Ooma Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 27, 2024

There are 10 speakers on the call.

Operator

Thank you for standing by, and welcome to Ooma's Second Quarter Fiscal Year 2025 Financial Results Conference Call. At this time, all participants are in a listen only mode. I would now like to hand the call over to Matt Robison, Investor Relations. Please go ahead.

Speaker 1

Thank you, Latif. Good day, everyone, and welcome to the fiscal Q2 2025 earnings call of Ooma, Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development.

Speaker 2

On the call with

Speaker 1

me today are Ooma's CEO, Eric Stang and CFO, Shig Hamamatsu. After the market closed today, Ooma issued its fiscal Q2 2025 earnings press release. This 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 and Presentations page of the Investor Relations section of our website. This link will be active for replay of this call for 1 year.

Speaker 1

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 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 and those risks are not 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.

Speaker 1

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 is included in our earnings press release, which is available on our website. On this call, we will give guidance Q3 and full year fiscal 2025 on a non GAAP basis. Also, in addition to our press release and 8 ks filing, the overview page and events and presentations page in the Investors section of our website as well as the Quarterly Results page of the Financial Information section of our website include links to information about costs and expenses not included in our non GAAP values and key metrics of our core subscription businesses.

Speaker 1

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

Speaker 3

Thank you, Matt. Hi, everyone. Welcome to Ooma's Q2 fiscal year 2025 earnings call. Thanks for joining us. We have great results to present for Q2 and new developments to report as we look ahead.

Speaker 3

I look forward to reviewing our progress and outlook with you. Financially, Q2 was a strong quarter as we outperformed on all of our major financial goals. Q2 revenue was 64,100,000 dollars and Q2 non GAAP net income was $4,100,000 Both results were above guidance and up nicely versus Q1 of this year. Q2 cash flow from operations was $7,100,000 which is close to double what we achieved both in Q1 of this year and in Q2 a year ago. With the improved cash flow, we were able to reduce our debt by $3,000,000 in the quarter to $8,500,000 at the end of Q2.

Speaker 3

We also spent approximately $1,800,000 in Q2 to repurchase stock to help offset dilution from vesting of stock grants. It's great to be ahead of where we thought we would be financially at this point in our fiscal year. As in Q1, Ooma Business, which comprises our UCaaS, POTS replacement and wholesale solutions performed well in Q2. Ooma Office, our small business UCaaS solution was buoyed by new feature releases, including several customer engagement features to enable our customers to connect more effectively with their customers and 2 new integrations, 1 with Square and the other with Intuit QuickBooks. The release of features such as these helps enable Ooma Office customers to trade up to a higher price service tier and also expands the appeal of Ooma Office to businesses of a larger size.

Speaker 3

In this vein, we're excited about our development roadmap for Ooma Office, which includes leveraging the capabilities of our 2,600 Hertz acquisition to launch more sophisticated call center features later this year. Ooma Airdial, our POTS replacement solution also made good progress in Q2. We further enhanced our differentiation versus other solutions with the launch in Q2 of call alerts, which informs customers when air dial calls are placed and can be a critical value in life safety applications. We believe we are the only POTS replacement provider to offer this feature. Likewise, our investment to expand our sales and marketing reach is generating more opportunities and sales momentum.

Speaker 3

Once again, in Q2, we closed more new customers for AerDIAL than any previous quarter. As in prior quarters, we also added new AerDIAL resellers in Q2. Here I have some special news. We've been told by an incumbent local exchange carrier that they plan to resell Aerodial beginning later this year. This is exciting because of the size and scope of this new partner who we believe is one of the top 10 largest service providers in America.

Speaker 3

As a large incumbent carrier, they have a vast number of customers they serve today with POTS lines that will ultimately need to be replaced. We expect to be able to provide more detail about this, including the timing for launch on our Q3 conference call. We believe this is a breakout win for AerDyle. 2,600 Hertz, our wholesale and developing CPaaS solution saw expanded customer interest in Q2 both domestically and internationally. We are increasingly excited by the level of interest in the 2,600 Hertz platform and scope of market opportunity in part due to the Metaswitch end of life announcement and the effect this is having in the marketplace.

