Ooma(OOMA) - 2024 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents Ooma, Inc.'s unaudited condensed consolidated financial statements and detailed notes for the period ended October 31, 2023 Item 1. Financial Statements Provides Ooma, Inc.'s unaudited condensed consolidated financial statements and comprehensive notes for the specified reporting periods Condensed Consolidated Balance Sheets Presents Ooma, Inc.'s financial position, detailing assets, liabilities, and stockholders' equity as of October 31, 2023, and January 31, 2023 Condensed Consolidated Balance Sheets (Amounts in thousands) | Metric | October 31, 2023 | January 31, 2023 | | :--------------------------------- | :--------------- | :--------------- | | Assets | | | | Cash and cash equivalents | $18,872 | $24,137 | | Short-term investments | — | $2,723 | | Accounts receivable, net | $9,224 | $7,131 | | Inventories | $21,343 | $26,246 | | Total current assets | $65,816 | $74,605 | | Property and equipment, net | $9,754 | $7,996 | | Operating lease right-of-use assets | $17,106 | $12,702 | | Intangible assets, net | $29,637 | $10,463 | | Goodwill | $22,917 | $8,655 | | Total assets | $162,908 | $131,005 | | Liabilities and Stockholders' Equity | | | | Accounts payable | $6,992 | $13,462 | | Accrued expenses and other current liabilities | $29,359 | $26,726 | | Deferred revenue | $17,303 | $17,216 | | Total current liabilities | $53,654 | $57,404 | | Long-term operating lease liabilities | $13,691 | $10,426 | | Debt, net of current portion | $18,000 | — | | Total liabilities | $85,359 | $67,861 | | Total stockholders' equity | $77,549 | $63,144 | | Total liabilities and stockholders' equity | $162,908 | $131,005 | Condensed Consolidated Statements of Operations Details Ooma, Inc.'s revenues, expenses, and net income (loss) for the three and nine months ended October 31, 2023 and 2022 Condensed Consolidated Statements of Operations (Amounts in thousands, except share and per share data) | Metric | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Subscription and services revenue | $55,886 | $51,749 | $163,661 | $146,467 | | Product and other revenue | $3,970 | $4,930 | $11,400 | $13,202 | | Total revenue | $59,856 | $56,679 | $175,061 | $159,669 | | Gross profit | $36,939 | $35,920 | $109,479 | $101,689 | | Loss from operations | $(1,018) | $(2,855) | $(1,620) | $(5,260) | | Net income (loss) | $2,285 | $(2,810) | $2,230 | $(3,238) | | Basic and diluted EPS | $0.09 | $(0.11) | $0.09 | $(0.13) | | Basic weighted-average shares outstanding | 25,469,997 | 24,608,685 | 25,458,063 | 24,373,836 | | Diluted weighted-average shares outstanding | 25,990,264 | 24,608,685 | 26,052,180 | 24,373,836 | Condensed Consolidated Statements of Cash Flows Outlines Ooma, Inc.'s cash inflows and outflows from operating, investing, and financing activities for the nine months ended October 31, 2023 and 2022 Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Metric | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $6,765 | $5,471 | | Net cash used in investing activities | $(31,044) | $(6,647) | | Net cash provided by financing activities | $19,014 | $1,546 | | Net (decrease) increase in cash and cash equivalents | $(5,265) | $370 | | Cash and cash equivalents at end of period | $18,872 | $20,037 | Condensed Consolidated Statements of Stockholders' Equity Shows changes in Ooma, Inc.'s stockholders' equity, including common stock, APIC, and accumulated deficit, for the period ended October 31, 2023 Condensed Consolidated Statements of Stockholders' Equity (Amounts in thousands) | Metric | Balance - Feb 1, 2023 | Balance - Oct 31, 2023 | | :--------------------------------- | :-------------------- | :--------------------- | | Common stock and APIC | $195,610 | $207,763 | | Accumulated other comprehensive loss | $(23) | $(1) | | Accumulated deficit | $(132,443) | $(130,213) | | Total Stockholders' Equity | $63,144 | $77,549 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1: Overview and Basis of Presentation Describes Ooma, Inc.'s business, recent acquisition, and the basis for preparing the unaudited interim financial statements - Ooma, Inc. provides communications services and related technologies for businesses and consumers via smart SaaS and unified communications platforms[16] - On October 20, 2023, Ooma acquired 2600Hz, Inc., a provider of business communications applications[17] - The financial statements are unaudited, prepared in accordance with GAAP and SEC rules for interim reporting, and should be read with the Annual Report on Form 10-K for the year ended January 31, 2023[19] Note 2: Revenue and Deferred Revenue Details Ooma, Inc.'s revenue recognition policies and disaggregated revenue sources, along with deferred revenue balances - Subscription and services revenue is derived from recurring fees for service plans (Ooma Business, Ooma Residential) and recognized ratably over the contract term[24] - Product and other revenue comes from sales of on-premise and end-point devices (e.g., Ooma AirDial) and porting fees, recognized at the point of control transfer[25] Revenue Disaggregated by Source (Amounts in thousands) | Revenue Source | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :----------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Subscription and services | $55,886 | $51,749 | $163,661 | $146,467 | | Product and other | $3,970 | $4,930 | $11,400 | $13,202 | | Total revenue | $59,856 | $56,679 | $175,061 | $159,669 | - Ooma Business contributed approximately 58% of total revenue for the three months ended October 31, 2023, up from 55% in the prior year, while Ooma Residential decreased from 43% to 39%[25] Deferred Revenue (Amounts in