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Ooma Inc (NYSE:OOMA)
Q3 2020 Earnings Call
Nov 21, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Ooma's Third Quarter Fiscal 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Matt. Thank you. Please go ahead, sir.

Matthew S. Robison -- Director of Investor Relations and Corporate Development

Thanks, Christine. Good day everyone and welcome to the third quarter of fiscal year 2020 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 Navula. After the market closed today, Ooma issued a press release via GlobeNewswire. The release is also available on the Company's website, ooma.com.

This call is being webcast live and is accessible from a link on the Events page of the Investor Relations section of our website. This link will be active for replay of this call for at least one year. A telephonic replay will also be available for a week starting this evening about 8.00 PM Eastern Time. Dialing information for it is included in today's earnings press release. During today's presentation, our executives will make forward-looking statements within the meaning of the Federal Securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission.

The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements except as required by law. Please note that, other than revenue or as otherwise stated financial measures to be discussed -- 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 fourth quarter and full-year fiscal 2020 on a non-GAAP basis. Also, in addition to our press release and 8-K filing, the Events & Presentations page in the Investors section as well as the Quarterly Results page of the Financial Information section of our website includes links to costs and expenses not included in our non-GAAP values and key metrics of our core subscription businesses. These are titled Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally, our investor presentation slides include GAAP to non-GAAP reconciliation. That also provides resolution of GAAP expenses that are excluded from our non-GAAP metrics.

Now, I will hand the call over to Ooma's CEO, Eric Stang.

Eric Stang -- Chief Executive Officer

Thanks, Matt. Hi everyone, welcome to Ooma's Q3 FY '20 earnings call. It's a pleasure to talk with you today. I'd like to cover three topics with you in my prepared remarks. The first is a review of our Q3 progress and momentum for Q4. Second, I'd like to emphasize our commitment to building shareholder value and discuss several new actions we are taking in that regard. And thirdly, I want to share our top-level objectives that will guide our plan for next year.

Our Q3 quarter just ended was, simply put, a fantastic quarter for Ooma. Q3 revenue of $39.6 million represents 21% growth versus a year ago. And for the first time in our history since going public, we generated a positive non-GAAP net income. I'll let Ravi take you through the numbers in detail, but I do want to highlight our progress. I believe Ooma has taken another big step forward by continuing to achieve strong revenue growth, while also now operating profitably.

Regarding our strategy to grow the number of customers using our business solutions, I feel we are executing well on all fronts. And I believe our 67% Q3 year-over-year growth in subscription revenues from Business customers inclusive of our Broadsmart acquisition backs this up. One major element of our success is we continue to roll out our combined Office and Enterprise business solution to the very large customer I spoke about on our last earnings call. I'm pleased to say that we expect to add a significant number of users with this customer in Q4 and we see potential for further user additions in FY '21 on a more limited basis, given our progress this year.

We are also executing well and growing our sales through channel resellers and VAR partners. In Q3, we expanded our activities by launching Ooma Office with select resellers by integrating Ooma Enterprise and Broadsmart further from a channel perspective and by signing up additional private label VAR partners. We have a strong dedicated team in place to drive sales through resellers and partners, and our plan is to accelerate channel growth.

A new area of development for us is our Sprint relationship. You'll recall, we announced a new strategic partnership with Sprint just last quarter that included Sprint's large sales team, selling Sprint-branded Ooma Office starting in July of this year. I'm pleased to report Sprint has now named this solution Sprint Omni, which they describe as a cloud-based commercial phone service designed to bring premium enterprise quality landline phone technologies to small and medium-sized businesses.

Now that the Omni name is announced, Sprint can begin marketing and promoting the offering. I'm confident that Sprint is fully committed to the success of our partnership as we certainly are. Finally, separate from our Q3 results, we executed well in engineering during the quarter, preparing for our launch this week of Ooma Office Pro. This is a new service tier that incorporates additional functionality relevant to larger-sized small businesses. We expect that with the launch of Ooma Office Pro, we can expand our addressable market. We also expect to raise our ARPU for those customers who adopt the Office Pro feature set, since Office Pro will be sold at a premium to standard Ooma Office.

