Ooma Inc Stock

Well, good morning, everyone. Thank you for joining us today. I'm Eric Stang, of course, CEO of Ooma. We're excited to talk with you today about what's going on in the company. We're going to try to move through it fairly quickly so we can get to Q&A, but we do have a lot to talk about, including a couple of exciting announcements, which we'll be making today. So I hope you enjoy our presentation. And by the way, welcome also to everyone who's dialed in and watching this online as well.

First, though, our safe harbor statement, which speaks to forward-looking statements that we'll be making during the day. I'll let you read this post the presentation. Ooma. We're obviously a cloud-based communications provider. We like to say that Ooma stands for object of my affection, but the real truth is we're named after Uma Thurman. So if any of you know her, let her know, she's got a public company named after her, not everyone can say that.

I'm very pleased to welcome many of our leadership team members here today. Not everyone on this slide has joined us, but several folks have, and you'll meet them as they come up to present. So I won't take a moment now to introduce them. But excited to be here with you. So Ooma today, just a little bit of background and perspective. As you know, we provide a set of services to customers using a multi-tenant SaaS platform, focused around telephony, messaging, video, and all kinds of unified communications solutions that go along with that.

We have over 1.4 million core users today. Core users for us excludes a small subsidiary that is a mobile app, Talkatone, and also our 2600Hz customers. About 1,500 people based in Sunnyvale, been public for about a little over 10 years. On the last trailing 4 quarters, we've driven $307 million in revenue, which is up 17% year-over-year, about $44 million in EBITDA, quite a lot of growth in EBITDA in the last 2 or 3 years, and we're committed to driving EBITDA up further as we go forward. About $300 million in annual recurring revenue, and our recurring non-GAAP gross margins run in the 70% plus range. So we're driving a lot of value from our customers, and with 99% retention, we feel we're building a bigger business and a better business each quarter that we go forward.

Our strategy is pretty simple. We aim to bring together advanced features, superior ease of use, and uncommon value. And when we combine -- can combine all 3 of those together, we believe we have a winning strategy. And we do that in certain segments that we target. And that allows us, we believe, to be a leader in those segments. We don't try to be everything to everybody, but we are going to take you through today the segments we're in and why we think we're winning.

A little bit of a history of the company and where we've gotten to today. We started out over 20 years ago in the residential telephony business. That today is less than 30% of our revenue. But we quickly moved past that and moved into business UCaaS, Unified Communications as a Service, started that segment for us over 10 years ago. We're very excited that third parties have rated us #1 in both of those areas of our business. More recently, in the last few years, we've gotten into POTS replacement, replacing plain old telephone service with more advanced solutions. And there, we're very excited because we have a very large partner reseller community, and that is growing for us every quarter. And we've also been recognized there as well for some of the leadership elements we bring. And we'll talk about what those are as we go further in the presentation.

And then finally, most recently with our 2600Hz acquisition, we've also been able to use our platform as a wholesale platform for others to leverage. And we'll talk to you a little bit about where we're going there and the pretty significant longer-term potential that, that segment holds for us. Looking at a little more detail, what are customers looking for in each of these segments? And why Ooma? Why do we do well? When it comes to smaller business communications, businesses up to 100, 200, 300 employees, they really want to avail themselves of the newest methods and resources that they have not generally had access to before. And with that, they want to portray a bigger business image and communicate with their customers more effectively.

Now why we win in that segment is we really put together a curated set of features for the smaller business customer and we do that so that they get everything they need, but they don't get a lot of extra that's confusing or too much for them. Keep in mind, a lot of our small business customers have no IT professional in their business. So they have to be able to set up and operate that and use that system themselves. And we marry that together with great ease of installation and use, good value, and very ready available support. And we think when we put that package together with a focus on their needs, we can differentiate versus the general UCaaS industry.

In POTS replacement, it's pretty simple. Our customers are looking to reduce costs. The cost of POTS lines have gotten astronomical. And they're also trying to just keep their equipment operating. Our equipment is legacy equipment that needs an analog connection. What do they do if that POTS line goes away? You're going to hear from us talk today about some very differentiated features that we bring to the space. And we have built our system end-to-end, so we can bring the control and reliability that is needed for this type of solution.

With our wholesale communications software and services, we find our customers are probably using an older platform, and they want to stay competitive as things are evolving. And where our platform really stands out is very modern in design, very API-based, allows our customers to not only leverage prebuilt applications, but really innovate on top of it to meet their needs. And we'll talk a little bit about what folks are doing there. And finally, in residential communications, it's really about the safety and convenience of having a home phone. And we believe we bring a very reliable service with some advanced features at a very low cost, and we'll talk more about that.

So our strategic priorities as a business today, we want to win carriers and other resale partners in order to dramatically grow in AirDial and our POTS replacement solutions. We want to focus on AI to extend our leadership serving small business customers and with that, dramatically grow our ARPU. We want to continue to focus on the modern capabilities of our 2600Hz platform and position it as the choice for the future as carriers and others eventually decide to replace their legacy solutions. And in residential, we have 2 new offerings, MyPhone and StarDial, which we'll talk about, and those will allow us to reignite residential growth.

At an overall level, we target certain segments where we believe we can be the best. We're going to take you through why as we go further here. But to do that, we have to have the leading solution and put together those 3 elements of the strategy that I talked about. We're also augmenting our growth with acquisitions in the -- primarily in the UCaaS space. I'll talk about what our objectives there and goals are a little later. But with that, we can build scale and drive more profitability as a business. And finally, the last one, driving profitable growth. We're very focused on what we're spending for what we're achieving, our customer acquisition cost, our payback, building scale to really bring that 72% gross margin that we run with today for recurring revenue on a non-GAAP basis to bring more and more of that down to the bottom line.

So with that, this is our agenda for today. I've taken us through the first one on here. We're very excited to have Elka Popova with us from Frost & Sullivan. She's going to give us a general market perspective, and then we're going to go through each of our 4 segments, financial metrics. I'll talk a little bit about acquisitions and closing remarks, and we will get to Q&A, although I know it's a lot. And Elka, thank you for joining us. She has got a lot of experience in our industry. She's the lead author for Frost & Sullivan's annual Radar reports on UCaaS and CPaaS. She's going to be joining us for Q&A as well and lunch. So feel free to also ask her questions as we go through the day. Thank you, Elka.

Thank you, Eric. Thank you for having me here, and hi, everybody. I'm here to talk to you about the growth opportunities in the UCaaS market. And there's a lot to talk about. So feel free to connect with me after the event or during lunch to take a deep dive. Throughout my brief presentation, I want to double-click on 2 trends that are defining this space. More specifically, I want to talk about AI technologies, which are transforming the industry by elevating the service provider value propositions, enabling the providers to position as workflow orchestrators above and beyond simple providers of communications and collaboration solutions.

I will also talk about a very distinct opportunity in POTS replacement. And as you will find out, Ooma is particularly well positioned in that space. But what's important to understand is that there is an urgency to replace legacy residential and business POTS lines. Now let's talk briefly about the key factors that are driving growth. Overall, we are in a relatively mature space. But going forward, the core benefits of cloud communications and collaboration solutions, more specifically the CapEx avoidance, the ability to flexibly adjust capacity, more rapidly gain access to advanced functionality, and so on, will continue to compel organizations to move their telephony from the premises to the cloud.

Also, we're seeing communications being perceived as strategic assets today, not just an expense center within the organization. And this is again driven by the digital technologies, AI, APIs, and so on, which are enabling organizations to embed communications into workflows and drive deeper transformation. Apologies. Now with the more rapid adoption of collaboration tools, video meetings, group chat, and so on, we're also seeing pull-through for telephony solutions to be integrated with the collaboration stack and moved from the premises to the cloud.

There's a lot to say about AI. But in my opinion, in the next few years, we're going to be -- to see a significant impact on the UCaaS market, where service providers will be able to boost ARPU and drive accelerated revenue growth. Hybrid work has become a common phenomenon across organizations. I know the pendulum has swung from a drastic shift to remote work back to the offices. But overall, organizations are a lot more distributed than they used to be, and that's where cloud communications offer the best solution to empower the employees. And last but not least, deskless workers and different vertical organizations have been underserved in the past. Today, we have an opportunity to create tailored solutions for health care, for retail, hospitality, and other industries using AI and APIs.

