Ooma, Inc. (NYSE:OOMA) Q4 2024 Earnings Call Transcript
Ooma, Inc. (NYSE:OOMA) Q4 2024 Earnings Call Transcript March 5, 2024
Ooma, Inc. beats earnings expectations. Reported EPS is $0.13, expectations were $0.12. Ooma, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and thank you for standing by. Welcome to Ooma Fourth Quarter and Fiscal Year 2024 Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Matt Robison. You may begin.
Matt Robison: Thank you, Towanda. Good day, everyone and welcome to the fiscal fourth quarter and full-year 2024 earnings call of Ooma, Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. I apologize in case I cough during my comments. On the call with me today are Ooma’s CEO, Eric Stang; and CFO, Shig Hamamatsu. After the market closed today, Ooma issued its fiscal fourth quarter and full-year 2024 earnings press release. This release is also available on the Company's website, ooma.com. This call is being webcast live and is accessible from a link on the Events & Presentations page of the Investor Relations section of our website. This link will be active for replay of this call for one year. During today's presentation, our executives will make forward-looking statements within the meaning of the Federal Securities laws.
Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today and those risks more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof and we disclaim any obligation to update any forward-looking statements, except as required by law. Please note that other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non-GAAP basis.
The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures is included in our earnings press release, which is available on our website. On this call, we will give guidance for the first quarter and full year fiscal 2025 on a non-GAAP basis. Also, in addition to our press release and 8-K filing, the Overview page and Events & Presentations page in the Investors section of our website as well as the Results page of the Financial Information section of our website include links to information about costs and expenses not included in our non-GAAP values and key metrics of our core subscription businesses.
These are titled Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally, our investor presentation slides include GAAP to non-GAAP reconciliation that also provides resolution of GAAP expenses that are excluded from non-GAAP metrics. Now, I will hand the call over to Ooma's CEO, Eric Stang.
Eric Stang: Thank you, Matt. Hi everyone. Welcome to Ooma's fourth quarter fiscal year 2024 earnings call. Thank you for joining us. I look forward to reviewing our Q4 and fiscal year 2024 results with you today. I'm also excited to talk with you about our strategy and plans for our upcoming 2025 fiscal year. Overall, I believe Ooma is fortunate to enter FY25 in a strong position with leading product solutions and significant potential for business expansion. In Q4, Ooma performed well financially, delivering $61.7 million in revenue and $3.5 million of non-GAAP net income. Adjusted EBITDA jumped to $5.2 million and cash flow from operations increased significantly to $5.5 million For all of FY24, we achieved $236.7 million in revenue, $15.4 million of non-GAAP net income and $19.8 million of adjusted EBITDA.
Year-over-year, we grew revenue by 10%, non-GAAP net income by 13%, adjusted EBITDA by 14%, and cash flow from operations by 40%. We achieved this growth while also investing significantly in new market opportunities and international expansion. And we believe we made important progress in FY24 on our strategy to expand our business and drive profitable growth. On the business side in Q4, we continue to invest in feature expansion, customer growth and the development of new resale partnerships. On all fronts, Ooma Office, Ooma Enterprise, Ooma Airdial and 2,600 Hertz, we made significant achievements in Q4. For Ooma Office, our solution for small to medium sized businesses, we expanded our sales efforts on the legal vertical, taking advantage of our announced integration with Clio legal practice management software.
These efforts are going well, with our largest customer win in the quarter being a 90 user deal. We also increased the proportion of new Ooma Office customers who signed up for a premium tier of service to 59%, our highest level to date. I'm also pleased to report that we signed an agreement with a new partner who will resell Ooma Office and we have started the work to enable them. We expect the contribution from this partner this year to be modest, but we consider it a great first step toward engaging other potential resell partners for Ooma Office. Regarding Ooma Enterprise, our solution for larger sized businesses, we also made significant achievements in Q4. One, was a large new customer we signed, where we will serve several thousand users spread across 400 locations.
We will be providing a combination of our full UCaaS solution for many of their users and our teams integrated calling solution for the rest. In our targeted hospitality vertical, we continued our momentum, again winning over 50 new hotels in the quarter. We also brought on a new technology partner who help us sell into this space. Ooma AirDial, our innovative solution to replace aging and expensive POTS lines continue to make progress in Q4 as we invest in this new opportunity. In Q4, we closed over 500 new customer deals, with some being notable large company wins. We expect many of these deals will start by rolling out only to a small subset of the available locations and then build through the year. In general, we find customers want to move forward on their immediate needs for copper line replacement, usually driven by lines being shut off or substantially increased line pricing before they plan a full rollout of Ooma AirDial across their business locations.
