Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to Ooma's Fiscal First Quarter 2024 Earnings Conference Call. [Operator Instructions] Matt Robison, you may begin your conference.

Thank you, Emma. Good day, everyone, and welcome to the Fiscal First Quarter 2024 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, Shig Hamamatsu. After the market closed today, Ooma issued its fiscal first quarter 2024 earnings press release. This 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 & Presentations 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 PM Eastern Time. Dialing information for it is included in today's 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 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 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 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 is included in our earnings press release, which is available on our website. On this call, we will give guidance for the second quarter and full year fiscal 2024 on a non-GAAP basis. Also, in addition to our press release and 8-K filing, the Overview page and Events & Presentations page in the Investors section of our website as well as the Results page of the Financial Info section of our website include links to information about 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 Q1 Fiscal Year 2024 Earnings Call. Thank you for joining us. I'm pleased to talk with you today about our Q1 accomplishments and our progress executing the many growth initiatives we have underway for FY '24. We accomplished a good start to the year in Q1 with revenue growing to $56.9 million and non-GAAP net income, again outpacing our expectations at $4 million. We also grew cash in Q1 by about $1.5 million while investing in several growth initiatives. And consistent with our growth plans, we increased our head count and expanded the size of 1 of our office locations. With no debt and the financial flexibility to pursue our plans, I believe we are well positioned and off to a good start this year to capitalize on our growth initiatives. Starting first with Ooma Office, which is our solution for small- to medium-sized businesses that has consistently been voted #1 by users in PCMag's annual user survey, we made good progress in Q1 on our strategy to introduce more advanced features, shift customers to higher tiers of service, increase our average revenue per user, expand the types and sizes of businesses we can serve and increase our market presence and sales reach. Late in Q1, we announced several new features, which helped contribute to our highest ever adoption of our premium service tiers, Office Pro and Pro Plus. Approximately 55% of new customers in Q1, and now 27% of our installed base have selected one of these premium tiers. Our road map calls for further feature additions each quarter through the balance of this fiscal year as we continue to execute our strategy. I'm also very pleased to highlight our just announced partnership with NexHealth to drive adoption of Ooma Office…

Thank you, Eric, and good afternoon, everyone. I'm going to review our first quarter financial results and then provide our outlook for the second quarter and full year fiscal 2024. We delivered another solid quarter with a total revenue of $56.9 million, at the high end of our guidance range of $56.4 million to $56.9 million. On a year-over-year basis, total revenue grew 13% in the first quarter, driven by the strength of Ooma business as well as the addition of OnSIP. In the first quarter, Business Subscription and Services revenue accounted for 56% of total subscription and services revenue as compared to 50% in the prior year quarter. Q1 product and other revenue came in at $3.8 million as compared to $3.6 million in the prior year quarter. On the profitability front, the first quarter non-GAAP net income was $4 million, above our guidance range of $3.4 million to $3.7 million and represented 34% increase over $3 million in the prior year quarter. Now some details on our Q1 revenue. Ooma Business Subscription and Services revenue grew 27% year-over-year in Q1, driven by user growth and the addition of OnSIP. Excluding the effect of OnSIP revenue contribution, Ooma Business subscription and services revenue grew 13% year-over-year. On the residential side, Subscription and Services revenue grew 0.3% year-over-year. As mentioned in our last call, the growth in residential subscription and services revenue in the first quarter was negatively impacted by approximately 4,000 Telo users churning during the quarter for a specific customer. Despite this onetime event, our relationship with this customer remains strong as we continue to expand our relationship with Ooma Business offerings for other users. For the first quarter, total subscription and services revenue was $53 million or 93% of total revenue as compared to $46.7 million or…

Thanks, Shig. As I mentioned at the outset, we're off to a good start this fiscal year. Our focus is on executing well on our growth initiatives and strengthening our competitive advantage and leadership in each of the segments we target. To that end, we are making strategic investments, especially in sales, marketing and partnership development and are carefully balancing those investments with our financial goals. We're fortunate to have large opportunities before us and good momentum underway. Thank you. Emma, we can now take questions.

