Ladies and gentlemen, thank you for standing by, and welcome to Ooma's Third Quarter Fiscal 2020 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Matt. Thank you. Please go ahead, sir.

Thanks, Christine. Good day, everyone, and welcome to the Third Quarter Fiscal Year 2020 Earnings Call of Ooma, Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. With me here today are in 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 1 year. The telephonic replay will also be available for a week starting this evening about 8 p.m. Eastern Time. Dialing information for it is included in today's earnings press release. 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, financial measures to be discussed -- 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 full year fiscal 2020 on a non-GAAP basis. Also in addition to our press release and 8-K filing, the Events & Presentation page in the Investors section as well as the Quarterly Results page of the Financial Information section of our website includes links to costs and expenses not included in our non-GAAP values and key metrics of our core subscription businesses. 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 our non-GAAP metrics. Now I'll hand the call over to Ooma's CEO, Eric Stang.

Thanks, Matt. Hi, everyone. Welcome to Ooma's Q3 FY '20 Earnings Call. It's a pleasure to talk with you today. I'd like to cover 3 topics with you in my prepared remarks. The first is a review of our Q3 progress and momentum for Q4. Second, I'd like to emphasize our commitment to building shareholder value and discuss several new actions we are taking in that regard. And thirdly, I want to share our top level objectives that will guide our plan for next year. Our Q3 quarter just ended was, simply put, a fantastic quarter for Ooma. Q3 revenue of $39.6 million represents 21% growth versus a year ago. And for the first time in our history since going public, we generated a positive non-GAAP net income. I'll let Ravi take you through the numbers in detail, but I do want to highlight our progress. I believe Ooma has taken another big step forward by continuing to achieve strong revenue growth while also now operating profitably. Regarding our strategy to grow the number of customers using our business solutions, I feel we are executing well on all fronts, and I believe our 67% Q3 year-over-year growth in subscription revenues from business customers, inclusive of our Broadsmart acquisition, backs this up. One major element of our success is we continue to roll out our combined Office and Enterprise business solution to the very large customer I spoke about on our last earnings call. I'm pleased to say that we expect to add a significant number of users with this customer in Q4, and we see potential for further user additions in FY '21 on a more limited basis given our progress this year. We are also executing well on growing our sales through channel resellers and VAR partners. In Q3,…

Thank you, Eric, and good afternoon, everyone. I'll start with a review of our third quarter financial results and then provide our outlook for the fourth quarter and full year fiscal '20. As a reminder, all income statement items except revenue are on a non-GAAP basis, and we have excluded expenses such as stock-based compensation, amortization of intangibles and restructuring charges. I will also be providing more details about the restructuring we undertook in the third quarter of fiscal '20. Starting with the third quarter results, we ended the quarter with strong financial performance, achieving $39.6 million in revenue, above the high end of our previously issued guidance range of $38 million to $39 million. On a year-over-year basis, total revenue grew 21%, driven primarily by Ooma Business. Net income for the third quarter was $117,000, around $1 million better than the midpoint of our previously issued loss guidance range of $800,000 to $1.2 million. We achieved profitability due to higher revenue and our focus on expense management. Achieving profitability is a significant milestone for us, as this is the first quarterly profit Ooma has reported since our IPO in 2015. I'll now add some color to the Q3 revenue. Ooma Business accounted for 42% of total revenue as compared to 30% in the prior year quarter. Business subscription and services revenue during the quarter grew 67% on a year-over-year basis. Excluding Broadsmart, Ooma Business subscription and services revenue grew 41%. We continue to be very pleased with the strong year-over-year organic growth in Ooma Business. We added several thousand more business users in the third quarter from a specific large customer we have mentioned in our previous earnings call. We are excited about the continued progress we are making with this customer, and we expect to add thousands more…

Thanks, Ravi. Looking ahead to next year, as I've outlined, our focus will be on Ooma Business. But that said, we intend to grow in all parts of Ooma including Residential. We expect to drive R&D to less than 20% of sales for the FY '21 fiscal year and to be non-GAAP net income positive in FY '21. Our level of growth will depend most on how well we execute our Sprint partnership, on the impact we can realize from our new Ooma Office Pro tier of service and other product and feature advances we plan for next year, on how successfully we can expand our reseller and VAR relationships and more generally, all of our sales and marketing activities for Ooma Business and on the degree to which we can continue to employ unique solutions to capitalize on large customer opportunities. We will update you further on the impact we see from these initiatives in our next earnings call when we provide our financial guidance and outlook for fiscal year '21. And thank you. We are now happy to take questions.

[Operator Instructions] Your first question comes from the line of Bhavan Suri from William Blair.

This is Matt Stotler on for Bhavan. So first, would love to dig into the Sprint partnership a little bit more. Obviously, still early days and especially the announcement today. But maybe we could talk about any sort of exclusivity that you have with this partnership, whether on your side or on the Sprint side? And in that context, are you looking for potential additional partnerships in the future? And if Sprint is offering multiple products here, how are they positioning Ooma versus the other offerings? That would be very helpful.