Speaker 3

We believe the leading capabilities of the 2,600 Hertz platform, enhancements we are making by integrating Ooma technology and applications into the platform and the steps we are taking to broaden the platform to serve select CPaaS applications are all driving strong customer interest. As well, the aging nature of competitive platforms is driving market opportunity. You'll recall, we announced a very large customer win for 2,600 Hertz last quarter and believe this customer will become one of our largest customers in the future. I'm pleased to report that we are on track to launch with this customer this fall. I'm also pleased to report that in Q2 this customer chose to expand the scope of our relationship and adopt more capabilities of the 2,600 Hertz platform than originally envisaged.

Speaker 3

We were able to upsell this customer to a more turnkey solution, thanks to our efforts to integrate Ooma applications and technology into the 2,600 Hertz platform. While this customer is of course receiving a lot of our attention, I'm also pleased to report they are not the only new 2,600 hertz customer we expect to roll out with this fall and we see a significant and growing pipeline of opportunity. It's difficult to foresee the revenue we will drive in the back half of this year from 2,006 100 Hertz expansion, but we anticipate positive momentum. On the residential front, Umitelo also performed well in Q2. We remain excited about the residential market opportunity, especially now that residential POTS lines are also increasing in cost and starting to sunset.

Speaker 3

We believe TELO can be an ideal solution to replace residential copper lines. In this regard, I'm extremely pleased to report that the large incumbent local exchange carrier I mentioned earlier has also told us that they plan to replace the residential copper lines across their business with Umitelo and they are actively engaged with us to start doing so. Together, we have selected one local market to launch this fall as a test to refine the deployment process. We anticipate this carrier will resell the TELUS solution and convert their residential copper base over time. We expect this first market rollout to begin late in our Q3.

Speaker 3

And we expect to be able to provide more information on our next earnings call. While we don't yet have clear visibility to predict the impact of this on our business, we can say that the market potential afforded by this carrier is very large indeed and is meaningful relative to the size of our current residential business. Before I turn it over to Shay, I'd like to make one more comment about Ooma's strategic direction. We are fortunate to have invested in several premier solutions with tremendous market potential. In doing so, we have spent heavily on creating these solutions and developing our current strategic position.

Speaker 3

As such, as we look forward, we feel we are reaching a turning point where we can increasingly capitalize on the investments we've made and the market opportunity they afford. In this regard, we also anticipate that we can drive increased bottom line results as we endeavor to capitalize on our competitive advantage and succeed in our target markets. I'll now turn the call over to Shig, our CFO to discuss our results and outlook in more detail and then return with some closing remarks.

Speaker 4

Thank you, Eric, and good afternoon, everyone. I'm going to review our Q2 financial results and then provide our outlook for the Q3 and full year fiscal 2025. Our 2nd quarter revenue was $64,100,000 solidly above the high end of our guidance range and was up 10% year over year, driven by the strength of Ooma Business as well as the addition of 2,600 Hertz. In the second quarter, we saw better than expected revenue contributions from many of our offerings, including air dial and 2,600 Hertz. Also, we did not see any material seat reductions from IWG during the quarter, although we now believe the reductions we had originally anticipated in Q2 have been deferred to the second half of this fiscal year.

Speaker 4

In the 2nd quarter, business subscription and services revenue accounted for 60% of total subscription and services revenue as compared to 57% in the prior year quarter. Q2 product and other revenue came in at $4,600,000 as compared to $3,600,000 in the prior year quarter. On the profitability front, the 2nd quarter non GAAP net income was $4,100,000 above our guidance range of $3,600,000 to $3,900,000 Now some details on our Q2 revenue. Business subscription and services revenue grew 15% year over year in Q2, driven by user growth and the addition of 2,600 Hertz. Excluding 2,600 Hertz revenue contribution, business subscription and services revenue grew 9% year over year.

Speaker 4

On the residential side, subscription and services revenue was down 1% year over year. For the Q2, total subscription and services revenue was $59,600,000 or 93% of total revenue as compared to $54,700,000 or 94% of total revenue in the prior year quarter. Now some details on our key customer metrics. We ended the 2nd quarter with 1,244,000 core users, which is up from 1,239,000 core users at the end of the Q1. At the end of the second quarter, we had 500,000 business users or 40% of our total core users, an increase of 12,000 from Q1, driven by user additions for Ooma Office, Ooma Enterprise and AirDile.

