Ooma Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 5, 2024

There are 8 speakers on the call.

Operator

Hello, and thank you for standing by. Welcome to Ooma Fourth Quarter and Fiscal Year 2024 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. I would now like to hand the conference over to Matt Robinson.

Operator

You may begin.

Speaker 1

Thank you, Towanda. Good day, everyone, and welcome to the fiscal 4th quarter and full year 2024 earnings call of Ooma, Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. I apologize in case I cough during my comments. On the call with me today are Ooma's CEO, Eric Stang and CFO, Shig Hamamatsu.

Speaker 1

After the market closed today, Ooma issued its fiscal Q4 and full year 2024 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. During today's presentation, our executives will make forward looking statements within the meaning of the federal securities laws.

Speaker 1

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 more fully described in our filings with the Securities and Exchange Commission. The forward looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward looking statements except as required by law. Please note that other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non GAAP basis.

Speaker 1

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 for the Q1 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, 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.

Speaker 1

Additionally, our investor presentation slides include GAAP to non GAAP reconciliations 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 Staeh.

Speaker 2

Thank you, Matt. Hi, everyone. Welcome to Ooma's Q4 fiscal year 2024 earnings call. Thank you for joining us. I look forward to reviewing our Q4 and fiscal year 2024 results with you today.

Speaker 2

I'm also excited to talk with you about our strategy and plans for our upcoming 2025 fiscal year. Overall, I believe Ooma is fortunate to enter FY 2025 in a strong position with leading product solutions and significant potential for business expansion. In Q4, Ooma performed well financially, delivering $61,700,000 in revenue and $3,500,000 of non GAAP net income. Adjusted EBITDA jumped to $5,200,000 and cash flow from operations increased significantly to $5,500,000 dollars For all of FY 'twenty four, we achieved $236,700,000 in revenue, $15,400,000 of non GAAP net income and $19,800,000 of adjusted EBITDA. Year over year, we grew revenue by 10%, non GAAP net income by 13%, adjusted EBITDA by 14% and cash flow from operations by 40%.

Speaker 2

We achieved this growth while also investing significantly in new market opportunities and international expansion. And we believe we've made important progress in FY 2024 on our strategy to expand our business and drive profitable growth. On the business side in Q4, we continue to invest in feature expansion, customer growth and the development of new resale partnerships. On all fronts, Ooma Office, Ooma Enterprise, Ooma Air Dial and 2,600 Hertz, we made significant achievements in Q4. For Ooma Office, our solution for small to medium sized businesses, we expanded our sales efforts on the legal vertical, taking advantage of our announced integration with Clio legal practice management software.

Speaker 2

These efforts are going well with our largest customer win in the quarter being a 90 user deal. We also increased the proportion of new Ooma Office customers who signed up for a premium tier of service to 59%, our highest level to date. I'm also pleased to report that we signed an agreement with a new partner who will resell Ooma Office and we have started the work to enable them. We expect the contribution from this partner this year to be modest, but we consider it a great first step toward engaging other potential resell partners for Ooma Office. Regarding Ooma Enterprise, our solution for larger sized businesses, we also made significant achievements in Q4.

Speaker 2

1 was a large new customer we signed where we will serve several 1,000 users spread across 400 locations. We will be providing a combination of our full UCaaS solution for many of their users and our Teams integrated calling solution for the rest. In our targeted hospitality vertical, we continued our momentum, again winning over 50 new hotels in the quarter. We also brought on a new technology partner who will help us sell into this space. Ooma Aerodial, our innovative solution to replace aging and expensive POTS lines continue to make progress in Q4 as we invest in this new opportunity.

Speaker 2

In Q4, we closed over 500 new customer deals with some being notable large company wins. We expect many of these deals will start by rolling out only to a small subset of the available locations and then build through the year. In general, we find customers want to move forward on their immediate needs for copper line replacement, usually driven by lines being shut off or substantially increased line pricing before they plan a full rollout of Ooma AirDial across their business locations. In Q4, we also continued to refine our AerDIAL product solution, including enhancing the AerDIAL remote device management system and enabling AerDIAL to serve new applications we came across. We added 5 new Aerodial resale partners in Q4, which expands the number of partners reselling Aerodial to over a dozen now.