Now this is my forecast for the UCaaS market without incorporating the impact of AI technologies. So this is a mature space if you do not count on the AI impact. I am still doing kind of back of the napkin calculations. And if some of you are also doing this, let's collaborate perhaps. But I believe that by 2031, we can see a boost of about 15% to 20%, just driven by paid AI capabilities. And there's a lot to look into -- to say about this, but I'll move on in the interest of time.

Here is just some data from a survey we conducted this year among close to 1,200 IT decision-makers, which included finance people, IT staff, and C-level executives. And what you're seeing is the light blue is the data from '26 and '29 is projections -- sorry, the darker blue is projections for '29. Overall, we see an increase in the number of organizations or the proportion of organizations adopting agentic AI across multiple use cases. So this proportion will double from 15% to 29%. At the same time, we're going to see a drastic decrease in the ones that are still in the watching and proof-of-concept stages.

What the adoption of AI is driving is an accelerated shift to integrated platforms that unify telephony, meetings, messaging, presence, and even contact center capabilities. Why? Because that's how you create a common data pool across which you can run AI technologies for deeper insights into the organization, customer engagement, and so on. And this is a particularly favorable trend for a company like Ooma.

And now switching gears. I talked about the urgency to replace POTS solutions, legacy technologies, deregulation around the globe is driving price increases for legacy solutions, also limiting the availability of some of those legacy services. So the urgency is driving organizations to increase their investment in next-generation solutions replacing specialty POTS lines. So more than 50% will be increasing, and practically, no one is decreasing their investments.

And now I'll take a moment to mention that we have a best practices recognition program as part of which we recognized Ooma specifically for its AirDial solution. We believe it creates an opportunity for Ooma to capitalize on at least 12 million POTS lines that needs to be replaced in the U.S. specifically, some of which are residential, some are business lines. And what we specifically value in Ooma's approach is the fact that the solution was tailored for those mission-critical analog applications, fire alarms, elevator phones, and so on, which are very common across many organizations. And they also have an integrated solution that includes the hardware, the connectivity service, the voice applications, and also leverage patented technologies that improve the reliability and security of those applications.

Because the government authorities have deregulated the markets and now the telcos are rapidly increasing the prices of these solutions and fully discontinuing the availability of some of these services. So you can't have an analog line, you got to move on to a next-generation solution. And that's separate from the benefits you get in terms of functionality, in terms of security and reliability, and so on. So I'll just quickly mention the POTS Tracker about which you will hear from Ooma itself, but it's a new capability that provides additional visibility to organizations about their risk exposure. So all of these capabilities combined really distinguished Ooma for us, and this is why we gave them that best practices award. And with this, I need to introduce Thad White, who's going to talk about emerging products.

Great. Hi all, good morning. And Chris Burgy, who's speaking later, will elaborate more on the POTS shutdown and what's driving that and the rate. So POTS replacement is different from UCaaS. Many of the remaining POTS lines are serving specialty equipment. This is things like elevators, alarm panels, door entry, gate entry phones. And this type of equipment has requirements that are not easily met by traditional voice over IP solutions. Ooma AirDial solves these requirements in unique ways, and I want to share some of the differentiators from others in the market.

First of all, Ooma owns and controls the full stack of the AirDial solution from the hardware device that sits on-premise, which we design and manufacture ourselves to the cloud call control layer, which we've built over many years and hardened to handle these special use cases to the management plane, where we've built a custom portal to provide monitoring and management with unmatched visibility to a customer or partner's phone lines. And what this owning the full stack allows is us to customize the firmware to serve these difficult applications. We have full control over the reliability of the service, and we're able to create differentiated features.

The first I want to talk about is multipath redundancy. So this type of specialty equipment requires redundant network connections. And usually, what that means is failover. The problem with failover is that it takes time and any calls in progress will be dropped. Ooma has developed this patented solution to simultaneously transmit all of the voice traffic over multiple links at once. And what this means is that calls in progress will not be interrupted if one of the network connections fails. And it also means that if one of the network connections is degraded perhaps because of congestion, but not enough to fail over, our calls won't be interrupted on AirDial.

Next is notifications. So Ooma AirDial provides more visibility to a customer or partners' lines than anyone else in the market. We provide standard device-based notifications. So if your device goes on to battery power or offline. Only Ooma AirDial provides call alerts, which can send an e-mail or SMS if a call to a specific number is made, such as 911 or to any number. Only Ooma AirDial provides extended off-hook notifications. So if an emergency phone is accidentally left off hook, we can notify the IT group and only AirDial provides equipment disconnect notifications. And this is very important and one of the reasons that health care customers choose Ooma AirDial. Hospital phones, it's very important to the IT department that the emergency red phones are not removed from their place and put in a drawer. And Ooma AirDial is the only service that can notify a hospital IT when that happens.

Next, our remote device management portal or RDM, is a one-stop shop for monitoring and managing your AirDial devices and phone lines. It combines many features that competitors offer in separate portals from separate vendors. And it's one of the reasons that retailers choose Ooma AirDial. We have many large retailers who have -- who value the hierarchical approach that we provide to managing a portfolio of POTS lines across the U.S. We have customers with retail installations in more than 47 states. And we also provide APIs so that these customers and partners can integrate monitoring and management into their own in-house tools.

And finally, installation and project management is critical to our customers when replacing their POTS lines. We provide a third-party network of installers nationwide. We assign onshore project management to orders within 24 hours. And this is one of the reasons that schools choose AirDial. We have over 800 schools and school districts, many with large-scale deployments across dozens or even hundreds of sites. Here's a map of our schools and school districts. Now let's hear from one of our customers, Phoenix Senior Living.

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And even though we feel like we have a really strong lead in this POTS replacement market with differentiated features. We're not stopping. We have a whole road map of enhancements. Soon, we will have a dual modem device with active, active LTE connections. We're working on FedRAMP early start certification to open up federal deals. We will have a 5G version of AirDial. The use case for POTS replacement doesn't require the speeds of 5G, but we want to future-proof as carriers change their spectrum.

And we are also developing a high-density solution for installations at buildings with more than 50 POTS lines to replace at once. We're also innovating on the remote device management cloud side. We are extending it to manage other Ooma products and devices, and we're building proactive monitoring capabilities and automated diagnosis and remediation capabilities. So with that, I want to thank you and hand it off to Chris Burgy, our Senior Vice President of Corp Dev.

Thank you, Thad. Good morning, everybody. Excited to have the opportunity to share more information with you today around the transition and the process for POTS deprecation. This journey actually began about 4 years ago when the FCC began to lift restrictions for the carriers here in the U.S. This started with forbearance, which allowed them to effectively increase prices at whatever rate that they want, which was a measure that they use to obviously protect revenue, but also to encourage customers to migrate off the network that they want to shut down.

The FCC took further actions to remove the red tape over a series of other orders, including some this year that effectively allow the incumbent carriers in the U.S. to fully deprecate the network at their own pace and desire.

And so we've seen that journey commence in earnest. We estimate, based upon the data that the FCC shares that there are up to 8 million lines in businesses alone that still exist here in the U.S. that need to go through this migration. Also bear in mind, this does impact the residential home phone service market, which is a separate category that they track. So there's mutual benefit for Ooma in 2 distinct categories of solutions that we offer.

The carriers are now taking this quite seriously, and it has become a factor that has weighed heavily on customers in determining what to do, including emergency shutdowns that occur often for things like copper theft, believe it or not, where companies may come out of compliance with their fire panel and other devices that, that shared and that forces immediate decision. The good news for us is this has woken up the market, and it is a forcing function for organizations to have to take action. We believe this journey for deprecation will continue for many years, and AT&T is the first to be most aggressive around this.

