Ooma, Inc. (NYSE:OOMA)
Q3 2017 Results Earnings Conference Call
November 29, 2016, 05:00 PM ET
Erin Rheaume - IR, The Blueshirt Group
Eric Stang - Chief Executive Officer
Ravi Narula - Chief Financial Officer
Alex Hu - Credit Suisse
Bhavan Suri - William Blair
Matt Robison - Wunderlich
Jane Wong - Bank of America Merrill Lynch
Josh Nichols - B. Riley & Co.
Good day. And welcome to the Ooma Third Quarter Fiscal 2017 Earnings Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Erin Rheaume. Please go ahead ma'am.
Thank you. This is Erin Rheaume, Ooma Investor Relations and I am pleased to welcome you to Ooma's conference call to discuss its third quarter fiscal 2017 earnings result. With me on the call today is Ooma's CEO, Eric Stang; and CFO, Ravi Narula.
After the market closed today, Ooma issued a press release through PR Newswire. The release is also available in the company's website at ooma.com. This call is being webcast live on the Investor Relations' page of the Ooma website and will be available for a 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 periods, our expectations regarding our strategic product initiative and the related benefits and our expectations regarding the market.
Our expectations and beliefs regarding those 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 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 as otherwise specifically stated, the financial measures discussed on this call will be 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 present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures disclosed [ph] in this call to the mostly directly comparable GAAP financial measures are included in our earnings press release that's available on our website.
Let me now turn the call over to Eric Stang, Ooma's CEO.
Thank you, Erin. Hello and welcome to Ooma's FY 2017 Q3 earnings call. I'm delighted to talk with you today about our strong Q3 results and our increasing momentum as we shipped more of our emphasis on to growing Ooma Office for small business. And while small business is increasingly our focus, I'm also pleased to report significant progress on our Telo strategy to monetize our large consumer customer base in new ways. I've also shared a preview of our plans for Q4 and our high-level goals for next year.
Q3 was another strong quarter for Ooma. Total revenue increased to $27 million and our core user base expanded to over 900,000. In line with our strategy, Ooma Office subscription services revenue grew approximately 70% year-over-year and represented the fastest growing part of our business. At this level, we believe we are outpacing the growth of our major cloud business phone service competitors.
Telo and Talkatone subscription services revenue also grew significantly versus the prior year quarter. Business Promoter subscription services revenue, however, declined approximately 35% year-over-year and this decline contributed to our Q3 year-over-year growth of 19% in total subscription services revenue.
We're disappointed, of course, by the continued decline in Business Promoter revenue this year and are taking further steps to derisk its impact on our overall results. Ravi will provide greater financial detail on Business Promoter in his remarks.
Finally, I'm also pleased to report that we narrowed our non-GAAP net loss in Q3 to $0.02; this is down from $0.10 non-GAAP net loss at the start of FY 2017. I'm particularly thrilled to report that we achieved our goal of positive EBITDA in Q3 two quarters ahead of plan.
As we announced last quarter in Q3, we began the shift to put more resources and priority to growth of Ooma Office for small business customers. Q3 marked the beginning of a several quarter effort to expand our sales and marketing, build a reseller program, accelerate the development of new features, expand the range of IP phones we support, and ramp up marketing of our newly launched Ooma Office for mobile. We made significant progress on all of these fronts, but also have much farther to go.
Key to our success will be hiring and training a larger sales team, which we believe will take time to execute well. Nonetheless, we are seeing early momentum from our efforts and have never been more optimistic about our longer term outlook. It's clear that our core competitive advantages resonate well with small business customers, especially the superior voice quality of our platform, the ability to integrate a combination of standard analog phones, mobile phones, and IP phones, the ease of use of our solution which does not require, for example, running wiring around the office, and our much better economic value.
While we began shifting some of our resources from Telo to Office in Q3, we have continued our growth strategy albeit with lower investment and continue to develop new ways of monetizing our large Telo customer base.
Telo serves a large market opportunity of 65 million or more households in North America and is rated the Number One Best Home Phone Service Solution. I'm pleased to highlight two recent announcements regarding our Telo consumer platform. The first is a breakthrough partnership with Zscaler to provide Internet Security through the Telo platform. This is a cutting edge, easy to use new service we offer our Telo customers for an additional monthly fee of just a few dollars a month. It protects all of the devices connected to the home network from Internet threats including all IoT devices in the home.
