Ooma, Inc. (OOMA) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ooma Inc. Fiscal Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. Matthew, you may begin your conference.

Good day, everyone. And welcome to the second quarter of fiscal 2019 earnings call of Ooma Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. With me here today are Ooma's CEO, Eric Stang and CFO, Ravi Narula. After the market closed today, Ooma issued a press release via GlobeNewswire. The release is also available on the Company's Web site 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 Web site. This link will be active for replay of this call for at least one year. During the course of 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 today, as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements except as required by law. Please note that, other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non-GAAP basis. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures are included in our earnings press release that is available on our Web site. On this call, we'll give guidance for third quarter and full year fiscal 2019 on a non-GAAP basis. Also in addition to our press release and 8-K filing, the events and presentations page in the Investor section, as well as the quarterly results page of the financial section of our Web site includes links to cost and expenses not included in our non-GAAP values and key metrics of our core subscription businesses. These are titled as supplemental financial disclosure one and supplemental disclosure 2. Additionally our investor relations presentation slides include GAAP to non-GAAP reconciliation and that also provides resolution of GAAP expenses that are excluded from non-GAAP metrics. Our August 7th press release described our participation in several conferences during coming days. We will be providing audio webcast from the Midwest Idea's Conference in Chicago on Thursday, August 30th and the Gateway Conference presented by Liolios, Thursday September 6th. Okay, Eric.

Thank you, Matt. Hi everyone, and welcome to Ooma's FY19 Q2 earnings call. I'm pleased to report that in Q2 Ooma achieved solid results, while making significant progress on several key initiatives. I'd like to elaborate on each of these today and then look forward to our plans for the second half of this fiscal year. Financially for Q2, we achieved $31.7 million in revenues and we grew our important core subscription service revenues 19% year-over-year. Our margins remains strong, our ARPU increased and our net dollar subscription retention rate was 100%. All-in, we executed well on many fronts and we’re pleased with our financial results for Q2. As we discussed at the start of this fiscal year, FY19 is in many respects a building year in which we are making significant investments for the future. We set out this year to expand the breadth of our solution for small businesses; to integrate and capitalize on our Voxter acquisition to serve larger businesses; and to extend the Ooma platform to include home security and video monitoring services for residential users. We made substantial progress on these initiatives in Q2, and I would like to elaborate here on each. First, regarding our curated, flexible and easy to use solution for small business, Ooma office; we added seven important new features, which we expect will make our solution attractive to more customers. These include the ability to serve businesses with multiple site locations; feature extension, such as a multilevel IVR, dynamic sequential range ballpark and others; and new phone options, namely our DP1 DECT wireless two-line desk phone and a new core cordless IP phone. We are now focused on three remaining major feature enhancements; a multiline receptionist phone, call recording and further improvements to our office mobile app, all of which we expect to launch before yearend. When these are complete, we believe we will have a solution capable of serving just about every small business that we encounter, and we will be able to turn more of our engineering resources towards other initiatives. On the sales and marketing front for Ooma Office, we expanded our sales team into our community during Q2, and once again executed well and grew faster than others in our industry. Consistent with our expectations, there is a ramp-up time to obtain full productivity when we add sales and marketing resources. And so we anticipate the investments we made in Q2 would drive further growth in Q3 and beyond. Turning next to our Voxter acquisition to serve larger sized businesses with a full-featured and uniquely customizable UCaaS solution, I'm pleased to report that we have repositioned Voxter in our go-to-market strategy as Ooma Enterprise, and have now integrated our sales and marketing activities between Ooma enterprise and Ooma Office. This integration allows us to optimize our response to the customer leads that we generate and to present each customer with a continuum of capabilities, all under the Ooma brand. We have also put in place the core Ooma Enterprise sales and marketing organization and just recently announced a strategic partnership with Talkdesk to bring Talkdesk's best-in-class contact center platform to Ooma Enterprise customers. Now while it's still early days for Ooma Enterprise, we are already seeing a positive response to our strategy of providing bespoke solutions targeted at what we see as an un-served market, namely companies that want their UCaaS to fit their individual custom needs extremely well. Finally in Q2, we made significant progress toward extending the Ooma platform to include home security and video monitoring services for residential users. Our most notable development is the ability to market and sell Ooma home security, which includes our unique remote 911 calling feature without the need first to sign up for phone service. Customers can now purchase the Ooma home starter kit specifically for home security and then later at their option add-on phone service. This approach allows us to market home security in the standalone way to customers. In addition, we added many important features in Q2 to the Ooma home security platform including voice integration with Amazon Alexa, geofencing for automatic arm and disarm of the system when a customer comes and goes from their premises and a siren for when the system is triggered. We also began selling the Butterfleye camera in Q2 and just recently integrated the camera's video screens into our main home security mobile app. This development allows us to present the customer with an integrated platform solution that also includes unique features such as remote 911 and facial recognition. While we have a lot of work ahead to place our home security solution at major retailers and build customer awareness, I believe we are off to a great start and well placed now for the back half of the year. Now, looking ahead to Q3. Our primary focus is to continue to execute on the main strategic initiatives I outlined earlier. For Ooma Office, we plan to launch a small number of remaining features, and we intend to capitalize on our added sales and marketing resources to a greater extent as they come up to speed. For Ooma Enterprise, our plans for growing call for growing the number of resellers, capitalizing on our new Talkdesk partnership, adding certain additional product features and expanding further our sales and marketing team. Finally for home security and Butterfleye, our efforts will concentrate on building brand awareness and retail placement, as well as continued future development. While we have much further to go to exploit fully the opportunities in front of us, I believe we are making solid progress, our initiatives are taking hold and I'm excited about our outlook ahead. Now, let me turn the call over to Ravi to discuss our results and outlook in more detail. I will then return with final comment and we will take your questions.