Speaker 2

And finally, I'm very happy to report that Ooma Airdial won the 2024 TMC Internet Telephony Product of the Year Award for its multipath technology, which delivers unique and patented uninterrupted backup for pots replacement. Turning now to 2,600 Hertz, our wholesale UCaaS, CCaaS and CPaaS platform solution. I believe we have made tremendous progress since acquiring them just 4 months ago. We believe we are on track to achieve the synergies we planned and make 2,600 Hertz adjusted EBITDA accretive in Q1 of this year. What is particularly exciting for us though is the level of new customer interest we are seeing.

Speaker 2

It is happening faster than I expected. We have already won one new customer who will convert their customer base to the 2,600 Hertz Pazoo platform and we are currently far along on other new customer opportunities. 2,600 Hertz is being looked at to replace aging and less agile UCaaS platforms. It is also being looked at as an alternative to standard CPaaS solutions, which lack pre built applications and cannot be directly controlled and hosted by end customers. Of course, the wholesale nature of this business means it will take new customers an extended amount of time to implement the solution and produce revenue.

Speaker 2

Nonetheless, the unexpectedly high level of interest we are seeing gives us confidence in our acquisition thesis and strategy for 2,600 Hertz. We're proud of our accomplishments in Q4, but we also realize we have much more to do to capitalize on the investments we are making in the business. As we look forward, we believe we are well placed to do so for three main reasons. One reason is we believe we are a leader in the key segments we serve, with differentiated product solutions and a very low cost position to provide services. A second reason is we see significant untapped market opportunity in the key segments we target, in particular since so many smaller sized businesses have yet to move to a more advanced cloud communications solution.

Speaker 2

The third reason is the new directions we have invested in over the last couple of years. Ooma air dial for POTS replacement and Ooma 2,600 Hertz for wholesale UCaaS, CCaaS and CPaaS applications give us greater breadth of opportunity and open up paths to partner with others and extend our market reach. As we look forward, we see several meaningful trends that support our strategic direction and give us confidence that the investments we are making will pay off. One of these is simply the fact that in North America alone, we estimate there are 6,400,000 small businesses with 1 to 20 employees and that a significant amount of these businesses have yet to transition to a modern cloud based communications solution. We believe the market opportunity for Ooma Office is quite sizable.

Speaker 2

A second trend is the shutting down of the traditional copper phone network, which is already underway both here in the USA and in parts of Europe and seems to be accelerating as of late. We have what we believe is the leading solution with Aerodial serve equipment that doesn't easily move off of a copper line. More generally, our small business and residential solutions both benefit as well as customers are forced to look for new solutions when they lose their copper connection. A third trend, which we believe is favorable to Ooma is the rise of 5 gs Internet. Many smaller sized businesses rely today on a double play solution.

Speaker 2

In other words, Internet and phone from a cable provider. The availability of 5 gs wireless Internet can cause these businesses to reconsider not only their Internet solution, but also their communications provider. It also presents a future opportunity for Ooma to offer its own 5 gs double play solution. As you know, currently, we offer our 4 gs based Ooma Connect solution as backup Internet for businesses or sometimes as primary Internet for very small sized businesses. A 4th market trend is the advent of AI.

Speaker 2

In contact center applications and generally across all communications, significant data is created in the form of calls, texts and chats, and AI has a strong role to play to help businesses optimize their performance. Today, our activities in this area have been limited in part due to the newness of AI and the fact that AI has not yet seen much adoption by smaller sized businesses. However, as we look forward, we anticipate launching AI applications in our solutions and believe that these applications will make our solutions more valuable and in greater demand by our customers. And finally, the last industry trend that I want to highlight is the desire by customers to do more with their communications solutions by making the applications they use more bespoke to their individual needs. For smaller customers, this can entail integrations with other solutions used in their businesses.

