Ladies and gentlemen, thank you for standing by, and welcome to the Ooma Second Quarter Fiscal 2021 Financial Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Matt Robison. Thank you. Please go ahead, sir.

Thanks, David. Good day, everyone, and welcome to the Second 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 its second quarter earnings press release via Business Wire. 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 8:00 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, risks related to the impact of the COVID-19 pandemic and those risks were 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 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, which is available on our website. On this call, we'll give guidance for third quarter and full year fiscal 2021 on a non-GAAP basis. Also, in addition to our press release and 8-K filing, the Events & Presentations 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 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 Q2 fiscal year 2021 earnings call. I'm pleased to talk with you today. Q2 was an outstanding quarter for Ooma financially as we exceeded our expectations on both the top and bottom line. Q2 revenues grew to $41.4 million, and non-GAAP net income was $3.1 million or 8% of revenue. We also generated approximately $2.5 million of cash flow from operations in the quarter. I appreciate the hard work put in by all members of the Ooma team to achieve these results. Looking at Q2, I'm particularly excited by our progress winning larger customers and solving increasingly complex customer deployments. One such example is the chain of hearing-loss clinics with 13 locations in Maryland. Previously, this company had different phone providers in different locations and were struggling to stay in touch with its customers because of COVID-driven office closures. Ooma was able to step in and provide 1 unified solution across all locations. In the words of the administrator at the company, who can now control phone services easily across all locations, Ooma Office has been a lifesaver. A second example is a large enterprise customer where we currently serve over 2,000 of their home-based call center agents in North America. Historically, this customer has used Ooma in conjunction with PSTN routing in a hybrid VoIP PSTN deployment. We are now engaged with this customer to peer directly to them, eliminate the PSTN element and improve both cost and quality. Our ability to provide seamless work-from-home solutions also helped drive larger new customer wins in Q2. One new customer of ours, who is an insurance and benefits company with over 100 employees, was faced with the challenge of some employees working from home while others are spending part of their work week…

Thanks, Eric, and good afternoon, everyone. Before I start, I want to thank the entire Ooma team for their hard work during these challenging times and for helping us deliver strong financial results. With that, I'll begin with a review of our second quarter financial results, then provide our outlook for the third quarter and full year fiscal '21. Even with the extraordinary challenges created by the pandemic, we've once again delivered a strong performance this quarter achieving $41.4 million in total revenue and exceeding our previously issued revenue guidance range of $40 million to $40.5 million. These results reflect solid performance from both our sales and marketing channels. On a year-over-year basis, the 11% revenue growth in Q2 was driven by Ooma Business, which now accounts for 43% of revenue compared to 38% in the prior year quarter. Net income for the second quarter of fiscal '21 was $3.1 million which exceeds our previously issued guidance range of $1.5 million to $2 million. This increased profitability stems from lower personnel costs, including lower travel expenses, as well as from other operational efficiencies while continuing to focus on our long-term growth objectives, which remain unchanged. Now some details on our Q2 revenue and key customer activities. Business subscription and services revenue grew 26% on a year-over-year basis, and residential revenue grew 3% year-over-year. On a combined basis, we achieved a 12% year-over-year growth in subscription and services revenue for both business and residential. Overall, subscription and services revenue as a percentage of total revenue was 93% compared to 92% for the prior year quarter. Product revenue for the second quarter was $2.9 million, consistent with the prior year quarter. During Q2, we saw improvements in orders from our direct customers as well as activities relating to our VARs and reseller…

Thanks, Ravi. Like last quarter, our current business view is that while we are seeing some improvement in the economy, we will still face effects from the pandemic through the rest of this year and likely into next year. Nonetheless, we believe we are executing well on our sales and marketing initiatives and are energized by the results we're achieving, in particular, with larger-sized customers. Also finding that our new features and capabilities most significantly the desktop app, expanded video collaboration and screen sharing, Ooma Connect and now Ooma Wi-Fi are and will open up new opportunities. Our outlook is to deliver profitable growth while continuing to invest in future. All in, we believe our strategy is working, and we can capitalize on significant opportunity going forward. Operator?

[Operator Instructions]. Your first question comes from the line of Mike Latimore with Northland Capital Markets.

Great. Yes, I guess, since the market is still a little fluid here, can you give a sense of how things transpired kind of by month over the last 3 or 4 months. And by that, I'm talking about a little bit on the churn side as well as on the demand side, just to give a flavor for kind of a month-by-month progression here.

