Quarterly Report for Quarter Ending July 31, 2025 (Form 10-Q)

Management's Discussion and Analysis ofFinancial Condition and Results of Operations

The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2025 filed with the SEC on April 1, 2025. In addition to historical financial information, the following discussion contains "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other legal authority. These forward-looking statements concern our operations, economic performance, financial condition, goals, beliefs, future growth strategies, objectives, plans and current expectations. The words "believe," "will," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "could," "potentially" and variations of such words and similar expressions are intended to identify such forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results, events or circumstances to differ materially from those expressed or implied in our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Item 2. MD&A, as well as the section titled "Risk Factors" included under Part II, Item 1A below. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

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, including Ooma AirDial. We primarily offer our solutions in the United States and Canada, with limited offerings in certain other countries.

We refer to Ooma Office, Ooma Enterprise, Ooma AirDial, 2600Hz, and OnSIP collectively as Ooma Business. Ooma Residential includes Ooma Telo basic and premier services, as well as Ooma Telo LTE services.

Second Quarter Fiscal 2026 Financial Performance

Reconciliations of non-GAAP adjusted measures to the most directly comparable GAAP measures are presented below under Adjusted EBITDA and Non-GAAP Financial Measures.

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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):

Core Usersdecreased year-over-year, which was primarily driven by a decline in Ooma Residential users, partially offset by an increase in Ooma Business users. As of July 31, 2025, Ooma Business users comprised approximately 41% of our total core users, up from 40% as of July 31, 2024. We define our core users as the number of active residential user accounts and business user extensions (excluding Talkatone and 2600Hz users). 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 ("AERR")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. 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 from our Core Users 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. AERR includes the annual recurring revenue from 2600Hz.

Net Dollar Subscription Retention Rate ("NDRR")was flat year-over-year. 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.

We define our NDRR as (i) one plus (ii) the quotient of Net Dollar Change divided by Average Monthly Recurring Subscription Revenue. We define Net Dollar Change as the quotient of (i) the difference of our Monthly Recurring Subscription Revenue at the end of a period minus our Monthly Recurring Subscription Revenue at the beginning of a period minus our Monthly Recurring Subscription Revenue at the end of the period from new customers we added during the period, all divided by (ii) the number of months in the period. We define our Average Monthly Recurring Subscription Revenue as the average of the Monthly Recurring Subscription Revenue at the beginning and end of the measurement period.

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Adjusted EBITDA

In addition, 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 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 those of competitors. Adjusted EBITDA represents net income before interest and other income, income taxes, depreciation and amortization of capital expenditures, amortization of intangible assets, stock-based compensation and related taxes, litigation costs, restructuring costs and gain on note conversion.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

Because of these limitations, Adjusted EBITDA should be considered alongside other financial performance measures, including net income (loss) and our other GAAP results.

The following table provides a reconciliation of GAAP net income (loss) to Adjusted EBITDA, for each of the periods indicated below (in thousands):

Components of Results of Operations

Revenue

Subscription and services revenueis 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 revenueincludes payments made for third-party network operations and telecommunications services, license fees, certain telecom taxes and fees, including Federal Universal Service Fund ("USF") contributions, credit card processing fees, costs to build out and maintain data centers, depreciation and

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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 revenueincludes 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 marginmay 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 marginmay 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 reflecting supply chain constraints in the global macroeconomic environment and the impacts of increasing tariffs or trade restrictions and related uncertainty, 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 will continue to be negative for the foreseeable future as they are negatively impacted by these higher component costs and AirDial installation costs.

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 expensesconsist 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 expensesare 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 expensesconsist of personnel costs for our finance, legal, human resources and other administrative employees and contractors, as well as professional service fees, and allocated overhead costs. We expect our general and administrative expenses to increase in absolute dollars as we continue to grow our business.

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Consolidated Results of Operations

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

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

Comparison of the three and six months ended July 31, 2025 and 2024 (dollars in tables are in thousands):

Revenue

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Three months ended July 31, 2025 Compared to Three months ended July 31, 2024

We derived approximately 63% and 61% of our total revenue from Ooma Business and approximately 35% and 36% from Ooma Residential for the three months ended July 31, 2025 and 2024, respectively.

Subscription and services revenue increased $1.6 million or 3% year-over-year, primarily attributable to an increase in AirDial lines, and an increase in the average revenue per core user.

Product and other revenue increased $0.7 million or 15% year-over-year, primarily attributable to an increase in AirDial shipments.

Six months ended July 31, 2025 Compared to Six months ended July 31, 2024

We derived approximately 63% and 61% of our total revenue from Ooma Business and approximately 35% and 37% from Ooma Residential for the six months ended July 31, 2025 and 2024, respectively.

Subscription and services revenue increased $3.4 million or 3% year-over-year, primarily attributable to an increase in AirDial lines, and an increase in the average revenue per core user, driven by organic growth, which was in part due to increased sales of Ooma Office and Ooma Enterprise services.

Product and other revenue increased $1.3 million or 15% year-over-year, primarily attributable to an increase in AirDial and Telo shipments.

