# OOMA INC (OOMA) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from OOMA INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1327688/000095017023012210/ooma-20230131.htm
Accession: 0000950170-23-012210
Filing date: 2023-04-07
Report date: 2023-01-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OOMA/
All MD&A years: /company/OOMA/mda/
Previous year: /company/OOMA/mda/fy2022/ (FY 2022)
Next year: /company/OOMA/mda/fy2024/ (FY 2024)

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, 2023 as fiscal 2023, our fiscal year ended January 31, 2022 as fiscal 2022 and our fiscal year ended January 31, 2021 as fiscal 2021. All other references to years are references to calendar years.

This section of this Form 10-K generally discusses fiscal 2023 and 2022 items and year-to-year comparisons between fiscal 2023 and 2022. Discussion regarding our financial condition and results of operations for fiscal 2022 as compared to 2021 is included in Item 7 of our Annual Report on Form 10-K for the year ended January 31, 2022, filed with the SEC on April 8, 2022.

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 U.S. and Canada, with limited offerings in certain other countries.

In July 2022, we completed the acquisition of Junction Networks, Inc., which does business as OnSIP, a provider of cloud-based phone and unified communications services for small and medium-sized businesses, from Intrado Corp. for a base purchase price of approximately $9.8 million in cash. The final aggregate purchase price was $9.5 million, reflecting a $0.3 million reduction for customary working capital adjustments. We believe the acquisition of OnSIP will accelerate overall growth of Ooma Business.

We refer to Ooma Office, Ooma Enterprise, Ooma AirDial and OnSIP collectively as Ooma Business. Ooma Residential includes Ooma Telo basic and premier services. See Item 1. Business above for additional information regarding our business, including products and services offered, competitive market and regulatory matters.

Fiscal 2023 Financial Performance

•
Total revenue was $216.2 million, up 12% year-over-year, primarily driven by the continued growth of Ooma Business and the acquisition of OnSIP.

•
Subscription and services revenue from Ooma Business grew 24% year-over-year, driven by user growth and two full quarters contribution from OnSIP.

•
Total gross margin was 64%, up from 62% in fiscal 2022.

•
GAAP net loss was $3.7 million, compared to a net loss of $1.8 million in fiscal 2022. Net loss for fiscal 2023 included $1.4 million in facilities consolidation charges, $1.5 million in acquisition-related transaction costs and a $2.1 million income tax benefit associated with the acquisition of OnSIP.

•
Non-GAAP net income was $13.6 million, compared to $12.6 million in fiscal 2022.

•
Adjusted EBITDA was $17.4 million, or 8% of revenue, compared to $15.6 million in fiscal 2022.

•
As of January 31, 2023, we had total cash, cash equivalents and short-term investments of $26.9 million, down $4.4 million from $31.3 million as of January 31, 2022. Cash usage reflected our acquisition of OnSIP.

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 | FY2023 Form 10-K | 46

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. For example, we launched Office Pro Plus in the first half of fiscal 2023. Additionally, 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. We also plan to evolve our fixed wireless and Wi-Fi solutions as part of our longer-term strategy to provide a more complete solution for small and medium-sized businesses.

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 | FY2023 Form 10-K | 47

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):

[[GREPCENT_TABLE]]
[["","","As of January 31,"],["","","2023","","","2022","","","2021"],["Core users","","","1,210","","","","1,100","","","","1,074"],["Annualized exit recurring revenue (AERR)","","$","206,700","","","$","176,900","","","$","160,500"],["Net dollar subscription retention rate","","","94","%","","","96","%","","","96","%"],["Adjusted EBITDA","","$","17,395","","","$","15,568","","","$","14,013"]]
[[/GREPCENT_TABLE]]

Core Users increased year-over-year, which was primarily driven by growth in business users. As of January 31, 2023, Ooma Business users comprised approximately 35% of our total core users, up from 28% as of January 31, 2022. As of January 31, 2023, core users included approximately 50,000 acquired OnSIP users. 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 office user extensions. 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, including the impact of OnSIP. 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 (excluding Talkatone revenue) 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.

