Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ooma Second Quarter Fiscal 2020 Financial Results. 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. I will now turn the call over to Ooma..

Thanks, Chris. Good day, everyone, and welcome to the second quarter fiscal year 2020 earnings call of Ooma, Incorporated. 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 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 website.

On this call, we'll give guidance for third quarter and full-year fiscal 2020 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 business.

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.

Before I hand it over to Eric, let me say we're pleased to be presenting at the Midwest IDEAS Conference this Thursday, August 29 in Chicago; The 8th Annual Gateway Conference in San Francisco on September 4; and The Dougherty & Company 2019 Institutional Investor Conference, which is an unclear [ph] presentation on September 5 in Minneapolis.

Further details about these conferences including the webcast from the Midwest IDEAS Conference and the Gateway Conference are on our Investor Relations site. Okay, Eric..

Thanks, Matt. Hi, everyone. Welcome to Ooma's Q2 FY 2020 earnings call. Q2 was an excellent quarter for Ooma. We delivered strong results compared to our plan. We executed particularly well on our strategy to grow Ooma business and we once again achieved our residential growth target.

All-in, I believe our strategy is working and we have a good momentum going into the back half of this fiscal year. Financially, revenues were 37.3 million for Q2. We ended the quarter with 135 million of annualized exit recurring revenue, and a 103% net dollar subscription retention rate.

Q2 business subscription services revenues, including Broadsmart grew 68% year-over-year and business revenue now represents 38% of our total revenue. We believe we are executing well on our strategy to create a solid business with significant long-term profit potential.

Operationally, I’m quite pleased by the progress we made in Ooma business during Q2. I say this for multiple reasons. First, you may recall that last quarter I mentioned we were creating a unique solution for a large customer opportunity, which could be quite significant for us over time.

I’m pleased to report this customer embraced our solution, deployed it to thousands of users in Q2, and is expected to deploy it to many more users through the balance of this year.

Winning this opportunity highlights our unique strategy versus competition as our solution for this customer is a synergistic combination of Ooma Office and Ooma Enterprise working together.

We provided this customer easy onboarding and a just right curated feature set via Ooma Office in combination with unique features customized to the customer’s specific needs enabled by Ooma Enterprise. Second, I can share that in late Q2, Sprint launched a new SMB cloud Voice over IP service sold through Sprint’s sales organization.

This service is powered by Ooma Office and represents an exciting expansion of our strategic relationship with Sprint. We are thrilled to be powering Sprint's new offering. In addition, we are collaborating with Sprint to develop additional services together that our organizations can sell.

We believe this expansion of our partnership creates significant opportunity for both Ooma and Sprint, and we are committed to working with Sprint closely to maximize this opportunity. Third, while it is only a short time since we closed our Broadsmart acquisition, we are already seeing synergy benefits, including some we considered upside.

During Q2, we integrated Broadsmart into our functional business organization, and began looking at the new opportunities they provide. In one case, we are now demonstrating an integrated solution that combines features from Ooma Broadsmart and Ooma Enterprise for a large customer in the retail vertical.

This could, if all goes well, roll us out on a large scale. In another case, we identified channel sales opportunities not just for Ooma Enterprise, which we expected, but also for Ooma Office and are now working to roll out Ooma Office to these channel partners.

Overall, we remain optimistic about our potential, we'll capitalize on Broadsmart acquisition, and in general, we are finding Ooma Office can be highly attractive to larger businesses that have telephony-centric needs, either standalone or in combination with our broader UCaaS solution.

Finally, as regards to Ooma Business, I also want to mention briefly that we continue to make good progress on rounding out the feature set for Ooma Office. In Q2, we launched approximately a half dozen new Ooma Office features.

As we planned, we are increasingly shifting our engineering development on the new types of capabilities for which we'll be able to generate additional service revenue. Now, on the residential side of our business, we delivered according to our plan in Q2 with 4% year-over-year growth on the back of relatively low marketing spending.

Our Telo plus wireless Internet solution, incorporating our 4G adapter powered by Sprint, is performing well, and we expect it to roll out to more retailers in Q3. Our camera and smart security solutions are in the marketplace but are not yet widely marketed by us while we continue to refine these solutions.

Overall, we remain excited about the opportunity to grow our residential services. In Q2, we announced we exceeded 1 million core users. Including Talkatone, we have in total more than 2 million users. Geographically, we now serve business users in 12 countries, including China and Japan.