Ooma Internet Security blocks viruses, malware, and phishing attempts triggered by browsing the Internet. It also provides sophisticated controls for users to easily block many categories of objectionable content. It employs a cloud-based real-time threat database powered by Zscaler that is updated up to 100,000 times a day to provide the most sophisticated Internet security available to consumers.
Zscaler security cloud is a comprehensive carrier-grade Internet security and compliance platform running in more than 100 datacenters distributed around the globe. We're thrilled to make a consumer-grade version of it available to our Telo customers.
Ooma Internet Security is now in beta test. User experience is straightforward and only requires two steps; the first is the Telo must be installed in the home network between the user's modem and router. Many of our customers already have their Telo installed in this configuration.
The second step is simply for the user to go to their My Ooma web portal and enable the service. For more sophisticated protection, users may also choose to download security certificate to their individual devices, but this is not required. We will soon be rolling out trials of the service to select customers and plan to introduce this new service more widely by Q1 of next year.
The second Telo new service announcement I'm pleased to highlight is the addition of customizable call blocking for our Telo Premier Service tier. Customizable call blocking allows our premier customers to identify certain callers who will be allowed to call them while blocking all other callers.
Similar to our unique blacklisting service, which automatically blocks telemarketers and other unwanted callers, the ability to customize who is allowed to call gives our customers back control over their home phone experience. Adding this new service to our Premier Service tier is part of our long-term strategy to grow adoption of paid premium services across our Telo customer base.
Now looking ahead to Q4 and next year, we have many initiatives underway. On the Ooma Office front for small business, we're investing significantly in sales and marketing and the development of new features to seize what we believe is a very large market opportunity.
It is a long-term investment strategy, but we anticipate announcing new developments in Q4. On the Ooma Telo front for consumers, we will roll out Ooma Internet Security and we plan to announce additional services related to our connected home strategy at the upcoming CES Show in January.
On the Talkatone front for mobile-only consumers, we continue to invest but at a measured pace investing in new services that strengthen the platform in order to maintain a positive return.
Looking out towards fiscal year 2018, we will continue our strategic focus on growing Ooma Office and on monetizing our Telo customer base to renew innovative services. Our core fiscal year 2018 strategic imperatives are to one accelerate expansion of our small business customer base; two, continue to add Ooma Telo customers, but more importantly, monetize our total customer base in new ways to increase ARPU; three, maintain significant investment in R&D to capture the full opportunity of the Ooma platform and remain poised to seize breakout opportunities; and four, continue to improve our financial results while driving significant overall business growth, particularly in subscription services revenue.
In FY 2018, we expect to benefit from our progress this fiscal year to improve our financial results and to increase the mix of subscription services revenue versus product and other revenues.
We expect Ooma Office and, to a lesser extent, Ooma Telo to drive our growth in FY 2018, while Business Promoter and Talkatone taken together do not grow meaningfully, but deliver a positive return to the business.
Overall, we see tremendous market opportunity to disrupt how small business, home, and mobile users experience phone service and our custom platform uniquely enables us to deliver innovative new services to new and existing customers. Overall, we're excited about our strategic direction and future outlook.
Now let me turn the call over to Ravi to discuss our results and outlook in more detail. I will then return with final comments and we will take your questions.
Thank you, Eric, and good afternoon everyone. As a reminder, all income statement items except revenue are on a non-GAAP basis and exclude expenses such as stock based compensation and related taxes and amortization of intangibles. The reconciliation of the GAAP to non-GAAP financial data can be found in the press release issued earlier today.
Total revenue for the third quarter of fiscal 2017 was $27 million, an increase of 15% over the same quarter last year. This growth in revenue was driven by our total core users, which grew 19% to approximately 904,000. Our overall subscription services revenue in the third quarter of fiscal 2017 also increased by 19% to $23.2 million.
Premium users as a percentage of total core users increased to 48% compared to 45% at the end of the prior year quarter. Our small business core users are now 17% of total core users as compared to 13% at the end of the same quarter last year. Our small business revenue continues to grow, driven by Ooma Office and is now 21% of our overall revenue compared to 19% in the prior year quarter.
As we discussed in the last earnings call, we're focusing on expanding the channels for Ooma Office and we're pleased with the positive momentum we're seeing towards that initiative. We have seen growth of our existing sales channels and continue to make progress in developing additional channels as a result, we saw Ooma Office grow at 71% on a year-over-year basis.