Cost of revenue and gross margin

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Three months ended July 31, 2025 Compared to Three months ended July 31, 2024

Subscription and services gross margin of 70% remained consistent year-over-year. Cost of subscription and services revenue increased $0.8 million or 4% year-over-year, primarily due to a $0.5 million increase in personnel-related costs, $0.2 million increase in infrastructure costs, and a $0.1 million increase in regulatory fees. Overall, the increase in the cost of subscription and services in part reflects the growth of Ooma Business.

Product and other revenue gross margin improved to negative 47% from negative 70% in the prior year period. The improvement in product margin was primarily due to the depletion of certain higher cost components that we procured in prior fiscal years to stay ahead of pandemic driven supply chain issues.

Six months ended July 31, 2025 Compared to Six months ended July 31, 2024

Subscription and services gross margin of 70% remained consistent year-over-year. Cost of subscription and services revenue increased $1.4 million year-over-year, primarily due to a $0.9 million increase in infrastructure costs, and a $0.8 million increase in personnel-related costs, partially offset by a $0.2 million decrease in depreciation and amortization expense, and a $0.1 million decrease in banking fees.

Product and other revenue gross margin improved to negative 45% from negative 69% in the prior year period. The improvement in product margin was primarily due to the depletion of certain higher cost components that we procured in prior fiscal years to stay ahead of pandemic driven supply chain issues.

Operating expenses

Three months ended July 31, 2025 Compared to Three months ended July 31, 2024

Sales and marketing expenses decreased $0.1 million or 1% year-over-year, primarily due to a $0.5 million decrease in personnel-related costs driven in part by a reduction in acquisition related stock-based compensation expense, partially offset by a $0.2 million increase in commissions expense, and a $0.2 million decrease in advertising and marketing expense.

Research and development expenses decreased $1.1 million or 8% year-over-year, primarily due to a $1.1 million decrease in personnel and contractor related costs, driven in part by a reduction in acquisition related stock-based compensation expense.

General and administrative expenses increased $0.3 million or 4% year-over-year, primarily due to a $0.2 million increase in personnel-related costs, and a $0.2 million increase in supplies and equipment costs, partially offset by a $0.1 million decrease in litigation costs.

Six months ended July 31, 2025 Compared to Six months ended July 31, 2024

Sales and marketing expenses increased $0.1 million year-over-year, primarily due to a $0.4 million increase in commissions expense, a $0.4 million increase in advertising and marketing expense, and a $0.1 million increase in travel related costs, partially offset by a $0.8 million decrease in personnel costs driven in part by a reduction in acquisition related stock-based compensation expense.

Research and development expenses decreased $2.5 million or 9% year-over-year, primarily due to a $1.9 million decrease in personnel-related costs, driven in part by a reduction in acquisition related stock-based compensation expense, a $0.2 million decrease in marketing expense, and a $0.4 million decrease in restructuring costs.

General and administrative expenses increased $0.8 million or 5% year-over-year, primarily due to a $0.5 million increase in personnel-related costs, a $0.3 million increase in supplies and equipment costs, and a $0.3 million increase in litigation costs, partially offset by a $0.3 million decrease in restructuring costs.

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Liquidity and Capital Resources

As of July 31, 2025, we had $19.6 million of total cash and cash equivalents, 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, and other factors. We may in the future make investments in or acquisitions of businesses or technologies, which may require the use of cash.

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

Operating Activities

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

For the six months ended July 31, 2025, our net income of $1.1 million included non-cash items of $14.0 million primarily related to stock-based compensation, operating lease expense, and depreciation and amortization expense. Operating asset and liability changes for the six months ended July 31, 2025 included:

Cash provided by operating activities for the six months ended July 31, 2025 decreased $0.6 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.

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Investing Activities

For the six months ended July 31, 2025, cash used in investing activities was $2.5 million, which consisted of capital expenditures of $2.5 million. Cash used in investing activities decreased $0.7 million year-over-year primarily due to a decrease in fixed assets additions in the first half of fiscal 2026.

Financing Activities

For the six months ended July 31, 2025, cash used in financing activities was $5.8 million, which consisted of payments of $2.7 million related to shares repurchased for tax withholdings on vesting of RSUs, and payments of $5.4 million under our stock repurchase plan, offset by proceeds of $2.3 million from the issuance of common stock from our ESPP and stock option exercises. Cash used in financing activities decreased $2.6 million year-over-year, which primarily reflected repayments of borrowings under our Credit Agreement during the first half of fiscal 2025, which did not recur in the first half of fiscal 2026.

Revolving Credit Facility

In October 2023, we entered into a credit and security agreement with certain banks that provides for a secured revolving credit facility under which we may borrow up to an aggregate of $30.0 million and, subject to certain conditions, may be increased to up to $50.0 million. As of July 31, 2025, we had zero outstanding borrowings and were in compliance with all loan covenants.

Contractual Obligations and Commitments

Refer to Note 6: Operating Leasesand Note 11: Commitments and Contingenciesin the notes to our condensed consolidated financial statements for disclosures related to our lease obligations and non-cancelable purchase commitments.

Critical Accounting Policies and Estimates

Refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended January 31, 2025 for a discussion of our critical accounting policies and estimates. There have been no changes to the Company's significant accounting policies and estimates as outlined in our fiscal 2025 Annual Report in the first half of fiscal 2026.

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