Switching over briefly to our activities serving Residential customers, I believe our results are on track and we are performing well. As Ravi will discuss, we grew our subscription revenues from Residential customers in Q3 by 4% year-over-year, in line with our expectations. We also expanded retail distribution of Telo and our new Telo 4G solution during Q3. We head into Q4 and the holiday season, well placed for continued success. We are also making some adjustments to our strategy for Residential customers, which I will elaborate on in just a few moments. I mentioned in my opening our commitment to building shareholder value. We are currently taking several steps, which we believe will enhance shareholder value. The first is we are shifting our overall corporate focus to a greater extent on new business solutions and driving the growth of Business customers.

To this end, we have stopped selling Ooma Smart Cam video cameras and disbanded the engineering and product team for Ooma Smart Cam. Our judgment is the market dynamics for Smart Cam deteriorated over the last two years and are not very attractive today. We have also completed the core feature development for smart security and so shifted engineering resources away from smart security onto other programs. These actions and others have led to the reduction and reassignment of personnel across engineering, product marketing, marketing, sales and service functions. Going forward, we will continue for the foreseeable future to provide service to our small existing base of Smart Cam users.

For smart security, we will continue to offer it for sale to customers online and through existing retail channels, but not invest meaningfully to promote it. This is because smart security rides on the Telo base which our Telo customers, of course, already have and because our margins on the service, which is now fully developed, are extremely high. Overall, the strategic move we are making is to double down on the growth of our business solutions for Business customers.

A second step we are taking to realize shareholder value is to operate Ooma profitably going forward. Over the last several years, we have invested quite significantly in the development of our solution, especially for Business customers. While we have an exciting road map ahead for further development, we also now can leverage the advances we've made over the last several years. This leverage along with the strategic shift I just mentioned will allow us to bring down our engineering spend as a percent of sales to drive non-GAAP profitability without compromising our growth potential.

The last step, I want to mention today in regard to realizing shareholder value relates to how we define and refer to our activities for Business customers. We intend to increasingly combine our Business products and services into one solution we refer to simply as Ooma Business. We of course offer a range of features and capabilities to meet the particular needs of each customer we serve, integrating those features and capabilities as Ooma Business reduces complexity and allows for more focus both inside Ooma and with customers, partners and shareholders. In considering what makes Ooma Business special in the marketplace, our strength versus competition, drive from our ability to serve customers' specific needs better than others to deliver breakthrough features and tailored solutions, to provide disruptive value, to capitalize on the broad scope of our business and to extend our reach to encompass new unique customer solutions. I believe it's for these reasons that we are seeing great success today growing Ooma Business.

I will now turn the call over to Ravi to discuss our results and outlook in more detail. But as I mentioned at the outset, when I return, I will share our top level objectives that will guide our plan for next year.

Ravi Narula -- Chief Financial Officer

Thank you, Eric, and good afternoon everyone. I'll start with a review of our third quarter financial results and then provide our outlook for the fourth quarter and full-year fiscal '20. As a reminder, all income statement items except revenue are on a non-GAAP basis, and we have excluded expenses such as stock-based compensation, amortization of intangibles and restructuring charges. I will also be providing more details about the restructuring we undertook in the third quarter of fiscal '20.

Starting with the third quarter results, we ended the quarter with strong financial performance, achieving $39.6 million in revenue, above the high end of our previously issued guidance range of $38 million to $39 million. On a year-over-year basis, total revenue grew 21%, driven primarily by Ooma Business. Net income for the third quarter was $117,000, around $1 million better than the mid point of our previously issued loss guidance range of $800,000 to $1.2 million. We achieved profitability due to higher revenue and our focus on expense management. Achieving profitability is a significant milestone for us, as this is the first quarterly profit Ooma has reported since our IPO in 2015.

