Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ooma, Inc., Fiscal Third Quarter 2019 Earnings Call. [Operator Instructions] Thank you. Matt, you may begin your conference.

Thanks, Josh. Good day, everyone. And welcome to the third quarter of fiscal 2019 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 via GlobeNewswire. The release is also available on the Company's website ooma.com. This call is being webcast live and is accessible from a link on the events page of the Investor Relations section of our website. This link will be active for replay of this call for at least one year. During 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 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 most 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 fourth quarter and fiscal 2019 on a non-GAAP basis. Also in addition to our press release and 8-K filing, the events and presentations page in the Investors section, as well as the quarterly results page of the financial information section of our website, include links to cost and expenses not included in our non-GAAP values and key metrics of our core subscription business. These are titled, Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally our investor presentation slides include GAAP to non-GAAP reconciliation, that also provides resolution of GAAP expenses that are excluded from non-GAAP metrics. In coming weeks, we will participate in several conferences, which are listed in today's press release. We have scheduled a webcast from the UBS Conference at 9:30 AM, December 4 and from the Needham Growth Conference on January 15. Okay, Eric?

Thanks, Matt. Hi, everyone, and welcome to Ooma's FY '19 Q3 earnings call. I believe Q3 was an outstanding quarter for Ooma. Q3 revenue of $32.6 million was above our guidance range. Q3 subscription services revenues from our business customers grew 52% year-over-year and our Q3 net dollar subscription revenue retention rate was 102%. I'm excited to talk with you today about our strategy, results and outlook. Strategically, as you know, Ooma has developed a unique end-to-end platform. And we focus on segments of the market where we can bring better features, quality and value than others. Our goal is to become the undisputed leader in each of the segments we target. And I believe we are well on our way to doing so. Starting first with providing cloud phone service to small businesses. This is a segment we have created and defined in the industry. And I think it's fair to say we lead it today. Through curated features and onboarding, ease of installation and use and quality and value ahead of others, we have become a brand and solution more businesses trust than ever before. We are unaware of competitors in this business segment coming close to the growth rates we are achieving. This year we've invested heavily in our small business solution to expand our range of features and the size of our addressable market. I'm pleased to report, we have made good progress, introducing features such as support for 911 calling from multiple locations and receptionist functionality, and we have more to come. On validation as we are increasingly seeing larger sized businesses, some on the order of 100 users choose Ooma Office for its great combination of Cloud PBX features, flexible deployment options and superior value. We've also executed well at building our sales channels…

Thank you, Eric, and good afternoon, everyone. I'll start with a review of our financial results for third quarter fiscal '19 and then will provide outlook for the fourth quarter and full year fiscal '19. As a reminder, all income statement items except revenue are on a non-GAAP basis and exclude expenses such as stock-based compensations, amortization of intangibles and acquisition-related charges. The reconciliation of GAAP to non-GAAP financial data and other key business metrics can be found in the press release issued earlier today, which is available on the IR section of our website. Now, Q3 '19 results. We had a strong third quarter financial performance, achieving $32.6 million of revenue, which exceeded our previously issued guidance range of $31.5 million to $32 million. On a year-over-year basis, total revenue grew by $4.1 million or 14%. We are pleased with the growth in our overall business, particularly Ooma Office. Net loss for the third quarter of fiscal '19 was $522,000, better than the previously issued guidance range of $800,000 to $1.3 million loss. Ooma Business subscription and services revenue grew 52% on a year-over-year basis and total revenue contributions from Ooma Business are now 30% of our total revenue compared to 23% in the prior-year quarter. This growth of Ooma Business was primarily driven by higher business users as well as better monetization of services such as toll free calling to our large customer base. Our residential subscription and services revenue grew 9% on a year-over-year basis. The combined subscription and services revenue from the core businesses, namely Ooma Business and Ooma Residential grew 20% year-over-year. For the third quarter of fiscal '19, subscription and services revenue was 91% of the total revenue compared to 90% in the prior-year quarter. Product revenue for the third quarter of fiscal '19…

Thank you, Ravi. As we discussed last quarter, FY '19 is in many respects a building year in which we are making significant R&D investments for the future. We now have a solid Q3 behind us and are looking ahead to Q4 next year. We believe we're executing well, and we remain focused on our key initiatives. Looking out longer term, we expect to become a substantially larger company with a greater portion of our revenues coming from business customers, and with increasing P&L leverage as our margins expand and we grow into our R&D spend. Most importantly, we expect to be the leader in the segments we target by providing the best solutions available to customers. Thank you. We'll now take your questions. Is the operator there?

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

I guess, maybe we'll start on sort of the UCaaS market here, just at the high level. I got a couple of questions, little more granular, but just at the high level, obviously there is massive shift happening to UCaaS, and you guys, you talked about starting at the low level and then sort of 10 sort of - companies about 10 employees and moving up, sort of, as I think about that space, Ring has been pretty successful, it's kind of bouncing around. How do you see yourself fitting into that landscape? I just want to understand how you guys think about that, given Voxter, given sort of this idea that we can move up market and go from SMB to sort of medium Enterprise. Just love to understand, how you guys are thinking about that transition in that market?

