Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Ooma, Inc. First Quarter Fiscal 2020 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. Matt Robison, you may begin the conference.

Thanks, Chris. Good day, everyone, and welcome to the first quarter of fiscal year 2020 earnings call of Ooma, Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. With me here today are Ooma's CEO, Eric Stang; and CFO, Ravi Narula. After the market closed today, Ooma issued a press release via GlobeNewswire. The release is also available on the Company's website, ooma.com. This call is being webcast live and is accessible from a link on the Events page of the Investor Relations section of our website. This link will be active for replay of this call for at least one year. 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 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 substitutes 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…

Thank you, Matt. Hi, everyone. Welcome to Ooma's Q1 FY '20 earnings call. I'm pleased to report Q1 was another strong quarter for Ooma both in terms of our financial results and our progress on key initiatives. I'm also excited to talk with you today about our announcement that we plan to acquire Broadsmart, which is a seller of UCaaS solution to medium and large enterprises. I'll say more about Broadsmart in a moment, but first, I'd like to update you on our Q1 results and key initiatives for this year. In Q1, we achieved revenue of 34 million, representing 13% growth year-over-year by margin subscription services revenues of 31.1 million with the vast majority of our revenue. And with a net dollar revenue retention of 99%, we feel we continue to build a strong business with significant long-term profit potential. In the quarter, subscription services revenues from business customers grew 45% year-over-year. Rate of growth, we continue to believe outperforms others in our industry. Subscription services revenues from residential customers grew 4% year-over-year in line with our expectations. All in, I'm proud of our continued momentum and excited about our outlook based on the initiatives we have planned for the balance of this year. For FY '20 our strategy, as we discussed previously, is to be the undisputed leader in each of the segments we target by capitalizing on our unique end-to-end platform. Starting first with Ooma Office, which is our solutions specifically designed for the needs of a small business, our product goals this year include rounding out the core feature set and then pivoting our development on to new office services for which we can charge additional revenue. I'm pleased to report that since the start of this fiscal year, we've launched eight new features on Ooma…

Thank you, Eric. Good afternoon everyone. I'll start with a review of our financial results for the first quarter of fiscal '20 then provide our financial outlook for the second quarter and full year fiscal '20. I'll also provide additional financial details about the pending acquisition of Broadsmart, announced earlier today. All income statement items except revenue are on a non-GAAP basis, and we have excluded expenses such as stock based compensation, amortization of intangibles and certain litigation charges. The reconciliation of GAAP to non-GAAP financial data can be found in the press release issued earlier today, which is available on the investor relations section of our website. Starting with the first quarter results, we ended the quarter with strong financial performance achieving $34 million in revenue at the top end of our previously issued guidance range of $33.5 million to $34 million. On a year-over-year basis, total revenue grew $3.8 million or 13%, primarily driven by Ooma Business. Net loss for the first quarter of fiscal '20 was $840,000, better than the previously issued guidance range of a $900,000 to $1.3 million loss. Revenue contributions from Ooma Business is now 33% of total revenue compared to 26% for the prior year quarter, and Ooma Business subscription and services revenue during the quarter grew 45% on a year-over-year basis. The combined subscription and services revenue from Ooma Business and Ooma Residential grew 15% year-over-year, while our residential subscription services revenue grew 4% for the same period. During the quarter, we saw some softness in our Talkatone business, largely driven by lower ad revenue. Overall revenue from Talkatone was $950,000 for the first quarter fiscal '20, compared to $1.2 million of revenue in the same period last year. For the first quarter of fiscal '20, product revenue was $2.9 million flat…

Thank you, Ravi. As we discussed at the outset, we're pleased to complete another strong quarter for Ooma. With our unique solution for the small business segment, our differentiated strategy in the enterprise segment which has now made even stronger by the pending acquisition of Broadsmart and our strong position and brand name in the residential segment, we are well positioned to continue our growth trajectory. And now that we are increasingly innovating in new areas and scaling our sales and marketing, we believe we are building additional momentum. Thank you. We're now happy to take questions.