In Q4, we also continued to refine our AirDial product solution, including enhancing the AirDial remote device management system and enabling AirDial to serve new applications we came across. We added five new AirDial resale partners in Q4, which expands the number of partners reselling AirDial to over a dozen now. And finally, I'm very happy to report that Ooma AirDial won the 2024 TMC Internet Telephony Product of the Year Award for its multipath technology, which delivers unique and patented uninterrupted backup for POTS replacement. Turning now to 2,600 Hertz, our wholesale UCaaS, CCaaS and CPaaS platform solution. I believe we have made tremendous progress since acquiring them just four months ago. We believe we are on track to achieve the synergies we planned and make 2,600 Hertz adjusted EBITDA accretive in Q1 of this year.
What is particularly exciting for us though is the level of new customer interest we are seeing. This is happening faster than I expected. We have already won one new customer who will convert their customer base to the 2,600 Hertz Kazoo platform, and we are currently far along on other new customer opportunities. 2,600 Hertz is being looked at to replace aging and less agile UCaaS platforms. It is also being looked at as an alternative to standard CPaaS solutions, which lack prebuilt applications and cannot be directly controlled and hosted by end customers. Of course, the wholesale nature of this business means it will take new customers an extended amount of time to implement the solution and produce revenue. Nonetheless, the unexpectedly high level of interest we are seeing gives us confidence in our acquisition thesis and strategy for 2,600 Hertz.
We're proud of our accomplishments in Q4, but we also realize we have much more to do to capitalize on the investments we are making in the business. As we look forward, we believe we are well placed to do so for three main reasons. One reason is we believe we are a leader in the key segments we serve, with differentiated product solutions and a very low cost position to provide services. A second reason is we see significant untapped market opportunity in the key segments we target, in particular since so many smaller sized businesses have yet to move to a more advanced cloud communications solution. The third reason is the new directions we have invested in over the last couple of years. Ooma AirDial for parts replacement and Ooma 2,600 Hertz for wholesale UCaaS, CCaaS and CPaaS applications give us greater breadth of opportunity and open up paths to partner with others and extend our market reach.
As we look forward, we see several meaningful trends that support our strategic direction and give us confidence that the investments we are making will pay off. One of these is simply the fact that in North America alone, we estimate there are 6.4 million small businesses with 1 to 20 employees, and that a significant amount of these businesses have yet to transition to a modern cloud-based communications solution. We believe the market opportunity for Ooma Office is quite sizable. A second trend is the shutting down of the traditional copper phone network, which is already underway both here in the USA and in parts of Europe and seems to be accelerating as of late. We have what we believe is the leading solution with AirDial to serve equipment that doesn't easily move off of a copper line.
More generally, our small business and residential solutions both benefit as well, as customers are forced to look for new solutions when they lose their copper connection. A third trend, which we believe is favorable to Ooma is the rise of 5G Internet. Many smaller sized businesses rely today on a double play solution. In other words, Internet and phone from a cable provider. The availability of 5G wireless Internet can cause these businesses to reconsider not only their Internet solution, but also their communications provider. It also presents a future opportunity for Ooma to offer its own 5G double play solution. As you know, currently, we offer our 4G based Ooma Connect solution as backup Internet for businesses or sometimes as primary Internet for very small sized businesses.
A fourth market trend is the advent of AI. In contact center applications, and generally across all communications, significant data is created in the form of calls, texts and chats, and AI has a strong role to play to help businesses optimize their performance. Today, our activities in this area have been limited, in part due to the newness of AI and the fact that AI has not yet seen much adoption by smaller sized businesses. However, as we look forward, we anticipate launching AI applications in our solutions and believe that these applications will make our solutions more valuable and in greater demand by our customers. And finally, the last industry trend that I want to highlight is the desire by customers to do more with their communication solutions by making the applications they use more bespoke to their individual needs.
For smaller customers, this can entail integrations with other solutions used in their businesses. For larger customers, this can mean building custom applications using either CPaaS or a flexible API based wholesale platform. Either way, Ooma is positioned with innovative and leading solutions to take advantage of these customer opportunities. Building on these industry trends, our plans for FY25 include continued investment in key opportunities, balanced with improvement in bottom line results. Some of the things we plan to accomplish in FY25 are: One, to introduce new integrations with other platforms. Two, to extend our current call center capability into a more complete and omnichannel contact center solution. Three, to incorporate 5G performance into our Ooma Connect wireless Internet solution.
