OOMA, INC. The following discussion should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under "Risk Factors" and elsewhere in this Form 10-K. The last day of our fiscal year isJanuary 31 , and we refer to our fiscal year endedJanuary 31, 2020 as fiscal 2020, our fiscal year endedJanuary 31, 2019 as fiscal 2019 and our fiscal year endedJanuary 31, 2018 as fiscal 2018. All other references to years are references to calendar years. This section of this Form 10-K generally discusses fiscal 2020 and 2019 items and year-to-year comparisons between fiscal 2020 and 2019. Discussion regarding our financial condition and results of operations for fiscal 2019 as compared to 2018 is included in Item 7 of our Annual Report on Form 10-K for the year endedJanuary 31, 2019 , filed with theSEC onApril 3, 2019 . 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 or rental of one of our on-premise appliances, connecting the appliance to the internet, and activating services, for which they primarily pay 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 theU.S. andCanada . InMay 2019 , we acquiredBroadsmart Global, Inc. ("Broadsmart"), a provider of cloud-based UCaaS solutions for a gross purchase price of$7.7 million . Broadsmart is expected to provide scale for our Ooma Office and Ooma Enterprise platforms, which aligns with our overall enterprise growth strategy. (See Note 12: Business Acquisitions in the notes to the consolidated financial statements.) We refer to Ooma Office and Ooma Enterprise collectively as Ooma Business. Ooma Residential includesOoma Telo basic and premier services as well as our Smart Security solutions.
See Item 1. Business above for additional information regarding our business, products and services, competitive market and regulatory matters.
Ooma | FY2020 Form 10-K | 40
--------------------------------------------------------------------------------Fiscal 2020 Financial Performance
• Total revenue was
by the growth of Ooma Business. We have grown our core users 13% from
approximately 929,000 as of
of
• Subscription and services revenue has increased as a percentage of our
total revenue over the last three years, from approximately 89% in fiscal
2018 to 92% in fiscal 2020. We expect subscription and services revenue to
continue to increase for the foreseeable future.
• Subscription and services revenue from Ooma Business and Ooma Residential
grew 61% and 4% year-over-year, respectively.
• Total gross margin was 59%, comparable to 59% in fiscal 2019 and 2018. • Net loss was$18.8 million , compared to losses of$14.6 million in fiscal
2019 and
operations and
the discontinuation of Ooma Smart Cam in October 2019 and a small
reduction-in-force.
• Non-GAAP net loss was
fiscal 2019 and
• Adjusted EBITDA was
and
• As of
investments of
2019. Cash usage reflects our investments in operating expenses to execute
on our growth initiatives.
Key Factors Affecting Our Performance
Our historical financial performance and key business metrics have been, and we
expect that our financial performance and key business metrics in the future
will be, primarily driven by the following factors.
Core user growth. Our growth in the number of core users, a key business metric
defined below, is a key indicator of our market penetration, the growth of our
business and our anticipated future subscription and services revenue,
especially Ooma Business.
Low core user churn. We believe that maintaining our current low core user churn
is an important factor in our ability to continue to improve our financial
performance and is a distinguishing advantage over many of our competitors. We
focus on providing high-quality services and support to our users so they are
motivated to remain with us. Our core user churn rate is higher for Ooma
Business customers than Ooma Residential customers, which is driven in part by
the failure rate of small businesses. Accordingly, we expect that our overall
core user churn rate will increase as sales of our business products increase
relative to sales of residential products.
Growth in additional services. We believe that there is significant opportunity
for us to increase the additional subscription and services that our customers
purchase from us in both the business and residential markets. Customers who
purchase additional subscription and services from us generate more value to
Ooma over the life of our customer relationship. In order to drive adoption of
additional services, we will need to continue to enhance our existing solutions
and develop new connected services. For example, we continue to invest in Ooma
Business to launch additional features.