Net Dollar Subscription Retention Rate decreased year-over-year due to lower growth year-over-year in average revenue per user, which was primarily due to continuing growth from a large customer with a customized pricing structure that slowed the rate of average revenue per user. Overall, customer churn across our user base remained stable throughout fiscal 2023. 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. It measures the percentage year-over-year change in our recurring subscription revenue per core user (excluding Talkatone revenue), which is then adjusted by factoring in the percentage of our core users we have retained during the same period. Our net dollar subscription retention rate is affected by changes in average amounts that our core users pay to us, fluctuations in the number of our core users, and our core user churn rate.

We calculate our estimated net dollar subscription retention rate for our core users by multiplying:

(i)
our year-over-year percentage change in annual recurring revenue per core user, which is calculated by:

▪
determining the annual recurring revenue per core user by dividing annual recurring revenue for the period ended by the number of core users at the end of that particular period; and

▪
calculating the year-over-year percentage change in annual recurring revenue per core user by dividing the current period recurring revenue per core user by the annual recurring revenue per core user for the same period in the prior year.

by:

(ii)
our core user annual retention rate, which is calculated by:

▪
determining our core user churn, by identifying the number of paying core users who terminate service during a month, excluding infant churn, which we define as office extensions and home users who terminate service prior to the end of the second full calendar month after their activation date;

▪
calculating our monthly churn rate by dividing our churn in a month by the number of core users at the beginning of that month; and

▪
calculating our annual retention rate as one minus the sum of our monthly churn rates for the preceding 12-month period.

Ooma | FY2023 Form 10-K | 48

Adjusted EBITDA increased year-over-year in line with our revenue growth, representing approximately 8% of our total revenues for fiscal 2023 and fiscal 2022. We use Adjusted EBITDA (Earnings Before Interest, Tax and 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 acquired intangible assets and other acquisition-related costs, facilities consolidation charges, and stock-based compensation 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):

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended January 31,"],["","2023","","","2022","","","2021"],["GAAP net loss","$","(3,655",")","","$","(1,751",")","","$","(2,441",")"],["Reconciling items:"],["Interest and other income, net","","(332",")","","","(179",")","","","(419",")"],["Income taxes","","(1,770",")","","","\u2014","","","","85"],["Depreciation and amortization of capital expenditures","","3,771","","","","3,117","","","","2,877"],["Amortization of acquired intangible assets and acquisition-related costs","","3,824","","","","1,304","","","","1,304"],["Facilities consolidation charges","","1,402","","","","\u2014","","","","\u2014"],["Stock-based compensation and related taxes","","14,155","","","","13,077","","","","12,607"],["Adjusted EBITDA","$","17,395","","","$","15,568","","","$","14,013"]]
[[/GREPCENT_TABLE]]

Ooma | FY2023 Form 10-K | 49

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.

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 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 due to supply chain constraints in the current 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. Accordingly, we expect our product and other gross margin during fiscal 2024 will be negatively impacted by these higher component 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.

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 | FY2023 Form 10-K | 50

Consolidated Results of Operations

The following table sets forth selected consolidated statements of operations data for each of the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended January 31,"],["","2023","","","2022","","","2021"],["Revenue:"],["Subscription and services","$","199,105","","","$","175,942","","","$","156,873"],["Product and other","","17,060","","","","16,348","","","","12,074"],["Total revenue","","216,165","","","","192,290","","","","168,947"],["Cost of revenue:"],["Subscription and services","","54,499","","","","49,563","","","","46,134"],["Product and other","","24,018","","","","24,289","","","","18,009"],["Total cost of revenue","","78,517","","","","73,852","","","","64,143"],["Gross profit","","137,648","","","","118,438","","","","104,804"],["Operating expenses:"],["Sales and marketing","","69,671","","","","58,631","","","","50,919"],["Research and development","","45,939","","","","38,193","","","","36,079"],["General and administrative","","27,795","","","","23,544","","","","20,581"],["Total operating expenses","","143,405","","","","120,368","","","","107,579"],["Loss from operations","","(5,757",")","","","(1,930",")","","","(2,775",")"],["Interest and other income, net","","332","","","","179","","","","419"],["Loss before income taxes","","(5,425",")","","","(1,751",")","","","(2,356",")"],["Income tax benefit (provision)","","1,770","","","","\u2014","","","","(85",")"],["Net loss","$","(3,655",")","","$","(1,751",")","","$","(2,441",")"]]
[[/GREPCENT_TABLE]]

