Ooma Inc (OOMA) 2019 Q2 法說會逐字稿

Good afternoon.

My name is Cheryl, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Ooma, Inc.

Fiscal Second Quarter 2019 Earnings Conference Call.

(Operator Instructions) Matthew, you may begin your conference.

Good day, everyone, and welcome to the second quarter fiscal 2019 earnings call of Ooma, Inc.

My name is Matt Robison, Ooma's Director of IR and Corporate Development.

With me here today are Ooma's CEO, Eric Stang; and CFO, Ravi Narula.

After the market closed today, Ooma issued a press release via GlobeNewswire.

The release is also available on the company's website, Ooma.com.

This call is being webcast live and is accessible from a link on the Events page of the Investor Relations section of our website.

This link will be active for replay of this call for at least 1 year.

During the course of today's presentation, our executives will make forward-looking statements within the meaning of the federal securities laws.

Forward-looking statements generally relate to future events or future financial or operating performance.

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

These risks include those set forth in the press release we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission.

The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements except as required by law.

Please note that, other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non-GAAP basis.

The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures are included in our earnings press release that is available on our website.

On this call, we'll give guidance for third quarter and full year fiscal 2019 on a non-GAAP basis.

Also, in addition to our press release and 8-K filing, the Events & Presentations page in the Investors section as well as the Quarterly Results page of the Financial Information section of our website includes links to costs and expenses not included in our non-GAAP values and key metrics of our core subscription business.

These are titled Supplemental Financial Disclosure 1 and Supplemental Disclosure 2. Additionally, our investor relations presentation slides include GAAP to non-GAAP reconciliation, and that also provides resolution of GAAP expenses that are excluded from non-GAAP metrics.

Our August 7 press release described our participation in several conferences.

During coming days, we'll be providing audio webcasts from the Midwest IDEAS Conference in Chicago, Thursday, August 30, and the Gateway Conference presented by Liolios Thursday, September 6.

Okay, Eric.

Thank you, Matt.

Hi, everyone, and welcome to Ooma's FY '19 Q2 Earnings Call.

I'm pleased to report that in Q2, Ooma achieved solid results while making significant progress on several key initiatives.

I'd like to elaborate on each of these today and then look forward to our plans for the second half of this fiscal year.

Financially for Q2, we achieved $31.7 million in revenues, and we grew our important core subscription service revenues 19% year-over-year.

Our margins remain strong, our ARPU increased, and our net dollar subscription retention rate was 100%.

All in, we executed well on many fronts, and we're pleased with our financial results for Q2.

As we discussed at the start of this fiscal year, FY '19 is, in many respects, a building year in which we are making significant investments for the future.

We set out this year to expand the breadth of our solution for small businesses, to integrate and capitalize on our Voxter acquisition to serve larger businesses and to extend the Ooma platform to include home security and video monitoring services for residential users.

We made substantial progress on these initiatives in Q2, and I would like to elaborate here on each.

First, regarding our curated, flexible and easy-to-use solution for small business, Ooma Office, we added 7 important new features, which we expect will make our solution attractive to more customers.

These include the ability to serve businesses with multiple site locations; feature extensions, such as a multi-level IVR, dynamic sequential ring, call park and others; and new phone options, namely our DP1 DECT wireless, 2-line desk phone and a new cordless IP phone.

We are now focused on 3 remaining major feature enhancements, a multi-line receptionist phone, call recording and further improvements to our Office Mobile app, all of which we expect to launch before year-end.

When these are complete, we believe we will have a solution capable of serving just about every small business that we encounter, and we will be able to turn more of our engineering resources towards other initiatives.

On the sales and marketing front for Ooma Office, we expanded our sales team and VAR community during Q2 and once again executed well and grew faster than others in our industry.

Consistent with our expectations, there is a ramp-up time to obtain full productivity when we add sales and marketing resources.

And so we anticipate the investments we made in Q2 will drive further growth in Q3 and beyond.

Turning next to our Voxter acquisition to serve larger-sized businesses with a full-featured and uniquely customizable UCaaS solution.

I'm pleased to report that we have repositioned Voxter in our go-to-market strategy as Ooma Enterprise and have now integrated our sales and marketing activities between Ooma Enterprise and Ooma Office.