As Elka mentioned earlier and one of the reasons that we're recognized by Frost & Sullivan, we developed a tool called POTS Tracker that allows organizations to understand the risk profile for their locations. This tool ingests and analyzes the filings that are submitted by the carriers, both with the FCC and many of them do it on their own direct websites as well. And this identifies the stages and the phases and the locations in which they're going to shut down the copper network. What we've seen incidentally through this system is an increasing wave of these actions. The first one actually began in June of this year. AT&T has another major action coming up in November, and they're continuing to conduct filings that now go into 2027 and 2028. Incidentally, we've also seen with the acquisition of Frontier by Verizon that they are now starting in earnest their journey to deprecate the legacy Frontier network as well.

This tool allows customers to upload all of their locations into watch list and identify if there are matching restrictions or deprecation events and equally as important, identify and notify them of future events as they happen so they can properly plan out the process to transition over. This allows us to assist them uniquely in the journey of working through phases, especially for large organizations with many thousands of locations. We take a multifaceted approach to go-to-market strategy. This has been one of our greatest strengths as an organization for the AirDial solution. We believe that it gives us exposure and access to a wide variety of verticals and size of companies.

Some examples of this approach include Tier 1 carriers like T-Mobile and Comcast, CLECs and wholesalers like Lingo, NextGen aggregators, Spectrotel and traditional channels in the UCaaS space like the technology services distributors and the subagents, many of whom have a long background serving telecom for customers. So this gives us effective access to the Fortune 1000 market, gives us effective access into people who have vertical specializations, lots of different touch points. And it is not uncommon for us in large organizations to have multiple of our channel partners in each of these categories bid, which sends a signal clearly to that customer if you have 3 organizations bidding on an RFP, for example, and it's all AirDial, the customer thinks there's something really special here since everybody is positioning this. It also allows us to scale our go-to-market strategy because we're not dependent on our own direct selling motion, but we can lean on these other routes to market.

I'm also very pleased and excited today to announce our newest relationship with TELUS. TELUS is a Tier 1 carrier in the Canadian market. TELUS went through a journey of evaluating all of the POTS vendors in the space, all of our competitors. And out of that evaluation, they selected AirDial as the solution for their business POTS replacement. This is a testament to the journey that we went through here in the U.S. and the credibility that we've built with a wide array of channels and carriers. TELUS evaluated and selected us for all the same reasons that the carriers here in the U.S. have selected us for as well, many of the things that Thad shared with you.

I think this sets us up for a strong position going forward. There are other carriers, of course, in Canada, and this is an exciting journey as Canada as a country goes through the same process as the United States. TELUS Business Solutions, where we're first starting has up to 300,000 lines. We're hopeful in that journey to assist them in converting as much as they'll allow us to. There are other divisions in TELUS that have their own POTS lines as well. So we'll continue discussions with them. The contract has been executed. We are starting the planning for launch. TELUS intends to want to move quickly and launch with our U.S.-based infrastructure to get to market soon. And then we'll move into Canadian-based data center facilities to serve the government entities where this is required there. We estimate the go-live will happen in the second half of our fiscal year.

The other attractive thing about AirDial is the structure of economics and the stickiness, if you will, about the solution. Customers don't look at this like other technology solutions that they select. They want a contract, they want certainty that it's going to stay, and it's a put it in and forget it sort of scenario. So we sell AirDial on a contract to practically all of our customers, some on even longer than 3-year contracts. Our ARPU, as we've shared previously in earnings is approximately $25 per line. That is a blend of our own direct sales, a blend of reseller partners who have a different structure. We also have an upfront capital model where they purchase equipment or rent it.

Today, we have approximately 45 reseller partners, exciting opportunity for us to continue to expand. We typically add approximately 2 or more per quarter. And again, this is really attractive to Ooma from an economic perspective because many of these reseller partners actually own the full selling motion. They'll do service delivery. So it gives us a strong standing to accelerate growth as a company, and we don't have to bear the cost of things that normally would in doing a direct sale. With that, I'd like to introduce Dennis Peng, our Senior Vice President of Product Management.

I'm Dennis Peng. I'm here to talk about the UCaaS side of the business. UCaaS is the phone messaging and collaboration solution that businesses rely on every day. It encompasses a wide range of capabilities, but it basically includes everything that a business needs to communicate from their phone number to text messaging, video conferencing, mobile and desktop apps, and now the AI services that layer on top of it all. Ooma serves companies of all sizes today. Our customers are primarily located in 30 countries in North America, but we are in 30 countries, primarily to serve one of our biggest customers, IWG or Regus.

This chart covers our entire UCaaS customer base. And while many of our customers are small businesses, we now have 45% of our seats, which are in accounts with 10 or more users and 15% of accounts with 100 or more seats in them. Ooma serves 2 very distinct customer types with 2 different solutions because they have different needs. First are small businesses. Here, the buyer is an owner or an office manager. There's no IT professional in the building. So it has to be simple. They just want to save money, sound professional to their callers, and talk to a human when they need help. And that's Ooma Office.

Second is Ooma Enterprise. These are generally larger organizations, and the buyer is a CIO or an IT department. They usually have more sophisticated requirements and sophisticated needs. So they need a more flexible solution and a different engagement model. And we serve those customers with Ooma Enterprise. Now Ooma Office is purpose-built to serve small businesses, and it draws from our years of experience serving consumers. A small business owner should be able to order phone service and be up and running the same day. We find that small businesses prefer to use hardware phones, so we label them, test them, and preactivate them so that when they arrive, they're ready to be used. We have onboarding specialists and support agents available 24/7 to answer questions and to help them customize their setup. All this comes at a small business price and no contracts. Let's now hear from an Ooma Office customer.

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Switching gears now to Ooma Enterprise, which is how we serve larger businesses. Here, you need to have a deeper set of features and more customization options like open APIs and flexible deployment models. You also need to work with the customer to solve a broader range of issues ranging from network, security, and telephony requirements and adapt to their specific needs. We found success in the hospitality segment of this market by addressing workflows specific to this industry. And in total, we now have over 1,000 hotels using our solution. Let's now hear from an Ooma Enterprise partner.

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As we look to the future, we are investing in 3 key areas that we think will drive growth. Number one is customer engagement. Today, we support customer contacts through voice, text, video, and a Contact Us widget that customers can put on their website. We want to expand to more web and digital channels so that a business can manage all their customer interactions in one place. Number two, AI solutions. I'm going to go into a lot more detail about AI later, so I won't say more about it now. Number three, CRM integrations. Customers find huge value in integrating their phone system with their CRM because they can see the customer history pop on their screen when someone calls.

We support over 25 integrations today, including many in specialized verticals such as Clio for law firms. And we are more successful in selling our service when we have a product integration. So we want to build more.

Our call center solution called Ooma CX is coming this fall. At $49.95 per agent per month and is an affordably priced call center solution for teams that need more than what we currently offer in our Pro Plus tier of service, but also who don't need the cost and complexity of an enterprise contact center implementation. We are excited about the call center functionality because it is an important capability to have to go upmarket and to win larger accounts. Ooma CX will check that box. Plus, it will give us a high-value upsell into our installed base.

Now to AI, which is the biggest product opportunity in front of us. Our view is that we're ideally positioned to provide turnkey solutions to small business customers that will deliver real value. As their communications provider, we already see all the calls and text going into and out of the business. We already connect to their CRM systems and calendaring systems. So we can build integrated AI solutions that will layer on top of this rich data source and the connectors that we already have. And we've spent years building for small businesses in a wide range of industries. So we know how to make it simple to put it into action. Our customers are price sensitive, so we try to offer features with a low upfront fee and charge based on usage. And because we can build and host our own solutions, we will be able to capture the benefit of improving AI models and the declining cost of intelligence as we scale.

We recently added 4 AI features to our Pro Plus tier service, transcriptions, summaries, insights, and Ask AI. We also started selling 2 voice agents as add-ons, a basic answering service and a full receptionist. Early results have been encouraging from our inside sales team where we first rolled out the program. First, we're seeing customers step up to Pro Plus to access those AI features, and this has caused our take rates on Pro Plus to nearly double for new customers. We are also seeing double-digit attach rates of the voice agent on new deals. Keep in mind, we're still in our first quarter of selling these new solutions, and we think there's more growth opportunity to unlock.