Sure. It takes time for a big company like Sprint to implement and move forward with something new like what we're doing with them. But we're pretty excited about this, and I know they are as well. And I believe we're both very, very committed to what we're doing together. They've launched a solution called Omni. It is under their name, but it is Ooma Office powered for the customer. And I believe that puts us in a very strong position with Sprint because we are not exclusive, but some of the other things they sell are not that tightly integrated with Sprint. Was there a third question?

Other partnerships.

Yes, are we looking for other partnerships? We always consider that, and I do think we are well setup to do additional partnerships, but we don't have anything to announce today.

Right. Okay. Very helpful. And then just one more for me. As far as investment priorities regarding Ooma Office and Ooma Business more largely, you've spoken about your investment priorities being to round out the core feature set before pivoting to new office services or business services that can provide additional revenue opportunities. So just wondering if you can speak to what pieces you're investing in to round out the core offering today. And where you're looking to -- or where you're looking at regarding additional revenue opportunities over the next several years?

Sure. Good question. I appreciate that. Well, we've just today, almost 2 days ago, I think, the press release went out, made our first big step forward in what I've been talking about in this regard with the announcement of Ooma Office Pro. Ooma Office Pro is a new tier of service that offers advanced features for a larger-sized small business, as I said in my remarks. And that includes key features such as call recording, blocking telemarketers, voice mail transcription and some other things that aren't in standard Office today. We will continue to fill out that tier with some additional capabilities to make it even stronger. But the key thing is, whatever we're doing going forward here is focused on a new tier of service where we can charge more money and have a greater result with our customers. Beyond just filling out Ooma Office Pro with some further features as we look forward, we are looking at other opportunities to expand in what we provide to our customers. And we will work, in some cases, with our partners to do those things. In other cases, there'll be things we do ourselves, but we're excited because being a company that designs the solution end-to-end from what goes in the customer's premise all the way through the cloud and the mobile apps, et cetera, we have the capability to evolve in, I think, some new ways that we don't see others doing in the industry today. But we don't have more to say on that at this time. So I hope that helps.

Absolutely. And great results again, guys.

Thank you.

Thank you.

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

On the -- Eric, you mentioned merging the platforms. Can you talk a little bit more about that? Does that include the Broadsmart or like just a little clarity on kind of merging of the platform? And how long that might take?

Yes. I didn't actually, I think, say, merging the platforms from at least a complete technicals perspective. There are things about the platforms that will be common, and it is possible for us today to serve a customer with elements from each of the platform, so to speak, working together in one seamless solution for the customer. But we're not trying to do some great re-architecture to put everything together technically in one form. We just don't think there's a need to do that. But we do intend, from a marketing and sales perspective and from a customer relations perspective, to be a company that can meet a range of their needs depending on what those are and they don't need to get too concerned with how we do it. And that's what we're thinking about when we talk more about Ooma Business. The ability to satisfy a small business with a very curated feature set and the ability to step up from there with more advanced solutions if the business needs more. So that's mostly the way we're thinking about it, although there is some commonality and certainly linkages across each of the things we use today to provide service. And there will be more of that over time. But we're not really merging things, so to speak.

Okay. Thanks for the clarification. And then on the OpEx side of things. I mean, roughly what percent of OpEx should we think about going to the Residential piece of your business at this point?

Mike, this is Ravi. It's very hard, given we have the same data center -- say a lot of similar infrastructure, but -- which is there, G&A is one common expense. Sales and marketing, there are some benefits when we invest into Residential, we get the benefits on Business and vice versa. So it's hard to have a good quantification of it, but at a very high level, there is significant cash being generated from the residential at this time. But how much -- how can I quantify? I think it's hard to quantify given lots of other things are all together. That's one also.

Okay. And just last one...

But we are generating positive cash on Residential.

On Residential. Yes. Okay. And then just the revenue guidance sequentially is sort of flattish. Is that just given some of this -- the Smart Cam dynamic there? Or anything -- any comments on that, I guess, given the strong growth that you have?

Not really. I do feel all the fundamentals of the business are very strong. It's just -- there is some seasonality, especially on the business side in -- during November, December -- holiday period and some weather related. So that could be -- that's probably the only reason I would say, the guidance could be flattish to slightly above, but otherwise -- but if -- but we have -- in corporate, we have had good experiences on these, and I feel they could be -- we are well positioned to execute on the guidance we have given. So I do feel very good about it.

Your next question comes from the line of Aman Gulani from B. Riley FBR.

Great quarter and really nice to see some of these new offerings roll out, especially Ooma Office Pro. How would you say that's tracking so far? What is your expectation for converting standard Office users to the new Office Pro platform?

Our expectations are more around expanding our addressable market with this capability and so using it more from a growth perspective. Most of our existing customers are happy with the solutions they have or they wouldn't have gone with Ooma. So I don't see us adding Office Pro to most of our current installed base. But we do -- the day we launched it, we had customers signing up for it, which we're glad to see. We've had some customers waiting for it. So there's a little bit of that. But mostly, it's an opportunity to expand the customers we can serve and to help drive our growth.