thousands) | Category | October 31, 2023 | January 31, 2023 | | :-------------------------- | :--------------- | :--------------- | | Subscription and services | $17,304 | $17,239 | | Product and other | $13 | $8 | | Total deferred revenue | $17,317 | $17,247 | | Less: current deferred revenue | $17,303 | $17,216 | | Non-current deferred revenue | $14 | $31 | Note 3: Fair Value Measurements Discusses Ooma, Inc.'s fair value measurements for financial assets and liabilities, including cash and short-term investments - The Company had no short-term investments as of October 31, 2023, compared to $2.7 million as of January 31, 2023[30][31] - Cash and cash equivalents were $18.9 million as of October 31, 2023[30] - Financial assets are classified as Level 1 or Level 2 based on observable market inputs; there are no Level 3 assets or liabilities[29][30] Note 4: Balance Sheet Components Provides detailed breakdowns of specific balance sheet accounts, including inventories, other assets, and accrued liabilities Inventories (Amounts in thousands) | Category | October 31, 2023 | January 31, 2023 | | :---------------- | :--------------- | :--------------- | | Finished goods | $12,396 | $13,715 | | Raw materials | $8,947 | $12,531 | | Total inventory | $21,343 | $26,246 | Other Current and Non-Current Assets (Amounts in thousands) | Category | October 31, 2023 | January 31, 2023 | | :--------------------------------- | :--------------- | :--------------- | | Deferred sales commissions, current | $8,352 | $7,826 | | Convertible note receivable (GTC) | $2,139 | $1,899 | | Total other current assets | $16,377 | $14,368 | | Deferred sales commissions, non-current | $15,080 | $14,467 | | Total other non-current assets | $17,678 | $16,584 | Accrued Expenses and Other Current Liabilities (Amounts in thousands) | Category | October 31, 2023 | January 31, 2023 | | :--------------------------------- | :--------------- | :--------------- | | Payroll and related expenses | $11,602 | $13,621 | | Acquisition related costs | $3,066 | — | | Short-term operating lease liabilities | $3,711 | $3,617 | | Regulatory fees and taxes | $4,223 | $3,609 | | Total accrued expenses and other current liabilities | $29,359 | $26,726 | - Amortization of deferred sales commissions was $2.3 million for the three months and $6.7 million for the nine months ended October 31, 2023[33] - Acquisition related costs of $3.066 million represent the remaining cash purchase consideration for the 2600Hz acquisition, paid in November 2023[35] Note 5: Acquired Intangible Assets and Goodwill Details the intangible assets and goodwill recognized from Ooma, Inc.'s recent business acquisition - The Company recognized $21.4 million in intangibles and $14.3 million in goodwill from the October 2023 acquisition of 2600Hz[36] Acquired Intangible Assets (Amounts in thousands) | Category | Estimated Life (years) | Carrying Value (Oct 31, 2023) | Carrying Value (Jan 31, 2023) | | :--------------------- | :--------------------- | :---------------------------- | :---------------------------- | | Customer relationships | 5-7 | $9,908 | $9,970 | | Developed technology | 2-7 | $18,660 | $328 | | Trade names | 2-5 | $1,069 | $165 | | Total intangible assets | | $29,637 | $10,463 | - Amortization expense for intangible assets was $0.8 million for the three months and $2.2 million for the nine months ended October 31, 2023[37] Note 6: Operating Leases Presents information on Ooma, Inc.'s operating lease assets, liabilities, and associated lease costs Operating Lease Assets and Liabilities (Amounts in thousands) | Category | October 31, 2023 | January 31, 2023 | | :--------------------------------- | :--------------- | :--------------- | | Operating lease right-of-use assets | $17,106 | $12,702 | | Short-term operating lease liabilities | $3,711 | $3,617 | | Long-term operating lease liabilities | $13,691 | $10,426 | | Total lease liabilities | $17,402 | $14,043 | | Weighted-average remaining lease term | 6.2 years | 4.8 years | | Weighted-average discount rate | 6.0% | 4.5% | - Total lease costs were $1.5 million for the three months and $4.3 million for the nine months ended October 31, 2023[40] - In July 2023, the Company recognized a $1.0 million facilities consolidation gain from writing off a lease liability related to the OnSIP acquisition[42] Note 7: Stockholders' Equity Summarizes Ooma, Inc.'s stock option and restricted stock unit activity, along with ESPP share purchases Stock Option Activity (Nine Months Ended October 31, 2023) | Metric | Shares (in thousands) | Weighted-Average Exercise Price Per Share | | :-------------------------- | :-------------------- | :-------------------------------------- | | Balance as of January 31, 2023 | 1,217 | $9.93 | | Exercised | (54) | $4.90 | | Balance as of October 31, 2023 | 1,158 | $10.14 | | Vested and exercisable | 1,049 | $9.54 | Restricted Stock Unit (RSU) Activity (Nine Months Ended October 31, 2023) | Metric | Shares (in thousands) | Weighted-Average Grant Date Fair Value Per Share | | :-------------------------- | :-------------------- | :----------------------------------------------- | | Balance as of January 31, 2023 | 1,466 | $15.81 | | Granted | 1,079 | $13.18 | | Vested | (643) | $14.68 | | Balance as of October 31, 2023 | 1,848 | $14.68 | - Employees purchased 0.2 million shares under the ESPP at a weighted-average price of $10.60 during the nine months ended October 31, 2023[46] Note 8: Stock-Based Compensation Details Ooma, Inc.'s stock-based compensation expense across various functional categories Stock-Based Compensation Expense (Amounts in thousands) | Category | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cost of revenue | $255 | $239 | $757 | $713 | | Sales and marketing | $502 | $503 | $1,499 | $1,513 | | Research and development | $1,200 | $1,178 | $3,496 | $3,441 | | General and administrative | $1,757 | $1,621 | $5,086 | $4,716 | | Total stock-based compensation expense | $3,714 | $3,541 | $10,838 | $10,383 | - As of October 31, 2023, $27.1 million of unrecognized compensation expense related to unvested RSUs, stock options, and ESPP rights is expected to be recognized over approximately 2 years[47] Note 9: Income Taxes Explains Ooma, Inc.'s income tax benefit, valuation allowance, and unrecognized tax benefits - The Company recorded an income tax benefit of $3.0 million for the three months and $2.6 million for the nine months ended October 31, 2023[49] - The benefit in Q3 FY2024 was primarily due to the release of a $3.2 million valuation allowance on deferred tax assets from the 2600Hz acquisition[49] - As of October 31, 2023, the Company maintained a full valuation allowance against its remaining deferred tax assets and had $10.3 million in unrecognized tax benefits[49][50] Note 10: Basic and Diluted Net Loss Per Share Presents the calculation of Ooma, Inc.'s basic and diluted net income (loss) per share Basic and Diluted Net Income (Loss) Per Share (Amounts in thousands, except share and per share data) | Metric | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $2,285 | $(2,810) | $2,230 | $(3,238) | | Weighted average common shares | 25,469,997 | 24,608,685 | 25,458,063 | 24,373,836 | | Potentially dilutive shares | 520,267 | — | 594,117 | — | | Diluted weighted-average common shares | 25,990,264 | 24,608,685 | 26,052,180 | 24,373,836 | | Basic and diluted net income (loss) per share | $0.09 | $(0.11) | $0.09 | $(0.13) | - Potentially dilutive securities of approximately 0.6 million and 0.7 million for the three and nine months ended October 31, 2022, respectively, were excluded as anti-dilutive[52] Note 11: Commitments and Contingencies Outlines Ooma, Inc.'s non-cancelable purchase commitments, service agreements, and legal contingencies - Non-cancelable inventory purchase commitments were $2.8 million as of October 31, 2023, down from $7.8 million as of January 31, 2023[53] - The Company has a non-cancelable service agreement with a telecommunications provider with minimum purchase commitments of $1.5 million (Aug 2022-Feb 2024) and $2.5 million (Mar 2024-Feb 2025)[53] - Ooma is involved in a class action lawsuit in Canada regarding its 'free' Basic Home Phone marketing, with the amount of possible loss not estimable[57] Note 12: Financing Arrangements Describes Ooma, Inc.'s new secured revolving credit facility and the status of its debt - On October 20, 2023, Ooma entered into a new three-year secured revolving credit facility for up to $30.0 million (expandable to $50.0 million)[60] - As of October 31, 2023, $18.0 million was outstanding under the new credit facility, used for the 2600Hz acquisition, at a Term SOFR interest rate of 7.5%[64] - The previous Key Bank Credit Agreement for $25.0 million was terminated on June 7, 2023[66][68] Note 13: Business Acquisition Provides details on Ooma, Inc.'s acquisition of 2600Hz, Inc., including purchase price allocation - On October 20, 2023, Ooma acquired 2600Hz, Inc. for approximately $33.0 million in cash, with $29.2 million paid in Q3 FY2024 and $3.1 million in November 2023[69] Preliminary Purchase Price Allocation for 2600Hz Acquisition (Amounts in thousands) | Asset/Liability | Fair Value | | :--------------------------------- | :--------- | | Cash and cash equivalents | $1,840 | | Intangible assets | $21,400 | | Goodwill | $14,262 | | Deferred tax liability | $(3,234) | | Total purchase consideration | $34,116 | - Intangible assets acquired primarily include $18.6 million in developed technology with a seven-year useful life[70] - The acquisition included approximately 423,000 restricted stock units (estimated fair value $4.3 million) vesting over 18 months, to be recorded as stock compensation expense[73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Ooma's financial condition and operational results for the three and nine months ended October 31, 2023, including the 2600Hz acquisition impact Executive Overview Provides a high-level summary of Ooma's business, revenue sources, and the strategic impact of the 2600Hz acquisition - Ooma provides communications services and technologies for businesses and residential customers through smart SaaS and unified communications platforms[76] - Revenue is primarily generated from subscriptions and services, with product and other revenue from device sales[77] - The acquisition of 2600Hz, Inc. on October 20, 2023, for approximately $33.0 million in cash, is expected to accelerate Ooma Business growth[78] - Ooma Business includes Ooma Office, Ooma Enterprise, Ooma AirDial, 2600Hz, and OnSIP, while Ooma Residential covers Telo basic, premier, and LTE services[79] Third Quarter Fiscal 2024 Financial Performance Summarizes Ooma's key financial results for the third quarter of fiscal year 2024, highlighting revenue growth and profitability - Total revenue: $59.9 million, up 6% YoY, driven by Ooma Business growth[83] - Subscription and services revenue from Ooma Business: grew 15% YoY due to user growth[83] - Total gross margin: 62%, comparable to 63% in prior year quarter[83] - GAAP net income: $2.3 million, compared to net loss of $2.8 million in prior year, mainly due to income tax benefits from 2600Hz intangibles[83] - Adjusted EBITDA: $5.0 million, compared to $4.5 million in prior year quarter[83] - Cash, cash equivalents, and short-term investments: $18.9 million as of October 31, 2023, down from $26.9 million as of January 31, 2023[83] - Total