Costs of revenue and operating expenses included stock-based compensation expense and related payroll taxes as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","","","","Fiscal Year Ended January 31,"],["","","","","","2023","","","","2022","","","","2021"],["Cost of revenue","","","","","$","986","","","","$","1,026","","","","$","1,054"],["Sales and marketing","","","","","","2,068","","","","","1,932","","","","","1,978"],["Research and development","","","","","","4,713","","","","","4,373","","","","","4,387"],["General and administrative","","","","","","6,388","","","","","5,746","","","","","5,188"],["Total stock-based compensation expense","","","","","$","14,155","","","","$","13,077","","","","$","12,607"]]
[[/GREPCENT_TABLE]]

Ooma | FY2023 Form 10-K | 51

Comparison of fiscal years 2023, 2022 and 2021 (dollars in tables are in thousands):

Revenue

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended January 31,","","","Change"],["","","2023","","","2022","","","2021","","","2023 vs. 2022"],["Revenue:"],["Subscription and services","","$","199,105","","","$","175,942","","","$","156,873","","","$","23,163","","","13","%"],["Product and other","","","17,060","","","","16,348","","","","12,074","","","","712","","","4","%"],["Total revenue","","$","216,165","","","$","192,290","","","$","168,947","","","$","23,875","","","12","%"],["Percentage of revenue:"],["Subscription and services","","","92","%","","","91","%","","","93","%"],["Product and other","","","8","%","","","9","%","","","7","%"],["Total","","","100","%","","","100","%","","","100","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2023 Compared to Fiscal 2022

We derived approximately 53% and 49% of our total revenue from Ooma Business and approximately 45% and 49% from Ooma Residential in fiscal 2023 and 2022, respectively.

Subscription and services revenue increased $23.2 million or 13% year-over-year, primarily attributable to an increase in our core users and an increase in the average revenue per user, driven by both organic and OnSIP-related growth in sales of Ooma Business and a higher mix of sales of our Office Pro and Pro Plus tier services. Subscription and services revenue from Ooma Business and Ooma Residential grew 24% and 3% year-over-year, respectively. The acquisition of OnSIP in July 2022 contributed approximately $6.5 million to our revenue growth during fiscal 2023.

Product and other revenue increased $0.7 million or 4% year-over-year, which was primarily attributable to shipments of Ooma AirDial.

Cost of Revenue and Gross Margin

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended January 31,","","","Change"],["","","2023","","","2022","","","2021","","","2023 vs. 2022"],["Cost of revenue:"],["Subscription and services","","$","54,499","","","$","49,563","","","$","46,134","","","$","4,936","","","10","%"],["Product and other","","","24,018","","","","24,289","","","","18,009","","","","(271",")","","(1",")%"],["Total cost of revenue","","$","78,517","","","$","73,852","","","$","64,143","","","$","4,665","","","6","%"],["Gross margin:"],["Subscription and services","","","73","%","","","72","%","","","71","%"],["Product and other","","","(41",")%","","","(49",")%","","","(49",")%"],["Total","","","64","%","","","62","%","","","62","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2023 Compared to Fiscal 2022

Subscription and services gross margin of 73% increased year-over-year from 72% reflecting the continued growth of Ooma Business revenues with higher average revenue per user and associated benefits of economies of scale. Cost of subscription and services revenue for fiscal 2023 increased $4.9 million or 10% year-over-year, primarily due to a $2.6 million increase in personnel related costs, driven in part by increases in headcount attributable to the OnSIP acquisition in July 2022, as well as a $1.1 million increase in infrastructure costs, a $0.5 million increase in regulatory costs and a $0.5 million increase in credit card processing fees that support the growth of Ooma Business. Overall, the year-over-year increase in the cost of subscription and services reflects both organic and OnSIP-related growth of our business.