Ooma started in the residential market more than a dozen years ago, but today we are large in scale with significant momentum in the business market. I think Ooma stands out competitively by our ability to provide ideal solutions to customers.

We distinguish ourselves by our ability to serve customers of all sizes from small to very large, our mix of offerings, each designed to best serve a distinct segment of the market, but also combinable into overall customer solutions.

Our platform that delivers unique call quality and unique feature flexibility, our disruptive cost structure, our sales and marketing scope that affords synergy across all parts of our business, and our platform’s extensibility into new areas of opportunity. These are some of the ways in which we believe Ooma achieves competitive advantage.

I’ll now turn the call over to Ravi to discuss our results and outlook in detail and then return with a final comment before we take your questions..

Thank you, Eric, and good afternoon everyone. I’ll start with a review of our second quarter financial results and then provide our outlook for the third quarter and full-year fiscal 2020.

As a reminder, 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, acquisition-related expenses, and certain litigation charges.

Starting with our second quarter results, we ended the quarter with a strong financial performance achieving $37.3 million in revenue, well above the high end of our previously issued guidance range of $35.5 million to $36 million. On a year-over-year basis, total revenue grew 18%, driven primarily by Ooma Business.

Net loss for the second quarter was $927,000, better than the previously issued guidance range of $1 million to $1.4 million loss. Revenue contributions from Ooma Business, which we define as Ooma Office and Ooma Enterprise, and which now includes Broadsmart was 38% of total revenue, compared to 27% for the prior year quarter.

Business subscription and services revenue during the second quarter grew 68% on a year-over-year basis. Excluding the effect of Broadsmart’s acquisition in the quarter, Ooma Business subscription and services revenue grew 46%. The overall growth in Ooma Business subscription and services revenue was driven by three key factors.

First, results from Broadsmart for the quarter were better than previously expected. As a reminder, in our last earnings call, we had increased our revenue guidance for fiscal 2020 by $5 million, due to Broadsmart. Secondly, due to the one large customer win we had in the quarter we gained several thousand business users.

Accordingly, we performed a large number of installations in the quarter to activate those customers, resulting in higher insulation services revenue. As we launched further locations with this customer, we expect to add significantly more Ooma Office users for the remainder of this year.

Thirdly, continued momentum of Ooma Office also resulted in higher revenues in the quarter. The combined subscription and services revenue from business and residential grew 23% year-over-year. Total subscription and services revenue as a percentage of total revenue increased to 92%, compared to 90% for the same period last year.

Moving on, product revenue for the second quarter was $2.9 million, down 12% year-over-year, primarily due to sales of certain accessories in the prior year, which were not repeated this year. With that, I will now provide details on some of our key customer metrics, which now include Broadsmart.

Our total core users increased to [approximately 1.023] at the end of the second quarter of fiscal 2020, up from 955,000 in the prior year quarter. These core users also include approximately 18,000 continuing Broadsmart users, 20% of total core users are now business users, compared to 15% at the end of the prior year period.

Our blended average monthly subscription and services revenue per core user or ARPU increased to $11 even, compared to $9.56 in the prior year quarter, primarily attributable to growth of Ooma business users. Annualized exit recurring revenue was $135 million up 23% on a year-over-year basis.

During the second quarter, we achieved 103% net dollar subscription retention rate compared to 100% for the prior year period. I’ll now elaborate a little on gross margin. Subscription and services gross margins were 69% for the second quarter, compared to 70% for the same period last year.

Broadsmart currently has lower gross margins relative to Ooma, given a small scale. However, we expect future gross margin improvement as we start leveraging Ooma’s infrastructure for Broadsmart.

Product and other gross margins were negative 28% for the second quarter, compared to negative 23% for the same period last year, primarily due to lower product revenue. Our overall gross margins were 61% for the second quarter, up 60 basis points year-over-year, reflecting economies of scale and higher mix shift towards business.

Now, onto operating expenses, second quarter of fiscal 2020 operating expenses were $24 million, an increase of $3.7 million or 18% on a year-over-year basis. Overall, sales and marketing expenses were $12.1 million, a 20% increase on a year-over-year basis, primarily driven by growth in sales and marketing personnel.

Research and development expenses were $8.3 million, up 12% year-over-year, reflecting continued innovation in our technology platform, as well as development of new features and products.