debt: $18.0 million as of October 31, 2023, compared to zero outstanding borrowings as of January 31, 2023[83] Key Business Metrics Presents and explains Ooma's core operational metrics, including user growth, recurring revenue, and retention rates Key Business Metrics (Amounts in thousands, except percentages) | Metric | As of October 31, 2023 | As of October 31, 2022 | | :--------------------------------- | :--------------------- | :--------------------- | | Core users | 1,241 | 1,202 | | Annualized exit recurring revenue (AERR) | $224,865 | $207,418 | | Net dollar subscription retention rate (NDRR) | 99% | 99% | - Core users increased year-over-year, primarily driven by a rise in business users, which comprised approximately 38% of total core users as of October 31, 2023 (up from 35%)[84] - AERR grew due to an increase in average revenue per core user, largely from an increasing mix of business users. $7.0 million annual recurring revenue from 2600Hz was added to AERR in Q3 FY2024[85] - The Net Dollar Subscription Retention Rate (NDRR) calculation methodology was transitioned in Q1 FY2024 to better reflect operational performance and align with industry peers, with historical NDRR under the new method at 99% for Q4 FY23 and Q3 FY23[86][90] Adjusted EBITDA Reconciliation (Amounts in thousands) | Metric | Three Months Ended Oct 31, 2023 | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | GAAP net income (loss) | $2,285 | $(2,810) | $2,230 | $(3,238) | | Interest and other income, net | $(267) | $(94) | $(1,214) | $(144) | | Income tax (benefit) provision | $(3,036) | $49 | $(2,636) | $(1,878) | | Depreciation and amortization of capital expenditures | $1,041 | $998 | $3,230 | $2,737 | | Amortization of intangible assets | $793 | $794 | $2,226 | $1,492 | | Acquisition-related costs | $408 | $580 | $408 | $1,381 | | Stock-based compensation and related taxes | $3,766 | $3,585 | $11,056 | $10,592 | | Facilities consolidation charges (gain) | — | $1,402 | $(956) | $1,402 | | Legal settlement costs | — | — | $300 | — | | Adjusted EBITDA | $4,990 | $4,504 | $14,644 | $12,344 | Components of Results of Operations Discusses the expected trends and drivers for Ooma's revenue, gross margin, and operating expense components - Subscription and services revenue is expected to grow with the expansion of the core user base, primarily driven by Ooma Business[94] - Product and other revenue consists mainly of sales of on-premise and end-point devices, including Ooma AirDial[95] - Subscription and services gross margin is expected to increase long-term due to scale efficiencies and Ooma Business revenue becoming a larger portion of total subscription revenue[98] - Product and other gross margin is expected to remain negative due to aggressive pricing to facilitate platform adoption, higher component costs from supply chain constraints, and high AirDial installation costs[99] - Operating expenses (Sales & Marketing, R&D, G&A) are expected to increase in absolute dollars as the business grows[101][102][103] Consolidated Results of Operations Provides a detailed comparative analysis of Ooma's revenue, cost of revenue, gross margin, and operating expenses Revenue Comparison (Amounts in thousands) | Revenue Category | 3 Months Ended Oct 31, 2023 | 3 Months Ended Oct 31, 2022 | Change ($) | Change (%) | 9 Months Ended Oct 31, 2023 | 9 Months Ended Oct 31, 2022 | Change ($) | Change (%) | | :----------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Subscription and services | $55,886 | $51,749 | $4,137 | 8% | $163,661 | $146,467 | $17,194 | 12% | | Product and other | $3,970 | $4,930 | $(960) | (19)% | $11,400 | $13,202 | $(1,802) | (14)% | | Total revenue | $59,856 | $56,679 | $3,177 | 6% | $175,061 | $159,669 | $15,392 | 10% | - Subscription and services revenue increased 8% YoY for the three months ended October 31, 2023, driven by core user growth and higher average revenue per user, with Ooma Business growing 15% YoY[107] - Product and other revenue decreased 19% YoY for the three months, partly due to non-recurring accessory sales in the prior year[108] - For the nine months, subscription and services revenue increased 12% YoY, while product and other revenue decreased 14% YoY due to non-recurring legacy inventory and accessory sales in the prior year[110][111] Cost of Revenue and Gross Margin Comparison (Amounts in thousands) | Category | 3 Months Ended Oct 31, 2023 | 3 Months Ended Oct 31, 2022 | Change ($) | Change (%) | 9 Months Ended Oct 31, 2023 | 9 Months Ended Oct 31, 2022 | Change ($) | Change (%) | | :----------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Cost of subscription and services | $15,993 | $14,070 | $1,923 | 14% | $46,174 | $39,954 | $6,220 | 16% | | Cost of product and other | $6,924 | $6,689 | $235 | 4% | $19,408 | $18,026 | $1,382 | 8% | | Total cost of revenue | $22,917 | $20,759 | $2,158 | 10% | $65,582 | $57,980 | $7,602 | 13% | | Subscription and services gross margin | 71% | 73% | | | 72% | 73% | | | | Product and other gross margin | (74)% | (36)% | | | (70)% | (37)% | | | | Total gross margin | 62% | 63% | | | 63% | 64% | | | - Subscription and services gross margin decreased to 71% (3 months) and 72% (9 months) YoY, primarily due to increased personnel, infrastructure, regulatory, and credit card processing costs[113][114] - Product and other gross margin significantly decreased to negative 74% (3 months) and negative 70% (9 months) YoY, mainly due to higher cost components procured in prior periods and non-recurring accessory sales in the prior year[115][116] Operating Expenses Comparison (Amounts in thousands) | Operating Expense | 3 Months Ended Oct 31, 2023 | 3 Months Ended Oct 31, 2022 | Change ($) | Change (%) | 9 Months Ended Oct 31, 2023 | 9 Months Ended Oct 31, 2022 | Change ($) | Change (%) | | :------------------------ | :-------------------------- | :-------------------------- | :--------- | :--------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Sales and marketing | $17,912 | $18,019 | $(107) | (1)% | $54,744 | $51,602 | $3,142 | 6% | | Research and development | $12,540 | $12,498 | $42 | 0% | $36,261 | $34,115 | $2,146 | 6% | | General and administrative | $7,505 | $8,258 | $(753) | (9)% | $20,094 | $21,232 | $(1,138) | (5)% | | Total operating expenses | $37,957 | $38,775 | $(818) | (2)% | $111,099 | $106,949 | $4,150 | 4% | - Sales and marketing expenses decreased 1% YoY for the three months, primarily due to lower advertising and third-party commission expenses, partially offset by higher personnel costs[118] - General and administrative expenses decreased 9% YoY for the three months, mainly due to a $1.4 million decrease in facilities consolidation charges, partially offset by higher personnel costs[119] - For the nine months, sales and marketing expenses increased 6% YoY, driven by higher personnel, travel, and amortization of capitalized sales commissions and intangibles[121] - Research and development expenses increased 6% YoY for the nine months, primarily due to higher personnel-related costs and web development costs[122] - General and administrative expenses decreased 5% YoY for the nine months, mainly due to a $2.3 million facility consolidation gain and lower acquisition-related expenses, partially offset by higher personnel costs and litigation settlement costs[123] Liquidity and Capital Resources Assesses Ooma's cash position, cash flow activities, and financing arrangements to meet future obligations - As of October 31, 2023, Ooma had $18.9 million in total cash, cash equivalents, and investments, deemed sufficient for the next 12 months[125] Selected Cash Flow Information (Amounts in thousands) | Cash Flow Activity | Nine Months Ended Oct 31, 2023 | Nine Months Ended Oct 31, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $6,765 | $5,471 | | Net cash used in investing activities | $(31,044) | $(6,647) | | Net cash provided by financing activities | $19,014 | $1,546 | | Net (decrease) increase in cash and cash equivalents | $(5,265) | $370 | - Operating cash flow increased $1.3 million YoY for the nine months ended October 31, 2023, primarily due to working capital impacts from payment timing[128] - Investing activities used $31.0 million, an increase of $24.4 million YoY, mainly due to the $29.2 million cash consideration for the 2600Hz acquisition[129] - Financing activities provided $19.0 million, an increase of $17.5 million YoY, primarily from $18.0 million in long-term debt proceeds for the 2600Hz acquisition[130] - The Company entered a new $30.0 million secured revolving credit facility in October 2023, with $18.0 million outstanding as of October 31, 2023, and was in compliance with all covenants[131] Critical Accounting Policies and Estimates States that there have been no material changes to Ooma's critical accounting policies and estimates - There have been no material changes to the Company's significant accounting policies and estimates in fiscal 2024 from those disclosed in the fiscal 2023 Annual Report on Form 10-K[134] Item 3. Quantitative and Qualitative Disclosures About Market Risk States no material changes to Ooma's market risk occurred during the first half of fiscal 2024, referring to the Annual Report for details - No material changes to the Company's market risk occurred during the first half of fiscal 2024[136] - For detailed market risk disclosures, refer to Part II, Item 7A of the Annual Report on Form 10-K for the fiscal year ended January 31, 2023[136] Item 4. Controls and Procedures Details the evaluation of Ooma's disclosure controls and procedures, confirming effectiveness and no material changes in internal control Evaluation of Disclosure Controls and Procedures Management concluded Ooma's disclosure controls and procedures were effective at a reasonable assurance level - Management, including the CEO and CFO, concluded that Ooma's disclosure controls and procedures were effective at a reasonable assurance level as of October 31, 2023[137] Changes in Internal Control over Financial Reporting Reports no material changes in Ooma's internal control over financial reporting during the quarter - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control during the quarter ended October 31, 2023[138] - The Company has not experienced significant impact to internal controls despite most employees involved in financial reporting working remotely[138] Inherent Limitations on Effectiveness of Controls Acknowledges that internal control systems provide only reasonable assurance and are subject to inherent limitations - Internal control systems provide only reasonable assurance and are subject to inherent limitations, meaning they may not prevent or detect all misstatements[139] PART II. OTHER INFORMATION Contains additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings Refers to Note 11 for a discussion of Ooma's legal proceedings, including a class action lawsuit - For a discussion of legal proceedings, refer to Note 11: Commitments and Contingencies in the condensed consolidated financial statements[142] Item 1A. Risk Factors Outlines significant risks and uncertainties that could materially affect Ooma's business, financial condition, and results of operations Risk Factor Summary Provides a high-level overview of the key risks Ooma faces across various operational and financial areas - Inability to attract new users cost-effectively[145] - Increased