Ladies and gentlemen, thank you for standing by. And welcome to the Ooma Inc. First Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Robison. Thank you. Please go ahead.

Thanks Shale. Good day, everyone, and welcome to the first quarter fiscal year 2021 earnings call of Ooma, Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. On the call with me today are Ooma's CEO, Eric Stang; and CFO, Ravi Narula. After the market closed today, Ooma issued a press release via Globe newswire. 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. A telephonic replay will also be available for a week, starting this evening about 8 PM 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 and 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, risk related to the impact of the Covid-19 pandemic and those risks 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 day hereof, and we disclaim any obligation to update any forward-looking statements, except as required by law. Please note that other than revenue or 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. The 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, which is available on our website. On this call, we'll give guidance for second quarter and full year fiscal 2021 on a non-GAAP basis. Also, in addition to our press release and 8-K filing, the events and presentations page in the investor 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 one and supplemental financial disclosure two. 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. Now, I will hand the call over to Ooma's CEO, Eric Stang.

Thank you, Matt. Hi, everyone. Welcome to Ooma's Q1 fiscal year 2021 earnings call. I'm pleased to talk with you today. Q1 was a strong and busy quarter for Ooma. During Q1, we remained focused on executing our strategy, while also adapting to the changes in our market environment and business activities driven by the global pandemic. I'm proud of all Ooma employees for stepping up to meet the new challenges we faced. And I'm extremely pleased to report that all Ooma employees and their families remain safe today. To all Ooma employees, thank you. Our Q1 revenues were $40.3 million, up 19% year-over-year. Subscription revenues from business users grew 54% year-over-year. Our Q1 non-GAAP net income was $2.4 million, up substantially both year-over-year and versus our guidance as we optimize our activities in response to the pandemic. I believe our solid growth, coupled with increasing profitability speaks to the resiliency of our business model and our ability to adapt to changing market conditions. Given that our Q1 ended on April 30, we experienced the effects of the pandemic for much of our quarter. As you would expect except for a few essential functions all Ooma employees shifted to working from home. Inside sales and online sales were largely unaffected, but sales through face-to-face channels and through retailers became more difficult. We adapted our marketing programs to emphasize to a greater extent the flexibility and savings afforded by our solutions. Feature wise, we moved quickly to introduce a modernized video collaboration user experience for Ooma Enterprise customers to enable use of Ooma Office IP phones concurrently at both work and home and to launch the Ooma Office Desktop app. We accommodated an approximately 50% increase in call volume in our network, and we managed supply chain challenges effectively. Overall, it's…

Thank you, Eric. And good afternoon, everyone. Before I start, I want to thank the entire Ooma team for the hard work and focus during these challenging times. I want to give my best wishes for everyone's safety at Ooma and beyond. With that I'll start with a review of our first quarter financial results then provide our outlook for the second quarter and full year fiscal 2021. Despite the extraordinary circumstances created by this pandemic and the stay-at-home orders, we once again had a strong financial performance in the quarter achieving $40.3 million in revenue within our previously issued guidance range of $40 million to $40.5 million. On a year-over-year basis, total revenue grew 19% driven by Ooma Business. Ooma Business now accounts for 43% of revenue compared to 33% in the prior year quarter. Net income for the first quarter of fiscal 2021 was $2.4 million significantly higher than our previously issued guidance range of $500,000 to $1 million; our strong profitability demonstrated significant leverage within our expense structure as we optimize our activities during the pandemic and focused on operational efficiencies. Now some details on our Q1 revenue. Business Subscription and Services revenue grew 54% on a year-over-year basis, or 33% year-over-year when normalizing for the effect of the Broadsmart acquisition made in May of last year. Residential Subscription and Services revenue grew 4% year-over-year with combined subscription and services revenue from both business and residential growing 22%. Subscription and Services revenue as a percentage of total revenue was 93% compared to 91% for the prior year quarter. Product revenue for the first quarter was $2.7 million compared to $2.9 million in the prior year period. During March and April, a number of our channel partners such as Best Buy were impacted by the shutdown orders, which…

Thanks Ravi. Our current business view is that while the economy will gradually open up going forward, the pandemic and its effects will be with us through this year and perhaps beyond. Although, we plan to be cautious in our outlook, we believe our solutions not only help businesses work more flexibly, but also often save the money. As we look forward, the value we bring to the customers as core strength in these times. Another core strength is our range of capabilities. Our expanding Office Pro feature set, ability to customize Ooma Enterprise and integrate it with Ooma Office and new Ooma Connect internet solution extend our reach in differentiation. And both our residential and our small business solutions are ranked number one by users themselves with tremendously high customer satisfaction scores and customer referrals. We believe our strategy is working and we can capitalize on significant opportunity over the long term. Thank you. Operator?

