Ooma - Q2 2025

Transcript

Operator (participant)

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. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. To remove yourself from the queue, you may press star one one again. I would now like to hand the call over to Matt Robison in Investor Relations. Please go ahead.

Matt Robison (Director of IR and Corporate Development)

Thank you, Latif. Good day, everyone, and welcome to the fiscal second quarter 2025 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 Stang, and CFO, Shig Hamamatsu. After the market closed today, Ooma issued its fiscal second quarter 2025 earnings press release. This release is also available on the company's website, at 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 this call for one year. 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 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. 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 third quarter and full year fiscal 2025 on a non-GAAP basis. Also, in addition to our press release and 8-K filing, the Overview page and Events and Presentations page in the Investor 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 One and Supplemental Financial Disclosure Two.

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 CEO, Eric Stang.

Eric Stang (CEO)

Thank you, Matt. Hi, everyone. Welcome to Ooma's second quarter 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. 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 $64.1 million, and Q2 non-GAAP net income was $4.1 million. Both results were above guidance and up nicely versus Q1 of this year. Q2 cash flow from operations was $7.1 million, 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 million in the quarter to $8.5 million at the end of Q2. We also spent approximately $1.8 million 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 two new integrations, one 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. In this vein, we're excited about our development roadmap for Ooma Office, which includes leveraging the capabilities of our 2600Hz 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 AirDial calls are placed and can be of 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.

Once again, in Q2, we closed more new customers for AirDial than any previous quarter. As in prior quarters, we also added new AirDial resellers in Q2. Here I have some special news. We've been told by an incumbent local exchange carrier that they plan to resell AirDial 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. 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 third quarter conference call. We believe this is a breakout win for AirDial.

2600Hz, 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 2600Hz 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. We believe the leading capabilities of the 2600Hz platform, the 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 2600Hz 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 2600Hz platform than originally envisaged. We were able to upsell this customer to a more turnkey solution, thanks to our efforts to integrate Ooma applications and technology into the 2600Hz 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 2600Hz 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 2600Hz expansion, but we anticipate positive momentum.

On the residential front, Ooma Telo 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. 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 Ooma Telo, 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 Telo solution and convert their residential copper base over time.

We expect this first market rollout to begin late in our Q3, 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 Shig, 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.

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.

Shig Hamamatsu (CFO)

Thank you, Eric, and good afternoon, everyone. I'm going to review our second quarter financial results and then provide our outlook for the third quarter and full year fiscal 2025. Our second quarter revenue was $64.1 million, 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 2600Hz. In the second quarter, we saw better-than-expected revenue contributions from many of our offerings, including AirDial and 2600Hz. 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 H2 of this fiscal year.

In the second 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 $4.6 million, as compared to $3.6 million in the prior year quarter. On the profitability front, the second quarter non-GAAP net income was $4.1 million, above our guidance range of $3.6-$3.9 million. 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 2600Hz. Excluding 2600Hz revenue contribution, business subscription and services revenue grew 9% year-over-year. On the residential side, subscription and services revenue was down 1% year-over-year.

For the second quarter, total subscription and services revenue was $59.6 million, or 93% of total revenue, as compared to $54.7 million, or 94% of total revenue in the prior year quarter. Now some details on our key customer metrics. We ended the second quarter with 1,244,000 core users, which is up from 1,239,000 core users at the end of the first quarter. 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 Ooma AirDial.

Our blended average monthly 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 second quarter, 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 million and was up 8% year-over-year. Our net direct subscription retention rate for the quarter was 100%, as compared to 99% in the first quarter. Now some details on our gross margin.

Our subscription and services gross margin for the second quarter was 72%, as compared to 72% in the prior year. As a reminder, subscription and services gross margin for the second quarter this fiscal year included an impact of 2600Hz gross margin, which is running lower relative to Ooma's subscription gross margin. Product and other gross margin for the second quarter 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 second quarter. Accordingly, we expect product and other gross margin will start to normalize in the negative 55% range in the H2 of this fiscal year. On an overall basis, total gross margin for Q2 was 62%, as compared to 63% in the prior year quarter.