customer turnover and costs to retain customers[147] - Reliance on small and medium-sized businesses, vulnerable to economic downturns[148] - Failure to develop or enhance products/services timely and cost-effectively[149] - Risks from acquisitions, including diversion of management attention and increased expenses[151] - Dependence on sole suppliers and limited manufacturers for devices, risking delays and increased costs[154] - Ransomware attacks or security breaches could disrupt service, compromise data, and incur significant liability[156] - Reliance on retailers and reseller partnerships for sales, with failure to manage these channels adversely affecting revenue[162] - Intense market competition, including from mergers, potentially leading to loss of market share[165] - Risks associated with expanding international operations[169] - Reliance on third parties for network connectivity and co-location facilities[174] - Interruptions in services harming reputation and increasing costs[176] - Reliance on third parties for software development, quality assurance, and customer service, including those in Russia and the Philippines[183] - Inability to obtain or retain direct inward dialing (DIDs) numbers[186] - Inability to effectively process local and toll-free number portability[191] - Inability to achieve or sustain profitability and potential decline in growth rates[194] - Fluctuations in quarterly and annual results, potentially missing analyst expectations[196] - Ineffective inventory and purchase commitment management leading to excess, obsolescence, or shortages[198] - Significant costs to protect against and address security breaches[200] - Failures in internet infrastructure or broadband interference affecting service reliability[201] - Excessive fraudulent activity or non-compliance with credit card merchant standards[203] - Accusations of intellectual property infringement[204] - Failure to obtain or enforce intellectual property rights[205] - Potential problems with information systems[208] - Limitations from using open source technology[211] - Increased regulatory requirements, taxes, or fees[214] - Non-compliance with communications and telemarketing laws[215] - Increased regulation of interconnected VoIP services[217] - Reform of Universal Service Fund programs increasing costs[222] - Non-compliance with industry standards and FCC regulations[225] - Evolving data privacy laws (e.g., CCPA, GDPR) increasing costs and liability[229] - Anti-corruption and anti-money laundering laws, and governmental sanctions impacting international expansion[232] - Liabilities for past services for taxes, surcharges, and fees[235] - Changes in effective tax rates or adverse tax audit outcomes[240] - Inability to use net operating loss carryforwards[242] - Failure to maintain effective internal control over financial reporting[243] - Operating results differing significantly from guidance[246] - Stock price volatility and potential decline[247] - Sales of substantial shares causing stock price decline[248] - Lack of analyst coverage or negative evaluations impacting stock price[249] - No anticipated cash dividends[250] - Charter documents and Delaware law preventing favorable takeovers[252] - Class action litigation risks[253] - Inability to hire, retain, and motivate qualified personnel[254] - Ongoing impact of the COVID-19 pandemic[262] - Catastrophic events or political instability disrupting business[264] - Impact of climate change on business operations[266] Risks Related to Our Business and Industry Details risks specific to Ooma's business model and the cloud-based communications industry - Ooma's growth depends on cost-effectively attracting new users, which is challenged by increasing advertising costs and potential customer resistance to new technologies[149][150] - Customers can terminate monthly subscriptions without penalty, and increased churn, especially among higher-paying Ooma Business customers, could materially affect financial performance[151][152] - A significant portion of revenue comes from small and medium-sized businesses, which are more susceptible to economic downturns, rising inflation, and financial institution defaults[154][155] - Failure to timely and cost-effectively develop or acquire new products (e.g., Ooma Office Pro Plus, Ooma AirDial, 2600Hz solutions) or enhance existing ones could adversely affect business and results of operations[156][157][158][161] - Acquisitions, such as 2600Hz, may divert management attention, dilute stockholders, increase expenses, and disrupt operations, with no guarantee of successful integration or financial recovery[162][163][164] - Dependence on sole suppliers and a few manufacturers for devices (e.g., in Vietnam and other Asian countries) creates risks of delays, interruptions, price increases, and supply chain disruptions[165][166][167][168] - Reliance on retailers (Amazon, Costco.com, Best Buy, Walmart) and reseller partnerships for sales means failure to maintain or expand these channels could adversely affect revenue[174] - The cloud-based communications market is highly competitive, with established providers and new entrants. Mergers or aggressive tactics by competitors could lead to pricing pressures and loss of market share[176][177][179][180] - International expansion exposes Ooma to significant risks, including compliance with diverse regulations, staffing challenges, collection difficulties, currency fluctuations, and geopolitical instability[183][184][185] - Reliance on third parties for network connectivity, co-location facilities (e.g., Equinix, Inteliquent), SMS, speech-to-text, and E-911 services creates risks of service interruptions, increased