G&A expenses were $3.6 million, compared to $2.9 million for the prior year quarter, an increase of $734,000 to support the growth of our business, including Broadsmart. Our net loss in the second quarter of fiscal 2020 was $927,000 or a $0.04 loss per share, compared to a $0.05 loss per share in the prior year quarter.

Adjusted EBITDA loss was $528,000 in the second quarter of fiscal 2020 versus a loss of $645,000 for the same period last year. Now, turning to the balance sheet and other metrics. At the end of the second quarter of fiscal 2020, we had total cash and investments of $28.7 million after paying $7.5 million for acquisitions in the quarter.

As a reminder, we closed the Broadsmart acquisition in May, so we had two months of activities in the quarter. As part of the acquisition accounting, we recorded $6.1 million for intangible assets and $400,000 for goodwill.

Although it is a relatively early, we are pleased with the initial results from Broadsmart on both the revenue growth and expense management. Cash used in operations for the second quarter was $411,000, compared to cash usage of $794,000 in the prior year quarter.

We ended the quarter with 770 personnel, up from approximately 700 in the prior year quarter. I’ll now provide guidance for the third quarter and full-year fiscal 2020. Again, our guidance is non-GAAP and has been adjusted for expenses such as stock-based compensation, amortization of intangibles, and other acquisition related expenses.

For the third quarter of fiscal 2020, total revenue is expected to be in the range of $38 million to $39 million. We expect non-GAAP net loss to be in the range of $800,000 to $1.2 million. Non-GAAP net loss per share is expected to be in the range of $0.04 to $0.06. We have assumed 21.3 million weighted average shares outstanding for Q3.

Our full-year fiscal 2020, total revenue is expected to be in the range of $148 million to $149.5 million, an increase of more than $2 million from the midpoint of the previously provided guidance range. This guidance reflects our confidence in the large opportunities ahead of us.

We now expect non-GAAP net loss to be in the range of $3.8 million to $4.6 million, an improvement of $300,000 from the midpoint of the previously provided guidance range. Non-GAAP net loss per share is expected to be in the range of $0.18 to $0.22. We have assumed approximately 21.2 million weighted average shares outstanding for fiscal 2020.

In summary, we are pleased with our fiscal second quarter performance, driven by growth momentum we have built this year, especially Ooma Business. With that, I’ll pass it back to Eric for some closing remarks.

Eric?.

Thanks, Ravi. So, stepping back a moment, now that we’re in the middle of our fiscal year, just wanted to say again that I'm excited by our momentum and the new opportunities we have in front of us. I believe that our Q2 results demonstrate our strategy is working, and we are executing well.

As we look forward, we believe we can continue to increase the proportion of revenue we obtained from business customers increase our gross margins and gain leverage on R&D and G&A spending. We can also capitalize on new partnerships and extend our platform into new areas of opportunity. These factors excite us as we look forward. Thank you.

We’ll now take your questions..

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

Thanks, this is Matt Stotler on for Bhavan. Congratulations on the results guys, and thanks for taking our questions.

So, first, it sounds like some encouraging early data points for Broadsmart, and I would love to dig a little bit further into your takeaways there and what you're seeing in the early days of integration, and how that’s progressing?.

Sure. We're thrilled to have the Broadsmart team part of Ooma. There are great people in that organization. They’ve folded in well to ours.

There is no Broadsmart per se anymore, it is part of our functional organization along with the other things we do as a company, although you hear us continue to refer to them that way in some respects, but we have a multi-quarter plan to improve their cost structure by bringing the scale of Ooma to their business.

We're very pleasantly – we're very pleased with the reception we’ve gotten by Broadsmart's channel partners and believe we can leverage them to do more like we planned as part of this acquisition, and so all-in I think it’s working out even better than we expected..

Great. And then just one more on the operating metrics.

You're looking at the operating metrics in your supplemental disclosures, you had some nice upticks kind of across the board, even adjusting for the inclusion of BroadSoft, particularly looking at ARPU and dollar retention, can you dig into the drivers of that organic improvement and any changes that you are seeing in spending habits with your core customer base, either on a seasonal or secular basis? Thank you..

Hi, this is Ravi here. With respect to those metrics, even excluding Broadsmart, as we continue to bring in more business users, generally a business user would give us an ARPU of north of 20 a month per user, and as that mix gets bigger, our ARPU should improve.