For the third quarter, we saw 35% year-over-year decline in revenue from Business Promoter Service to $1.2 million. This decline in revenue was due to two main reason; lower overall call volume for the service, as well as a decrease in average revenue per Business Promoter user. This decrease in ARPU was largely due to lower budgets available from digital marketing agencies.
Our average monthly subscription and services revenue per core user declined on a year-over-year basis to $7.95 per month, impact of including Business Promoter in this metric, reduced the blended ARPU by $0.19 per month.
Subscription and services revenue grew to 86% of total revenue by the third quarter compared to 83% of total revenue for the same quarter last year. Annualized exit recurring revenue or AERR increased 16% on a year-over-year basis to $86.3 million for the third quarter, up from $74.4 million for the prior year quarter.
Our quarterly net dollar subscription retention rate was 90% for the third quarter compared to 97% for the same quarter last year. Again Business Promoter impacted the net dollar subscription retention rate by 8% for the third quarter of fiscal 2017.
Product and other revenue for the third quarter was $3.8 million, down from $4 million for the same quarter last year. This decline was primarily due to lower average selling price of Telo unit in the quarter.
Now, moving onto the gross margins, our overall gross margins improved by four points to 58% in the third quarter compared to 54% for the same quarter last year. We continue to make good progress with the improvement in our subscription and services gross margins which increased to 69% in the third quarter, up from 66% for the same quarter last year.
These improvements in the gross margin were primarily due to an increasing mix of Ooma Office customers and continued growth in core users. Third quarter operating expenses were $16 million, a year-over-year increase of $1.4 million. This increase was driven by investment in R&D and some sales and marketing expenses. Sales and marketing expenses was $7.9 million, an increase of $600,000 over the prior year quarter. This increase was primarily due to emphasis on driving growth of Ooma Office with lower spending in other areas.
Research and development expenses were $5.3 million, an increase of approximately $900,000 over the prior year quarter. The increased R&D spend went towards the development of new features and functionalities to support our growth initiatives. This included development of mobile-only version of Ooma Office as well as launch of Internet Security Service highlighted earlier by Eric.
G&A expenses in the third quarter were flat at $2.8 million on a year-over-year basis and accounted for 10% total revenue, down from 12% of total revenue in the prior year period.
In summary, as a result of improved gross margins and managed spending, our net loss in the third quarter of fiscal 2017 significantly improve and was under $300,000, or $0.02 loss per share. During the same period last year, the net loss was $2 million or $0.12 loss per share.
We have pleased to have achieved a positive adjusted EBITDA of $81,000, down from negative $1.5 million for the same quarter last year.
Now turning to the balance sheet, we had cash and investments of $53.4 million with no debt as of the end of the third quarter. This was a second consecutive quarter where we generated positive cash from operations. We generated approximately $400,000 of cash from operations compared to cash used in operations of approximately $46,000 at the end of the prior year quarter.
Deferred revenue at the end of the third quarter was $15.4 million as compared to $15.6 million at the end of the prior year quarter. We had 164 full-time employees as of the end of the third quarter.
Now, for our outlook, the following guidance excludes stock-based compensation expense and related taxes and amortization of intangibles. For fourth quarter fiscal 2017, total revenue is expected to be in the range of $27 million to $27.5 million. This guidance assumes approximately $1 million of revenue from Business Promoter in the fourth quarter, down 15% from the third quarter of fiscal 2017.
Non-GAAP net loss is expected to be in the range of $300,000 to $700,000. This includes higher sales and marketing expenses in the fourth quarter, primarily due to increased expenses from our participation at CES in January.
Non-GAAP net loss per share is expected to be in the range of $0.02 to $0.04. We have assumed 18 million shares outstanding for Q4. For full year fiscal 2017, total revenue is expected to be in the range of $104 million to $104.5 million. Non-GAAP net loss is expected to be in the range of $2.9 million to $3.3 million.
Non-GAAP net loss per share is expected to be in the range of $0.16 to $0.19. We have assumed approximately 17.6 million shares outstanding for fiscal 2017. My apologies, these were GAAP numbers. Non-GAAP net loss for the full year is expected to be in the range of $2.9 million to $3.3 million.
With that, let me pass it back to Eric for some closing remarks. Eric?