This integration allows us to optimize our response to the customer leads that we generate and to present each customer with a continuum of capabilities all under the Ooma brand.

We have also put in place the core Ooma Enterprise sales and marketing organization and just recently announced a strategic partnership with Talkdesk to bring Talkdesk's best-in-class contact center platform to Ooma Enterprise customers.

Now, while it's still early days for Ooma Enterprise, we are already seeing a positive response to our strategy of providing bespoke solutions targeted at what we see as an unserved market, namely companies that want their UCaaS to fit their individual custom needs extremely well.

Finally, in Q2, we made significant progress toward extending the Ooma platform to include home security and video monitoring services for residential users.

Our most notable development is the ability to market and sell Ooma Home Security, which includes our unique Remote 911 calling feature without the need first to sign up for phone service.

Customers can now purchase the Ooma Home starter kit, specifically for home security and then later, at their option, add on phone service.

This approach allows us to market home security in a stand-alone way to customers.

In addition, we added many important features in Q2 to the Ooma Home Security platform, including voice integration with Amazon Alexa, geofencing for automatic arm and disarm of the system when a customer comes and goes from their premises and a siren for when the system is triggered.

We also began selling the Butterfleye camera in Q2 and just recently integrated the camera's video streams into our main Home Security mobile app.

This development allows us to present the customer with an integrated platform solution that also includes unique features such as Remote 911 and facial recognition.

While we have a lot of work ahead to place our Home Security solution at major retailers and build customer awareness, I believe we're off to a great start and well placed now for the back half of the year.

Now, looking ahead to Q3, our primary focus is to continue to execute on the main strategic initiatives I outlined earlier.

For Ooma Office, we plan to launch a small number of remaining features and we intend to capitalize on our added sales and marketing resources to a greater extent as they come up to speed.

For Ooma Enterprise, our plans for growing -- call for growing the number of resellers, capitalizing on our new Talkdesk partnership, adding certain additional product features and expanding further our sales and marketing team.

Finally, for Home Security and Butterfleye, our efforts will concentrate on building brand awareness and retail placement as well as continued feature development.

While we have much farther to go to exploit fully the opportunities in front of us, I believe we're making solid progress, our initiatives are taking hold, and I'm excited about our outlook ahead.

Now let me turn the call over to Ravi to discuss our results and outlook in more detail.

I'll then return with a final comment, and we will take your questions.

Thank you, Eric, and good afternoon, everyone.

First, I'm going to review the financial results of our second quarter fiscal year 2019 and then provide our outlook for the third quarter and full year fiscal '19.

All income statement items except revenue are on a non-GAAP basis and exclude expenses such as stock-based compensation, amortization of intangibles and acquisition-related charges.

The reconciliation of GAAP to non-GAAP financial data and other key business metrics can be found in the press release issued earlier today, which is available on the Investor Relations section of our website.

Now, our Q2 '19 results.

We had a strong second quarter performance, achieving $31.7 million of total revenue, which exceeded our previously issued guidance range of $30.5 million to $31.3 million.

This was an increase of $3.5 million or 12% on a year-over-year basis, and I'm pleased with our growth driven by continued execution, particularly for Ooma business.

Net loss for the second quarter of fiscal '19 was $943,000, within the previously issued guidance range of a $800,000 to $1.3 million loss.

Ooma business subscription and services revenue grew 49% on a year-over-year basis, and revenue contributions from Ooma Business are now 27% of our total revenue compared to 22% in the prior year quarter.

Our residential subscription and services revenue grew 10% on a year-over-year basis.

The combined subscription and services revenue from the core businesses, namely Ooma Business and Ooma Residential, grew 19% year-over-year.

As a reminder, we refer Ooma Office, which is our small business solution, and Ooma Enterprise, our customizable UCaaS solution, together as Ooma business.

Consistent with our expectations, Talkatone revenue for the second quarter was $1.2 million, a 20% decline year-over-year and was relatively flat compared to first quarter of fiscal '19.

At the end of the second quarter of fiscal '19, subscription and services revenue was 90% of total revenue compared to 89% in the prior year period.

Product revenue for the second quarter of fiscal '19 was $3.3 million, 9% increase year-over-year.

This product revenue increase was driven by sales of Home Security bundles, Butterfleye cameras as well as some product sales to a large telecommunications service provider.

