Ooma Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 5, 2023

There are 9 speakers on the call.

Operator

Hello, and welcome to Ooma Third Quarter Fiscal Year 20 24 Financial Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You would then hear an automated message advising your hand is raised. I would now like to hand the conference over to Matt Robison.

Operator

Sir, you may begin.

Speaker 1

Thank you, Towanda. Good day, everyone, and welcome to the fiscal Q3 2024 Earnings Call of Ooma, Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. On the call with me today are Ooma's CEO, Eric Stange and CFO, Shig Hamamatsu. After the market closed today, Ooma issued its fiscal Q3 2024 earnings press release.

Speaker 1

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

Speaker 1

These risks include those set forth in the press release we issued earlier today and those risks were fully described in our filings with the Securities and Exchange Commission. The forward looking statements in this presentation are based on information available to us As of the date hereof, and we disclaim any obligation to update any forward looking statements except as required by law. Please note that other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non GAAP basis. The non GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non GAAP financial measures and a reconciliation of the non GAAP financial measures discussed in this call To the most directly comparable GAAP financial measures is included in our earnings press release, which is available on our website.

Speaker 1

On this call, we will give guidance for Q4 and full year fiscal 2024 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. 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 2

Thank you, Matt. Hi, everyone. Welcome to Ooma's Q3 fiscal year 2024 earnings call. Thanks for joining us. I can report that Q3 was another strong quarter for Ooma.

Speaker 2

We performed well financially and made a major advance by acquiring 2,600 Hertz during the quarter. We look forward to reviewing our progress with you. Our Q3 results include $59,900,000 in revenue, dollars 4,000,000 of non GAAP net income and $5,000,000 of EBITDA. Organically, for Q3, which is to say excluding the impact of 2,600 Hertz, We increased our business subscription and services revenue 14% year over year. We held our OpEx spending nearly flat to a year ago And we grew our EBITDA by 17% versus Q3 last year.

Speaker 2

Our annual exit recurring revenue, including 2,600 Hertz, is now 225,000,000. We feel these results demonstrate good progress for the company and strong performance for the quarter. During Q3, we continued to pursue the strategies we have outlined throughout this year to expand Ooma's revenues from business customers. Ooma Office, our award winning solution for small to medium sized businesses, Added premium features and new integrations. One of our most exciting new integrations is with Clio, the number one software used in the legal industry.

Speaker 2

Users of Clio can now integrate their Ooma calling and communications with their Clio experience. This integration is available as part of Ooma's Pro Plus service tier and contributes to our long term strategy of increasing our premium office users and raising our average revenue per user. I'm pleased to report that in Q3, We once again sequentially increased our ARPU from business customers. I'm also pleased to report that 56% Of our new office customers were premium users and that premium users now make up 28% of our total office customer base. It was exciting in Q3 to announce finally the name of our largest customer, International Workplace Group or IWG, which is also known by the name Regis.

Speaker 2

We made the announcement in conjunction with the launch of our services for IWG in Asia. In Q3, we rolled out our platform for the Africa region and started serving IWG in South Africa. In total, We now serve IWG in 30 countries across 5 different regions and we are working with them to expand further. We anticipate slower international expansion in Q4 given the holidays, followed by a pickup in Q1 as we roll out to new countries throughout the first half of next year. Outside of North America, We also expanded with Ooma Enterprise, which began serving a new customer with locations spread across Australia, Netherlands, Spain and the U.

Speaker 2

K, in addition of course to Herein the USA. In our targeted hospitality vertical, we once again landed over 50 new hospitality locations, The largest of which being a property with 4 74 rooms and another being our 2nd airport hotel. In general, we believe our strategy in enterprise to focus on select verticals is giving us advantages in the market. In Q3, we continued to pursue our air dial strategy aggressively. In particular, we hired Additional sales personnel and signed a total of 4 new air dial resellers, one of which Touchstone Communications we announced in a press release.

Speaker 2

These resellers joined a number of others we are already partnered with for Aerodial, including T Mobile and more recently U. S. Cellular. We also announced that Viking Electronics, who is a manufacturer of more than 500 secondurity and communications products, including emergency phones, entry systems, elevator phones, and campus safety phones, began recommending AerDIAL to its customers and distributors after performing their own extensive testing of AerDIAL. As we've mentioned, we believe AerDIAL offers the best solution in the market We're replacing increasingly expensive and soon to be decommissioned copper lines that are connected to elevators, final alarm panels, older PBX equipment and more.