Investing in long-term revenue growth. We believe that our total addressable
market opportunity is large and we intend to continue investing in sales and
marketing to grow our user base. However, we expect the markets in which we
conduct our business will remain highly competitive. We recently entered the
home security market and face significant competition from incumbent providers
promoting their own offerings. We also expect to continue investing in research
and development to enhance our platforms and develop additional connected
services. We may evaluate additional possible acquisitions of businesses,
products and technologies that are complementary to our business.
Looking Ahead to Fiscal 2021. In the year ahead, we plan to continue to execute
on our growth initiatives and drive long-term revenue growth. However, the
extent of the recent COVID-19 pandemic and its impact on our operations is
uncertain. 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 would 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 Item 1A.
Ooma | FY2020 Form 10-K | 41
--------------------------------------------------------------------------------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. The following table sets forth our key metrics for each of the periods indicated (in thousands, except percentages):
As of January 31,
2020 2019 2018
Core users 1,048 976 929
Annualized exit recurring revenue (AERR) $ 143,190 $ 119,102 $ 102,992
Net dollar subscription retention rate 100 % 99 % 101 %
Adjusted EBITDA $ 966 $ (1,859 ) $ (217 )
Core Users increased 7% 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 number of
active residential user accounts and office user extensions. We believe that the
relationship that we establish with our core users positions us to sell
additional premium communications services and other new connected services to
them.
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. We estimate our AERR by
dividing our recurring quarterly subscription revenue (excluding Talkatone
revenue) by the average number of core users each quarter, and annualize by
multiplying by four. We then multiply that result by the number of core users at
the end of the period to calculate AERR.
Net Dollar Subscription Retention Rate was 100% for fiscal 2020, 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. It measures the percentage year-over-year change in our recurring
subscription revenue per core user (excluding Talkatone revenue), which is then
adjusted by factoring in the percentage of our core users we have retained
during the same period. Our net dollar subscription retention rate is affected
by changes in average amounts that our core users pay to us, fluctuations in the
number of our core users, and our core user churn rate.
We calculate our estimated net dollar subscription retention rate for our core users by multiplying:
(i) our year-over-year percentage change in annual recurring revenue per core
user, which is calculated by:
? determining the annual recurring revenue per core user by dividing annual
recurring revenue for the period ended by the number of core users at the
end of that particular period; and
? calculating the year-over-year percentage change in annual recurring
revenue per core user by dividing the current period recurring revenue per
core user by the annual recurring revenue per core user for the same
period in the prior year.
by:
(ii) our core user annual retention rate, which is calculated by:
? determining our core user churn, by identifying the number of paying core
users who terminate service during a month, excluding infant churn, which
we define as office extensions and home users who terminate service prior
to the end of the second full calendar month after their activation date;
? calculating our monthly churn rate by dividing our churn in a month by the
number of core users at the beginning of that month; and
? calculating our annual retention rate as one minus the sum of our monthly
churn rates for the preceding 12-month period.
Adjusted EBITDA
In addition, we use Adjusted EBITDA (Earnings Before Interest Tax and
Depreciation and Amortization) 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
Ooma | FY2020 Form 10-K | 42
--------------------------------------------------------------------------------
related taxes, amortization of acquired intangible assets and other
acquisition-related charges, restructuring charges and certain litigation costs
that are not representative of the ordinary course of our business. (See Note
15: Restructuring Charges in the notes to the consolidated financial
statements.)
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, restructuring
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):
Fiscal Year Ended January 31,
2020 2019 2018
GAAP net loss $ (18,801 ) $ (14,572 ) $ (13,121 )
Reconciling items:
Interest and other income, net (780 ) (830 ) (603 )
Income tax benefit (130 ) (384 ) -
Depreciation and amortization of capital
expenditures 2,548 2,269 1,958
Stock-based compensation and related taxes 13,149 10,695
11,118
Restructuring charges 3,085 - - Amortization of acquired intangible assets and acquisition-related costs 1,289 821 431 Litigation costs 606 142 - Adjusted EBITDA$ 966 $ (1,859 ) $ (217 ) Ooma | FY2020 Form 10-K | 43
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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 slightly decline on a year-over-year basis.