I'll now add some color to the Q3 revenue. Ooma Business accounted for 42% of total revenue as compared to 30% in the prior-year quarter. Business subscription and services revenue during the quarter grew 67% on a year-over-year basis. Excluding Broadsmart, Ooma Business subscription and services revenue grew 41%. We continue to be very pleased with the strong year-over-year organic growth in Ooma Business. We added several thousand more Business users in the third quarter from a specific large customer we had mentioned in our previous earnings call. We are excited about the continued progress we are making with this customer and we expect to add thousands more users from the customer during the fourth quarter. Adding users from this customer give us meaningful product and installation services revenue in addition to monthly recurring revenue.

With Ooma Residential subscription and services revenue in the third quarter growing 4% on a year-over-year basis, the combined subscription and services revenue from both Business and Residential grew 24% in the third quarter. Total subscription and services revenue as a percentage of total revenue for the third quarter was 92% compared to 91% for the same period last year. Product revenue for the third quarter was $3.1 million, up 10% year-over-year, primarily driven by sales to Business customers, including the one large customer I mentioned earlier.

Now, some key details on our key customer metrics our total core users increased to approximately 1,038,000 at the end of the third quarter of fiscal '20, up from 969,000 in the prior year quarter. 21% of our total core users are now Business users compared to 16% in the prior year quarter. Our blended average monthly subscription and services revenue per core user or ARPU increased to $11.13, up from $9.92 in the prior-year quarter, driven by the growth in Ooma Business users. Annualized exit recurring revenue was approximately $139 million, growing 20% on a year-over-year basis. Driven by business mix shift, we achieved solid net dollar subscription retention rate of 100% in the third quarter compared to 102% for the prior-year quarter.

Moving to gross margins. Subscription and services gross margins for the third quarter of fiscal '20 was 71%, driven by scale economies and also due to a one-time benefit in the quarter, which is why we expect fourth quarter subscription margins to be slightly lower at around 70%. Product and other gross margins were negative 36% for the third quarter compared to negative 30% for the same period last year, due to some higher product costs, including tariffs. Despite lower product and other gross margins, we are pleased with the increase in overall gross margins to 63% for the third quarter of fiscal '20.

Now some commentary on the operating expenses for the quarter. Third quarter fiscal '20 operating expenses were $24.8 million, a growth of $3.5 million or a 16% year-over-year increase. Sales and marketing expenses were $12.3 million or 31% of total revenue. These expenses were up 19% year-over-year, driven primarily by growth in sales headcount and increased marketing programs. Research and development expenses were $8.8 million or 22% of total revenue. These expenses were up 16% year-over-year, reflecting continued innovation in our technology platform, as well as development of new products and features. Given steps taken as part of the restructuring, we expect R&D expenses as a percentage of total revenue to be 20% or lower going forward.

G&A expenses were $3.8 million or 10% of total revenue compared to $3.5 million for the prior-year quarter to support the growth in our overall business. During the quarter, we turned profitable with net income of $117,000 or a $0.01 income per share compared to a $0.03 loss per share in the prior year quarter.

Now some details about the Q3 restructuring activity we undertook late in the quarter. As Eric mentioned earlier, we made a decision to stop selling Ooma Smart Cams, given the increased level of competition in the market since our acquisition of Butterfleye in 2017. Unfortunately, this restructuring activity did impact a number of personnel within the Company. All in, we incurred a $3.1 million restructuring charge in the quarter, comprised of a number of things; write down of existing camera inventory and certain other assets, severance expenses for the affected employees as well as write-off of certain intangibles. As we had only built a small amount of Smart Cam revenue into our previous revenue guidance, we do not believe this restructuring to impact our current or future revenue guidance materially, if at all. Additionally, on a go-forward basis, we expect to realize more than $3 million of annual cost savings from these activities. As this restructuring activity was undertaken late in the third quarter, we expect approximately $2 million of operating cash usage in the fourth quarter of fiscal '20.

Now on to EBITDA and balance sheet metrics for the third quarter. For the third quarter of fiscal '20, adjusted EBITDA profit was $589,000 versus a loss of $237,000 for the same period last year. At the end of the third quarter of fiscal '20, we had total cash and investments of $27.5 million with $627,000 of cash used in operations for the third quarter compared to cash usage of $1.3 million in the prior-year quarter. We ended the quarter with 765 employees and contractors, up from 667 in the prior-year quarter.

