Ooma Inc (OOMA) 2018 Q1 法說會逐字稿

Welcome to the Ooma First Quarter Fiscal 2018 Earnings Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to you, Mr. Soohwan Kim. Please go ahead, sir.

Thank you. This is Soohwan Kim, Ooma Investor Relations, and I'm pleased to welcome you to Ooma's conference call to discuss these first quarter fiscal 2018 earnings results.

With me on the call today is Ooma CEO Eric Stang, and CFO Ravi Narula.

On the market's call today, Ooma issued a press release to the [PR and Inquire]. A release is also available on the Company website, at Ooma.com.

The call is being webcast live on the Investor Relations page of the Ooma website, and will be available for the period of one year.

During the course of today's presentation, our executives will make forward-looking statements within the meaning of federal securities laws. Forward-looking statements generally related to future events are future financial or operating performance. Forward-looking statements of this transition [fully], but are not limited to, statements related to our business and financial performance, expectations and guidance for future periods, our expectations regarding our strategic prior positions and the related [back put], and our expectations regarding the market.

Our expectations and beliefs regarding these matters are not materialized, and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks include the assessment from the press release that we released earlier today, as well as those more fully described in our filings with the SEC Securities and Exchange Commission.

The forward-looking statements in this presentation are based on information available to us as of the date featured thereof, and we disclaim any obligation to [uphold] any forward-looking statements as required by law. Please note that other than the revenue or as otherwise specifically stated, the financial measures we discuss on this call will be on a non-GAAP basis.

Non-GAAP financial measures are not as typically considered in isolation, or as a substitute for results occurring to according to the GAAP. A discussion of why we present non-GAAP financial measures in reconciliation with non-GAAP financial measures discussed in this call are similar to directly comparable GAAP financial measures are included in our Ooma press release that is available on our website.

On this call, we'll give guidance for the second quarter and full year fiscal 2018 on a non-GAAP basis. We do not make available reconciliation on non-GAAP guidance measures, [to courses on these GAAP] measures on the form of conveying if this is a high variability and a low variability [for these] (technical difficulty) versions only on these non-GAAP measures.

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

Thank you, Soohwan, and hello, and welcome to Ooma's FY 2018 Q1 Earnings Call.

I'd like to begin by sharing our Q1 results and overall outlook, and then, discuss our plans to drive results moving forward.

In the first quarter, our revenue was $27.6 million, which fell short of expectations, and our adjusted EBITDA was $0.1 million.

I'd like to say upfront that we appreciate how important it is to deliver on our plans, and everyone at Ooma remains deeply committed to achieving our goals for the business.

In Q1, we delivered on our key initiatives to rapidly expand Ooma Office for small business, and to grow Ooma Telo for residential.

Our combined subscription services revenue from these two core parts of our business grew 20% year over year, and our Q1 subscription service revenues from Ooma Office alone grew 63% year over year.

Our Business Promoter service and our Talkatone mobile app, however, performed below expectations. Our combined revenues for these two parts of our business declined more than $1 million versus Q1 a year ago, and largely drove our revenue shortfall for the quarter.

Looking forward to Q2 and the rest of this fiscal year, we anticipate continued strong growth of Ooma Office for small business, but we see a more conservative growth trajectory for Ooma Telo for residential. And we anticipate continued revenue weakness in both Business Promoter and Talkatone.

As such, I'd like to review each part of our business in depth, and describe the actions we are taking.

We remain focused on our plans to grow Office for small business. As I stated earlier, we achieved strong growth in Office in Q1, and our outlook for Office remains positive for the balance of the year.

We outlined last quarter that our key Ooma Office initiatives this year include increasing investment in sales and marketing; building a reseller program involving new channels of distribution; introducing new features and supporting more IP phones to increase our addressable market; and capitalizing on our WeWork partnership, including launching service in several new countries.

I'm pleased to report that in Q1, we launched our service in France for WeWork, and are now in the process of rolling out to other countries.

We have also continued the development of a reseller channel, including establishing the systems and tools to support it.

It is early days day both of these efforts, but we are proud of our progress so far.

I'm also especially happy to announce that the readers of PC Magazine have voted Ooma Office the best business VoIP service for an unprecedented fourth year in a row. Overall, I believe we have strong momentum in Ooma Office, which is our number one priority.

Turning now to Ooma Telo -- which is, of course, our platform that provide home phone and other services to our residential customers -- consistent with our plans, we grew residential subscriptions services revenue 12% in Q1, compared to a year ago.

As you know, Ooma Telo's voice quality, unique features and great value make it an ideal platform built for delivering home phone service and other services, such as home security and internet security.

We achieved good growth in Q1; however, a couple of factors lead us to be more conservative in our outlook for revenue for Q2 and the remainder of FY 2018.

The first factor is that we are currently running below both prior year adoption levels and our expectations for this year, and believe we should be cautious with our residential outlook.