Thank you, Eric, and good afternoon everyone. First, I'm going to review the financial results of our second quarter fiscal year 2019 and then provide our outlook for the third quarter and full-year fiscal '19. All income statement items except revenues are on a non-GAAP basis and exclude expenses such as stock-based compensation, amortization of intangibles and acquisition related charges. The reconciliation of GAAP to non-GAAP financial data and other key business metrics can be found in the press release issued earlier today, which is available on the Investor Relations section of our Web site. Now Q2 '19 results. We had a strong second quarter performance, achieving $31.7 million of total revenue as we exceeded our previously issued guidance range of $30.5 million to $31.3 million. This was an increase of $3.5 million or 12% on a year-over-year basis and are pleased with our growth driven by continued execution, particularly for Ooma business. Net loss for the second quarter of fiscal '19 was $943,000 within the previously issued guidance range of $800,000 to $1.3 million. Ooma business subscription and service revenue grew 49% on a year-over-year basis and revenue contributions from Ooma business are now 27% of our total revenue compared to 22% in the prior year quarter. Our residential subscription and services revenue grew 10% on a year-over-year basis. The combined subscription and services revenue from the core businesses, namely Ooma business and Ooma residential grew 19% year-over-year. As a reminder, we refer Ooma Office, which is our small business solution and Ooma Enterprise our customizable UCaaS solution, together as Ooma business. Consistent with our expectations, Talkatone revenue for the second quarter was $1.2 million, a 20% decline year-over-year and was relatively flat compared to first quarter of fiscal '19. At the end of the second quarter of fiscal '19, subscription and services revenue was 90% of total revenue compared to 89% in the prior year period. Product revenue for the second quarter of fiscal '19 was $3.3 million, 9% increase year-over-year. This product revenue increase was driven by sales of phone security bundles, Butterfleye cameras, as well as some product sales to a large telecommunications service provider. I'll now take this opportunity to add some color on the progress of Voxter and Butterfleye acquisitions we recently made. Starting with Voxter first; we are making good progress, building solid infrastructure for Voxter, such as a billing portal and a more robust and automated system for regulatory stack compliance; and we continue to add new product features and have integrated our lead generation and other marketing activities with Ooma Office. All this progress gives us confidence and makes us believe that Voxter is well positioned but future users and revenue growth. Now some details on Butterfleye. As Eric mentioned earlier, we started shipping Butterfleye cameras during the second quarter, having resolved some initial production issues and are now working to create new retail channels for Butterfleye cameras. On the product development side, we continue to add new features to make Butterfleye more competitive in the market place. With that some details about our customer metrics now. Our total core user base increased 7% from $895,000 core users at the end of second quarter of fiscal '18 to approximately $955,000 core users at the end of second quarter of fiscal '19. Our business users grew to 15% or of total core users at the end of the second quarter of fiscal '19, up from 11% at the end of second quarter of fiscal '18. Our blended average monthly subscription and services revenue or monthly ARPU increased to $9.56 in the second quarter of fiscal '19 compared to $8.61 for the prior year period. Annualized exit recurring revenue was approximately $110 