Speaker 2

We are thrilled by the validation we are seeing by the many resellers we have signed up for AerDyle. We are also thrilled to have announced in Q3 that Elevator World Magazine, the leading media voice in the vertical transportation industry, Selected Ooma for the 2023 LEs Awards in the category of Best Communication Systems Supplier, Honoring the Ooma Aerodial solution for POTS replacement. We're not standing still either in our continued improvement of Aerodial. Just recently, we announced that Aerodial now incorporates Ooma's patented MultiPath technology. MultiPath creates a continuous dual connection between air dial and the public switched telephone network by transmitting data packets simultaneously through 2 separate data links.

Speaker 2

Unlike other approaches where calls are Dropped unfailable failover, where there can be delays before failover occurs And where other issues can occur related to the quality of individual transport links, Ooma's multi path technology provides seamless backup for customers who enable 2 Internet connections to their AirDow device. MultiPath provides one more example of how Ooma stands out by providing the full end to end air dial solution, encompassing both cloud and customer premise equipment. While not announced, we also made additional improvements in Q3 to AirDile's remote device manager or RDM as we call it. RDM gives our AerDyle customers the ability to provision, monitor, manage and control all of their AerDyle devices from one portal. We view RDM as another key differentiator for Aerodial.

Speaker 2

I'm pleased to report that in Q3, we landed what we expect will become Our 2 largest AerDyle customers today. 1 of these customers is a large retailer with many individual brands. We've already started rolling out AerDIAL to one brand of stores owned by this customer, where we are displacing another POTS replacement solution. We expect this rollout is just Phase 1 with this customer. The other customer is a provider in the elevator industry with access to a very large number of opportunities.

Speaker 2

I'm pleased to report our backlog of potential sales opportunities grew again in Q3 and we have many large opportunities that we are pursuing. I'd like to turn now to 2,600 Hertz, which is the new business we acquired back in October. As a reminder, 2,600 Hertz provides open source Core calling functionality named Kazzu that is in use today by many telecom providers. Since initially launching Kazzu over a decade ago, 2,600 Hertz has also expanded to provide its own non open source suite of prebuilt UCaaS, CPaaS and call center applications. Telecom providers have the choice of relying solely on open source Kazzu and building applications themselves or contracting with 2,600 Hertz for a more complete solution.

Speaker 2

2,600 Hertz today provides hosted cloud, private cloud and customer hosted solutions to approximately 130 paying customers who serve 100 of thousands of end users. The company runs data centers in 8 locations spread across North America, Europe and Oceania, maintains a workforce of about 100 employees and contractors and has revenues of approximately $7,000,000 annually. Three main reasons drove our decision to acquire We made this acquisition to capitalize on the opportunity we see in the wholesale marketplace, To unlock significant operational benefits between Ooma and 2,600 Hertz and to enhance Ooma's strategic position and ability to serve the fundamental needs of large carriers and other partners. It's now been about 6 weeks since 2,600 Hertz became part of Ooma. In that time, we have blended our 2 teams together, rationalized spending in certain areas and established our new combined strategy.

Speaker 2

Central to our strategy is to We are now actively working internally to provide 2,600 Hertz customers telecom services delivered in a CPaaS business model. We're also working to leverage some of Ooma's key user applications for the benefit of 2,600 Hertz customers. 2,600 Hertz's customer base has responded with positive feedback on our acquisition. They are excited about our strategic direction and the intellectual property and resources we bring as a larger scale and more mature organization. Similarly, we already have active conversations underway with a number of possible new customers.

Speaker 2

These conversations will take time as possible customers evaluate Qazoo and get to know us, but we are optimistic about their potential. Overall, I believe our integration with 2,600 Hertz is going well and we are on track as promised to make the acquisition adjusted EBITDA accretive to Ooma within 6 months. Finally, I'm thrilled to mention that the publication you see today Recently named the Qansu Communications Solution from 2,600 Hertz as the Best White Label Solution at the prestigious UC Partner Awards 2023. Kazzu was chosen by a panel of 12 leading analysts in the cloud Of course, we're not surprised since we know Qazoo's modern API based architecture With that, I will 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 3

Thank you, Eric, and good afternoon, everyone. Before I dive into our Q3 financial results, I'd like to quickly recap the financial aspects of the 2,600 Hertz acquisition we completed on October 20, 2023, right before the end of the Q3. We acquired 2600 First For approximately $33,000,000 in cash and there are no other contingency payments for this acquisition. With regard to funding of cash purchase price, we used approximately $50,000,000 of our cash from balance sheet And the remaining $80,000,000 came from a new $30,000,000 revolving line of credit from Citizens Bank. 2,600 Hertz is expected to add approximately $7,000,000 in annual recurring revenue to Ooma.