And ARPU, average revenue per user, as that goes up, lots of other metrics start improving, whether it’s gross margins, whether it’s net dollar subscription retention rate, and our churn has been relatively consistent. So, as we continue to improve upon our ARPU, I think you will see those other metrics continue to improve. Eric, do you want to….

Alright. Thanks again for taking the questions..

Absolutely..

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

Yes, congratulations on the quarter there.

Does the large customer you talked about, just want to be clear is that an individual company or is that a distributor selling into a lot of different end users there, I guess?.

Hi, this is Eric. It’s a large company..

Great.

And are you replacing an on-premise system there or…?.

We’re replacing multiple solutions they have, some of which are on-premise, not all..

Okay. Great.

And then in terms of the Broadsmart offering, how should we think about you differentiating that relative to other companies that use Broadsoft as a platform?.

Yes. I think what the team at Broadsmart is particularly strong at is enabling complex solutions to come together for a customer. Customers who maybe even need networking or other assistance as part of the overall solution. Those are key capabilities and they have some very strong channel relationships as well.

As we go to market, it’s more and more for us just Ooma Business, if you will from a customer or partner standpoint, because we're going to bring whatever mix of solutions is going to fit the need.

And, we have situations today, as I talked about in my script where we are combining Ooma Office and Ooma Enterprise for a customer, we have other solutions where we are combining Ooma Enterprise and the Broadsoft platform, that Broadsmart would host into one solution for a customer.

And so, it’s less about the actual Broadsoft Solutions more about our capabilities overall as a company.

Now, certainly over time, we are pretty proud of what we are building with Ooma Enterprise and the flexibility and the customization it affords and I think that will open up, that will increasingly be what we would rely on to be successful, but nonetheless we have a lot of tools in our arsenal now, and it is all about meeting the customer's needs ideally..

Very good.

And then just last, what did Talkatone contribute to the quarter?.

Mike, this is Ravi. Talkatone contributed $1 million as per our expectations from the start of this year. So, Q2 was $1 million of revenue..

Okay. Thank you..

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

Thanks for taking my question and congrats on this anchored customer win, it looks to be pretty significant.

I know you can't say too much about the customer or whatnot, but as a follow-on, could you help frame the size of the opportunity? You already installed thousands of units this quarter and you expect thousands more and how long the installation may take to complete with this customer?.

I think that, I can say that what we're doing this year is a great start with this customer, it’s quite significant from our perspective, but I believe we can do even more next year, but we will have to see if those opportunities come to us. Right now, we're very focused on rolling out on a very large scale through the balance of this year..

Great.

Thanks, and then I did want to ask, good to see, really furthering this strategic relationship with Sprint, do you think that that’s going to be something that could be more of a needle mover in the near-term or the long term, or is that you view as just kind of a little bit more incremental potentially?.

We view that as quite a significant development for Ooma. As I said in my script, they are now selling a solution powered by Ooma through their large sales organization and we’ve seen these types of partnerships in our industry by others, and they’ve been quite significant for those other players.

So, we have to see how this unfolds, but I believe there’s potential for this being quite significant for us..

And then last question for me.

Looks great to see the company's growth and a lot of the key metrics really moving in the right direction, going forward what’s the company's strategy overall, is it like balancing kind of growth and then capital that you guys have as Broadsmart moves towards becoming kind of creative over the next several quarters?.

Let me give a partial answer to that, but if you are asking financially, I’ll also pass this over to Ravi in a moment. Ooma started out over a dozen years ago with a very unique approach to how you would design a platform for these kinds of solutions in the marketplace.

And unlike competitors of ours who have, for instance started in residential, but then kind of parked and set aside what they did, and then bought whole new platforms in acquisitions to kind of go a new direction in business, we’ve consistently evolved our platform.

And I think one of our real strength is the scale and scope and capability of what we've built. And so, as we grow, and serve customers from small to very large we continue – at the core we continue to evolve and differentiate what we can do in the market based on the kind of solution we are providing. That’s kind of at the core of our strategy.

Now, you know all the other elements of it. We've talked about how business is our primary focus and we’re trying to grow quite significantly there, faster than competition, and how we’re taking strategies that include our ability to customize for larger customers and really meet their solution in an ideal way.

But at the core of it has to do with the strength of what we build as a company. Let me turn it to Ravi for the other half..

Josh, with respect to some of the key focus what we have as Eric said, on the business side focusing on growth, and as we go forward and as we get bigger scale, we do expect to start getting leverage on R&D and G&A. And as business gets bigger, I think we will start seeing gross margins continue to improve.