I will now provide guidance for the fourth quarter and full-year fiscal '20 and some high level commentary for fiscal '21. Our guidance is non-GAAP and has been adjusted for expenses such as stock-based compensations, amortization of intangibles and restructuring expenses. For fourth quarter fiscal '20, total revenue is expected to be in the range of $39.6 million to $40.3 million. We expect non-GAAP net income to range between breakeven to a profit of $400,000. Non-GAAP net income per share is expected to be between $0.00 to $0.02. We have assumed 22.5 million weighted average diluted shares outstanding for Q4.

For full-year fiscal '20 total, revenue is expected to be in the range of $150.5 million to $151.2 million, an increase of $2 million from the midpoint of the previously provided guidance range. This revenue guidance reflects our increased confidence in the growth of Ooma Business. We now expect non-GAAP net loss to be in the range of $1.4 million to $1.8 million, an improvement of more than $2.5 million from the midpoint of the previously provided guidance range. Non-GAAP net loss per share for the full-year fiscal '20 is expected to be in the range of $0.06 to $0.08. We have assumed approximately 21.1 million weighted average shares outstanding for fiscal '20.

Before I end my prepared remarks and pass it back to Eric, I want to highlight to you that we expect full-year fiscal '21 to be slightly positive, as well as generate slightly positive cash from operations. But those forecasts are not expected to be linear, there may be some seasonal puts and takes in our quarterly results, which could cause either of those metrics to fluctuate through the next year. I expect to be able to provide clearer guidance for both net income and cash flow for fiscal '21 on our next quarterly earnings call after we have finalized all our planning this year.

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

Eric Stang -- Chief Executive Officer

Thanks, Ravi. Looking ahead to next year, as I've outlined our focus will be on the Ooma Business. But that said, we intend to grow in all parts of Ooma, including Residential. We expect to drive R&D to less than 20% of sales for the FY '21 fiscal year and to be non-GAAP net income positive in FY '21. Our level of growth will depend most on how well we execute our Sprint partnership, on the impact we can realize from our new Ooma Office Pro tier service and other product and feature advances we planned for next year, on how successfully we can expand our reseller and VAR relationships and more generally, all of our sales and marketing activities for Ooma Business and on the degree to which we can continue to employ unique solutions to capitalize on large customer opportunities. We will update you further on the impact we see from these initiatives in our next earnings call when we provide our financial guidance and outlook for fiscal year '21.

And, thank you, we are now happy to take questions.

Questions and Answers:

Operator

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

Matt Stotler -- William Blair -- Analyst

Hey, this is Matt Stotler on for Bhavan. Thanks for taking the questions. So, first, I would love to dig into the Sprint partnership a little bit more. Obviously, it's still early days and especially giving the announcement today, but maybe we could talk about any sort of exclusivity that you have with this partnership, whether on your side or on the Sprint side. And in that context, are you looking for potential additional partnerships in the future? And if Sprint is offering multiple products here, how they are positioning Ooma versus the other offerings? That would be very helpful, thanks.

Eric Stang -- Chief Executive Officer

Sure, hi. It takes time for a big company like Sprint to implement and move forward with something new like what we're doing with them. But we're pretty excited about this and I know they are as well and I believe we're both very, very committed to what we're doing together. They've launched a solution called Omni. It is under their name, but it is Ooma Office, however, for the customer and I believe that puts us in a very strong position with Sprint, because we are not exclusive, but some of the other things they sell or not that tightly integrated with Sprint. Was there a third question?

Ravi Narula -- Chief Financial Officer

Other partnerships.

Eric Stang -- Chief Executive Officer

Oh, yeah, are we looking for other partnerships? We always consider that and I do think we are well set up to do additional partnerships, but we don't have anything to announce today.