[Operator Instructions] Your first question comes from Bhavan Suri with William Blair. Your line is open.

I guess I wanted to start first just to start on the acquisition front, obviously, given the announcement this morning. Just progress as you think about Butterfleye, competitive environment there, and then more importantly sort of as you think about not today but with future acquisitions, are you thinking more on the infrastructure side, the channel side, customers? Is it going up market like Voxter was like adding enterprise features? Help us understand what's the strategy around acquisitions? And I've got a couple more follow-ups.

Sure. Well, talking first about the acquisition we just announced, this is a very logical move for us with what we're doing today. We have a platform of Ooma Enterprise, very customizable and can do unique things for customers. And the Broadsmart team of individuals is exceptionally strong at customizing deployments and providing white-glove service to larger enterprise customers. And so bringing that team into Ooma, I think we can do more together. And, we can talk more about it, but it's part of our direction to scale up in enterprise and leverage our strategy faster. I think your second question was about the Butterfleye camera or I may have missed that.

Yes, so maybe a strategy a little bit. So I guess maybe just talk about sort of, so you've added Butterfleye, you've got something Home Security, which is over just to say an adjacent market. Regarding Voxter to move up market, you've now brought a company to provide infrastructure and sort of white-glove service, and as I thought at the core kind of Ooma Telo Ooma Office, what you're building around it. I'm just trying to sense of it as you look at that map. What do you feel like needs to be added? What do you feel like is an area that you would look at maybe not specifically a company, but just areas you look at strategically from an acquisition perspective?

Sure, let me step back a minute and just talk about this company and what makes us special. We have a core platform that has led us to be the number one ranked phone service for residential customers and now also the number one ranked solution for small business customers. And we really defined the Small Business segment with Ooma Office in the market compared to anyone else out there and we're building on that. We're building with Ooma Enterprise, we're stretching capabilities into larger customer opportunities now and customers that need more completely UCAAS type solutions and more customization in their applications. And we didn't think it makes sense for Ooma Office to try to be that too because Ooma Offices is a curated solutions specifically designed to be simple and elegant and easy to use for a small business owner. And so marrying up Enterprise with Office was a very logical move. All of our sales and marketing efforts can now be spread across both those activities on the go-to-market side of our business, we do find significant synergy. But bringing the enterprise on board, solution on board allowed us to target, customers that we're having said no to, previously, frankly. The acquisition of Broadsmart, the pending acquisition will allow us to take this great platform capability and extend it faster and farther into being able to meet the full range of needs of a larger customer. It's not just what the platform can do, but it's how you work with them and how you manage their deployment, and how you structure the whole solution for them. And the team at Broadsmart is fantastic is that. And so it marries up those capabilities with I think the enterprise solution that we've that, that we're pioneering and the small…

No, it did. That was actually quite, quite helpful. I want to touch on the channel partners as well. So, take Broadsmart out for a second, but you've talked about expanding both Enterprise and Home Security by growing the respective partner channels. I guess just talk me on the progress you saw there and sort of just the percentage of revenue from the channel on both the VAR channel, but also the co-branding versus white labeling channel?

Yes, developing channels to augment what we do selling direct is a key part of our strategy, right to highlight it. And I believe it has tremendous leverage to it because each channel partner you bring on and make productive off can have several or quite a few even sales people to bring to the platform. We distinguish this a little bit between what we do at the small business level and what we do at the enterprise level. At small business level, we're bringing on particularly IT professionals and I would say others that often have not sold telecom in the past and leveraging them into the small business channel. And that's going well for us, but it's a steadily growing part of our business and we have a lot farther to go with it, frankly, but we have a team on that and it grows every quarter. On the enterprise side is where you more likely to see what you might think was more typical telecom reseller, it could be -- and there we believe the traditional resellers of that type have kind of been -- and who have traditionally done things themselves have been facing this dilemma of how do I move to the cloud, and how do I preserve my relationships and my position with my customers. And we believe one of our unique strategies, the willingness to white label to those channel partners, and we have brought on several white label channel partners over the last well since the start of this fiscal year. And I think you recall my last conference call, I talked about how we spent a lot of our effort last year developing the systems and infrastructure to work with channel partners in that way, in a white label way. That is nascent for us, but since the start of this fiscal year, we've been turning up the dial. And it is our -- one of our key strategic goal this year is to build a significant channel network of white label partners on the enterprise side. This acquisition of Broadsmart, they are 100% channel in what they sell and they have some very deep channel relationships. And we're we think we're going to -- that is one of the things that we will be able to leverage here to move Ooma faster.