We anticipate comparatively light sales in February and March, but customer adoption has not picked up significantly in April and onward. We see declining consumer and retailer interest in home phone service, and going forward, we believe there's potential for indirect competition from Amazon Alexa and Google Home.

The second factor involves our priorities in execution.

As you know, we set plans this year to launch new residential services -- most significantly, home security -- and then, to enhance those services through the course of the year.

These plans have been delayed by the need to place most of our efforts on rapidly expanding Ooma Office -- and particularly, internationally for WeWork -- and compounded as well by the fact that we have not grown our engineering team as quickly as we intended.

One outcome of this is our momentum in home security has been delayed, as we are only now beginning to shift sensors in quantity. We remain focused on rapidly expanding our engineering team to deliver on our ambitious plans for new residential services, in addition to our small business and international commitments, but we anticipate further delays to our plans for the residential market.

As a result of all these factors, we have modified our outlook for Ooma Telo for the balance of FY 2018. Nonetheless, we remain confident that our residential subscription service revenue will continue to grow, albeit, slower than previously expected.

Switching now to Business Promoter, Business Promoter contributed approximately $850,000 of revenue in Q1, as patent budgets from our digital partners reduce monetization of the service.

As we've described previously, as we had little influence over our partners' budgets, our Business Promoter strategy is to limit investment, and drive positive EBITDA.

We now expect Business Promoter revenue to decline further this year. So we have reduced expenses, but we expect to continue to achieve positive EBITDA from the service.

Finally, our Talkatone mobile app provides calling and texting to approximately 1.7 million monthly users.

In Q1, our revenues from Talkatone fell to approximately $1.4 million, and we're down year over year. At a high level, we were unable to fill all available ad space, which left us unable to capture revenue on more than 15% of the ads we had intended to display.

We believe this issue is an industry-wide problem, possibly driven by advertisers directing more of their ads to Google and Facebook. We now anticipate a sizable shortfall in ad supply at acceptable pricing going forward, and so, are taking steps to increase our ad supply to the degree possible, and steps to add new revenue generating premium end user features later this year.

We're also reducing our revenue outlook for Talkatone for the balance of FY 2018.

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

Thank you, Eric.

As a reminder, all income statement items, except revenue, are on a non-GAAP basis, and exclude expenses such as stock-based compensation, related taxes, and amortization of intangibles. The reconciliations on GAAP to non-GAAP financial data can be found in the press release issued earlier today on our Investor Relations website.

Today, I'm going to review the financial results of our first quarter of FY18, and then, provide our outlook for the second quarter and FY2018.

[For the] revenue for the first quarter of fiscal 2018 was $47.6 million, an increase of $3.1 million, or 13%, on a year-over-year basis, driven by strong performance of Ooma Office.

As Eric stated, revenue came in slightly lower than our guidance range, primarily due to underperformance of our Business Promoter and Talkatone services.

Net loss for the first quarter of fiscal 2018 improved to $291,000, compared to a $1.4 million for the same quarter last year. Loss per share was $0.2, compared to a loss of $0.8 per share for the same period last year.

For the first quarter of fiscal 2018, subscription and services revenue, excluding Business Promoter and Talkatone, grew 20% on a year-over-year basis.

We are pleased with the growth of Ooma Office subscription and services revenue, which grew at 63% in the first quarter of fiscal 2018, as Ooma Telo subscription and services revenue, which grew 12% on a year-over-year basis.

To provide better gauge of our main business, going forward, we'll exclude Business Promoter data from our key metrics -- that's our score users, ARPU, and net dollar subscription retention rate. Accordingly, all the business metrics we will discuss today will include Ooma Office and Business only unless otherwise stated.

Additionally, we'll refer to Ooma Office as our small business solution. Please review the Investor Relations section of our -- on our website, but additional supplemental information on these metrics.

Our Core user base increased 13%, from 776,000 at the end of the first quarter last year, to over 879,000 at the end of the first quarter this year. Our Premium users grew from 42% to 44% of the overall Core users during the same period.

Our small business Core users are now 11% of total Core users, compared to 8% at the end of the same quarter last year. Our small business revenue continues to grow, and is now at 21% of our overall revenue, compared to 13% in the prior year quarter.

Our average monthly subscription and services revenue for Core user, or ARPU, was $8.38 for the first quarter of fiscal 2018, compared to $7.94 for the prior year period. This growth in ARPU was driven by growth in Ooma office users, which had a higher ARPU per user.

Annual and Exit recurring revenue increased 19% on a year-over-year basis, to $88.3 million for the quarter, up from $74 million for the prior year quarter.

Our net dollar subscription retention rate for the first quarter was 97%, compared to 103% for the same quarter last year.

Now let me provide you some details on our performance of our Business Promoter and Talkatone sale issues.

Business Promoter revenue for the first quarter of fiscal 2018 was approximately $850,000, compared to $1.8 million for the same quarter last year, as 52% year-over-year revenue decline was due to fewer revenue-generating calls [initiated].