Thank you, Ravi. Overall, I believe we're making good progress on our strategy to penetrate small business, home, and mobile segments in North America based on the superior quality, features, and value of our Number One Ranked Cloud Phone Service.
Our progress demonstrates the power of our business model and our competitive advantage over other solutions. As I mentioned previously we have never been more optimistic about the opportunity in front of us for Ooma Office for small business and now with significant new ways to monetize Ooma Telo as well, I believe we're going to Q4 and our next fiscal year particularly well-positioned for growth. Thank you I would now like to take your questions.
Thank you. [Operator Instructions]
And we will take our first question from Michael Nemeroff with Credit Suisse.
Hi, guys. This is Alex Hu calling in on behalf of Michael. Thanks for taking the questions. Just a couple for Eric. Just wanted [Indiscernible] to the Q4 revenue guide at Office growth this quarter seemed like an acceleration from the prior quarter, just curious if you help parse out your expectations from Business Promoter for Q4?
Sure. I think Ravi guided to about $1 million of revenue in Q4 as our plan for Business Promoter. I can tell you that's less than half our original plan for the business when we set out our plans this year, but we -- and it is down a little bit from Q3 as well, but that's what we've built in and that puts our overall guidance for Q4 at $27 million to $27.5 million. That reflects to some degree the seasonality that we expect for Q4. Q4 with everything going on with holidays and all is not the best time for small businesses necessarily be changing their phone service and we do lower our pricing some on our Telo platform as we compete for the holidays. So, all-in, we've tried to reflect all that in our guidance.
Okay. Good. And then just a couple more follow-ups, how resilient do you think that 1 million in Q4 for Business Promoter is, because it's clear as we look into 2018, how much -- sorry, 2017, how much of a potential drag you could have on future growth perhaps?
Well, in our guidance for Q4, Business Promoter is down to less than 4% of our total revenue. I don't think we're going to pay that much more attention to it as we look forward. We're going to run it to make a nice return from it and if it grows or goes down a little bit, either way, I don't think it's going that big effect on our numbers given how small it is now.
And that is right. Alex this is Ravi and that's one of the reasons because of volatility in the Business Promoter, we have provided further color in terms of the revenue assumptions we're making for Business Promoter. So that will help us help you understand the growth in Ooma Office and Telo and all the other businesses much more easily.
Great. And then just on the leverage, it's nice to see all [Indiscernible] Adjusted EBITDA [this quarter, two quarters] [ph] ahead of the original plans, should we expect Ooma to remain positive adjusted EBITDA, I'm looking Q4 guidance, it seems like that? And then also if you could update your framework on balancing growth versus profitability and if there are any changes to that?
Alex let me take the first one and then Eric can jump in with the overall vision and strategy for fiscal 2018 and beyond. In terms of fiscal -- fourth quarter of fiscal 2017, we guided a loss of $300,000 to $700,000, primarily due to the additional spending -- expenditure we'll have for CES Show. So, that will -- the result of that would be whether we are adjusting EBITDA positive or negative by small amount that's not going to be significantly different from Q2, but could be little bit lower profit from Q3.
Little bit lower positive or slightly negative, but for fiscal 2018, we have not fully guided at this time, but let Eric speak if he has any other color to provide.
Well, we all know that that we're -- we've got a great payback on our investment in sales and marketing to grow our company and add more users. So we're very focused on trying to drive as much of our -- as we can into growth. But that said, we've always taken the approach of wanting to run the company properly and one of the imperatives I laid out in my script for FY 2018 was to continue to improve our financial results while we drive significant business growth.
We had the -- we had this year, this fiscal year, which is still not over, of course, but this year, we had to take steps to narrow our -- bring down our EBITDA loss from a much larger amount at the start of the fiscal year and that's not something we'll have to necessarily achieve next year. So, we go into next year a little stronger already, but no, our goals are to drive growth significantly consistent with at least some improvement in our overall financial results.
Great. Thank you for taking my questions.
No, thank you.
We'll move on to Bhavan Suri with William Blair.
Hey guys, thanks for taking my question. Eric, I guess just starting off with obviously the Business Promoter business, this is something -- we've had some volatility in agencies et cetera, there has also been the sort of idea that we can hang multiple applications off that. Just strategically, has that thought process changed? Or do you think that something could happen at some point or have you sort of said, okay, it hasn’t played how we thought and this is just a business, will that fade out over time? How should we think about what you think about that as a strategic part of Ooma overall?