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 get 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 decrease in both absolute
dollars and as a percentage of revenue in the short-term.
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 flat as a percentage of total revenue.
Ooma | FY2020 Form 10-K | 44
--------------------------------------------------------------------------------Consolidated Results of Operations
The tables in this section set forth selected consolidated statements of operations data for each of the periods indicated (dollars in thousands):
Fiscal Year Ended January 31,
2020 2019 2018
Revenue:
Subscription and services $ 139,499 $ 116,429 $ 101,999
Product and other 12,094 12,802 12,491
Total revenue 151,593 129,231 114,490
Cost of revenue:
Subscription and services 43,748 36,108 31,406
Product and other 18,464 16,632 14,992
Total cost of revenue 62,212 52,740 46,398
Gross profit 89,381 76,491 68,092
Operating expenses:
Sales and marketing 50,497 40,761 37,302
Research and development 37,770 33,903 29,328
General and administrative 20,825 17,613 15,186
Total operating expenses 109,092 92,277 81,816
Loss from operations (19,711 ) (15,786 ) (13,724 )
Interest and other income, net 780 830 603
Loss before income taxes (18,931 ) (14,956 ) (13,121 )
Income tax benefit 130 384 -
Net loss $ (18,801 ) $ (14,572 ) $ (13,121 ) Costs and expenses included stock-based compensation expense and related payroll taxes as follows (in thousands):
Fiscal Year Ended January 31,
2020 2019 2018
Cost of revenue $ 1,311 $ 957 $ 1,129
Sales and marketing 2,004 1,501 1,857
Research and development 4,773 3,906 4,046
General and administrative 5,061 4,331 4,086
Total stock-based compensation and related taxes
Ooma | FY2020 Form 10-K | 45
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Revenue
Fiscal Year Ended January 31, Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Revenue:
Subscription and services $ 139,499 $ 116,429 $ 101,999 $ 23,070 20 % $ 14,430 14 %
Product and other 12,094 12,802 12,491 (708 ) (6 )% 311 2 %
Total revenue $ 151,593 $ 129,231 $ 114,490 $ 22,362 17 % $ 14,741 13 %
Percentage of revenue:
Subscription and services 92 % 90 % 89 %
Product and other 8 % 10 % 11 %
Total 100 % 100 % 100 %
Fiscal 2020 Compared to Fiscal 2019
We derived approximately 58% and 68% of our total revenue from Ooma Residential and approximately 39% and 28% from Ooma Business in fiscal 2020 and 2019, respectively.
Subscription and services revenue increased$23.1 million or 20% year-over-year, primarily driven by a 7% increase in our core users and an increase in the average revenue per user associated with the growth of Ooma Business. Year-over-year revenue growth reflected a combined 21% increase in subscription and services revenue from Ooma Business and Ooma Residential that was offset in part by a decline in revenue from Talkatone. Product and other revenue decreased$0.7 million or 6% year-over-year, primarily driven by a decline in sales of Ooma Residential accessories, reflecting the discontinuation of Smart Cam in the third quarter of fiscal 2020, that was offset in part by growth in Ooma Business products.
