Ooma, Inc.

only mode later we'll conduct a question and answer session and instructions will follow at that time if anyone should require assistance during the conference please press star zero i would now like to turn the conference over to your host mr matthew robinson please go ahead thanks alexander good day everyone and welcome to the first quarter fiscal year 2022 earnings call of uma inc my name is matt robison who is director of ir and corporate development

On the call with me today are UMA's CEO, Eric Stang, and CFO, Ravi Narula. After the market closed today, UMA issued its first quarter fiscal year 2022 earnings press release via BusinessWire. The release is also available on the company's website, UMA.com. This call is being webcast live and is accessible from a link on the events and presentations page of the investor relations section of our website. This link will be active for replay of this call for at least one year. The telephonic replay will also be available for a week starting this evening about 8 p.m. Eastern time. Filing information for it is included in today's press release. During today's presentation, our executives will make forward-looking statements within the meaning of the Federal Securities Law. 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 in financial periods 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 are included in our earnings press release, which is available on our website. On this call, we will give guidance for second quarter and full year fiscal 2022 on a non-GAAP basis. Also, in addition to our press release and 8K filing, the overview page and events and presentation page and investor section of our website, as well as the results page of the financial info section of our website, include links to information about costs and expenses not included in our non-GAAP values and key metrics of our course subscription businesses. These are titled Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally, our investor presentation slides include gap to non-gap reconciliation. It also provides a resolution of gap expenses that are excluded from non-gap metrics. Now I will hand the call over to UMA's CEO, Eric Stang. Thanks, Matt. Hi, everyone. Welcome to UMA's Q1 fiscal year 2022 earnings call. Thanks for joining us today. I'm excited to share with you the strong start we've made to this year, and I look forward to updating you on our key growth initiatives and outlooks. For fiscal Q1, our results again outpaced our guidance with revenue of $45.6 million and non-GAAP net income of $2.8 million. Our Q1 revenues grew 13% year-over-year, comprised of 24% year-over-year growth in business revenue and 5% year-over-year growth in residential revenue. We also once again generated positive cash flow from operations while investing in new growth initiatives, including international expansion. Across our business, I believe we executed well, and we are on a good trajectory to realize our plans for this year. You may recall I mentioned last quarter that 76% of small businesses, defined as less than 100 employees, say they have yet to invest in IP-based communications solutions. UMA Office is our uniquely designed solution for such small business customers who desire advanced features but do not have an IT department to implement them. We believe UMA Office brings productivity improvements and savings that drive compelling value. Our strategy is to target this vast market opportunity primarily by scaling our sales and marketing programs, by adding features that drive increased customer adoption and raise our revenue per user, and by expanding internationally. On the first of these, scaling our sales and marketing programs, we executed well in Q1 and established several important new reseller relationships to support future channel sales growth. For the quarter, sales through channel resellers contributed approximately 40% of business sales. On the marketing front, we increased our intent-based marketing and enhanced the targeting of our marketing programs. Direct sales, particularly e-commerce sales, performed well in Q1. Some of our more notable UMA office new customer wins included a 67-user implementation for a multi-location restaurant group and a 55-user implementation for a medical group. They also continued expansion with a large national brand through the addition of over 150 new locations. Scaling our sales