Speaker 4

Our blended average monthly 3 subscription and services revenue per core user, or ARPU, increased 4% year over year to $15.07 driven by an increase in mix of business users, including higher ARPU Office Pro and Pro Plus users. During the Q2, we continued to see a healthy Office Pro and Pro Plus take rate with 58% of new office users opting for these higher tier services, which was up from 55% in the prior year quarter. Overall, 31% of Ooma Office users have now subscribed to these higher tier services. Our annual exit recurring revenue grew to $233,000,000 and was up 8% year over year. Our net direct subscription retention rate for the quarter was 100% as compared to 99% in the Q1.

Speaker 4

Now some details on our gross margin. Our subscription and services gross margin for the Q2 was 72% as compared to 72% in the prior year. As a reminder, subscription and services gross margin for the Q2 this fiscal year included an impact of 2,600 hertz gross margin, which is running lower relative to Ooma subscription gross margin. Product and other gross margin for the Q2 was negative 69% as compared to negative 73% for the same period last year. As anticipated, we have substantially completed consumption of higher cost components we had procured during the pandemic in the Q2.

Speaker 4

Accordingly, we expect product and other gross margin will start to normalize in the negative 55% range in the second half of this fiscal year. On an overall basis, total gross margin for Q2 was 62% as compared to 63% in the prior year quarter. And now some details on our operating expenses. Total operating expenses for the Q2 were $35,200,000 up $2,000,000 or 6% for the same period last year. Excluding the impact of 2,600 Hertz, the total operating expenses increased $200,000 from the same period last year.

Speaker 4

Sales and marketing expenses for the 2nd quarter were $17,600,000 or 27 percent of total revenue was down 1% year over year as we controlled our spending to increase profitability. Research and development expenses were $12,200,000 or 19% of total revenue, up 15% on a year over year basis, driven mainly by the addition of 2,600 Hertz team members. G and A expenses were $5,400,000 or 8% of total revenue for the Q2 compared to $4,900,000 for the prior year quarter. The year over year increase in G and A expenses was primarily due to increases in personnel and audit related costs. Non GAAP net income for the 2nd quarter was $4,100,000 or diluted earnings per share of $0.15 as compared to $0.15 in the prior year quarter.

Speaker 4

Adjusted EBITDA for the quarter was $5,600,000 a record for the company or 9% for total revenue as compared to $4,900,000 for the prior year quarter. We ended the quarter with total cash and investments of $16,600,000 Cash generated from operations for the Q2 was strong and at $7,100,000 it was a new quarterly record for the company. On a trailing 12 months basis, we generated a record $18,000,000 of operating cash flow and $12,000,000 of free cash flow, which represented 69 percent and 154 percent increase respectively over the same period a year ago. We paid down the debt by $3,000,000 in the 2nd quarter and reduced the outstanding debt balance to $8,500,000 On the headcount front, we ended the quarter with 11.30 employees and contractors. Now I will provide guidance for the Q3 and full fiscal year 2025.

Speaker 4

Our guidance is on a non GAAP basis and has been adjusted for expenses such as stock based compensation, amortization of intangibles and certain non recurring gains and expenses. We expect total revenue for the Q3 of fiscal 2025 to be in the range of $64,200,000 to $64,600,000 which includes $4,300,000 to $4,500,000 of product revenue. We expect 3rd quarter net income to be in the range of $4,100,000 to $4,300,000 Non GAAP diluted EPS is expected to be between $0.15 $0.16 We have assumed $27,500,000 with average diluted shares outstanding for the 3rd quarter. For full fiscal 2025, we are raising both revenue and profitability outlook. We now expect total revenue of $254,000,000 to $255,500,000 The full year fiscal 2025 revenue guidance assumes business subscription and services revenue growth rate of approximately 13% over fiscal 2024, while residential subscription revenue to decline 1%.

