OOMA INC (OOMA) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 is January 31, and we refer to our fiscal year ended January 31, 2024 as fiscal 2024, our fiscal year ended January 31, 2023 as fiscal 2023 and our fiscal year ended January 31, 2022 as fiscal 2022. All other references to years are references to calendar years.
This section of this Form 10-K generally discusses fiscal 2024 and 2023 items and year-to-year comparisons between fiscal 2024 and 2023. Discussion regarding our financial condition and results of operations for fiscal 2023 as compared to 2022 is included in Item 7 of our Annual Report on Form 10-K for the year ended January 31, 2023, filed with the SEC on April 7, 2023 (the "FY2023 Form 10-K").
Executive Overview
Ooma provides leading communications services and related technologies that bring unique features, ease of use, and affordability to businesses and residential customers through our smart SaaS and unified communications platforms. For businesses of all sizes, we deliver advanced voice and collaboration features including messaging, intelligent virtual attendants, and video conferencing to help them run more efficiently. For consumers, our residential phone service provides PureVoice high-definition voice quality, advanced functionality and integration with mobile devices.
We generate revenues primarily from the sale of subscriptions and other services for our business and residential communications solutions. We generate our product and other revenue from the sale of our on-premise devices and end-point devices. We primarily offer our solutions in the United States and Canada, with limited offerings in certain other countries.
On October 20, 2023, we completed the acquisition of 2600hz, Inc. (“2600Hz”) a provider of cloud-based business applications targeted at resellers and carriers, for a base purchase price of approximately $33.0 million in cash. The final aggregate purchase price was approximately $32.2 million, reflecting reduction for customary working capital adjustments, and was funded in part by the incurrence of $18.0 million of borrowings under our Credit Agreement. We believe the acquisition of 2600Hz will accelerate overall growth of Ooma Business.
We refer to Ooma Office, Ooma Enterprise, Ooma AirDial, 2600Hz, and OnSIP collectively as Ooma Business. Ooma Residential includes Ooma Telo basic and premier services, as well as Ooma Telo LTE services. See Item 1. Business above for additional information regarding our business, including products and services offered, competitive market and regulatory matters.
Fiscal 2024 Financial Performance
•
Total revenue was $236.7 million, up 10% year-over-year, primarily driven by the continued growth of Ooma Business and the acquisition of 2600Hz.
•
Subscription and services revenue from Ooma Business grew 22% year-over-year, driven by user growth.
•
Total gross margin was 62%, down from 64% in fiscal 2023.
•
GAAP net loss was $0.8 million, compared to a net loss of $3.7 million in fiscal 2023. GAAP net loss for fiscal 2024 includes tax benefit for the release of a $3.1 million valuation allowance resulting from the recording of certain intangible assets associated with the acquisition of 2600Hz in late October 2023, as well as a $1.0 million gain on consolidation of facility costs, partially offset by $0.7 million in acquisition related costs and $0.5 million in certain restructuring costs.
•
Non-GAAP net income was $15.4 million, compared to $13.6 million in fiscal 2023.
•
Adjusted EBITDA was $19.8 million, or 8% of revenue, compared to $17.4 million in fiscal 2023.
•
As of January 31, 2024, we had total cash, cash equivalents and short-term investments of $17.5 million, down $9.4 million from $26.9 million as of January 31, 2023. Cash usage reflected our acquisition of 2600Hz, including the repayment of borrowings under our Credit Agreement.
Reconciliations of non-GAAP adjusted measures to the most directly comparable GAAP measures are presented below under Adjusted EBITDA and Non-GAAP Financial Measures.
Ooma | FY2024 Form 10-K | 49
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 for Ooma Business and Ooma Residential 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 remain with us.
Growth in additional services and products. 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, which generates more value to Ooma over the life of our customer relationship. We are investing in Ooma Business to develop additional features to continue our momentum serving businesses of all sizes and further increase our average revenue per user. We continue to see a large market opportunity to capitalize on Ooma AirDial as an integrated solution for businesses to replace legacy copper-wire analog phone service.