The potential impact on revenue of AI is unmistakable. Take a small insurance group, which would have bought 5 Pro users before AI. And now with AI, they step up to Pro Plus and get the AI receptionist. And our total revenue jumps up by 60%. We also believe there will be a secondary benefit in terms of retention. Existing customers don't need to look elsewhere for a solution. And we also believe that use of AI features generates a large trail of data, which will be harder to walk away from.

Now finally, let me talk about the AI productivity agent bundle that we are launching this week. Our strategy is to look around the functions of the business from front desk to customer service to sales and ask how AI can streamline the work, take a task off someone's plate, or do the work that no one has time to do. We've identified a list of jobs that agents can perform, and we are launching 4 agents now as part of Phase 1. To give you an idea of what these agents can do, one of them will review your calls and flag the ones that need your attention, such as the unhappy customer or the big new sales opportunity. The benefit to the business, get on top of problems early and don't let that opportunity drop through the cracks.

Another agent will review calls from a customer, their recent calls, their recent text, and generate a summary. So the business is prepared for the next call. The benefit that frees up employee time, and it allows them to deliver more personalized service. More agents will be launched through the balance of the year and early next year. And we're going to be offering access to all these agents through a single bundle instead of individual separate offerings. So the business can try one and expand over time. They just pay for what they use. No matter which business you talk to, you'll likely find that they're shorthanded. And these agents will allow them to add capacity without hiring. Let me now turn it over to Rob.

Thank you, Dennis. Good morning. My name is Rob Ferrer. I run business sales for Ooma. So let's refresh everybody's memory on the UCaaS market space. There's just under 8 million businesses that contribute approximately 57 million lines or users in the space. 95% of that is 50 users or 50 lines and below, which is commonly called the SMB marketplace. Within that marketplace, about 50% of it is still available to convert to what we would now commonly call a full UCaaS solution like Ooma. From a go-to-market strategy perspective, we focus in on that SMB, and that's core to our message. We -- the importance of that 95% and how we communicate to them is specifically around a business impact, ease of use, cost-effective solution. And we do that through web-based marketing, which is the primary place where the buyer looks for their solution, so digital demand. And our messaging is clear. Again, we focus on many calls to action, simple, cost-effective, high value, and delivers an immediate business impact.

From an enterprise perspective, it's a little bit different. We focus more, as Dennis had mentioned, more on some of the segments that we have specific competitive advantage in, things like hospitality, additionally, things like large health care and hospital systems, where we can deliver a solution that is much more specific to their needs than a generic UCaaS one-size-fits-all solution that our competitors typically do. This is much more partner-driven. So our marketing efforts go towards our partner community.

Overall, the business, UCaaS and all of our segments, we have 3 main routes to market, and Chris did a good job of articulating a little bit of that earlier. First is our direct sales organization. And this one is a high-velocity transaction organization optimized to convert marketing leads. Most of those leads come in from our SMB segments. And we mainly have inside sales organizations, 2 in the United States and 5-plus in Manila.

We also have other routes to markets that we leverage for our direct selling efforts. From a channel sales perspective, this is the telecom service brokers, the telecom distribution brokers, and this is the agent community. Chris also alluded to that a little bit earlier. That's the community that's historically been buying telecommunications, UCaaS solutions, POTS replacement solutions. Those are the entities that sell that to the large enterprises. We leverage those heavily within our channel partner environment.

And we work side by side with them. Sometimes we lead in the sales, sometimes we sell together. Typically, it's one of those 2. And finally, the strategic partner aspect of it, which is commonly called the resellers. This is tiered again, Chris did a great job of articulating this. We have the carrier sales, T-Mobile, Comcast, and excited to talk about TELUS. But also we have the other tier of 40, 45-plus other resellers that we work through. So between all of these, we have a unique coverage model to the marketplace to capitalize on the growth that we see not only in the UCaaS space, but the AirDial space.

I'll take a moment just to give you some perspective from the UCaaS environment. This is what our cost structure looks like. We don't have to go through this too much, but it gives you a really good sense. We have multiple tiers from a pure UCaaS perspective, for an entry-level UCaaS user all the way to our Pro Plus, which is fully enhanced, has AI features. And then we have the AI and other add-on solutions, the CX, answering service, receptionist, and the productivity suite that we're going to be releasing -- what we announced releasing today. With that, I'm going to bring back Chris Burgy.

Thank you, Rob. Also pleased to share some perspective on 2600Hz, which is a business that we acquired in October 2023. This is a wholesale platform that allows other entities to build UCaaS, CCaaS, and CPaaS solutions, and they have the flexibility to do this in a turnkey model or the flexibility to take parts and pieces and design their own differentiation off of this platform. There's multiple different deployment models for how they can host this and the entire architecture from the onset was designed to be API-driven, which gives us a lot of power in the tailoring and customization of the solution. Additionally, since the acquisition, Ooma has been porting over our own intellectual property into the platform to make it more robust and more capable, things like our desktop and mobile, AI will be coming as well. This will allow the platform to become very competitive out in the market and equip others to be successful in the same way that Ooma has been in the space. With that, I'm pleased to share a testimonial from one of our largest customers, ServiceTitan.

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It was such a joy to watch the solution that they've built and how they've been able to transform the trades business. The market opportunity for 2600Hz is something that's very attractive to us over the long term. There's a variety of different targets for us to pursue companies that are operating legacy platforms that are lacking features like BroadSoft and Metaswitch, fiber companies that may have regulatory requirements to offer voice services to their customers, and situations like ServiceTitan and many of our other customers that are vertical SaaS companies that want to incorporate voice capabilities, whether UCaaS or contact center into their solution because they are now the system of record, and that's a whole data set that they can take advantage of and blend into the AI capabilities that many of these companies have.

This market is shifting because of the regulatory requirements that I mentioned and that there are lots of legacy providers out there that aren't maintaining their platforms. The investment that we've made by converting over the significant R&D expertise and intellectual property that we have really tees us up to have a compelling platform in the future. While there is a lot of addressable market here, the other thing to bear in mind is this is like an enterprise sales cycle, slightly more complex. These are entities that are running thousands of users or hundreds of thousands of users. So the decision-making cycle takes a long time, and then you have to go through a migration process. Either way, we view this as a very interesting growth lever for Ooma in the future that we can tap into that additionally helps us to scale. With that, I'd like to introduce Jim Gustke, our Senior Vice President of Marketing and Residential Sales.

Thank you very much, Chris. I'm here to talk about our residential business and why Ooma continues to win. So let's start with our core product, Ooma Telo. It's been rated #1 by Consumer Reports magazine for over 10 years, and that's not a mistake. It's because of our technology, PureVoice HD technology that makes it noticeably better quality than a typical landline. We work with handsets in the home, but we have the flexibility through the Ooma mobile app to also go on the road. Most important is our freemium business model, which means the core service is free, all they pay are taxes and fees with an optional Premier service at $9.99 for customers that want more. Today, we have over 723,000 customers, and I'm really happy to say and growing.

So the North American market, why does this matter? It's still 27 million home phone lines in North America. But many people say, well, why do people even have a home phone? Well, the answer is they like the convenience of having a home phone and especially homes throughout -- their phones throughout their home. 911 plays a big role. They want the safety and security of address-based 911. And they know that their phone is always on in the house, never runs out of batteries. And finally, the presence of children in the household is a big driver to have a home phone.

So -- I'm sorry, let me go back. Down, let me point your attention to the lower right-hand corner, the market drivers for the residential phone market.

First, many parents are now delaying smartphone use among their kids. The second is the unbundling of cable service. And the third is what we've been talking about a lot today, copper sunset or the decommissioning of copper phone lines. Now speaking of parents delaying smartphone use with their children, let me introduce MyPhone. MyPhone was designed specifically for families with kids. For kids, it delivers simple screen-free calling, no texting, no social media. It has a trusted circle of contacts that the kids can communicate with. It has a party line so that they can talk to multiple friends at once, and they can also listen to voice mails.