[Operator Instructions] The first question is from Josh Nichols of B. Riley. Please go ahead. Your line is open.

Yes. Glad to hear everyone's safe and thanks for taking my question. Really strong profitability on the bottom line this quarter. I didn't want to ask like thinking about it good to see that the R&D leverage that the company's capitalizing on this quarter. Is the thought that that's going to continue to remain at or around these levels as a percentage of revenue or maybe that starts to trickle up a little bit given the investments the company is doing with the new launches in the second half of this year for offerings.

Hi, Josh. Good to talk to you. Our R&D this quarter is about the same level spend as it was a year ago, and we don't intend to grow it at the rate we grow sales, so that would mean some leverage in order. And maybe Ravi has more to comment.

Hey, Josh. Yes. So if you look at our mid-term target model of one to three years, the R&D range we have given is 17% to 19%. Yes, we are at the high end of that range today, but as we grow the business, we do expect some more leverage coming in. So, it -- that 19% could over period of time could go down to 17% also.

Thanks and then, Eric, I want to ask, great to see the company has this big opportunity in front of it to expand outside of the North America market. How long is this, I guess, demo or proof-of-concept expected to take for the company?

I think that that's a little open, but I don't expect it will last more than a couple months, maybe a little longer than that. We had intended a quarter ago to have this proof-of-concept started at the end of Q1. We had to do some work before we be ready to start it. We got all that work done, and it will be starting this quarter and that means as I said in my script for the back half of this year; we're hopeful that we can roll out to some significant numbers of users.

And is there any additional detail that you could provide as far as the size of the opportunity? I know last quarter you mentioned you’re already up to 20,000 seats.

This company has never been as large in this new area -- geographic region of the world as it is here in North America. So, the opportunity is pretty significant, and I do think, too, over time this is a customer who we could be growing with for years to come. So, it's a pretty big opportunity.

Thanks, and then last question, and then I'll hop back in the queue. I know management's taken a pretty conservative stance on the top line for the guidance like what's kind of built in there for the expectations around Ooma Connect, the Desktop app, and upsells to these Pro solutions that the company's thinking about?

I'll take the second part of your question first and then come back to connect. We're pretty pleased with the progress we've made with Ooma Office Pro since its launch late last year. It's say about 5% of our base is now using it, and on new customers, we're seeing – in some channels, we’re seeing about 10% of new customers take it and some other channels we see as much as 30% to 40% of new customers take it. And so, it is our goal to drive it to a double-digit percentage as we go forward here of our entire base. So, we are pretty happy with it. We're obviously adding more to it as time goes on. We just added the Desktop app and that is an important work-from-home tool as well by the way. So, I think it's off to a good start and we're doing some good things. On Ooma Connect where we haven't set very precise goals yet because it's just out in the market and we're getting feel for what customers think about it, I can tell you that we are coming across customers who have remarkably poor and expensive internet; and in those cases; it's a good primary solution. Good primary Internet solution, and we have some pretty good success already in those types of situations. So, we know we've got a success there. I think what we need to learn as we go forward with this product is what amount of our customer base will see value in having a backup internet solution for their everyday needs, and we're hopeful that we can drive that and we can also -- we're also hopeful that some much larger companies with lots of distributed locations will find Ooma Connect a great backup internet solution for them as well. Those companies today put in other solutions today, and we're hopeful that they'll find Ooma Connect a better choice. So, there is a lot to come with Ooma Connect, and in its early days, but I'll try to give more color on it next quarter after we've got another quarter under our belt.

You next question is from Mike Latimore of Northland Capital. Please go ahead. Your line is open.

Thank you. Yes, congratulations on the nice quarter there. I guess on the 100 Connect users or Connect customers, do they come through any specific channel? Is there any verticals that took it? Any kind of color on that would be great.

