Ooma Inc (OOMA) 2016 Q4 法說會逐字稿

Please standby. Good day and welcome to the Ooma Fourth Quarter and Fiscal 2016 Earnings Conference Call.

Today's conference is being recorded. At this time, I would like to turn the conference over to Cynthia Hiponia. Please go ahead ma'am.

Thank you,[Johnny]. This is Cynthia Hiponia, Ooma Investor Relations and I am pleased to welcome you to Ooma's conference call to discuss its' fiscal fourth quarter and full year 2016 earnings result. With me on the call today is Ooma CEO, Eric Stang and CFO Ravi Narula.

After the market close today, Ooma issued a press release in PR Newswire. The release is also available in the Company's web site at ooma.com. This call is being webcast live on the Investor Relations page the Ooma web site and will available for period of 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. Forward-looking statements in this presentation include, but are not limited to statements related to our business and financial performance and expectations and guidance for future period. Our expectations regarding our strategic product initiative and the related benefits and our expectations regarding the market.

Our expectations and beliefs regarding these matters may not materialize and actual results for future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include set forth in the press release that 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 otherwise -- or as otherwise specifically stated, the financial measures to be discussed 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 will give guidance for the first quarter and full year fiscal 2017 on a non-GAAP basis. We do not make available reconciliation of non-GAAP guidance measures to corresponding GAAP measures on a forward-looking basis due to the high variability and low visibility with respect to the charges, which are excluded from these non-GAAP measures.

Let me now turn the call over to Eric Stang, Ooma's CEO.

Thank you, Cynthia. Hello and welcome to Ooma's F.Y. '16 Q4 Earnings Call. I'm very pleased to report that F.Y. '16 was a transformational year for Ooma. In F.Y. '16, we expanded our user base to over 800,000 core users and we grew our high margins subscription in services revenues by 36%.

It significantly developed our SMB business which now approaches 20% of our overall revenue and we broadened our consumer base by launching new connected home partnerships with major companies like [Nest] and Amazon and, of course, we became a public company in July which puts us in the position today of having a strong balance sheet and improved brand recognition.

I'd like to take this opportunity here to say thank you to all of our customers, employees, and shareholders for their many contributions to our success. Just we are beginning a new fiscal year, I will mostly talk today about our major fiscal year 2017 initiatives and goals and the great opportunity we see in front of us.

But first, I'd like to make a couple of comments about our Q4 F.Y. '16 quarter just ended. In Q4 F.Y. '16, we had a non-GAAP net loss of $0.10 per share as compared to our guidance of $0.10 to $0.12 per share net loss. However, while we maintain strong growth particularly in our subscription and services revenue, our total revenues of $24.3 million were below our guidance midpoint by $400,000.

Two factors probe this revenue result. First, we lowered our product pricing in the quarter. We made the strategic move to price our consumer product to Ooma Telo lower and have now moved the manufacturers' suggested retail price for it to $99.99. Our research indicates hitting this new $99 price point should generate greater sales volume going forward. The second factor was lower than expected revenue from our Business Promoter service.

Simply put some of our Business Promoter customers adjusted down their end of year marketing spending more than we anticipated. It also took us longer than we anticipated to complete the calendar 2017 planning cycle and get new marketing budgets set with some of our Business Promoter customers.

This end of year cycle is now behind us and we started F.Y. '17 with what we believe to be a large opportunity for Business Promoter. Nonetheless, given the volatility, we've experienced with this service. We intend for forecasting purposes to take you more cautious view of our Business Promoter outlook.

Q4 F.Y. '16 was also notable for several new product enhancements. For our SMB customers, we demonstrated IP phones working in beta version with our service with the CES show in January and we continued our beta program for Ooma Office for mobile, our mobile only version of Ooma Office. For home customers, we announced that Ooma Telo now works with more leading smart home products including Amazon, Echo and Alexa Voice Service, IOS and android devices, Philips Hue and LIFX light bulbs, and [Limo] spark plugs. And for mobile customers, we recently announced that Talkatone provides both picture messages and in-network group messaging and will soon offer out-of-network group messaging which we expect will be an industry first for apps of its kind.