For parents, what it delivers is the safety of having real address space 911 in the home, and it has scheduled quiet hours. So the phone isn't available during bedtime or homework time. It has call logs so they can see who their kids are talking with. And because it's from Ooma, it's easy setup with no technology background needed.

Now what is the market opportunity? From the U.S. census, there's a huge number of households with kids that's suitable for MyPhone. And this is a real issue for parents. Pew Research found that 86% of parents are managing their kids' screen time on a day-to-day basis. And this is not a fad.

There's a whole ecosystem of parent-led organizations throughout the country that are focused on reducing smartphone use and screen time. Wait Until 8th is one, 8th as in eighth grade, unplugged and there are many, many others. And currently, MyPhone is online on ooma.com with major online retailers. And I'm very happy to announce here today that beginning in November, we're launching in-store with a major brick-and-mortar. I'd like to play a video from one of our social influencers that really brings the MyPhone message alive for parents.

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Okay. Now shifting gears to another opportunity. It's Starlink households. Starlink has been growing like crazy and some forecasts are that it's going to reach 10 million households in North America by 2030. We designed StarDial specifically for satellite Internet. It's got optimal sound quality, not only through HD voice, but also through our adaptive redundancy, which is perfect for the latency of a satellite Internet connection. And this is -- this package design and the whole product is designed to be marketed right next to Starlink. And I'm also really happy to announce today that a major retailer is taking Starlink in as part of their -- sorry, StarDial as part of their Starlink assortment.

So finally, let me bring this all together. We've got 4 major drivers of the residential market. The first is the copper sunset, then unbundling of cable services, the delay of smartphone use, and Starlink. We have specific products that address each of these entrants into the market. That's our strategy, and that's why we're confident that Ooma is going to win in residential. Now let me introduce Shig, our CFO.

Thank you, Jim. Good morning, everyone. I'm going to spend the next few minutes talking about our key financial metrics and also how what you heard so far from my colleagues can translate into our long-term financial targets. So a quick recap on our most recent quarter -- the numbers coming out of Q2, most recent quarter. So our current revenue guidance for fiscal year is about $333 million. And we have achieved 38% year-over-year growth on business subscription revenue in the second quarter. We also maintained a high dollar retention rate. We also exited Q2 with $299 million of annual exit recurring revenue, which grew 25% year-over-year. In terms of free cash flow and EBITDA profitability, we also achieved 50% and 68% year-over-year growth, respectively. In terms of adjusted EBITDA, this is a trailing 12 month number as of Q2. We did guide to about $48 million of EBITDA for the year.

This is a history -- historical graph on our total revenue going back to fiscal '21. And far right, we're showing the guidance number for the year. And as you can see, we have almost doubled between '21 to fiscal '27 guidance number. We also maintained a very high proportion of recurring revenue, providing a lot of visibility, over 90% of revenue coming from the recurring revenue. And we believe that, that trend will continue in the future years. Now drilling a little bit more into the recurring portion of revenue we just saw.

Here's a breakdown of recurring revenue going back to fiscal '21. Blue bar at the bottom is residential recurring revenue and the red bar at the top is the business subscription. So as you can see that we are maintaining the recurring revenue on residential subscription relatively stable. And we continue to grow that business subscription coming from the UCaaS solution and also the AirDial solution. And we believe that the proportion of the business recurring revenue continue to grow with the growth of AirDial and Business UCaaS, which also drives the gross margin -- recurring gross margin improvement over time.

So here's our ARPU trend. It's the average revenue per user per month. This is a blended ARPU between business and residential recurring revenue, and it was almost $17 per user per month at the end of Q2. We also believe that there's an opportunity to continue to increase the ARPU overall going forward with the increasing proportion of business users -- it was about 70% coming out of Q2. We think that can be much higher as we continue to grow the UCaaS users and add users. And also, you heard about the exciting AI offerings, which are upsell to our UCaaS users, which we believe that can add to the ARPU trend going forward.

So here's our historical chart on the EBITDA and free cash flow generation going back 12 quarters. And each bar in the line graph shows the numbers on a trailing 12-month basis. So at the end of Q2, on a trailing 12-month basis, we generated over $44 million of adjusted EBITDA and also $30 million of free cash. And we believe we can continue to drive the higher on both metrics. And by the way, we do convert about 70% of EBITDA into free cash, and we have a very low CapEx requirement. We believe that's going to be the case going forward as well. So we believe we can continue to grow free cash flow along with the adjusted EBITDA.

Now many of you have seen this, but our long-term target is to get to over 20% to 25% of adjusted EBITDA from where we are today, which is 15%. And let me get to the next page here, just kind of bridge from where we are to how we get to that number. On the left-hand side, what we're trying to say here is that we're looking at 3- to 4-year time frame. That's our long-term target model time frame where we aim to double revenue, mostly coming from the business UCaaS, organic and inorganic growth, and also the AirDial. Those are 2 big chunks.

On the right-hand side, I'm bridging the EBITDA margin, 15% in Q2 this year to over 20%. A good chunk of that is coming from the recurring margin -- gross margin expansion. Again, bigger proportion of the recurring revenue coming from business users in the future years. We also think that there's a lot of operating leverage that can come from R&D leverage. It's about 17% today of revenue that can be going down to low teens. We have made heavy investments already in the growth areas.

So I'd like to end my section with a slide. In terms of delivering shareholder value, we believe it's all about execution. We are in the -- this UCaaS market for small business, we believe we have the strong offerings. We have AI features that are coming on. And also, we want to supplement that with the inorganic growth, which we have a good history of. We are very clear about the new growth strategies. You already heard from my colleagues in the middle column. And we -- combining these things, we think we can expand the gross margin, realize the operating leverage, which all translate into greater EBITDA generation and free cash flow generation. With that, I'd like to give mic back to Eric for our M&A strategy and closing remarks.

Thank you, Shig, and thanks, everyone, for joining us through this conversation. We just have a couple slides left. We've talked a little bit about M&A and how that can augment our growth and outlook. Our primary objectives for M&A are around acquiring more UCaaS users cost effectively. We're not looking to get into a new segment. There's no new technology that we feel we need to bring in. But where we can bring in more UCaaS users cost effectively, that allows us to broaden our sales and marketing reach, drive cost reduction with synergies, particularly with shared R&D, but also just in general from growing Ooma scale.

And our goal when we do these is to have our acquisitions be accretive within just a couple quarters and to drive EBITDA in the 15% to 40% range post acquisition. It depends a little bit on how much we want to grow the business after we've acquired it. Business that's not growing, we expect to be in the 30% to 40% EBITDA range.

Now our deal targets are really solid businesses that don't need fixing. But if they have some feature gaps, that's fine. We have a lot of technology into Ooma that we can bring to fill out those gaps. We prefer our focus on North America and $10 million to $50 million in revenue is a nice size. It's a nice size for us to digest. It's also an acquisition target that there aren't many companies like us going after. So it gives us leverage as we look for opportunities.

We made 2 acquisitions late last year. Both have worked out very well for us. We were able to purchase FluentStream at just 4.5x EBITDA and Phone.com at about 1x revenue. I'm very pleased to say that with FluentStream, we've been able to expand with some channel opportunities. And at Phone.com, we've already moved the EBITDA up into double digits, and we're excited about where we can go with both these as we go forward.

So in quick closing, I hope we've shown you that we believe we're leading with differentiated solutions in the market. I believe in all of our markets, we're serving opportunities that are at inflection points. AirDial is at an inflection point. We even see that in residential with new things happening. We're attempting to accelerate our profitable growth through acquisitions. We would like to do an acquisition or 2 every year. Obviously, that has to line up in terms of opportunities and valuations because we are pretty selective, but that is our goal.

And finally, trying to leverage our customer base to drive enhanced profitability as we go forward. With that, I want to thank you. We're all about creating Oomazing experiences and ultimately revolutionizing markets.