Speaker 3

The acquisition of 2,600 Hertz is expected to be accretive to our adjusted EBITDA within 6 months and to make increasing contribution to our overall adjusted EBITDA as operational synergies are realized in subsequent periods. Now I'm going to review our Q3 financial results and then provide our outlook for the Q4 and full year fiscal 2024. We delivered another solid quarter with a total revenue of $59,900,000 which included $230,000 of subscription and Services revenue from 2,600 Hertz for the last 12 days of the quarter. Excluding 2,600 Hertz revenue contribution, Q3 revenue came in at $59,600,000 at the high end of our guidance range of $59,000,000 to $59,600,000 On a year over year basis, total revenue grew 6% in the 3rd quarter, driven by the growth of Ooma Business, which accounted for 58% of total subscription and services revenue as compared to 55% in the prior year quarter. Q3 product and other revenue came in at $4,000,000 as compared to $4,900,000 in the prior year.

Speaker 3

The prior year Q3 product revenue included certain accessory sales that did not recur this year. On the profitability front, the 3rd quarter non GAAP net income was $4,000,000 Excluding $300,000 of net loss from 2,600 Hertz, the 3rd quarter non GAAP net income was $4,300,000 Exceeding our guidance range of $3,800,000 to $4,100,000 and represented 24% increase over $3,500,000 in the prior year quarter. Now some details on our Q3 revenue. Excluding the impact of 2,600 Hertz, Ooma Business Subscription and Services revenue grew 14% year over year in Q3, driven by user growth. On the residential side, subscription and services revenue were flat year over year.

Speaker 3

As a reminder, we had a one time Churn event during the Q1 of this fiscal year with a particular customer with an unusual application where we lost approximately 4,000 tele users, which continue to impact our year over year comparison in Q3. For the 3rd quarter, Total subscription and services revenue was $55,900,000 or 93% of total revenue as compared to $51,700,000 or 91% of total revenue in the prior year quarter. Now some details on our key customer metrics. Please note that the key metrics I'm about to discuss do not Include any metrics related to 2,600 hertz users. Given the wholesale nature of 2,600 hertz's business, We do not intend to blend 2,600 Hz user metrics into our traditional core user metrics, which will continue to represent the key metrics related to Ooma Business and Residential Users only.

Speaker 3

We ended the 3rd quarter with 1,241,000 core users, up from 1,237,000 core users at the end of the Q2. At the end of the Q3, we had 475,000 Business users or 38 percent of total core users, an increase of 8,000 from Q2. Our blended average monthly subscription and services revenue per core user or ARPU increased 3% year over year to $14.63 driven by an increase in mix of business users, including higher output Office Pro and Pro Plus users. During the Q3, we continued to see a healthy Office Pro and Pro Plus take rate With 56% of new office users opting for these higher tier services, which was up from 50% in the prior year quarter. Overall, 28% of Ooma Office users have now subscribed to our Pro or Pro Plus tier.

Speaker 3

Our net dollar subscription retention rate for the quarter was 99% as compared to 99% in the 2nd quarter. Our annual exit recurring revenue, which now consists of recurring revenue from Ooma Core users and 2,600 Hertz users, Grew to $225,000,000 and was up 10% year over year. Now some details on our gross margin. Our subscription and services gross margin for the 3rd quarter was 72% as compared to 73% in the prior year. Q3 subscription and services gross margin this year was impacted by certain investments we made for our largest customer as we started the further expansion into Asia and Africa in the Q3 as well as investments in our customer support resources for ongoing AirDire ramp.

Speaker 3

Products and other gross margin for the 3rd quarter was negative 73% as compared to negative 35% for the same period last year. As mentioned on the previous calls, The decline in Q3 product gross margin this year versus last year was anticipated and primarily due to the following two factors. First, we saw the sell through impact of certain higher cost components that we have procured in the last fiscal year to stay ahead of pandemic driven supply chain issues and second, the prior Q3 product gross margin benefited from certain accessory sales That did not recur this year. We continue to expect product and other gross margin for the remainder of fiscal 2024 to be Negatively impacted by one time excess component costs running through the P and L and currently estimate Product and other gross margin for the 4th quarter to be in the neighborhood of negative 70%. On an overall basis, Total gross margin for Q3 was 62% as compared to 64% in the prior year quarter.