costs, and liability[186][187][188][189][190] - Service interruptions due to errors, defects, or third-party failures could harm Ooma's reputation, result in significant costs, and impair sales[191][192][193] - Dependence on third-party contractors for software development, quality assurance, and operations (including in Russia and the Philippines) creates risks of control loss, increased costs, and disruptions from international sanctions[194][195][196] - Failure to strengthen Ooma's brand or negative customer feedback could adversely affect reputation and ability to attract/retain customers[198][199] - Significant business growth, including through acquisitions, places demands on management and infrastructure, potentially straining service levels and increasing costs[200] - Inability to obtain or retain Direct Inward Dialing (DIDs) numbers, or limitations on distributing local/toll-free numbers, could make services less attractive and hinder revenue growth[201] - Failure to effectively process local and toll-free number portability in a timely manner, due to reliance on third-party carriers, could delay customer acquisition and lead to fines[203] - Ooma has incurred net losses and may not achieve or sustain profitability, with revenue growth potentially slowing due to macroeconomic conditions, competition, or failure to capitalize on opportunities[204] - Quarterly and annual results have fluctuated and may continue to do so due to demand, competition, marketing efforts, supply chain disruptions, and economic conditions, potentially causing stock price volatility[205][206][207] - Additional tariffs or trade restrictions on imported goods (e.g., from China) could increase costs, reduce supply, and harm revenue and gross margins[208][209][210] - Ineffective management of inventory levels and purchase commitments could lead to excess or obsolete inventory, shortages, write-down charges, or discounted sales, negatively affecting gross margins and customer relations[211][212][213] - Loss of key management or employees, or inability to attract and retain skilled personnel, could delay strategic objectives and adversely affect business operations[214] - Inability to secure additional financing on favorable terms, or at all, could limit Ooma's ability to pursue business objectives and respond to challenges, potentially diluting stockholders or increasing debt obligations[215][216] - Future growth depends on increased acceptance of cloud-based communications and connected services, particularly in the evolving small and medium-sized business and enterprise markets, and for Ooma Residential and mobile platforms[217][218][219][220] Risks Related to Security, IT Systems and Intellectual Property Addresses risks concerning Ooma's data security, information technology infrastructure, and intellectual property protection - Ooma faces significant costs to protect against and remediate security breaches (e.g., ransomware, DDOS attacks), which could lead to service interruptions, data loss, reputational harm, and substantial liabilities[169][170][171][172][222][223][224] - Failures in internet infrastructure or interference with broadband access could make Ooma's systems seem unreliable, causing customers to switch to competitors or avoid services[225][226][227][228] - Excessive fraudulent activity (e.g., stolen credit cards, chargebacks, communications fraud) or inability to meet evolving credit card merchant standards (e.g., PCI compliance) could incur substantial costs, fines, and loss of payment acceptance rights[229][230][231] - Accusations of intellectual property infringement, including from AI tool usage, could lead to costly litigation, diversion of management attention, and potential liability or restrictions on product use[232][233][234] - Failure to obtain or enforce intellectual property rights (patents, trademarks, copyrights, trade secrets) could harm Ooma's brand, allow competitors to duplicate technology, and necessitate costly litigation[235][236][237][239] - Potential problems with Ooma's information systems, or those of third parties, could disrupt business operations, billing, customer service, and financial reporting, especially during system enhancements[240][241] - Use of open source technology carries risks that license terms could impose unanticipated conditions, potentially requiring Ooma to make proprietary software source code public or discontinue services[242] Risks Related to Regulatory and Tax Matters Covers risks associated with Ooma's compliance with various federal, state, and international regulations and tax laws - Ooma's services are subject to federal (FCC), state, municipal, and international regulations (e.g., privacy, disability access, E-911, call signaling), with non-compliance risking fines, enforcement actions, and business restrictions[243][244][245][246][247][248] - Failure to comply with communications and telemarketing laws (e.g., TCPA, CAN-SPAM) or call recording regulations could result in significant fines, class action litigation, and restrictions on business[249] - Increased regulation of interconnected VoIP services by the FCC, including potential classification as telecommunications services, could subject Ooma to additional common carrier regulation[250] - Reform of federal and state Universal Service Fund (USF) programs could increase Ooma's contribution costs, diminishing its pricing advantage or reducing profit margins[252] - Ooma's products must comply with evolving industry standards (e.g., SIP, SRTP, NFPA 72) and regulations (FCC, UL), with non-compliance or delays risking fines, service interruptions, and negative market perception[253] - Processing personal information subjects Ooma to