Now looking forward to F.Y. '17, our strategy revolves around four major initiatives; each will be a key driver of our growth and success over the course of the year. First, we will continue our emphasis on growing our SMB customer base. Our business customers bring relatively higher ARPU. It increased our overall subscription and services profitability as they become a large proportion of our mixed of core users.

Our growth strategies here include expanding our target market with the promotion of office for mobile. Since office for mobile is ideal for single-owner operator business owners and other small business owners who operate their businesses for mobile devices. Our growth strategies also include support for select I.T. phone to provide our customers more options and expansion of our marketing and sales activities.

Second, we will make the Ooma Telo even more attractive to home consumers. The home market opportunity remains vast with our unique solution, number ranking five years in a row from consumer reports and very high customer retention rate. We see a tremendous opportunity to bring a higher quality feature rich, better value phone service to frankly millions of customers. Our strategies for making the Ooma Telo more attractive to consumers include our recent drop in the pricing of Telo to $99.99 MSRP and our continued development of all OEM partners who helped us reach new consumers in new ways.

Third, we will expand the range of services we offer particularly for our home consumers with a focus on integrating Ooma into the connected home experience. We anticipate this add-on services will drive higher margins in our subscription and services revenues by increasing usage of our premier service tier or by creating incremental customer revenues. We're expecting will also increase the stickiness and long-term retention of our customer base. Even small take raise for a new service can generate considerable revenue even the size and growth of our customer base. Our strategies for F.Y. '17 will include new solutions and services from Ooma along with new integrations with other leading connected home products.

And fourth, we intend to invest significantly growth while also improving our bottom line. Our fast payback on new customer acquisition and high customer retention should make this possible in F.Y. '17. Based on our F.Y. '16 Q4 run rate just ended, we believed we can generate over $50 million in profit dollars this fiscal year. This represents a sizable amount of cash to reinvest for growth this year.

In F.Y. '17, we planned to spend significantly on new customer acquisition, taking advantage of our attractive customer payback period. We also plan to spend significantly on engineering adding new services that increase per customer monetization. With this large scale of investment, we believe we can drive a significant increase in the future value of Ooma.

Through these four initiatives driving high growth of our SMB customer base increasing the attractiveness and growth of Ooma Telo expanding the range of services we offer and achieving significant growth while improving our bottom line. We have the strategic vision in place to make F.Y. '17 another transformational year.

Now, let me turn the call over to Ravi to discuss the results and outlook in more detail. I will then return with final comments and to take your questions.

Thank you, Eric. As a reminder, all income statement items except revenue are on a non-GAAP basis and exclude non-cash expenses such as stock-based compensation expense, amortization of intangibles and acquisition related to contingent consideration. The reconciliation of the GAAP to non-GAAP financial data can be found in the press release issued earlier this afternoon.

Today, I'm going to review the results of our fourth quarter and fiscal year 2016 and I also provide our outlook for the first quarter and full year fiscal 2017. Total revenue for fiscal 2016 was $88.8 million, an increase of $16.6 million or 23% over fiscal 2015. Net loss for fiscal year 2016 was $8.5 million as compared to a loss of $4.7 million of fiscal 2015.

Total revenue for the fourth quarter of fiscal '16 was $24.3 million, an increase of $3.4 million or 16% over the fourth quarter of last year but slightly below the guidance range of $24.5 million to $25 million. We will discuss the main reasons for the shortfall momentarily.

For the fourth quarter of fiscal '16, subscription and services revenue, a component of total revenue increased $4.6 million or 29% year-over-year to $20.6 million. Subscription and services revenue was 85% of total revenue for the fourth quarter some [pay] to 76% of total revenue for the prior year quarter.

The year-over-year increase in subscription and services revenue was driven primarily due to growth in the subscriber based of both residential and office customers offset in part by year-over-year decrease in revenue from our Business Promoter services. This decrease was due to an unanticipated reduction in the marketing spend with some of our Business Promoter customers. We remain confident in the long-term growth of this business due to an expectation of higher demand for lead generation services with small businesses through digital and social channels.

We are, however, taking a more cautious view on guidance for that business in order to factor in the volatility in the marketing stand of such small businesses. Our core user base increase 24% from 645,000 at the end of the fourth quarter last year to over 800,000 at the end of the fourth quarter this fiscal year and our team of users grew from 42% to 46% of the overall core users during the same period. This growth in core users is an indicator of increased market penetration and potential future upsell opportunities.