Matt Stotler -- William Blair -- Analyst

Right. Okay, very helpful. And then just one more from me, as far as investment priorities regarding Ooma Office and then Ooma Business more largely, you've spoken about your investment priorities being the round out the core feature set before pivoting to new Office services or Business services that can provide additional revenue opportunities. So, just wondering if you can speak to what pieces you're investing into round out the core offering today and where you're looking to -- or where you're looking at regarding additional revenue opportunities over the next several years? Thank you.

Eric Stang -- Chief Executive Officer

Sure. Good question, I appreciate that. What we've -- just today, almost two days ago I think the press release went out, made our first big step forward in what I've been talking about in this regard with the announcement of Ooma Office Pro. Ooma Office Pro is a new tier of service that offers advanced features for a larger size small business, as I said in my remarks. And that includes key features such as call recording, blocking telemarketers, voice mail transcription and some other things that aren't in standard Office today.

We will continue to fill out that tier with some additional capabilities to make it even stronger, but the key thing is whatever we're doing going forward here is focused on a new tier of service where we can charge more money and have a greater result with our customers. Beyond just filling out Ooma Office Pro with some further features as we look forward, we are looking at other opportunities to expand in what we provide to our customers and we will work in some cases with our partners to do those things, other cases, there'll be things we do ourselves, but we're excited because being a company that designs the solution end-to-end from what goes in the customers' premise, all the way through the cloud and the mobile apps, etc, we have the capability to evolve in, I think, some new ways that we don't see others doing in the industry today. But we don't have more to say on that at this time, so hope that helps.

Matt Stotler -- William Blair -- Analyst

Absolutely. Thank you very much and great results again, guys. Thank you.

Eric Stang -- Chief Executive Officer

Thank you.

Ravi Narula -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Michael Latimore from Northland Capital. Your line is open.

Michael Latimore -- Northland Capital Markets -- Analyst

Hi, thanks. Sorry, I'm in a little background noise. I think on the -- Eric, you mentioned merging the platforms. Can you talk a little bit more about that? Is that -- does that include the Broadsmart or like just a little clarity on kind of the emerging of the platform and how long that might take?

Eric Stang -- Chief Executive Officer

Yeah. I didn't actually I think say merging the platforms from a -- at least a complete technical perspective. There are things about these platforms that will be common and it is possible for us today to serve a customer with elements from each of the platform, so to speak, working together in one seamless solution for the customer. But we're not trying to do some great rearchitecture to put everything together technically in one form. We just don't think there's a need to do that, but we do intend from a marketing and sales perspective and from a customer relations perspective to be a company that can meet a range of their needs depending on what those are and they don't need to get too concerned with how we do it and that what we're thinking about when we talk more about Ooma Business, the ability to satisfy a small business with a very curated feature set and the ability to step up from there with more advanced solutions if the business needs more. So, that's mostly the way we're thinking about it, although there is some commonality and certainly linkages across each of the things we use today to provide service and there will be more of that over time, but we're not really merging things, so to speak.

Michael Latimore -- Northland Capital Markets -- Analyst

Okay, thanks for the clarification. And then on the opex side of things, I mean, roughly what percent of opex, should we think about going to the Residential piece of your business at this point?

Ravi Narula -- Chief Financial Officer

Hey, Mike, this is Ravi. It's very hard, given we have the same data centers, same -- there's a lot of similar infrastructures, but which is there G&A is one common expense, sales and marketing, there are some benefits when we invest into Residential. We get the benefits on Business and vice versa. So it's hard to have a good quantification of it, but at a very high level, there is significant cash being generated from the Residential at this time. But how do -- how much do I -- how can I quantify? I think it's hard to quantify, given lots of other things are all together, platform also [Phonetic].

Michael Latimore -- Northland Capital Markets -- Analyst

Okay. And just last one --

Ravi Narula -- Chief Financial Officer

But we are generating positive cash from Residential.

Matt Stotler -- William Blair -- Analyst

On Residential, yeah. Okay and then just the revenue guidance sequentially is sort of flattish. Is that just given some of this -- the Smart Cam dynamic there or anything, any comment on that, I guess, given the strong growth of you guys?