We are disappointed with this performance, and have recently reduced expenses related to Business Promoter, and have adjusted our expectations for revenue for the remainder of fiscal 2018.

[Profitable] revenue declined 10% on a year-over-year basis, and 31% sequentially, to approximately $1.4 million. This decline was primarily due to lower ad sales, [ads are] at lower CPMs.

As mentioned in our previous earnings call, there is generally some seasonality to the capital business in the first quarter. However, we saw a larger than expected decline this quarter due to certain market dynamics, as mentioned earlier by Eric, leading us to adjust our guidance down for the balance of fiscal 2018.

[Currently] other revenue for the first quarter was $3.5 million, an increase of 17%, on a year-over-year basis.

One of the drivers for the increase was from sales to -- of our links to large telecommunications provider. This was first ordered from this provider, and we expect to receive additional orders in the future as they test out our products and launch related services to their customers.

Additionally, we sold a higher number of other accessories, including IP phones in the quarter.

Now moving on to gross margins, overall for our business, our subscription and services gross margin increased to 69% in the first quarter, up from 67% for the same quarter last year, as a result of expanding the personal [page of] Ooma Office customers and their [links], offset in part due to declines in Business Promoter and Talkatone milestones.

Product and other gross margin was negative 8% for the quarter, and fell to negative 17% for the prior year quarter, benefiting primarily from higher accessory sales, which generally had product margins.

Our overall gross margin increased to 59% in the first quarter, compared to 57% for the same quarter last year, due to improvement in both subscription and services revenue margin and product margin.

First quarter, operating expenses were $16.8 million, an increase of $1.4 million, or 9%, on a year-over-year basis.

This increase in operating expenses was primarily driven by higher R&D expenditure as we continue working on new features and functionalities tied to our investment in WeWork and developing other features and functionalities.

[Fees] and marketing expenses were $8.6 million, an increased of $900,000 on a year-over-year basis, primarily due to continued sales initiative to grow our small business user base.

R&D expenses were $5.5 million, an increase of $700,000 year over year, due to investments in personnel and other costs. This increased investment in R&D supported the work on our Office platform, including launching of WeWork service in US, Canada and France, as well as developing additional full security features.

G&A expenses were $2.6 million, a decrease of $200,000 from the prior year period, as we continue to manage our expenses.

Our net loss in the first quarter was down to $291,000, a $0.02 loss per share, compared to a net loss of $1.4 million, a $0.3 loss per share for the first quarter of fiscal 2017.

Adjusted EBITDA improved to about just $71,000 in the first quarter of fiscal 2018, compared to negative $1.1 million EBITDA in the first quarter of FY17. This is the third consecutive quarter of fall to adjusted EBITDA.

Now turning to the balance sheet, we had [cash], cash equivalence and short-term investments of $53.3 million, with no debt [added] at the end of the first quarter.

Deferred revenue at the end of the first quarter was $16 million, an increase of 10% from the prior year period. This is the fourth consecutive quarter we have generated positive cash from operations.

In Q1, we generated $165,000 of cash from operations, compared to $1.2 million of cash used in operations in the prior year quarter. We ended the first quarter with 597 full-time employees and contractors to our various partner organizations, up from 456 in the prior year quarter.

Now, for our outlook.

As Eric discussed earlier, given the conditions impacting our business, we are adjusting our overall guidance for fiscal 2018 down by approximately $8 million. Approximately $3 million to $4 million of this reduction is due to lower Business Promoter and Talkatone revenue, while the remainder is primarily due to reduced expectations of sales to new and existing residential customers for the remainder of the FY18.

Following guidance excludes stock-based compensation expense and related taxes and amortization of intangibles.

For second quarter fiscal 2018, total revenue is expected to be in the range of $27.6 million to $28.0 million.

Accordingly, non-GAAP net loss for the second quarter of fiscal 2018 is expected to be in the range of $500,000 to $800,000. Non-GAAP net loss per share is expected to be in the range of $0.03 to $0.05. We have assumed $18.3 million weighted average shares outstanding for Q2.

For full year fiscal 2018, total revenue is expected to be in the range of $113 million to $116 million. We expect a non-GAAP net loss to be in the range of $1.5 million to $2.5 million, which is consistent to our prior guidance of fiscal 2018.

Non-GAAP net loss per share is expected to be in the range of $0.08 to $0.13. We have assumed approximately $18.8 million weighted average shares outstanding for fiscal 2018.

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

Eric?

Thanks, Ravi.

We are disappointed in our diminished outlook. I want you to know that we take this seriously, and we are fully committed to doing everything we can to address it.

To start, we understand that we must execute better in order to accomplish all of our plans. We do believe that our core business is fundamentally strong, and we have a great opportunity ahead.

We will continue to pursue aggressive growth for Ooma Office to capture the large untapped small business opportunity in North America, and now, internationally. We will also monetize new services on our Ooma Telo residential customers, and we remain excited about the possibilities for both.