Our small business core users grew over 90% from the prior year's quarter which now exceeds 100,000 core users. Our average monthly subscription and services revenue per core user for the quarter over $8 for the fourth quarter of fiscal 2016. By the end of the fourth quarter, capital net over $1.5 million monthly active users are MAUs of growth of 6% on a year-over-year basis with continued better monetization of these MAUs.

Product and other revenue another component of total revenue decreased $1.3 million year-over-year to $3.7 million. This product and other revenue for the fourth quarter of fiscal 2015 included $1.1 million of sales to [rivent] and OEM partner which sales were not repeated in the fiscal 2016 quarter. Lower average selling prices are ASPs, contributed to this declined in product revenue by approximately $400,000 but was offset in part by higher volume of [Harvey] unit sold in the quarter.

Annualized exit recurring revenue or AERR, increased 24% year-over-year to $76.9 million for the quarter up from $61.9 million for the prior year quarter. Our annual net dollar subscription retention rate was 94% at the end of the fourth quarter. This rate reflects the impact of lower than anticipated Business Promoter revenue in the quarter while our overall [churn] remained consistent on year-over-year basis to 6% annually.

Our total gross margin increased to 55% in the fourth quarter compared to 47% for the same quarter last year as we extend our core user base thereby resulting in continued growth and revenue from high margin subscription and other services. Product and other gross margin was negative 8% for the quarter compared to negative 17% for the prior year quarter. Subscription and services gross margin for the quarter was 67% compared to 68% in their prior year quarter.

Fourth quarter operating expenses are $15 million, an increase of $2.3 million or 18% year-over-year. Shares and marketing expenses were $8 million, an increase of $1.3 million year-over-year primarily due to ramping our marketing activity for a small business segment. Research and development expenses were $4.4 million, an increase of $800,000 year-over-year with increase in personnel cost related to the development of new features and functionalities.

General and administrative expenses were $2.6 million which is an increase of $200,000 year over year. This is an improvement of 80 basis points from the prior year quarter as we see the benefit of scale. Our net loss in the fourth quarter was $1.6 million or $0.10 per basic and diluted share compared to a net loss of $3 million or $1.21 loss for basic and diluted share for the fourth quarter of fiscal 2015. Adjusted EBITDA loss improved to $1.3 million in the fourth quarter of fiscal 2016 compared to a $2.5 million loss in the fourth quarter of fiscal year 2015.

Now, turning to the balance sheet with cash -- cash equivalent and short-term investments of $55.4 million with no debt as of the end of the fourth quarter. Cash generated from operations during the fourth quarter of fiscal 2016 plus $439,000 compared to cash use in operations of $675,000 in their prior year quarter primarily due to the reduction of inventory end of quarter. During the quarter, we paid $1.8 million for the purchase of property and equipment related to establishing an additional data center.

Deferred revenue at the end of fiscal 2016 increased to $15.1 million from $14.4 million at the end of fiscal 2015. This increase is due to growth in the first subscriptions and services revenue as we continue to increase our core users. We ended fiscal 2016 with 139 full-time employees up from 104 at the end of fiscal 2015.

Now, for our outlook, the following guidance is based upon non-GAAP results and excludes stock-based compensation, amortization of intangibles, and other related expenses. For Q1 fiscal 2017, total revenue is expected to be in the range of $23.5 million to $24.3 million. This takes into account an expectation of lower product revenue due to lowering of the price of our Telo product last month. Non-GAAP net loss is expected to be in the range of $1.5 million to $1.8 million. Non-GAAP net loss per share is expected to be in the range of $0.09 to $0.11. We have assumed 17 million basic and diluted shares for Q1.

Guidance of full year fiscal 2017, total revenue is expected to be in the range of $102 million to $107 million. This guidance reflects product and other revenue decline on a year-over-year basis due to plan, lower [ASPs] of our products, as well as adjusted expectations for our Business Promoter services based on a more conservative view of that business.

We expect continued growth in our core user base on a year-over-year basis. That growth in core users should grow our subscription and services revenue by at least 25% for fiscal 2017. Non-GAAP net loss is expected to be in the range of $4 million to $5.5 million. Non-GAAP net loss per share is expected to be in the range of $0.23 to $0.31 assuming 17.5 million basic and diluted shares for fiscal 2017.