I'll now take this opportunity to add some color on the progress of Voxter and Butterfleye acquisitions we recently made.

Starting with Voxter first.

We are making good progress building solid infrastructure for Voxter, such as a billing portal and a more robust and automated system for regulatory tax compliance.

And we continue to add new product features and have integrated our lead generation and other marketing activities with Ooma Office.

All this progress gives us confidence and makes us believe that Voxter is well positioned for future users and revenue growth.

Now some details on Butterfleye.

As Eric mentioned earlier, we started shipping Butterfleye cameras during the second quarter, having resolved some initial production issues and are now working to create new retail channels for Butterfleye cameras.

On the product development side, we continue to add new features to make Butterfleye more competitive in the marketplace.

With that, some details about our customer metrics now.

Our total core user base increased 7% from 895,000 core users at the end of second quarter of fiscal '18 to approximately 955,000 core users at the end of second quarter of fiscal '19.

Our business users grew to 15% of total core users at the end of the second quarter of fiscal '19, up from 11% at the end of second quarter of fiscal '18.

Our blended average monthly subscription and services revenue, or monthly ARPU, increased to $9.56 in the second quarter of fiscal '19 compared to $8.61 for the prior year period.

Annualized exit recurring revenue was approximately $110 million at the end of the second quarter of fiscal '19, a 19% year-over-year increase.

We are pleased to have achieved 100% net dollar subscription retention rate for the second quarter compared to 98% for the prior year period.

Now some color on gross margins.

Overall gross margins were 60% for both the second quarters of fiscal '19 and fiscal '18.

Our subscription and services gross margins were strong at 70% for the same period.

Product and other gross margins was negative 23% for the second quarter compared to the prior year quarter of (technical difficulty).

During the second quarter, we started the production of Butterfleye camera; and as a result, we incurred some incremental material and freight charges.

Now onto operating expenses.

Second quarter operating expenses were $20.4 million, an increase of $2.8 million, or 16% on a year-over-year basis.

We ended the quarter (technical difficulty) employees and contractors, up from 646 in the prior year quarter.

Overall, sales and marketing spend increased by approximately $1.3 million (technical difficulty) [$10.1 million] as compared to the prior year quarter to drive growth of Ooma Business.

During the quarter, we also started marketing activities in terms of branding and creating market awareness of Ooma Home Security.

While the benefits from these marketing and branding efforts are expected over a longer time frame, we believe we are well positioned to gain market share in the future.

Research and development expenses were $7.4 million, an increase of $1.3 million or 22% on a year-over-year basis to support enhancements made to Ooma Business as well as the development of new features for Ooma Home Security, including Butterfleye.

G&A expenses (technical difficulty), a 6% increase from the prior year period to support the growth of the business, including the 2 recent acquisitions.

Our net loss in the second quarter of fiscal '19 was $943,000 or $0.05 loss per share compared to a loss of $396,000 or $0.02 loss per share in the second quarter of fiscal '18.

Adjusted EBITDA loss was $645,000 in the second quarter of fiscal '19 versus a loss of $71,000 for the same period last year.

Now some details on cash.

We had cash and investments of $48.6 million with 0 debt at the end of the second quarter of fiscal '19.

For second quarter of fiscal '19, cash used in operations was approximately $800,000 compared to cash generation of approximately $1.3 million in the prior year quarter.

This cash was used to support the growth of Ooma Business as well as building Butterfleye camera inventory.

I will now provide our third quarter and full year fiscal '19 outlook.

The following guidance excludes stock-based compensation expense, amortization of intangibles and acquisition-related charges.

For the third quarter fiscal '19, total revenue is expected to be in the range of $31.5 million to $32 million.

We expect non-GAAP net loss in the range of $800,000 to $1.3 million.

Non-GAAP net loss per share is expected to be in the range of $0.04 to $0.07.

We have assumed 20 million of weighted average shares outstanding for Q3.

For full year fiscal '19, based on our revenue trends, we are increasing total revenue guidance for fiscal '19.

Revenue is now expected to be in the range of $125.5 million to $127.5 million.

Given the increase in marketing activities on Ooma Home Security, in addition to our ongoing commitment to Ooma Business, we expect non-GAAP net (technical difficulty) $3.5 million to $4.5 million.