Product and other revenue gross margin of negative 41% improved from 49% in the prior year, primarily due to nonrecurring sales of legacy inventories that were previously written-down in fiscal 2022 coupled with higher sales of certain accessories with favorable margins. However, during the fourth quarter of fiscal 2023, our results of operations started to be negatively impacted by certain higher cost components that we had procured earlier in the fiscal year to manage pandemic-driven supply chain issues.

Ooma | FY2023 Form 10-K | 52

Operating Expenses

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended January 31,","","","Change"],["","","2023","","","2022","","","2021","","","2023 vs. 2022"],["Sales and marketing","","$","69,671","","","$","58,631","","","$","50,919","","","$","11,040","","","19","%"],["Research and development","","","45,939","","","","38,193","","","","36,079","","","","7,746","","","20","%"],["General and administrative","","","27,795","","","","23,544","","","","20,581","","","","4,251","","","18","%"],["Total operating expenses","","$","143,405","","","$","120,368","","","$","107,579","","","$","23,037","","","19","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2023 Compared to Fiscal 2022

Sales and marketing expenses increased $11.0 million or 19% year-over-year, primarily due to a $4.3 million increase in advertising and marketing costs for channel development activity, a $2.3 million increase in personnel-related costs, a $1.9 million increase in third-party commissions, a $1.7 million increase in amortization of capitalized sales commissions and a $0.8 million increase in amortization of acquired customer intangible assets. Overall, the year-over-year increase in sales and marketing reflects our strategy to drive continued growth in sales of Ooma Business.

Research and development expenses increased $7.7 million or 20% year-over-year, primarily due to a $7.3 million increase in personnel-related costs, driven by growth in headcount for higher utilization of contractors, and $0.4 million incurred for acquisition-related transition costs. Overall, the year-over-year increase in research and development was designed to support our efforts in the development of new features for both Ooma Office and Ooma Enterprise, as well as new products such as Ooma AirDial.

General and administrative expenses increased $4.3 million or 18% year-over-year, primarily due to a $1.7 million increase in personnel-related costs to scale with the overall growth of our business, including stock-based compensation, as well as $1.4 million incurred for facilities consolidation charges during the third quarter of fiscal 2023 and $1.1 million incurred for OnSIP acquisition-related transaction costs. Facilities consolidation charges included asset write-downs related to leased office space assumed in our OnSIP acquisition that we determined were not needed for the future growth of our business.

A significant portion of the year-over-year increase in personnel-related costs for operating expenses was due to increases in headcount attributable to the OnSIP acquisition near the end of the second quarter of fiscal 2023.

Income Taxes

We recorded a net income tax benefit of $1.8 million for fiscal 2023 which was primarily attributable to the release of a $2.1 million valuation allowance on certain preexisting deferred tax assets that was realized as a result of deferred tax liabilities assumed in our acquisition of OnSIP.

Ooma | FY2023 Form 10-K | 53

Non-GAAP Financial Measures

This Form 10-K contains certain non-GAAP financial measures, including non-GAAP net income below and Adjusted EBITDA above. 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, 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 charges recorded in connection with vacated office facilities assumed in the OnSIP acquisition, including right-of-use asset impairment charges and the related ongoing operating lease cost of those facilities recorded under ASC 842, Leases. 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):

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended January 31,"],["","2023","","","2022","","","2021"],["GAAP net loss","$","(3,655",")","","$","(1,751",")","","$","(2,441",")"],["Stock-based compensation and related taxes","","14,155","","","","13,077","","","","12,607"],["Amortization of acquired intangible assets and acquisition-related costs","","3,824","","","","1,304","","","","1,304"],["Facilities consolidation charges","","1,402","","","","\u2014","","","","\u2014"],["Acquisition-related income tax benefit","","(2,133",")","","","\u2014","","","","\u2014"],["Non-GAAP net income","$","13,593","","","$","12,630","","","$","11,470"]]
[[/GREPCENT_TABLE]]

Ooma | FY2023 Form 10-K | 54

Liquidity and Capital Resources

As of January 31, 2023, we had $26.9 million of total cash, cash equivalents and investments, 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.