Well, looking at Q2, we've seen pretty good demand through the quarter. I wouldn't say that there's been a hockey stick in any way in that regard. I think with churn, we saw churn go up in Q1 as we talked. It's stabilized, and it has not gone up further. And in some cases, has come down.

Got it. Okay. Great. And then in terms of your new WiFi offering, how do you see that playing out here? Is there a clear device or service that you're going to be kind of easily replacing among current customers? Or is this more of a new customer thing?

I think it will be for both, although I think we'll see our biggest penetration with new customers. It's not uncommon for a customer when they're changing their phone service, moving to the cloud, to look at their whole networking strategy and their needs. We also find customers wanting to put WiFi phones in the business where it's easier to do than running cabling. With a WiFi solution, we can ensure those phones will work properly with enforced quality of service. And we can also just provide a turnkey solution so they can kind of get the full package from us without having to struggle with that or bring in others to do implementation. It's a very, very much a managed service by us. The customer will buy the endpoints from us. And once they're installed in their locations, all the rest of it essentially done by us for the customer, including the ongoing monitoring and any customization that they need to have it work just the way they want. So I think there's a lot of value in the service. But obviously, we're just getting started with it, and we'll have to see how it develops.

Got it. And then just you talked about a new North American opportunity with your large -- I think, your largest customer. Is that more seat? Is that new services being added? And how should we think about the size of that new opportunity?

It is large in scope but it is not delivering the full service the way we've traditionally done for them and the users we have to date. It's kind of a partial step forward with them, which will allow us to save them some money and provide them some better quality of service. And over time, I believe it can lead to substantial more growth for us as we bring other elements of our service to those users. So I think it's large in scope, but it's not as much revenue as we would have had per user before, but it's only a partial implementation, and the rest will flow, we hope in the future.

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

Really good to see the top line beat also flowing down with the EBITDA margin expansion quarter-over-quarter here. Ravi, I think you mentioned with the Broadsmart acquisition fully integrated, that you're seeing a little bit more focus on the VAR channel. Any specifics you can provide on that front as far as some of the traction you're seeing? What percentage of company sales are coming from VAR? What's the expectation going forward and the opportunity set?

Josh, thank you. What I said, yes, we are seeing some good traction from the VARs and resellers. But if I look at the overall or Ooma perspective, VAR and reseller contribution, generally, it has been growing, increasing pretty well. It's a little bit more than 1/3 of the total revenue coming from VARs and resellers. And in the longer term, we expect it to be around 50% of our overall user growth. So I think we're making good progress at this time, which Broadsmart was also playing a role in that growth, but we have been building VARs and reseller programs for us for a couple of years now, and we are seeing some good momentum.

And then just to get back to the company's largest customer, I know you've been working through beta for an opportunity outside of North America. One, is it still fair to assume that the opportunity set for that is comparable to the 20,000 seats you have domestically? And two, is there any of that really built into guidance for the back half of the year? Or is that excluded because it's still beta?

It is in scope, the size that you mentioned there. I'll let Ravi talk about the guidance.

We obviously have included or incorporated the thought process of what all investments will take and how much upside could there be. But until upsides really happened, obviously, I would want to take a cautious approach to that. So there is some element of whether it's expenses, some element of revenue built in, but a very small element, and we would want to make sure I don't disappoint. So I think we are optimistic about this opportunity, but I am taking a cautious approach from a guidance perspective.

And then last question for me. Good to see the companies continue to unleash these new features. Now you have WiFi as well. Could you provide a little bit more detail on the timing from when you expected to roll out this new solution that's going to have like video conferencing and some of the features or what do you think the company's value proposition versus other people and the peers on that market?

Yes. We have it out and working today at some customers. This is for Ooma Office now. For Ooma Enterprise, we've always had video conferencing, and we even made some improvements to it earlier this year. Our smaller business customers have generally not had that much interest in this kind of a service. But obviously, in these times, that's changing. And so we want to be able to enable it as part of our Office Pro tier. Economically, it's going to be a great value to be able to have that included as part of all the other things that you get just for the extra $5 a month. And as I said, we have some customers using it now in beta. It's going very, very well. I have no doubt that this quarter, it will roll out extensively.

Our next question comes from the line of Matt Stotler with William Blair.