With that, let me pass it back to Eric for some closing remarks. Eric?

Thanks, Ravi. As we look forward to F.Y. '17 and beyond, we see tremendous opportunity for two key reasons. One is the large size of the markets we are disrupting and the other is the unique competitive advantage we bring to these markets. The market opportunity is clearly significant, we continue to see the small business market for our services in its early days but most small businesses still stuck with traditional high-cost feature-limited solutions.

We estimate there are 30 million or more small business customers in North America alone, and on the home side, we see a market that remains enormous in size where more than 65 million North American households with a home phone today can enjoy the significantly better, less expensive solution with Ooma. We believe we're truly serving mega market opportunities. These markets demand the unique voice quality features and value that only Ooma can deliver.

We believe we are the only company in the market today that has developed a fully integrated platform where the Cloud network, the onsite hardware, and the services are all integrated into one optimal superior solution. Our unique hybrid SaaS platform affords us deep competitive advantage in the small business and home segments of the market which demands special requirements as compared to larger sized businesses. In these market segments, we believe our solutions stand out as the clear leader.

Now, thank you. We are happy to take you questions. Operator?

Thank you.

(Operator Instructions)

And we'll go ahead and take our first question from Michael Nemeroff with Credit Suisse. Please go ahead.

Thank you, guys. Thanks for taking my questions. Just on the guidance, Ravi, I'm curious could you maybe just walk us through how the guide -- the reduction in the guidance that you're giving for '17 compares to what we were expecting and exactly which components you're taking down?

Hey, Michael. So, two things as I mentioned earlier, there are two major components which are driving the guidance. Our view of fiscal '17 guidance, one is given, we just recently reduced our prices, the ASP for our products have come down. So, roughly from $129 to $99 that should mean $15 or $20 per unit reduction in each unit there. So that is one of the major factors which will impact -- which is impacting the guidance.

Secondly, given we had some volatility with the Business Promoter business, and for different reasons but we are taking a lot more conservative view of that business. We also projecting growth or for the purpose of guidance, we are taking a more conservative view and those are the two factors would be the -- is resulting in our lower expectations for fiscal '17.

That's helpful but how cautious are -- you said, you're still expecting growth to promote , so do you know the magnitude of the reduction you were expecting X percent and now you're expecting X percent in promoter? Could you give us a sense of how big or just how cautious you're being on that unit?

Hey, Michael, we do -- so, as we run the business and we are executing on our business, we do have expectations of growth in that but none of those growth fact -- none of the growth is included in our guidance at all, and -- so it's a very cautious guidance I would say but we are -- do -- we are still anticipating on growing their business and we are investing in -- on a [measure] base in that business - Eric if you have anything else --

Great. That's -- Eric, I just want to understand, now as you've lowered the price on the units to $99, part of the reason why the company has been so successful in keeping and would there be subscribers, because the quality is so high. Now that you're bringing down the cost of the unit, are you actually losing money per unit on the Telo -- on the Telo side? And can you make that up with lower price components and how would that affect quality in your opinion?

We're not concerned at all about any issue at quality in that sense. I -- we don't believe we're going to make substantial reductions in the cost of the unit itself from our side. We're always doing small things, of course. We had been discounting off the $129.99 already in Q4 and ended up do a little bit more discounting than we thought would be late in the quarter and through our learnings with that and some additional market research that we did early this year, we feel the $99.99 price point will be significantly more attracted to consumers than the $129.99 was.

So, since we're all about growing our subscription in services revenue, we feel that this is the right direction for us and you'll mean our margins are a little bit lower on the product side potentially slightly negative but all in I think it's a strong move for us.

Can you maybe just walk us through that elasticity calculation, $129 going to $99, what kind of a bumpin demand do you expect to see from the price going from that price reduction specifically?

Here, I don't think I want to share the exact results of our margin research and what we're thinking. But we do believe there will be a bump, and we can tell you that since going to $99.99, when we look at the last couple of few weeks, in the weeks where we wouldn't been backed at $129.99 or maybe $109, if we had been discounting at the time, that's compared to what I think we would have done. We are seeing higher sales by staying at $99.99 every week but I can't way put a number out for you.

Have there been any changes at all in the distribution channels that are notable either in Q4 or anything that you expect to be different on a meaningful basis in '17 positive and or negative?