Yes. They did not come through general marketing and inbound lead generation as much as they came through either customers we already know or some of our more face-to-face sales channels that we're still able to operate. These tend to be a little bit larger sized customers I would say. A lot of them so far are, I would call, some form of Main Street location where they just don't have good access to Internet for whatever reason, and that's really where we got started with the product. When we roll out a new product like this, something so fundamental, we started off with what we call, we started off with levels and we only expose it to a small portion of our customer base that wants to kind of get some experience with it. It's worked fantastic and now we're expanding. We aren't finding it will work in all customer situations. It depends -- it runs today on the Sprint network, and we're finding -- we are subject to the coverage that that network has. We're hopeful that with the T-Mobile Sprint merger, we'll be able to expand the range of coverage. We can adopt -- we can create with this product, but no, all our efforts so far have worked out as we expected.

Great. And then -- just on the gross margins. Subscription was fairly strong, you mentioned the freight cost on the product side I guess how we should think about those margins in the next --in the second quarter subscription and product.

Yes. Mike, this is Ravi. I do expect -- there's always small puts and takes which happens. For example, a higher calling volume will have some impact on the margins, but at the same time Office Pro customers as we keep adding those they will help us on the margin side. So I do expect subscription services margins for Q2 to be around the Q1 levels on the subscription side. On the products margins, I do expect it to be improving lightly from Q1 levels given will have less air freight charges, but obviously it's a function of overall freight charges have they gone up or not but we do expect less airfare charges in Q2 since we have built up good inventory.

Got it. And then just in terms of pricing your various services, are you having to change much in the way of pricing given the environment we're in or is it pretty consistent?

We haven't made any changes of note in pricing. We've always been a strong -- provided a strong value to the market and we haven't felt the need to change it.

Right and just last one, Talkatone. What was the Talkatone revenue in the quarter?

It was around $1 million, slightly below $1 million given CPMS had gone down especially in March and April. So it was an iota below $1 million. But we had expected was $4 million for the year. I think we are on track for that, so nothing big in terms of Talkatone.

Your next question is from Kevin McVeigh of Credit Suisse. Please go ahead. Your line is open.

Great. Thank you. So I wondered can you give a sense of what percentage of your sales is face-to-face versus your other channels. Because it seems like net-net even just despite the disruption, the Covid disruptions still saw pretty good outcome overall on the revenue side.

We did have a good outcome, although keep in mind that depending on when new customers come in the quarter they may not be much revenue in the quarter, but then they build over time. Approximately 30% of our business sales come through some channel that I would consider face-to-face, which means there are field activities going on in some form. So it's about 30%.

Got it. So, Eric, is it fair to say that you kind of over delivered in other areas the way the revenue came in overall?

We did well in certain areas. In fact, our inbound and direct sales were a little stronger but not enough to make a big point of it.

Got it. And then just real quick on, are you seeing and obviously post Covid I think there's going to be some behavioral changes. And how are you folks kind of positioned to benefit from some of the behavioral changes among your customers for this channel in a post Covid world, where maybe probably more remote work. Can you tell us on the bit space as we [Tech Difficulty].

I apologize. I couldn't get that from you. There was some background noise. Could you just ask it again? I apologize.

Yes. Of course, Eric. Just how are you folks thinking about the business model post Covid-19, no, it feels like you could be in a position to benefit as opposed to other entities coming out of post Covid-19 as you think about your clients' need?

Yes. I think we're well placed post Covid-19. Our solutions are strong and I think Covid-19 is woken up a lot of businesses to the frailty or the limitations of the existing solutions they've had. And let me take a very small petty example but if you're a restaurant and now you have to do all your business through phone orders and pick up, you need a phone system that's going to handle that. And so I think that it's an opportunity for us to tell people about what more we can do for them and maybe get them a little more interested in looking at switching for reasons other than just cost savings per se. So I think it's going to help us as we think about coming out post Covid. I would say for mid-sized and larger businesses the moves to work from home, a lot of those companies have kind of hunkered down a little bit. These are companies that make more strategic decisions; it's more of a sell to an IT professional. I think that if anything there'll be some potentially some pent-up demand as people come back to work. We'll see. I don't -- but at the moment those companies aren't making big fundamental new decisions. They may be augmenting what they have or getting some extra users for work from home, but they're not going to try to make bigger changes right at the moment. So, yes, I think that post Covid we will be building back up our sales teams a little bit as we go through that. That'll be a measured pace for us, and will be able to get the take advantage of that situation.

Your next question is from Matt Stotler of William Blair. Please go ahead. Your line is open.

