Good afternoon, my name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ooma Third Quarter Fiscal 2018 Earnings 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, you may begin your conference.

Good day, everyone and welcome to the fiscal third quarter earnings call of Ooma Inc. My name is Matt Robison, 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 website at ooma.com. This call is being webcast live on the Investor Relations' page of the Ooma website, 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 website. 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 press release and 8-K filings, there is an events in presentation page in the Investors Section of our site ooma.com that includes a link to non-GAAP reconciliation and key metrics of our core subscription businesses. Additionally, our investor presentation slides include GAAP to non-GAAP reconciliation that provides further resolution of GAAP expenses that are excluded from non-GAAP metrics. In addition to our earnings report, we announced our participation in the Credit Suisse 21st Annual Technology, Media and Telecomm Conference tomorrow with a webcast of our fireside chat session at 4:30 P.M. Eastern Time. There will be a link to it on the Events & Presentations page of our website. Okay, Eric.

Thanks Matt. Hi everyone, and welcome to Ooma's FY18 Q3 earnings call. I am pleased to talk with you today about our strong Q3 performance and our momentum going into Q4. We are making great progress towards executing on our key goals and I'm excited about our long-term strategic outlook. Later in my remarks, I will share an overview of our key priorities as we look ahead to next year. Q3 was another strong quarter for us as we exceeded our revenue guidance by achieving total revenue of $28.5 million. Once again, I believe we grew subscription services revenue in our core segments faster than competitors with Ooma offers for small business customers growing subscription services revenue in Q3 approximately 59% year-over-year; and Ooma Telo, for residential customers, growing subscription services revenue in Q3 approximately 11% year-over-year. Combined our core subscription services revenue once again grew 20% year-over-year. Subscription services revenue overall is now 90% of our total revenue, and we expect our annual exit recurring revenue will be more than $100 million by the end of this fiscal year. With these results, I believe we are executing well on our growth strategy and I'm excited as I look forward. In addition to executing on growth, we also once again generated positive cash flow from operations. Our gross margin increased again and now stands at 71% for subscription services revenue. Our net dollar subscription services retention rate increased marginally as well and now stands at 99%. Clearly, our business strategy is working, we believe we can continue to build a stronger business going forward as we execute our strategy. In our industry we are different because we are focused on serving the special needs of small businesses, as well as residential customers. We believe our unique hybrid SaaS platform allows…

Thank you, Eric and good afternoon, everyone. As a reminder, all income statement items, except revenue, are on a non-GAAP basis and exclude expenses, such as stock-based compensation, 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 website. Today, I'm going to review the results of our third quarter of fiscal year 2018 and then provide our outlook for the fourth quarter and full year fiscal '18. Total revenue for the third quarter of fiscal '18 was $28.5 million, an increase of $1.5 million or 6% on a year-over-year basis, above the top end of our previously provided guidance range. This revenue growth was driven by strong performance in our core subscription services including Ooma Office. Subscription and services revenue were 90% of total revenue in the third quarter of fiscal '18 compared to 86% of total revenue in the prior year quarter. Net loss per share for the third quarter of fiscal '18 was $0.02 similar to the third quarter of last year. For the third quarter of fiscal '18, subscription and services revenue excluding Talkatone again grew 20% on a year-over-year. We are pleased with our 59% year-over-year growth of Ooma Office subscription and services revenue as they continue to develop new sales channels. Ooma residential subscription and services revenue grew 11% on a year-over-year due to growth in users and to a lesser extent due to minor changes made and how we structure our pricing in the third quarter. As previously expected, revenue from Talkatone declined 27% on a year-over-year basis to $1.5 million, and was flat on a sequential basis. Consistent with a last couple of quarters, business promoter data has been excluded from our key…

Thanks, Ravi. Just very briefly in summary, given the scale of the markets we serve, the uniqueness of our platform and strategy and our strong execution; I'm excited about our outlook for next year and beyond. And I want to say thank you, and we're now happy to take your questions. Operator?

[Operator Instructions] Your first question comes from Bhavan Suri from William Blair. Bhavan, your line is open.

I just wanted to dive a little bit first into the residential business. What from your solutions are the customers adopting this drive for their growth there? And then as you think about that growth over the next few years, just some sense of the sustainability of growth in the residential business over the next few years?