Speaker 2

For larger customers, this can mean building custom applications using either CPaaS or a flexible API based wholesale platform. Either way, Ooma is positioned with innovative and leading solutions to take advantage of these customer opportunities. Building on these industry trends, our plans for FY 2025 include continued investment in key opportunities balanced with improvement in bottom line results. Some of the things we plan to accomplish in FY 2025 are 1, to introduce new integrations with other platforms 2, to extend our current call center capability into a more complete and omnichannel contact center solution 3, to incorporate 5 gs performance into our Ooma Connect wireless Internet solution 4, to expand further internationally, including with our largest customer, IWG 5, to enhance our 2,600 Hertz wholesale platform by integrating other Ooma technology and applications 6th, to increase our sales and marketing activities across our business from direct sales to online and inside sales to channel and agent sales to partner sales. And finally, 7, to grow our community of resale partners who value our solutions and help us reach more of the vast market opportunity in front of us.

Speaker 2

I'm excited by the strategy we have put in place and by the progress I see us having made each quarter as we expand and grow. I believe FY 'twenty five looks to be an exciting year ahead for Ooma. 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 3

Thank you, Eric, and good afternoon, everyone. I'm going to review our 4th quarter financial results and then provide our outlook for the Q1 and full year fiscal 2025. We delivered another solid quarter with a total revenue of $61,700,000 near the high end of our guidance range. On a year over year basis, total revenue grew 9% in the 4th quarter, driven by the growth of Ooma Business as well as the addition of 2,600 Hertz. In the 4th quarter, business subscription and services revenue accounted for 60% of total subscription and services revenue as compared to 55% in the prior year quarter.

Speaker 3

Q4 product and other revenue came in at $3,700,000 as compared to $3,900,000 in the prior year quarter. On a full year basis, total revenue was $236,700,000 as compared to $216,200,000 in the prior year, representing 10% growth year over year, including 22% growth in business subscription and services revenue. On the profitability front, the 4th quarter non GAAP net income was $3,500,000 which exceeded our guidance range. On a full year basis, non GAAP net income was $15,400,000 compared to $13,600,000 in the prior year. Now some details on our Q4 revenue.

Speaker 3

Business subscription and services revenue grew 19% year over year in Q4, driven by Ooma Business user growth and the addition of 2,600 Hertz. Excluding the effect of inorganic revenue contribution, Ooma Business Subscription and Services revenue grew 12% year over year. On residential side, subscription and services revenue was down 1.7% year over year. As a reminder, we had a one time churn event during the Q1 of fiscal 2024 with a particular customer with an unusual application, which continued to impact our year over year comparison in Q4. For the 4th quarter, total subscription and services revenue was $58,000,000 or 94% of total revenue compared to 93% in the prior year quarter.

Speaker 3

Now some details on our key customer metrics. As a reminder, except for annual exit recurring revenue, these metrics do not include the 2,600 Hertz wholesale business. We ended our 4th quarter with 1,243,000 core users, up from 1,241 1,000 core users at the end of the 3rd quarter. At the end of the 4th quarter, we had 484,000 business users or 39% of our total core users, an increase of 9,000 from Q3. Our blended average monthly subscription and services revenue per core user or ARPU increased 3% year over year to $14.72 driven by an increasing mix of business users, including higher ARPU Office Pro and Pro Plus users.

Speaker 3

During the Q4, we continue to see a healthy Office Pro and Pro Plus take rate with 59% of new Office users opting for these higher tier services, which was up from 52% in the prior year quarter. Overall, 29% of Ooma Office users have now subscribed to Pro or Pro Plus tier. Our annual exit recurring revenue grew to $227,000,000 and was up 10% year over year. Our net dollar subscription retention rate for the quarter was 99% as compared to 99% in the 3rd quarter. Now some details on our gross margin.