So, I think once we get leverage on R&D, G&A and improving gross margins, you will start – and as long as we keep our payback period intact with our new customers, we will keep investing into sales and marketing. So, we can continue to grow our Ooma Office and Ooma Business overall.

So, that’s our focus and I think, as business gets bigger and bigger you will start seeing ARPU improvement, you will see the net dollar subscription retention rate in the long-term improve, and that’s what excites us, as the company becomes more and more stronger..

Great. Thanks guys. I'll hop back in the queue..

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

Great thanks.

Hi, wonder if you can give us a sense of how dilutive Broadsmart was to mortgage in the quarter? Obviously nice result overall, but just how much of a headwind was that and any sense Ravi of when we can expect it to get up to the corporate average from a margin perspective?.

So, overall – on an overall basis, Kevin, this is Ravi. I would say impact of Broadsmart to the overall gross margins were one point. So, we are 69% subscription margins, we would have been one point higher without Broadsmart. That’s the impact of Broadsmart, but obviously their margins are lower than 70%.

This is the overall number, but we do believe in a year or so, we should see significant improvement in their gross margin profile, and as that margin improves, we should see less and less impact on our overall margin. So, it’s not huge but, just I would say around 100 basis point or one point totally..

Got it.

And then obviously, the 23% growth really, really nice outpacing the industry, was that primarily that client win or was there anything else that contributed to that?.

Sorry, I jumped in, Ravi was going to say. This customer win is big for us, but so are the other things we are doing. Office itself and what we are doing with Ooma Business even outside of Broadsmart or this new customer are on track for the things we set out to execute this year. So, we're feeling good about our progress. You want to say something..

No, that covered it..

Okay. Thank you..

Thank you..

Your next question is from Pat Walravens with JMP Securities. Your line is open. .

Great, thank you. And congratulations guys. Okay, so Eric for you first. Hi.

A lot of good stuff in this quarter, right? Say, customer, Sprint, Office, Broadsmart working, what are you most excited about?.

Honestly. I’m most excited that the strategies we’ve put in place to be able to do different – things differently from others out there is coming together and isolate. In terms of the synergy in our sales activities, in terms of our ability to put solutions together for customers to meet their needs ideally.

I’m also excited about some of the new ways we think we can extend ourselves in the business space. If we look out to next 6 months to 18 months, although we aren't talking much about some of those things yet. And then I couldn't be more pleased about the Sprint relationship.

As I said, these partnerships can be quite significant and we’re hopeful that over time this will develop similarly for us..

Alright, great. And then Ravi, kind of the same question for you, so a lot of the metrics went the right direction, which one do you think is most significant? I kind of like the net dollar retention ticking up, but I'm curious what you think..

I think it’s – all of those hand-in-hand, but I would say, besides ARPU and all these ones, as we continue to see our payback period improve, I'm pretty happy with where it is, but it continues to improve as we get more leverage and more synergies, but be in the various channels, I think that probably is the best metric.

Obviously, it happens because ARPU going up my churn stays stable, as well as my gross margin improvements happen. So, I think it’s a combination of all of those, but what we have published with you guys in terms of net dollar subscription retention rate AERR, you are right.

ARPU growth as the big business gets bigger and as ARPU goes by cost structure, doesn't go up much. So, my margins will improve – as our margins will improve, with gives me more leverage to invest back in the business, or improve my bottom line or both or the options, which becomes available to us..

Okay. And then one last one for you, Ravi.

And I think I know the answer for this too, but, remind us how much cash you had at the end, and that’s plenty, right? Just in terms of what you need to execute against the growth strategies?.

Yes. We had 28 million plus of cash and investments in hand, no debt. And in Q2, for example, we burned roughly $400,000 of cash in operations. So, I think, even if you do, there would always be small volatility in cash burn, but whether it’s 0.5 million or a million, we have plenty of months or quarters. And this was for one quarter.

So, we have plenty of quarters or years ahead of us without having to raise any cash..

Okay great. Thanks, very much..

Thanks..

Ladies and gentlemen, this does conclude the Q&A period. I’ll now turn it back to Ooma for any closing remarks..

Thank you everyone for joining our call today and listening. You can tell we’ve got some good things happening. We’re really excited about them and looking forward to this next quarter and be able to talk to you again about them. Thank you everybody..

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