million at the end of the second quarter of fiscal '19, a 19% year-over-year increase. We are pleased to have achieved 100% net dollar subscription retention rate for the second quarter compared to 98% for the prior year period. Now some color on gross margins. Overall, gross margins were 50% for the second quarters of fiscal '19 and fiscal '18. Our subscription and services gross margins were strong at 70% for the same period. Product and other gross margins was negative 23% for the second quarter compared to the prior year quarter of [Technical Difficulty]. During the second quarter, we started the production of Butterfleye camera and as a result, we incurred some incremental material and freight charges. Now on to operating expenses, second quarter operating expenses were $20.4 million, an increase of $2.8 million or [16%] on a year-over-year basis. We ended the quarter [Technical Difficulty] employees and contractors, up from 646 in the prior year quarter. Overall, sales and marketing spend increased by approximately $1.3 million [Technical Difficulty] as compared to the prior year quarter to drive growth of Ooma business. During the quarter, we also started marketing activities in terms of branding and creating market awareness for Ooma Home Security. While the benefits from these marketing and branding efforts are expected over a longer timeframe, we believe we are well positioned to gain market share in the future. Research and development expenses was $7.4 million, an increase of $1.3 million or 22% on a year-over-year basis to support enhancements made to Ooma business as well as the development of new features for Ooma Home Security including Butterfleye. G&A expenses [Technical Difficulty], a 6% increase from the prior year period to support the growth of the business, including the two recent acquisitions. Our net loss in the second quarter of fiscal '19 was $943,000 or $0.05 loss per share compared to a loss of $396,000 or $0.02 per share in the second quarter of fiscal '18. Adjusted EBITDA loss was $645,000 in the second quarter of fiscal '19 versus a loss of $71,000 for the same period last year. Now some details on cash, we had cash investments of $48.6 million with zero debt at the end of the second quarter of fiscal '19. The second quarter of fiscal '19 cash used in operations was approximately $800,000 compared to cash generation of approximately $1.3 million in the prior year quarter. This cash was used to support the growth of Ooma business, as well as building Butterfleye camera inventories. I will now provide our third quarter and full year fiscal '19 outlook. The following guidance excludes stock-based compensation expense, amortization of intangibles and acquisition related charges. For the third quarter of fiscal '19, total revenue is expected to be in the range of $31.5 million to $32 million; we expect non-GAAP net loss in the range of $800,000 to $1.3 million; non-GAAP net loss per share is expected to be in the range of $0.04 to $0.07; we have assumed 20 million of weighted average shares outstanding for Q2. For full year fiscal '19, based on our revenue trends, we are increasing total revenue guidance for fiscal '19. Revenue is now expected to be in the range of $125.5 million to $127.5 million. Given the increase in marketing activities on Ooma homes security, in addition to our ongoing commitment to Ooma business, we expect non-GAAP net [Technical Difficulty] to $4.5 million. Non-GAAP net loss per share is expected to be in the range of $0.18 to $0.23. We have assumed approximately 19.9 million weighted average shares outstanding for fiscal '19. In summary, we are pleased with the second quarter financial results and our business momentum positions us well to execute towards our long-term growth strategy. With that, I'll pass it back to Eric for some closing remarks. Eric?