[Operator Instructions] Your first question today comes from the line of Matt Stotler with William Blair.

This is Alex on for Matt. So just maybe one on the partner ecosystem. Could you talk about the partnership with Jazzware and NexHealth? And just the traction you've seen with the Jazzware partnership and any thoughts on how the vertical-specific market approach expands your TAM?

Sure. So Jazzware is a partner of ours in the hospitality space, and that's been a growing area for us all through last year and into this year. And it's an exciting area because there's, what, 80,000 plus hotels in North America to go after. And a lot of them have still stayed on PBXs in the closet because they have complex needs with analog lines to the rooms and other different types of needs at the front desk. Jazzware allowed us to connect up to about 80 different property management systems. That's a really key advantage to have in that vertical. And we get customer referrals from Jazzware. We refer customers to Jazzware. And the ideal customer for us is one that adopts their solution along with ours and basically does a rip and replace moving to the cloud for their phone service. We are pursuing certifications, if you will, with some of the large hotel chains. I made a few remarks in my script about our -- that we're making progress there. And although I didn't get too specific. And we're excited about where we can go with that vertical. It's the kind of thing we do well. It's complex, and we have a great solution. So Jazzware is a key enabler for us in that vertical. We view NexHealth in a similar manner. Some of you may not have heard of NexHealth, but they're no small player in the space. Just citing publicly available data, LinkedIn says they've got 300 employees. Crunchbase says they've had $175 million or more invested in them. And that they're getting 800,000 or more visits a month to their website. Clearly, they have momentum today in serving particularly dental practices. And we want to leverage that as we target that vertical. And I can tell you, we've already got customers that came to us through NexHealth and vice versa. And we were both at the -- what was called the California Dental Association Show last week. And I think it's just a way to propel yourself a little bit faster than the space and to ensure that you can give a very complete solution for the customer. When we benchmark what our solution does overall versus some of the others in the space and what they're selling, we think there's a whole host of features available in Ooma Office that aren't available if you go with one of the competitors' solutions. So we think we also bring good competitive advantage to the space. But this is what our partnerships do for us. But ultimately, the majority of our success is driven by our own sales and marketing activities in our level of effort we put targeting the vertical. I hope that answers it for you, Matt.

Yes. No, that's great. Super helpful. I really appreciate all that color. And then maybe just switching gears a little bit. One other one from me. So office revenue continues to be -- continues to increase as a percentage of the total. What is your view on the potential growth profile for that business in a normalized macro? And what do you guys view as key drivers to get there from where we are today?

Well, I mean, you have our guidance for this year, which is kind of how we look at the immediate outlook in light of the economy and what we're up against. Bigger picture, we see a space -- well, you got to break our segments down, but our -- the smaller business segment, 7 million of small businesses in North America with 1 to 20 employees, and we estimate 2/3 of them have yet to move to the cloud. That's just tremendous opportunity. And that's before we think about expanding beyond serving our largest customer in Europe and maybe elsewhere. So for us, it's go, go, go in that. And we are bringing out additional features to expand the range of businesses that our solution will appeal to and to along with that, improve our ARPU as we do so. But fundamentally, our office solutions targeted at the small business needs. The kind of customer that doesn't have an IT professional needs something super simple to set up and use that just works really reliably. And frankly, for what you pay has great value. And with our low-cost structure in the industry that we believe we have, we think we can put all that together in a way others don't because we focus so much on that segment, Ooma Office. We move over to Ooma Enterprise. It's much more of a target certain verticals where we can establish differentiation or other types of customer needs where there's a custom requirements, and we can do that well because of the nature of our platform, which is very customizable. So I'm excited on all those fronts. We did some really strategic hiring this last quarter, in particularly strengthening the capabilities in our sales team. And this is just part of expanding and…

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

I guess on the NDR number, it's been very stable. I guess, I assume you expect it to continue to be stable. That's one question. And then second, on the last call, Eric, you mentioned that November, December was a little slow. January got better. I guess, any general color on February, March, April in that context?