Well, today of course people buy our residential solution to have a great phone service experience at a very good value. We start off at just taxes and fees and you can have basic service. People step up to our premier platform to an extra $10 a month to get a whole range of additional services in a lot of unique things that they can't get elsewhere including we'll block telemarketers from calling the home and several other things. So that's what drives it today, there is -- I don't know the number exactly but let's say 65 million residential lines in North America today, that's a very big market and one where as we get the word out about Ooma, we think we can continue to grow. It really comes down to how much we want to spend for growth, and as you know, we've kind of set our spending on the residential side at a level where we want to drive for single-digit growth rates; and we are beyond that investing heavily in the growth of Ooma Office. As we look forward, we have an additional driver for residential and that's our home security solutions which we've launched this year but they are still nascent and we are putting a lot of work into additional features and capabilities with some securities we look forward. We see a very big home security market opportunity at some market that we've seen estimates will double over the next five years and it's certainly growing and we think we can bring a very unique combination of capabilities and value to that segment just the way we have for phone service. So I think longer term we'll see more of our growth also coming from that service for residential, but -- that's kind of how we see it, it's in our hands, we just have to execute to make it happen.

Got it. And then, I guess just a little bit on the VAR channel, I know it's relatively nascent but love to listen how the VAR channel has been performing vis-à-vis expectation and the contribution to growth? Thank you.

Yes, you've heard us talk about that for a couple of quarters now, at least. And we've always said and we still say that it's a longer term area of development for us, we're are investing in it and we are adding VARs on a consistent basis, we're upto hundreds now but it's still a channel that you have to train the VARs, and get them productive and not all VARs are going to be great performers for you. So it's making its contribution but it's still an area of investment and I believe it's a long-term opportunity for us to continue to build overtime and it will become more significant as we go forward. It has helped a little bit; in the last couple of quarters we've made certain advances, I think it was a quarter ago or so we announced that we can go beyond 20 users in a business when a business needs that. And some of these things are rather fundamental for a VAR channel that might find a little bit larger size customers. So we have other things we want to do on that front, you heard that one of our key areas of focus for investment right now is completing the set of features we want to have for Ooma Office which we hope to largely be through by the middle of next year. I think that will help also with increasing the productivity of the VAR channel as we build it; so it's kind of all coming together as we look at it in that timeframe.

The VAR channel is contributing to our financials but not yet at a material level. We do see an upside from that in the longer term but it has tried to produce some results but not. Given we have been focusing on the Ooma Office for so many years, it is adding in there but it is not at a material level as yet.

Ravi, one other quick one if I may, on churn. Obviously, that improved in the quarter but small business churn is higher than your residential churn; does that become a bigger part of the business? Moving up markets certainly helps, I guess, but just help us think through how churn plays out, not over a couple of quarters but over the next few years as the business part of Ooma becomes a bigger contributor. Thank you.

I think you are right. Churn; there could be a number of inter-players for churn as small business gets bigger in the overall user. We might see more churn given small businesses churn but as we expand and increase our VAR channel, we may be able to get the benefit of lower churn because now it's a more stable business, there is more partners involved who can help in the process. And as our platform also becomes more and more robust, we should see in the longer term the churn to actually be going down on the overall business side. So I think there are a number of various things which happened; we are not too worried about the churn, I think we have done a good job so far and with these various initiatives we have in the longer term we do see churn to be not going up significantly on the small business.

Your next question comes from Jacqueline Chong from Bank of America Merrill Lynch.

This is Jacqueline on for Nikolai [ph]. I have a few questions for you. So Amazon, Google and soon, Apple, are generating more buzz around their home products and the first two actually have limited calling functionality now. So what can you do to reinvigorate interest in your Telo solution? And also, these solutions also have the home security angle, how do you generate buzz around your home security solutions?

So far we have not seen an impact from those products on our own results, we've maintained steady growth and we're excited about that. We also observed that those solutions don't offer a full calling platform for the home; for instance, you can't call 911 from them, and in some cases you can't even get inbound calls or do other thing. So we're not too worried about them, directly, if you will; I think it's more on our hands to grow the residential business. Now, we will take advantage of those platforms, we already do to some degree today. You can speak to your Amazon Echo for instance to operate certain features on your Telo platform and as we get -- and there will be more things we do in the future to take advantage of those solutions as a place of voice control if you will, of things we're doing. So in ways they are complementary with us, and we're -- that's the way we see it. Most of our customers or families with children wanting phones in every room and the ability to call 911 and the ability to have convenience and a second phone number for the home and maybe even a home office and so -- when you start to think in those terms, the Amazon Echo in the kitchen isn't really going to solve your needs even if it did provide more than it does today.

And about the home security angle, how are you going to generate buzz around your home security solutions?