Investing in long-term revenue growth. We believe that our total addressable market opportunity is large and we intend to continue significantly investing in sales and marketing to grow our user base in multiple verticals and channels. We expect the domestic and international markets in which we conduct our business will remain highly competitive. We plan to work together with our strategic partners to explore and pursue potential growth opportunities related to the market transition to 5G internet. We expect to continue investing in research and development to enhance our platforms and develop additional connected services and products, as well as launch our Ooma Business services in a number of international countries. We may evaluate additional possible acquisitions of businesses, products and technologies that are complementary to our business.
Ooma | FY2024 Form 10-K | 50
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 (in thousands, except percentages):
| As of January 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| Core users | 1,243 | 1,210 | 1,100 | |||||||||
| Annualized exit recurring revenue (AERR) | $ | 227,500 | $ | 206,700 | $ | 176,900 | ||||||
| Net dollar subscription retention rate (1) | 99 | % | 99 | % | 99 | % | ||||||
| Adjusted EBITDA | $ | 19,843 | $ | 17,395 | $ | 15,568 |
(1) Revised January 31, 2023 and January 31, 2022 due to new methodology as described below
Core Users increased year-over-year, which was primarily driven by growth in business users. As of January 31, 2024, Ooma Business users comprised approximately 39% of our total core users, up from 35% as of January 31, 2023. 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 business user extensions (excluding Talkatone and 2600Hz users). 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 year-over-year due to an increase in the average revenue per core user, which was largely driven by an increasing mix of 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 from our core users 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. Beginning in the third quarter of fiscal 2024, we have added $7.8 million annual recurring revenue from 2600Hz to AERR.
Net Dollar Subscription Retention Rate
Effective in the first quarter of fiscal 2024, we transitioned to a new calculation methodology for our net dollar subscription retention rate (“NDRR”). Since the majority of our subscription revenue is now generated from Ooma Business customers, we believe the new methodology better reflects our operational performance during the reporting period and is more in alignment with the reporting of our industry peers. 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.
Prior to the current fiscal year, we calculated the NDRR as a function of the year-over-year growth in average revenue per user and churn as further discussed in the FY2023 Form 10-K. Under the new methodology, we define our NDRR as (i) one plus (ii) the quotient of Net Dollar Change (as defined below) divided by Average Monthly Recurring Subscription Revenue (as defined below). We define “Net Dollar Change” as the quotient of (i) the difference of our Monthly Recurring Subscription Revenue (as defined below) at the end of a period minus our Monthly Recurring Subscription Revenue at the beginning of a period minus our Monthly Recurring Subscription Revenue at the end of the period from new customers we added during the period, all divided by (ii) the number of months in the period. We define our Average Monthly Recurring Subscription Revenue as the average of the Monthly Recurring Subscription Revenue at the beginning and end of the measurement period. “Monthly Recurring Subscription Revenue” is defined as recurring subscription amounts from Ooma Residential and Ooma Business customers at the end of the most recent month, excluding recurring revenue from 2600Hz.
For example, if our Monthly Recurring Subscription Revenue was $115 at the end of a quarterly period and $100 at the beginning of the period, and $18 at the end of the period from new customers we added during the period, then the Net Dollar Change would be equal to ($1.00), or the amount equal to the difference of $115 minus $100 minus $18, all divided by three months. Our Average Monthly Recurring Subscription Revenue would equal $107.5, or the sum of $115 plus $100, divided by two. Our NDRR would then equal 99.1%, or approximately 99%, or one plus the quotient of the Net Dollar Change divided by the Average Monthly Recurring Subscriptions.
NDRR was flat year-over-year due to relatively consistent level of user churn and increase in Average Monthly Recurring Subscription Revenue.
Ooma | FY2024 Form 10-K | 51
Adjusted EBITDA increased year-over-year in line with our revenue growth, representing approximately 8% of our total revenues for fiscal 2024 and fiscal 2023. We use Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to manage our business, evaluate our performance and make planning decisions. We consider this metric 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. Investors often use similar measures to evaluate the operating performance with competitors. Adjusted EBITDA represents net income before interest and other income, income taxes, depreciation and amortization of capital expenditures, amortization of intangible assets, acquisition-related costs, certain litigation settlement costs, restructuring costs, non-recurring gains, and stock-based compensation expense and related taxes. See "Non-GAAP Financial Measures" below for additional information.