Now we do have time for Q&A. We ran over a little bit, but we can go as long as you like. If you're joining us virtually, there's a tab, Ask a Question. If you submit your question there, someone will read it in the room. So I don't -- why don't we bring our Ooma team up so we can all be here to answer whatever you'd like to talk about. Anyone want to start? Yes, please.

On your acquisitions, like what's the potential -- I mean, is it a target-rich environment for you? Those -- that $20 million in revenues that -- are there a lot of companies out there that you can go after?

There are actually quite a few players. Some of them happen to be resellers of BroadSoft or other platforms. Some of them built their own platforms. It's not uncommon to come across a player in that $10 million to $50 million range that has struggled to keep up with the latest developments in technology and also spending a lot on sales and marketing just to kind of stay where they are and not grow very much.

And -- but what holds us back from doing more acquisitions faster is those businesses have to be at a point where they're ready to do a transaction. We don't want to overpay when we do these acquisitions. And so -- but yes, we think there's quite a number of targets. We've looked at some this year. Nothing's come together. But we look at things every quarter.

Okay. One more. I don't understand why AT&T and where are they trying to get rid of their copper? What's wrong with those -- what's wrong with that business?

It's a good question. I'll let Chris answer that. You want to stand here?

I'll stand here, then. Yes. So it's a great question. And there's a couple factors that are contributing to this. One, much of the talent that understands how to maintain that network has retired. And the second is it's very costly to maintain all of that infrastructure, the central office facilities, the copper in the ground, the nitrogen they have to pump in to keep water out of it. It's a degrading asset. You have weather conditions that occur. So they view it as an OpEx savings. And another perspective to think about is the central offices are like mini data centers. So that's real estate footprint that they could look at selling or leveraging for distributed AI data centers effectively.

There's a question right behind you. Why don't we go there next because he had his hand up first.

Great. My question is actually for Elka. How many companies were recognized with best practices for POTS replacement? That's my first part of it. And then can you speak to the competitive landscape? How many U.S. solutions providers for POTS replacement have a quality solution that your research suggests can compete with Ooma?

Oh boy, that's a tough one. So Ooma is the only company we've recognized with this particular award. We're trying to be very selective in general with the Best Practices Award. So they're usually given in different spaces for different kind of capabilities. But in POTS replacement, it's only Ooma. Now the issue with that space is that you have solutions that are only hardware-based or just a service offered by different providers. The telcos sometimes simply get a device from a hardware vendor and use it for the same purposes. That's why I highlighted the fact that Ooma has an integrated approach. I would not want to mention any other competitors that have the same approach. But a few, in my opinion and based on my research, have the combination of capabilities.

Great. I've got a follow-up for the Ooma team. If AT&T has another wave of terminating POTS lines coming up in November, what does the sales cycle look for these users? And when do the majority of these enterprises or small companies, when do they transact? When do they look to get ready for that termination?

Sure. So while they announced that there's going to be a wave, the wave has a date, right? So it's typically not 30 days out. We have, on occasion, seen 90 days out, but it's typically a year or so out. So that starts the process. And some folks are immediately made aware that this is happening to them. But the way that announcement is made, many of the affected parties may not know, right? Chris kind of alluded to the fact that a lot of the carriers don't have that expertise in-house. A lot of our customers haven't thought about POTS lines for 20 or 30 years. So it takes a little bit of cure time.

Now the good news is this marketplace has matured in terms of awareness 3-plus years ago when we got into the space, a lot of the questions we were getting were, what are POTS and why would we even care? Now we're much more aware. So what we're seeing is we're seeing an acceleration, but it still could take multiple months before they form a project, multiple months to evaluate the vendors and then a deployment cycle after that. So these announcements could have anywhere from a 3-month to a 18-month tail on it.

Alinda? Won't go that way. Then we'll get to you, Eric.

Alinda Li here with William Blair. So with the AI -- existing AI products like the AI Receptionist, Answering Service and AI Insights, what are the early customer feedbacks and adoption trends on that? And how should we think about success going forward with AI monetization in the next 12 to 24 months as you continue to add on new AI software add-ons here?

So I'll let Dennis speak to that, but I'll start by saying our goal with the AI Productivity Bundle is to have something that every one of our customers finds valuable so that we can spread AI across our customer base at large. But we only have about a quarter of experience so far. And I'll let Dennis, I'll let you repeat some of the metrics we've seen so far from our inside sales team. We're very pleased with what we've seen in just 1 quarter in terms of impact. But go ahead.

Yes. So in terms of the features that we have bundled with Pro Plus, we have seen the movement of Essentials and Pro customers into Pro Plus, right? So for new customers, we're seeing a doubling of that take rate for Pro Plus, which indicates that they are upgrading for the AI features. We're also seeing double-digit take rates of the voice agents, the Answering Service and Receptionist, around a 60-40 split between full Receptionist and the basic Answering Service. And right now, those programs are largely rolled out to new sales and we're just starting, kind of, our installed base marketing of those features.

Got it. That's helpful. And another question. So with the multiple growth initiatives underway, including AirDial expansion, StarDial, MyPhone and also the AI product developments, how are you prioritizing your investments across these opportunities? And which areas are receiving the greatest focus over the next year?

So the way we organized our presentation today is our focus. We started by talking about AirDial, then we went to UCaaS, then we went to 2600Hz and residential. Now we have a lot going on in the company, but we're also fortunate that a lot of these solutions are built and in-market, and now we're capitalizing on the growth opportunity. So we don't -- we've done a lot of the legwork now already, and we're not having to invest maybe at some of the levels we did in the past. Let's go up to Eric and then we'll come down this side. Sorry, guys.

My question has to do -- yes, Eric Martinuzzi from Lake Street Capital Markets. My question has to do with the AirDial and the traction. I think, Shig, you put up the -- about $100 million of that doubling of the business over the next few years is going to be AirDial driven. I think we're in kind of an $18 million to $20 million marker right now for AirDial. So how does -- how do we close that gap? Is it, hey, we've got the 40-plus resellers and it's going to be resellers and it's going to be linear between here and there? Or is it somebody like a TELUS shows up and we get a big slug all at once? And then I've got a follow-up.

Well, I'll start, but then I'll let Shig or Chris or others jump in. We're super excited about the contract we just signed with TELUS. They are the best customer we can have for AirDial because they have the lines. It's their lines that they provide those customers, and they can go into their own customers and do the upgrades. And as far as we know, we are the only company they're working with and they selected us after a long process, and they are eager to move forward quickly. So when we look at a customer like that, that has potential for 300,000 lines or more, it was really just one part of TELUS that we indicated with that 300,000 line number, there's significant potential. If you want to add?

Yes. So I'll add a little more color to that. The reseller channels are certainly an interesting lever. We continue to add to that. And they vary in the nature of the types of accounts that they pursue. So Comcast, which we're in the enterprise division, for example, is pursuing Fortune 1000 companies. That's how that team is compensated. So much longer sales cycles, but much larger opportunities. And you start to see those entities move, and that's a lever up for it as well.

What we did not share in the presentation, as an example, is the Verizon ecosystem, we're also in. We have their top platinum level partners and Verizon's strategy has shifted to channel first is the way that they fulfill. Verizon proper has not started their own copper deprecation yet. They're just working on the Frontier assets. They will begin that journey in the future, and we believe that's another interesting opportunity for us to be the preferred solution fulfilled through their critical platinum partners.

Okay. So no, there's not like AirDial has targets it needs to hit across or per reseller -- sorry, I put that backwards. Resellers don't have targets that they need to achieve to maintain their reseller status or anything like that?

It varies. There are some that have particular targets based upon how we structure the relationship. But to be frank, we were fairly relaxed in that approach to snag as many resellers as we can. Many of them converted from competitive POTS replacement products to us. So we think the coverage model of continuing to add and all of them attacking the market will be sufficient to capture the demand that we need going forward.

Okay. And I know you've been working with resellers for as long as we've had AirDial, whatever it is, 3, 4 years. Any lessons learned with certain resellers as far as enabling them or holding them to investments in Ooma?