Speaker 3

And now some details on operating expenses. Total operating expenses for the 3rd quarter were $33,400,000 up $600,000 or 2% from the same period last year. Excluding the impact of 2,600 Hertz, The total operating expenses increased $100,000 or effectively flat from the same period last year. Sales and marketing expenses for the Q3 were $16,800,000 or 28% of total revenue and flat year over year. Excluding the impact of 2,600 Hertz, sales and marketing expenses for the Q3 were $16,600,000 or a decrease of $300,000 from the same period last year as we control the spend into increased profitability.

Speaker 3

Research and development expenses were $11,300,000 or 19% of total revenue, up 3% on a year over year basis from $11,000,000 driven by investments in new features for Ooma Office And enterprise as well as air dial. Excluding the impact of 2,600 Hertz, R and D expenses for the 3rd quarter were $11,000,000 G and A expenses were $5,300,000 or 9% of total revenue for the 3rd quarter Compared to $4,900,000 for the prior year quarter, the year over year increase in G and A expenses was primarily due to an increase in personnel costs. Non GAAP net income for the 3rd quarter was $4,000,000 or diluted earnings per share of $0.15 Excluding the impact of 2,600 Hertz, non GAAP net income For the Q3 was $4,300,000 or diluted earnings per share of $0.16 as compared to $0.14 in the prior year quarter. Adjusted EBITDA for the quarter was $5,000,000 or 8% of total revenue. Excluding the impact of 2,600 Hertz, Adjusted EBITDA for the quarter was $5,200,000 or 9% of total revenue and represented 17% increase over $4,500,000 for the same period last year.

Speaker 3

We ended the quarter with total cash investments of $18,900,000 We generated cash from operations of $1,900,000 as compared to $2,500,000 in the same period last year. As mentioned earlier, we funded a cash purchase price of 2,600 hertz with a combination Cash from our balance sheet and an $18,000,000 draw from a new $30,000,000 revolving line of credit. The new credit facility has a 3 year term and the borrowing under it will bear interest rate Based on Solvad, plus 2 10 basis points or approximately 7.5% of all in volume rate at the time of the drawdown in October. The additional details on the credit facility are available In our Form 8 ks filed on October 23, 2023, as well as in our Form 10 Q to be filed later this week. On the headcount front, we ended a quarter with 1192 employees and contractors, which included new team members from 2,600 Hertz.

Speaker 3

Now I'll provide guidance for the 4th quarter and full Fiscal year 2024. 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 items. Additionally, the guidance reflects a full quarter impact of 2,600 hertz Starting in the Q4, as well as interest expense for the outstanding balance under the new credit facility and the partial benefit of related restructuring activities took place earlier in the Q4. We expect Total revenue for the Q4 of fiscal 2024 to be in the range of $61,200,000 to $61,800,000 which includes $3,800,000 to $4,100,000 of product revenue. We expect the 4th quarter net income to be in the range of $3,100,000 to $3,400,000 As mentioned earlier, Q4 net income guidance includes a 4 quarter impact of interest expense related to the new credit facility, which is estimated to be approximately $400,000 Additionally, the guidance assumes interest expense will be sequentially lower By approximately $200,000 given that $15,000,000 of cash from balance sheet was spent towards the cash purchase price of 2,600 Hertz.

Speaker 3

Non GAAP diluted EPS is expected to be between $0.12 $0.13 We have assumed 26,700,000 where the average diluted shares outstanding for the 4th quarter. For full fiscal year 2024, we expect total revenue to be in the range of $236,300,000 We expect non GAAP net income for fiscal 2024 to be in the range of $14,900,000 to $15,200,000 Fiscal 2024 net income guidance also reflects an increase in interest expense related to the new credit facility of approximately $400,000 as well as a reduction in interest income of approximately $200,000 for the reasons stated earlier. Based on this non GAAP net income guidance range, we estimate our adjusted EBITDA for fiscal 2024 We expect non GAAP diluted EPS for fiscal 2024 to be in the range of $0.57 to $0.58 We have assumed Approximately $26,300,000 were the average diluted shares outstanding for fiscal 2024. In summary, we are pleased with our solid performance in the 3rd quarter. The team has done a great job Our growing business subscription revenue 14% year over year organically, while keeping operating expenses effectively flat in today's environment, which resulted in year over year organic non GAAP net income and adjusted EBITDA growth of 24% and 17%, respectively.