Sure. Well, first of all, it starts with the fact that we feel the small business segment is a different segment from the larger business segment. That belief led us to come out with two very different kinds of solutions. In the small business segment, Ooma Office is a curated solution, which is very easy to set up and use an administer and kind of gives everything a small business without all the complexity that they don't want. We are seeing that solution move up to larger size businesses. I've talked on the order of even 100 customers in my script. And that's when a bigger business just wants that set of functionality at a - in - at a great value. Now when you speak about UCaaS itself, today we're serving much larger businesses that you mentioned. We have customers with hundreds of users and many of our customers are 50 users enough. But that said we are going to position ourselves in the UCaaS space, the Enterprise space with Ooma Enterprise specifically to target the two segments, I described here. We're being very open and straightforward about this. One is, we believe with an API first designed to our solution, we can customize it readily and easily for businesses that need bespoke requirements met. And it's not one size fits all, we're happy to work with the business and meet some need they have that will make their business run better and I think we're very good at doing that. It's harder for the larger players to be so custom, and so I feel like we have a real advantage in meeting individual customer's needs, more specifically. And then second segment we're targeting simply is the VAR reseller channel with the ability to offer them as much as or even a full white label solution where they do the billing, it's their name on the solution and we are just powering it in the background. We are finding that the VAR reseller channel can't get that from most of the big players, you mentioned here, in fact, it can't. And it's - we're getting a lot of positive response to that strategy to enable those resellers to continue to operate their businesses in a more holistic way. So that's how we're approaching it. I don't think we're not trying to be the biggest, we're not trying to beat the other guy. We're trying to serve the segments we serve with the leading solution, and I believe we can certainly do that.

I guess turning to sort of your - the push into home security and effectively connected home and again, this is sort of a high-level question as we think about it, it seems like IoT sort of would be a market that sort of dovetails with where, these parts of your business that had, just talk about how you view Ooma as a potential player in this market. Do you think it's a little early before we start thinking about that, or do you think that's a play you guys might make a little more sort of strategically in the near-term. Just the opportunity and then sort of your initiatives in that space.

Yes. We are making great strides on, with our smart security solution in our - in the launch of our Butterfleye camera. And I say great strides because we are putting most of our investment today into growing our business customers and our business platforms. The 52% growth year-over-year there I think just as emblematic of what focus we have on that. While we've also brought out significant new capabilities in our smart security platform and we are increasingly starting to differentiate it versus others, which is where I think we're really going to gain our competitive advantage. We're going to stand out because we're able to offer the customer more ways to use the system in their lives. To give you little bit more specificity on that, with Ooma you can individually control each sensor and how it acts. We give a wider range of alerts than many other players out there in the space today. Our Butterfleye camera has facial recognition built into it, which can also allow you more usability with solution. I think over time, you're going to see us build a - become recognized as the solution that allows customers to get a greater peace of mind and understand better what's happening in their world - just, did the dog walker come, did the kids bring to friend home, whatever it is. Albeit, we have a long way to go. We are new into the space, we've just launched our first solutions, we're going to continuing to evolve this as we go forward, but we're excited, because it's a very large market opportunity for the long-term and the Ooma platform is very well suited to bring some unique capabilities to the space over time.

Then again, to get Ravi there. So Ravi, one quick one for you here, just on margins sort of puts and takes here. You had a number of moving parts with varying growth rates out there and then you sort of designated fiscal '19 sort of quotes a building year for future growth. Just major puts and takes, you're seeing that drive the variation in gross margin and then your thoughts on the trajectory for margins we look forward?

Absolutely, Bhavan. If you look at our subscription - let me parse out the gross margins into two, product margins and subscription. Subscription margin is where we focus on, because we have 190% of our revenue comes from subscription services. And secondly, that's where the ultimate value we create for the Company by having a user, and creating revenue from there. The subscription margins have been around 70% and this is after we absorbed two acquisitions both Butterfleye and Ooma Voxter Enterprise in the last six to 12 months of the Company. So we have invested into more infrastructure, datacenters, adding more pops and adding more users with sub-scale there on those two businesses. But as we grow, I do believe our subscription services margin which is now around 70% will grow to 75% plus in the next couple of years. So as we grow the mix of business over residential as we grow the number of users, and as we add in more services, like this smart security services to our existing customer base or have additional services. I do expect the gross margin on the subscription services side to grow. And as that grows, the overall margin should also be growing. It's around 63% now, and I do believe in the longer term could be north of 65% even as high as 70% there. On the product gross margin we are hovering around 25%, 30% negative gross margin, and I don't expect that to change much given the goal is to get a customer and if we have to discount the hardware upfront. We are totally fine with that. So I think in the long term, you'll see that product gross margin to be around where we are. They may go up or down once in a while, but generally speaking, would not change, but subscription services gross margin will drive the margins overall.

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

This is Joe Goodwin on for Pat. Just a couple of quick questions. First is, can you provide any color on Black Friday results?