Yes. I think there's been a lot of lessons learned between Rob's team and my team. We've invested a lot of effort in enablement strategy for resellers. Some of them are very capable on their own. Others are not as capable. So we have a team of sales reps that actually focus exclusively on the resellers. We have another team that helps with the enablement and product management, and taking more of the lead where we're allowed. So a good example of this is T-Mobile. Their sellers are used to selling cell phones, to be candid.

And so we have different programs where now they're letting us lead the sales process. We're much more expert at doing this. So I think that helps us make them more successful. They get access to the accounts and all the right tools. There's been a lot of positive feedback that's come from resellers on product capabilities that product management and engineering have built that have really strengthened the solution versus the other offerings that are available in the market. So we're -- we've hit this maturity point, I guess, to put more succinctly, in how we're handling go-to-market, and it's very well packaged and very well structured now as we bring on new resellers.

Let's go to Tim. Thanks for your patience, Tim.

Two broad questions. On AirDial, so the primary reason people need to use this is because they require connectivity that's always on with backup and multiple paths of connectivity. Is that right?

Yes. So there's a multitude of legacy devices out there that they don't want to swap out or they can't swap out, and they need to maintain that same old-school POTS copper connectivity into that device. Give you an example, we have a natural gas company. They monitor pipelines over POTS lines and modems, for example. We're at the Sunoco fuel tanks at NASCAR tracks, same thing. So it presents an opportunity that they have to act because these are critical devices.

And in some cases, there are legal requirements with fire panels and elevators, for instance, and how they have to work, fire inspector can come in and fine you or even revoke your certificate of occupancy. So folks just want the easy swap on this. They know it's going away. There's a lot of price pressure, of course, with the bills that they're seeing. So that's what puts us in a bit of a unique situation versus other categories in the voice space.

Yes. I mean I'm looking at these buildings would have a dozen of those connections each for fire elevators.

Yes. We have a number of customers here in New York State. Yes, so same thing. They just want to swap.

So I mean your market estimates seem very low to me. Like, who else is providing the service? Like you mentioned TELUS. I mean, AT&T is going to have to swap out 3 million lines. What else are they going to go to if they're not using you?

So AT&T does have a separate solution that they're currently utilizing for it. There are a handful of vendors in this space that I would consider our material competitors to in particular, but there are not a lot of choices. And there have been a lot of product-related struggles with the other solutions. And for us, this goes back to the point where, Thad made this, we own the whole stack, and that's really unique for us because we can go turn the knobs in lots of different places to make the fire panel work that nobody else can get to work, for example. So it's a fairly concentrated market in terms of the vendors that are available and the choices that are available.

Yes. I mean just the other choices I've seen, yours, they don't even seem to compare. And then just switching gears to the AI side, Eric. Can you maybe just step back a little bit and talk about where do you get your data? How have you built this platform? What other suppliers are you using? What kind of security? Like how important is your AI platform for the solution here?

So I'll say a couple of words, but either Dennis or Toby can join me after. We've developed a fair bit internally, not all the models we run. Sometimes we do work with outside models, but we also run some models internally. And we do that with the goal of driving to the lowest cost structure we can get. And that's kind of permeated Ooma as a fundamental core competency in everything we do.

We will invest and design our own in order to get the lowest cost structure possible. We do think it's dynamic. So when we're using an outside model, we usually use more than one, and we can switch between them based on what's working best or frankly, where costs go. And -- but we are running equipment in data centers to get this done. I think that addresses your question, at least in part. But I don't know if Dennis or Toby want to add to that.

No, I think I'll just reiterate the point. We do use a combination of both in-source and outside models. AI models are progressing very quickly. There's constant change in that market. The advent of open-weight models is also changing pricing structure, right, in the industry. So we're staying flexible right now. We do use some outside models right now for time to market and for instant capacity. But at the same time, we are vendor -- basically model agnostic, and we're constantly experimenting with other models to try to find the right price point, the right value for delivering what a specific agent or task needs to do.

And maybe just -- do your customers let you use their data? Or where do you get the data? And then I guess you're alluding to on the hardware side, do you actually own some of your own GPUs that you're running this on?

Yes. So we do. And one of the things about AI that I think the industry is going to learn is AI does not breed loyalty at the infrastructure layer. It's very easy to move from one model to another at the infrastructure layer. At the application layer and kind of the harness around it and the user interface, that's something that you have to get eyeballs to be used to a particular way of using it, that's sticky. But what we approach this from an infrastructure point of view is to give it ourselves that flexibility so we can move to different solutions. And yes, we do own GPUs.

And we -- the trick there is to figure out how to spread the load so that you're not building -- overbuilding just for your peak usage, but actually figure out how to spread that out. If you think about it from a residential point of view, residential use of AI, the peak load is in the evening. For business, it's in the morning or it's in the afternoon. And so they actually overlap very nicely to get maximum use of the infrastructure. So we pay attention to that, and we pay attention to being able to be flexible about what models we move to based on market.

And the data we're using is the customers' data, their phone calls, text messages, other things they're doing. And we just use that data for that customer. We're not asking our customers to share their data.

Lastly, so have you built your own harness capabilities?

It's essentially when you...

Hang on, you got to speak here if you're going to speak.

When you use the product, when an actual user uses the product, he's using the user interface that the team has built. That's what they get used to using and they don't want to switch once they figure out exactly how that works and how to get the most out of it.

One of the things we cut from our presentation because we were worried about time, we had a pretty detailed look at our AI Receptionist product. It's difficult to -- for -- business has to educate that product for their situation, their vertical, what they want customers to know about them. We've built automated tools for -- to make it easy for a business to do that and set it up in, I think, a very elegant way.

And that's that harness capability that really makes it come to live for a small business situation. And that's where we think the competitive advantage is, along with the fact that we're bundling together in one solution. So instead of trying to put things together themselves as a customer and deal with inefficiencies, we can put it all together in one package.

Just to follow up on that. It seems to me that it's pretty impressive that you were able to get this to market pretty quickly. Could you maybe describe the process of how you've decided to pursue these products? How long have you been working on it? How much have you invested either from an operating expense or capitalized expense?

And then as you think about the revenue from here, I would think that the contribution margin from that revenue is going to be extremely high. Is that sort of a correct assumption that there's very little in the way of incremental operating expense as you sell these products?

Yes. On your second question first, there is a lot of leverage in our pricing today. We're able to leverage what we've done across these customers and make it work well for us. We're excited about the margins we see as we get into AI. Now how do we get into this in the first place? We started -- boy, it's maybe 1.5 years ago or more, but we started building systems for our own use internally. And we launched those, particularly in our inside sales and customer support teams. And it was very dynamic. We were changing models and changing ways of doing things almost every month for a long time.

And what we wanted to do through that process is get to a point where we really understood it and could make it simple and easy to use. And so we kind of used ourselves as the test case to see what worked and what didn't and to learn from it. And it wasn't until we had been at that for over a year that we started working on our solutions for customers. And I think that's part of why we've been able to move so fast since we made that transition because we had a lot built and ready to go. I'll go to the very back because we have -- [ Jean ] is going to read questions from outside the room, and then I'll get back to you.

We'll start with the first 2 virtual questions. Peter Lowry with Citizens. AirDial is growing rapidly and seems like a great market opportunity. Is there anything you can speak to in terms of its current scale?

Shig, do you want to address that?

Sorry, could you repeat the question? I was...

Oh sure, I'll get back to it. AirDial is growing rapidly and seems like a great market opportunity. Is there anything you can speak to in terms of its current scale?

Sure. So we've been talking about our intermediate goal to hit -- excuse me, I should stay up here, to hit 300,000, 330,000 lines to hit $100 million of recurring revenue. We're about -- a little bit over 1/5 of the way at the end of Q2. So I think you also heard us say coming out of Q2 that we grew the subscription revenue in Q2 year-over-year about 70%. And so again, you heard about the runway that's remaining, which is still large. And we got good new partners and carrier sign-ups. And so we believe that we have -- we continue to have a good momentum on AirDial.