Speaker 3

I'll now pass it back to Eric for some closing remarks. Eric?

Speaker 2

Thanks, Shig. Q3 was a busy quarter for us. We worked to grow our business user base and to expand internationally. We also invested significantly to increase our Aerodial sales team, number of resellers and pipeline of opportunities, and with those, our Aerodial installed user base. On top of these, we also closed on our 2,600 Hertz acquisition and took steps to integrate 2,600 Hertz into Ooma and along with that optimize our cost structure.

Speaker 2

I feel we're well along on our plans for 2,600 Hertz and the acquisition is going smoothly. Our plans for Q4 entail continued focus on our multiple strategies Thank you. We'll now take questions.

Operator

Thank Our first question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open.

Speaker 4

Yes. Thanks very much. On the your largest customer, which is outrageous, How many users do you think they will have by fiscal year end now? And then I think you said you expect to launch new countries next year. I guess, what's the kind of incremental opportunity next year?

Speaker 2

Yes. Hi, Mike. So hello. We're over 85,000 users with them now. And we did not have as much growth in Q3 as we might have because some of these new countries are taking a little bit more work on both sides to bring up and get going.

Speaker 2

And Q4 will be a little slower too just with it's a lot of work To do this and the teams need a little bit of a break. But we'll be up Over 90,000 at the end of the fiscal year. And I've talked in the past that we could get to Maybe 120,000 or so and that's where we're working towards for the first half of next year. But Each it's an extra effort every country we add and the countries are smaller now than the ones at the outset. So how fast we get there, I'm not exactly sure.

Speaker 2

But we're anticipating first half of next year is still busy with adding users.

Speaker 4

Okay. And then how much is The U. S. Small business market, any noticeable change versus last quarter in terms of just Sales cycles, collections, general activity and sort of small business UCaaS land?

Speaker 2

Actually, no. Sales cycles Are similar, no collections issues other than the normal ones we have. We're a little cautious for Q4 because as we remember last year with the holidays and all, Small businesses were busy or finishing up their years and then obviously we kicked off in January with a good market opportunity. But we think the markets it was stronger during the COVID time when everyone was figuring out new solutions, but it's still robust. And most importantly, there's a big market that's yet to be brought Up to a modern communication solution like Ooma provides.

Speaker 2

So we see lots of opportunity to go after.

Speaker 4

Great. And just last one on product gross margin. Once some of the anomalies come out of the mix here, what should that Product gross margin normalized too?

Speaker 3

Yes. So It's probably we're talking about Q2 next year once we get through the consumption of the higher cost components, Mike. But I think, normalized range, I would say, 50% to 55% kind of range. We traditionally were There before we had this component, so that's what I would say.

Speaker 4

Okay. Very good. Thanks a lot.

Speaker 5

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Ert Zafiger with JMP Securities. Your line is open.

Speaker 6

Yes. Thanks for taking the question. First off, just on the outlook for Q4, it does seem as though you're looking For relatively flat sequential growth on the subscription revenue on an organic basis, Is there any reason you're more conservative there?

Speaker 3

So on an overall total revenue basis, one of the reasons we had about $400,000 of Non recurring product revenue in Q3 that we're not going to have in Q4. That's one of the total revenue, seems flat quarter over quarter. And then there is one adjustment that on the business subscription side that in a sequential basis we're making That really just one time in nature and it's not fundamentally nothing different about the So if you take out these two items, fundamentally, we see still the subscription revenue growing More normalized level, which is, I would say, dollars 1,000 quarter over quarter. So it's a little bit hard to see, Obviously, we'll add some of these pointers, but that's what we

Speaker 6

see. Okay. And then you said, Regis could reach, I think you said 120,000 end users. How many countries would you anticipate that that will be?

Speaker 2

70 or so, over 50 for sure. We're already able to serve more countries than they're we're now in with them as we wait for conversions and Rollout to happen, but I believe we'll be in Vast majority of the countries that are now in, they're in a total of about 100 countries, but I need to be a little conservative because I think we'll see How it runs out in the tail, some of the countries are quite small.

