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Ooma (NASDAQ: OOMA) is another alternative communications company that provides cloud-based phone services to consumers and small businesses. The company is like some other small public companies like Vonage (NYSE:VG), MagicJack (NASDAQ: CALL), and RingCentral (NYSE: RNG).

Ooma has an offering directed at the home market and one for small businesses. As consumers continue their shift away from traditional telephone service to internet-based offerings they look to companies like Ooma, Vonage, MagicJack for inexpensive alternatives. Cable companies and Telcos also try and capture some of this demand with their infamous “bundles” and “triple play specials.”ooma1

Vonage has a long history in the home market. It’s been a struggle. The home market is very price-sensitive, and yet can be heavy users of the network (homes with teenage children for example). Vonage discovered the more attractive SMB market some time ago and has their own offering. The Vonage reported business segment revenues were $42M in 1Q2015 versus $20M for the entire Ooma business in the same quarter. The home market is still much larger for Vonage, but the SMB market is where they see all the growth coming from. At close to $1B in revenue, Vonage is the largest independent player in the space.

RingCentral is purely an SMB play with $237M in revenue for the last twelve months and a strong growth rate of ~35%. The company offers an all-in-the-cloud PBX that delivers a suite of services including call forwarding, line management, conference calling and some basic call-center features for monthly per-user pricing of $25-45/month. Because they don’t have the home “legacy” business of Vonage, they trade at a premium valuation of 4.3x LTM sales for a market capitalization of $1.2B.

So how does Ooma stack up?

Ooma can be viewed as a hybrid of Vonage and RingCentral. If Vonage was a new company without the “legacy” of their existing home user base it would be almost identical to Ooma. The SMB market is an  attractive, large, and growth market – there is no reason all three of these can’t be successful over the next  years and build $500M+ annual businesses in SMB cloud communication services.

For their part, Ooma does plan to move upmarket with more advanced SMB services to support sales and marketing. We’ve heard about this “pay per call” or “pay per lead” model before and it has yet to take off. For example, a few years ago Marchex (MCHX) was offering this service, especially for online calling using Skype, and as far as we can tell it went nowhere. Same with the stock. However, this could have been an execution rather than a market issue. We know from conversations with SMB owners that they put extremely high value on an inbound call because it indicates a strong demand to purchase.

From a technology standpoint, Ooma uses a piece of on-premise equipment as a proprietary link to the cloud services they provide. This edge cuts both ways – it provides a platform for more advanced services, but it involves hardware (cost and overhead) and some customers resist having to rely on proprietary hardware for cloud computing.

We’d shelve the “IoT” part of the story

We agree with the first two drivers management sees as driving the business but think that Ooma as a play on the “Internet of Things” or IoT is a stretch. At this stage it’s just an add-on dream to help sell the strategy. The jury is still out on how the IoT space will evolve, let alone begin to show winners. Google has bought their way in with Nest, but some feel that Amazon might emerge stronger in the market with some more integrated version of Echo. There are a slew of startups in the space and recently public companies like Alarm.com (ALRM) and Control4 (CTRL).

Ooma has taken some steps into the security arena by integrating with Google’s Nest product line. It’s a bit much to imply that this is a “partnership” since Ooma is simply taking advantage of the open integration and certification option offered to anyone by Nest. It’s like being accepted into the Apple App store and implying you have a “partnership with Apple.” Just a small yellow flag and a reason we feel that the “more IoT Partnerships in Development” [sic] is more about hype and news flow than real revenue opportunity.

Right now the “IoT” in the home is useful but an unintegrated mess. It’s only an anecdote, but we have ChromeCast working nicely on the TV for Netflix, AppleTV for iTunes content, Sonos for music and a mystery of Wi-Fi connected appliances that don’t show up anywhere. We also have connected cameras at remote locations for monitoring but none of this stuff communicates or integrates at all. Like many, we will keep adding things as the gadgets become attractive for what they do – smart lights, security, remote control locks, but they will probably all be independent devices with their own interfaces, apps and data. Not something most families will tolerate.

Investment Conclusion

Despite our seemingly critical assessment of the company, the company isn’t a bad investment based on our IV model. In fact, as we show below, the current IV is $22 versus the current $17 mid-point. In 2016 it steps up greatly to $42/share based on growth and expanding margins. The market is large enough that company execution will be the primary factor in whether or not Ooma meets or exceeds their targets.

Positive aspects of the story are all in the roadshow – fairly high and trending up gross margins, 75% subscription revenue with 100% renewal rates, ARPU trending up sequentially and a LTV per customer of over $900, which is over 7x the CAC.


One potential wrinkle in near-term results is the deceleration in growth shown in 1Q2015. We suspect that this was due to some “sandbagging” to build pipeline for Q2 and Q3 when Ooma will be subject to scrutiny as a public company.

Given the IV and time of year, our best guess is that they will have a successful IPO and trade well initially. We’d be price-sensitive buyers with an eye toward that $42 2016 IV if the company can execute. We still have two quarterly reports and the six month lockup expiration to get through.

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