Speaker 3

Our subscription and services gross margin for the 4th quarter was 72% as compared to 73% in the prior year. As a reminder, subscription and services gross margin for the 4th quarter this fiscal year included a 4 quarter impact of 2,600 Hertz gross margin, which is running lower relative to Ooma subscription gross margin. Product and other gross margin for the Q4 was negative 72% as compared to negative 54% for the same period last year. As mentioned in the prior calls, the decline in Q4 product gross margin this year versus last year was primarily due to sell through impact of certain higher cost components that we had procured in the last fiscal year due to pandemic driven supply chain issues. Currently estimate product and other gross margin for the first half of fiscal twenty twenty five will be comparable to that of the Q4 fiscal 2024 as we continue to work through this excess component costs and then normalizing in the negative 50% range starting in the second half of fiscal twenty twenty five.

Speaker 3

On an overall basis, total gross margin for Q4 was 63% as compared to 64% in the prior year quarter. And now some details on operating expenses. Sales and marketing expenses for the 4th quarter were $17,300,000 or 28 percent of total revenue, up 2% year over year, primarily driven by increases in personnel costs and channel development activity for AerDyle. Research and development expenses were $11,900,000 or 19% of total revenue, up 14% 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 9% of total revenue for the Q4 compared to $4,900,000 for the prior year quarter.

Speaker 3

The year over year increase in G and A expenses was primarily due to an increase in personnel costs. Overall, total operating expenses for the 4th quarter were $34,700,000 up $2,300,000 or 7% from the same period last year. Non GAAP net income for the Q4 was $3,500,000 or a diluted earnings per share of $0.13 as compared to $0.16 of diluted earnings per share in the prior year quarter. In addition to stock based compensation and intangible amortization expenses, non GAAP net income for the Q4 excluded approximately $1,000,000 of acquisition and other related costs incurred in connection with the 26 100 First transaction. Adjusted EBITDA for the quarter was $5,200,000 a record for the company or 8% of total revenue as compared to $5,100,000 for the prior year quarter.

Speaker 3

We ended the quarter with total cash and investments of $17,500,000 Cash generated from operations for the Q4 was strong and up $5,500,000 It was a new quarterly record for the company. For fiscal 2024, we generated a record $12,300,000 of operating cash flow and $6,100,000 of free cash flow, which represented 40% 69% increase respectively over the prior year. Given our strong cash flow in the 4th quarter, we already began paying down the debt and reduced the outstanding balance by $2,000,000 at the end of Q4. We paid down an additional $2,000,000 shortly after the end of Q4 and as of today, we have reduced the outstanding debt balance to $14,000,000 On the headcount front, we ended a quarter with 1221 employees and contractors. Now I will provide guidance for the Q1 and full fiscal year 2025.

Speaker 3

Our guidance is on a non GAAP basis and has been adjusted for expenses such as stock based compensation and amortization of intangibles. We expect total revenue for the Q1 of fiscal 2025 to be in the range of $61,700,000 to $62,200,000 which includes $3,700,000 to $3,900,000 of product revenue. We expect 1st quarter net income to be in the range of $3,000,000 to $3,300,000 Non GAAP diluted EPS is expected to be between $0.11 $0.12 We have assumed 26,600,000 weighted average diluted shares outstanding for the Q1. For full year fiscal 2025, we expect total revenue to be in the range of $250,000,000 to $253,000,000 The full year fiscal 2025 revenue guidance assumes business subscription and services revenue growth rate of 11% to 13% over fiscal 2024, while residential subscription revenue to decline 1% to 2%. For fiscal 2025 revenue guidance, fiscal 2025 revenue guidance also assumes the impact of larger than normal churn from IWG where the seat count is expected to be reduced by about 20% in the Q1.

Speaker 3

We believe this event is infrequent in nature and the substantial portion of it can be offset by additional seat deployment during fiscal 2020 5 as we continue international expansion with IWG. 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. We expect non GAAP net income for fiscal 2025 to be in the range of $14,000,000 to $15,000,000 Based on this guidance range, we estimate our adjusted EBITDA for fiscal 2025 to be $20,500,000 to $21,500,000 Let me give you some additional color on our fiscal 2025 non GAAP While we expect the non GAAP operating margin and adjusted EBITDA to increase year over year, our non GAAP net income guidance range represents a slight decline year over year due to the following factors. 1st, we expect interest expense to increase by $700,000 to $800,000 due to a full year impact of the new revolver debt. 2nd, we expect interest income will be lower year over year by approximately $1,000,000 as we continue to focus on debt pay down in fiscal year 2025.

