

Yes, great. Congratulations on the strong year there.

[Eric Stang:]

Thank you.

[Michael Latimore:]

I guess, in terms of - you gave I think business guidance growth rate for the year of 20%. Did that include hardware or was that subscription only?

[Ravi Narula:]

It's subscription only, Mike.

[Michael Latimore:]

Okay, got it. Great. And also, as you highlighted Microsoft Teams direct as an opportunity. I guess, if you're successful there, how meaningful could that be? Could it be 10% of bookings, at some point? Just trying to get a sense of like how meaningful that could be.

[Eric Stang:]

So it's a good question. I'll let Ravi maybe approach it from a numbers perspective. But Teams with larger organizations is doing well in the marketplace. And most companies find value in getting a separate direct routing solution. We can bring some extra features to Teams through that process as well. So we see a lot of opportunity for it. We're new to it. Of course, we launched it in Q4, we're just getting going. But we think it can be meaningful. And we also did - we have some - at the scale we're at, with over 2 million users total, gives us some real advantages versus some of the other companies trying to do this. Ravi, do you want to give a sense on scope, Teams?

[Ravi Narula:]

I think Eric covered it. It's a meaningful opportunity for us. Our goal is not only to focus on Microsoft Teams or larger enterprises, but also smaller businesses too. So I think this has a potential but, obviously, we'll work on growing both Ooma Office as well as Ooma Enterprise along with Microsoft Teams.

[Michael Latimore:]

Yeah, yeah. Great. And then, just last on your large customer, I think at one point you had highlighted the opportunity to sort of double the size of that customer, with an international effort. I guess, is that still what you're thinking here? And, is it still kind of the same - maybe 12-month horizon or how should we think about that relative to prior comp?

[Eric Stang:]

Sure. Yes, what we believe we can achieve this year, by adding a dozen or more countries internationally to where we serve them, we believe that has the potential to double the users we have from where we're at today, with this customer. I think it's a little early to exactly know, we've got a lot of rollout to do. And it'll take through the year for the growth to happen. But, yes, we certainly see the potential for that and more, if we look out even longer term.

[Michael Latimore:]

Great. Thanks a lot. Good luck.

[Eric Stang:]

Thank you.

[Operator:]

Your next question comes from the line of Matthew Harrigan of Benchmark. Please go ahead.

[Matthew Harrigan:]

Thank you. You have a pretty schemed out analytics for looking at the TAM domestically, Bureau of Labor Statistics information and all that. When you look at Europe, I mean, how do you think the relative opportunity is, based on the characteristics of the economy over there? I mean, I guess, you've got the Mittelstand in Germany, famously, that would be right within your niche. And are there any issues in terms of achieving scale on the cost side or other issues, when you don't really have it tacked on to a residential business, if you do make a major endeavor in Europe over a period of time? Thank you.

[Eric Stang:]

Yeah. So we're focused this year, primarily on expanding to serve the needs of this customer that we have. And we believe we can do that very successfully. There is going to be investment through the year to do that. And those investments can be leveraged to do even more. But we feel comfortable. Having a large customer opportunity gives us the scale we need to go do this well. We are already in, in a small way, in 3 or 4 countries in Europe. And we can bring a lot of what we do in our network and the design of our network to this for scale. But you're right, as we get even bigger, we'll have a scale of economies that we can drive further. But we feel it's very doable. And it'll give us the beachhead to build from, to even go farther.

[Matthew Harrigan:]

And, I guess, a quick follow-on when you look at how much COVID has worked or maybe the economy or maybe it's already changed in some areas, when you look at the product for our customer verticals, has there been any real change in terms of where you perceive the opportunities over a period of time? I mean, I think it's almost, I'd tell, you weren't hurt very badly at all, obviously, in the restaurant bar side, that's not your constituency. But just apart from just the overall growth in the market, are there any verticals that you're particularly excited about?