In F.Y. '16, so last fall -- summer, fall, we increased our distribution channels meaningfully and we talked about it on our prior calls. And so we go into this fiscal year well positioned we think from a retail channel perspective and we expect that to continue. There's -- and we consider it an opportunity to leverage.

We also do work with OEM partners and we talked about on OEM partner on our Q3 earnings call that we'd be launching this year. We do expect them to launch in the first half of this year and we're being cautious about where that will go because into what happens we don't really know, but we think that will be a nice opportunity for us this year. So, there's -- yes, that's how it looks.

That's helpful. Lastly for me, Ravi, could you maybe -- did you feel comfortable enough now to maybe put a stake in the ground in terms of profitability?

So, Michael, with respect -- we have guided full year net loss and APS numbers. It's -- but we have a roughly 80% of the overall revenue coming from subscription and services and I mentioned is a high margin business, and as we continue to grow subscribers, we do see -- we do expect to see the benefit of the growth in core users and subscription revenue and margins to have -- with their bottom line improvement also.

So, you will continue to see improvement in the bottom line as we go forward and I think it won't be linear. It's all back and loaded. You will -- it will be pretty reasonable scale and benefit in terms of profitability, you'll see as we did in Q4 and we do expect going forward to.

Okay. Thanks for taking my questions.

Thank you, Michael.

And we'll take our next question from Nikolay Beliov with Bank of America. Please go ahead.

Hi. Thank you for taking my question. Eric, can you give us a little bit more detail you mentioned in your prepared remarks about new services Ooma all we'll be launching on the comp side like - and roughly what areas can we expect that to be in?

I'm not sure I can shed much more light in what we said in our remarks. We're focused on the connected home and the kinds of services that our customer could value particularly integrating telephony experience with other things going on in the home.

And so we're driving towards solutions in that area. Some other solutions with the things we do directly and some will be solutions that we do by partnering and integrating with other's products and services. We are thrilled about the ones we've already done, both Amazon and Nest and other big players in the space like Philips but that said I don't think you'll see -- I would have expectations that solutions directly from us will be in the back half for the year not first half of the year.

Got it, I want to ask you about cross-sell between the different product lines, how active are you in cross-sell between home and office and Talkatone and Business Promoter, is there a focus for - for this fiscal year?

We don't -- we clearly get cross-sell which is to say someone finds out about Ooma and they will move from one Ooma product to more. It's interesting in our market research, the folks buying our small business solution say they've seen our TV advertising just as much as our home consumers, tell us they say it, and even though our TV advertising is focused on entirely on home consumers, so we see that.

We do see many of our business customers also having our home solution. But that said, we aren't particularly working today to actively cross-sell. We tend more so to try to upsell which is to say if you are a consumer customer we like you to take advantage of all our features, particularly those that are around our premier tier.

Or if you're a small business customer, we would like you to take advantage of Promoter or take advantage of our internet faxing or some of the other solutions that can be optional there. We will increasingly do more of what you're suggesting but right now we're staying most focus on just growing our subscriber base.

Thank you, and Ravi, a couple of questions for you. CAPEX, what should we model for CAPEX this year and should we expect retention rate to bump up as the headwinds from Business Promoter diminished?

Nicolay, so this past quarter, Q4, we did spend $1.8 million for that additional datacenter. We don't expect that to repeat. I think we have adequate capacity, more than adequate capacity for datacenters, so I do expect the CAPEX to be significantly lower going forward. We have been averaging in the past other than Q4 around $4 or 500,000 a quarter and I do expect that run rate to continue.

And then on the retention rate, is it -- is it going to be the bottom of the retention rate and will pick up going forward?

I'm sorry Nicolay, can you repeat the question?

Sorry, I asked also about the retention rate, it has been up and down...

The retention rate...

Yes.

Yes. Do you think that's the bottom and is it going to start picking up as Business Promoter headwind's diminished?

Yes, so it has been -- our blended churn rate has been roughly 6% annually, so retention rate is 94%. We do expect that to -- around that number to continue. Obviously as small business gets bigger, that rate may slowly inch up but we don't expect in the near term that retention rate to go down from where we are.

Got it, thank you.

(Operator Instructions)

We will take our next question from Bhavan Suri with William Blair. Please go ahead.