Speaker 4

In terms of revenue mix for the year, we expect 93% to 94% of total revenue to come from subscription and services revenue and the remainder from products and other revenue. As for non GAAP net income, we now expect it to be in the range of $15,700,000 to $16,200,000 Based on this guidance range, we estimate our adjusted EBITDA for fiscal 2025 to be in $21,500,000 to $22,000,000 We expect non GAAP diluted EPS for fiscal 2025 to be in the range of $0.57 to $0.59 We have assumed approximately 27,500,000 weighted average diluted shares outstanding for fiscal 2025. In summary, we are pleased with our solid Q2 results with record adjusted EBITDA and free cash flow and remain focused on executing to our long term strategy to achieve profitable growth. I'll now pass it back to Eric for some closing remarks. Eric?

Speaker 3

Thank you, Shig. It's been a pleasure to talk with you today about our great Q2 results and our progress to grow our business. The next few quarters should be very interesting for Ooma as we attempt to roll out and expand new customer relationships and we look forward to being able to share more with you as these opportunities unfold. Thank you. We will now take questions.

Operator

Thank you. Our first question comes from the line of Brian Kinstlinger of Alliance Global Partners.

Speaker 5

Great. Thanks so much for taking my questions. Just a couple. The first one is, are there any updates on the sales cycle or install pace for air dial customers, the enterprise lines?

Speaker 3

Nothing special to report. We've talked about the sales cycle and pace in the past and about how customers sometimes start with a portion of their needs and even proof of concepts before they move to full rollout. But all the pressures are there in the market and we do see the market developing as we'd expect as potlines become even more expensive and more sunset. But no, it's still a process with the larger customers. With the smaller customers, we can move pretty quickly.

Speaker 3

Most often when you've got a customer that just needs a few lines, we'll have it installed within a month.

Speaker 5

Great. Thank you. And then you talked about the top 10 service provider in the U. S. Selling Third Eye to its residential customers.

Speaker 5

Is the sales, the execution of the sale on them? And will we see let me change it. Do you expect to see the residential customers and users begin to increase in the second half of the year or early next year? How do you think this might impact your results on the residential side?

Speaker 3

Yes. Well, first of all, to clarify, this incumbent local exchange carrier, I talked about they're doing 2 things with us, with their reselling AirDial, which will go to their business customers, which they have a lot and reselling Ooma Telo, which will go to their residential customers, which they also have a lot. I think both are quite significant for us as a company, but I'm not yet ready to give guidance on what we'll mean for next year. But these are terrific, terrific new opportunities for Ooma. We believe we're the only provider they're working with.

Speaker 3

And since they own or manage all of these residential and business copper lines, they have direct customer access, they have trucks they can roll out to switch customers over. They have the ability to move at whatever pace they choose to move. And so it's we expect it to be a very exciting opportunity for us that will unfold, particularly over the next 3 or 4 months as they go through the trial on the residential side, which I mentioned, and as they get the air dial product launched into market.

Speaker 5

I want to follow-up on that. You mentioned they can move as fast as they want. So the consumer, the user on a residential side won't have to opt in?

Speaker 3

These are residential consumers that they have today. They do have to give, I think, maybe a 90 day notice for some laws that exist around this. But if they're going to shut off your pots line, your residential line and they give you that 90 day notice, as a residential customer, I guess, you have a decision to make. You can say, yes, come in and switch it out with a TELO or you can say, don't. But they have control over their customers and how they handle them, I believe.

Speaker 5

Great. That's helpful. Last question for Shay. I asked this last quarter too, but with revenue in the Q3 and Q4 looking similar to what was just reported with a similar mix and the gross margin of hardware coming down by 15 points or more, I guess I'm wondering why the adjusted net income guidance looks similar in the Q3 Q4 compared to what was reported in the second quarter, Hope that makes sense.

Speaker 4

Yes, I understand. So part of it is, obviously, the guidance for revenue, let's say, first includes the impact of anticipated churn. Now it has slipped from Q2 to second half with IWG I talked about. So there's a little impact of that is factored in, in the second half. And also, the product revenue, I think I guided to 4.1% to 4.3% in Q3.

Speaker 4

Some of those product revenue, by the way, what I'm going to say is unrelated to airdial, so something other than airdial. There are some one time installations that we're expecting in Q3 that may not recur in Q4. So there's some one time revenue plus in Q3 that's not a recurring Q4. And also this recent impact is impacting the revenue pace Q3 versus Q4. And yes, so those are main drivers.