Four, to expand further internationally, including with our largest customer IWG. Five, to enhance our 2,600 Hertz wholesale platform by integrating other Ooma technology and applications. Six, to increase our sales and marketing activities across our business from direct sales to online and inside sales to channel and agent sales to partner sales. And finally, seven, to grow our community of resale partners who value our solutions and help us reach more of the vast market opportunity in front of us. I'm excited by the strategy we have put in place and by the progress I see us having made each quarter as we expand and grow. I believe FY25 looks to be an exciting year ahead for Ooma. I'll now turn the call over to Shig, our CFO, to discuss our results and outlook in more detail and then return with some closing remarks.
Shig Hamamatsu: Thank you, Eric, and good afternoon, everyone. I'm going to review our fourth quarter financial results and then provide our outlook for the first quarter and full-year fiscal 2025. We delivered another solid quarter with a total revenue of $61.7 million near the high end of our guidance range. On a year-over-year basis, total revenue grew 9% in the fourth quarter, driven by the growth of Ooma Business as well as the addition of 2,600 Hertz. In the fourth quarter, business subscription and services revenue accounted for 60% of total subscription and services revenue as compared to 55% in the prior year quarter. Q4 product and other revenue came in at $3.7 million as compared to $3.9 million in the prior year quarter.
On a full year basis, total revenue was $236.7 million as compared to $216.2 million in the prior year, representing 10% growth year-over-year, including 22% growth in business subscription and services revenue. On the profitability front, the fourth quarter non-GAAP net income was $3.5 million which exceeded our guidance range. On a full year basis, non GAAP net income was $15.4 million compared to $13.6 million in the prior year. Now some details on our Q4 revenue. Business subscription and services revenue grew 19% year-over-year in Q4, driven by Ooma Business user growth and the addition of 2,600 Hertz. Excluding the effect of inorganic revenue contribution, Ooma business subscription and services revenue grew 12% year-over-year. On residential side, subscription and services revenue was down 1.7% year-over-year.
As a reminder, we had a one-time churn event during the first quarter of fiscal 2024 with a particular customer with an unusual application, which continued to impact our year-over-year comparison in Q4. For the fourth quarter, total subscription and services revenue was $58 million or 94% of total revenue compared to 93% in the prior year quarter. Now some details on our key customer metrics. As a reminder, except for annual exit recurring revenue, these metrics do not include the 2,600 Hertz wholesale business. We ended the fourth quarter with 1.243 million core users, up from 1.241 million core users at the end of the third quarter. At the end of the fourth quarter, we had 484,000 business users or 39% of our total core users, an increase of 9,000 from Q3.
Our blended average monthly subscription and services revenue per core user or ARPU increased 3% year-over-year to $14.72 driven by an increasing mix of business users, including higher ARPU Office Pro and Pro Plus users. During the fourth quarter, we continue to see a healthy Office Pro and Pro Plus take rate with 59% of new Office users opting for these higher tier services, which was up from 52% in the prior year quarter. Overall, 29% of Ooma Office users have now subscribed to Pro or Pro Plus tier. Our annual exit recurring revenue grew to $227 million and was up 10% year-over-year. Our net dollar subscription retention rate for the quarter was 99% as compared to 99% in the third quarter. Now some details on our gross margin. Our subscription and services gross margin for the fourth quarter was 72% as compared to 73% in the prior year.
As a reminder, subscription and services gross margin for the fourth quarter this fiscal year included a fourth quarter impact of 2,600 Hertz gross margin, which is running lower relative to Ooma subscription gross margin. Product and other gross margin for the fourth quarter was negative 72% as compared to negative 54% for the same period of last year. As mentioned in the prior calls, the decline in Q4 product gross margin this year versus last year was primarily due to sell through impact of certain higher cost components that we had procured in the last fiscal year due to pandemic-driven supply chain issues. We currently estimate product and other gross margin for the first half of fiscal 2025 will be comparable to that of the fourth quarter fiscal 2024 as we continue to work through this excess component cost and then normalizing in the negative 50% range starting in the second half of fiscal 2025.
On an overall basis, total gross margin for Q4 was 63% as compared to 64% in the prior year quarter. And now some details on operating expenses. Sales and marketing expenses for the fourth quarter were $17.3 million or 28% of total revenue, up 2% year-over-year, primarily driven by increases in personnel costs and channel development activity for AirDial. Research and development expenses were $11.9 million or 19% of total revenue, up 14% on a year-over-year basis, driven mainly by the addition of 2,600 Hertz team members. G&A expenses were $5.4 million or 9% of total revenue for the fourth quarter compared to $4.9 million for the prior year quarter. The year-over-year increase in G&A expenses was primarily due to an increase in personnel costs.