The following table provides a reconciliation of GAAP net loss to Adjusted EBITDA for the periods indicated (in thousands):
| Fiscal Year Ended January 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||
| GAAP net loss | $ | (835 | ) | $ | (3,655 | ) | $ | (1,751 | ) | ||
| Reconciling items: | |||||||||||
| Interest and other income, net | (1,188 | ) | (332 | ) | (179 | ) | |||||
| Income tax benefit | (1,978 | ) | (1,770 | ) | — | ||||||
| Depreciation and amortization of capital expenditures | 4,317 | 3,771 | 3,117 | ||||||||
| Amortization of acquired intangible assets | 3,711 | 2,286 | 1,304 | ||||||||
| Acquisition-related costs | 885 | 1,538 | — | ||||||||
| Facilities consolidation (gain) charges | (956 | ) | 1,402 | — | |||||||
| Stock-based compensation and related taxes | 15,110 | 14,155 | 13,077 | ||||||||
| Legal settlement costs | 300 | — | — | ||||||||
| Restructuring costs | 477 | — | — | ||||||||
| Adjusted EBITDA | $ | 19,843 | $ | 17,395 | $ | 15,568 |
Ooma | FY2024 Form 10-K | 52
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 and prepaid international calls. We expect our subscription and services revenue to grow as we expand our core user base, driven primarily by growth in Ooma Business. We expect revenues from Ooma Business will continue to account for most of our revenue for the foreseeable future.
Product and other revenue consists primarily of sales of our on-premise devices and end-point devices used in connection with our services, including shipping and handling fees for our direct customers.
Cost of revenue and gross margin
Cost of subscription and services revenue includes payments made for third-party network operations and telecommunications services; certain telecom taxes and fees, including Federal Universal Service Fund (“USF”) contributions; credit card processing fees; costs to build out and maintain data centers; depreciation and maintenance of servers and equipment; personnel costs associated with customer care and network operations support; amortization of certain acquired intangible assets, and allocated overhead costs.
Cost of product and other revenue includes the costs associated with the manufacturing of our on-premise devices and end-point devices, including Ooma AirDial, as well as personnel costs for employees and contractors, costs related to porting our customers’ phone numbers to our service, shipping and handling costs, tariffs imposed on imported product and allocated overhead costs.
Subscription and services gross margin may fluctuate from period-to-period based on the interplay of a number of factors, including revenue mix and fluctuations in the costs described above. We expect our subscription and services gross margin to increase over the long-term, primarily as we achieve scale efficiencies and as Ooma Business revenue becomes a larger majority 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 as compared to the direct costs of production and relatively fixed personnel costs incurred. We sell our on-premise devices at aggressive price points to facilitate the adoption of our platforms and services. Additionally, some product costs have become subject to significantly higher pricing we experienced due to supply chain constraints in the global macroeconomic environment as well as certain components becoming subject to end-of-life and we may not be able to fully offset such higher costs through price increases. Another factor is the high AirDial installation costs due to ramp up efforts. Accordingly, we expect our product and other gross margin will continue to be negatively impacted by these higher component costs and AirDial installation costs. 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 revenue mix will cause our total gross margin to change. For example, in periods where we sell significantly more on-premise devices or other products, we would expect our total gross margin to be impacted.
Operating expenses
Sales and marketing expenses consist primarily of personnel costs for employees and contractors, advertising and marketing costs, sales commissions paid to internal sales personnel and third parties, amortization of capitalized sales commissions, amortization of acquired customer relationship intangible assets, travel expenses and allocated overhead costs. 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 solutions and improvements to our platforms and backend architecture. Research and development expenses consist primarily of personnel costs for employees and contractors, including third-party development, and allocated overhead costs. We expect our research and development expenses to increase in absolute dollars as we continue to grow our business.
Ooma | FY2024 Form 10-K | 53
General and administrative expenses consist of personnel costs for our finance, legal, human resources and other administrative employees and contractors, as well as professional service fees, certain acquisition-related costs, and allocated overhead costs. We expect our general and administrative expenses to increase in absolute dollars as we continue to grow our business.