Speaker 4

I think the Q3 I mean, excuse me, Q2 sales and marketing spend, we controlled well. We made sure that we're investing in the right channel. But to the extent that we want to look closely at the opportunity to invest some more dollars into sales and marketing, maybe in the 28% range instead of 27%. So there's some puts and takes that's leading to the guidance number. But having said that, we're still looking at the 9% EBITDA based on our guidance EBITDA margin for second half, which should put us to 9% EBITDA margin for the whole year.

Speaker 4

So that's versus 8% what we guided to coming out of the year. So I think there was some more work we can do to improve, but we're happy to say what we are going into second half to improve the profitability much better than what we guided to at the beginning of the year. Okay. Thanks. I think that the other thing, Brian, so just finish up my thought.

Speaker 4

There's a little bit of seasonality to the G and A expense, namely to audit fees. We get billed more in the second half as we get into the kind of a heavier set of audit cycle in the year. So that's the other factor impacting the OpEx, a little bit higher for G and A in the second half.

Speaker 5

Okay. That makes a little more sense because it sounds like you're going to save $1,000,000 on hardware gross margin with the exact same split of revenue. So to me that $1,000,000 maybe it's explained by G and A, but other than that it was a bit

Speaker 4

Yes, maybe I should probably say that first, but that's one of the bigger factors in thinking about how we model that next two quarters.

Speaker 5

Okay. Thank

Speaker 4

you. Yes. Thank you.

Operator

Thank you. From the line of Mike Latimore of Northland Capital Markets.

Speaker 6

All right, great. Thanks. Yes, great results and some interesting updates here. I guess, first on 2,600 Hertz, obviously, you have a nice big customer you're launching. I guess, as you look at the pipeline, is the pipeline more skewed towards sort of a wholesale model or a CPaaS customer?

Speaker 3

Well, I think it's more skewed towards the wholesale model today. We have many customers talking with us who have metaswitch in particular and are trying to figure out what they're going to do next. And the CPaaS model is something that's evolving for us. We did make some advances on that front in Q2 that I didn't even get into in my script to start the process of strengthening what we do for that type of service delivery. But no, the very big opportunities that we're chasing today are largely wholesale opportunities.

Speaker 3

One though that comes to mind is CPaaS where we'd be replacing another CPaaS provider. So it's a little bit of both, but that's how we see it.

Speaker 6

Okay. And the ILEC announcement is very interesting. I guess, did you say that you are the exclusive vendor into the business channel there or is it the preferred vendor?

Speaker 3

What I said is, we believe we're the only vendor for a pots replacement solution and we believe we're the only vendor for a residential copper line replacement solution. We think they're working only with us and we're I mean, that doesn't that shouldn't be surprising though. I mean, if you look at the products in the market today, are the features and capabilities of our airdial solution stand above others. And similarly, our residential solution has been rated the number one phone service in America by Consumer Reports for like 10 years. But yes, we think that this is a it's a very new it's a breakout for us because it's the 1st partner we've signed up who has their own residential lines to go replace themselves.

Speaker 3

And it's also the first time we've signed up a partner who's going to take our residential solution into the residential marketplace. Both of those are big, big wins for us. And the fact that this is a, we believe, a top 10 ILEC in the country, this is this could turn out to be quite significant for Ooma over time.

Speaker 6

And have they do they have a sort of drop dead date where their pipeline go away and would be a catalyst for both these segments here?

Speaker 3

I will answer that a little bit differently by saying I think they are eager to move forward.

Operator

Okay. All

Speaker 6

right. Makes sense. Great. Thanks very much.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from the line of Josh Nichols of B. Riley.

Speaker 7

Yes, thanks for taking my question. Good to see some upside on the top line, not just for the quarter, but for the year. It sounds like you got a few irons in the fire, but I'm kind of curious if you were to think about the back half and the upside revenue guidance. How would you attribute that if you were to kind of bifurcate it between the core business offering that you guys have air dial and 2,600 Hertz? How is that being driven?

Speaker 3

Well, our core business offering is our business solutions. And whether it's delivered whether they're delivered in a wholesale way with 2,600 Hertz or to small businesses with Ooma Office or larger businesses and particularly hospitality and hotels with Ooma Enterprise or our POS replacement solution, which is more akin to our residential solution in some respects. It's we focus on growing all of those and all of them are growing. And now the market dynamics are a little different across the 3. I mean the competitors we face and the competitive position we have is different across all 3.