So far we have primarily focused our -- what we've done today on addressing our existing customer base and letting them know that we now have some sensors they can get that will work with their Telo and give them, what I call very basic home monitoring experience. To step up to a more complete home security solution is going to be need more -- need to be more features and functionality and I did talk a quarter ago that we have several that we're working on at the moment and over the next several months plus we'll be bringing those to market starting with some announcements at CES. And so I think as we put more capability into the solution, we will start to invest more in the marketing and the sales to drive the recognition for it, and we have a lot of great retailer relationships and we have a lot of opportunity with our retailers directly to get the word out. But beyond that, there is all the other normal channels around online or other types of advertising we might do and frankly, word of mouth, we give -- get a very lot of our customers just word of mouth and people had a good experience with Ooma and tell their friends. So I think that when we're ready to turn on the gas for home security, we'll have a lot of tools to utilize for that and we'll be excited about what we're doing but as we said, so far this year we've focused mainly on exposing it to our existing customer base and getting more and more feedback on the solution and what they think about it.

One more point, as we mentioned there is lot of buzz by other players; I think this is a very big market, very growing market, there is a lot of excitement happening in the market space. So as we bring in new products, I think we will see because of all these activities happening in the marketplace we will see some -- just more traction.

And one more on your distribution strategy for Office. Can you talk a bit about the direct and indirect channels and how you can sustain and possibly accelerate momentum?

Sure. We don't have one single way that we go to market with office. You can for instance buy through retail events but most of our sales are done through our inside sales team. And our inside sales team is talking with prospects that have seen our marketing or heard about Ooma in some way and want to talk to us more about our solution. We do do things to reach out to small businesses and get them to have a conversation with us. If we can get to the small business owner we can usually get a lot of interest because we can help that small business stack up, step up to being astounding and being a big business in terms of the way their phone system operates but also save them perhaps as much as half on their phone bill because there is a lot of compelling reasons once a small business focuses on what we have to bring them. And so we're just continuing to do the things we do to generate that marketing interest and build our inside sales team to follow-up on it. We are building what we call a VAR channel, that is a third-party resellers of our service that will find customers on their own and resell Ooma; we're investing in that. We are investing with WeWork today and it's part of that, expanding internationally which creates new opportunities for us. And then as we finish up some of the things we want from the system, it expands the addressable market. We have customers today who love our solution but we don't quite have everything they need. I'll give examples of something we've already addressed; a quarter ago we couldn't serve a customer who is more than 20 users, we had to say…

Okay, thank you. And if I could have one more question; qualitatively, to help us model fiscal '19. How should we think about the growth versus margin trade-off? And what do you think -- what rate do you think Telo can grow at?

I'll start and then let Ravi speak. Telo can grow at the rate that we choose to invest in it to grow it. We've set relatively modest growth expectations for it, consistent with the amount we're spending for that and that's where we're at today, we're not here today to really give guidance for next year, that will be our next conference call but that's how we're handling it today. We are driving one of our goals for next year that I mentioned in my opening remarks is to continue to improve our gross margins to limit the growth in spending in R&D and of course, G&A. And as we do that, we want to increase our emphasis on revenue growth for the Company, so that speaks a little bit to how we're thinking about things as we look forward. Do you want to add anything, Ravi?

I think Eric has captured well. The only one other data point which we -- six months ago, Eric has mentioned in the previous earnings call was that we anticipate a residential subscription services revenue growth of mid to high single-digit on a year-over-year basis; that guidance we have previously given but he will provide more color in our next quarterly earnings call or full year fiscal '19.

Your next question comes from Mike Latimore from Northland Capital Markets. Mike, your line is open.

On the service gross margin, should we think -- very strong in the qtrs.; should we think about that as serving a new baseline that you can build from here?

As I mentioned, the service revenue gross margin was 71%, this was positively impacted by a small expense credit we got. So I would probably say we have made good progress on the services side. I would probably say around 70% is a good indication where we are and obviously, as we grow in the future along with some investments we'll make in data centers and other places, I think 70% is a good start.

And then, in terms of the -- on the Office, you launched the new Office product service in mid-August that scaled a little bit higher. Have you seen the -- kind of average size of the customer since that announcement increased or is it still kind of early days here?

Overall, it's -- since we have been selling Office for a number of years it won't make a big impact to the overall numbers but yes, we have based on the emphasis, based on -- there is no limit of 20; as Eric said, if 18 user employee business was coming to us previously, they may not have signed up because they were thinking of growing upto 20-22 quickly. So now that hurdle is gone, so we have seen some -- it's very early in the process but we have seen some positive trends in the direction which were the benefit of where 20 is coming there. But at the same time it will be -- by the time we start seeing the average go up significantly, it will take some time just because of our large customer base today but we are seeing very early on some signs of positive improvements there.

And then last, should we think of the product revenue growing sequentially in the fourth quarter just given sort of the seasonality there?