Ooma | FY2024 Form 10-K | 54
Consolidated Results of Operations
The following table sets forth selected consolidated statements of operations data for each of the periods indicated (in thousands):
| Fiscal Year Ended January 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||
| Revenue: | |||||||||||
| Subscription and services | $ | 221,624 | $ | 199,105 | $ | 175,942 | |||||
| Product and other | 15,113 | 17,060 | 16,348 | ||||||||
| Total revenue | 236,737 | 216,165 | 192,290 | ||||||||
| Cost of revenue: | |||||||||||
| Subscription and services | 63,667 | 54,499 | 49,563 | ||||||||
| Product and other | 25,838 | 24,018 | 24,289 | ||||||||
| Total cost of revenue | 89,505 | 78,517 | 73,852 | ||||||||
| Gross profit | 147,232 | 137,648 | 118,438 | ||||||||
| Operating expenses: | |||||||||||
| Sales and marketing | 73,503 | 69,671 | 58,631 | ||||||||
| Research and development | 49,935 | 45,939 | 38,193 | ||||||||
| General and administrative | 27,795 | 27,795 | 23,544 | ||||||||
| Total operating expenses | 151,233 | 143,405 | 120,368 | ||||||||
| Loss from operations | (4,001 | ) | (5,757 | ) | (1,930 | ) | |||||
| Interest and other income, net | 1,188 | 332 | 179 | ||||||||
| Loss before income taxes | (2,813 | ) | (5,425 | ) | (1,751 | ) | |||||
| Income tax benefit | 1,978 | 1,770 | — | ||||||||
| Net loss | $ | (835 | ) | $ | (3,655 | ) | $ | (1,751 | ) |
Cost of revenue and operating expenses included stock-based compensation expense and related payroll taxes as follows (in thousands):
| Fiscal Year Ended January 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||||||
| Cost of revenue | $ | 1,026 | $ | 986 | $ | 1,026 | ||||||||||
| Sales and marketing | 2,276 | 2,068 | 1,932 | |||||||||||||
| Research and development | 4,876 | 4,713 | 4,373 | |||||||||||||
| General and administrative | 6,932 | 6,388 | 5,746 | |||||||||||||
| Total stock-based compensation expense | $ | 15,110 | $ | 14,155 | $ | 13,077 |
Ooma | FY2024 Form 10-K | 55
Comparison of fiscal years 2024, 2023 and 2022 (dollars in tables are in thousands):
Revenue
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 vs. 2023 | ||||||||||||||||
| Revenue: | |||||||||||||||||||
| Subscription and services | $ | 221,624 | $ | 199,105 | $ | 175,942 | $ | 22,519 | 11 | % | |||||||||
| Product and other | 15,113 | 17,060 | 16,348 | (1,947 | ) | (11 | )% | ||||||||||||
| Total revenue | $ | 236,737 | $ | 216,165 | $ | 192,290 | $ | 20,572 | 10 | % | |||||||||
| Percentage of revenue: | |||||||||||||||||||
| Subscription and services | 94 | % | 92 | % | 91 | % | |||||||||||||
| Product and other | 6 | % | 8 | % | 9 | % | |||||||||||||
| Total | 100 | % | 100 | % | 100 | % |
Fiscal 2024 Compared to Fiscal 2023
We derived approximately 58% and 53% of our total revenue from Ooma Business and approximately 40% and 45% from Ooma Residential in fiscal 2024 and 2023, respectively.
Subscription and services revenue increased $22.5 million or 11% year-over-year, primarily attributable to an increase in our core users and an increase in the average revenue per core user. Revenue increase year-over-year is also attributable to inclusion of revenue from 2600Hz, which we acquired at the end of third quarter of fiscal 2024 and revenue for the entire fiscal year from OnSIP, which we acquired in the second quarter of fiscal 2023.
Product and other revenue decreased $1.9 million or 11% year-over-year, primarily attributable to the sale of certain legacy inventories and accessories in fiscal 2023. These sales did not recur in fiscal 2024.