Speaker 3

And 2 of them wholesale and POS replacement aren't traditional UCaaS. And I think that's a it's nice to be diversified as a company across different areas. But even our UCaaS solution given our focus on small business sets us apart from most of the rest of the industry. It's our intent to grow all 3 and grow all 3 well. Now obviously, Airdial is growing off a smaller base.

Speaker 3

So not surprisingly, I think it'd be fair to say that's the fastest growing of the 3 segments today. But we announced a huge customer win a quarter ago. It's funny how it's almost old news now, but they'll be rolling out this fall. And as I said, we expect them to get to be one of our very largest, if not largest customers over time. And that's just one win on the wholesale front.

Speaker 3

So we've got great opportunities across all three and we kind of look at it as Zuma business today. A lot of our teams are combined. We try to drive synergy across all three of those areas.

Speaker 7

Thanks. And then, I know the 2,600 Hertz margin profile is a little bit lower, but the company has actually seen subscription and services gross margins start to increase again sequentially at least for the last couple of quarters. I'm just curious when you look at that piece of the business, Shig, do you think that there's room for that margin to continue to expand from current levels in the back half now that the integration is largely complete? Or what are the margin thoughts for the subscription piece in the back half?

Speaker 4

Yes. We're starting to think that there's more room to improve on 2,600 Hertz and team is constantly working on the opportunity to and do that. I think for the remainder of the year, we're still projecting around 72 percent margin, round number. Part of it is, while we continue to increase the 2,600 hertz specific gross margin that we probably will continue to invest a little bit more into their dial support, things of that nature. So there's a little bit of offsetting going on.

Speaker 4

But certainly, going into next year, obviously, when I guide into next year, but we should start to see another additional step of improvement on subscription gross margin as we continue to grow the business subscription revenue.

Speaker 7

Thanks. So then I guess like last question for me in terms of timing, it looks like you have a lot of stuff that's starting to come online in the second half of this year, some new air dial opportunities as well that you've talked about recently, as well as 2,600 hertz that seems to be benefiting from the MetaSwitch news. Fair to assume whenever you look at like how you guys have laid out the guidance for this year that well, you're not providing any formal guidance for next year that you would expect at least a decent acceleration in growth rate based on kind of the irons that you guys have in the fire today at least on the subscription piece?

Speaker 3

Well, that's certainly what we're driving towards. And I do think these large customer wins have the potential to be a real adder to our growth rate. We said at the start of this year that the guidance we gave, we wanted to drive north, which is to say either grow faster or make more money or both. I think we'll be able to do both next year. And obviously, we have to get to the end of this year and be able to give you guidance and so we'll know at that time.

Speaker 3

But the 2 large customer wins we've announced the last two quarters are just has the potential to be massive for us. And we're not done. We are hopeful to have further wins here even this year. So yes, we're trying to build up the building blocks that can be very clearly looked at to estimate what we hope will be a faster growth rate next year.

Speaker 4

Thank you.

Operator

Thank you. Thank you. Our next question comes from the line of Eric Martinuzzi of Lake Street Capital Markets.

Speaker 8

Yes. I wanted to follow-up on the ILEC win. Was there any other competitor on either the business side or the residential side that kind of gave you a run for your money or caused the awarding of it to maybe get slowed down versus what you thought or is it pretty much you're writing the RFP and winning the RFP?

Speaker 3

Well, we're in a competitive market. There's no doubt. I mean, most companies have competitors. And I'm sure that this new customer did their homework. I can tell you that we've been working with them for a while and have been through much of Q2, we were doing development in conjunction with them to be ready for the Q3 residential rollout that we talked about.

Speaker 3

So but I don't think it was too hard for Ooma to stand out. I mean, our air dial solution and our residential solution, I think, have so many competitive advantages and can be offered at such a great value that, I think the important thing is getting to the point where customers like that make the decision they need to do something and start the process to do it. And I think with the pots replacement market, it's just a year ago, we talked to customers that hadn't even heard about the need. Now most customers have kind of heard about this, but we haven't really hit the inflection point where the market, I think turns and a lot of people need to do something, but we're getting there. One analyst that talked with us told us they think only about, I mean, like sub 5% of the lines that need to convert in the U.