Sure. And this speaks to the uniqueness of Business Promoter in some ways. Our core strategy of being able to leverage our platform to monetize new kinds of services is clearly in place and working. The launch of our new Internet Security Service powered by Zscaler is a great example of that.
We do sell Business Promoter to some of the customers on our Office platform and that's a success as well, but the challenge for Business Promoter, specifically, is it’s a business we acquired and a lot of its customers and revenue have come from third-party agencies that we're reselling the service for a standalone and we don't have control over that sales process, they're not tied in any way to the rest of our platform, those customers, and as such we really don't have as much control over that.
When we do things on our platform and bring it to our customer base, I think it's highly successful and we intend to continue do a lot more of that actually as we look forward. But Business Promoter was kind of -- became a hybrid with its own growth through these digital agencies and that's what has slipped back on us through much of this year.
And Bhavan, this is Ravi, and we're managing Business Promoter to maximize the cash what we can generate from that business. So, we are working with it, we're being conservative in terms of guidance, but at the same time, we're maximizing our cash flow.
Got it. And if we turn to core user growth and obviously this could be strategic too, but core user growth, again, feels like it's dip below the 20% number and that's a first time ever and part of it is sort of your direction, but help me understand how you guys are thinking about that metric and is that metric valid anymore or is that something that we should focus on less?
I'll make one comment and let Ravi take it from here. As we direct more of our sales and marketing spend towards Office than Telo, we spend more per user to get an Office user and so we don't grow the Office users at the same rate, but we do make more revenue and more margin off each user, though it's still a smart thing to do.
So, measuring users can be a little bit misleading when you're comparing the prior periods when we were growing our Telo home users perhaps a little faster. That's just a mix CAC-type elements to the story, but let Ravi answer this little more for you.
Bhavan, if I were to exclude the Business Promoter which is more volatile, using - measuring the core user growth for Telo as well as for Office, I do believe it is helpful because the more users we add helps grow the subscription services revenue. Yes, there's a difference between the CAC and the ARPU from Office versus Telo, but both of them are highly profitable customers for us and looking at those two types of core users actually is helpful for us to run the business because we are growing subscription and services revenue and as subscription services revenue grows, we see the margin improvement and that helps our financial performance overall.
So, Business Promoter is one which actually makes it little bit muddier but overall, core user for Office as well as for residential Telo customers is what we look at how we are growing our business there.
Ravi, that's really helpful. I guess the follow-up to that given we've got CAC and we've got sort of the user account here, help me understand what churn rates look like for both of those, just -- to obviously wrap-up the unit economics? You might've given that, I'm sorry. I was just on the long call, but just help me work through the churn rates maybe?
Sure. Our overall churn rate, if you pull out Business Promoter, was consistent about 6% or 7% a year and that's something we've maintained for long time and we're proud of that. Within that 6% to 7% a year churn rate, the Telo churn rate is a little lower and then small business churn rate is a little higher. That's for a couple of reasons; small business is a newer platform for us and we continue to make improvements to it.
Also small businesses do sometimes go out of business and that affects churn some there too, but we're very happy with our churn rate. We think it's one of our key core advantages and we believe it's steady and in control.
Great. That's it from me guys. Thanks for taking my questions. Thank you.
We'll now move on to Matt Robison with Wunderlich.
Thanks. Can you talk a little about the economics of the -- of service you're doing with Zscaler, how are you going to split the revenue for that?
Sure. The specific answer to your question is we expect our gross margins on that to be in line with our other subscription service gross margins for the other services we have. So, we're very happy about being able to add this new service into our platform.
I can't go into specifics of our arrangement with Zscaler, of course, I do take a minute though and speak a little bit about this because this is a huge new step for us as a company.
The appliance that we put out in the field is a router as well as you know a Linux computer and a wireless access point and some other things and I we're able to leverage that routing capability to offer the services. This is going to be a very easy to use service for our customers and it's going to be world-class in terms of the protection we're providing them.
Zscaler is the largest cloud provider of security in the world. They are processing more than 25 billion transactions a day. They block 125 million threats a day for the users they have now. They are serving over 5,000 companies including 50 of the Fortune 500. These guys are incredible and we're just thrilled that they chose to partner with Ooma and we're also thrilled that we have the kind of platform that can do something like this, because I don't believe any of our competitors could enable service like this the way we have.