Non-GAAP net loss per share is expected to be in the range of $0.18 to $0.23.

We have assumed approximately 19.9 million weighted average shares outstanding for fiscal '19.

In summary, we are pleased with the second quarter financial results, and our business momentum positions as well to execute towards our long-term growth strategy.

With that, I'll pass it back to Eric for some closing remarks.

Eric?

Thanks, Ravi.

As we've discussed, we now have a solid Q2 behind us and are looking ahead to Q3 and the balance of the year.

We're committed to bring new solutions to the market, expand our market opportunity and gain added momentum from the acquisitions we made at the start of this year.

We believe we're executing well and we remain focused on our key FY '19 initiatives.

Overall, we see tremendous opportunity ahead of us and feel our strategy is working.

Thank you.

We're now open to take questions.

(Operator Instructions) Our first question comes from the line of Bhavan Suri of William Blair.

I just had a couple of questions here.

I guess, I'd love to understand the go-to-market and how you delineate between Ooma Office and let's just say, the Ooma mid-market opportunity in Voxter, because obviously different products.

But when you look at Voxter, just sort of how many seats do you sort of delineate that or deal size?

I'd love to sort of understand sort of how that cadence and delineation plays?

And then how are you seeing that move upmarket?

Sort of you talk about sort of pleased with it but just versus expectations a couple of quarters ago.

Sure, happy to.

We don't specifically delineate by number of seats or type of business.

(technical difficulty) the nature of what the customers' needs are.

Ooma Office really fills a segment that isn't well served by any other competitor we (technical difficulty)

very curated, easy to use, simple to set up, simple to administrate system, ideal for us (technical difficulty) and appear like a big business and have some big business features like an IVR and music on hold, an extension [dock] (technical difficulty) but really doesn't need anything more sophisticated than (technical difficulty)

We made it (technical difficulty) it wouldn't be so ideal for a small business environment.

So a lot of our small business customers set up the solution on their own and operate it on their own.

And obviously, with our unique platform design, we can provide on-site type service even from a centralized location by being able to dial into their equipment and operate it and operate it and test it and things like that.

If a customer is happy with that level of functionality and capability, Ooma Office is it, and we don't try to go beyond that.

But when a customer needs more, when they have the need for more advanced UCaaS type solutions, maybe some contact center capabilities, more sophisticated call flows, something customized, they want something to do -- to operate in a special way with our (technical difficulty) we built (technical difficulty) what Slack's product does and our Ooma Enterprise solution just for them.

So when a customer needs more, that's when we step up to what is, frankly, a more expensive but more complete solution, Ooma Enterprise.

And we do have separate marketing efforts going on for each segment, but what we find is, when we do those activities, we (technical difficulty) that apply better to the other.

So our integration has really been more around making sure we share leads and work together.

In fact, we've just been working on one this week that is an opportunity with about 20-some storefronts, all flowing up to a parent organization.

That's a perfect example.

We found it through Ooma Office.

Ooma Office would be ideal for each of those storefronts, but the parent organization wants some custom analytics and some extra features that Office (technical difficulty) are going to try and go with Ooma Enterprise for that customer.

So hopefully, that gives you a little bit of a flavor of how we're approaching that.

No, no, it does.

Thanks for the use cases.

I guess, the next follow-up I have is just on the resellers.

And this is maybe touching a little bit on competition, too.

When you look at the resellers, I guess, how are the resellers looking at the products and sort of the go-to-market?

And then who else are the resellers selling -- especially in Voxter's case, sort of who else would be the competitor that resellers are thinking of not selling or the customers demanding Voxter's customization capabilities vis-a-vis someone else?

So just some color on sort of who they resell to and sort of how they delineate between the 2 offerings.

Sure.

And once again, I think each segment has (technical difficulty) hundreds of resellers now for Ooma Office.

Generally, those tend to be quite small resellers, maybe even owner-operator businesses that might be doing IT or other services for a small business.

Perhaps they haven't even sold telecom in the past, but it's ideal for them to layer on Ooma Office and be able to bring it as an added value to their customer.

They are not working at a level where you generally find a customer needing Ooma Enterprise, but they do generate some opportunities, and we'll follow those up.