In March 2023, the portion of our cash deposits held at Silicon Valley Bank ("SVB") were temporarily unavailable as that financial institution was placed into receivership. We hold our cash and cash equivalents with multiple large U.S. financial institutions, including SVB previously and currently with its purchaser, First Citizens BancShares. As of the date the accompanying consolidated financial statements were issued, we had access to all of our cash, cash equivalents and short-term investments. We continue to believe that we have sufficient assets and liquidity to adequately cover future obligations using cash balances that we maintain.

The following table summarizes cash flow information for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","","","Fiscal Year Ended January 31,"],["","","2023","","","2022","","","2021"],["Net cash provided by operating activities","","$","","8,773","","","$","","6,655","","","$","","4,367"],["Net cash (used in) provided by investing activities","","","","(6,146",")","","","","(4,887",")","","","","229"],["Net cash provided by financing activities","","","","1,843","","","","","601","","","","","1,022"],["Net increase in cash and cash equivalents","","$","","4,470","","","$","","2,369","","","$","","5,618"]]
[[/GREPCENT_TABLE]]

Operating Activities

The following table provides selected cash flow information for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

For fiscal 2023, our net loss of $3.7 million included non-cash charges primarily related to stock-based compensation expense, operating lease expense, depreciation and amortization expense, facilities consolidation charges and an income tax benefit related to our business acquisition. Operating asset and liability changes for fiscal 2023 included:

•
a decrease of $0.4 million in accounts receivable due to the timing of cash collections

•
an increase of $12.3 million in inventories and deferred inventory costs to mitigate the risk of global supply chain disruptions caused by component shortages and longer lead times, as well as to scale our need for new products

•
an increase of $2.5 million in prepaid expenses and other current and non-current assets primarily due to the capitalization of sales commissions and the timing of prepayments

•
an increase of $4.5 million in accounts payable, accrued expenses and other liabilities due to the timing of payments

Cash provided by operating activities for fiscal 2023 increased $2.1 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.

Ooma | FY2023 Form 10-K | 55

Investing Activities

Cash used in investing activities was $6.1 million for fiscal 2023, which consisted of cash consideration paid for the OnSIP business acquisition of $9.8 million, short-term investment purchases of $3.9 million and capital expenditures of $5.2 million, partly offset by proceeds of $12.7 million from maturities of short-term investments. Cash used by investing activities increased $1.3 million year-over-year primarily due to funding our business acquisition with proceeds from investment maturities.

Financing Activities

Cash provided by financing activities was $1.8 million for fiscal 2023, which consisted of proceeds of $3.4 million from the issuance of common stock from our Employee Stock Purchase Plan (“ESPP”) and stock option exercises, partly offset by payments of $1.6 million related to shares repurchased for tax withholdings on vesting of restricted stock units (“RSUs”). Cash provided by financing activities increased $1.2 million year-over-year, which primarily reflected higher proceeds from stock option exercises.

Revolving Credit Facility

In January 2021, we entered into a credit and security agreement with certain banks that provided for a secured revolving credit facility under which we may borrow up to an aggregate of $25 million and, subject to certain conditions, may be increased to up to $45 million. We currently have no outstanding borrowings. See Note 12: Financing Arrangements in the notes of our consolidated financial statements for more information.

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, 2023, our total future expected payment obligations under non-cancelable operating leases with initial terms longer than one year were approximately $15.5 million, with payments of $3.7 million due in the next 12 months and $11.8 million due thereafter. As of January 31, 2023, we have payment obligations for a new operating lease that has not yet commenced totaling $6.9 million. See Note 7: Operating Leases in the notes to our consolidated financial statements.

As of January 31, 2023 and 2022, non-cancelable inventory purchase commitments to our contract manufacturers and other suppliers totaled approximately $7.8 million and $19.4 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 July 2023 and $2.5 million between August 2023 and July 2024.

Ooma | FY2023 Form 10-K | 56

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. For example, in the second quarter of fiscal 2023, our product and other gross margin was favorably impacted by nonrecurring product sales of approximately $0.5 million for legacy inventories that were previously written-down in fiscal 2022. Overall, our estimates of inventory carrying value adjustments have been materially consistent with actual results.

Ooma | FY2023 Form 10-K | 57