We're going to be charging our customers monthly for the service. We’re going to give a little break to our Premier customers. For them it's going to be 399 a month; for our basic customers, its 599 a month. We're going to be able to give them free trials. We're going to be able to let them test their Internet to see if they need the service and we have no idea what the take rates will be, but I can tell you from myself personally and for all of us here at the Ooma, we're just excited ourselves to get the service.
And so we think it could be quite a big deal for us and couldn’t be more thrilled to be partnered with Zscaler for it.
So, your -- are your routers going to be able to keep up with line rates that you can expect from some of the newer DOCSIS deployments if they run of this kind of security?
Yes I mean our Ooma Telo is 100 megabit per second line speed router, which is we think is sufficient in almost all cases for our customers' installations. The addition of the Zscaler service onto the platform has such a low impact that you would -- it's not even almost describable. The way it works it will not cause any really any slowing down of the Internet service for the customer.
About a third of our customers today already have their Ooma Telo installed between their modem and router, so they are already using it in the configuration that we talked about in our script here and -- so for them, it's a very easy decision to adopt the service and that will be the customers that we target first.
Make sense. Ravi, did you say that $1 million of Promoter for the fourth quarter is down 15% -- as in 15% year-over-year?
I said 15% down on a sequential basis, so Q3 was $1.2 million; we are forecasting just a $1 million of revenue in Q4. But also on a year-over-year basis, its down and its down actually more than 15%, I think it's roughly 30% year-over-year lower.
You mentioned looking at the core user growth without Business Promoter, is that a number you also provided?
I did not provide that. We have not provided that but overall we saw a growth in core users for both residential Telo customers as well as small business customers. Small business customers grew the fastest.
I mean we grew our subscription services revenue on Office 70%, roughly 70% year-over-year. That's another great quarter for us.
Sure. Okay. That's it from me. Thanks.
We will now move onto Patrick Walravens with JMP Securities.
Yes, hi, this Matt on for Pat. Thank you very much for taking my question. I guess as we look at the guide for Q4 and some of the -- I guess headwinds you're facing more near-term, what kind of impact that could have longer term. I know in the past we talked about mid 20s year-over-year growth in your subscription line in fiscal 2018. Is that still something that's on the table for you guys or did I misunderstand something in the past? Thanks.
Hey Matt, this is Ravi. If I can just give you one color in terms of -- Eric did mention Business Promoter is less -- is around 4% of overall revenue, so very small revenue base now.
If I exclude the Business Promoter in Q3 and the year before we had subscription services revenue growth of 25% excluding Business Promoter in Q3. So, we’re growing overall with small business -- with Oona Office with for Telo and Talkatone at a pretty healthy rate above 20%, in Q3 it was 25%. In the previous quarter, it was higher than that.
So, we do believe as we continue to grow, all of these dimensions and Business Promoter become smaller and smaller, our Subscription Services revenue growth rate should be in pretty good -- should be driving our growth in the future. We will provide more color in our Q4 earnings call for next year, but we do -- we're pretty optimistic about our Subscription Services revenue growth.
Yes. I would add that -- we -- well, let me leave it there.
Great. And it's very helpful. Thank you, guys.
We will now move on to Nikolay Beliov with Bank of America Merrill Lynch.
Hi, this is Jane Wong here on behalf of Nikolay. Can you talk about what the goal is -- can you talk about what your goal is for longer term, may be three to five years out for the split between home versus office revenue and maybe also give us an update on the competitive environment on both the Home and Office side?
Sure. You want to take the first part?
Hi, Jane, this is Ravi. In the longer term, we do believe Office will continue to grow fast -- at a much faster pace than the residential side, right around its 20% of the overall revenue. We do expect that number two go up to around 40% of overall revenue in three to four years from now.
So, we -- and we're investing much more aggressively. We're adding more sales channels into our Office platform and Office efforts there. So, we do believe it will be a 60/40 ratio between Residential and Office in the longer term.
Yes. In terms of the competitive environment, I don't want to say this incorrectly, but I feel like we have our destiny in our hands. We have a unique platform that we've custom built from the earliest days in this company and it’s a platform that can do phone service in a very unique way with very high quality but also very low cost. We've leveraged that well in both the consumer small business fronts.
