OOMA - Ooma: Muted Third Quarter Result With No Significant Upside Potential

2023-12-18 04:51:56 ET

Summary

• Ooma's Q3 results show muted revenue growth and contracted profit margins, leading to a hold rating on the stock.
• The acquisition of 2600Hz is expected to add $7 million in annual recurring revenues.
• OOMA is trading at a high valuation, and there is limited upside potential in the stock price.

Investment Thesis

Ooma, Inc. ( OOMA ) is a communication services provider based in Sunnyvale, California. Since my last analysis , the stock has corrected 20%, and I haven't seen any significant improvement in the company's financial performance. In this thesis, I will analyze its recently announced third-quarter results and its future growth prospects. I will also be analyzing its valuation at current price levels and upside potential in its stock price. The muted revenue and operating profits growth, along with sustained economic headwinds, are the main reasons behind me maintaining a Hold rating on OOMA.

Company Overview

OOMA is a technology company specializing in communications solutions, with a focus on Voice over Internet Protocol ((VOIP)) services. The company was founded in 2004 and has since established itself as a provider of innovative communication tools for both residential and business users. Its business VoIP Services provides communication solutions tailored for businesses, including VoIP phone systems, virtual receptionists, and other enterprise-grade features. These services aim to enhance communication efficiency for small and medium-sized businesses. Its residential VoIP Services offer home phone services using VoIP technology, allowing users to make calls over the Internet instead of traditional phone lines.

Q3 FY2024 Result

OOMA reported muted third-quarter results. The revenues and the EPS were in line with the market estimates. As per my analysis, a decline in the subscription revenue growth due to a lower-than-average increase in client base has restricted the total revenue growth. The revenues from its products segment don't present a positive picture either, with a fall in y-o-y revenues from the segment. One positive for the company is the acquisition of 2600Hz, a VoIP platform targeting smaller businesses. 2600Hz is expected to add $7 million in annual recurring revenues for the company.

It reported total revenue of $59.8 million , up 5.6% compared to $56.7 million in the same quarter last year. The subscription revenues accounted for 93% of the total revenue at $55.8 million, up 6% compared to $51.7 million in the corresponding quarter last year. I believe its office segment has witnessed better technological advancement and interest from clients. However, the home segment has not gained considerable traction among consumers. I think the company should focus more on its office segment and dedicate more resources there, as it has the potential to earn significant subscription revenues on a consistent basis. The revenues from products and other segments were reported at $3.9 million, down 20% compared to $4.9 million in the same quarter last year. Its gross margins for the quarter stood at 61.7%, compared to 63.5% in the same period the previous year. The increased subscription and service costs and less-than-expected growth in revenues resulted in this decline in gross profit margins. On the operational front, it managed to keep the costs under control, and operation expenses were reported at $37.9 million, a slight decline of 2% compared to $38.7 million in the corresponding quarter last year. The company managed to bring down its loss from operations to $1.08 million from $2.85 million y-o-y. It reported a net income of $2.28 million, compared to a net loss of $2.8 million in the year-ago period. However, I would like to highlight that the increase in the net income was due to the income tax benefit of $3 million that the company received during the quarter. This clearly shows that the company has a long way to go in terms of achieving stable profitability.

Now, let us have a look at its balance sheet. As of October 31, 2023, it reported cash and cash equivalent of $18.8 million against long-term debt of $18 million. I do not see any major problems in its balance sheet. The company has room to raise funds to boost growth in the future without putting much stress on its balance sheet. It has also managed to reduce its inventory levels to $21 million, which I believe is a positive sign with respect to the future inventory and related cost control measures.

Overall, the third quarter reflected missing organic revenue growth and contracted profit margins. The management's FY24 guidance doesn't instill much confidence either. It updated FY24 revenue guidance from $235.5-$237 million to $236.3-$236.9 million and the loss per shared guidance from $0-$0.04 to $0.04-$0.05. This clearly reflects that the company will continue to witness stressed profit margins and muted revenue growth. The acquisition of 2600Hz and increasing demand for its AirDial products could change the growth trajectory, but I would recommend investors hold the stock till there are signs of a clear momentum shift both in terms of revenues and profits.

Valuation

OOMA is currently trading at a share price of $10, a YTD decline of 26.8%. It has a market cap of $258 million. It is trading at a forward non-GAAP P/E m ultiple of 17.3x with an FY24 EPS estimate of $0.58 . Comparing this to the sector P/E of 15.3x, I believe it is trading at a high valuation despite a recent decline in the stock price. I do not see a material upside potential in the stock price from current price levels. The existing investors can hold the stock, but initiating a fresh buying position is not advisable at the current price level.

Conclusion

OOMA has not been able to achieve a strong revenue growth rate, and the management's future guidance suggests that the revenue and profits could remain stressed throughout FY24. It is trading at a premium valuation compared to the sector, which doesn't leave much room for an upside in the stock price. The acquisition of 2600Hz and increasing demand for its AirDial products could change the growth trajectory, but the challenging economic business environment could hinder this growth. Considering all these factors, I assign a hold recommendation for OOMA.

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