Hey guys, Ravi, Eric, can you hear me okay?

Yes, hi Bhavan.

Great, hey guys. So just to dive a little bit into the competitive environment, you know, have you seen any change there, have you seen any impact from what Vonage is doing, have you seen -- anything that just sort of change both on the Business Promoter side and then more importantly on the office side?

There's no specific competitive moves to talk about in the last quarter that we would highlight. Generally, over the course of the last 12 months I would say the consumer market has gotten a little bit more competitive just from a pricing standpoint, if you will, but it always does. And so, it's just part of -- part of the development of the business.

Obviously Bonn, it just cut back its TV advertising significantly and we debated internally a little bit what that can mean for the -- for the industry but I think from our perspective the future is really in our hands. I mean we are a small market share player relative to the total size of the market.

We know from our market research that when customers fully understand what we offer, we are the product of choice. People love our solution. We also know the customers who get our product, love our solution. In fact, we said it before 35% of new customers tell us they first heard about us from word of mouth from an existing customer, and that has maintained itself in our most recent research.

The one final thing we know is that most Americans have not yet heard of Ooma. So for us, it's a matter of telling our story and telling it better and better and more widely. And we know we will grow, so we aren't too focused on competition and competition losing in that -- in that sense, that's largely an answer from a consumer perspective_.

If I switch over to small business, small business we -- continues to be as it was in prior quarters where I talked about it, most customers we win, had a traditional high-cost inflexible solution, and for switching to Ooma is a -- is a no brainer, if you will. They're going to get a lot more for a lot less.

And we have not seen competition do something different from previous quarters there either. On the Business Promoter front just to round this out, really we think we have fairly unique solution in that space and our biggest challenges are literally our customers having budgets available particularly at year end.

And our own side, from the point of view of taking new accounts we've won and converting them into paying customers which takes us efforts and is an investment that we make, and we do that at a measured pace. But, we do believe there's an opportunity in that business as well or that area as well because of the fact that we have -- many customers still to enable. So, I hope that approaches your competitive question -- from what you're trying to find out but it's not.

No, no that's very helpful. I guess just to focus on Business Promoter a little bit, there are some volatility, you've explained some of it but what I love to know is sort of when you look at the backlog in the pipeline, both from the account you're going to add and then from potential new partners like agency, just sort of a little color there would be helpful too.

Yes. You recall from six months or more ago, we were talking about broadening the number of partners we work with. We get customers for business promoter both off of our own platform and also from -- call them digital agencies that have access to small businesses that can -- that can use our service.

And we have successfully broadened our base of partners we work with. We're very happy with how we broaden it actually. We have not yet enabled [nearly] the amount of customers that broadening has brought up. I should say potential customers that broadening has brought us and that's a continuing effort to do so.

To be better at that, honestly we need to implement some automation on our side and you recall from our last conference call that the work on that automation was delayed by the issues we had in Q3 in that business. And we still don't have that automation in place but that automation we're going to place some time this year and when it does will help us accelerate in that -- in that area.

That -- the Business Promoter Service is our toughest to forecast because we don't have -- in some cases we don't have direct access to the end customer and budgets can go up and down but that said, it is a very valuable service and it grew last year. We believe it will grow this year and we just want to be conservative and cautious in our planning outlook for it, so that we can -- we don't have to talk about it as not achieving expectations like it -- like Q4.

Got it and then I want to sort of - more strategic question. You talked about taking the platform of whatever you want to call it, the Ooma core business and hanging these application and Business Promoters are really neat application to hang off of it.

Let's fast forward two to three years out, what were you thinking you could add to that to provide value to small businesses through the integration of Voice obviously or off the Voice platform that sort of the -- the sort of app that end up layering on the value added services whether it's Lead Gen or marketing or whatever, just some sense of how we should think about that pipeline or what you guys are thinking for sort of strategic product roadmap.

It's a good question and I believe you asked that for small business, so I'll answer it that way but I could also answer for home consumers if you wish me to go there as well.

I would not stop you Eric.

Okay. We talked in the past that we have three areas in which we think about layering on additional connected services that will utilize the strength of our platform and frankly are close customer connection. And those are three areas are in the areas of productivity, automation and infrastructure.