[Eric Stang:]

There are some verticals that we are I would call it, more excited about. But I don't want to focus too much on them, because in general smaller size businesses are not well served today, by the solutions that most have. And most of our competitors have designed solutions for larger sized company implementations and tend to focus more on larger businesses. And our smaller business solutions are really applicable to just about every small business out there. And we don't find we need to think vertically too much with those solutions to be successful. So, I did mention that one of our large customers this last quarter was in healthcare, and other one was in the automotive space. So those are certainly areas that do well for us, as do many others, professional services generally. But even in restaurants and things that new businesses are getting formed every day and we found just tremendous opportunity with our small business solution, because it's so well designed for the needs of that segment. So, yeah, COVID hasn't really caused us at the small business level to have to change much from the market of - the sales and marketing efforts that we were pursuing.

[Matthew Harrigan:]

Thanks, Eric.

[Eric Stang:]

Sure.

[Operator:]

Your next question will come from the line of Brian Kinstlinger of Alliance. Please go ahead.

[Brian Kinstlinger:]

Great, thanks so much. You mentioned a couple of large customer wins, clearly, the healthcare and automotive clients. First, can you talk about the average number of users per customer is today? And is there a different sales cycle in terms of length for customers like this that are larger? And if so, can you quantify how long they take versus the smaller deals?

[Eric Stang:]

Sure, I'll say a little bit of that and let Ravi jump in too. So when you move up to an - what we might - what we would call an enterprise customer, which is often 10s of users, if not over 100 users. There's definitely a sales cycle, you are making a more - you're selling to a more educated customer with probably an in-house IT department. And it is a more technical and more issue-oriented sale. When you're selling to a small business, our tagline for those customers that sound like a big business at a small business price, I mean, these are customers that haven't - often haven't had the advantage of IVRs, and mobile apps, and desktop apps and some of the other things we do with our Ooma small business solution, and we bundle in e-fax and conferencing to the solution all in one great value price. And so for those customers, it is - a lot of those customers do make their purchase decision quickly with us. So it is different between the 2. We're - our average users per customer are in the 10s of users for enterprise, if you cross it overall. But we have customers to go up much, much larger. And on the small business side, it depends a little bit on how you count. We have - sometimes we have a lot of smaller locations that are part of a larger business entity, I guess, I'll say, but per location we're in the single-digit users per location with our small business solution.

[Brian Kinstlinger:]

Right. Sure…

[Ravi Narula:]

And then, one thing - Brian, I'll add one thing to Eric's point. If you look at 3 or 4 years ago, we literally add very, very few more than 10 user businesses. Now Eric mentioned earlier on that we have around 20% of our users are more than 10 users. So our size of users have been going up, but obviously, we focus on small businesses, whether it's 5-employee businesses or 25-employee businesses, they are pretty happy with any or all of them.

[Brian Kinstlinger:]

Great. And then clearly, you've been upfront about the investments we're making and it looks like profits will be down this year purposely. Can you specifically first talk about Eric mentioned additional investments in sales and marketing? Can you maybe quantify what that is versus how much does on average, it cost the company at least this year? Is it going to open a new geographical location?

[Ravi Narula:]

Yeah. This is Ravi, Brian. So there are a couple of things which we have incorporated into our guidance for the year, obviously, we want to keep investing and adding into our sales and marketing to grow faster. Then the other aspect is, obviously, the new geographic locations. And then we've also incorporated, as things economy picks up, there will be more travel, there will be some more employee related expenses. So those are 3 major factors, which we have included into our guidance, how much to quantify for all of those, I think, all of them probably will have some meaningful amount. The travel expenses and project-related expenses could be $1 million or $2 million for fiscal 2021 - fiscal 2022, assuming, not everything will open up on day one. And then large customer opportunities a onetime cost initially. And that could also be in a couple of million dollars of expenses. So I think it's the combination of sales and marketing, large customer launch, as well as some expenses on the employee side.

[Brian Kinstlinger:]

Great. Last questions are quick numbers question. You added 1,200 business jobs. Can you quantify how many of that were from - in this quarter were from your largest customer? Are you able to quantify that?

[Ravi Narula:]

Brian, I think, you mentioned 12,000, I believe, in Q4.