Speaker 3

Lastly, we currently estimate tax expense for fiscal 2025 will increase by approximately $200,000 We expect non GAAP diluted EPS for fiscal 2025 to be in the range of $0.51 to $0.55 we have assumed approximately 27,400,000 weighted average diluted shares outstanding for fiscal 2025. In summary, we are pleased with our solid finish to our fiscal 2024 with a record quarterly adjusted EBITDA along with strong cash generation in the 4th quarter. We are excited about growth opportunities in front of us and remain focused on executing to our long term strategy to achieve profitable growth. I will now pass it back to Eric for some closing remarks. Eric?

Speaker 2

Thank you, Shig. As I mentioned at the outset, I believe we entered fiscal year 2025 in a strong position with leading product solutions and significant potential for business expansion. We are working to take advantage of several significant industry trends and our strategy includes exciting investments in feature expansion, customer growth and the development of new resale partnerships. We believe our strategic focus on small to medium sized businesses, larger businesses that are in select verticals, POS replacement and wholesale UCaaS, CCaaS and CPaaS platform opportunities positions us well for future success. Thank you.

Speaker 2

We'll now take your questions. Operator?

Operator

Thank you. Our first question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Speaker 4

Perfect. Thank you guys. Appreciate you taking the question here. I thought the partnership with Cleo was pretty interesting, especially as it relates to the legal vertical. Can you maybe just expand a little bit on how impactful that can be to the business?

Speaker 4

And when you think about other verticals or other potential partnerships, how are you viewing the opportunity with some of these vertical software players that exist as an entry point into other verticals or to expand some of those where you might already have a presence?

Speaker 2

Yes, happy to. I don't think there's well, each time we do one of these, it gives us an marketing perspective, it also allows us to position ourselves well as a good solution to those customers. And to some degree, depending on who the partner is, we can also get some momentum and some additional sales and marketing reach out of what the partner will do with us on their own to help promote or support what we're doing. So all around, it's an exciting way to just build a better solution for the customer. And we've definitely seen that in legal verticals, what we've done with Clio.

Speaker 2

We've done things in a couple of other verticals already as well. And I think you'll just see we expect to roll out a cadence of these through the year as we look forward.

Speaker 4

Okay. Got it. That's helpful. And then maybe, Eric, sticking with you, on the CCaaS space, I know you called that out as a priority going into fiscal 2025. But when you think about that market, there is quite a bit of competition there already.

Speaker 4

Maybe can you just give us a sense of how Ooma is differentiating in that market? What your offering has that's above some of the competitors to be able to take share there? And then help us understand the timing of when we might start to see maybe an inflection from the CCaaS capabilities? Thank you.

Speaker 2

Yes, happy to talk about it. It's something that has us excited. We took a big step forward in our acquisition of 2,600 Hertz on this front. They have worked for a number of years on their CCaaS solution. And I think by middle of this year, that work will come to fruition and we'll be able to really leverage in a multimodal way the capabilities they put in place.

Speaker 2

It will be a little bit longer before we apply that solution to say Ooma Office or Ooma Enterprise. But nonetheless, it really opens the door for us to take a big jump forward in a critical part of the market. It's not our intent strategically to build the most complete or extensive CCaaS solution. We see a lot of customers that need core functionality, where call center and contact center may be a part of what the business does and they have anywhere from a handful agents to a greater number. And they want something that works well and fits into the rest of the solution and frankly isn't too expensive.