Cost of Revenue and Gross Margin
Fiscal Year Ended January 31, Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Cost of revenue:
Subscription and services $ 43,748 $ 36,108 $ 31,406 $ 7,640 21 % $ 4,702 15 %
Product and other 18,464 16,632 14,992 1,832 11 % 1,640 11 %
Total cost of revenue $ 62,212 $ 52,740 $ 46,398 $ 9,472 18 % $ 6,342 14 %
Gross margin:
Subscription and services 69 % 69 % 69 %
Product and other (53 )% (30 )% (20 )%
Total 59 % 59 % 59 %
Fiscal 2020 Compared to Fiscal 2019
Subscription and services gross margin of 69% was flat year-over-year. Cost of subscription and services revenue for fiscal 2020 increased$7.6 million or 21% year-over-year, primarily driven by a$3.5 million increase in employee and consultant related costs, including travel and customer installation-related costs, as well as a$3.3 million increase in telecom and network infrastructure costs, a$0.3 million increase in credit card processing fees and increases in other expenses. Overall, the year-over-year increase in the cost of subscription and services reflects both organic and acquisition-related growth of our business. Product and other revenue gross margin of negative 53% decreased year-over-year from negative 30% due to restructuring charges of$2.1 million for excess inventory, non-cancelable purchase commitments and impaired intangible assets related to the discontinuation ofOoma Smart Cam inOctober 2019 . Ooma | FY2020 Form 10-K | 46 --------------------------------------------------------------------------------
Operating Expenses
Fiscal Year Ended January 31, Change
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Sales and marketing $ 50,497 $ 40,761 $ 37,302 $ 9,736 24 % $ 3,459 9 %
Research and development 37,770 33,903 29,328 3,867 11 % 4,575 16 %
General and administrative 20,825 17,613 15,186 3,212 18 % 2,427 16 %
Total operating expenses $ 109,092 $ 92,277 $ 81,816 $ 16,815 18 % $ 10,461 13 %
Fiscal 2020 Compared to Fiscal 2019
Sales and Marketing. Sales and marketing expenses for fiscal 2020 increased$9.7 million or 24% year-over-year, primarily due to a$4.5 million increase in employee and consultant related costs, driven by higher headcount, as well as a$3.0 million increase in commissions expense, a$0.7 million increase in marketing activities and a$0.6 million increase in intangible amortization associated with acquired Broadsmart customer relationships. Overall, the year-over-year increase in sales and marketing reflects our strategy to drive continued growth in Ooma Business. Research and Development. Research and development expenses for fiscal 2020 increased$3.9 million or 11% year-over-year, primarily due to a$2.5 million increase in employee and consultant related costs, driven by higher headcount, a$0.6 million increase in non-recurring engineering and license costs, and$0.6 million incurred for severance and other charges associated with ourOctober 2019 restructuring actions. General and Administrative. General and administrative expenses for fiscal 2020 increased$3.2 million or 18% year-over-year, primarily reflecting a$1.6 million increase in employee and consultant related costs, driven by higher headcount, as well as a$0.8 million increase in litigation costs and a$0.2 million increase in software and license fees. The increase in litigation costs were primarily driven by legal proceedings that are not representative of the ordinary course of our business.
Income Taxes
We recorded an income tax benefit of$0.1 million and$0.4 million for fiscal years 2020 and 2019, respectively, primarily associated with our acquisition of Voxter. We did not record a provision or benefit for income taxes in fiscal year 2018. We continue to maintain a full valuation allowance against our deferred tax assets. See Note 10: Income Taxes in the notes to our consolidated financial statements. Ooma | FY2020 Form 10-K | 47
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Non-GAAP Financial Measures
In addition to disclosing financial measures prepared in accordance with GAAP,
this Form 10-K contains certain non-GAAP financial measures, including non-GAAP
net loss and Adjusted EBITDA (see above). These non-GAAP financial measures
exclude non-cash stock-based compensation expense and related taxes,
amortization of acquired intangible assets and other acquisition-related
charges, restructuring charges and certain litigation costs that are not
representative of the ordinary course of our business.
These non-GAAP financial measures are presented to provide investors with
additional information regarding our financial results and core business
operations. We consider these non-GAAP financial measures to be useful measures
of the operating performance of the Company, because they contain adjustments
for unusual events or factors that do not directly affect what management
considers to be our core operating performance, and are used by our management
for that purpose. We also believe that these non-GAAP financial measures allow
for a better evaluation of 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 of a company.
Non-GAAP financial measures are presented for supplemental informational
purposes only to aid an understanding of our operating results. The non-GAAP
financial measures should not be considered a substitute for financial
information presented in accordance with GAAP, and may be different from
non-GAAP financial measures presented by other companies. A limitation of the
non-GAAP financial measures presented is that the adjustments relate to items
that the Company generally expects to continue to recognize. The adjustment of
these items should not be construed as an inference that the adjusted gains or
expenses are unusual, infrequent or non-recurring. Therefore, both GAAP
financial measures of Ooma's financial performance and the respective non-GAAP
measures should be considered together.