Got it. That's helpful. And then you previously mentioned on your last calls you were talking about an integrated solution that combines Broadsmart and Ooma Enterprise for a large customer in the retail vertical. I just want to get a sense for how that relationship is progressing. And if you could size that potential opportunity? I know you did mention that it could be pretty meaningful.

Yes. First of all, I don't know that we've ever said what vertical it's in. But we already have a very meaningful business relationship with this large customer. We added several thousand users in Q3, and our outlook is we'll do that again in Q4, which we're excited about. This company is a large multinational, and we are hopeful to continue to be expanding with them in new areas and new ways as we look forward. But some of that's undefined, and it's up to us to keep working with them and try to bring new opportunities to fruition. So I think I said in my remarks that we do expect to continue to grow with them next year, but on a more limited basis, given the big accomplishments we've already put in place this year. So to me, this customer is not only important in and of itself, but I think it's representative of what Ooma is capable of today. This customer loves our Ooma Office capabilities for a large portion of their user base, but they also need more enterprise-like features and even some custom-tailored solutions just for what they do for some of their users. And we're able to integrate all that together in a way that just gives them a great Ooma Business solution. And as we look forward, that strategy of being able to serve very large customers who have that kind of needs to be met is an opportunity for us. And it's one of the things we look to next year for to see if we can deliver. So excited about it as much for what it says Ooma is capable of doing today as much as what they're contributing to these quarters.

And just last question from me, with these new business solutions rolling out, are you starting to see an increase in the average number of seats?

Yes. We do have seen small -- it's -- we have a big base of customers. So any new customers coming in with higher seats, the average will take time to move up. But we are seeing average seats per customer going up over the last 6 to 12 months. So we are actually seeing some improvements there. But the average is not going to grow meaningfully because of the existing large base there. But we are seeing upside. We are seeing some improvements there.

[Operator Instructions] Your next question comes from the line of Nick Farwell from Arbor Group. Nick Farwell;Arbor Group;Owner: Ravi, can you hear me? I'm on a...

Yes, Nick. Nick Farwell;Arbor Group;Owner: Great. I noticed that sequentially, COGS were up about just shy of $2.7 million. If you had a restructuring charge, did it fall in that category? And if so, can you provide us some detail?

Yes, Nick, good question. When we -- there are 2 big elements. So I said $3.1 million was restructuring charge. Of that, we wrote off Smart Cam inventory as well as commitments we had. We wrote off intangibles and both of those comprise of the significant majority of the $3.1 million, which all goes into product COGS. So intangibles because it was at the time of acquisition, it goes into -- for GAAP accounting it goes into product cost as well as Smart Cam inventory and commitments we had, they all go into that. So that's why we have non-GAAP-ed it, but -- to give you a complete picture of the regular business operations. But it's all driven because of Smart -- because of the restructuring charge. And then as we did impact some number of employees, which ranged in R&D, sales and marketing, but there were a couple of people in customer support also. So all of that went into the cost side. And that's what you're looking at, largely speaking. If I take out the restructuring expense, you wouldn't see any major shifts in expenses as you would have seen otherwise. Nick Farwell;Arbor Group;Owner: Okay. So just so I have -- I'm sure I understand, $2.1 million was in product COGS, the other $1 million was basically written off against R&D, I presume, virtually all R&D and the restructuring of the 2 programs. Is that correct?

There is some sales and marketing also, which includes severance for some folks in sales and marketing and R&D. But otherwise a little bit more than $2 million -- more than $2 million went into product COGS.

[Operator Instructions] Your next question comes from the line of Pat Walravens from JMP Securities.

This is Mark for Pat. So I'm just wondering in terms of the large customer you have, I'm wondering, are there any maybe similar type of customer? Or how do you kind of maybe think about to attract more similar type of customer going forward?

Yes. We do see customers out there or we think about our strategy and how we want to build our business. We do, when we do that, see other types of customers out there that have similarities to the customers serving today. And we may be able to leverage directly what we've built for this one large customer or we may have to do other customizations for those customers. But at the core of it, it's a customer who has a need for a very simple, reliable, easy to use, easy to set up solution for some of their user base along with some special needs at perhaps a corporate center or another level where they need to have some unique capabilities introduced into the system. Our biggest strengths as a company are around our ability to serve 90% of the businesses in America with a turnkey solution that is -- brings those capabilities I just mentioned a minute ago combined with the ability at the enterprise level to easily customize and tailor solutions for our customers. Our Enterprise solution is very flexible for that. So we want to leverage that. And yes, there are other customers, maybe not exactly in the same business as the one we're serving today, but with similar type of needs where we can do that. And in some cases, we have conversations underway. In other cases, we are targeting opportunities, but part of our strategy for next year is to try to do more of that to help drive our growth.

There are no further questions at this time. I will now turn the call back to Eric Stang for closing remarks.

Thanks, everyone. Thanks for joining us today. We are committed to building shareholder value and taking the steps necessary to achieve that. And I think you saw some moves by us in this Q3 towards that, and we intend to continue to drive that focus and drive the focus of the company to achieve the results we want to have. So thank you. And I think with that, we'll end the call. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.