Speaker 2

And we think with what we'll do with Ooma Office and Ooma Enterprise, we'll approach the market more from that perspective. You can think of that a little in a way as a solution that's going to fit a business 1 to 1,000 employees as opposed to a big mega contact center implementation. But what we're building on the 2,600 Hertz side and what they will have is quite flexible. And because of that flexibility and API based design, it will do a lot of valuable things and it will be possible for anyone who wants to use that platform to extend it into any bespoke applications or extension of it that they want to do. So in some ways, it's also a foundation for larger companies to get just what they want out of the solution.

Speaker 2

So I hope that answers your question. Timing is kind of middle of this year and then later this year for Ooma Office, Nuum Enterprise and you can and I think I covered the way we're targeting the market with it.

Speaker 4

Yes. That was clear. I appreciate the color. Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Josh Nicholas with B. Riley. Your line is open.

Speaker 5

Yes. Thanks for taking my question. Two things, I guess. One is, could you elaborate a little bit? You talked about expecting some churn, I think, with AWG in the Q1 and help quantify the impact that that has?

Speaker 5

And then 2, I'm just kind of curious given all the backlog ramp that you kind of talked about on the airdial front like what you're kind of assuming for the growth for that piece of the business given that it's still early stage?

Speaker 2

Sure. Hi, Josh. So every for years in working with IWG, they've had some measure of churn, so to speak. I don't tend to think of it so much as churn because we serve all of their customers. Now they obviously have customers who leave their centers and other ones that come in and you can view it as churn when one leaves and then maybe as a new user when the next one comes in.

Speaker 2

But we've had some turnover and some reductions all through our working with them. And the numbers we've reported to all of you over the time have been net. They've been net of that, call it, say quarterly reassignment almost. And those numbers tend to run at a certain level, maybe a few 1,000 a quarter. But what Shig talked about is a bigger adjustment.

Speaker 2

And basically, this is a catch up. This is we've worked with IWG from both sides, our side and their side and help them get a finer analysis done across their full worldwide business of what lines they need and don't need. And so we're doing essentially a more or less one time catch up adjustment here. There's a little bit larger than the normal term we see every quarter. And I think Shig talked about it being on the order of?

Speaker 3

Yes. In terms of seat numbers, about 20% of what we have with them in the seat count. I think in terms of dollars, we're not going to specifically quantify it, Josh, but I think that we have considered it obviously in our annual revenue guidance range, the impact of it and then also our Q1 guidance because the churn yes, you heard it right, churn is happening in Q1. So we consider the Q1 revenue guidance. I think the other point I would be, we thought about the impact on net debt retention rate, we reported 99%.

Speaker 3

Really, this trend would just bring it down to 98%, our estimate today when that happens. So it's not a the 20% is a good number, as Eric said, it's a catch up, but impact overall is not that significant. And I think that says a lot about diverse base of our customer.

Speaker 2

Well, and as well, we're adding new users with IWG every month. We have further rollout going on with them internationally through the first half of this year at least. And they have quite an ambitious plan, although I probably can't say exactly, but they have pretty ambitious plan for opening new centers around the world as well. And all of that is growth for us. So we're going to see how much we can offset this and generate additional growth, but we just wanted to call out because it's out of trend, this adjustment.

Speaker 2

Your other question was about air dial growth and the assumptions we have in the outlook. I'll make a quick comment on that. I don't know if Shig has more to add. We've chosen in our outlook to be conservative on what will happen with AerDAL this year. We have not been very good at predicting it.

Speaker 2

And so while we shared what we can share around number of deals we closed last quarter and our continued belief in the business, we're not trying to forecast something much larger than where we are today until we see those results come through.

Speaker 3

Yes. I'd echo what Eric said that, Josh. So I think we learned a lot in last 18 months and on air dial, particularly the installation timing. As we said before that when customers are ready to install, we can be there right pretty quick and install and we had some of those quick deals, installation deals in Q4 as well. We want to be conservative in our guidance and that's what we assumed.

Speaker 3

And but at the same time, we're still excited about growing pipeline of ELDAR.

Speaker 2

Yes. Don't take this outlook as any diminution, if you will, diminution of the pipeline we see for Aerodial and the deals we're working. That's as robust as ever.