and marketing programs will continue to be a priority for us this year. We also launched exciting new features in Q1 to support our strategy to serve more small business customers and increase revenue per user. Most notably, we just recently added two new features to our UMA Office Pro tier of service. The first we call Color Info Search. This feature enables caller information from CRM systems, such as Salesforce, HubSpot, and Zoho, and from websites, such as LinkedIn, Google, and Facebook, to pop up automatically in our desktop app when a call comes in. The second feature is integration with Google Workspace, specifically an add-on in the Google Workspace Marketplace website. which enables calendar integration, for example, to schedule a NUMA video meeting and automatically populate meeting details in Google Calendar. Further integration with Google Contacts, the Chrome browser, and more are planned to follow, along with similar capabilities for integration with Microsoft 365. These new developments will improve productivity for small businesses and further grow adoption of our Office Pro higher tier of service. In Q1, approximately 43% of new office users stepped up to our pro tier of service at $5 more per month. Internationally, as we discussed last quarter, we are expanding this year to more than a dozen new countries and plan to capitalize on the opportunity to serve our largest customer in these new locations. We made good progress on this goal during Q1 and now are serving or have the capability to serve users in nine Western European countries. In Q2, we expect to launch in more European countries and at least one country in Asia. The rollout of additional users with our largest customer has just recently started, and we expect significant progress to occur during Q2. In addition to our strategy to target the vast market opportunity afforded by small businesses that have yet to move to the cloud, We also have a second strategy underway to serve larger businesses which have custom needs or in verticals where we believe we can bring unique value. To this end, we continued our investment in UMA Enterprise during Q1 and are excited about winning a new opportunity with a reseller, which we believe will lead near term to the addition of more than 1,000 new users. We also secured several new customer wins in one of the key verticals we are targeting, We scaled up sales efforts for our direct routing for Microsoft Teams solution, and we implemented direct routing for Teams for our initial customers during the quarter. We intend to continue to invest in UMA Enterprise this year to develop new opportunities. Our longer-term vision extends to providing a more complete infrastructure solution to small businesses and distributed enterprises. As a start to this vision, we launched UMA Connect last year to provide business wireless Internet services, both for Internet backup and for primary Internet use. Since the launch, we've worked to learn about the connectivity needs of small businesses and enhance our value proposition. In Q1, we extended our capabilities to include use of the T-Mobile network to enable both user and UMA-controlled speed options, to make our unique continuous voice technology available to all UMA Connect customers, and to introduce unlimited data plans. We're excited about the potential to provide increasingly extensive and integrated solutions that bring more value to small business customers. Finally, I'm pleased to report our residential business also performed well and increased in revenue in line with our expectations. During Q1, we expanded our retail distribution of Umatello. We also extended the power of our residential mobile app to include cellular mode calling. This mode uses the mobile device's voice network to provide a new option for completing calls. Many of our residential customers take advantage of our very low-cost international calling rates to make calls overseas while on the go, for example, while driving on the highway. In such circumstances, cellular mode can enable more reliable calls. We continue to see a strong outlook for our residential business. So overall, we are excited to be off to a good start on the year, and we are looking forward to driving further growth in the quarters ahead. I will now turn the call over to Ravi to discuss our results and outlook in more detail, and then return with some closing remarks.

