Good afternoon, my name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to Ooma Second Quarter Fiscal 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Matt Robison, Director of Investor Relation and Corporate Development, you may begin your conference.

Thank you, Christine. Good day everyone and welcome to the fiscal second quarter earnings call of Ooma Incorporated. My name is Matt Robison. It’s my pleasure to have participating in every Ooma earnings call prior to today as an analyst and now as Ooma’s Director of IR and Corporate Development. With me here today are Ooma's CEO, Eric Stang and CFO, Ravi Narula. After the market closed today, Ooma issued a press release through NASDAQ Globe Newswire. The release is also available on the Company's Web site at ooma.com. This call is being webcast live on the Investor Relations' page of the Ooma Web site, and will be available for a period of one year. During the course of today's presentation, our executives will make forward-looking statements within the meaning of the Federal Securities Laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results in financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release that we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements, except as required by law. Please note that other than revenue or as otherwise stated the financial measures to be disclosed on this call will be on a non-GAAP basis. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the mostly directly comparable GAAP financial measures are included in our earnings press release that is available on our Web site. On this call, we'll give guidance for the third quarter and full year fiscal 2018 on a non-GAAP basis. Also, in addition to our first release and 8-K filings, there is an events in presentation page on our site that includes a link to non-GAAP reconciliation. Okay, Eric.

Thanks Matt, and welcome to Ooma team. Hello everyone, and welcome to Ooma's FY18 Q2 earnings call. I am pleased to talk with you today about our strong Q2 performance and our momentum for the balance of fiscal year '18. Also like to highlight our investments in new services and international expansion, and our excitement about our outlook and opportunity for growth. In Q2 FY18, we exceeded our revenue guidance by achieving total revenue of $28.2 million. In line with our ambitious growth expectations; Ooma Office, for small business customers, grew subscription service revenue approximately 62% year-over-year; and Ooma Telo, for residential customers, grew subscription services revenue approximately 11% year-over-year. I'm pleased to report that in each of these core business lines, we are, to our knowledge, growing faster than all our other competitors in our space. I am also pleased to report that we achieved this growth while improving our gross margins, generating positive cash flow and investing heavily in R&D. In fact, our subscription services margins achieved a new record high of 70%, and Q2 is now the fifth quarter in a row that we have generated positive operating cash flow in spite of investing over 22% of sales in R&D in Q2. We exit Q2 with approximately 2.4 million total users, annual exit recurring revenue of over $92 million and a core user dollar subscription revenue retention rate of 98%. Clearly, our business is working and we believe we are in a strong position to execute our strategy. Our strong momentum stems from our unique hybrid SaaS platform. We believe we are the only company that has designed the full value chain and user experience end-to-end from the device to the cloud to achieve unique competitive advantage. We believe this supports several fundamental strengths over competitors; first,…

Thanks, Eric. As a reminder, all income statement items, except revenue, are on a non-GAAP basis and exclude expenses, such as stock-based compensation and related taxes and amortization of intangibles. The reconciliation of the GAAP to non-GAAP financial data can be found in the press release issued earlier today on our Investor Relations Web site. Today, I'm going to review the financial results of our second quarter of fiscal '18 and then provide outlook for the third quarter and full year fiscal '18. Total revenue for the second quarter of fiscal '18 was $28.2 million, an increase of $2.7 million or 11% on a year-over-year basis, driven by the continued strong performance of Ooma Office. Net loss for the second quarter of fiscal ’18 was $396,000 compared to $856,000 loss for the second quarter last year. Loss per share was $0.02 compared to a loss of $0.05 per share for the same period last year. For the second quarter of fiscal ‘18, subscription and services revenue for Ooma Office and Ooma Telo combined grew 20% on a year-over-year basis. We are pleased with the subscription and services revenue growth of Ooma Office, which grew at 62% in the second quarter of fiscal ’18, and Ooma Telo subscription and services revenue grew 11% on a year-over-year basis. As Eric mentioned earlier, we sold our Business Promoter service earlier this month, because Business Promoter had significant volatility and was non-core to the Ooma Service. We expect this divestiture will help us further increase our focus on the core businesses, Ooma Office and Ooma Telo. This divestiture will have an impact on our previously provided guidance as Business Promoter had an annual revenue run rate of $3 million to $4 million. As part of this divestiture, we may realize some earn-out payments over…

