The following discussion should be read in conjunction with our condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q and with our audited financial statements included
in our Annual Report on Form 10-K for the year ended
Executive Overview
Ooma creates powerful connected experiences for businesses and consumers. Our smart cloud-based SaaS and UCaaS platforms serve as a communications hub, which offers cloud-based communications solutions, smart security and other connected services. Our business and residential solutions deliver our proprietary PureVoice high-definition voice quality, advanced functionality and integration with mobile devices, at competitive pricing and value. Our platforms help create smart workplaces and homes by providing communications, monitoring, security, automation, productivity and networking infrastructure applications.
We drive the adoption of our platforms by providing communications solutions to the large and growing markets for business, residential and mobile users, and then accelerate growth by offering new and innovative connected services to our user base. Our customers adopt our platforms by making a one-time purchase of one of our on-premise appliances, connecting the appliance to the internet, and activating services, for which they primarily pay subscription fees on a monthly basis. We believe we have achieved high levels of customer retention and loyalty by delivering exceptional quality and customer satisfaction.
We generate subscription and services revenue by selling subscriptions and other
services for our communications services, as well as other connected services.
We generate our product and other revenue from the sale of our on-premise
appliances and our end-point devices, as well as from porting fees to enable
customers to transfer their existing phone numbers to the Ooma service. We
primarily offer our solutions in the
We refer to Ooma Office and Ooma Enterprise collectively as Ooma Business. Ooma
Residential includes
First Quarter Fiscal 2021 Financial Performance
• Total revenue was$40.3 million , up 19% year-over-year, primarily driven by the growth of Ooma Business. • Subscription and services revenue from Ooma Business grew 54% year-over-year, reflecting both organic and acquisition-related growth of our business. • Total gross margin was 62%, up from 60% in the prior year quarter. • Net loss was$1.1 million , improved from a loss of$4.7 million in the prior year quarter, reflecting our continued focus on controlling costs and improving operational efficiencies. • Adjusted EBITDA was$3.0 million , compared to a loss of$0.5 million in the prior year quarter. • As ofApril 30, 2020 , we had total cash, cash equivalents and short-term investments of$23.3 million , compared to$26.1 million as ofJanuary 31, 2020 . Cash usage was largely driven by the timing of payments. Ooma | FY2021 Form 10-Q | 18
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COVID-19 Update
In
During the first quarter of fiscal 2021, we have remained focused on executing our growth strategy, while also adapting to the changes in our market environment and business activities driven by the global pandemic. Most of our employees have transitioned to work-from-home operations and we have canceled all non-essential business travel by our employees, which have changed how we operate our business. Inside sales and online sales functions were less affected, but sales through face-to-face channels and through retailers became more challenging.
Our financial results for the first quarter were not significantly impacted by
the COVID-19 pandemic; however, the severity and duration of the pandemic and
its impact on our operations remains uncertain and may not be fully reflected in
our results of operations and overall financial performance until future
periods. For example, during March and
A prolonged pandemic could adversely impact the efficiency and effectiveness of our organization, further impact our global supply chain network, result in delays or decreases in customer collections, reduce demand for our products and services, increase churn, and inhibit our sales efforts, any of which will likely materially impact our revenues, results of operations, cash flows and liquidity. For more information on risks associated with the COVID-19 pandemic, please see "Risk Factors" in Part II, Item 1A below.
Key Business Metrics
We review the key metrics below to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Key business metrics include combined data for our core offerings.
The following table sets forth our key customer metrics for each of the periods indicated (in thousands, except percentages):
Three Months Ended April 30, April 30, 2020 2019 Core users 1,049 985 Annualized exit recurring revenue (AERR)$ 145,551 $ 121,200 Net dollar subscription retention rate 100 % 99 %
Core Users increased year-over-year, which was primarily driven by growth in business users. We believe that the number of our core users is an indicator of our market penetration, the growth of our business and our anticipated future subscription and services revenue. We define our core users as the total number of active residential user accounts and business user extensions.
Annualized Exit Recurring Revenue grew 20% year-over-year due to an increase in the average revenue per core user, which was largely driven by an increase in business users. We believe that AERR is an indicator of recurring subscription and services revenue for near-term future periods.
Net Dollar Subscription Retention Rate was 100% for the first quarter of fiscal 2021, driven by growth in average revenue per user and retention rate. We believe that our net dollar subscription retention rate provides insight into our ability to retain and grow our subscription and services revenue, and is an indicator of the long-term value of our customer relationships and the stability of our revenue base.