Hey, guys. Thank you for taking my questions. Solid results and good to see that even in a challenging environment. I guess, first, I'd like to maybe double-click on COVID impact. You said, obviously, some push outs in the deals that require face-to-face interaction. Would love to maybe delineate between what you're seeing and how this environment is impacting conversations with existing customers? What you saw deals that were in process? And then overall new business, given it seems like outside of that face-to-face situations business actually was pretty good in the first quarter.

Yes. I see if I can elaborate a little bit, a lot of our -- a lot of the smaller businesses we serve still aren't -- still may be closed actually are in work from home mode. But we are finding in the market that they're very interested in saving money. They're very interested in our mobile apps or virtual receptionist, our remote flexibility and our closing ratios with the businesses we're talking to our inline. We're not seeing any increased resistance to change; in fact, if anything we're seeing recognition that there are better solutions out there. And I already mentioned in the previous comment that I think the larger size business a little bit hunkered down and just getting through these times as they then reevaluate where they go from here. There's no doubt that the Covid situation has put a spotlight on work from home capabilities. And I don't know how the nation's going to go, but out here in California some big companies like Google and Facebook and others have announced that if we're going to continue to work from home for the balance of this year and maybe even longer. So we're seeing things change and a cloud phone service that can be flexible and frankly integrate into the way your business needs to operate, which is where we think we diff -- we are most distinctive. I think that it's just even more valuable as we look forward. In terms of deals we are doing, I don't think any pushed out per se. We tend to have it for most of the business we do. We tend to have a relatively fast sale cycle. It's the enterprise deals that tend to be longer in nature and that are a smaller portion of our business today. But we're, I will say in terms of building channel, one of our goals this year is to strengthen our sales through channel partners. A little bit harder to build that when conferences get shut down and you can't go out to meet with channel partners and really tell your story that way. But even there we're doing the best we can. And I'm sure that will turn around. So I think, yes, I think that pretty much lays it out, if that's helpful.

Hey, Matt. This is Ravi. If I may just add one other comment to Eric's. Over the last couple of years, we have built a very diversified sales channel right. We have VARs. We have resellers. We have retailers. We have inbounded. We do a lot of marketing activities that also gives us a lot of bench strength that we can deal with issues short term and long term. And obviously, we, our goal is to continue to building more and more channels and more VARs and channels as Eric said, but we are pretty happy with the diversification of our sales channel so far.

Right. That's very helpful. Thank you. And just one more for me. We'd love to get some updated thoughts on the competitive landscape, especially in the current environment? We've heard InterMedia announced deal with NEC recently, and we've been hearing more out of dial pads, so I'd love to get your thoughts on those players and what else you're seeing in the market, if there's any change? Thank you.

Yes. I don't think there's any fundamental change. We go up against these types of companies depending on the user's needs and the channel we're in. Some companies have chosen to give away video conferencing for free as a way to maybe expand recognition a little bit. That's something we've not done, although, we did as I said early on we did modernize our video conferencing for our users on the enterprise side to make a little a little stronger. That's something we're doing generally on with our enterprise solution. Microsoft announced a solution for -- or took one step further in their solutions for smaller size businesses, but what they define as smaller is still pretty large. And I can tell you having looked at that solution, it's an intricate product to set up and use. So it's not something for a lot of the channels that we're addressing. And I don't know that there's much else to particularly mention.

Your next question is from Joe Goodwin of JMP Securities. Please go ahead. Your line is open.

Thank you for taking my question. And glad to hear everyone as well. Just in regards to the large -- the 20,000-seat deal that was closed last year, I mean, is there other potential opportunities out there or in the pipeline currently that you provide any color on?

Yes. I can't really talk about pending deals per se. The opportunity with the same large customer this year is there to have another very significant increase. We have set out this year to secure more larger sized customers and I think we're off to a good start on that. We think we have a great solution for larger companies with a lot of distributed locations typically when they need back up Internet in those locations. And so that's one area of strategic focus for us, if you will. And there are companies who are talking to in that regard and then in general, we're able to garner opportunity with larger sized companies when they have a business process or a need that's not well fulfilled by what they have today. And particularly if they need some customization or some flexibility in the way the solution works for them. And we've talked about our enterprise solution as being very API based and the ability to be different for every single user on our multi-tenant platform based on how we customize it for them. And that's a real advantage when the customer has a need. So that's how we see it looking forward. And, yes, hope that's responsive.