For additional information and reconciliations of our Adjusted EBITDA, see "Key
Business Metrics" above. Reconciliations of our GAAP and non-GAAP net loss were
as follows (in thousands):
Fiscal Year Ended January 31,
2020 2019 2018
GAAP net loss $ (18,801 ) $ (14,572 ) $ (13,121 )
Stock-based compensation and related
taxes 13,149 10,695 11,118
Restructuring charges 3,085 - - Amortization of acquired intangible assets and acquisition-related costs 1,289 752 431 Litigation costs 606 142 - Non-GAAP net loss$ (672 ) $ (2,983 ) $ (1,572 ) Ooma | FY2020 Form 10-K | 48
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Quarterly Results of Operations and Trends
The following table sets forth selected quarterly financial data for each of the eight quarterly periods endedJanuary 31, 2020 (in thousands, except percentages): Three Months Ended January 31 October 31 July 31 April 30 Fiscal 2020 Total revenue$ 40,648 $ 39,595 $ 37,343 $ 34,007 Gross profit$ 24,588 $ 22,040 $ 22,320 $ 20,433 Gross margin 60 % 56 % 60 % 60 % Total operating expenses$ 27,060 $ 28,980 $ 27,599 $ 25,453 Net loss$ (2,294 ) $ (6,784 ) $ (4,983 ) $ (4,740 ) Fiscal 2019 Total revenue$ 34,720 $ 32,608 $ 31,681 $ 30,222 Gross profit$ 19,707 $ 20,073 $ 18,773 $ 17,938 Gross margin 57 % 62 % 59 % 59 % Total operating expenses$ 23,534 $ 23,937 $ 22,937 $ 21,869 Net loss$ (3,489 ) $ (3,494 ) $ (3,904 ) $ (3,685 )
Revenue. Our total revenue has grown sequentially each quarter due to the continued growth in our subscriber base driven by an increase in our core users.
Gross Margin. Over the past eight fiscal quarters, our gross margin has fluctuated between 56% and 62% due to changes in our product mix and the introduction of new products, as well as restructuring charges recorded in the third quarter of fiscal 2020 as described above.
Operating Expenses. Our quarterly operating expenses in absolute dollars have
increased significantly from fiscal 2019 to fiscal 2020, primarily driven by
growing headcount and personnel-related expenses, as well as marketing and
advertising expenses associated with our efforts to increase our overall
subscriber base and product sales, and restructuring charges recorded in the
third quarter of fiscal 2020 as described above.
Ooma | FY2020 Form 10-K | 49
--------------------------------------------------------------------------------Liquidity and Capital Resources
As ofJanuary 31, 2020 , we had$26.1 million of total cash, cash equivalents and short-term investments. Our primary source of cash is receipts from sales to our customers. We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our sales and marketing and research and development expenditure, and the continuing market acceptance of our solutions. We may in the future make investments in or acquisitions of businesses or technologies, which may require the use of cash. For example, in the second quarter of fiscal 2020, we completed the acquisition of Broadsmart for approximately$7.1 million , net of cash acquired of$0.6 million , as well as made payment of$0.4 million in connection with our acquisition of Voxter in fiscal 2019. In addition, in the fourth quarter of fiscal 2019, we invested cash of$1.3 million into a small privately-held technology company, in exchange for an 18-month convertible promissory note (see Note 6: Balance Sheet Components of the notes to our consolidated financial statements). The table below provides selected cash flow information, for the periods indicated (in thousands): Fiscal Year Ended January 31, 2020 2019 2018 Net cash used in operating activities$ (7,564 ) $ (3,926 ) $ 3,173 Net cash provided by investing activities 2,866 14,853 (2,155 ) Net cash provided by financing activities 1,008 (40 ) (525 ) Net (decrease) increase in cash and cash equivalents$ (3,690 ) $ 10,887 $ 493 Operating Activities The table below provides selected cash flow information, for the periods indicated (in thousands): Fiscal Year Ended January 31, 2020 2019 2018 Net loss$ (18,801 ) $ (14,572 ) $ (13,121 ) Non-cash charges 19,645 12,321 13,327 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 135 (1,050 ) 1,856 Decrease (increase) in inventories and deferred inventory costs 407 (4,213 ) 310 Increase in other assets (4,965 ) (5,334 ) (1,519 ) (Decrease) increase in accounts payable and other liabilities (4,089 ) 8,150