Ooma | FY2021 Form 10-Q | 19
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Adjusted EBITDA
In addition, we use Adjusted EBITDA to manage our business, evaluate our performance and make planning decisions. We consider this measure to be a useful measure of our operating performance, because it contains adjustments for unusual events or factors that do not directly affect what management considers being the core operating performance, and are used by our management for that purpose. We also believe this measure enables us to better evaluate our performance by facilitating a meaningful comparison of our core operating results in a given period to those in prior and future periods. In addition, investors often use similar measures to evaluate the operating performance with competitors. Adjusted EBITDA represents net income (loss) before interest and other income, non-cash income tax benefit, depreciation and amortization, stock-based compensation and related taxes, amortization of acquired intangible assets and other acquisition-related charges, and certain costs that are not representative of the ordinary course of our business.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• Adjusted EBITDA does not consider any expenses for assets being depreciated and amortized that are necessary to our business; • Adjusted EBITDA does not consider the impact of non-cash income tax benefits, stock-based compensation and related taxes, amortization of acquired intangible assets and other acquisition-related charges, and certain litigation costs that are not recurring in nature; • Adjusted EBITDA does not reflect other non-operating expenses, net of other non-operating income, including net interest and other income/expense; and • Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net loss and our other GAAP results.
The following table provides a reconciliation of net loss (the most directly comparable GAAP financial measure) to Adjusted EBITDA for each of the periods indicated (in thousands): Three Months Ended April 30, April 30, 2020 2019 GAAP net loss$ (1,066 ) $ (4,740 ) Reconciling items: Interest and other income, net (79 ) (258 ) Income tax benefit - (22 ) Depreciation and amortization of capital expenditures 713 652 Amortization of acquired intangible assets and acquisition-related costs 326 243 Stock-based compensation and related taxes 3,134 3,123 Litigation costs - 534 Adjusted EBITDA$ 3,028 $ (468 )
Components of Results of Operations
Revenue
Subscription and services revenue is derived primarily from recurring subscription fees related to service plans such as Ooma Business, Ooma Residential and other communications services, and to a lesser extent from payments associated with our Talkatone mobile application, prepaid international calls and installation-related services. We expect our subscription and services revenue to grow as we expand our core user base, driven primarily by growth in Ooma Business.
Product and other revenue consists primarily of sales of our on-premise appliances and end-point devices used in connection with our services, including shipping and handling fees for our direct customers, and to a lesser extent from porting fees we charge our customers to enable them to transfer their existing phone numbers to Ooma Business or Residential. We expect our product and other revenue to decline on a year-over-year basis.
Ooma | FY2021 Form 10-Q | 20
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Cost of revenue and gross margin
Cost of subscription and services revenue includes payments made for third-party network operations and telecommunications services, Federal USF contributions, credit card processing fees, costs to maintain third-party data centers, including co-location fees for the right to place our servers in third-party data centers, depreciation and maintenance of servers and equipment, personnel costs associated with customer care and network operations support, and allocated costs of facilities and information technology.
Cost of product and other revenue includes the costs associated with the manufacturing of our on-premise appliances and end-point devices, as well as personnel costs for employees and contractors, costs related to porting our customers' phone numbers to our service, shipping and handling costs, and allocated costs of facilities and information technology.
Subscription and services gross margin may fluctuate from period-to-period based on the interplay of a number of factors, including the costs we pay to third-party telecommunications providers, the timing of capital expenditures and related depreciation charges, and changes in our headcount. We expect our subscription and services gross margin to increase over the long-term, primarily as we achieve scale efficiencies and as our business revenue becomes a larger portion of total subscription revenue.
Product and other gross margin may fluctuate from period-to-period based on a number of factors, including total units shipped during a period as compared to the direct costs of production and relatively fixed personnel costs incurred during the period, as well as potential changes in tariffs imposed on imported product. We sell our on-premise appliances at an aggressive price point to facilitate the adoption of our platforms and services. We expect our product and other gross margin to continue to be negative for the foreseeable future.
Our subscription and services gross margin is significantly higher than product and other gross margin. As a result, any significant change in the mix between subscription and services revenue and product and other revenue will cause our total gross margin to change. For example, in periods where we sell significantly more on-premise appliances, we would expect our total gross margin to be impacted.
Operating expenses
Sales and marketing expenses are the largest component of our operating expenses and consist primarily of personnel costs for employees and contractors directly associated with sales and marketing activities; internet, television, radio advertising fees; public relations expenses; amortization of sales commissions we pay to internal sales personnel, third-party sales entities and resellers; trade show expenses; travel expenses; marketing and promotional activities and allocated costs of facilities and information technology. We expect our sales and marketing expenses to increase in absolute dollars as we continue to grow our business.
Research and development expenses are focused on developing new and expanded features for our services and improvements to our platforms and backend architecture. Research and development is expensed as incurred and consists primarily of personnel costs for employees and contractors, allocated costs of facilities and information technology, software tools and product certification. We expect our research and development expenses to remain relatively unchanged as a percentage of total revenue.
General and administrative expenses consist of personnel costs for our finance, legal, human resources and other administrative employees and contractors. In addition, it includes professional service fees, legal fees, acquisition-related transaction costs and earn-outs, and allocated costs of facilities and information technology. We expect our general and administrative expenses to remain relatively unchanged as a percentage of total revenue.
Ooma | FY2021 Form 10-Q | 21
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