Thank you. Let's go to questions.

(Operator Instructions)

[Mike Nemaras], Credit Suisse.

Hey, guys, this is Alex on for Mike, and thanks for taking my questions, and appreciate the color and the further guidance, Ravi.

I'm --

Hi, Ravi.

curious if -- hey, Ravi.

I'm curious, could you quantify your current expectations for Talkatone and Business Promoter revenue contributions for the full year, as it relates to your total revenue guidance, as well as on the residential side?

I mean, I guess my -- I'm trying to figure out what percent of the business will be Ooma Office when we exit this year.

Yes. So Alex, right now when I said $3 million to $4 million of impact to Business Promoter and Talkatone total. But for the full year fiscal 2018, our expectations are both of them combined will be less than 10% of overall revenue.

They are in high-single digit. Business Promoter will be -- could be around 2% or 3%; Talkatone could be around 5% or 6% maximum. But -- I'm sorry -- it'll be high-single digit between -- around 7% or 8% total for the year in our guidance right now.

Secondly -- and the small business, our Ooma Office is currently at 21% of overall revenue, and with a growth of -- we have -- we've seen consistent subscription services revenue growth of 60% plus for the last number of quarters, and we do expect it to continue to perform.

So with that perspective, you can look at it -- you can come up with a calculation of how much we expect from Ooma Office.

Okay, great, thank you.

And I guess one for Eric.

Could you provide an update on the competitive front for Ooma Office?

On the competitive front?

Yes.

Sure.

I don't know that there's a lot of new news to share on that; though, there've always been a lot of providers, you know, with solutions for the business space -- the enterprise space particularly.

Yes.

No one really does it our way. We think we have some unique capabilities about our solution, and particularly how easy it is for our customers to install it themselves and set it up and operate it. And we obviously bring our benefits in voice quality, and the fact that you don't even need to cable your office, if you want to use our wireless system with the analog phones in the office.

But that said, you know, most of the time, we are -- when we're competing in [the] space, we're competing against traditional solutions the customer's had for years. They are paying substantially more for that than what they'll pay for Ooma. And so, we continue to close a very meaningful percentage of the leads that we get that we can bring to our inside sales team, and really talk to the business owner.

So I don't think there's really anything particularly new on the competitive front to single out.

Okay, great. Thanks for taking our questions.

Sure.

Matt Robinson, Wunderlich Inc.

Thanks. It's good to see the acceleration in Office.

I was hoping to dive a little bit deeper into the conversational AI companies.

You mentioned Alexa and Google Home, and they have not been around a real long time in the market, with telephone service on Alexa, I think they just brought it out. But you are indicating it's a threat. And I'd like to talk to you about how --

Yes.

-- you're extrapolating that.

And what opportunity you may have that's, I believe -- I may be wrong on this -- but I believe Alexa right now is just between different Alexa users, and it would seem that they would -- there might be a use for a telephony backend to associate with it. And so, I'd like to get your thoughts on that.

And also, you know, why you think it might grow to be more significant, but later in the year. Thank you.

Yes.

You know, I'll say up front, we're mostly speculating here; it's very early days for both of those platforms, in terms of providing calling.

We know two things.

We know that Alexa has launched in-network calling from Alexa to Alexa, or Alexa to a mobile app, that you can get from them. That's a far cry from being a home phone service with 911, and being able to call anyone.

And honestly, I'm not sure if (technical difficulty). You know, and so, when you cross over into providing a full service, you get into, you know, become a regulated phone Company, and, you know, a whole bunch more complexities emerge.

So we've seen what they've done, and it is fairly limited in that sense.

Google Home has announced -- they haven't done it yet -- but they've announced that they're going to provide calling from Google Home to any phone number. What that exactly means, we'll have to wait to see when they roll it out.

We're really not seeing any meaningful impact from those products today, I don't think. But we are cautious going forward, particularly in the sense that, you know, if a customer is shopping, and they've got $100 to spend, are they going to direct it towards one of those products, or are they going to direct it towards a new New Telo?

And, you know, I think over time, customers'll realize we provide a much more complete service. We've bought telemarketers, we are -- alert you if someone calls 911, and obviously, all the other features you know.

But I think up front, there may be some buzz around what we're describing -- we're talking about here, and we just don't know how it's going to impact things. So we're trying to be cautious on it.

You're right, we do have -- you know, we frankly have some measure of relationship with each of these two companies, particularly Amazon, and we have already enabled some limited features on the Amazon Echo. And today, it's not possible to take that farther.

But we hope that that will be possible in the future, and if so, I think we'd be the kind of partner that would be the, you know, kind of Company Amazon would want to do that with. And, you know, we'd -- it would be a natural [stance, then] for us to do that.

So it may turn into a opportunity, what we're talking about here. But right now, I think, you know, given the -- you know, what we're seeing in the marketplace today, we just want to be cautious.