Speaker 5

Yes. So I guess I'd just classify this as a little bit more like a kind of baseline growth rate assumption excluding any material traction or success in Erbao?

Speaker 2

Yes. I mean, you heard our comments. Yes.

Speaker 6

Appreciate it. I'll hop back in the queue.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Brian Kinstlinger with AGP. Your line is open.

Speaker 6

Great. Thanks so much for taking my questions. It's a question on the guidance. If you look at the Q1's revenue guidance, the midpoint is about 9%, I think. If you look at the full year, it's just a too much over 6%.

Speaker 6

So it appears that year over year growth rates decelerating. We think with early installs of Aerodial not going as quickly and rolling out like you said in the second half of the year, I would think that coupled with the enterprise customers, a large customer ramping, also coupled with the headwind in the first half of IWG coming out, the 20% that the second half of the year might be faster than the first half of the year. Could you just kind of reconcile why it appears the growth rate is going to slow in the second half of the year?

Speaker 3

I think the hey, Brian. I think the first quarter growth versus second half, here's how I think about it. You're right, the midpoint of the guidance implies that 9% year over year growth. But do remember that that has an impact of inorganic piece of it because last year Q1 or 2024 Q1 FY 2024 doesn't have 26 100 Hertz in it. And so that there's an inorganic piece of it.

Speaker 3

So if you take out inorganic piece of it and just look at the organic growth in Q1, I'm looking at about 5% organic growth. And so in fact, if you go to back half of the year, then you start to have these both here having the 2,600 Hertz. So you naturally see the total revenue growth lower than Q1 unless you consider the organic piece of it. So that's the reason why you're seeing those number comparison you mentioned. I do think that the organically we should see better growth in the second half, especially as we continue to ramp on the airdial opportunities.

Speaker 3

Again, we're not going to be specific about those airdial numbers, first half, second half, anything like that. But one main explanation is what I said, just kind of looking at the inorganic versus organic growth.

Speaker 6

Got it. Okay. And then you mentioned 6 kind of areas, I think 6 of investment and plans for the year on your strategy. And if I look at the EBITDA growth, it's about similar to the revenue growth plus or minus. When do you expect the investments to, A, accelerate revenue growth?

Speaker 6

And if it does accelerate revenue growth in the time to come, do you expect to see leverage in the EBITDA margin or will you continue do you think in the near term to reinvest that profit?

Speaker 2

Yes. So we followed our an outlook this year that we've been following in the past, which is to invest in these key new areas of opportunity, while also, slowly growing our EBITDA and bottom line. And we're pretty proud that we're managing to do both because we do have a lot going on in the company. We have improvements to Ooma Office and Ooma Enterprise, new verticals we're going to target. We have contact center coming through this year to bring into those solutions.

Speaker 2

We have international expansion going on. We have further investment this year in Aerodial because we also want to make Aerodial available outside of North America. And to do that, we've got to make some changes in the product, which we're working on and we'll have done this year. And with the acquisition of 26 on Hertz, there's kind of a one time effort, probably take us a year in all honesty, although we're 3 or 4 months into it, one time effort to make 26100hertz stronger by the technology and applications we can bring to it from the Ooma side. And so there's a lot going on right now.

Speaker 2

But as I look forward, which is I think what your question is about, I think a lot of these investment areas, I don't see them needing to continue for years to come. They are we I look back to kind of the 10 years ago or 9 years ago when we went public and the strategy we had and where we wanted to take Ooma. And with these things I just mentioned, we are rounding out the kind of company we wanted to be. And so I think that it's always in our hands how much we want to invest in new things versus bring to the bottom line. But and we do have a business model that could bring quite substantial amount of investments to the bottom line.

Speaker 2

But this year still we've got these areas of investment. One of our goals this year is to turn some of these areas that I just described around from being areas where we invest and don't make much money to start to get more payoff from them, whether that's international or air dial or even our 2,600 Hertz acquisition now. And as we do that, I think these new areas will start to be contribute very nicely to our overall bottom line. So I think that's the best answer I can give you, but it's a little bit more work to do, but there isn't a big mountain decline. We know where we're going and I think we're making good progress.