[Brian Kinstlinger:]

I mean, 12,000. I mean, 12,000. Sorry, I skipped the zero. Yeah, 12,000, sorry, that's a big difference. Of the 12,000, how many - yeah.

[Ravi Narula:]

12,000 is net of churn, right, net new users. And significant - put, almost significant majority of that is coming from regular organic business, not from large customers. Large customer launch is expected to happen throughout the year. So you'll see the user growth coming from that in fiscal 2022 more there was a small number, as Eric mentioned, around 450 in Q3 and Q4, but the numbers in the 12,000 was very small.

[Brian Kinstlinger:]

Got it. I misunderstood that. Thank you so much.

[Operator:]

Your next question comes from Josh Nichols of B. Riley. Please go ahead.

[Josh Nichols:]

Yeah, thanks for taking my question. Eric, if you could dive into a little bit more on the company's strategy and how you're expanding the partnerships that seems to be going well on the reseller channel, but a little bit more about you mentioned digital marketing, and what the company's plans are maybe ramped that spend a little bit?

[Eric Stang:]

Yeah, I can say a few words. I think, we're up operating, executing, if you will very well on our sales and marketing fronts right now. And growing nicely and just about all the areas in which we try to grow. And some of those - some of that growth is direct, some of it is through channel partners, and it's just doing more of what we do well, we spent about 29% of revenue in Q4 on sales and marketing, and that's low for our industry. We would like to just dial-up and be more aggressive. And, we - it's kind of a stair step process as you bring on personnel and you invest more in your online marketing methods and your other channel support activities. But there's no major change in what we're trying to do for fiscal year 2022. We just want to do more of it and grow commensurately with it. And so that that has excited, I think, we go into the year already executing well. The big additional thing this year on the sales and marketing front is expanding internationally with our largest customer. And that also impacts the R&D front with the effort to put in the capabilities for that. So I hope that answers your question.

[Josh Nichols:]

Yeah, thanks for that. And then I did want to talk a little bit about good to see the churn seems to be subsiding after the original spike with the pandemic. And you have net dollar subscription retention revenue improving quarter-over-quarter, what's left for potential improvement on that front, I know historically, if you go back a few quarters, company have been able to achieve 100% or even a little bit better than that, that could also kind of help support the company's growth? And what's left to be done on that front for potential improvement for 2022?

[Eric Stang:]

I'm sorry, which one?

[Josh Nichols:]

The net dollar subscription retention revenue.

[Eric Stang:]

Yeah. We - that's got 2 components to it. As you know, it has to do with growth rate for existing users in churn. With the launch of Office Pro, we've made great headway. But we will continue to focus on that as we go forward, and we see more potential there still. And as we add more features and services to office, which we talked about - I talked about my prepared remarks, you'll see additional elements to what we do with Ooma Office that I think can also help drive this metric. As we move to a little bit larger customers, we do tend to sell more of our business on contract as opposed to just month-to-month. And that might have a little bit of impact on this, although, I think my view as always is, you just have to serve the customer really, really well, and it doesn't matter whether you have a contract or not. But that's a dimension as well, we have seen churn stabilize and come down some from the peak of the pandemic, but it isn't all the way back to where it was pre-pandemic. So there's a little bit of potential there too, which I think is maybe somewhat a little bit out of our control, but more just with time through the year. So all of that is part of how we look at trying to see that number go up further. But, the core of it, frankly, is doing a good job for your customer. And when, Consumer Reports ranks us number 1 in the residential side or the readers of PC Magazine ranked us the number 1 solution for business, I mean, that's the key. That's what really drives that metric, and augment that with additional services, you can come back and sell it to existing customer base, including Ooma Connect and potentially Ooma Wi-Fi and you've got that going the right direction.

[Josh Nichols:]

Thanks. The last question for me, I know, the company has done a good job transitioning, generating healthy cash flow this year, record cash flow. But it's just like the company just took out a revolving line of credit. Just want to ask a little bit your thoughts on like high level capital allocation strategy, given that you already have a pretty strong balance sheet is that just out of some additional caution after the pandemic or potential bolt-on M&A opportunities? I know, the company has done a few before.