Cost of Revenue and Gross Margin
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 vs. 2023 | ||||||||||||||||
| Cost of revenue: | |||||||||||||||||||
| Subscription and services | $ | 63,667 | $ | 54,499 | $ | 49,563 | $ | 9,168 | 17 | % | |||||||||
| Product and other | 25,838 | 24,018 | 24,289 | 1,820 | 8 | % | |||||||||||||
| Total cost of revenue | $ | 89,505 | $ | 78,517 | $ | 73,852 | $ | 10,988 | 14 | % | |||||||||
| Gross margin: | |||||||||||||||||||
| Subscription and services | 71 | % | 73 | % | 72 | % | |||||||||||||
| Product and other | (71 | )% | (41 | )% | (49 | )% | |||||||||||||
| Total | 62 | % | 64 | % | 62 | % |
Fiscal 2024 Compared to Fiscal 2023
Subscription and services gross margin of 71% decreased year-over-year from 73%. Cost of subscription and services revenue increased $9.2 million or 17% year-over-year, primarily due to a $4.1 million increase in personnel and contractor related costs, a $2.2 million increase in infrastructure costs, a $1.7 million increase in regulatory fees, a $0.7 million increase in intangible amortization expense and a $0.5 million increase in credit card processing fees. Overall, the year-over-year increase in the cost of subscription and services reflects both organic growth and growth related to our acquisitions of 2600Hz and OnSIP in fiscal 2024 and 2023, respectively.
Product and other revenue gross margin changed to negative 71% from negative 41% in the prior year. This change was primarily due to the usage of certain higher cost components that we had procured in the prior fiscal year to stay ahead of pandemic driven supply chain issues. Product and other gross margin for fiscal 2023 benefited from certain accessory sales that did not recur in fiscal year 2024.
Ooma | FY2024 Form 10-K | 56
Operating Expenses
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 vs. 2023 | ||||||||||||||||
| Sales and marketing | $ | 73,503 | $ | 69,671 | $ | 58,631 | $ | 3,832 | 6 | % | |||||||||
| Research and development | 49,935 | 45,939 | 38,193 | 3,996 | 9 | % | |||||||||||||
| General and administrative | 27,795 | 27,795 | 23,544 | — | — | ||||||||||||||
| Total operating expenses | $ | 151,233 | $ | 143,405 | $ | 120,368 | $ | 7,828 | 5 | % |
Fiscal 2024 Compared to Fiscal 2023
Sales and marketing expenses increased $3.8 million or 6% year-over-year, primarily due to a $4.1 million increase in personnel and contractor related costs, a $0.4 million increase in commission costs, and a $0.7 million increase in intangible asset amortization, offset in part by a $1.6 million decrease in advertising and marketing expense.
Research and development expenses increased $4.0 million or 9% year-over-year, primarily due to a $3.5 million increase in personnel and contractor related costs, driven by higher headcount, and a $0.5 million increase in restructuring costs.
General and administrative expenses remained the same year-over-year with key movements including a $2.5 million increase in personnel and contractor related costs to scale with the overall growth of our business, offset by a $2.4 million change in facility consolidation gain.
A significant portion of the year-over-year increase in personnel and contractor related costs for operating expenses was due to increases in headcount attributable to the 2600Hz and OnSIP acquisition in fiscal 2024 and 2023, respectively.
Income Taxes
We recorded an income tax benefit of $3.1 million and $2.1 million in fiscal 2024 and 2023, respectively, offset by $1.1 million and $0.3 million of income tax expense in the respective fiscal years. The income tax benefits were related to certain preexisting deferred tax assets realized because of deferred tax liabilities assumed in our acquisitions of 2600Hz and OnSIP in fiscal 2024 and 2023, respectively.
Ooma | FY2024 Form 10-K | 57
Non-GAAP Financial Measures
This Form 10-K contains certain non-GAAP financial measures, including non-GAAP net income and Adjusted EBITDA. These non-GAAP financial measures are presented to provide investors with additional information regarding our financial results and core business operations. Non-GAAP financial measures are presented for supplemental informational purposes only to aid an understanding of our operating results and 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 expenses or gains 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.
These non-GAAP financial measures have limitations as an analytical tool, in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. Some of these limitations are:
•
Adjusted EBITDA does not consider the impact of interest and other income/expense and does not reflect income tax payments that may represent a reduction in cash available to us;
•
Adjusted EBITDA does not consider any expenses for assets being depreciated and amortized that are necessary to our business; although these are non-cash charges, the property and equipment being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash capital expenditure requirements for such replacements;
•
Adjusted EBITDA and non-GAAP net income exclude stock-based compensation expense and related payroll taxes because we believe these adjustments provide better comparability to peer company results and because these charges are not viewed by management as part of our core operating performance;
•
Adjusted EBITDA and non-GAAP net income exclude acquisition-related costs, including the amortization of acquired intangible assets and restructuring costs, as well as third-party transaction costs incurred for legal and other professional services, and an acquisition-related income tax benefit. These items are not factored into our evaluation of potential acquisitions, or of our performance after completion of the acquisitions, because they are not related to our core operating performance or reflective of ongoing operating results in the period, and their frequency and amount vary significantly based on the timing and magnitude of our acquisition transactions and the maturities of the businesses being acquired. Although we exclude the amortization of acquired intangible assets from these non-GAAP measures, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation;
•
Adjusted EBITDA and non-GAAP net income exclude facilities consolidation gain or charges recorded in connection with vacated office facilities assumed in the OnSIP acquisition. These charges do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of current operating performance or comparisons to the operating performance in other periods;
•
Adjusted EBITDA and non-GAAP net income exclude certain legal settlement costs. These charges do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of current operating performance or comparisons to the operating performance in other periods;
•
other companies may calculate these non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures.