Thank you, Eric, and good afternoon, everyone. I'll start with a review of our financial results for the first quarter and then provide our outlook for the second quarter and full year fiscal 22. We delivered strong financial results, achieving record revenues of $45.6 million, which was above the high end of our previously issued guidance range of $44 million to $44.8 million. On a year-over-year basis, total revenue grew 13% driven by the strength of UMA business, UMA Business now accounts for 47% of total revenue compared to 43% in the prior year's quarter. Net income for the first quarter of fiscal 22 was $2.8 million and above our previously issued guidance range of $1.8 million to $2.4 million. Our strong revenue growth and profitability demonstrates the strength of our large and diversified customer base as well as our solid execution. Now some details on our Q1 revenue results. Our overall subscription and services revenue grew 12% on a year-over-year basis to $42 million, with UMA business subscription and services revenue growing 22% year-over-year and 5% sequentially from Q4. Our residential subscription and services revenue for Q1 grew 4% year-over-year, which is an improvement from the 3% growth we saw in the fourth quarter of last year. Subscription and services revenue as a percentage of total revenue was 92% compared to 93% for the prior year quarter. During the first quarter, we saw our product and other revenue increase 34% to $3.6 million and compared to $2.7 million for the same period last year. This strong growth in product and other revenue was driven by increased sales of IP phones, as well as higher activation revenue from business users. Now some details on key customer metrics. We ended the first quarter with 1,083,000 core users, up from 1,049,000 at the end of the first quarter last year, driven by growth in business users through various sales and marketing activities. I am excited to report we now have over 281,000 business users, a 19% increase on the year-over-year basis. Our average monthly subscription and services revenue per core user, or R2, increased 10% to $12.68, up from $11.56 in the prior year quarter due to an increasing mix of business users, including higher R2 Office Pro users. Accordingly, our business output is now approximately $24 per unit. We are pleased with the growth of our annual exit recurring revenue, which has now increased to a record $165 million, growing 13% year over year. Our net dollar subscription retention rate for the first quarter improved to 98%, a two-point improvement on a sequential basis. Now some color on gross margins. Subscription and services gross margins for the first quarter were 71.3%, an increase of 70 basis points year over year, and down 60 basis points sequentially, primarily due to investments being made for future growth. Product and other gross margins for the first quarter were negative 41%, compared to negative 39% for the same period last year, and improved sequentially from the negative 58% in Q4. Our overall gross margins were 62% for the quarter, compared to 63% in the prior year period, driven by a higher proportion of product revenue in the quarter. Now some details on our operating expenses. Operating expenses for the first quarter for fiscal 22 were $25.8 million, an 11% increase on a year-over-year basis. Sales and marketing expenses were $13.3 million, or 29% of total revenue. This 13% year-over-year increase was driven by higher marketing and channel development activity through my business. Research and development expenses were $8.2 million, or 18% of total revenue. This is an increase of 6% on a year-over-year basis, driven by investments in the new products and features including launching our service in a number of international countries, starting first with our largest customers. DNA expenses increased to $4.3 million, or 9% of total revenue, compared to $3.8 million for the prior year quarter due to higher personnel-related costs. Net income for the first quarter was $2.8 million, resulting in diluted earnings per share of 11 cents comparable to the $0.11 EPS for the prior year quarter. Adjusted EBITDA earnings for the first quarter improved to $3.5 million, or 8% of total revenue, as compared to $3 million in the prior year quarter. We ended Q1 with cash and investments of $29 million, compared to $23.3 million at the end of Q1 in the prior year. Even though the first quarter had a number of annual payments, we generated approximately $400,000 in cash from operations, which was a significant improvement from the $2.8 million of cash used in operations in the prior year quarter. This was our fourth consecutive quarter of positive cash flow from operations. On the personnel front, we ended the first quarter with 983 employees and contractors up from $799 at the same time last year. Now I will provide guidance for second quarter and full year fiscal 22. Again, our guidance is non-GAAP and has been adjusted for expenses such as stock rate compensation and amortization of expenses. We expect total revenue for the second quarter of fiscal 22 to be in the range of $46 million to $46.8 million. We expect second quarter non-GAAP net income to be in the range of $1.9 million to $2.4 million. Non-GAAP diluted EES is expected to be between $0.08 and $0.10. We have assumed 23.4 million weighted average basic shares and 24.6 million weighted average diluted shares outstanding for future. Full year fiscal 22 guidance. We expect total revenue for fiscal 22 to be in the range of $185 million to $187 million and increase from the previously issued guidance range of $182.5 million to $185.5 million. We believe we are tracking well towards our objective of business revenue crossing 50% of total revenue by the end of this fiscal year. We expect non-GAAP net income for fiscal 22 to be in the range of $7.5 million to $9.5 million versus the previously issued guidance range of $6.5 million to $8.5 million. Non-GAAP diluted EPS is expected to be in the range of 30 cents and 38 cents. We have assumed approximately 23.5 million weighted average basic shares and 25 million weighted average diluted shares outstanding for fiscal 22. From a cash flow perspective, we expect to continue to generate positive cash from operations for the full year fiscal 22. With that, I'll pass it back to Eric for some closing remarks. Thank you, Ravi.