evolving data privacy and security laws (e.g., CCPA, CPRA, GDPR), increasing compliance costs, limiting service features, and exposing the company to liability[254][255][256][257][258][259][260][261] - The increasing popularity of internet voice communications heightens the risk of new or increased regulatory requirements, taxes, or fees, potentially increasing costs and harming results of operations[262][263] - Ooma is subject to anti-corruption (FCPA) and anti-money laundering laws, with non-compliance risking criminal/civil liability, fines, and reputational harm, especially with international business partners[264][265] - Governmental sanctions and export/import controls (e.g., U.S. Export Administration Regulations) could impair international expansion, delay product sales, and subject Ooma to substantial penalties for non-compliance[266][267] - Ooma may be subject to liabilities for past services for uncollected state or municipal taxes, fees, or surcharges, which could result in increased tax liabilities and harm customer relationships[269] - Future effective tax rates could be volatile due to changes in deferred tax asset valuation, tax credit laws, non-deductible expenses from acquisitions, and changes in tax laws or interpretations[270] - Ooma may be unable to fully utilize its net operating loss (NOL) carryforwards ($96.9 million federal, $79.3 million state as of Jan 31, 2023) due to insufficient future income or ownership changes, leading to higher tax payments[271] Risks Related to Being a Public Company Discusses risks inherent to Ooma's status as a publicly traded company, including financial reporting and guidance - Failure to maintain an effective system of internal control over financial reporting could lead to inaccurate financial reporting, adversely affecting investor confidence and stock value[272][273] - Ooma's actual operating results may differ significantly from its guidance, which is speculative and based on assumptions, potentially causing stock price decline and costly lawsuits[274][275][276] Risks Related to Ownership of Our Common Stock Outlines risks pertinent to investors holding Ooma's common stock, including price volatility and corporate governance - Ooma's stock price has been and may continue to be volatile due to operating results, financial projections, market reactions, industry trends, and macroeconomic conditions, potentially leading to substantial investment loss[277][278][279] - Sales of a substantial number of common stock shares in the public market, or the perception of such sales, could cause the stock price to decline and impair Ooma's ability to raise capital[280] - If securities analysts cease coverage or publish negative evaluations, Ooma's stock price could decline due to reduced market visibility[281] - Ooma does not anticipate paying cash dividends in the foreseeable future, meaning investors' return depends solely on stock price appreciation[282] - Ooma's charter documents and Delaware law contain provisions (e.g., classified board, blank check preferred stock, limitations on stockholder actions) that could delay or prevent a takeover and reduce stock price[283][284] - The exclusive forum provision in Ooma's certificate of incorporation for stockholder disputes could limit stockholders' ability to choose a favorable judicial forum, potentially discouraging lawsuits[285] - Ooma has been and may continue to be subject to class action litigation, which can be costly, divert management resources, and harm its brand and reputation[287] General Risk Factors Presents broader risks such as personnel retention, pandemics, catastrophic events, and climate change impacts - Inability to hire, retain, and motivate qualified personnel, especially in competitive markets like the San Francisco Bay Area, could adversely affect Ooma's business and growth[288] - The ongoing impact of the COVID-19 pandemic, including resurgences and new variants, could disrupt Ooma's business, operating results, or financial condition due to evolving consumer behavior and macroeconomic conditions[289] - Catastrophic events (e.g., earthquakes, hurricanes, cyber-attacks, war, political instability) could seriously impair Ooma's business operations, cause system interruptions, and harm financial results, especially given facilities in vulnerable regions and reliance on international contractors[290][291] - Climate change and related environmental impacts (e.g., drought, wildfires, new regulations) could disrupt Ooma's business, suppliers, and customers, leading to higher churn, losses, and increased compliance costs[292][293] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities Reports no unregistered sales of equity securities, use of proceeds, or issuer purchases during the fiscal quarter - No unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities occurred during the fiscal quarter ended October 31, 2023[294] Item 5. Other Information States no Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted, modified, or terminated by directors or officers - None of Ooma's directors or officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the fiscal quarter ended October 31, 2023[294] Item 6. Exhibits Lists all exhibits filed or incorporated by reference as part of the Quarterly Report - The exhibit index lists documents such as the Agreement and Plan of Merger for 2600Hz, Amended & Restated Bylaws, Credit Agreement with Citizens Bank, and CEO/CFO certifications[298] Signatures Confirms the official signing of the report by Ooma's President, CEO, and CFO - The report was signed on December 7, 2023, by Eric B. Stang, President and Chief Executive Officer, and Shig Hamamatsu, Chief Financial Officer[304]