The following table presents a reconciliation of GAAP net loss to non-GAAP net income for the periods indicated (in thousands):
| Fiscal Year Ended January 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||
| GAAP net loss | $ | (835 | ) | $ | (3,655 | ) | $ | (1,751 | ) | ||
| Stock-based compensation and related taxes | 15,110 | 14,155 | 13,077 | ||||||||
| Amortization of acquired intangible assets | 3,711 | 2,286 | 1,304 | ||||||||
| Acquisition-related costs | 692 | 1,538 | — | ||||||||
| Facilities consolidation (gain) charges | (956 | ) | 1,402 | — | |||||||
| Legal settlement costs | 300 | — | — | ||||||||
| Restructuring costs | 477 | — | — | ||||||||
| Acquisition-related income tax benefit | (3,131 | ) | (2,133 | ) | — | ||||||
| Non-GAAP net income | $ | 15,368 | $ | 13,593 | $ | 12,630 |
Ooma | FY2024 Form 10-K | 58
Liquidity and Capital Resources
Our material cash requirements are discussed below under “Contractual Obligations and Commitments.” As of January 31, 2024, we had $17.5 million of total cash, cash equivalents and investments and borrowing capacity of $14.0 million under our Credit Agreement, which we believe 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 introduction of new and enhanced offerings, the timing and extent of our sales and marketing activities and research and development expenditures, the expansion of our business internationally and other factors. We may in the future make investments in or acquisitions of businesses or technologies, which may require the use of cash.
The following table summarizes cash flow information for the periods indicated (in thousands):
| Fiscal Year Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| January 31, 2024 | January 31, 2023 | January 31, 2022 | |||||||||||||
| Net cash provided by operating activities | $ | 12,273 | 8,773 | $ | 6,655 | ||||||||||
| Net cash used in investing activities | (35,328 | ) | (6,146 | ) | (4,887 | ) | |||||||||
| Net cash provided by financing activities | 16,454 | 1,843 | 601 | ||||||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (6,601 | ) | $ | 4,470 | $ | 2,369 |
Operating Activities
The following table provides selected cash flow information for the periods indicated (in thousands):
| Fiscal Year Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| January 31, 2024 | January 31, 2023 | January 31, 2022 | |||||||||||||
| Net loss | $ | (835 | ) | (3,655 | ) | $ | (1,751 | ) | |||||||
| Non-cash charges | 21,735 | 22,245 | 20,095 | ||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||
| (Increase) decrease in accounts receivable | (2,587 | ) | 434 | (2,082 | ) | ||||||||||
| Decrease (increase) in inventories and deferred inventory costs | 6,341 | (12,333 | ) | (1,571 | ) | ||||||||||
| Increase in prepaid expenses and other assets | (2,280 | ) | (2,460 | ) | (4,609 | ) | |||||||||
| (Decrease) increase in accounts payable, accrued expenses and other liabilities | (9,579 | ) | 4,509 | (3,599 | ) | ||||||||||
| (Decrease) Increase in deferred revenue | (522 | ) | 33 | 172 | |||||||||||
| Net cash provided by operating activities | $ | 12,273 | $ | 8,773 | $ | 6,655 |
For fiscal 2024, our net loss of $0.8 million included non-cash charges primarily related to stock-based compensation expense, operating lease expense, depreciation and amortization expense, facilities consolidation gain and an income tax benefit related to our business acquisition. Operating asset and liability changes for fiscal 2024 included:
•
an increase of $2.6 million in accounts receivable due to the timing of cash collections;
•
a decrease of $6.3 million in inventories and deferred inventory costs;
•
an increase of $2.3 million in prepaid expenses and other current and non-current assets primarily due to the capitalization of sales commissions and the timing of prepayments; and
•
a decrease of $9.6 million in accounts payable, accrued expenses and other liabilities due to the timing of payments
Cash provided by operating activities for fiscal 2024 increased $3.5 million year-over-year, which primarily reflected working capital impacts resulting from the timing of payments. Although we have generated cash from operations in recent periods, our operating cash flow may not remain positive in the future as we continue to invest in efforts to scale our business and paydown borrowings under our Credit Agreement.