Thanks Ravi. As we've discussed, we now have a solid Q2 behind us and are looking ahead to Q3 and the balance of the year. We're committed to bring new solutions to the market, expand our market opportunity and gain added momentum from the acquisitions we made at the start of this year. We believe we're executing well and we remain focused on our key FY19 initiatives. Overall, we see tremendous opportunity ahead of us and feel our strategy is working. Thank you. We're now open to take questions.

[Operator Instructions] Our first question comes from the line of Bhavan Suri of William Blair. Please go ahead your line is open.

I just had a couple of questions here. I guess, I'd love to understand the go-to-markets and how you're doing it between Ooma Office or I should say the Ooma mid-market opportunity and Voxter, because obviously different products. So when you look at Voxter just how many seats do you delineate that or deal size? I would love to just understand how that cadence and delineation is placed? And then how are you seeing that move-up market, you talked about pleased with it, but just versus expectation a couple of quarters ago?

We don’t specifically delineate by number of seats or type of business [Technical Difficulty] the nature of what the customers' needs are. Ooma Office really is still the segment that isn’t well served by any other competitor we [Technical Difficulty] curate, easy to use simple to set-up simple to administrate system, ideal for [Technical Difficulty] and appear like a big business and has some big business features like an IVR and these hold and extension [Technical Difficulty], but really doesn’t need anything more sophisticated than [Technical Difficulty]. We made it [Technical Difficulty] it wouldn’t be so ideal for a small business environment. So a lot of our small business customers set up their solution on their own and operate it on their own. And obviously, with our unique platform design, we can provide onsite type service even from a centralized location by mail and dial into their equipment and operate and test and things like that. If a customer is happy with that level of functionality and capability, Ooma Office is it and we don’t try to go beyond that. But when a customer needs more, when they have the need for more advanced UCaaS type solutions, maybe some contact center and capabilities, more sophisticated call flows, something customized, they want something to do to operate in a special way with our [Technical Difficulty] we build [Technical Difficulty] that slacks product does and our Ooma Enterprise solution just for them. So when a customer needs more, that's when we step up to what is frankly a more expensive but more complete solution, Ooma Enterprise. And we do have separate marketing efforts going on for each segments, but what we find is when we do those activities [Technical Difficulty] apply better to the other. So our integration has really been more about making sure we share these and work together. In fact, we've just been working on one this week that is opportunity with about 20 some store fronts all going up to a parent organization. As an perfect example we found it through Ooma Office. Ooma Office would be ideal for each of those store front, but the parent organization want some custom analytics and some extra features that offers [Technical Difficulty] going to try and go with Ooma Enterprise for that customer. So hopefully, that gives you a little bit of a flavor of how we're approaching that.

I guess the next follow up I have is just on the resellers, and this is maybe touching a little bit into competition too. When you look at the resellers, I guess how the resellers looking into products and the go-to-market. And then who else the resellers, especially in Voxter's case, who else would be the competitor of the reseller thinking of not selling or the customers demanding Voxter's customization capabilities vis-à-vis someone else -- so just some color who they resale to and how they delineate between the two offerings?