Ravi Narula -- Chief Financial Officer

Not really. I do feel all the fundamentals of the business are very strong. It's just, there is some seasonality, especially on the Business side in during November-December -- holiday period and some weather related. So that could be -- that's probably the only reason I would say the guidance could be flattish to slightly above, but otherwise -- but if -- but we have incorporate -- we have had good experiences on these and I feel there could be -- we are well positioned to execute on the guidance we have given, so I do feel very good about it.

Michael Latimore -- Northland Capital Markets -- Analyst

Okay, great. Thanks a lot. Excellent results.

Ravi Narula -- Chief Financial Officer

Thank you.

Eric Stang -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Aman Gulani [Phonetic] from B. Riley FBR. Your line is open.

Aman Gulani -- B. Riley FBR -- Analyst

Hey, thanks for taking my question and great quarter and really nice to see some of these new offerings rollout, especially Ooma Office Pro. How would you say that's tracking so far? What is your expectations for converting standard Office users to the new Office Pro platform?

Eric Stang -- Chief Executive Officer

Our expectations are more around expanding our addressable market with this capability, and so, using it more from a growth perspective. Most of our existing customers are happy with the solutions they have or they want to fund with Ooma. So I don't see us adding Office Pro to most of our current installed base, but we do -- the day we launched it, we had customers signing up for it, which we're glad to see. We've had some customers waiting for it. So there's a little bit of that, but mostly it's an opportunity to expand the customers we can serve and to help drive our growth.

Aman Gulani -- B. Riley FBR -- Analyst

Got it. Thank you. That's helpful. And then, you previously mentioned on your last calls, you were talking about the integrated solution that combines Broadsmart and Ooma Enterprise for a large customer in the retail vertical. I just wanted to get a sense for how that relationship is progressing and if you could size that potential opportunity. I know you did mention that could be -- it could be pretty meaningful.

Eric Stang -- Chief Executive Officer

Yeah, first of all, I don't know that we've ever said what vertical it's in, but we already have a very meaningful business relationship with this large customer. We added several thousand users in Q3 and our outlook is we'll do that again in Q4, which we're excited about. This company is a large multinational and we are hopeful to continue to be expanding with them in new areas and new ways as we look forward, but some of that's undefined and it's up to us to keep working with them and try to bring new opportunities to fruition. So I think I said in my remarks that we do expect to continue to grow with them next year, but on a more limited basis, given the big accomplishments we've already put in place this year.

So to me this customers not only important in of itself, but I think it's representative of what Ooma is capable of today. This customer loves our Ooma Office capabilities for large portion of their user base, but they also need more Enterprise like features and even some custom-tailored solutions just for what they do for some of their users, and we are able to integrate all that together in a way that just gives them a great Ooma Business solution. And as we look forward that strategy of being able to serve very large customers who have that kind of need to be to be met is an opportunity for us and it's one of the things we look to next year for to see if we can deliver. So excited about it as much for what it says, Ooma's is capable of doing today as much as what they are contributing to these quarters.

Aman Gulani -- B. Riley FBR -- Analyst

Thank you. Okay, just last question from me. With these new business solutions rolling out, are you starting to see an increase in the average number of seats?

Ravi Narula -- Chief Financial Officer

Yeah, we do have -- we do have seen, it's -- we have a big base of customers. So any new customers coming in with the higher seats, will take -- the average will take time to move up, but we are seeing our average seats per customer going up over the last six to 12 months. So we are actually seeing some improvements there. But the average is not going to move meaningfully, because of the existing large base there, but we are seeing upside. We are seeing some improvement there.

Aman Gulani -- B. Riley FBR -- Analyst

Okay, thank you. I'll jump back in the queue.

Eric Stang -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Nick Farwell from Arbor Group. Your line is open.

Nicholas Farwell -- Arbor Group -- Analyst

Ravi, can you hear me? I'm on a...

Ravi Narula -- Chief Financial Officer

Yes, Nick, yeah. Hi, Nick.

Nicholas Farwell -- Arbor Group -- Analyst

That's great, thank you. I noticed that sequentially, COGS were up about just shy of $2.7 million. If you had a restructuring charge, did fall in that category and if so, can you provide us some detail?