Investing Activities
Cash used in investing activities was $35.3 million for fiscal 2024, which consisted of cash consideration paid for the 2600Hz business acquisition of $32.2 million, and capital expenditures of $6.2 million, partly offset by proceeds of $2.8 million from maturities of short-term investments and $0.3 million of cash received for working capital adjustments from the seller related
Ooma | FY2024 Form 10-K | 59
to the acquisition of OnSIP in the second fiscal quarter of 2023. Cash used in investing activities increased $29.2 million year-over-year primarily due to the 2600Hz acquisition.
Financing Activities
Cash provided by financing activities was $16.5 million for fiscal 2024, which consisted of proceeds from the issuance of long-term debt of $18.0 million to provide funding for the 2600Hz acquisition, proceeds of $2.7 million from the issuance of common stock from our Employee Stock Purchase Plan (“ESPP”) and stock option exercises, partly offset by payments of $1.7 million related to shares repurchased for tax withholdings on vesting of restricted stock units (“RSUs”), $2.0 million repayment of long-term debt, and $0.5 million debt issuance costs. Cash provided by financing activities increased $14.6 million year-over-year, which primarily reflected cash proceeds from borrowings under our Credit Agreement.
Revolving Credit Facility
In October 2023, we entered into the Credit Agreement with certain lenders that provided for a secured revolving credit facility under which we may borrow up to an aggregate of $30.0 million and, subject to certain conditions, may be increased to up to $50.0 million. As of January 31, 2024, we have $16.0 million of outstanding borrowings and were in compliance with all loan covenants, including having liquidity of $10 million and trailing four-quarter recurring revenue of $180 million at that date.
On June 7, 2023, we terminated our credit and security agreement with KeyBank National Association.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under operating leases for our headquarters located in Sunnyvale, California, as well as office space and co-location data center facilities in several locations. As of January 31, 2024, our total future expected payment obligations under non-cancelable operating leases with initial terms longer than one year were approximately $21.3 million, with payments of $3.8 million due in the next 12 months and $17.5 million due thereafter. See Note 7: Operating Leases in the notes to our consolidated financial statements.
As of January 31, 2024 and 2023, non-cancelable inventory purchase commitments to our contract manufacturers and other suppliers totaled approximately $1.1 million and $7.8 million, respectively. Additionally, we have a non-cancelable service agreement with a telecommunications provider that contains total annual minimum purchase commitments of $1.5 million between August 2022 and February 2024 and $2.5 million between March 2024 and February 2025.
Ooma | FY2024 Form 10-K | 60
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flows and the related disclosures. We base our estimates on historical experience and on other assumptions we believe to be reasonable under the circumstances. Actual results could differ materially 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
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 primarily generated from the sale of on-premise devices and end-point devices, including shipping and handling fees for our direct customers. We recognize product and other revenue from sales to direct end-customers and channel partners at the point in time that control transfers.
Our contracts with customers typically contain multiple performance obligations that consist of communications services and related products. Judgment is required to properly identify the accounting units of multiple performance obligations and to determine the manner in which revenue should be allocated among the obligations. Individual performance obligations are accounted for 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 determine the SSP for our on-premise devices and end-point devices based upon our best estimates and judgments, considering company-specific factors such as pricing strategies, discounting practices, and estimated product and other costs. 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.
Our distribution agreements with channel partners typically contain clauses for price protection and right of return. 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.
Inventories
Inventories consist of raw materials and finished goods and are stated at the lower of actual cost and net realizable value on a first-in, first-out basis. 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 product and other revenue resulting in a net benefit to our gross margin in that period.
Ooma | FY2024 Form 10-K | 61