Now some details on our operating expenses. Total operating expenses for the second quarter were $35.2 million, up $2 million or 6% for the same period last year. Excluding the impact of 2600Hz, the total operating expenses increased $0.2 million from the same period last year. The marketing expenses for the second quarter were $17.6 million, or 27% of total revenue, was down 1% year-over-year as we controlled our spending to increase profitability. Research and development expenses were $12.2 million, or 19% of total revenue, up 15% on a year-over-year basis, driven mainly by the addition of 2600Hz team members.

G&A expenses were $5.4 million or 8% of total revenue for the second quarter, compared to $4.9 million for the prior year quarter. The year-over-year increase in G&A expenses was primarily due to increases in personnel and audit-related costs. Non-GAAP net income for the second quarter was $4.1 million, or diluted earnings per share of $0.15, as compared to $0.15 in the prior year quarter. Adjusted EBITDA for the quarter was $5.6 million, a record for the company, or 9% of total revenue, as compared to $4.9 million for the prior year quarter. We ended the quarter with total cash and investments of $16.6 million.

Cash generated from operations for the second quarter was strong and at $7.1 million, it was a new quarterly record for the company. On a trailing twelve months basis, we generated a record $18 million of operating cash flow and $12 million of free cash flow, which represented 69% and 154% increase, respectively, over the same period a year ago. We paid down the debt by $3 million in the second quarter and reduced the outstanding debt balance to $8.5 million. On the headcount front, we ended the quarter with 1,130 employees and contractors. Now I will provide guidance for the third quarter and full fiscal year 2025.

Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization, intangibles, and certain non-recurring gains and expenses. We expect total revenue for the third quarter of fiscal 2025 to be in the range of $64.2 million-$64.6 million, which includes $4.3 million-$4.5 million of product revenue. We expect third quarter net income to be in the range of $4.1 million-$4.3 million. Non-GAAP diluted EPS is expected to be between $0.15 and $0.16. We have assumed 27.5 million weighted average diluted shares outstanding for the third quarter. For full fiscal 2025, we are raising both revenue and profitability outlook.

We now expect total revenue of $254 million-$255.5 million. 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%. In terms of revenue mix for the year, we expect 93%-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 $15.7 million-$16.2 million. Based on this guidance range, we estimate our Adjusted EBITDA for fiscal 2025 to be $21.5 million-$22 million.

We expect Non-GAAP diluted EPS for fiscal 2025 to be in the range of $0.57-$0.59. We have assumed approximately 27.5 million 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?

Eric Stang (CEO)

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 two 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 (participant)

Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. To remove yourself from the queue, you may press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brian Kinstlinger of Alliance Global Partners.

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

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 AirDial customers, the enterprise ones?

Eric Stang (CEO)

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

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

Great. Thank you. And then, you talked about the top ten service provider in the US selling AirDial to its residential customers. Is the sales execution of the sale on them? And will we see, well, let me change it. Do you expect to see the residential customers and users begin to increase in the H2 of the year or early next year? How do you think, you know, this might impact your results on the residential side?

Eric Stang (CEO)

Yeah. Well, first of all, to clarify, this Incumbent Local Exchange Carrier I talked about. They're doing two 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, you know, terrific, terrific new opportunities for Ooma. We believe we're the only provider they're working with, 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 we expect it to be a very exciting opportunity for us that will unfold, particularly over the next three or four months as they go through the trial on the residential side, which I mentioned, and as they get the AirDial product launched into market.

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

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

Eric Stang (CEO)

These are residential consumers that they have today. They do have to give, I think, maybe a ninety-day notice for some, you know, laws that exist around this. But if they're gonna 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, "Yeah, come in and switch it out with Ooma Telo," or you can say, "Don't." But they have control over their customers and how they handle them, I believe.

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

Great. That's helpful. Last question for Shig. I think I asked this last quarter, too, but with revenue in the third quarter and fourth quarter 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 third quarter and fourth quarter compared to what was reported in the second quarter? Hope that makes sense.