Speaker 6

Okay. And then how do you anticipate Generating follow on business with those countries, is that kind of can you talk a little bit about the timing around that? Well, I'll follow on business with additional customers that is.

Speaker 2

Sure, sure. So obviously, the next 6 to 9 months is just rollout phase of, as we've discussed here. They are a growing organization, so that's potential growth for us. And also, we're serving their The kinds of users of theirs that we're serving are the ones that have that are operating in their buildings. They have other users that do other things with them that are potential for us down the road As are more premium solutions that we could roll out with them as well.

Speaker 2

I don't want to get too much into where we see it evolving next, But, we think we'll have more opportunities for growth after we get this rollout under our belt.

Speaker 6

Got it. Okay. Thank you.

Operator

Thank you. Please stand by for our next speaker. One moment. Our next question comes from the line of Josh Nichols with B. Riley, your line is open.

Speaker 7

Yes, thanks for taking my question. I was wondering if you could elaborate a little bit. I think you mentioned that In the quarter, you landed 2 air dial customers that you think ultimately are probably going to become the largest customers. I know air dial is taking a little bit longer to ramp than originally anticipated. But could you provide a little bit more clarity on the type Market opportunity that those two customers represented, do you have any visibility into what type of install units these two customers alone Represent if we think about over the next 12

Speaker 6

to 18

Speaker 8

months. Sure.

Speaker 2

Hi, Josh. Yes. We mentioned to clarify my words, we mentioned they could be the 2 our 2 largest customers to date. We do have other customers we are pursuing in our sales funnel that are even larger. But each one is thousands of users, and let me put it that way, not over 10,000, but thousands of users potential.

Speaker 2

The other thing we've seen is all through this year, the 1st 3 quarters of this year, the Number of opportunities in our sales funnel, particularly the number of potential users in our late stage sales process Has grown each quarter and that also helps us get a better understanding of where we can go with this. We did make a big step in Q3. We were able to fill several sales positions for Aerodial, Which will allow us to go after the market more strongly. We have 10 different verticals that we're pursuing with AirDile. And if you look at the opportunities we have and even just what these couple of customers can represent, It continues to be a very positive opportunity for us.

Speaker 2

But obviously, as you said, we need to Good. We would like to move faster and we're doing and we're investing to do that.

Speaker 7

Thanks. And then just One or two small things. Shig, did you mention, I think you said product revenue would be between $3,800,000 and 4.1 For the Q4?

Speaker 3

Got you, correct. Okay.

Speaker 8

So that

Speaker 7

was kind of in line. Yes. And then last question, I know that there's like a big delta between The GAAP and the non GAAP guidance for 4Q, I know that that's not super surprising given the acquisition. I was just kind of Curious what you were expecting for one time costs, just trying to think about how to manage or model the cash flow for 4Q?

Speaker 3

Yes. So the Q4, we're going to have a few One time cost, so one item is restructuring cost, restructuring activities we undertook As a cost associated with it, it's in press release, Josh, but it's $500,000 that we're incurring there in Q4. And we also have some additional I have put additionally later calls, but we can get it's actually in the press release too and happy to get you in more detail there.

Speaker 7

Sounds good. Appreciate it. Thank you.

Speaker 3

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Your line is open.

Speaker 3

Great. Thanks so much for taking my question. Congrats on the successes with Aerodial. My one question is last quarter you talked about There were challenges in the pace of installation. Some of it were people, some of it were The various places where installs might happen, what progress has the company made, especially within its control,

Speaker 2

Yes. Hi, Brian. I feel we've got that well in hand actually. We have a customer Right now, who wanted to roll out quite significant to quite significant number of locations and do it all in a week. And we did it.

Speaker 2

And so when a customer is ready to move and if the customer knows what their needs are And where their needs are and has the access and all that planned out, we can move quickly with them. We're Not all our customers are like that. Some customers can take several months just to even stand up a proof concept and test something for then a couple of months more, but sometimes you get customers who have a deadline and they want to move. So I feel like the pace of rollout is being driven more from what customers can accomplish Then our team, we're ready to go.

Speaker 3

I guess my second question for Shig would be, When the installations start ramping, and they become a more meaningful piece of revenue, just remind us The puts and takes to product revenue and margin versus subscription and services? Yes. So as the installation ramps, Brian, did. So we're reporting the Cost and revenue related to installation activity itself in a product along with the product itself. And so we're going to start to see that product revenue increase as we ramp on the installation.