Thanks, Ravi. To my mind, it’s amazing what Ooma has already done for customers. We now estimate that Ooma customers have collectively saved over $1.5 billion compared to what they would have paid using traditional providers. From an execution standpoint, we are thrilled to be the fastest growing business in each of our core business lines. And strategically, we’re even more excited that the investments we are making this year will position us extremely well for our next upcoming fiscal year. So thank you. We’re now happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Michael Nemeroff from Credit Suisse. Your line is open.

This is Alex Hu on for Michael, thank you for taking our questions, and congrats on the quarter. Eric, just want to touch on the strength in Telo. I believe, you mentioned last quarter, you expect a more conservative growth trajectory for Telo in part due to indirect competition and other things. But clearly, that’s not the case, given the double-digit growth this quarter. Has that framework changed at all? How hard the adoption levels and consumer interest tracking relative to last quarter? And did you see any impact from Alexa and/or Google Home?

I’ll answer the second part first. No, we didn’t see any impact from those in the quarter that I can put a finger on. Neither those platforms provide a calling service like we do, of course. And it’s hard to see how they will, given that that would turn them into a regulated home phone service. In fact, we hope that will be an opportunity for us some day to leverage those platforms if they open up their APIs ever and make that possible. The strength of Telo, we put a little more efforts on the marketing front, and we continue to be there is a very big market opportunity out there for Telo. As you know, we’re ranked number one and we can offer customers a great savings and more features. And so we just -- our focus on small business, we pulled back on our Telo marketing. But we try to be a little better in Q1. And I’m pleased that we achieve that. It sets to me we’ve got good opportunity there.

And just on the Ooma Office, clearly, it’s going greater than 60% for our pretty much forever; just curious now that you expanded the capability to serve small business, great than 20. Has your go-to-market efforts changed? Or do you foresee any adjustments you may make aside from the expanded VaR channel, which is great, given this larger market opportunity you’re addressing now?

As we sit here today, no, we’re not making any specific changes in light of this additional capability that we have. We feel strongly that the business market segments into, really three segments. It’s wrong to talk about business without separating enterprise from small business, because their needs are different, they purchase differently, and we have focused on small business and serving that segment better than anyone else. And that remains our focus. I do think, as we build the VaR reseller channel, we’re going to see more opportunities for larger size businesses and we’re going to take advantage of them. I think we have a disruptive price point in that space, and that will help propel us. But no, as we sit here today, our strategy is not changing and we will stay focused on small business. By the way, the third segment I see in the business space is the mobile-only segment, and we haven’t talked much about that in a while. But we hope to talk more about that segment with you in coming quarters as we continue to make improvements on our office for mobile product solution.

And just one last question for Ravi. So I heard the Q3 guide you said it excluded $800,000 to $1 million from Business Promoter. Correct?

That is right, Alex. Yes.

So for the full year guidance, I may have missed this. Can we just extrapolate that, and just say for your guide excludes, call it, $1 million to $2 million from Business Promoter?

$1.6 million to $2 million, yes.

And your next question comes from the line of Pat Walravens from JMP Securities. Your line is open.

So first of all, I am delighted that you are divesting Business Promoter, that’s been a source of a lot of problems. I’d love to hear the background on that.

I don’t talk about it anymore Pat. I am going to let Ravi talk about it. The only [multiple speakers] I said two quarters ago that once it stabilized at $1 million, we were going to do something about it. And I am glad to say we now have. But, I’ll let Ravi take it.

Pat, I think this is early this month we did divested. We will have some earn-out. There was no major upfront cash payout, but this will be more, going forward. The benefits of this will be we will be able to prioritize more on every aspect of our business into the core Ooma Office and Ooma Telo. In terms of the arrangements, there will be some earn outs and I don’t think it will be material. It was contributing some positive EBITDA to the bottom line. But we’ll, as we grow and as we grow our gross margins, I think we’ll get through those things quickly. So it does have a year-over-year impact because in Q3 and Q4 we won’t have comparable revenues from Business Promoter. But I do believe this will make us more stable, and we’ll have less volatility going forward as a business.