Shig Hamamatsu (CFO)

Yeah, I understand. So part of it is, you know, obviously, the guidance for revenue, let's say first, includes the impact of anticipated churn. Now, you have slipped from Q2 to the H2 with IWG I talked about, so there's a little, you know, impact of that is factored in in the H2. And also, the product revenue, you know, I think I got it to 4.1-4.3 in Q3. Some of those product revenue, by the way, what I'm gonna say is unrelated to AirDial, so something other than AirDial. There's 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 recur Q4, and also this recent impact is impacting the revenue pace, Q3 versus Q4.

Yeah, so those are the main drivers. You know, I think, the Q3, I mean, excuse me, Q2, sales and marketing spend, we controlled well. We made sure that we invest in the right channel, but to the extent that we, you know, wanna look closely at the opportunity to, you know, invest some more dollars into sales and marketing, maybe in 28% range instead of 27%. So there's some puts and takes that leading to the guidance number. But having said that, you know, we're still looking at the 9% EBITDA based on a guidance, EBITDA margin for H2, which should put us to 9% EBITDA margin for the whole of the year. So that's, you know, versus 8%, what we guided to coming out of the year.

you know, I think there was some more, you know, work we can do to improve, but we're happy to see where we are going into H2 to improve the profitability much better than what we guided to at the beginning of the year.

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

Okay. Thanks.

Shig Hamamatsu (CFO)

I think that the other thing, Brian, so just finish up my thought. There's a little bit of seasonality to the G&A expense, namely the audit fees. We get billed more in the H2 as we get into the kind of a heavier set of an audit cycle in the year. So that's the other factor in impacting the OpEx a little bit higher for G&A in the H2.

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

Okay, that makes a little more sense because it sounds like you're gonna save $1 million on hardware gross margin, the exact same split of revenue. So to me, that $1 million may be explained by G&A, but other than that, it would be a little bit.

Shig Hamamatsu (CFO)

But yeah, maybe I should probably said that first, but that's one of the bigger factors in, you know, thinking about how we model that next two quarters.

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

Okay. Thank you.

Shig Hamamatsu (CFO)

Yeah, thank you.

Operator (participant)

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

Mike Latimore (Managing Director and Senior Research Analyst)

All right, great. Thanks. Yeah, great, great results and some interesting updates here. I guess first on 2600Hz, 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?

Eric Stang (CEO)

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 gonna 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. 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.

Mike Latimore (Managing Director and Senior Research Analyst)

Okay, great. 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, you know, the preferred vendor?

Eric Stang (CEO)

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 it, at the products in the market today, it, you know, the features and capabilities of our AirDial solution stand above others.

Mike Latimore (Managing Director and Senior Research Analyst)

Mm-hmm.

Eric Stang (CEO)

Similarly, our residential solution has been rated the number one phone service in America by Consumer Reports for, like, 10 years.

Mike Latimore (Managing Director and Senior Research Analyst)

Right.

Eric Stang (CEO)

But yes, we think that this is a breakout for us because it's the first partner we've signed up who has their own residential lines to go replace themselves.

Mike Latimore (Managing Director and Senior Research Analyst)

Mm-hmm.

Eric Stang (CEO)

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, we believe, a top ten ILEC in the country. This could turn out to be quite significant for Ooma over time.

Mike Latimore (Managing Director and Senior Research Analyst)

Do they have a sort of drop dead date where their POTS lines go away and, you know, would be a catalyst for both these segments here?

Eric Stang (CEO)

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

Mike Latimore (Managing Director and Senior Research Analyst)

Mm-hmm. Okay. All right. Makes sense. Great. Thanks very much.

Eric Stang (CEO)

Thank you.

Operator (participant)

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

Josh Nichols (Senior Research Analyst)

Yeah, thanks for taking my question. Good to see some upside on the top line, not just for the quarter, but for the year. 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, AirDial and 2600Hz? How is that being driven?