And productivity relates most frankly to small business. We think Business Promoter is a productivity application for marketing small businesses. You can imagine other services there that might relate to contact center or other things a small business would do, I don't know.

On the automation side, facility monitoring. On the infrastructure side, things that would take advantage of the fact that our appliance is also a router and can help optimize and do things with internet traffic generally in and out of the facility. We think about all three of those areas but today our Business Promoter and Lead Generation is our primary service and we're very focused on that. But if you think two or three years out, I expect we will have other services for business, in fact I know we will.

On the consumer side, the automation element of those three is the strongest but there are also things we can do particularly from an infrastructure perspective but from the automation perspective we have talked about enabling connected home solutions. We think the connected home is about connected home and the phone services at homes were the key elements of connectivity. Our platform today already includes mobile apps that integrated into the platform and ability to serve up alerts.

For instance, when someone dials 911 from your home -- from their home today, with Ooma they get a text message telling whomever they've identified that happened, so that you know you can respond as a parent or as another member of the household. So to broaden that into other connected home area is pretty straightforward.

We also think that we have a unique position because our customers are connected to us. They're using their service everyday. They go to their My Ooma and My Office portals to manage their service. Our marketing expense to layer on additional services is really quite minor.

We just have to present it to our customer base and we believe the advantage of having very little to no marketing cost and the advantage of already having on site the base appliance that's needed to interact with other devices if there are other hardware involved on premise gives us a very simple foundation for customers to try new things from us.

So, we're excited what we can do. We're also excited because with 800,000 core users now and growing, you don't have to get a very high take rate. I said this in my prepared remarks, you don't have to get a very high take rate to have a meaningful revenue impact either in terms of customer -- more customers taking our premier tier or customers beginning to buy something else from us that's priced separately.

So, we're pretty excited about the potential but we're -- we're taking measured steps. You will see that one or two new services come out from us this year and of that pace, kind of indicates what we can do with the level of investment we're making on the business today.

Got it, that's very helpful guys. Thanks for taking my questions, I appreciate it.

Our pleasure, thanks Bhavan.

And we'll take our next question from Patrick Walravens with JMP Securities. Please go ahead.

Oh great, thank you. I think what would be helpful for me is just stepping back for a second and ignoring the product and other line, why has the subscription in services line deaccelerated, so much? So if you look at fiscal '15, you guys were north of 50% for the year and then Q4 was 29 and now we're talking about 25% for next year. If you could walk us through that that would very helpful.

Hey Pat, this is Ravi. So a couple of things I would say, if you look at fiscal '15 we had for the first time in that year the impact of Business Promoter as well as Talkatone. Talkatone, we had acquired in some times early in fiscal '15.

So if you were to look at the growth rate in fiscal '15 over '14 in subscription, there were a couple of these businesses we had acquired or grown which resulted in higher growth rate in that year. If you were to exclude the impact of that acquisition -- because in fiscal '14, it was zero and then now they're building from that base which was in 2015.

Secondly, fiscal '16, yes it was lower -- it was -- the full year was at 36% but the one other reason in Q4 was the decline in year over year for Business Promoter Services. So overall, we did well in terms of fiscal '16 except we had some challenges which we discussed in our Q3 Earnings Call for the technical issues and then in Q4 because of this marketing and spend issue we had -- we saw declined year over year in Business Promoter.

Fiscal -- moving forward in fiscal '17, we do expect all of these various components of subscription and services to grow but we are taking a more cautious approach especially for business promoter given the volatility we have seen over the last couple of quarters.

How much did Business Promoter grow in fiscal '16?

It grew in double digits year over year but it was a decline in Q4.

Okay. And then, the Street has got you guys doing 18 cents and positive EPS in fiscal '18, is it time for us to be moderating our expectations for profitability or is that still sort of things you guys are planning to do?

We are not diving at this time for fiscal '18 but what we -- what I already mentioned is that we do believe the benefit to the bottom line will continue to come as we grew the business. And just be conservative, we wanted to give a guidance which is a conservative and with some upside potential there.

So we do -- we will provide you more color as progress in the year as to what the specific timing of profitability would be but we do believe this business [cares] very well as we continue to build it for users. And some of these services like Business Promoter can really add value but we wanted to keep those ones into more than accept that into our base plan also.

But don't you guys think it's important to let shareholders know, you know, at least your conservative case when you're going to hit profitability?