Sure, and once again, I think each segment has [Technical Difficulty] hundreds of resellers now for Ooma Office. Generally, those tend to be quite small resellers, maybe even owner operator businesses that might be doing IT or other services for small business. Perhaps they haven’t even sold telecom in the past, but that's ideal for them to layer on Ooma Office and be able to bring it as an added value to their customer. They are not working at a level where you generally find a customer needing Ooma Enterprise, but they do generate some opportunities and we'll follow those up. On the Flip side, when Voxter became part of Ooma, they had a team of resellers already established, it's not real big. One of our goals through the balance of this year and into next year is to grow that team but those resellers are more substantially sized companies. And in this case, they could choose from just about any of the vendors out there for cloud telecommunications and UCaaS. And generally, they've been forced into a decision where they're having to just resale somebody else's stuff pretty much the way it is and probably under that partners' brand name. We're much more flexible than that we're willing to white label with our resellers. In fact, you can customize the Ooma Enterprise platform so that it's completely White labeled, mobile app and everything in about an hour it's built that way. And so between that between what we're willing to do for those resellers and what they can do on their own with the system, they can do bespoke solutions; they can talk to a customer; find out their special needs and provide more; and that's the reseller that we want to work with; and maybe they'll somebody else's kit as well; but we think we're adding a dimension for them that they really don't get from others.

If I may squeeze one more quickly in and all my questions are go-to-market here unfortunately but I'll be quick. On the home security piece, as you think about. Is that solution that more of a DIY type solution, or do you think there is also a go to market here with dealers like security guys monitoring companies, or is this still very much, hey, I'm going to offer this to my tell all customers for them to do themselves. How should we think about that go-to-market? Thank you.

Sure, I'll try not to talk so long about this one. But yes, our focus today and this is new for us, we just launched Ooma Home the starter kit into the channels within weeks of now. So we've got a lot of building and added dimensions to bring to this. But as we look at it today and we're focused today, we're viewing it as a DIY solution for a customer to use one or two ways either to augment the system they already have, they might have an expensive AVT type system but you know what, it doesn't protect the garage or it didn’t include video cameras, or didn’t include leak sensors underneath their pipes in the winter or whatever. We view it either to augment what they may already have, or frankly if they're willing to go [Technical Difficulty] just the way we do it today. It can surpass a much more expensive solution, instead of $30, $40, $50 a month, it's by maybe up to $10 a month to self monitor. So with our remote 911 capability built-in if they get an alert, they can push one button and their home calls 911 and the authority show up even if they don’t talk. But yes our focus with it as we go forward here now is largely DIY.

Your next question comes from line of Pat Walravens of JMP Securities. Please go ahead. Your line is open.

So I just have two question one question Eric just bigger picture. I think if you're new to the story, you might step back and say, gosh, this company is going to do whatever 130 million roughly in revenue and they have Office and they have Voxter, and they have the Butterfleye camera and they have the residential business. Why are there is so many things going on, isn’t office enough. How would you explain it to them?

Yes, we do have a lot going on, particularly this year as we make some critical investments in these areas. But there are a lot of common threats to what we’re doing, and let me tie them together this way. First of all is the platform itself. There are significant commonalities amongst the technical side of how our cloud works for all three areas that you described. In addition, we always built Ooma as a platform for services, not a telecommunications or VoIP phone system. We put a lot of capability into the endpoint devices in processing power, in memory, in ability to connect up other sensors through DECT, etcetera with a vision towards doing more. And just to labor that a little bit, think about our home security. The home security has to be able to monitor and then provide alerts to mobile apps we do all that with phone service. And so adding it on is not as much of an as you might think. In fact, we think it fits well. Beyond that, we have built a strong retail position and a fair bit of brand recognition, and very good brand recognition. We have a very high net promoter score. On Tello its 50% some net promoter score. We just got ranked again we heard this week as the number one phone service in America by the leaders of consumer reports. That brand position and retail position we think gives us a real base to build from as we bring out home security. And we also think we can do home security better than others, because we can marry up some phone service features like promote 911 with Phone security. So because of sales and market -- sales position and brand and the type of platform we have, these extensions are nearly as dramatically as they might seem to someone just looking at us from the outside. Now to tie all what I just last said into the business side of what we're doing, frankly small businesses think, act and even buy to some degree like consumers. We find that when we run our TV advertising for residential, our small business owners tell us they saw our TV ads and heard about Ooma just as much as our residential customers did. And I think the nature of our residential starts to the company where we had the base things super reliable, super high quality and super easy to use, is what allows us to do it differently in the small business space, because we bring that same DNA. Frankly, the board inside the device that we put onsite in a business is the same board that we put -- that goes to Tello customer inside a Tello device. So it gives you some sense of the commonality and ability to leverage. And then when we look at Ooma Enterprise that brought us several benefits. We believe we can leverage our sales and marketing activities on Office. As I said earlier, we're trading up leads to that business. Certainly, the Ooma brand I think has a positive momentum and what we're now doing and why we called it Ooma Enterprise. It also gave us a beachhead in Vancouver, which is a much lower cost location to continue to build our company. And most of all, we got a great team and one that platform wise does marry up well with the rest of what we’ve built. So you tie it all together and to us it feels natural. But I realized from outside looking in, it can't see like three different things.