Eric Stang (CEO)

Our core business offering is our business solutions. Whether they're delivered in a wholesale way with 2600Hz, or to small businesses with Ooma Office, or larger businesses, and particularly hospitality and hotels with Ooma Enterprise, you know, our POTS replacement solution, which is more akin to our residential solution in some respects, we focus on growing all of those, and all of them are growing. Now, the market dynamics are a little different across the three. I mean, the competitors we face and the competitive position we have is different across all three. Two of them, wholesale and POTS replacement, aren't traditional UCaaS, and I think that's 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 three and grow all three well. Now, obviously, AirDial is growing off a smaller base, so, You know, not surprisingly, I think it'd be fair to say that's the fastest growing of the three 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.

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

Josh Nichols (Senior Research Analyst)

Thanks for that. I know the 2600Hz margin profile is a little bit lower, but the company's actually seen a subscription and services gross margin start to increase again sequentially, at least for the last couple 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?

Shig Hamamatsu (CFO)

Yeah, we certainly think that there's you know more room to improve on 2600Hz. And you know the 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% margin, you know, round number. Part of it is, you know, while we continue to increase the 2600Hz specific gross margin, that we probably will continue to invest a little bit more into the AirDial support, you know, things of that nature. So there's a little bit of offsetting going on. But certainly, going into next year, obviously, we're not guiding to next year, but we should start to see another you know additional step or improvement on subscription gross margin as we continue to grow the business subscription revenue.

Josh Nichols (Senior Research Analyst)

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 H2 of this year, some new AirDial opportunities as well, that we've talked about recently, as well as 2600Hz, it 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 while 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?

Eric Stang (CEO)

That's certainly what we're driving towards. 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. 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. The two large customer wins we've announced the last two quarters just have the potential to be massive for us. We're not done. We are hopeful to have further wins here, even this year.

Yeah, 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.

Josh Nichols (Senior Research Analyst)

Thank you. Thank you.

Operator (participant)

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

Eric Martinuzzi (Senior Research Analyst)

Yeah, 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 you know, 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?

Eric Stang (CEO)

Well, you know, 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, you know, through much of Q2, we were doing development in conjunction with them to be ready for the Q3, you know, residential rollout that we talked about. 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, It, you know, a year ago, we talked to customers who 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 US have converted so far. I don't know how they quite get that number, but I can tell you that, we have won 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 gonna do. And that's great for us. That's what we've been building to for the last two years, in all honesty. So, it's got us excited.

Eric Martinuzzi (Senior Research Analyst)

So that's pipeline that could potentially convert here in FY2025?

Eric Stang (CEO)

Yeah, we will get sales in FY2025, which is to say, the back half of this year, and we should go into FY2026, which starts February next year, with a lot of momentum.

Eric Martinuzzi (Senior Research Analyst)

Okay. And then for the business growth rate, your guidance is based on 13% for business and residential at -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 a backlog or a pipeline that substantiates that full year at 13%? Or what's behind the guide?

Shig Hamamatsu (CFO)

Yeah, that is mainly due to the growth, YoY growth rate for our largest customer, IWG. So if you, if you think, if you recall that, last couple quarters, the new seat additions at Regus has been relatively low compared to, let's say, Q2, Q3, Q4 last year. So, the, If you think about Q1, we had a more benefit of having user additions in the prior twelve 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, plus we had a churn in Q1, half of the large churn we talked about. So really the driver there is the reduced YoY growth has been lower quarter-over-quarter.

Eric Stang (CEO)

Got it. Thank you for taking my questions.

Shig Hamamatsu (CFO)

No, thank you.

Operator (participant)

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

Hi, this is Chris, I'm for Arjun, and I'll add my congrats on a great quarter. So it was nice to see net retention inflection 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 IWG feature?

Shig Hamamatsu (CFO)

Sure. The main driver is improving 100%, I think, is, you know, we had a little better churn, you know, for business users in particular, this past quarter. So, you know, that certainly helped us to tick up a bit to 100% from 99.9% last quarter. To your point, in terms of short term, looking forward, I do think that it could dip back down to 99% when the large churn in H2 from IWG, we're expecting when that happens. Right now, most of it looks like going to happen in Q3, maybe some in Q4, but that could pull us back down to 99%. So my sense right now is we're going to hover between 99% and 100% in the foreseeable future.