Our priorities for this year remain as we outlined them just a quarter ago, namely to increase our sales and marketing, both for direct and through channel resellers, to add new features to UMA Office that can build our revenue per user, to focus on Microsoft Teams direct routing, feature customization, and select verticals to drive growth of UMA Enterprise, to evolve our UMA Connect and UMA-managed Wi-Fi solutions, and to expand geographically to serve users in more than a dozen new countries. We believe these actions will allow us to capture the large market opportunity before us and drive significant expansion of our business. We're excited about the opportunities ahead Thank you. In a moment, we'll take your questions, and then at the very end, after the question and answer session, Ravi and I will have some final remarks. Operator?

Thank you. At this time, I would like to inform everyone, in order to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. We have your first question from Mike Lattimore with Northland Capital. Your line is open.

Excellent. Yeah, thanks a lot. Great quarter. The revenue retention rate up to 98% from 96, was that largely driven by improvements in the business segment?

That is right, Mike. There's a lot of things which moved in there, but if you look at primary reasons for the growth of improvement in net dollar retention rate is improved ALCO as well as churn improving ALCO.

Okay. And then just maybe a macro comment on the small business environment. You know, how does the pipeline look? How is sort of, you know, new lead activity? I mean, do you feel like as the economy opens, you're seeing more deals come over the horizon here?

Hi, Mike. Well, we talked a quarter ago about positive tailwinds for this year coming out of COVID. It's hard to talk too much about pipeline because a lot of our small business customers purchase relatively quickly after they connect with us and find out what we can offer. But I will note that in Q1, e-commerce sales were very strong, as were direct sales in general. So we're seeing those positive signs.

That makes sense. And did you say on your large customer that's expanding internationally that you expect, you know, kind of deployments, sort of material deployments to start in the second quarter?

Yes. We put a lot of work into preparing for deployments. the expansion and we expect that expansion to engage so to speak uh start to happen in q2 it'll roll out through the whole year and uh you know but um but we do expect to see some significant progress in q2 great thanks a lot thank you thank you we have your next question from matt falter with william blair your lines open

Hey, guys. Thanks for taking my questions. Just maybe the first one here on the direct routing with Teams. You know, we'd love to kind of double-click on where you're seeing the demand there. You know, I think of the direct routing opportunity maybe as being more of an upmarket opportunity, but clearly, you know, obviously that's where you get, you know, Teams, quote-unquote, for free with E5. But clearly you're seeing some good traction here, some good interest, so we'd love to just better understand what you're seeing on that front, where that demand is coming from.

Sure. So our data from last quarter, which we talked about, suggests that 70% of the businesses that are installing Teams are going to turn to a direct routing solution for more flexibility and better cost. And you're right, it is larger-sized entities. We tend to think about kind of 100 users and up for this type of application. It's part of our UMA Enterprise platform, this capability, and it's largely sold through channel resellers that we're connected to. And I will say there's been a very favorable reception by channel resellers to what we've done with our team's direct routing, and it's great. It's certainly a developing opportunity. We've also learned through this, because it's larger-sized companies, there is now a pipeline and a time until companies make their decisions and install. And so we've been building pipeline for the four or five months since we've launched this, and we have a good outlook for it now, but it does take time.

Got it, got it. That's helpful. And then second question, just looking at the international opportunity, obviously you've been very clear about the primary focus there being supporting your large customer and the expansion there. And that's, you know, inherent in that you're going to establish some of the underlying infrastructure you need to support other customers. Can you just walk through, you know, assuming that, you know, maybe in, you know, next year or in the coming years you start to expand your international presence outside of that kind of core customer, if you will, you know, what kind of investments will be left on the kind of go-to-market front and getting that infrastructure set up internationally? And how do you think about the timing of when that starts to layer in?

Yeah, you're right that this year is all about serving our large customer. And we talked a quarter ago about how we see the potential this year to double the number of users for that customer from 25,000 or so today to 50,000. And that's our primary focus this year. We're not trying to go beyond that. It's a little too soon to talk about what our plans will be next year. I can tell you that this large customer will have the potential for significant further growth next year as we look out. So we'll be balancing that with trying to go beyond this customer and serve the market in general. We are a lot of our small business customers come to us through direct sales activities, a lot of marketing, a lot of inside sales, those things would be relatively easy to ramp in new locations. And so we do think about that. But I'm sure when we get to planning next year, we'll be trading off all the different opportunities in front of us to see where we think we have the most impact. And so that one is a little bit more to come.

Got it. That's helpful. Thanks again.