And then the other one that I have my doubts about, but I think maybe you guys feel differently, and plus talk about it. So Talkatone, last quarter, you talked about how you’re unable to sell the ad space on, I think, more than 15% of the ads that you would hope to display. And it seems like it’s down 13% last quarter, down even more this quarter. So how do you feel about that business?

We talked about that last time. And I would reiterate here today what we said before, which is to say, we don’t have new things to add at this time. That business has suffered from the ad market changes, but it's stabilized and we are taking two steps in that business internally; one is steps to add ad partners and work with at partners in new ways to we think increase the amount of ad volume we can tap into; and then secondly, begin to enable certain services on a platform that we can charge independently for. We launched one in the quarter and its possible now on Talkatone to pay to change your phone number to a new phone number. The business, though, the team is working hard, they are doing a good job, the business is stable. And we’re going to continue to evaluate contingently how we can make the most of that for plan its future.

And then lastly -- and if I missed this, forgive me. But I remember last quarter one of the things that was making the WeWork expansion a little harder than you thought was some missions around the speed at which you’re hiring engineering resources. Can you update us on that?

I can. That’s a glass half full glass half empty story. You can see we grew our R&D expense, as a percentage of revenue, up to over 22% of sales; and grew it faster than we grew sales and marketing, if you compare to a year ago. We did a lot of hiring in the quarter, and I'm very proud of what the team accomplished. That said there is still farther to go and we’re still, if you will, catching up a little bit with all the things we want to do this year. But we feel we’re much better placed now than we were a quarter ago, and we feel we’re executing well, to be frank.

Your next question comes from the line of Nikolay Beliov from Bank of America Merrill Lynch. Your line is open.

Hi this is Jin Wang on for Nikolay. My question is, in light of this quarter, how are you thinking about what Telo’s long term sustainable growth rate? And more specifically, can that business grow sustainably in the low double digits, or are you thinking more in the single digits growth rate?

We talked on our call of last quarter that we felt that upper single digits growth rate was achievable with the level of marketing and sales investments we were putting into that. And we still feel that way. And we also feel that if we were to put more resources on the growth of that segment, home segment with Telo, we could grow faster. And I do make both of those comments with very low expectations, or really not including much at all for home security. Home security is a new area of development for us, and it's one where we’re making steady progress. And we look at the home security market and are pretty excited about it. We’ve seen data that says only about 8 million residences in the U.S. have, or North America, have adopted smart home security solution. And we also see estimates that that’s going to grow 15% a year to double in five years. And I think we’re going to have an incredibly successful solution to that space. Not only do we offer features others can't offer, like our unique 911 remote 911 capability, but we’re able to do this at price points that others can't reach. So as we develop more on the home security front, we may take a new look at the potential and our outlook for the home residential market in Telo. But right now, what we said a quarter ago is still the way we see it.

Thank you. You read our minds, because that was our follow up, the traction on home security. And I guess, we were wondering, is it impacting the numbers yet or not yet?

It is a little bit. We’ve sold well over 10,000 sensors, and we’re thrilled with that start to the effort. But as I’ve said too, there are additional developments we want to bring to that business line. We want to round out what we have in the way from security. And I think it will take six to nine months, as I said in the script, to get all those things in place. And as we do, we’ll be able to put more effort and traction on it.

And can you update us on what’s in the pipeline for the partnership with WeWork?

We’re thrilled. We’ve integrated with WeWork at the on-boarding level, at the customer support level. We’re expanding countries with them. Our next country will be the United Kingdom, which we’ll go into with them next month. I anticipate there will be more countries we go into, the balance of this year and presumably ongoing. So it’s an incredible partner to have to be growing with internationally. And one of our challenges for next year will be to leverage our investment in international to do more than just what we do for WeWork in those countries. It’s one of the four upsides that I see as we look to next year for the investments we’re making this year.

Your next question comes from the line of Mike Latimore from Northland Capital Markets. Your line is open.

In terms of the sensors sold in this quarter. Was that -- do you see that as repeatable in the third quarter? Or is that kind of a one-time event that maybe [indiscernible]?