Got it. Thank you. That's helpful color, and then we're, you know, about a quarter in since the launch of AirDial in Canada. I was wondering if you had any early feedback from customers and, you know, how things are going in that market? Thanks.

Eric Stang (CEO)

Yeah, 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 partner 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 (participant)

Again, ladies and gentlemen, to ask a question, please press star one one on your telephone. Again, that's star one one on your telephone to ask a question. We have a follow-up question from Brian Kinstlinger of Alliance Global Partners.

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

Thanks so much. I have two follow-ups. The first one is, can you provide an update on that large 2600Hz 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 four to six quarters? I guess, is there a committed number of lines that they've communicated over the first 12 months?

Eric Stang (CEO)

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, two, three months, because it's a very, you know, 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. And how fast they roll it 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 hundred thousand user number, if not above it. So, yeah, I think it's clearly the platform of the future for them, and they put a lot of work on their side, you know, using the APIs in the 2600Hz platform to really build a custom solution for the market that is just what they want to bring to market. 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.

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

Great.

Eric Stang (CEO)

So yeah.

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

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

Eric Stang (CEO)

No, I think at this point, I would rather just say that we believe they're a top ten ILEC in the country. That means they're gonna have hundreds of thousands of residential copper lines and hundreds of thousands of business lines that they serve today. And I think I'll leave it at that for now, but you know, it's clearly a big number.

Brian Kinstlinger (Managing Director and Senior Technology Analyst)

Okay. Thank you so much.

Eric Stang (CEO)

Thank you.

Operator (participant)

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

Matthew Harrigan (Equity Research Analyst)

Oh, thank you. It's nice to see that the carrier is also taking Telo as a compliment to AirDial 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 two more questions after that.

Eric Stang (CEO)

Yeah, 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, gosh, the FCC puts out numbers with delay, but I guess you could estimate around 40 million residential POTS lines in use today in North America. So gives you a sense of what's out there that's gonna have to change over. 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, you know, 20%-25% take rate of the homes they pass.

And, that tells me people wanna have home phones. They wanna be able to call 911, have something that, you know, works well from home in maybe more cellular-challenged locations. So yeah, 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 gonna be a great step.

Matthew Harrigan (Equity Research Analyst)

You did say, in relation to that ILEC, that this is a company that has one of the top 10 number of consumer relationships, so we can infer that we're probably at the high end of the league table on that one, if you intersect the Venn diagrams, I would think. Is that fair?

Eric Stang (CEO)

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

Matthew Harrigan (Equity Research Analyst)

Didn't you also say that they were one of the top 10 companies in terms of US consumer relationships, or did I misunderstand?

Eric Stang (CEO)

I'm not sure I said that, no.

Matthew Harrigan (Equity Research Analyst)

Okay, I misheard then. Great. Well, the best results in quite a while. Congratulations.

Eric Stang (CEO)

Thank you.

Operator (participant)

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

Patrick Walravens (Managing Director and Senior Research Analyst)

Hey, great. This is Oliver on for Pat. Could you provide an update on the US 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?

Eric Stang (CEO)

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

Although those tend to be more referral opportunities for us than direct sale by T-Mobile. US Cellular is going great. We have a great relationship there. And we you know, last quarter, we mentioned that not only are they selling AirDial, but they're gonna begin to start selling Ooma Office, and that's coming along, too, although that's still nascent. But these are two strong relationships for us, and you know, we expect both of them to grow as we look forward.

Operator (participant)

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

Eric Stang (CEO)

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, you know, more importantly, a strategic position that we feel is really strong as we look forward. Our annual exit recurring revenue for Q2 was $233 million, with 72% gross margin. That puts us at about $167 million or so 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. So, we'll keep working at that and look forward to giving you more updates on our next call. Thank you, everyone.

Operator (participant)

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