We have your next question from Josh Nicholas with B. Riley. Your line is open.

Yeah, thanks for taking my question. Great to hear the company is kind of on track for business revenue to kind of cross that key 50% threshold at the end of this fiscal year in a similar accord. it looks like you're getting some good traction on the reseller market as well. Uh, what do you think is really driving that as far as the company's core value proposition and how long until that could get from say 40% of sales today to kind of close to 50, if I'm trying to think about the opportunity there?

Yeah. Um, well, what's driving it a little bit is, um, our, uh, investing, if you will, in the development of, of those channels. Um, we, um, We historically have focused more on the direct sales side of things, and we've been building the team and building the relationships and, you know, establishing the solutions for serving larger businesses through channels. And I think that's going well, but I think we have a long runway ahead of us, a lot farther we can go with it. One of the channel reseller relationships that we established in Q1 was could be quite impactful for us as we look forward. It's a very large reseller that we're very excited to now be starting to work with. How fast it will get to 50%? It depends a little bit on how fast the other half of the business grows as well. So we haven't really set that kind of a target, but we have set targets to – develop in these areas because we do see channel resale activities as an untapped opportunity for us, largely speaking. And so we definitely want to develop it.

Thanks. And then the last question for me, if we could break it out a little bit further, what's kind of the mix right now between like Office and Enterprise? If you could kind of elaborate a little bit on what you're seeing as far as like the current growth trajectory is there and outlook generally?

So keeping in mind that we launched our first office solutions a number of years ago, and we've been I like to say sometimes we set out 10-plus years ago to conquer residential, and we did it. And we established the number one solution in the market, not only in terms of our success, but in terms of scores by customers. And we set out to do the same in small business quite a number of years ago, and I think we're there today. I think we're growing faster than others, and I know we're rated the number one solution in third-party surveys. Enterprise is still a work in progress for us. And so it is much smaller. We started this effort with an acquisition we made a couple years ago. It was a fortunate move because we were able to blend what we do with enterprise along with what we do with office to serve our largest customer and enable that opportunity. So a lot of our early efforts with enterprise were around that. But today, as I said in my remarks, We're focused on what we consider a differentiated strategy against the other larger players, one built around some unique things we do on direct routing for teams, some select verticals where we think we can bring some added value, and thirdly, the ability to customize our solution for larger customers to do special things that they just wouldn't get from anybody in the industry today. And those capabilities, I think, will allow us to chart our own course But it is a long, you know, we are in now a longer-term strategy to build enterprise to where we want it, the way we have already done with residential and office.

Thanks. I'll hop back into the queue. And Ravi, best of luck on future opportunities. It's been great working with you over the years. I'll talk to you guys later.

We have your next question from Matthew Harrigan with Benchmark. Your line is open.

Thank you. At Deutsche Telekom's Capital Markets Day, T-Mobile really reiterated their emphasis on their home internet project and really getting to 78 million, 7 to 8 million customers in five years. They're also taking much more of a business and SME focus overall, not surprisingly, gravitating away from their traditional consumer emphasis because they're underpenetrated. I know you probably got hurt, dinged a little bit by Sprint being much more business oriented than T-Mobile initially, and now it looks like it can pull back in your direction. Is that anything that has any implications for you, positively or negatively, or is that just basically noise?

Well, let me start. With part of what you were speaking about, we're very excited about what we think we can do with UMA Connect, which is our wireless Internet solution as we look forward. And T-Mobile is our partner. And, you know, we're also thinking not only about 4G, which is the way that product works today, but in the future when 5G is more ubiquitous and lower cost. I do believe business Internet, small business Internet, can be well served by 5G with capabilities and price points that will be competitive. So we're looking ahead to that. We're also mindful that when you put that Internet together with our office phone service solution, you can do things that improve the experience for the customer, whether it's making their Wi-Fi phones work better or, again, you know, our continuous voice technology or other things. So we are also thinking about an integrated solution to be stronger in serving small businesses. T-Mobile is an important partner of ours for this, and we're thrilled to be working with them.