And I'll ask one more, so I saw the partnership with Talkdesk. And I'm wondering if you can just tell us what you see in terms of how the contact center space is evolving, I guess competitively and the other piece that we have all been hearing a lot about and that is Twilio Flex, which is programmable contact center. So I'm just wondering how do you see that whole contact center area evolving.

That might be a little bit longer discussion at some point. But for here now let me say, we're very excited about to be partnered with Talkdesk. We think they're on the forefront of doing some very innovative things. And as you know, it's built from a little bit different approach. They're growing faster hungry it's a two way partnership, which is important for us. And it fits in well, because we have a pretty sophisticated contact center solution in Ooma Enterprise but mainly built around voice. And we do have customers today who have hundreds of contact center agents on that system. But still if you want to step up to a very sophisticated level, we can bring Talkdesk in to be everything that customer is going to need. And rather than try to build it ourselves, the partnership makes a lot of sense. So where we found them good to work with and I think going to be a real strength for us. In terms of contact center market generally and how it's evolving, you see the things that I would note. I mean we've seen folks like Amazon and even others start to offer certain types of solutions. I think you still have to invest quite a bit to do something as full featured as what sophisticated customers really need. And I think standalone contact center solutions can be grateful what they do, but you really want them more integrated with the overall platform for communications that the business has. And that's where we think it makes sense to marry up with Talkdesk and we don’t see Talkdesk as the competitor now, I think they see us as a competitor. So I hope that adds a little bit and happy to take it offline if you want it.

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

Maybe a little early, but on the Butterfleye camera sales. What percent of the initial unit is the customer taking the subscription as well?

This is still initial -- I don’t want to give a number. But we have been -- it's in double-digit we are pretty happy with the initial take rate. Obviously, there is always room for improvement but it is reasonable double-digit numbers, and also depends upon whether the customers are buying a one pack or three packs. So let's say somebody buys a three packs to use it for the business, we are seeing very, very high take rate there. If it's one pack, it's still good double-digit number that’s not as high as a three pack, but then the goal is how do we provide the more features or tell them about the features about this facial recognition and other stuff that they can upgrade. And once we have those customers, we can always market with them through email and other ways to upgrade them. So we are -- it's early stage, but we are happy with what we have achieved in the first couple of months of [Technical Difficulty] into our customers.

And then you gave some guidance for the combined Voxter/Butterfleye revenues here. Any change to that guidance or is it same as before?

If I can just mention the guidance I had given plus -- I mean exclude the $3 million for the year, this last quarter Q2 was more foundational building foundations, infrastructures, whether it's a billing portal, whether it is tax benefit on the Butterfleye we started now shipping. I think it's includes in the numbers that might be one of the small factors not a big factor in terms of what we're doing for revenue guidance for the full-year. But I think at the very minimum I can say both Butterfleye and Voxter together are performing as per our expectations in terms of revenue guidance I had previously given.