As we start to add some of the new features, you're seeing things like the Internet Security from Zscaler where we can really break out in some new services.
The real challenge for us is can we continue to do the things with the platform that we want to do and also invest as much as we like to invest in sales and marketing. You'll notice in our Q3, for example, and this may speak a little bit to what you were also asking Pat, we actually steered a little bit more of our budget Q3 in the R&D and out of sales and marketing. Sales and marketing Q3 was lower spend than Q2. We're pretty happy with our results for Q3 given that, but it allowed us to really take some advances here on the development of new features for the platform.
So, as we look ahead, we believe our focus on small business, the unique needs of small business is special. Those needs are different for that customer segment and we think we have great solutions for that customer segment and we're just going to push forward.
Now, there's no doubt we're in a market with a lot of competition, but of course, it's a very, very large market on 65 million households in North America or arguably 30 million small businesses in North America and so you're going to have competition, but the question is can we do things especially and win in and I feel like we're achieving that.
Thank you. And just one last question on those development of new features, do you see opportunity to cross-sell between Home, Office Talkatone or is it really -- are the new features being launched going to be kind of segment-specific?
That's a very good question and we think a lot about this. Most of the new features we are working on can be applied across our platform and doesn't mean we've applied them yet, but it means if you look at our vision, we will apply them. So, there for instance services on the Home front that we would like to bring to the Office and small business front and vice versa.
There's even things Talkatone does today that we'd like to bring onto the small business and home platforms and so when we develop these new features, we'll develop them for one of our focus segment, but we will expand them to the rest over time.
Now, of course, all three of our segments; Office, Home, and Mobile do ride on a common calling platform that is very low cost and we get the benefit of scale out of that today. But, yes, we're excited as we talk about the new feature for the home market today; we're excited that we'll hopefully be able to talk about it with you for other parts of the business in the future.
We'll now take our last question from Josh Nichols with B. Riley.
Yes. Hi. I want to talk a little bit more about the growth driver offering. I know it's relatively early, can you talk about market receptiveness you're seeing as you kind of pivot the marketing strategy, how the new hire ramp is going and any expectations you have going forward as far as keeping maybe the sales and marketing spend in that 30 to--
Sure. We talked a quarter ago about shifting more of our sales and marketing budget on to Office and away from Telo and we did some of that in Q3 and we'll do more of it as we look forward.
We're very pleased with the results of Q3. We sold significantly more Office units in Q3 than we did in Q2 in and that's the beginning of that longer term strategy shift as I've described.
Now, it is true that we have significant hiring to do, particularly in our sales team to accomplish our goals. We also discussed a quarter ago about beginning to build a value-added reseller call it, VAR channel network, something we've never done before in our history and that is also going to take time to build.
But we believe we can do those things while we maintain our growth rates and on do it without having to lose money as a business. And so we feel like we're in a great spot and in some degree this year, we've had to deal with the fact that just couple quarters ago, our adjusted EBITDA was over $1 million loss per quarter. And we had to take some of the profitability of the business and put it towards bringing our adjusted EBITDA to now positive.
Now that we're there we can go forward on an even stronger basis. So, we're pretty optimistic as we look forward, we certainly see the opportunity. We can get small businesses to connect with us; we have a great close rate. We have a great story. We can bring them more features and better functionality for half or less of the cost than they're probably paying with the traditional phone service that have. It was a great story. It's a matter of the outreach to make it happen, and that's what we're investing in. So, I hope that addresses your question a little bit.
No, that's actually very insightful. Last -- very quick as a follow-up is while you're decreasing your TV and marketing spend, are you seeing decrease -- or is that impacting the SMB [ph] subscriber growth in any way, is there any correlation between that or no? I do understand that SMB, sales are usually done in-house?
There is a real synergy between our consumer advertising and our small business advertising. And we're able to see that and track that. But I don't -- I think if we -- as we shift resources onto new marketing methods, we're only doing it because we think we'll have an overall positive impact and that's what we're driving for.
Sounds good. Thank you.
That concludes today's question-and-answer session. Ms. Rheaume, at this time, I'll turn the conference back to you for any additional or closing remarks.
Great. Thank you for joining us and look forward to updating you on our next earnings call. Thank you.
Ladies and gentlemen this does conclude today's conference. We thank you for your participation.
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