On the flip side, when Voxter became part of Ooma, they had a team of resellers already established.

It's not real big.

One of our goals through the balance of this year and into next year is to grow that team.

But those resellers are more substantially sized companies.

And in this case, they could choose from just about any of the vendors out there for cloud telecommunications and UCaaS.

And generally, they've been forced into a decision where they're having to just resell somebody else's stuff pretty much the way it is and probably under that partner's brand name.

We're much more flexible than that.

We're willing to white label with our resellers.

In fact, you can customize the Ooma Enterprise platform so that it's completely white label, mobile app and everything, in about an hour.

It's all -- it's built that way.

And so between that, between what we're willing to do for those resellers and what they can do on their own with the system, they can do bespoke solutions.

They can talk to a customer, find out their special needs and provide more.

And that's the kind of reseller that we want to work with.

And maybe they'll sell somebody else's kit as well, but we think we're adding a dimension for them that they really don't get from others.

Yes, that's really helpful, Eric, especially the white labeling part.

It's interesting.

And if I may squeeze one more quickly in.

And all my questions are go-to-market here, unfortunately, but I'll be quick.

On the Home Security piece, as you think about that solution, is that more of a DIY type solution?

Or do you think there's also a go-to-market here with dealers, like security guys, monitoring companies?

Or is this still very much, hey, I'm going to offer this to my sort of Telo customers for them to do themselves?

How should we think about that go-to-market?

Sure.

I'll try not to talk so long about this one, but yes, our focus today -- and this is new for us.

We just launched Ooma Home, the starter kit, into those channels within weeks of now.

So we've got a lot of building and added dimensions to bring to this.

But as we look at it today and we're focused today, we're viewing it as a DIY solution for a customer to use 1 of 2 ways.

Either to augment the system they already have -- they might have an expensive ADT type system, but you know what, it doesn't protect the garage or it didn't include video cameras or it didn't include leak sensors for underneath their pipes in the winter or whatever.

We view it either to augment what they may already have or, frankly, if they're willing to go (technical difficulty) is the way we do it today, it can supplant a much more expensive solution.

Instead of $30, $40, $50 a month, it's $5, maybe up to $10 a month to self-monitor.

So with our Remote 911 capability built in, if they get an alert, they can push one button on the app and their home calls 911, and the authorities show up even if they don't talk.

So -- but yes, our focus with it, as we go forward here now, is largely DIY.

Your next question comes from the line of Pat Walravens of JMP Securities.

So I guess, I have 2 questions.

One question, Eric, is just sort of bigger picture.

I think if you're new to the story, you might sort of step back and say, gosh, this company's going to do, whatever, $130 million roughly in revenue.

And they have Office, and they have Voxter.

And they've got -- and they have the Butterfleye camera, and they have their Residential business.

Why are there so many things going on?

Isn't Office enough?

How would you explain it to them?

Yes.

We do have a lot going on, particularly this year as we make some critical investments in these areas.

But there are a lot of common threads (technical difficulty) what we're doing.

And let me tie them together this way.

First of all is the platform itself.

There are significant commonalities amongst the technical side of how our cloud works for all 3 areas that you described.

In addition, we always built Ooma as a platform for services, not a telecommunications or VoIP phone system.

We put a lot of capability into the endpoint devices in processing power, in memory, in ability to connect up other sensors through DECT, et cetera, with a vision toward doing more.

And just to labor that a little bit, think about Home Security.

The Home Security has to be able to monitor and then provide alerts to mobile apps.

We do all that with phone service, and so adding it on is not as much of an extension as you might think.

In fact, we think it fits well.

Beyond that, we have built a strong retail position and a fair bit of brand recognition and very good brand recognition.

We have a very high Net Promoter Score.

On Telo, it's 50-some percent Net Promoter Score.

We just got ranked again, we heard, this week as the #1 phone service in America by the readers of Consumer Reports.

That brand position and retail position, we think gives us a real base to build from as we bring out home security.

And we also think we can do home security better than others because we can marry up some phone service features like Remote 911 with Home Security.

So because of sales and market -- sales position and brand and the type of platform we have, these extensions aren't nearly as dramatic as they might seem to someone just looking at us from the outside.

Now, to tie all what I just last said into the business side of what we're doing, frankly, small businesses think, act and even buy to some degree like consumers.