[Ravi Narula:]

Hey, Josh. This is Ravi. You are right. We had a pretty solid fiscal 2021 cash flow perspective, free cash flow, cash flow generation, and this revolver of $25 million is your housekeeping. It also reminded us during the pandemic, if in case we were able to need something how well we are prepared. There was not any specific reason we got this revolver. But, obviously, if an M&A opportunity comes up, we want to be able to look at that. But the purpose of revolver initially was how do we get prepared, if something was to happen, although, our day-to-day needs of business, we are pretty positive cash flow from operations. So I'm not worried about, hey, what's happening and we have actually added that. It was generally speaking good housekeeping as well.

[Josh Nichols:]

Thanks, guys.

[Eric Stang:]

Thank you, Josh.

[Operator:]

Your next question will come from the line of Matt Stotler of William Blair. Please go ahead.

[Matt Stotler:]

Hey, Eric, Ravi, Matt. Thanks for taking the question. Just a couple of quick ones here. I guess, one on the partnership front. Obviously, partner channel is becoming increasingly meaningful part of the overall go-to-market, an increasing portion of bookings there. And then, you mentioned, north of 40% at this point. You guys obviously have a pretty solid representation on the retail side of the partner channel. I would love to get an update on just how you're thinking about expanding go-to-market partnerships going forward, what that pipeline looks like, and where you're most focused in terms of building out those new relationships, whether that's resellers, master agents, sub agent, system integrators, carriers, how do you think about that?

[Eric Stang:]

Sure. You're right. We see a lot of potential on this front kind of in 2 respects. One is there's a large reseller community out there. And generally, Ooma hasn't focused on that community that much up until the last couple years. And so, we're not very penetrated into it yet. We have some very close partners that we work very well with, but vast majority of, say, master agents or others in the industry, we really haven't gotten involved with them yet. So it's a longer-term direction for us to just continue expanding in that regard. And I see a lot of potential going forward for us for that. The second respect, though, is we do also work with partners who are - they might be a reseller or they might just be someone we work in conjunction with. But they could be a company that does something particularly in a vertical space, and finds there's value in being able to marry up what our solutions do with what they do otherwise. And we don't really talk about who those partners are. But they're an important investment area for us. And we do have a handful onboard today. And, over time, these efforts should show up and are intended to show up in the growth of the overall revenues that we drive. So we found that our small business solution fits well with what some others are doing in the small business space. And that's a second dimension for us. This is just an untapped opportunity for us to keep pursuing all through the year, and frankly, longer than that.

[Matt Stotler:]

Great. Yeah, absolutely. And then, just one more quick follow-up on Ooma Meetings, we'd love to just get a little bit of an update there on early interest or traction. Obviously, still relatively early there, but embedding this offering in Office Pro, do you plan to offer standalone Meetings or collaboration product ? Would that make sense? Just any commentary around that product and how you're thinking about how to going forward would be helpful?

[Eric Stang:]

Sure. Well, first of all, say, Ooma Meetings works great. And we've had very positive feedback from those of our customers that are using it. And having Ooma Meetings and some of the other things in our Office Pro tier have also helped to drive the adoption of Office Pro. So far, what we've done with Ooma Meetings is working great for our customer base. But we will consider enhanced features in Ooma Meetings that might even be a higher level tier of service as we look out over time. But we don't have plans today to offer Ooma Meetings standalone. That's not a direction we're taking at the moment. We're using it to help drive the step up to the premium level services that we bring our customers. And I think that's working great.

[Matt Stotler:]

Great, thanks again.

[Operator:]

And we have no further questions. I'll turn the call back over to the presenters.

[Eric Stang:]

Great. Well, thank you, everyone for joining us today. It's been an exciting fiscal year 2021. And we're even more excited as we look forward to 2022. We've got a lot of good things happening and we look forward to updating you through the year on how things develop. Thank you.

[Operator:]

This concludes today's conference call. Thank you for joining. You may now disconnect.