There might be some product revenue growth, it's possible given seasonality, you're right on that; Black Friday is holiday period, generally for consumer side has been little bit higher trending that way. Yes, so I do expect it to grow slightly but will it not material but I do believe it may go up a little bit.

It's mitigated a little bit by the fact that we get a little more aggressive on pricing in the fourth quarter as well with the specials. But -- yes, from a residential point of view, the fourth quarter is -- should be our biggest quarter. And Mike, if I can go back to your earlier comment about more than 20 users, we continue to build our VAR channel, generally you would see a little bit higher, traction higher user count from VARs; so I think as VAR channel becomes more meaningful, we might see some bump [ph] because of that.

Your next question comes from Pat Walravens from JMP Securities. Pat, your line is open.

Hi, this is Matt Spencer on for Pat Walravens. Congratulations on a good quarter and thanks for taking my question. As it relates to WeWork, can you just give us a little bit more detail on that partnership, specifically how many more countries do you hope to roll out together and what is your plan to extend -- to expand it geographically beyond WeWork? Thanks.

Well, as I said, we're in five countries today and we do expect to roll out to more. I don't think it will be a lot more, at least not in the near term. If we look at these decisions along with them and what their needs are and what we can help them with best and we take them decision-by-decision. And so as we sit here today, we are working on another country roll out but where we go after that will be decided after we get this one done. So it's a little bit hard to give you a specific work cast [ph] for that. We are excited about the footprint we're gaining international with WeWork and we have aspirations as you know to expand beyond WeWork in those countries and we've talked about that in the past, and that is part of our longer term strategy. How soon we do that though is going to be a function also of where we think we can get the best return on our investment as we look at next year's goals. And when we talk with you next quarter, we'll have a little bit better -- little bit more specific answer on that question. But generally speaking, we see a large market opportunity here in North America that that's going to get our primary focus for investment and as we expand internationally, we'll make steps forward and we'll do things but I don't think it's going to come at the expense of trying to drive or doing in North America hard.

And your next question comes from Josh Nichols from B. Riley FBR. Josh, your line is open.

Just as a follow-up to the last question; have you been able to do much marketing domestically regarding WeWork or you've been preoccupied with the quick international rollout that you've been doing this far since you've talked about investing a little bit more in North America?

We have done some marketing, I mean the two are being [ph] exclusive. It's more been an issue for our R&D team to put the effort into make these countries turn online but one of the beauties of the WeWork relationship is that we don't have to do a lot of marketing, they expose our solution to their members and those members can get Ooma for WeWork straight through their WeWork relationship with them just by connecting up to us that way. So -- but we do do some things and we're -- I think one of the big drivers for us with WeWork will be how fast WeWork grows because as they add new members, that's who is going to need front service. A lot of WeWork's members just live off their cell phone or don't do anything more significant than that; also there is no obligation for WeWork member to buy phone service through WeWork, they can just bring in something themselves if they wish. But all that said, we are easy simple solution with no upfront cost and with great support, both from WeWork's support team, as well as Ooma's support team. So it's a known opportunity in the countries we're in to maximize and we do whatever we can do to make sure that members at least hear about us an option for their needs.

And then, good to hear that churn remains admirably low; but anything you've comment around what you're seeing as far as customer acquisition costs on both the Telo front and also the faster growing Ooma Office side?

I'll let Ravi add if he has anything but generally speaking, my view of those is that they are steady.

We focus on payback period and obviously, it depends upon if you are investing into some channels, for example, VAR channel and things like that but overall, if you look at the steady core business, those things have not significantly moved. Obviously, we do try different things but as on SEM side and other channels but largely speaking, our -- for the channels which have been more consistent for some time, they are pretty robust. And obviously, that gives us flexibility to invest into new channels for further growth in the future.

And then last question for me; just given some of the news out recently about net neutrality that's been going on, any concerns on your end regarding sacrificing voice quality given any potential bandwidth degradation or just how do you view things generally on that front?

That's a really interesting question. We have a healthy debate internally where some members of my team feel net neutrality is harmful to Ooma and some feel it's helpful to Ooma. I personally believe that for what we do and the level of traffic we bring to the internet which is obviously extremely small in the great scheme of things, I don't think net neutrality is going to affect us very much whether it's in place legally or not in place legally. So I'm not giving it as a key matter for us at this time.

And Josh, giving our Telo is like a router; it gives the customers flexibility if they were to put -- they can put it between the modem and the router. So I think because of those certain things we should not be negatively impacted, where there is positive, I think that's a debate we always have [ph].

[Operator Instructions] And there are no more questions at this time. This concludes today's conference call. Thank you for participating and you may now disconnect.