OOMA - Ooma Stock: Steady Growth But Missing Value

2023-12-18 15:24:03 ET

Summary

• OOMA reported its Q3 earnings, highlighted by continued growth from its VoIP telecom subscription services.
• The challenge for the company is that this segment is highly competitive with several tech names targeting the same market opportunity.
• We expect shares to remain volatile as recent trends and the current outlook are not strong enough to spark a sustained rally higher.

Ooma, Inc. ( OOMA ) offers telecom solutions for consumers and businesses seeking an alternative to traditional landline phone services. The company's integrated voice-over-internet protocol (VoIP) platform benefits from an established brand, serving over 1.2 million customers.

On the other hand, the challenge for Ooma is attempting to stand out from its relatively small market position in what is recognized as a highly competitive segment. Indeed, despite steady growth and recurring profitability, the stock is down more than 25% this year.

Balancing what we view as overall solid fundamentals, we sense that the stock is missing a catalyst to build a positive movement. We can also cite what remains a valuation premium relative to peers that adds a layer of uncertainty. We expect shares to remain volatile.

OOMA Q3 Earnings Recap

Ooma's Q3 fiscal 2024 EPS of $0.15 matched the consensus estimate and was up from $0.14 in the period last year. Revenue of $59.9 million was slightly above estimates and climbed by 6% year-over-year. Within that amount, the core subscription and services segment was stronger with a 14% organic increase, while the smaller hardware sales side of the business posted a decline.

The gross margin on subscription services has been relatively flat, although the weaker performance of the hardware segment dragged the firm-wide adjusted gross margin to 62% from 64% in Q3 fiscal 2023. Favorably, an effort at cost savings and efficiency is evident as total operating expenses fell by 2.1% y/y this quarter. The result is that the adjusted EBITDA at $5.0 million was up 11.1%.

Operationally, management cited several customer wins this quarter while projecting a positive tone during the earnings conference call . The performance metric that stands out is the average revenue per user (ARPU) at $14.63, up 3% y/y capturing a higher proportion of business users in the "Office Pro" and "Pro Plus" products.

The company believes its "net data subscription retention ratio" of 99% reflects good customer satisfaction overall. One of the efforts announced with the strategy initiatives is an expanded sales force which is expected to generate some stronger growth going forward including entering new countries internationally.

In terms of guidance, the management is targeting Q4 revenue between $61.2 and $61.8 million, reflecting a 9% annual increase including a boost from the recent acquisition of " 2600Hz, Inc. ", as a call center platform this past quarter. On the other hand, the EPS forecast between $0.12 and $0.13, if confirmed, represents a 24% decline from the period last year considering some volatility in key large contracts, specifically about $400k of a non-recurring product revenue captured in Q3.

Finally, we can mention that OOMA ended the quarter with $19 million in cash and cash equivalents against $18 million in debt. Considering over $15 million in adjusted EBITDA over the trailing twelve months, we view the balance sheet as a strong point in the company's investment profile.

What's Next For OOMA?

The attraction of Ooma is the recognition that traditional "copper-based landlines" are being phased out, with VoIP evolving into the standard for fixed telecom services. Data suggests over-the-top VoIP is a market growing at an average of 26% per year, essentially capturing shares from the legacy solutions, which include more than 58 million businesses that depend on this technology.

That being said, Ooma is hardly the only player in this segment with multiple companies including much larger tech leaders, traditional telecom giants, and emerging names all targeting what is arguably a commoditized service. So even as Ooma has been ranked highly in terms of customer satisfaction with industry awards in the past decade, the long list of competitors highlights the challenge of really breaking out.

Companies offering VoIP systems include Microsoft Corp. ( MSFT ), Alphabet Inc. ( GOOGL ), Zoom Video Communications ( ZM ), 8x8, Inc. ( EGHT ), RingCentral, Inc. ( RNG ), Verizon Communications Inc. ( VZ ), among others which ultimately translates in industry-wide pricing pressures and low margin. This backdrop helps explain subdued market enthusiasm towards Ooma stock.

The current consensus is for top-line growth of around 9% through next year while EPS is expected to climb in the mid-single-digits range. Again, this is a solid trend but nothing to call home about in our opinion.

The other issue here is that OOMA is currently trading at a 17x forward P/E multiple and 13x in terms of its EV-to-forward EBITDA ratio. This level represents a premium compared to its peer group in names like RingCentral and 8x8, which becomes harder to justify without evidence the company is gaining market share over these players.

Final Thoughts

Taking a dive through Ooma, we believe the trends are good, but not quite good enough to draw a strong bullish view on the stock. We rate shares as a hold, looking ahead to the next couple of quarters for signs of accelerating operating and financial trends.

The main risk we see is that efforts to drive growth can end up impacting near-term profitability, which would force a reassessment of the earnings outlook and add volatility to the stock. Longer-term, competitive pressures in the segment add to uncertainty. The company's current market cap of around $250 million appears to reflect fair value in our opinion.

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