Ravi Narula -- Chief Financial Officer

Yeah, Nick. Good question. When we -- there are two big elements, so as said, $3.1 million was restructuring charge.

Nicholas Farwell -- Arbor Group -- Analyst

Correct.

Ravi Narula -- Chief Financial Officer

Of that, we wrote off Smart Cam inventory as well as commitments we had. We wrote of intangibles and both of those comprised of the significant majority of the $3.1 million which all goes into product COGS, so intangibles because it was at the time of acquisition, it goes into -- for a GAAP accounting, it goes into product cost, as well as Smart Cam inventory and commitments we had, they all go into that. So that's why we have non-GAAPed it, but -- to give you a complete picture of the regular business operations, but it's all driven because of Smart -- because of the restructuring charge. And then as we -- we did impact some number of employees which ranged in R&D, sales and marketing, but there were a couple of people in customer support also. So, all of that went into the cost side and that's what you're looking at, largely speaking.

Nicholas Farwell -- Arbor Group -- Analyst

Okay, so --

Ravi Narula -- Chief Financial Officer

If I take out the restructuring expense, you wouldn't see any major shifts in expenses, as you would have seen otherwise.

Nicholas Farwell -- Arbor Group -- Analyst

Okay. So just so I have -- I'm sure I understand, $2.1 million was in product COGS. The other $1 million was basically written off against R&D I presume, virtually all R&D in the restructuring of the two programs. Is that right?

Ravi Narula -- Chief Financial Officer

There is some sales and marketing also which includes severance for some folks in sales and marketing and R&D, but otherwise a little bit more than $2 million -- more than $2 million went into product COGS.

Nicholas Farwell -- Arbor Group -- Analyst

Okay, that's it. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Pat Walravens from JMP Securities. Your line is open.

Mark -- JMP Securities -- Analyst

Hi, this Mark [Phonetic] for Pat. Thank you so much for taking my question. So I'm just wondering in terms of a large customer you have, I'm wondering are there any maybe similar type of customer or how do you kind of maybe you think about to attract more similar type of customer going forward?

Eric Stang -- Chief Executive Officer

Yeah, we do see customers out there. We think about our strategy and how we want to build our business. We do when we do that see other types of customers out there that have similarities to the customer we're serving today and we may be able to leverage directly what we've built for this one large customer, or we may have to do other customizations for those customers. But at the core of it, it's a customer who has a need for a very simple reliable, easy to use, easy to set up solution for some of their user base along with some special needs at, perhaps, a corporate center or another level where they need to have some unique capabilities introduced into the system. Our biggest strengths as a company are around of our ability to serve 90% of the businesses in America with a turnkey solution that is -- it brings those capabilities I just mentioned a minute ago, combined with the ability at the enterprise level to easily customize and tailor solutions for our customers. Our Enterprise solution is very flexible for that. So we want to leverage that and, yeah, there are other customers, maybe not exactly in the same business as the one we're serving today, but with similar type of needs where we can do that and in some cases, we have conversations under way and other cases, we are targeting opportunities, but part of our strategy for next year is to try to do more of that to help drive our growth.

Mark -- JMP Securities -- Analyst

That's really helpful. Thank you so much.

Eric Stang -- Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. I will now turn the call back to Eric Stang for closing remarks.

Eric Stang -- Chief Executive Officer

Thanks everyone. Thanks for joining us today. We are committed to building shareholder value and taking the steps necessary to achieve that and I think you saw some moves by us in this Q3 toward that and we intend to continue to drive that focus and drive the focus of the Company to achieve the results we want to have. So, thank you and I think with that we'll end the call. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Matthew S. Robison -- Director of Investor Relations and Corporate Development

Eric Stang -- Chief Executive Officer

Ravi Narula -- Chief Financial Officer

Matt Stotler -- William Blair -- Analyst

Michael Latimore -- Northland Capital Markets -- Analyst

Aman Gulani -- B. Riley FBR -- Analyst

Nicholas Farwell -- Arbor Group -- Analyst

Mark -- JMP Securities -- Analyst

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