We find that when we run our TV advertising for Residential, our small business owners tell us they saw our TV ads and heard about Ooma just as much as our Residential customers did.

And I think our -- the nature of our residential start to the company, where we had to bake things super reliable, super high quality and super easy to use, is what allows us to do it differently in the small business space because we bring those -- that same DNA.

Frankly, the board inside the device that we put on site in a business is the same board that we put -- that goes to a Telo customer, inside a Telo device.

So it gives you some sense of the commonality and ability to leverage.

And then when we look at Ooma Enterprise, that brought us several benefits.

We believe we can leverage our sales and marketing activities on Office.

As I said earlier, we're trading up leads to that business.

Certainly the Ooma brand, I think, is a positive momentum to what we're now doing and why we've called it Ooma Enterprise.

It also gave us a beachhead in Vancouver, which is a much lower cost location to continue to build our company.

And most of all, we got a great team and one that platform-wise does marry up well with the rest of what we've built.

So you tie it all together, and to us, it feels natural.

But I realize from an outside looking in, it's -- it can seem like 3 different things.

No, that's super helpful.

And if I can ask one more.

So I saw the partnership with Talkdesk, and I'm wondering if you can just tell us what you see in terms of how the contact center space is evolving, I guess, competitively.

And the other sort of piece that we've all been hearing a lot about and that is Twilio introduced Flex, which is sort of programmable contact center.

So I'm just wondering, how do you that whole contact center area evolving?

That might be a little bit longer discussion at some point, but for here now let me say we're very excited to be partnered with Talkdesk.

We think they're on the forefront of doing some very innovative things, and as you know, it's built from a little bit different approach.

They're growing fast.

They're hungry.

It's a 2-way partnership, which is important for us.

And it fits in well because we have a pretty sophisticated contact center solution in Ooma Enterprise but mainly built around voice.

And we do have customers today who have hundreds of contact center agents on that system, but still, if you want to step up to a very sophisticated level, we can bring Talkdesk in to be everything that customer's going to need.

And rather than try to build it ourselves, the partnership makes a lot of sense.

So we're -- we found them good to work with and I think going to be a real strength for us.

In terms of the contact center market generally and how it's evolving, you know -- you see the things that I would note.

I mean, we've seen folks like Amazon and even others start to offer certain types of solutions.

I think you still have to invest quite a bit to do something as full featured as what sophisticated customers really need.

And I think stand-alone contact center solutions can be great for what they do, but you really want them more integrated with the overall platform for communications that the business has.

And that's where we think it makes sense to marry up with Talkdesk, and we don't see Talkdesk as a competitor now.

I think they see us as a competitor.

So I hope that adds a little bit and happy to take it offline if you want to go deeper.

Your next question comes from the line of Mike Latimore of Northland Capital.

On the -- it may be a little early, but on the Butterfleye camera sales, what percent of the initial units is the customer taking the subscription as well?

This is Ravi.

The -- just so -- and so I don't want to give a number, but we have been -- it's in double digits.

We are pretty happy with the initial take rate.

Obviously, there is always room for improvement, but it is reasonable double-digit numbers.

And it also depends upon whether the customers are buying a 1 pack or a 3 pack.

So let's say if somebody buys a 3 pack, they use it for the business, we are seeing very, very high take rate there.

If it's 1 pack, it's still good double-digit numbers.

It is not as high as the 3 pack, but then the call is how do we provide them more features or tell them some of the features that there's facial recognition and other stuff that they can upgrade.

And we'll -- once we have those customers, we can always market with them through e-mail and other ways to upgrade them.

So we are -- it's early stage, but we are happy with what we have achieved in the first couple of months of us (technical difficulty) into our customer.

And then you gave some guidance for the combined Voxter, Butterfleye revenue this year.

Any change to that guidance?

Or is it the same as before?

This -- last quarter, yes, if I can just mention the guidance I'd given.

[I mean,] $2 million to $3 million for the year.

This last quarter of Q2 was more foundational, building foundations, infrastructure, whether it's the billing portal, whether it is the tax side of it.

On the Butterfleye, we started now shipping.

I think it's included in the numbers.

That might be one of the small factors, not a big factor in terms of what we're doing for revenue guidance for the full year.