Speaker 6

Okay. Thank you so much.

Speaker 3

Thank you. Thanks, Brian.

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 open.

Speaker 7

Thank you. Eric, you laid out a pretty expansive TAM for Aerodial, particularly including Europe, I mean, literally tens of 1,000,000 of lines. And clearly, I'm not sure I'd be shutting down the copper lines if I was AT and T, if I'm really charging $400 sometimes even more anecdotally. But what are people doing to defer the need to upgrade because clearly these are mission critical? And are you seeing more in the way of competition because it is counterintuitive that you've got this gaping need and you've got the best product bouquet and our best product features and yet it isn't really taking off.

Speaker 7

I mean, this is just a much more graceful process than people thought notwithstanding the move to fiber? Or are you actually seeing some competition perhaps in Europe where you said you had to modify the technical specs to get interest from the Vodafone and others over there? Thank you.

Speaker 2

Yes. Hi, Matthew. I think that the market is sizable. And the biggest challenge to our growth is getting awareness of air dial into the market and getting the customers to consider us. And that's where we've been investing.

Speaker 2

We've been investing on the direct sales front, something we haven't done as much of as a company. We've been much serving smaller businesses. We've been much more marketing and inside sales driven. But I think that it's in our hands to go seize this opportunity in a bigger way, but we have to do some things different from what we've done in the past. Resale partners do help, particularly T Mobile has been a very valuable partner with us, but so have some of the others that we've talked about with you already in the past.

Speaker 2

I don't want to though gloss over competition. I think there's 2 or 3 forms of competition that we run into. Some of them cause delay, some of them are just competition. One is, if we're talking with a larger customer and we're that it's not uncommon for the existing provider of those POTS lines to come back in and say, oh, we'll lower your prices back down, just don't do anything and try and push things out a year. And we do run into that sometimes.

Speaker 2

We've had customers who we thought we're going to move forward with who said we're going to come back and look at this a year from now because we don't have a burning need now that the pricing has come back down and the network is intact for the moment. We do have customers where we've they've asked us to come upgrade quite an extensive amount of equipment. And as we go to do that with them, they discover, they didn't know, but they discover that maybe their alarm manufacturer has already made upgrades to some of their alarm panels without them even knowing it. And they actually charge them for the cost of upgrading the actual panel, which is obviously what a lot of these customers want to avoid. So we run into that a little bit.

Speaker 2

And then the 3rd kind of competition that is hardest for us in some ways, with some particularly large customers, they may have another aggregator type provider who does all of the telecom for them as a business. And that aggregator may not have as good probably doesn't have good solution to Zuma AirDial, but promises, oh, we'll take care of it. And it's difficult when you're sailing against someone who has the rest of the customer relationship around the product you're offering. But those are the competitive challenges we face, but honestly those shouldn't stop us from getting to the goals we've already outlined to you in the past. There's a sizable market opportunity and we definitely have by far the best product in the market.

Speaker 2

And the evidence that I say that with is, my view is we have some of our resell partners were reselling other people's stuff and stopped doing it to come to us because they're having so much problem with other people's stuff. And some of our customers are literally ripping out other people's stuff to put ours in because ours is working better for them and the other stuff wasn't working well enough. I think I talked about a customer in our Q3 conference call where we were moving quickly to do that for them. We're very proud of the solution we have. It's a very good solution in the market.

Speaker 2

And we just need to continue to pursue it aggressively. And so that's really what the challenge is still. I hope all that is a little color and helps. Thanks.

Speaker 7

That makes sense. Thanks,

Operator

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

Speaker 2

Well, thank you for everyone for joining us today. I think we made some great progress in FY 'twenty four and sitting here today with air dial and with 2,600 Hertz really as nice additions to our growth outlook in addition to growing office and enterprise. And so we're excited about what we can do going forward. With that, let me say thank you for joining us. Bye bye.

Operator

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

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Earnings Conference Call
Ooma Q4 2024
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