Yes, well, Google has -- you know, they've had Google Voice for years, and Amazon I don't think has anything quite like that, and I could see why [they'd] be more distinguished.

Do you see yourself at any particular disadvantage versus some other telco provider, in terms of working with Amazon?

No. In fact, I think on the flip side, we have advantages, because the last thing you want to do is have your Amazon Echo going off every night while you're sitting down to dinner, you know? I mean, we can do things on that platform that I don't think others -- other competitors of ours are capable of doing, and I think those features would be valued.

We also, as you know, are very -- we're a very low-cost solution in the marketplace. We've engineered our platform to be very low cost, and, you know, we pass that on to our customers.

So given the great value we bring as well, I think we're well-placed if it's possible to do more and leverage these platforms in the future.

Last thing I'll mention is that, you know, Telo was the best seller on Amazon -- at least most recently, it was a couple days ago -- and down [$7] in the price point. Anything in the quarter that might have driven that?

And then I guess, one more just to ask you on the accessories and the home automation front. Is it -- is the -- you mentioned a delay in getting products out. Is that -- does that factor into your reduced expectations for residential this year?

Yes. On the first, you're right. We're often typically the number one provider on Amazon with Telo, and we're excited about that. And we do special programs and deals with them, and we have done one of those within the last couple weeks, so that may be also what you [are] seeing there.

Yes, but, you know, I want to speak more about these delays a little bit.

We bit off a lot in our new WeWork partnership, and it's fundamental and strategic for the Company, and a big opportunity. But it's a lot of work to take our service internationally, particularly the first time, to the first country.

And, you know, if -- and you'll see that our R&D spend, did actually not -- it didn't actually go up from Q4 to Q1. We weren't able to bring on the additional resources like we'd like. That compounded things, as well as the fact that I think it was just harder than we anticipated it would be to take these steps to expand into Europe.

And so, yes, we place Office first in our strategy. We will put our resources there first, and we have had to delay some of the developments on the residential platform. And we think there will be further delays as we continue to take the steps to execute better going forward.

We were -- we started our marketing for home security about, I'd say early- to mid-quarter last quarter. But then we had to stop it, because we were short of sensors to ship. We just couldn't get product in in time, and those delays relate back to everything we're talking about here as well.

So we're only now, frankly, starting to get sensors in in quantity and starting to reenergize our marketing for home security. And so, we sit here today still pretty unsure about what the adoption rates will be for it, and how our customers react.

And we also know that some of our plans for Ooma we want to roll out next for home security are going to take longer now than maybe we thought they would, even just a little while ago. So we're trying to factor all that in to our outlook, and that is an important driver of why are new guidance is what it is.

Thanks.

Sure.

Nikolay Beliov, Bank of America.

Hi, thanks for taking my questions.

Hey, Ravi, I'm just trying to get a sense, the revenue guide coming down by $8 million. Is that the worst-case scenario for this year?

What could be -- you know, why would the numbers could come in better or worse based on the new guide for the year?

Nikolay.

We have used the best estimate available right now, and we felt reasonably comfortable -- and obviously, to some extent, cautious -- saying, we get that, given some of the challenges Eric mentioned earlier -- that in respect to home security, just the market dynamics for Telo, as well as business proposals -- so we have taken a very, very hard look at all our business plans, including home office.

And we said that we looked at those, and obviously, we have brought the guidance down.

It will be a shame on us to bring it down again for any factors that we could have anticipated for it. So we are taking a cautious look at this, and bring -- and trying to provide the best perspective as of today available to you.

And a question for both of you, what do you think the Telo sustainable growth rate could be going forward, in light of the factors you outlined that impact the business?

Is it, like, mid-single digit of the fiscal year rating on a normalized basis, or -- and it's, like, 0% growth at some point -- do you think, with securitization, it could reaccelerate, and, again, grow double-digits of the FY18?

That's a good question, and it's difficult to answer based this fiscal year. And it depends a little bit, I think, on how far we go with some of the additional services on the platform and how fast, and the customer responds to them, and also, how much marketing, frankly, we put into residential versus Office.

You know, we had thoughts on our last call about thinking that Telo would be a high-single digits to low-double digits grower this year. We're still thinking it will be an upper-single digits growth for us, in terms of subscription and services revenue.

So I think we -- you know, it's still meaningful growth for us this year. And I would point out, I think that that's probably -- that's outpacing others in the industry, in our view, so. But, you know, next year, we'll have to see where we are at the end of this year, and take into account all the factors.

We do know that there's a large market out there for home phone service still. And a lot of people do understand that, for real 911, and for just convenience -- and, particularly with kids in the home -- having a home phone is a -- is valuable, particularly that it doesn't cost very much and it works well, which, of course, is what Ooma's so good at.

And one last question for both of you.

I'm just curious, you said we're going [for] another reset on the revenue growth rate, and you're going into 10% growth for the year. How do you think about margins? And wouldn't you want to give shareholders more margins going forward, in light of the revenue growth reset?