Well, the numbers I gave well over 10,000 is since launch, it’s not just from Q2. But yes, we do expect to continue to sell sensors. I don’t know if Ravi would add more to this.

Mike, we do have large number of customers. We have tapped some of our customers and they bought, some of them have bought one sensor, some of them have bought multiple sensors. We do believe with the hundreds of thousands of users we have in the longer term, we can actually sell lot more sensors than what we have done. So it is a start not an end. And I think as we bring more and more features to the home security platform, we would probably see even more increase in the users.

And then I think your guidance implies like good sequential growth in the fourth quarter. What do you see as a fourth quarter driver here?

There are a couple of things; one, there is always some seasonality in Q4, given we have just Black Fridays, Thanksgiving, Holiday time period where Telo generally picks up little bit; and we are always working on some other opportunities. So there are number of growth opportunities we have for Q4, which some of those are built into our forecast. So I think the number one thing is seasonality just because there is more sales of Telo’s, and as we invest more and more, I think we should be able to get that benefit. But beyond that, I think we are working on other opportunities.

And then we see -- good to see the new Office launch we have [technical difficulty]…

Mike, you’re cutting out. Can you repeat the question please?

On the Office product, obviously, you’ve expanded it so that it supports more users. But I thought there was, at some point, you were going to do a multi-site offering as well. Is that still slated for the future?

Yes, that and other things. We’re very proud of what we’ve built on Ooma Office platform. But there is polishing still to do on it. We’re only three or four years into it. And there are some features like that to support businesses with multi-site locations that will only expand our market potential. And yes, we have plans such as that in the balance of this year. We want to go into next year very well set. The opportunity for Office for mobile with the additional things we’re doing there; on the opportunity for home security with the additional five developments we’re trying to bring out over the six to nine months; and on the opportunity internationally. Now, that we’re place in those international markets that’s what next year is all being set up for, for us. And yes, that’s one of the key things for Office.

Your next question comes from the line of Josh Nichols from B. Riley. Your line is open.

Since you just mentioned, could you elaborate a little bit on some of these areas of interest for these five new developments you’re working-on on the home monitoring side of things that might be a good complement you might think?

Yes, I can say a little bit. I mean, obviously, we can’t announce new features before we’re ready to announce them. But we want to enable a DIY security solution for our customers that gives them just about everything they need to experience a good experience with that. I’ll give you -- one example would be, there are certain other products out that we’d like to integrate with that we don’t integrate with yet today. Another example would be, we think we can make it more streamline how users enable and disable the alarming of the system as they are -- when they’re home or when they are away. There’s just different things we want to do that we think will bring that platform all together. Now, I will say this too. Once we get there, over the next six to nine months, there will be another set of things we want to do to really create I’ll call it a pro-tier or a higher level of capability with it. But I do think over the next balance of this year, may be a little bit longer, we’ll be able to put in place all the basics to really have a great solution to market.

And then how many WeWork subscribers are you up to at this point with the expansion going on?

We have quite a few, but that’s not a number we’re actually disclosing specifically. We achieved 62% growth in subscription services revenue for Office year-over-year, and WeWork is one of those components, along with the many other things we’re doing to get there. And we’re thrilled with our progress on all fronts.

And then WeWork actually just received some significant funding from SoftBank, it’s going to use to expand specifically in Asia, and Tokyo and Singapore. I assume that you’re going to be with them in those locations as they launch as well?

I can’t make forward comments this time on where we’ll go with WeWork. But, yes we are expanding with them internationally.

And then last question, so looking here, no real change to the guidance from the revenue side, except for the adjustment for business promoter. Are you still targeting transitioning back to sustainable EBITDA profitability in Q4?

With the guidance we have given, the implied guidance of Q4 would have a loss. And there are a couple of factors; we have, as a result of the guidance there; one is, we are investing into still many opportunities ahead of us, whether it is in engineering, as well as we’ll continue to work on development of sales and marketing channel; and secondly, Business Promoter was contributing to positive EBITDA, which is also the second reason why I think we’ll have some small amount of loss in Q4 versus the previous expectations of positive EBITDA in Q4.

Your next question comes from the line of Bhavan Suri from William Blair. Your line is open.