Speaker 3

And I think we talked about earlier, but our intent is to not lose money on the installation activities, Meaning that we pass on a cost to customer to achieve that. And so My take on that is, as we have more AirDAR related product installation revenue, product margin should improve as well over time. Obviously, that will precede the ramp on the subscription revenue related to AerDao because installation needs to happen in front of it. And we're still seeing a pretty good trend on AirDAR outgroup on the service side, And we think it's going to be accretive to our subscription margin today as we ramp on the subscription side as well. Great.

Speaker 3

Thank you so much.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Matthew Harrigan with Benchmark. Your line is

Speaker 8

open. Thank you. Firstly, since you're not including 2,600 Hertz in your KPIs, and it's pretty evident we're going to be modeling that in the longer term. You talked about some of the growth opportunities there With some of the customized apps and certainly even better monetization of Qazoo, what's your ambition In terms of the long term growth rate there, which would presumably exceed that for your core business? And then secondly, on your existing subscription business, you said that 28% are taking Pro or Pro Plus Right now, I mean, you've got a good product incrementally at pretty low incremental cost.

Speaker 8

Why is it I know I've asked you this before, but How often do you consider to building more to marketing to upgrade the installed base? I don't know whether it's much more of a Brotherly shove, and it looks like on the surface to get people to upgrade, but presumably you could be affording more utility for customers and ramping up your growth rate While you do it at the same time, thanks.

Speaker 2

Yes. Hi, Matthew. Well, we do a bit of outreach to our existing customer base around Pro and Pro Plus. You got to keep in mind that when they came on board as users, They self selected at the time with our solution. So they're pretty happy with what they've got, many of those users.

Speaker 2

In some cases, it's hard to reach out to them too because marketing e mails don't always get to flow through. But we do see customers as they expand, starting to tap into some of our new capabilities. And As I said, the new customers coming on board are coming on, more than half of them are taking a premium, Premium tier. We It might be part of it a little bit, might be too just you really need to explain it to customers and our sales people are able to do that with the new customers. It's a little bit hard to Have those conversations at that level with our installed base.

Speaker 2

But it is something we work on and we can devote More resources to you going forward. First question again?

Speaker 8

Would there be Would there be any way to do a sort of a push free trial for like a month or 3 months just so that the capabilities, I assume The expenses wouldn't be that high to do it or is that just awkward in terms of the software upgrade?

Speaker 2

No. We do different kinds of things, sometimes more or less of that nature. Yes. It's a good question. And what we tend to do today is just send e mails with A little bit information of some of the features that people could get, but free trials aren't a bad way to go either.

Speaker 2

And Keep that in mind.

Speaker 3

I think, Matt, your first question was, I'm going on the line of, with respect to 2,600 Hertz, What sort of growth rate that you could assume in relation to the core business or something like that, right?

Speaker 8

Exactly, because It's pretty obvious people are going to be modeling that separately since you're not including that in your core KPIs as you stipulated.

Speaker 2

Yes. We're a little reluctant to try to answer that question with too much detail because it's only been 6 or 7 weeks that we've Been developing this opportunity now and owned it. But we do see real Meaningful opportunities. There are users out there of the Qonsu platform from an open source perspective that Could be converted over into paying users by offering them more than what they have today. There are significant opportunities For new customers to be brought on to the platform, some of whom would be moving off another platform that's out there And others that just are going to sunset maybe something they've built internally and want to move to something more modern.

Speaker 2

I think we are close to getting our first customer to move off of another company's platform and on the Kazoo, but we'll have to wait and see if we close that in Q4. And then thirdly, the CPaaS services. And we have a very specific effort in place today to bring Ooma's cost structure and scale In telecom services as a CPaaS offering to the installed base and then move from there. Predicting what That will be for next fiscal year is hard for us. I think that we'll learn a lot the next 3 months in our sales efforts and then be able to give better guidance at the end of the next quarter.

Speaker 8

Great. Thanks, Eric. Thanks, Jake.

Speaker 3

Thanks, Matt. You bet.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Speaker 5

Thank you guys for taking the question. If I could just go back to the user growth, I know it sounded like it was I got a largest customer, Regis, that was driving some of the headwinds there. But if we look to other customers, Are you seeing similar kind of muted growth there in Q3 and Q4? Or is it largely related to Regis We're seeing slower growth from the customer base from the user base rather.