You meant, Nikolay, operating margin?

Yes.

Yes, so I think you have to break this -- the growth into two or three buckets there.

You are right. When we look at Business Promoter and even Talkatone, that should be contributing positively to those businesses -- to the operation margin and to the bottom line. So we totally did that -- get that.

We saw Business Promoter, because of revenue reduction, was not performing and not getting us to the bottom line, so we did take action to manage that.

And home office, we do believe is a growth story. We have been growing 60% year over year, and our goal is to keep the growth rates high for Ooma Office. It's a big market, we have a great solution, and it's more about the investment story, versus bringing to the bottom line.

And then, Telo, residential side has been something of, we are seeing -- we are being uber cautious, in terms of the market dynamics.

But with -- but you're right, with some of these new opportunities like home security, we are launching a -- and once they are fully rolled out, and once they are bringing -- we are getting existing customers to buy these security services, we should see growth in ARPU and margins. So I think it depends upon which business we are looking at, it will be different.

But overall, we are managing our bottom line very tightly. We are four quarters now in a row, forecast real positive, EBITDA positive for the last few quarters. So we're managing our expenses, at the same time the focus is to grow home office as fast as we can.

Thank you.

Pat Walravens, JMP Securities.

Thank you.

You know, guys, isn't it time to take your guidance for Business Promoter and Talkatone to zero?

Let me start, and then Eric can jump in.

That's one of -- one approach to it. We -- so, first, let me step back for a second.

Talkatone, we are disappointed with the performance in Q1. But, at the same time, over the last couple of years, since we've been public, this is the first quarter where the market dynamics has resulted in disappointing Talkatone results there.

So what Business Promoter over the last couple of quarters, on and off, has disappointed us, and we -- it's now down to $3 million.

We are -- we discussed that. We're saying that, if you were to take the $3 million out, we will get to the low end of the range there.

So that was one of our ways of thinking, saying, if Business Promoter is zero, what will the number be for the year? It's close to being at the low end of the range.

For Talkatone, we think this is more steady. It has 1 1/2 -- 1.7 million users. It's more of CTMs, in some cases, it [excel] time.

And hopefully, in the next couple of quarters, we might see a change. But if it -- if we do not see a change, we'll evaluate that.

And then, I mean, like, you know, this is not that big a Company, and you have a lot of balls in the air.

Do you think maybe you should just focus on, you know, just sort of keeping the residential service where it is, and then, focus on the Office opportunity, and let this other stuff go?

Yes, I think that's a fair question, Pat.

And, you know, we parked Business Promoter, in a sense already. And I -- it's annoying and particularly difficult because we have to talk about it. But it generates buzz with EBITDA for the business --

Yes, Okay.

and internally, it takes very few cycles -- advancement time.

We're not -- we don't consider it Core at all. And, for the right opportunity, we would, you know, have no reason to hang on to it. And certainly, it's something that -- you know, it has been a ongoing issue that we would like to put behind us.

Talkatone, it is more strategic for us. It's not essential to be part of Ooma. But, you know, we are in mobile apps with our Office for Mobile, and with our residential mobile app.

In a way, Talkatone fits in as a mobile-only solution on the residential side of our business, and leverages our [Telo] platform and our technology quite a bit. And we don't really spend any marketing dollars that are -- any appreciable marketing dollars on Talkatone. It's viral, word of mouth-driven.

So we are investing carefully, and primarily in Office, followed by residential. And I think that is critical -- that we don't confuse that, and go invest in more places.

But, you know, that -- that's how we see things, and, you know, we're obviously managing it the best we can at this time.

Okay.

I will say the Alexa engineers are presenting at the Twilio Conference this week in San Francisco. So we may get some idea of what direction they may be going with that.

Yes, that's possible.

Yes. Okay, thank you, Eric.

Okay. Sure.

Bhavan Suri, William Blair.

Hey, guys.

Just to focus on Talkatone a second, you know, you sort of suggested that it was sort of not sort of filling the ad space.

How do you approach those customers to sort of get that advertising space filled [up]? How -- what's the investment there like, and sort of, you know, how's that tracking even sort of now, as we look at sort of recent trends post the quarter?

I'd say it's about Talkatone and ad fill, certainly.

This is a hard one for us, because one of the strengths of Talkatone is that we work with a large number of ad networks to source ads, and the platform includes the ability to do that, and do that smartly.

So there aren't a lot of places for us to turn to go bring in additional ad supplies. There are some opportunities, and we're working those.

There's also a trend in the industry towards some advertisers wanting to receive viewability statistics on their ads, and to provide those statistics, you have to embed the ad network's SVK into your app. That's something we have not done in the past, because we will be doing going forward, at least for select ad networks. And then, we open up a little bit more ad supply.

But honestly, we're a little bit in uncharted territory. We have never been, at this point in the year, with, you know, 15% or more of our ads unavailable to us. At this time last year, we were over-allocated on ad supply -- about 100%, which -- and you can talk about how you can even be there.