Yes, that was helpful. Thank you. And then just in the expansion outside of North America, do you see that as a large opportunity kind of beyond the kind of existing customers?

I do for us as a business. It's fun to have a little history here maybe it's fun. We first got started in internationally with WeWork in a variety of locations and that drove us to re-architect our office solution in particular to be able to operate it in more easily in other countries. And I think with this customer we will take the next step but it will be our goal to launch more generally than just with specific customers.

Your next question is from Brian Kinstlinger of Alliance Global Partners. Please go ahead. Your line is open.

Great. Thanks so much. I'm wondering what kind of two follow-ups of questions that have been asked, but in terms of the competitive landscape, mainly RingCentral, it recently came out with a $19.99 price point that's similar to yours. Do you believe this has any impact on your sales going forward? And how often your customers inquiring about the difference between your $19.99 per month plan versus theirs when you're discussing new business opportunities?

Yes. We have seen a little bit more price competitiveness from certain players. You don't always get everything and you don't always get it except with a one-year contract or other constraints. And the balance of you it's only a minority of the time that we see them in the marketplace. Our solution at that level at that price point is designed to be really easy to set up and use. And it's curated to be just what a business needs without further complexity. And I think it's why we're ranked number one by users themselves as the best solution available. And it's why we get so much of our business through referrals. So, yes, we're going to have competition, but I don't think, we're not seeing a particular issue with others trying to beat us on price. Let me say that.

Right. My follow-up is in terms of the large customer; the ramp that you're expecting should then have much more of an impact on 2021 being a revenue catalyst or is that -- we may see at the end of 2020? Thank you.

Brian, this is Ravi. Yes. Once we have the POC done and the installs starting to happen, you will see some positive impact in fiscal 2021. Obviously, they are more binary. So it's very hard to predict which month in which quarter they will have a much bigger impact, but the impact on MRR will be more in fiscal 2022 given when I put in -- when we installed even thousands of users in the second half of this year. The bigger impact will be in the year after but there could be also some install revenue or some impact on the MRR. So I am optimistic that we will see some growth from this large customer in the second half, but since it's binary obviously we want to be more cautionary about it.

Your next question is from Matthew Harrigan of Benchmark. Please go ahead. Your line is open.

Thank you. I apologize if these are two relatively Ooma neophyte questions. So when you look at the internet capability on Ooma Connect, recognizing that the marketing is different and you have to maintain the business perception. Would there be any thought of introducing that also at appropriate price point is a higher-end residential in a product? And then second question is there any thoughts with all the progress on the voice recognition side of including some voice APIs in your product suite is that as a differentiator. And I realize these are kind of tangential questions but I was interested. Thank you. Thanks for taking my questions.

No. Happy to talk and thank you. I could see our Ooma Connect being used in certain home situations particularly when you have a home office and a really dedicated need. We do offer today something we call Telo 4G which is a 4G tower married up with our Telo home phone solution. And that is targeted at the residential space. It's not as high powered or capable as Ooma Connect, but it's just same product that we launched a little while ago and continues to build for us. So we do have a capability there. I will take a minute to mention that we designed Ooma Connect in a modular way that when the time comes it will not be difficult for us to put a different modem in it and move it up to 5G. And we are looking forward with this product as well as throughput speeds and capabilities develop in the networks. We also designed it with continuous voice by the way which is something we've applied for a patent on where if your voice call drops on your main internet, your backup internet through the wireless will immediately pick up the call with no miss. And that's a very nice feature to for businesses have to be very sure of not losing customers. In terms of voice APIs, it's not our strategy today to expose APIs and target a developer type community, but it is our strategy for larger customers to work with the APIs we have internally to be able to customize for the customer. And so it's kind of a solution approach to the market all-in-one and we think that's -- we think that's powerful. We can do a lot with it and frankly our largest customer the one we've talked a lot about, we wouldn't have that customer if we hadn't done something special with Ooma Enterprise and then integrated it with Ooma Office so they could have a combined solution that does something just what they need. So we kind of doing what you sort of I think talking about today, but we're doing it kind of all-in-one solution as a company.

There are no further questions at this time. I will turn the call over to the presenters for closing remarks.

Thank you. We appreciate all of your time today. We're working hard at Ooma and we do hope everyone out there is staying safe and that we get through these challenges of the times quickly and can move forward because we're excited about what we're doing with our strategy. Thank you everyone.

This concludes today's conference call. Thank you for your participation. You may now disconnect.