2,366
Increase (decrease) in deferred revenue 104 772 (46 ) Net cash (used in) provided by operating activities$ (7,564 ) $ (3,926
)
For fiscal 2020, our net loss of
• an increase of
primarily due to the capitalization of sales commissions costs under Topic
606 and operating lease costs under Topic 842
• a decrease of
liabilities due to the timing of payments
For fiscal 2019, our net loss of
• an increase of
of billing and our collection efforts
• a net increase of
to scale our business
• an increase of
primarily due to the capitalization of sales commissions costs under Topic
606
• an increase of
liabilities to support the growth of our business, including higher
headcount
Ooma | FY2020 Form 10-K | 50
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Investing Activities
Our investing activities include short-term investment activities, capital expenditures and business acquisitions. Our capital expenditures have primarily been for general business purposes, including network servers used in data centers, computer hardware and other equipment and development of our company website. During fiscal 2020, cash provided by investing activities was$2.9 million , which consisted of proceeds of$44.4 million from maturities and sales of short-term investments, offset in part by$31.2 million used for purchases of short-term investments,$7.1 million used for the acquisition of Broadsmart in the second fiscal quarter and$3.3 million used for capital expenditures. During fiscal 2019, cash provided by investing activities was$14.9 million , which consisted of proceeds of$59.0 million from maturities and sales of short-term investments, offset in part by$38.5 million used for purchases of short-term investments,$1.9 million used for capital expenditures,$2.4 million used for the acquisition of Voxter in the first quarter, and$1.3 million used to invest in a privately-held technology company in the fourth quarter.
Financing Activities
Cash generated from financing activities include net proceeds from common stock
issuances related to employee stock benefit plans. Cash used in financing
activities includes payment of shares repurchased for tax withholdings on
vesting of restricted stock units ("RSUs") and payment of acquisition-related
holdbacks.
During fiscal 2020, cash provided by financing activities was $1.0 million ,
which consisted of proceeds of $3.0 million from the issuance of common stock
related to our Employee Stock Purchase Plan ("ESPP") and stock option exercises,
offset in part by payments of $1.5 million related to shares repurchased for tax
withholdings on vesting of RSUs, as well as payment of $0.4 million in
connection with our fiscal 2019 acquisition of Voxter.
During fiscal 2019, financing activities consisted of payments of $2.9 million
related to shares repurchased for tax withholdings on vesting of RSUs, offset by
proceeds of $2.9 million from the issuance of common stock related to our ESPP
and stock option exercises.
Contractual Obligations and Commitments
As ofJanuary 31, 2020 , our total future expected payment obligations under non-cancelable operating leases with terms longer than one year were approximately$9.1 million . See Note 7: Operating Leases in the notes to our consolidated financial statements for a table of contractual obligations, including payments due by period. As ofJanuary 31, 2020 , non-cancelable purchase commitments with our contract manufacturers totaled approximately$4.0 million .
Off-Balance Sheet Arrangements
We do not have any material relationships with unconsolidated entities or financial partnerships, including entities such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements.