But, so, the business still contributes even at these revenue levels, and we have a good team there. And they're -- I believe we're going to develop solutions as we move forward. But it's not as easy as just go out and find some more ads, and then, [entrust] the issue.

All right.

So that's kind of what's going on there, and we're going to push hard.

And, you know, it is also a business where ad supply and ad demand can change through the year. And the back half of the year, particularly the fourth quarter, can be a stronger time. So we're not betting on that, but that is an opportunity potentially for us.

Got it, got it.

And then, just, to Eric, one more thing here before I turn over to Ravi. You know, you talk about adding some reseller partners there. Just kind of some color on sort of how you're going to do that, and what sort of numbers we could see being added to help drive sort of sustainable Office growth.

Yes.

I think that that can relate to different things we're doing. But primarily when we talked about it, we're talking about building a network of IT professionals -- or we call them VARs, value-added resellers -- who will --

Sure.

independently sell Ooma Office.

Okay.

And we know how hundreds of those individuals linked up in learning about Office, and starting to sell it.

There is a little bit of a pyramid in this, in that the best ones tend to do a lot more than the ones father down the pyramid. But we are building. And it's a long-term effort for us.

You don't build these networks quickly, and you have to educate, and you have to put systems in place to serve them well. But we are -- it's an investment area for us, I guess I would say, and we're investing will in it, and seeing progress.

And if I can --

All right.

just add in --

Sure, Ravi, yes.

we are finally able to -- the ones we have added all the systems and processes to ramp up.

So as indicated, instead of the hundreds, we have 500 or 1,000, we will be able to sustain that. So a lot of investment over the last 6 or 12 months have been made. Now it's you can execute on adding more and more reseller factors.

But part of the job --

You'll run with it.

not to --

Yes.

go on, but we're going after the IT professionals that would serve small business.

They probably aren't dedicated telecom bars in any way. And a little bit harder to find, and get comfortable with telecom, and get them on board. But as we do, I think we're building a very strong channel that we can have a lot of leverage with. So yes.

Okay.

And then, well, it's, just, you know, we've talked about visibility in the past. Given sort of, you know, we've sort of been conservative on Telo.

We want to assume -- you know, talk to Telo and what it does, and sort of, you know, take the numbers down for -- you know, it's more of, like, the visibility we have getting the numbers to zero, and do you have an answer.

You know, if you look at what --

Sure.

you've got, so to speak, how should we think about visibility going into the [forward] numbers, if that makes sense?

Yes. So we address, especially when Eric mentioned earlier about March -- about April, for example, and even in May, that Telo was lower ramp up compared to a year ago. So we really look at that.

We had to take a very conservative view on all fronts of the business, not just one -- that it was home security, whether it was Telo, capital business. So we evaluated every potential product side, services side. We looked at our retention rates, we looked at our ARPU, our growth of ARPU.

So we had to -- before we came over to this guidance for the full year at fiscal 2018, we had took a very conservative and hard look, actually, on all the various segments of our business, and we prepared this guidance there.

So we do feel comfortable with this guidance, and especially after bringing it down. But we are cautious and conservative about the various elements in the business there.

And I guess, Ravi, I guess my -- to be really specific, so, you know, we've been [accused] of, you know, going into a given year, you would have $0.65, $0.70 [over] visibility.

You know, as you look at those reduced numbers, is it, you know, given we're halfway through the year, is it sort of, like, $0.90, $0.95? I mean, just give some sort of comfort level there vis-a-vis, you know, sort of the fact that you're still held back by it, but you're a bit conservative.

But, you know, a quarter ago, we talked about it normally going on this quarter, and you were conservative then. So just a little more color'd be helpful.

Yes, very good.

It's significantly high level of confidence.

Okay. Thanks for taking my questions, guys.

Yes.

(Operator Instructions) Josh Nichols, B. Riley.

Yes, hi.

Real quick, just thinking since, you know, Echo and Google, those are relatively new offerings.

And I was thinking, do you think a large percentage of the decreased demand that you've maybe seen for the Telo product, that's possibly related to the decrease in advertising spend that started a couple quarters ago, and maybe loses a little bit of brand awareness, or consumer mindshare, if you will?

Yes, we do think that that is affecting us, so, there's no doubt.

But we had expected this year to be down versus a year ago. We're seeing right now that it's, you know, down further. But, yes, there's some of that.

We -- in our brand awareness studies, we see our brand awareness is roughly holding steady. And we think we can drive some more brand awareness, now that we've launched or are launching home security. And we really haven't even skewed it up in retail, because we didn't have the product available to get going with it.

But, you know, we're going to leverage the things we're doing as much as we can.

We haven't walked away from Telo. We're -- we do intend to grow it this year, and grow it meaningfully. But, yes, we're not nearly spending what we were spending, say, maybe a year and a half ago. And that probably does have some effect.