Speaker 3

S. Have converted so far. I don't know how they quite get that number. But I can tell you that we have one this one large customer and we have other conversations going on where we're starting to see potentially large partners get to the point where they know they need to do something and they're considering what they're going to do. And that's great for us.

Speaker 3

That's what we've been building to for the last 2 years in all honesty. So it's got us excited.

Speaker 8

So that's pipeline that could potentially convert here in FY 2025?

Speaker 3

Yes, we will get sales in FY 2025, which is to say the back half of this year. And we should go into FY26, which starts February next year with a lot of momentum.

Speaker 8

Okay. And then for the business growth rate, your guidance is based on 13% for business and residential at a minus 1%. Just looking quarter by quarter, the trend is actually going the other way, Q2 versus Q1 on the business side at 9% versus the 12% we had in Q1. Is that just a question of the lumpiness of the quarter by quarter and that we've got either a backlog or a pipeline that substantiates that full year at 13%? What's behind the guide?

Speaker 4

Yes. That is mainly due to the growth EOBR growth rate for our largest customer, IWG. So if you think if you recall that last couple of quarters, the new seat additions at Regis has been relatively low compared to, let's say, Q2, Q3, Q4 last year. So the if you think about Q1, we had more benefit of having user additions in the prior 12 months. Now you go to Q2 now and we have a less benefit because we didn't add as many in the last couple of quarters.

Speaker 4

Plus, we had a churn in Q1, half of the large churn we talked about. So really, the driver there is the readers EOBO growth has been lower quarter over quarter.

Speaker 8

Got it. Thank you for taking my questions.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from the line of Arjun Bhatia of William Blair.

Speaker 9

Hi, this is Chris on for Arjun and I'll add my congrats on a great quarter. So if I could see net retention implied up to 100, could you give us a sense for what some of the main drivers were there and how you see this trending over the next few quarters? Is this the start of a trend or will that not be consistent until we get through the full IWGC churn?

Speaker 4

Sure. The main driver of improving 100%, I think, is we had a little better churn for business shoes in particular this past quarter. So that certainly helped us to pick up a bit to 100% from 99% last quarter. To your point, in terms of short term looking forward, I do think that the it could get back down to 99% -ish when the large churn in the second half from IWG we're expecting when that happens. Right now, most of it looks like it's going to happen in Q3, maybe some in Q4, but that could pull us back down to 99%.

Speaker 4

So my sense right now is we're going to hover between 99%, 100% in the foreseeable future.

Speaker 9

Got it. That's helpful color. And then we're about a quarter in since the launch of AirDile in Canada. I was wondering if you had any early feedback from customers and how things are

Speaker 5

going in that market? Thanks.

Speaker 3

Yes. I'm glad you asked about that. It's off to a good start, but honestly, I don't think we've put enough market development into Canada yet. We do have a party up there that we've worked with that is starting to resell AirDial, which is great and we've had some wins, but I think there's a lot more market opportunity than what we've tapped into yet. So it's just something we need to keep executing on.

Operator

I

Speaker 5

have two follow ups. The first one is, can you provide an update on that large 2,600 Hertz customer? You had mentioned it has the potential to add 100,000 seats, I believe, last quarter. How do you see that rollout playing out over the next 4 to 6 quarters? I guess, is there a committed number of lines that they've communicated over the next over the 1st 12 months?

Speaker 3

So my expectation is they will launch their product in beta form in the market in September. And that'll be a great step for them. How long that beta lasts is hard to say. I could see it lasting months, couple of 2, 3 months, because it's a very elaborate new solution that they're bringing to market versus what they've had in the past. I think that means by closer to year end, they're ready to go GA with it and really roll it out.

Speaker 3

And how fast they rolled out across their customer base, I don't know. But I'm sure they will give us more guidance at that time. But I could see them rolling out to most of their customer base through next year. And if they do that, we'll be a long way towards that 100,000 user number, if not above it. So yes, I think it's clearly the platform of the future for them and they put a lot of work on their side using the APIs in the 2,600 Hertz platform to really build a custom solution for the market that is just what they want to bring to market.

Speaker 3

So I think they're going to move as fast as they can with it once they get over the step of the beta process.