And one last for me. On the competitive front for Ooma Office obviously, you had a successful IPO from Zoom and they've got Zoom phone, which is sort of targeting sort of 5% to 10% type kind of environment. And so, given sort of where Ooma Office started, I was just wondering if you seen anything there, is there any sort of competition? Or is it something where the markets are big you haven't run into? So I am just trying to sense how that competitive environment looks like at the low end. Obviously with Voxster and stuff you're moving up market, but sort of in the core low end small business I was wondering, but you would see there from Zoom specifically?

Sure, I have not seen them at all in our small business segment, not once. And I'm not worried about them as a competitor in that space for us. What we have built now in the small business space has got several years more actually, of development into it. And it's a complex task to make a PBX cloud experience accessible, low cost, and easy to administrate and use in a small business setting without a VAR partner, without having to run cabling, without having to sign contracts, without even having to buy IP phones, if you don't want to buy them. And our solution frankly goes all the way back to the first days of Ooma more than a decade ago when we started building this platform. And so, I'm pretty excited about what we have for that segment. I don't think anybody compares to us. And so, maybe we'll see them at some point in the future, but I feel we have a very strong solution and that market is really open to us based on how much sales and marketing want to spend for growth in it.

Your next question comes from Josh Nichols with B. Riley FBR. Your line is open.

Yes, thanks for taking my question. Look forward to catching up at our conference this week. I just want to ask, as you push a little bit more into the VAR channel with your previous efforts as well as this new acquisition. Could you talk for a little bit about any economic differences between the payouts for the VAR channel versus internally generated sales?

Josh, this is Ravi. I'll give you a couple of data points in this. Generally speaking for a VAR and a channel partner, you have some economics to share between -- from the customers between the channel partner and the Company. So, the generally speaking the gross margins are slightly lower than if you go over to, go to a direct customer. But at the same time we don't have to enter the same sales and marketing spending. So if I look at from a gross margin basis, I share that economic with them. But on a payback period, I'm pretty happy whether I get the customer through a direct sales channel or to a VAR or channel partners. So the payback period, the lifetime value for customer is pretty good for whether it's coming through a VAR partner or to a direct basis. Then we were looking at this acquisition for Broadsmart, we did the same analysis saying, what is economic model to have these customers who are coming in, and we were pretty happy with the price we paid for. So, I think overall, we are happy with this -- with the economics, we've paid for Broadsmart at the same time through the channel partners going forward.

And then just to follow up on that. Are you seeing the customers, the customer payback period holding relatively study or potentially even coming down a little bit? Or is you kind of get these higher value business customers specifically ones with more lines?

Good question. I'll say a couple of things. For channels which are more mature, we have been pretty happy with the payback period and the customer acquisition costs we're spending to get the customers. But over the last 12 to 18 months, we've been investing into developing and creating new channels. That's where we are investing in and there is a higher, longer payback period for those channels. All in, we are happy with our payback period, but the existing channels have been performing very well consistently. And the new channels, obviously, as expected we are investing into, so they have a higher, the longer payback period. But we do believe as we continue to make those channels more mature, the payback period will improve.

And then last question for me. Good to hear about the Smart Cam launch now that's shipping, but just as far as guidance, I'm assuming that there's not too much factors in the way for that for this fiscal year. Is it fair to say?

Yes, it, there is some expectation of that, but obviously since it's not fully, we are starting to launch it. So, I would say there is more upside from those given we have to be more conservative we started shipping it just recently.