But there's also the effect, I would say, frankly, that the whole industry has reduced its advertising in the category. And to some degree, I think that floats all votes, if you will.

I mean, people start thinking about when -- you know, changing and saving on their home phone service, and then, they shop around, and they discover Ooma. You know, it's, you know, recommended number one by Consumer Reports, and et cetera.

And I think the whole industry advertising has reduced significantly, and I think that is in effect as well, just on the category in general -- just, the number of shoppers out there.

And, I think you mentioned it, but just wanted to confirm. You think that the revenue growth in Telo is going to be high-single digits this year? So it's still growing for subscription and services revenue.

Yes.

Yes. Upper-single digits would be -- is our outlook.

Yes. And then, I wanted to ask about WeWork.

So you -- the Company was pretty quick to expand to France, and I know you mentioned that there's always some challenges whenever you look to do that.

How many countries do you anticipate being in it by the end of this fiscal year, and do you think there'd be a significant amount of work that may be left to do next fiscal year, to continue the expansion internationally? Or how do you think about that?

The short answer is yes. But it's opportunity, and it's fantastic for us to be able to take advantage of this with such a partner.

But, yes, we expect to be in several additional countries --

[Okay].

and WeWork locations by the end of the -- this fiscal year, and I fully expect there will be more the year after.

They get easier each time you do one. There's kind of two big things that have to happen any time you do one.

One is, you have to put data center capability in a region to provide the service.

And secondly, we had to really redesign our platform in some fundamental ways to make it capable of replicating additional countries as we go to each one of them. Now when we go to a country, it is a little easier to change language, change calling, dialing plans, emergency service requirements, things like that. It's still work, though, but it is easier.

And as we get a data center in a region, the next country in that region, it is not as hard. But it's a lot of work.

So yes, we're -- it's a longer-term investment for us, but we're excited about it.

And we have not yet begun in our plans to think about broadening in a country beyond WeWork, but that'll be the next step. Once we've got service for WeWork in a country like France, we intend to come back at some point, when we have the resources and the ability to do so, and broaden the service to the -- to, you know, small businesses in the country generally.

So it's a long-term opportunity for us, but it's a lot of work right now, there's no doubt.

Yes.

And then, I know it's still early in the partnership, but anything that you could tell us about how many subscribers you've been able to add thus far, or anything about maybe, like, the unit economics of the WeWork partnership?

I'm happy to speak to the first, and maybe Ravi will have some comments on the second.

You know, we launched in early February. WeWork tends to bring most of its members in on the first day of the month. That really meant March 1 was kind of the start of presenting ourselves to new members that WeWork in the US and Canada at that time.

And we have -- you know, we don't want to give too highly precise numbers for WeWork. But, you know, I think it's fair to say, we have around 1,000 users on WeWork today, and we're growing every week with it.

In France, we don't have very many. We wouldn't expect that. It's one building that they just opened. They haven't even opened all the floors in that building yet, so, it's more a beachhead.

But, you know, we're off to a reasonable start. And really, it's going to take the next several months for us to expand with this partnership and leverage it to see the full potential of it.

And, Josh, this is Ravi here.

We expect the unit economics, obviously, there's not -- there's no customer acquisition cost for a WeWork member; it's more investment in R&D, those things infrastructure. But -- and there is some revenue share between Ooma and WeWork whenever they charge from a customer there.

So all in, our margins are relatively consistent towards our overall margins are for Ooma. So it's not too different.

And then, we're ready to look at, beyond the R&D investment and the time for other investments, our payback period in the longer term will be, if not equally valid, then or our Ooma one, just because there's no customer acquisition for us.

This year, there's a lot more investment going in. But in the long term, we do see this as a great opportunity for not only adding to the top line, but also to the bottom line.

And I'd add to, if I may, I mean, some of the -- most of the things we're doing for WeWork are things we want to do anyway as a business. It's just that, we may be doing it a little faster than we would've lining that up.

I mean, we've expanded with WeWork so that we can handle, you know, hundreds of users in an account that we work. Today, our regular service still taps out at 20 users.

Also with WeWork, you can get just IP phones from us; you know, for the rest of our business, still today, you have to get the Ooma Office base station, and then, build from there.

Eventually, we'll move some of those developments over, and, you know, see some more benefits of what we're doing for WeWork and the rest of our business, but we're not there yet, Josh.

Thanks, guys, appreciate it.

Sure, no problem.

And there appears to be no further questions at this time.

So I'll turn the program back over to our presenters for any final or closing comments.

Yes, I'd just like to say finally here, a thank you to everyone. I can assure you, everyone in Ooma is working extremely hard, and we're very committed to what we see as a big potential in front of us.

And it really does disappoint us greatly to see this diminished outlook at this time. But we do believe the things we're doing and the things we're investing are going to really take us where we need to go going forward.

But thank you, everyone, and we appreciate your time today, so.

Thank you.

This concludes today's program. Thank you for your participation. You may now disconnect. Have a great day.