And then you said that some of the products of hardware strengths that you had an order from a large telco I think you said. Is that related to residential or business segment?

It's more on the residential product side, yes.

Your next question comes from the line of Josh Nichols of B. Riley. Please go ahead your line is open.

Real quick I did want to ask. Could you help frame how much the Company is investing a little bit as it works to ramp up the sales staff and integrate Voxter and Butterfleye? And how that might translate into some better operating leverage like next fiscal year?

Well, I'll start but I am sure, Ravi will have more to say on this. But I think for Q2, we were about 23% of revenues spent on engineering and R&D -- 24%. And I think by any measure versus competitors or just generally in the industry that's a significant amount investing on development. So overtime we're going to grow into that spend and that will give us flexibility to direct investments elsewhere. I don't know if you want to add, Ravi?

You're right, as I have mentioned even in the previous earnings calls, we do expect to invest into both Butterfleye and Voxter this year in terms of building infrastructure, getting the ground work done. And we had mentioned -- and we are still on track or our expectations are still similar that in fiscal 2020 it should be -- when these acquisitions become accretive, so I think we are tracking towards that goal of what we had. In terms of the financial leverage, I think it will come from two sides; once we have built these infrastructures we should start seeing some benefits; and secondly, the benefit of scale. As Eric earlier mentioned, we are passing these from Ooma Office to Voxter and vice versa. Those things will help us get financial leverage even more. But you're right, the R&D is pretty high and we need to -- as revenue goes up margins should go up. And our goal is R&D as a percentage of revenue, given the scale benefits, should start coming down you will start seeing the leverage then the question would be whether we spend the money in sales and marketing or grow faster or grow it to the bottom line.

And then I also want to ask, good to see things coming along pretty well, particularly with the enterprise solution. I know you mentioned that that was higher cost offering. Could you talk a little bit how should we think about the gross margin profile of the subscription services revenue as those -- as enterprise offering and the home security subscription revenue tends to layer on?

Right now, subscription services margins are 70% home security should be relatively higher margin but obviously we have a million customers today as we add -- continue to add home security, I do believe they'll be more accretive to the subscription services margin, so this should help. In enterprise, we are in the building state at this time. Obviously, the pricing the price point generally speaking for Voxter and to Ooma Enterprise is higher but until now we are investing into more. So in the long term I do expect the margins should be aligned with our long term target model for subscription services. Just as a reminder, Josh, our subscription services long term target model is 75% to 80%. And I believe of both Ooma home security as well as Ooma Enterprise they fit well with that long-term target.

And then last question for me, good to see the revenue guidance for the year. And I just want to ask regarding the cadence and some seasonality. Are you still expecting typically Q4 is materially stronger during the holiday selling season, or do you expect that to be a little bit less of a case given how you have a growing base of business subscribers here that are more steady eddy and less seasonal?

It does cut a little bit both ways. As the holiday quarter, we do see some added momentum on the residential side, but we do also do some things surprisingly lower with Black Friday specials or things like that. And then on the business side, there are periods through the quarter where I think businesses aren't looking to make these kinds of changes or not as much. They might be very busy for the holiday themselves or taking time off over the holiday. So I think it all balances itself out a little bit and maybe a little bit of seasonality in Q4, but we're not counting on a dramatic difference.

John, what needs to be three, four years is going to be more residential the seasonality was much more but now with business around 27%, 26% of revenue and with special happens throughout, even the day, prime days they happen throughout the year just as not at these lower than we used to be before on the residential side.

[Operator Instructions] There are no further audio questions at this time. I would like to turn the call back over to Eric Stang for closing remarks.

Thank you. I just want to quickly say thank you to everyone on this call today. We really appreciate your support for Ooma and thank you for your time today.

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