Sure. I'll let Shig take the first question, and I'll take the second.

Yes, Mike, that's the question on NDR. Yes, the short answer is that we anticipate that to be very stable. Looking backwards down to the new methodology pretty stable. We saw 99% again, and we continue to expect that would be the case. Eric?

Yes. We did talk on our last conference call about how at the end of last year, calendar year, it seemed to slow down a little bit and then picked up in Q1. And Q1, I thought was pretty strong through the quarter and through April. We also, I think, did a good job of balancing our marketing spend through the quarter. And yes, I'm particularly pleased with the growth in the funnel of opportunities, the pipeline for AirDial. That funnel increased significantly for us. And we did that in addition to growing in the other areas of our business. If anything today, we're a little sales resource constrained on going after all the opportunity we see there. But yes, I think that we'll anticipate a little bit of as the summer comes and all, I think people are going to be traveling more in all that. But I think it will -- we're not expecting a big change from having bounced back in the first quarter.

Okay. Great. And then your large international customer, I guess were they more or less than half of the sub adds in the quarter for business? And then is that on plan for the year? Have you always expected kind of a pause for ramping in APAC later in year?

So they were a significant contributor because it was a big quarter for us in Q1, but also the other parts of our business grew well, too. And I would say we probably didn't quite get as far in Q1 as we thought we might just because the effort it takes. It was a very big quarter as big as any other quarter we've had with them. But we didn't maybe go farther than that. In Q2, yes, I think it's taking us in them a little longer to get ramped to onboard users in Asia. And so you heard my guidance that we're not expecting much growth with them we think the back half of the year will be strong again. I think overall for the year, if I were to sum it up, we have the potential to do better than we planned. I think that's more likely than not. But we'll have a better perspective on that once we get up and running in Asia and we see the pace of rollout. So I couldn't be more pleased. They've been great to work with. And we've got a lot of things going on together. But before the end of this year, we want to be in more regions beyond Asia. So there's still a lot of work to do.

Your next question comes from the line of Brian Kinstlinger with Alliance Global Partners.

Wanted to get a little bit more detail on AirDial in terms of business development, sales cycles and preparation from the customer side, particularly, can you provide any number of lines in backlog lines booked or numerical context, you talked about a significant increase in the sales funnel? Maybe some kind of context would help us understand more about that.

Yes. We're not divulging those specifics for competitive as well as mainly reasons. But I don't think the outlook has fundamentally changed the way I talked about it in the last couple of quarters, which is particularly the very large opportunities, they want to do a proof of concept. We've got more proof of concepts running right now than we've ever had. And those can cycle between kind of -- they usually take two to three months to run their course and then you go into negotiations where you're going to go from there. We did have some of our largest customer opportunities last quarter instead of sign up with us for everything they need, they kind of tranched it and bought hundreds of lines, but not thousands of lines. And they said, once we get those installed, we'll come back and we'll do we'll do the next tranche because for our customers to have a big need, they're not going to be able to do it all at once either. But on the positive side, compared to the way I've talked about it in the past, we are getting better at installation. It's going faster our third-party vendors that we work with are doing a better job. For our customers ready to go, we can close a deal and have AirDials getting installed within weeks, not months, weeks. And you take a little bit on how much auditing you got to do to find out what their needs are. In other words, how much they know about their own situation. But I think we're making good progress on the installation and deployment front. If you look at most of what we have planned for Q2, it's deals that we've sold in Q1 that are deploying through the quarter. And what we sell in Q2 will probably be what we then deploy in Q3 or maybe even Q3 and Q4 because the biggest opportunities can take two quarters really to roll out. I think that customers are clearly waking up. We've been getting some cold inbounds, if you will, which is to say, they found us. And we love that. And that, to me, is evidence that we're starting to get our name out and big customers are starting to look around. But I think that I think we have the next three to five years to see the rollout of this type of solution as POTS lines go away. And so we're also looking at it with that longer-term horizon. I don't know if that's quite what you're asking, but that's maybe a little I can share.