Ooma | FY2020 Form 10-K | 51
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP, which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flows and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Our future consolidated financial statements will be affected to the extent that our actual results materially differ from these estimates. Note 2 to the notes to consolidated financial statements of this Form 10-K describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. We believe that the accounting policies discussed below are critical to understanding our historical and future performance as these policies involve a greater degree of judgment and complexity. Revenue Recognition We derive revenue from two sources: (1) subscription and services revenue, which is generated from the sale of subscription plans and other services; and (2) product and other revenue. Our financial results for fiscal 2020 and 2019 are presented in accordance with the provisions under Topic 606, Revenue Recognition, which we adopted onFebruary 1, 2018 . Comparative prior period amounts for fiscal 2018 have not been adjusted and continue to be reported under Topic 605, which is materially similar to Topic 606. 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. Subscription revenue is generally recognized ratably over the contractual service term. Product and other revenue is generated from the sale of on-premise appliances and end-point devices, including shipping and handling fees for our direct customers, and to a lesser extent from porting fees that enable customers to transfer their existing phone numbers. Beginning fiscal 2019, we recognize revenue from sales to direct end-customers and channel partners at the point in time that control transfers which is typically when we deliver the product or when all customer contractual provisions have been met, if any. Our distribution agreements with channel partners typically contain clauses for price protection and right of return. Prior to fiscal 2019, we deferred product revenue and related costs of revenue on these product channel sales until title was transferred to the end-customer. See Note 2: Significant Accounting Policies in the notes to our consolidated financial statements for additional information regarding our subscription and services revenue and product and other revenue. Our contracts with customers typically contain multiple performance obligations that consist of product(s) and related communications services. For these contracts, we account for individual performance obligations separately if they are distinct. The contract transaction price is then allocated to the separate performance obligations on a relative stand-alone selling price ("SSP") basis. We determine the SSP for our communications services based on observable historical stand-alone sales to customers, for which we require that a substantial majority of selling prices fall within a reasonably narrow pricing range. We do not have a directly observable SSP for our on-premise appliance and end-point devices, and therefore we establish SSP based on our best estimates and judgments, considering company-specific factors such as pricing strategies, estimated product and other costs, and bundling and discounting practices. The determination of SSP is made through consultation with and approval by our management. As our business offerings evolve over time, we may be required to modify our estimated selling prices in subsequent periods, and the timing of our revenue recognition could be affected. We record reductions to revenue for estimated product returns from end users and customer sales incentives at the time the related revenue is recognized. Product returns and customer sales incentives are estimated based on our historical experience, current trends and expectations regarding future experience. Trends are influenced by product life cycles, new product introductions, market acceptance of products, the type of customer, seasonality and other factors. Product return and sales incentive rates may fluctuate over time but are sufficiently predictable to allow our management to estimate expected future amounts. If actual future returns and sales incentives differ from past experience, additional reserves may be required. To date, actual results have not been materially different from our estimates. Ooma | FY2020 Form 10-K | 52 --------------------------------------------------------------------------------
Inventories
Inventories consist of raw materials and finished goods and are stated at the lower of actual cost or market on a first-in, first-out basis. Our assessment of market value requires the use of estimates regarding the net realizable value of our inventory balances, including an assessment of excess or obsolete inventory. At each balance sheet date, we determine excess or obsolete inventory write-downs based on multiple factors, including: forecast demand for our products within a specified time horizon, generally 12 months, product acceptance and competitiveness in the marketplace, product life cycles, product development plans, and current and historical sales levels. Inventory write-downs for excess and obsolete inventory are recorded in cost of goods sold within the consolidated statement of operations during the period in which such write-downs are determined as necessary by management. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. This would have a negative impact on our gross margin in that period. If in any period we are able to sell inventories that were not valued or that had been written down in a previous period, related revenues would be recorded without any offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period. For fiscal 2020, we recorded write-downs of$1.4 million for excess inventory and non-cancelable purchase commitments related to the discontinuation ofOoma Smart Cam inOctober 2019 , which were included in the restructuring charges described above. Inventory write-downs recorded for fiscal 2019 and 2018 were not material. Income Taxes We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We have recorded a full valuation allowance against our deferred tax assets as ofJanuary 31, 2020 and 2019. We use a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A tax position is recognized when it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. Deferred tax assets associated with our unrecognized tax benefits were fully offset by a valuation allowance as ofJanuary 31, 2020 and 2019. Ooma | FY2020 Form 10-K | 53
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