Great. Thanks, Eric. A very brief interval, but nice working with you, Ravi, as well.

Absolutely. Thank you, Matt. It has been a pleasure working with you.

We had your next question with Brian Genslinger with Alliance Global Partners. Your line's open.

Thanks so much for taking my question. For three consecutive quarters, you've added roughly a solid 12,000 new business subs net during the pandemic. As the business environments improve, there's no travel restrictions really in the U.S. I'm not sure that impacts you at all, how you've shifted. You're adding new channel partners. You're adding direct sales folks. Your turn is lower. So the question is, outside of your largest customer, is there any reason to believe you wouldn't be increasing or accelerating the number of subs you add per quarter? And the second part of the question is, given your personnel and travel restrictions wherever they are, what's your capacity to add users per quarter, meaning can you add 15,000 per quarter outside of your largest customer while continuing to expand within that customer?

Yeah, so let me take the second part of your question first. We have a lot of capacity to expand with more users. There's nothing holding us back on that front. And, yes, to realize our growth ambitions, we have to add more users as we go forward. So that's clearly in our strategy. To be honest, the second wave of the pandemic – around the holidays and then what happened, you know, the first couple months of, you know, first few months of this year did affect some of our channels. Not enough to slow us down fundamentally, but we do think we'll, as we look forward, that those will bounce back and that as we look forward now, we're seeing a brighter outlook than we did, say, early in Q1 when some of that was happening. So Yeah, it's certainly our intent to grow significantly. There are arguably 6 million businesses in North America with 1 to 20 employees, and we have less than 100,000 of them, or about 100,000 of them. So tremendous opportunity for us to go after.

Great. My follow-up question is in terms of the enterprise side where you obviously highlighted you haven't been there as long, so taking a little bit of time, has management and the board considered M&A as a way to accelerate enterprise adoption or stronger entry?

Well, we got to where we are partly by two M&A moves, the acquisition of Boxster and the acquisition of BroadSmart. The first brought us more technical capability, and the second brought us an established customer base and established sales and channel relationships, as well as other capabilities. I think that's a great foundation for us. We're not adverse customers. to more M&A that we think would build our direction, but it's also not a primary focus for us. We certainly don't want to distract ourselves from the opportunities we're pursuing right now. So I realize that's a bit of an ambiguous answer for you, but that's kind of how we see it today. Okay. Thanks so much.

Thank you.

Again, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. I am showing no further questions at this time. I would now like to turn the conference back to Mr. Eric Tang, CEO, for any closing remarks.

Thank you, Operator. And, yes, we do have some closing remarks this time. You know, as we announced on April 26th, Ravi will be departing UMA to pursue other opportunities. And when that occurs, we're fortunate to have Namrata Sabharwal, who will take over as interim chief financial officer. We also intend to enter into a consulting agreement with Ravi upon his departure to assist in the transition to a successor. I know from the many comments that have been shared with me since the announcement that all of us will miss Ravi and that we wish him well. I can honestly say that Ravi has been like a brother to me the last six and a half years, and I will dearly miss working with him every day. But I'm also really happy to see Ravi move to the next chapter of his career, and I wish him great success in those endeavors. And most of all, on behalf of the board and the company, I just want to thank him for his many, many contributions to UMA. So, Ravi, thank you.

Thank you, Eric. This means a lot to me. I would like to take this opportunity to thank UMA's board, customers, shareholders, and the entire UMA team for providing me with such an amazing experience. Over the years, we have seen UMA become a more mature public company with a solid foundation, supported by Eric, and a strong management team where the company's culture enables execution, continuous improvement, and a positive team environment. As a result of this, UMA has executed well towards its strategy I believe it is well positioned to do so in the future. I am forever grateful for this opportunity. I was provided to be a part of this something big. I have very much enjoyed my time at UMA. It has truly become a second family to me. I wish Eric and the entire UMA team the very best. Thank you.

Thank you, Ravi. Thank you, everyone, on this call. A new chapter ahead. who are looking up. So we're looking forward, I should say. Thank you, everyone. That ends the call. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may not disconnect.