Speaker 4

Great. So, yes.

Speaker 5

That's helpful. And then my other question as it relates to that local carrier you discussed on this call, can you maybe you did already, I missed it. Can you size both the residential and enterprise opportunity in terms of lines?

Speaker 3

No. I think at this point, I would rather just say that we believe there are top 10 ILEC in the country. That means they're going to have 100 of 1000 of residential copper lines and 100 of 1000 of business lines that they serve today. And I think I'll leave it at that for now. But it's clearly a big number.

Speaker 5

Okay. Thank you so much.

Speaker 4

Thank you.

Operator

Thank you. Our next question comes from the line of Matthew Harrigan of The Benchmark Company.

Speaker 2

Thank you. It's nice to see that the carrier is also taking fellow as a compliment to Aerodial because it hasn't gotten nearly as much attention. Can you talk about a little bit more about sizing the TAM on TELO and what it would be internationally, I guess, especially in Europe given the regulatory differences? And I have 2 more questions after that.

Speaker 3

Yes. Well, we don't sell TELO in Europe today. We could certainly do it, but we have not customized the product for that marketplace. Here in North America, we gosh, the FCC puts out numbers with delay, but I guess you could estimate around 40,000,000 residential POTS lines in use today in North America. So it gives you a sense of what's out there to that's going to have to change over.

Speaker 3

I know that this is an interesting statistic that gives me is meaningful to me. When we see a more rural entity who might be working with us, roll out TELO across their base, they get 20% to 25% take rate of the homes they pass. And that tells me people want to have home phones. They want to be able to call 911, have something that works well from home in maybe more cellular challenged locations. So yes, I think the real challenge with residential is just getting to those customers and having a partner who can directly do that because they already have the customers is going to be a great step.

Speaker 2

And you did say in relation to that ILEC that this is a company that has 1 of the top 10 member of consumer relationships. So we can infer that we're probably at the high end of the lead table on that one, if you interstperse Venn diagrams, I would say. Is that fair?

Speaker 3

I'm not sure what you just said exactly, but I really can't say more than that we believe there are top 10 ILEC.

Speaker 2

Didn't you also say that they were one of the top 10 companies in terms of U. S. Consumer relationships or did I misunderstand?

Speaker 3

I'm not sure I said that. No.

Speaker 2

Okay. I misheard that. Great. Good results in quite a while. Congratulations.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from the line of Patrick Walravens of Citizens JMP.

Speaker 5

Hey, great. This is Oliver on for Pat. Could you provide an update on the U. S. Cellular and T Mobile reseller partnerships, how they contributed this quarter and how you expect those to ramp throughout the back half of the year?

Speaker 3

Sure. T Mobile is a very strong partner for us on air dial. They have fully embraced air dial and they because of the kind of company they are and have some very large customer relationships that we certainly Ooma wouldn't have. So, we have a lot of activity going on with aerodial at T Mobile. And I don't I think that'll just continue.

Speaker 3

U. S. T Mobile is also, I've announced in the past, selling some residential product alongside their fiber rollout and alongside their wireless home Internet. They don't emphasize it, but it's there for a customer who asks or needs a solution. And those that's going well too, although those tend to be more referral opportunities for us than direct sale by T Mobile.

Speaker 3

U. S. Cellular is going great. We have a great relationship there. And we last quarter, we mentioned that not only are they selling Airdyle, but they're going to begin to start selling Ooma Office.

Speaker 3

And that's coming along too, although that's still nascent. But these are 2 strong relationships for us and we expect both of them to grow as we look forward.

Operator

Thank you. I would now like to turn the conference back to Eric Stang for closing remarks. Sir?

Speaker 3

Well, thank you everyone for joining us today. It was a busy Q2 for us. We're excited to have some new developments in the company and more importantly, a strategic position that we feel is really strong as we look forward. Our annual exit recurring revenue for Q2 was $233,000,000 with 72% gross margin that puts us at about 167 or so $1,000,000 of gross profit dollars from our business services, business and residential services. I feel like we've got a strong balance sheet and good opportunity to execute based on our financial position.

Speaker 3

So we'll keep working at that and look forward to giving you more updates on our next call. Thank you, everyone.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Ooma Q2 2025
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