Speaker 2

Yes. Hi. Well, we thank you for both Q3 and Q4, particularly Q4 now. We're going to see, as you said, muted growth with our large customer. But beyond that, we want to be cautious because Q4 is an interesting quarter.

Speaker 2

With the holidays involved and small businesses taking time off, we're being very busy With the holiday time, it's not always the best time for customer acquisition. We're being very sensible about that We are controlling our sales and marketing spend. We're happy with our customer acquisition costs And we're improving the EBITDA commensurately. Our EBITDA is growing faster than our the growth of our other metrics. So I think we have a good plan for Q4.

Speaker 2

And but yes, we're being a little guarded, just to wait and see how it turns out. I can give one more data point. I know you didn't ask about residential, but we're pleased with our residential business Thus far into the quarter, we're through Black Friday and Cyber Monday and that Thanksgiving period when we Want to drive some sales on the residential front and we were happy with what we achieved this year compared to a year ago. So that's one piece of positive news that we already have.

Speaker 5

Okay. Perfect. That's helpful. And then maybe going back to, Regis, I know you're talking about expanding into other countries and the opportunity that How should we think about what that process is like to go into other countries? How long does it typically Take to open up a new geography, how many resources are required, what are the challenges, maybe just help us understand that process A little bit better.

Speaker 2

Sure. I'm going to repeat some of the things I may have said in previous calls. I apologize. But So it starts with putting our capabilities into the region. Because we're dealing with communications services, You have to be mindful of Internet distances and delays that can affect The quality.

Speaker 2

So we have to have fully standalone instances of what we do in each region where we want to serve the countries there. As I said, we're in 5 regions today, and we can serve all the countries now pretty much in those regions, although we aren't yet. And then we have 2 more regions to stand up between now and the middle of next year. Once we have those 7 regions in place, we'll have very good coverage. And then it comes down to What you need to do to be in that particular country, there may be certain laws and regulations you have to conform to, certainly language And other adaptations to the platform, maybe calling patterns, you have to decide how you're going to deliver Services from a carrier, partner status.

Speaker 2

And then, once you have that in place, Plan a rollout strategy that involves converting away from something already in place, and there's a lot of work to do that. So, we tend to roll out with our large customer kind of country by country or a couple of countries in a region at a time and then you move on to the next ones. And we went into Hong Kong in Q3. We went into South Africa in Q3. There are other countries in Asia that we're expanding in, in Q4.

Speaker 2

We'll be finishing up South Africa in Q4, And we'll just be rolling out from there. It's giving us an incredible footprint on a much Bigger stage than we've operated on in North America, and I think that's a really valuable asset for Ooma as we look forward, not only for our UCaaS solutions, but also, frankly for AerDyle. And We're going through the thinking right now on what our priorities will be for next year to start to capitalize on this asset beyond North America. And Aerodal will be a very strong Contender for that because we think we have such unique solution there and kind of a unique market opportunity at this time. So It's exciting for us to have this in place.

Speaker 2

We're well down the train on all of this. Not to go on, but it's been years in the making to be where we are today, And we're just getting over, I think, the final hurdles.

Speaker 5

And sorry, one more if I can just follow-up. On the is the Subscription and services gross margin following this international build out, meaning once this is once you have the additional regions stood up by the middle of next year, Should that be the trough in subscription gross margins or are there other factors that maybe I'm not considering there?

Speaker 3

Yes. So certainly, we talked about this a little bit, but we're making some investment related investments Related to the expansion that I talked about we just talked about. So it's pulling down revenue a little bit upfront. I mean, Gross margin a little bit upfront on the subscription side. I think going into second half of next year, I think we started to see more Scale efficiency there.

Speaker 3

We'll expect their largest customer as well. And also on your terms, remember that 26 900 Hertz gross margin or recurring revenue isn't quite at the level that corporate Ooma margin is either. So As we walk through the further expansion of largest customer along with the synergies related to 26% HERS, I think second half of next year is a good point to start to see some improvements on the subscription margin.

Speaker 5

Okay, very helpful. Thank you for taking my questions.

Speaker 3

You

Operator

bet. Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Herb for closing remarks.

Speaker 2

Well, thank you, everyone. We've gone the full hour, so I won't say more, but appreciate your attendance today. Thank you very much. Bye bye.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Ooma Q3 2024
00:00 / 00:00