Yes. That's good. My one follow-up on NexHealth. Maybe I missed it to your answer another question. Did you give a -- maybe what their customer installed base is or their customer count is, I guess, fun to gauge, is there any low-hanging fruit that you can cross-sell into their base?

No, I didn't give that. They're a private company, and it would be up for them to disclose. But I think they're pretty sizable in the space, though. And I think their solution if you were able to see it in action, it's very modern. I think it shows very well to the customer, and I think that's what positive for what they're doing. So I think they've done it right. But no. All I can say is we've already got some customers we're working with together. And we've got referrals going both ways now between our two companies.

Your next question comes from the line of Matthew Harrigan. Your line is now open.

I know that one reason why you've been able to expand internationally is you're somewhat piggybacking of your largest customer and thereby not blowing up your lines. When you look at the hospitality vertical, I mean, it's almost -- certainly is international and global by definition, is there any other vertical and presumably, your clients' customers are very happy with you. Isn't there a push from -- I'm sure you're not going to comment on Hilton specifically. But on a large entrant like that, wouldn't they want to pull you into Europe and Asia and basically everywhere, if they were that enamored with your product? And can you do that efficiently the same way that you've been able to do that for your large customer? Because it seems like that's clearly a global vertical opportunity versus just in the U.S., if I'm not misunderstanding something. You maybe there already, and I'm not getting it, I assume you would indicate that you were there if you were doing a lot with someone like Hilton in Japan or Germany or something.

Yes. I know where you're coming from, and that's a logical question. In our experience, the brand that you think of the corporate entity can certify and recommend, but you still have to sell to the individual hotels. And often these individual hotels are owned by operators, franchisees, I guess, in a way, although I'm not sure I'm using the word correctly here. But so we have to go after these hotels either one by one or if you get an owner who's got a lot of hotels under their belt, you can get some momentum through their base. But those tend to be regional in nature. So all our activities on the hospitality front today are North America and we haven't really thought about it beyond North America so far.

Your next question comes from the line of [Katherine Note] with B. Riley.

I'm on for Josh Nichols today. So the first question is just -- you talked about strengthening your sales team pretty significantly this quarter. And I was just wondering if you could comment maybe on the cadence of seat adds you expect throughout the rest of the year?

Yes. So where we made some particular advances last quarter or recently is we've brought in two very senior folks to drive our activities in some areas, such as channel development and our direct sales activities. And I think, is strengthening the team under Rob, which is terrific. And we will continue to make more senior hires like that. But primarily now our focus is on folks who can do strategic sales to larger customers, driven primarily by either AirDial or hospitality opportunities that we go after. So if you look at the history of Ooma, we've always -- we were very, very strong and are very, very strong in inside sales and then we branched into channel development, but building our own strategic sales at a direct level or to assist the channel in large opportunities, that's an area that we're investing as we look forward this year. We grew our headcount by about -- I'm going to say, 50 in Q1 versus Q4, maybe it's 40.

40.

Yes. Shig says maybe 40. Most of that was -- much of that was in sales. And that's a good base of growth for us to not need to grow a lot more in the next three quarters. We'll grow some, but it won't be on the order of that as we go forward. We won't need to.

Okay. Great. And then I think I missed this earlier, but can you -- do you mind breaking out the business and residential subscription revenues again?

Yes. Business and let's see -- for business in Q1 subscription revenue was $29.8 million and residential was $22.1 million.

[Operator Instructions] There are no further questions at this time. I'll turn the call back to Eric for closing remarks.

Thank you. I thought some of you might ask me about one of the key things I mentioned that -- today that is very new news for us. U.S. Cellular's decision to resell AirDial is a big, big step for us. They have quite a large organization, and they're going to be selling it on their paper, so to speak, and under the Ooma brand name. And I think that's a great next step for us to bring on another key partner for AirDial. So I want to emphasize that here at the end as we sign off. Thank you, everyone, for joining us today, and we appreciate your time.

This concludes today's call. Thank you for attending. You may now disconnect.