Your next question is from Michael Latimore with Northland Capital Markets. Your line is open.

Can you just tell us, if an Ooma sales person or channel partner now sees like, they had 200 seats opportunity. Would they sell in Ooma Enterprise or would they sell on Broadsmart?

We'll sell them whichever is going to best fit the needs of the customer. It might even sell them Ooma Office to be honest with you. We have Ooma Office customers with over 100 seats. It's because all they needed was is the capabilities what Ooma Office does. But, generally, I would contrast the two as follows, which I think is what you're asking. Someone who's going to utilize Ooma Enterprise is going to need something that is customizable and flexible for their specific business needs. We have a great partnership with Talkdesk on the enterprise platform for really advanced contact center. And frankly, we have a little bit more pricing flexibility with Enterprises as you might imagine because it's a wholly owned platform from us. And if the partners interested in white label, then obviously that's going to be the platform they're working with. But that doesn't mean to say that, if a customer needs, a particularly rich UC portfolio, the kinds of things that Broadsmart has been developed for a long time and doesn't need other integrations other than the one that Broadsmart supports and such. It may be that the Broadsmart is what we offer. But we're not targeting one over the other, we're not saying we're going to go to all the customers of Broadsmart and tell them they have to switch. But we can be more flexible and a little more competitive on the Ooma Enterprise side. So, we'll see how this develops.

And is the Broadsmart revenue kind of stable at this point or growing? Or how's that sort of -- what's the trajectory there?

Hey, Mike, good question. This is Ravi again. So, if you look at just recently, they have improved the churn, but they -- in the past, they were, they had some churn but they really worked hard to manage that churn down. And we still believe there's some opportunity to reduce the churn going forward. For so far in the last couple of periods, they have been relatively flat, they've been adding new users which were to replenish the churn they were having. So with the integration of channel strategy with options to either give Ooma Enterprise or Ooma Office at Broadsmart and I think having our low cost platform, I think we look at longer term, the synergies between Broadsmart and Ooma to help grow the revenues going forward.

And then, did they use BroadWorks or BroadCloud as the platform?

They used BroadWorks. They host it for their customers.

[Operator Instructions] Your next question is from Kevin McVeigh with Credit Suisse. Your line is open.

Great, thank you. Hey Ravi, can you give us a sense of how much of Broadsmart's dialed into the current revenue guidance, the 145 to 148 versus the prior guidance 140 to 143?

The big change at this time to the guidance is largely driven by Broadsmart. So like as Josh said, I have not baked too much of Smart Cam into the guidance. There is some expectation but not a lot, but majority of the change in the guidance from last quarter to this one increase is driven by Broadsmart. And the logic is, we'll probably close the transaction sometimes this quarter with after paying them $7 million plus of revenue with a slightly under one-times revenue multiple for seven or eight months of revenue, this should help us there. But I think we can probably -- in the longer term, I expect it to be doing better, but right now this is our current assessment of the guidance.

And it looks like the lower end you brought down, any thoughts around that? Is that tariff related or just the maybe some costs associated with the Broadsmart deal? Just any thoughts on the earnings impact.

Yes, on the net loss side, previous guidance was $3 million to $5 million. Now, it's 4 to 5 and it's driven by Broadsmart again. And there is some initial transition expenses, sometimes have to spend some money upfront in the next six months to make some synergies some assessments things like those that's probably driving it. But I do feel comfortable that this will be an accretive investment for us in 12 months or even under than that.

And then just real quick, what drove the decision to boost the sales force in the Ooma Office?

The great opportunity we see. We've been growing faster than we think others are growing in the industry and we want to continue that this year. And to do that, we're going to have to have a bigger team.

Ladies and gentlemen, this concludes the Q&A portion of the call. I will now turn it back over to Eric Stang for any closing remarks.

Thank you everyone. Thanks for dialing in today and we look forward to hopefully seeing all of you at one of our conferences coming up. Thank you very much.

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