We actually don't even have all the Black Friday results in hand and Cyber Monday was yesterday. But we're pleased with what we've seen so far where, it's always a strong time for us, and this year is no different.

Understood. And then also just - do you have any plans to change any of your sales motions? I know the Voxter in Ooma Enterprise is relatively new. But in that short time you guys have been running that team, have you learned anything that is going to change up your motions moving forward?

I'm sorry, change the promotion, you said?

Yes, just the sales motion and the go-to-market strategy for the Enterprise.

Yes. Well, there - I would just answer that with the kinds of things we've been talking about already that we are seeking to do. We have been working to drive more synergy in the marketing and the lead flow between Ooma Enterprise and Ooma Office. And that is working for us. We're also driving synergy now at the VAR reseller level, that's nascent. But I think over time we'll accomplish more there as well. We are certainly going to continue to be building our resources in both areas. And I think that - as each get stronger, it will help the other, if that's the best way I can say it. But no, largely our path forwards continue doing what we're doing and just execute well.

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

Yes, good to hear the Enterprise division already getting some traction with 100 plus type business customers. I was going to - as you did mentioned that that was an area where you wanted to expand on the feature set. Could you talk a little bit about some of the opportunities regarding feature sets for expansion? And then how long might that take you think and how you could get the platform a little bit more rounded out and customized?

Sure. I'm going to take your question is relating mainly to Ooma Office for small business, because that's where we've been making a heavy investment through this year to expand the feature set, and with that expand the addressable market. And I think we've made several steps forward, already this year and we'll see more this quarter and early Q1. These are things that aren't - weren't necessary when we're serving particularly small businesses, but as we move up a little bit - to little bit larger businesses become useful. The ability for instance to serve a business with multiple locations at different sites, or business to have more advanced receptionist functionality than we originally had. There are other things that we have on our roadmap as well, but we're largely getting to where we want to be with Ooma Office. And I think, it would be wrong to think that Ooma Office is going to keep adding lots more features, because part of the power of it is, is that it's curated and it's just what you need and not what you don't need. And if a customer really needs a more complete solution than that, we would step them up to Ooma Enterprise which we're happy to do. So, I hope that addresses your question. On the Ooma Enterprise front, we are investing in the segments, I described, ability to make it easier to customize their solution, the ability to make it easier for channel partners to white label and work with us. And those investments are coming on well. And I think if we look out to next fiscal year, we'll be pretty well positioned with where we want to be.

Then I was going to ask, good to see that outside of obviously high double-digit growth for the business side. Is that you're continuing to grow on the home market here with high single-digit service revenue? Do you think that, although the space is contracting, overall new advanced feature sets make mid to high-type single-digit service revenue growth rate for the home front kind of sustainable for the foreseeable future?

If you look at this year so far with three quarters behind us, we've outperformed the guidance we gave. We've been guiding to mid-single-digits maybe a little bit more than that. We are investing heavily on the business side and less so on the residential phone service side. But that said, we continue to be excited about the opportunity. It's a large market, perhaps 50 million households in North America and we offer the best features, the best quality and the best value in the space. So some growth we expect, it's difficult to forecast how much.

[Operator Instructions] Your next question comes from Mike Lattimore with Northland Capital. Your line is open.

This is [Vijay Devar] for Mike Latimore. One quick question is on the Ooma Enterprise, could you tell me how many customers, one during the quarter and how many subs are within them? And any - and also I guess you spoke a little bit about the growth in Enterprise that could accelerate the next year, so, any further insights in terms of what could potentially drive that growth, please.

Let me start with - this is Ravi, let me start with the user growth and then Eric can jump in with additional comments there. We don't break out Enterprise versus Office users separately. We look at both of those, because there is so much lead, sharing, there is a common marketing programs we have. We look at the growth of overall Ooma Business. And what I had mentioned in my prepared remarks is the overall users are now 969,000 core users, which includes residential also. But 16% of those users are now business users. And if we look at a year ago we had 914,000 total users and Ooma Business users were only 12%. So, a significant growth in Ooma Business users, which is a combination of both Residential - combination of both Enterprise and Ooma Office. Both grew in the quarter, both Ooma Enterprise and Ooma Office grew, but we have - and that was the goal, and we are pretty happy with the results what we have, but we don't break out how many are Enterprise users versus Ooma Office users.

I think - this is Eric. I think, what was behind my comments when I opened this call, in this regard, the more we develop our solution and talk to potential resellers and talk to customers, the more excited we get. There is a significant market opportunity out there that we see for the segments that we've decided to focus on. Lot of customers don't want one size fits all solutions, and the resellers are really interested in, some I should say are really interested in being able to conduct their business with more control of the end customers. So I think that we see a lot of potential. And now it's our job to execute well and capitalize on that and we'll be giving guidance for next year when we have our next call in early New Year.

[Operator Instructions] There are currently no more telephonic questions at this time. I'll turn the call back to Eric.

Thank you. Thanks, everyone for participating today. We're pleased to bring you an outstanding quarter for Q3, and we're working hard as we look forward. So, thank you, everyone.

This concludes today's conference call. You may now disconnect.