I guess just to start off with obviously, Office now is your bigger market, but lots of stand to go to market with partners; so some of the guys you sell to these larger enterprises sell-through a VaR channel; Avaya falling apart now it's a bit bigger than what you typically sell through. But now that I can deal with large customers, how you're seeing about the VaR channel?

Yes, that’s a good question Bhuvan. And I think this was going to be evolving part of our strategy as we go forward. But where we sit today is we are trying to build a VaR channel that's specifically focused on the small business user. These are local IT professionals or others. They may not -- they’re most likely not just focused on voice; and I think they’re a channel that we can work well with; our product is very easy to install and use; and it can be a nice add-on sell for these partners. We are getting some, what I could call more traditional telecom VaRs, as well, just because we build it. In fact, we’re having some of the more traditional VaRs, if you will, tell us they’ve got a second line to carry with smaller customers out there that they don’t want to put so much effort into, or don’t want to pay the higher price point of what others might have. But it's not our focus today to go head-to-head in enterprise. We're focused on small business. We have -- that's a big market; it's 90% of the business is out there; we have the best solution in our minds for that; and we’re going to stay focused on that and win. So that's a half -- I mean, that’s answer of half way to your question, but that’s the way we see it today. As we develop, we may try to go farther, but that's where we are today.

So maybe touching on WeWork a little bit and I know lot of questions have been asked about it. But I guess as you look at that space, there is a bunch of players that compete with WeWork. Is there anything that restricts you going after the other players or offering the same solution? Or have you thought about going after that space and say, hey, we partner WeWork, we should partner with a bunch of guys that [shared] Workspace. Any thoughts there?

No there is nothing that restricts us.

And then are you targeting it, your people thinking about that or is that just something that maybe down the road?

We think about all kinds of customer opportunities, that’s when we thought as well if any. We do manage our commitments to what we can accomplish. And as you know, we’ve had our hands full with WeWork but we’re coming through that now; and we built a better system out of what we’ve done with them; we’ve built an international footprint out of what we’ve done with them. So we’re a much stronger company today than we were just six months ago. And I’m really excited about the next six months. Because what I see us accomplishing over the next six months is so much. I mean, I feel like we have -- I talked about four things for next year. I feel like we’ve got the ball 90% of the way up the hill on each of those four. And just over the balance of this year, we’re going to get it to the top of the hill. But yes, we’re obviously looking at things but also being remindful of what we can accomplish.

And the four things -- that’s great that you’re get there. I guess one quick one, maybe for Ravi. If you look out at churn with Telo and Office, you’ve always had pretty low churn for Telo, given it’s a consumer offering. But just -- and I don’t need number, but color of how Office churn is trending vis-à-vis Telo. And then obviously, how that impacts the whole business from a CAC or LTV perspective. Any color there would be great. Thank you.

The churn for small business is higher than the residential churn. And one of the biggest reasons why that happened is because businesses go out of business. So it is higher. But it is -- we have great initiatives, as well as a great platform where we do expect in the longer term to have even much lower churn than the industry as we have for residential. So as Eric said earlier, this Office platform is three or four years old. I think as we bring in more features and even more stability, I do expect it to be coming down and hopefully closer to the residential churn there. But it’s not there as yet but it’s making good progress towards that side. In terms of LTV and CAC, we do look at both the Telo and business side. On the office small business CAC and payback period, it is little bit hard to just put out total number because they are certain investments we’re making. For example, we’re investing into the WeWork relationship; we are investing into building a VaR channel; and there it takes time to get results from those investments. So the CAC is little bit higher -- the payback period is little bit longer than what our target range is. Our target payback period is 18 to 24 months, we are not there; given we are making some investments into some sales and marketing channels today. We do believe, as we continue to build those things and we have a large number of VaRs, we have a big footprint on WeWork. I think we’ll get more benefit in the future.

There are no further questions at this time. Mr. Eric Stang, I turn the call back over to you.

Thank you. We appreciate everyone’s time today. We’re excited about our results. We believe our growth rates for Office and Telo are right where we thought they could be. And I’m going to stay focused on executing, going forward. So thank you everybody.

Thank you, ladies and gentlemen. This concludes today’s conference call. You may now disconnect.