Congrats on the solid results. I guess, first, I'd love to touch on, I guess, another one on the partner channel. Unfortunate to see the update with Sprint Omni, but it's good that the relationship with T-Mobile is still intact, and there still seems to be opportunity there. I'd love to get any additional thoughts around the potential for, I guess, moving forward with that partnership. And then as you think about the pipeline for additional carrier partnerships, how do you think about that? How is that shaping up? And what do you see the importance of that specific channel looking like going forward in terms of contribution to the business?

Yes. As you said, we still have a strong partnership with T-Mobile. And this narrowing of their portfolio doesn't just extend to us. They're doing that fairly extensively as far as I can tell. Cutting back to much more of a core business focus. And I can appreciate that. Yes, things can always develop differently down the line. But for the moment, that's the outlook we have. We are excited about some of the forward-looking things we're doing strategically internally, and they are interested in some of those things, and we'll just have to see how that unfolds with them. And they do, of course, as I said earlier, continue to power Ooma Connect, which is an important fixed wireless solution that we do together with them. In terms of additional partnerships, we think of that more broadly than just other carriers. And we are in discussions with other parties today in various forms and with various scope and potential. And that's something that I think we're good at. Our solutions are setup to work with others in those kinds of ways. And so we continue to drive towards seeing more of that develop for us.

Right. Right. It's good to hear. And then just one more on the international piece. Obviously, you've talked a bit about the positive results from the POC and kind of just waiting for the timing there. How do you think about further expansion internationally or other opportunities or maybe avenues where you could see that expansion outside of North America?

We're not rushing to expand internationally just to do so. With a large lead customer, it's a very economic move for us. And so that's what will propel us to do it. We are already today in a number of countries, 3 or 4 countries in Europe, Australia. We have users in other countries as well. Japan comes to mind. So we are not adverse to enabling any international opportunity that's needed as part of a business opportunity that makes sense. But our current focus for sales and marketing today is North America, unless we have a large customer that we can leverage to expand further. We think we are going to be able to do that internationally in a new geographic region with this large customer that we've talked about. It's just a matter really of when this whole pandemic situation has, I think, gotten away a little bit of some of the timing of what we're doing with them, but the need is there and the economic sense for the partnership is there. And what we're doing together is going well. So I do believe over time, we'll see all this come together just as we've discussed.

Your next question comes from the line of Joe Goodwin with JMP Securities.

Just first on the guidance, it looks like just from the midpoint, the 4Q shows a sequential decline. Is that just conservatism there or anything we should be thinking about?

Joe, this is Ravi. Given such a high subscription revenue, generally, we don't see decline in subscription revenue sequentially. So I would just say it's a range, which I've given. Given it's just 6 months out in the pandemic, but I think I would say we have seen, generally speaking, sequentially, subscription services revenue growth. Where could be a small variability is on the product revenue side of it. If there is a bigger issue in November, December, January, given the pandemic and some brick-and-mortar stores may be closed, that's probably the only reason I could highlight where we could be at the low end of the range and that's why you can probably call it some conservatism or some unknowns around it, but more than 90% of our revenue subscription revenue, which is very stable and predictable.

Got it. And then just on the business subscription line, what's kind of the right way of thinking beyond this year? I mean, how do you guys kind of think about the growth trajectory of that business? I mean, is it fair to assume kind of low mid-20s for the foreseeable future? I guess, how do you guys think about that internally?

I would love -- we continue to invest into the business side, so I would love to see the growth rates in the future. But this year is a very different year with lots of challenges and situations. So I would say, next year, I expect, I would hope to be more than 50% of revenue coming from business, that's one thing I would want to see that. And we'll probably provide more color and guidance for our growth rate for next year in terms of business in our Q4 earnings call. But right now, I would say there are some unknowns, for example, this large customer of ours got impacted. Some of the plans we had for early this year are slightly being pushed out. So we would want to see what's happening with this pandemic, but I think we are well positioned. We have very good growth engines, growth channels. VARs resellers are there. So we have all the right channels and opportunities ahead of us. We just have to see how this COVID-19 situation comes out over the next 3 or 6 months.

[Operator Instructions]. Your next question comes from the line of Brian Kinstlinger with Alliance Global Partners.

Great. Obviously, we've seen a little bit of a slowdown in terms of year-over-year growth in business subscribers. Clearly, COVID has slowed that business development. With the economy beginning to open, a lot of people back in the office, obviously, not everybody. How are conversations changing with enterprises? And when might we see additions begin to accelerate?

Sorry, how is what changing with enterprises?