Yes, we've given annual guidance here for our net loss for the year and we've given guidance that you're going to see our net loss narrowing over time as we grow. As the year unfolds, we may get more specific on that but frankly too we have tremendous opportunities in front of this company.

We are acquiring customers profitably and we want flexibility to time investments when we have opportunities and pursue the things we need to pursue. So to give guidance now for this year around exactly quarter by quarter when things are going to happen, we've chosen not to do that but we are very mindful. The bottom line is you heard us say in the past and we'll continue to be mindful of it and you will see the bottom line continue to improve.

Okay, I'm sorry, just one last time. So, I'm not talking about quarter by quarter but you know I think every other company that I covered is in a lost position, is at least saying, listen, you know, by the end of fiscal '18 we'll be profitable or by the end of fiscal -- by end of calendar '18 we'll be profitable, by the end of calendar '17, we'll be profitable.

And you guys -- I don't know, don't you feel like you should be providing that [guide] because the problem is people going to worry about how much cash you're going to spend before you get there.

Yes, I'm going to let Ravi here speak in a minute but I can tell you we are not far away from profitability and profitability for us given the strength of this business is a decision point. And so we -- we feel we've given a pretty good outlook in terms of how we're going to manage the business but maybe Ravi would like to be more -- say more here.

In fact if I can just give you one flavor, we are guiding for net loss of $1.5 million to $1.8 million in Q1. And the full year -- so if you were to look at and if you don't improve at all for the first three quarters, we are guiding for $4 million of loss, low end of the range, 4 to 5.5 for the full year.

Basically, what -- we will start seeing the benefit of the scale come in and $1.5 -- if we continue to guide for $1.5 to $1.8 million of loss for the next four quarters, we will not be able to meet our full year guidance forecast also. So, you will see the benefit come in every quarter and whether it happens, the profitability of cash flow break-even happens in Q4.

It's absolutely possible, but we are not at this time given the -- especially guidance which quarter it will take. But, you're not too far off if you were to look at the end of this year, somewhere around a year from now somewhere, we get the cash flow break-even, absolutely very much doable because of our scale of the business.

Okay, that's helpful, thank you.

And we will take our next question from Matt Robison with Wunderlich. Please go ahead sir.

Great, I guess the first question is what do we -- we're thinking about in terms of time frame for IT phone service to go commercial?

We demonstrated IT phones on our service at CVS in January actually and it is on planned internally for Q1 which for us ends at end of April, but I can't give you the exact timing because we always trade-off the different things we need to do in the business, but it is close.

That's close enough. How should we think about subscription revenue growth ex Business Promoter?

Matt, I said in the prepared remarks we do expect at least 25% year over year subscription revenue growth and we are taking a very cautious view of Business Promoter, literally not even including in our growth trajectory as part of the guidance. So if you were to exclude that for both the year, you will probably by doing the reverse, Matt, you will see the subscription services revenue [on-Business Promoter to be growing faster than 25%, so...

Let me ask another way because actually I was thinking about the fourth quarter specifically, we had -- if I remember right, your subscription growth is about the same as 8x8 and a little bit lower than RingCentral. If we took out Business Promoter, how would you -- how would your growth fared relative to those two? I think 8x8 was 29 % and RingCentral is 30%.

Yes. Our overall subscription revenue growth was 29%, you're right, and we had taken out Business Promoter from both the years. We would have been growing in low 30 -- we would have been growing in -- between 30% and 35%.

Okay. And another question I had, third one, has the average -- actually I got -- I might ask a fourth too, so has the average number of small business lines change?

Not fundamentally, no. It does grow slowly over time ever since we announced that we go up to 20 users per business. The overall average has been growing, but it's a slow rate.

And the -- last call you said high teens for SMB, you said nearly 20%, is that two-ways of saying the same thing or is that code for you grew the percentage a little bit?

It's the same thing. We would have growth faster but because of Business Promoter, that held us back, it's in high themes, very close to approaching 20%.

Thanks.

Thanks Matt.

That does conclude today's question and answer session. I would like to turn the conference back over to you Cynthia for any additional or closing remarks.

Great. Thank you everyone for joining us this afternoon and we look forward to updating you again on our next earnings call.

That does conclude today's conference. We like thank you all for your participation.