But I think, at the very minimum, I can say both Butterfleye and Voxter together are performing as per our expectations in terms of revenue guidance I'd previously given.

Okay.

And then you said that some of the product or hardware strength that -- you had an order from a large telco, I think you said.

Is that related to Residential or Business segment?

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

Your next question comes from the line of Josh Nichols of B. Riley.

Real quick, I did want to ask, could you help kind of frame how much the company is investing a little bit as it works to ramp up the sales staff and integrate Voxter and Butterfleye?

And how that might translate into some better operating leverage like next fiscal year?

I'll start, but I'm sure Ravi will have more to say on this.

But I think, for Q2, we were at about 23% of revenues spent on engineering and R&D, 24%.

And I think by any measure versus competitors or just generally in industry, that's a significant amount to be investing on development.

So over time, we're going to grow into that spend, and that'll give us flexibility to direct investments elsewhere.

We're -- yes, I don't know if you want to add, Ravi?

Yes.

So Josh, this is Ravi.

You're right.

As I mentioned even in the previous earnings call, we do expect to invest into both Butterfleye and Voxter this year in terms of building the infrastructure, getting the ground work done.

And we had mentioned -- and we are still on track or our expectations are still similar, that fiscal 2020 should be when these acquisitions become accretive.

So I think we are tracking towards that goal, what we had.

In terms of the financial leverage, I think it will come from 2 sides.

One is once we have built these infrastructures, we should start seeing some benefits; and secondly, the benefit of scale.

As Eric earlier mentioned, we are passing leads from Ooma Office to Voxter and vice versa.

Those things will help us get financial leverage even more.

But you're right, the R&D is pretty high, and we need to -- as the revenue goes up, margins should go up.

And our goal is R&D as a percentage of revenue, given the scale benefits, should start coming down.

You will start seeing the leverage.

Then the question would be whether we spend the money in sales and marketing or to grow faster or to put it to the bottom line.

And then I also wanted to ask -- good to see things coming along pretty well, particularly with the Enterprise solution.

I know you mentioned that, that was a higher cost offering.

Could you talk a little bit -- how should we think about the gross margin profile of the subscription and services revenue as those -- as Enterprise offering and the Home Security subscription revenue kind of tends to layer on?

Right now subscription services margins are 70%.

If -- Home Security should be relatively high margin, but obviously, we have 1 million customers today.

As we add -- continue to add home security, I do believe they'll be more accretive to the subscription services margin, so they should help.

And Enterprise, we are in the building stage at this time.

Obviously, the pricing, the price point generally speaking for Voxter and Ooma Enterprise is higher.

But until now we are investing into more.

So in the long term, I do expect the margins should be aligned with our long-term target model for subscription services.

Just as a reminder, Josh, our subscription services long-term target model is 75% to 80%, and I believe both Ooma Home Security as well as Ooma Enterprise, they fit well with that long-term target.

And then last question for me, good to see the bump to revenue guidance for the year.

I just want to ask regarding the cadence and some seasonality.

Is -- you're still expecting typically Q4 is materially stronger during the holiday selling season?

Or do you expect that to be a little bit less of the case given how you have a growing base of Business subscribers here that are more steady-eddy and less seasonal?

Yes.

It does cut a little bit both ways.

As a holiday quarter, we do see some added momentum on the Residential side, but we do also do some things to price a little lower with Black Friday specials or things like that.

And then on the Business side, there are periods through the quarter where I think businesses aren't looking to make these kinds of changes, or not as much.

They might be very busy for the holidays themselves or be taking time off over the holidays.

So I think it all balances itself out a little bit.

There may be a little bit of seasonality in Q4, but we're not counting on a dramatic difference.

That is right.

Josh, what used to be 3, 4 years ago when we were more Residential, the seasonality was much more.

But now with business around 27%, 26% of revenue and with specials happen throughout -- [seasons] of the days, prime days, they happen throughout the year.

The seasonality is lower than it used to be before on the Residential side.

(Operator Instructions) There are no further audio questions at this time.

I would like to call -- turn the call back over to Eric Stang for closing remarks.

Thank you.

I just want to quickly say thank you to everyone on this call today.

We really appreciate your support for Ooma, and thank you for your time today.

This concludes today's conference call.

You may now disconnect.