Overall, total operating expenses for the fourth quarter were $34.7 million, up $2.3 million or 7% from the same period last year. Non-GAAP net income for the fourth quarter was $3.5 million or a diluted earnings per share of $0.13 as compared to $0.16 of diluted earnings per share in the prior year quarter. In addition to stock-based compensation and intangible amortization expenses, non-GAAP net income for the fourth quarter excluded approximately $1.0 million of acquisition and other related costs incurred in connection with the 2600 Hertz transaction. Adjusted EBITDA for the quarter was $5.2 million, a record for the company or 8% of total revenue as compared to $5.1 million for the prior year quarter. We ended the quarter with total cash and investments of $17.5 million.
Cash generated from operations for the fourth quarter was strong and up $5.5 million, it was a new quarterly record for the company. For fiscal 2024, we generated a record $12.3 million of operating cash flow and $6.1 million of free cash flow, which represented 40% and 69% increase respectively over the prior year. Given our strong cash flow in the fourth quarter, we already began paying down the debt and reduced the outstanding balance by $2 million at the end of Q4. We paid down an additional $2 million shortly after the end of Q4, and as of today, we have reduced the outstanding debt balance to $14 million. On the headcount front, we ended our quarter with 1,221 employees and contractors. Now, I will provide guidance for the first quarter and full fiscal year 2025.
Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation and amortization of intangibles. We expect total revenue for the first quarter of fiscal '25 to be in the range of $61.7 million to $62.2 million, which includes $3.7 million to $3.9 million of product revenue. We expect first quarter net income to be in the range of $3 million to $3.3 million. Non-GAAP diluted EPS is expected to be between $0.11 and $0.12. We have assumed 26.6 million weighted average diluted shares outstanding for the first quarter. For full year fiscal 2025, we expect total revenue to be in the range of $250 million to $253 million. The full year fiscal 2025 revenue guidance assumes business subscription and services revenue growth rate of 11% to 13% over fiscal 2024, while residential subscription revenue to decline 1% to 2%.
For fiscal 2025 revenue guidance, fiscal 2025 revenue guidance also assumes the impact of larger than normal churn from IWG where the seat count is expected to be reduced by about 20% in the first quarter. We believe this event is infrequent in nature, and the substantial portion of it can be offset by additional seat deployment during fiscal 2025 as we continue international expansion with IWG. In terms of revenue mix for the year, we expect 93% to 94% of total revenue to come from subscription and services revenue and the remainder from products and other revenue. We expect non-GAAP net income for fiscal '25 to be in the range of $14 million to $15 million. Based on this guidance range, we estimate our adjusted EBITDA for fiscal 2025 to be $20.5 million to $21.5 million.
Let me give you some additional color on our fiscal 2025 non-GAAP net income guidance. While we expect the non-GAAP operating margin and adjusted EBITDA to increase year-over-year, our non-GAAP net income guidance range represents a slight decline year-over-year due to the following factors. First, we expect interest expense to increase by $0.7 million to $0.8 million due to a full year impact of the new revolver debt. Second, we expect interest income will be lower year-over-year by approximately $1 million as we continue to focus on debt pay down in fiscal year 2025. Lastly, we currently estimate tax expense for fiscal 2025 will increase by approximately $0.2 million. We expect non-GAAP diluted EPS for fiscal '25 to be in the range of $0.51 to $0.55.
We have assumed approximately 27.4 million weighted average diluted shares outstanding for fiscal 2025. In summary, we are pleased with our pleased with our solid finish to our fiscal '24 with a record quarterly adjusted EBITDA along with strong cash generation in the fourth quarter. We are excited about growth opportunity in front of us and remain focused on executing to our long-term strategy to achieve profitable growth. I will now pass it back to Eric for some closing remarks. Eric?
Eric Stang : Thank you, Shig. As I mentioned at the outset, I believe we enter fiscal year 2025 in a strong position with leading product solutions and significant potential for business expansion. We are working to take advantage of several significant industry trends, and our strategy includes exciting investments in feature expansion, customer growth and the development of new resale partnerships. We believe our strategic focus on small to medium sized businesses, larger businesses that are in select verticals, POTS replacement and wholesale UCaaS, CCaaS and CPaaS platform opportunities positions us well for future success. Thank you. We'll now take your questions. Operator?
Operator: [Operator Instructions] Our first question comes from the line of Arjun Bhatia with William Blair.
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