Conversations.

Just conversation. I mean, it sounds like in the last 3 or 4, 5 months, we've seen business development slow. You've had some challenges, businesses have had challenges. As they're opening, does it sound like you're getting more comfortable with moving forward and implementing some of your solutions? And might that lead in the near term to an acceleration in the year-over-year growth rate of business subscribers?

Yes. It's interesting. There isn't just one answer to that question. Some of our customers are moving from an on-prem or a very disjointed solution to something that's much more capable of working across their needs. And in those cases, I think there's been a little bit of acceleration to make changes with the pandemic and the pressures it's put. A number of other customers, though, have hunkered down a little bit to save cost. And even people we've been talking to, those customers might be on furlough or not with the company anymore. So we've seen a whole range of things happen with customers. Generally, I think the customer demand is strong and I don't think a lack of customer demand is going to hold us back as we look forward. I think if anything where we've impacted the most is the ability of all of our sales channels and teams to be as effective as we'd want them to be, particularly those channels and teams that are talking to customers directly or more engaged face-to-face. I do think it's getting better, but I think we've got farther to go. And I think we have to plan a little bit in our outlook for somewhat of a second bounce, if you will, later this year as cold weather comes back and things. But all that said, I feel pretty optimistic that our solutions are just what the customers need. And once we engage with a customer, we have a very good success rate with winning the business and moving forward. So I'm feeling -- I said it in the script, I think things are gradually getting better for us, too, as we look forward, and we'll be able to leverage that as we go, too, with the environment.

Great. And a follow-up to that. Great. If you can speak to the pipeline, especially in terms of the enterprises and small businesses, notwithstanding your largest customer. Over the last six months where we are today, are you seeing has the pipeline grown? Has it shrunk given COVID? I'm just curious kind of what the near-term opportunity in terms of conversations and, if you will, RFPs, I'm not sure if there's RFPs. But what is that looking like?

Our pipeline has -- again, it's affected a little bit by channel. And by the way, I described it earlier. But generally speaking, our pipeline is robust, and it is growing as we sit here today.

Okay. The last question I had, it was a few questions about your largest customer. It sounds to me like compared to the last time we talked, it's a little bit more unclear about when installation may move forward. Is that a COVID result or is that some other factor that's going on with that customer?

So I mentioned two things about this customer. Yes, with these trials we've done in a new geographic area, I think that because of the pandemic, the customers not able to move as fast with some of the implementation that they want to do. But I do still believe we will see that happen. But I also mentioned that since we talked last, secured a new opportunity in North America with that customer, which is a nice step forward and positions us well for even more business as we go beyond implementing what we're implementing now with them. So I think all things are in a good spot. And yes, ideally, the pandemic wouldn't happen, everything would be running forward as fast as we were before, but I still think we're going to see things come together nicely.

Your next question comes from the line of Matthew Harrigan with Benchmark.

I think video conferencing at some point, probably sooner than people expected, given COVID becomes somewhat the de rigueur as part of people's product bouquet, if you will. But can you talk more about your offering there and whether that affects your pricing power over a period of time? And then just generically, it seems with so much more utility of work at home and all that. I mean, do you think that eventually translates to higher pricing power on the business side over a period of time, particularly as the economy becomes more robust, hopefully, inevitably next year?

Yes. I think that's a good question. What we incorporate today for Ooma Enterprise is at a higher price point than what we will do with Ooma Office for a smaller business. But our Ooma Office solution that we're building into the Office Pro tier is -- it's got some limitations. They're not particularly significant, but it's basically, it's a good solid video conferencing and screen sharing solution that will satisfy most businesses. There will eventually be a premium tier of that capability, which would allow us to price higher or, say, a power user, someone wants to have even larger conferences, even longer conferences, maybe some special features in those conferences. But yes, our strategy, though, I think you've heard us talk about this a little bit. We really do believe we are very cost-effective in what we do as a business. And we are currently piling more and more capability in the Ooma Office Pro to make it just a great value to the end customer. And I think that adding video and screen sharing is just one more step along the way there, and it puts us in a favorable position in the market versus others. So I think it's a little bit of both. I think what we're doing is going to be very effective, but it will also be the base for an even higher tier of service as we look forward.

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

Well, great. I really appreciate everyone joining us today. We're very happy with our results for Q2. And very excited about the new things we're doing and the success we're having on a larger scale and look forward to updating you on all that after Q3. Thank you.

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