Okay. And the second question comes from Matthew Maus with B. Riley. How much of the growth in the revenue bridge factors is contributions from acquisitions? Or would acquisitions add upside to the long-term road map?

Yes. I don't know if we've been explicit about that, but there's certainly some acquisitions included in the UCaaS bar that we're showing on that breakdown. If we can accomplish our goal of an acquisition every year or more in the $10 million to $50 million range over 2 or 3 years, we can certainly exceed that $100 million of growth for sure. But it's -- we can't handicap whether those acquisitions will happen and whether we'll be able to bring them to fruition. But we've had a pretty good track record. If you think back, we acquired Broadsmart, we acquired Voxter, we acquired OnSIP. We acquired FluentStream and Phone.com, and we have every reason to think there are going to be more as we go forward.

Just to add what Eric said, again, the timing itself is hard to predict. But again, just the FluentStream and Phone.com as an example that we did almost a year ago. And those 2 brought in $46 million of revenue. So you can see that it doesn't take too much to actually fill the gap on that UCaaS growth that I showed in the bridge.

Go ahead.

Andrew King at Rosenblatt Securities. Just wanted to go into the AI bundle that you launched today. First off, can you just give us a little bit of your reasoning behind bundling those solutions rather than offering them as stand-alone products? And then any further color that you can give us into the pricing of that bundle would be great.

Sure. We're always thinking, particularly for our smaller business customers, how do we keep this simple? And so putting it all together in one bundle, it's $15 a month for the account. That's almost nothing to sign up to have it. And then you've got all the stuff to play with. And we will charge based on usage.

There are certain credits that you -- the customer will buy and they'll be able to use them up as they do different work with those agents. So it's just a simple way to bring it to market. Also, all of those items are built around improving productivity at the business. So they do go together well in that sense. We thought it was just an easy entry way to get started. I don't know if you want to add, Dennis?

Yes. I think our strategy there, like Eric said, was to make it easy and accessible for small businesses. We find that they're interested in AI, but also hesitant, right? So they want to be able to try it. They want to test it. They want to see. They might start with one feature, then as they see that, build on that success, enable more. So we think that giving them access to everything at once encourages that experimentation and eventually the adoption of the feature, right, in production.

So it is a usage-based system for $15 per month, they get a certain number of credits. right? The agents based on which agents they select, which workflows they use, they're deducted from their credits. So it gives us a way to let them experiment and use the features, and we have control, right, over our margins and our costs because they -- inevitably, there's a cost aspect to it. So it just allows us to tune the knobs that we're always right side up.

Go ahead, Brian.

Okay. A couple more. Brian from AGP. First, congrats on the TELUS win. How long was the evaluation process? Are you aware of how many vendors were evaluated? You said there were all of your competitors. And are you willing to share what your pricing was and how it compared to those competitors?

Well, we won't share the last.

That's why I said are you willing. That's why I said are you willing, I knew.

So the process was for a Tier 1 carrier relatively quick. End to end, I would say it was approximately 6 months. So pretty quick. All of our competitors were in there. They evaluated the major vendors. If you do your research, you'll see who those are, the top 5 solutions basically as part of that process. They went through thorough testing, incidentally, of all of the solutions, including a fire panel that is unique to Canada.

And again, much to our strength and our talent on the engineering side, we're able to make adaptations to the firmware on our device within a couple of days and make it work. Our ability to act that quickly thoroughly impressed TELUS, to be honest, that we have that sort of bench on the development side. But it was a quick process.

And Canada is going through the same journey as the U.S. CRTC, which is their equivalent of the FCC, has a new head that wants to, in effect, parallel what the FCC did by removing all the red tape for the Canadian carriers. So it really opened up optionality for them where that was not the case at all because it was highly regulated and difficult to shut down the network.

I have 2 more. The first is this was 300,000 lines. Your medium-term target is 300,000 lines. So I want to make sure I understand how long do you expect it's going to take to fully replace all of these lines?

Yes. So one point of correction, 300,000 lines in just TELUS Business Solutions. They have other divisions that have their own lines. We're in conversations with them. I think that they'll follow a similar journey and path as what AT&T has done here. They'll likely take action over a number of years. 3 to 5 maybe, for example, you have to send out notices, give customers sufficient time plan. You don't want to shut off critical life safety devices, elevators and fire panels, et cetera, and have liability issues. So it will be a pragmatic approach over time.

They intend to use their own techs to also do this. So other carriers have done this where they're dispatching the tech out. You get a letter that we're changing your service, here's your new device, here's the tech that's going to plug it in and operate it for you. So that becomes, kind of to Rob's point earlier, much like enterprise customers, a project management cycle that you have to address over time and do in stages because you can't just rapidly go convert 100,000 lines, for example, in 12 months.

Right. Some of those lines will go away, I'm sure. Some will get upgraded where they decide to put a new elevator panel in or something that will work and not require legacy capability. But I think in our experience, majority of the lines that we see out there, the best and easiest solution for customers to just pop in AirDials. Salesforce Tower in San Francisco, every elevator in that tower has an AirDial powering the call button. And it was a very simple way for them to upgrade. And that's what is why the solution is so powerful.

Great. I got one last question. When you look at your active pipeline for POTS replacement, how many active opportunities do you have that are similar to TELUS with a network operator where you're already addressing an RFP and being evaluated, if you can share that?

We can maybe say a couple of words around that. I don't think we can give that in absolute numbers. But Chris, if you have any.

Sure. So we're engaged in a number of conversations, as you can imagine, both here in the U.S. and Canada. Of course, we have, outside of AT&T, relationships established with the key Tier 1 carriers here in the U.S. There's still ample opportunity. And one of the benefits that I will share is a lot of people are approaching us now about AirDial, either they've lost an opportunity against one of our other resellers or they've heard about it or they've had a failed experience with one of the other solutions. So it's equally become an inbound exercise for us as much it was an outbound exercise for outreach before.

Let's try to take -- there was a question over here that I skipped past, but let's take 1 or 2 questions and then we can keep talking at lunch if that's on schedule. Was there another question? Yes, go ahead. I don't mind whichever way we want to do it, but...

Shig, I would like to ask you a question. On the 3- to 4-year framework to roughly double revenue, could you help us think about the composition of that growth? Specifically, how much of the incremental revenue do you expect to come from AirDial versus organic UCaaS growth, AI and 2600 and how much assumes the future M&A? And as the mix shifts towards those businesses, which of those drivers should contribute most to getting your goal EBITDA margins above 20%? I'm from Freedom Capital Markets, Dilrukh.

So well, I appreciate the question. So the -- you saw that in terms of bridging where we are today to a long-term model. On a high level, I showed the similar amount of bucket, $100 million coming from UCaaS and the $100 million coming from AirDial. And AirDial could certainly be bigger than that, depending on what we achieve prospectively with new partners and new carriers and large accounts.

And as I said earlier, we're seeing the AirDial subscription growth be in the high double digit. We've done that in the last few quarters, and we think there's opportunity to continue to do that in the short term. At some point, the law of large number comes in, obviously, right? And so that might be a little smaller. But I think in terms of pure growth rate because AirDial is growing from a smaller number versus UCaaS, we continue to see that higher growth rate for AirDial.

In terms of the small business UCaaS, it's been -- in the recent quarters and years, it's been steady growing about mid-single to a little bit higher than that year-over-year. But I think this AI opportunity is a very interesting, exciting opportunity for us that could accelerate that further to high single digit or even double digit. We need to see that come through that. But that's the magnitude of growth rate between the 2. Obviously, UCaaS growing from the larger base, you're going to see that those numbers I just described. But that's what I can tell you right now. Does that answer your question? The best I can.

Is there one last question over here? This gentleman, yes. Here, take the mic so that they can hear you out externally too.

So in general, can you give us some kind of -- I don't know, how do you generally deal with your resellers? What's -- is there a general revenue split here? Or can you -- without getting specific, right?

Yes. Well, first of all, I'll say that when we tell investors to model around $25 per line per month, that's a blend of our direct sales that are often above that and our resellers, which can be below that. And so we're putting that together that way for you. We -- it depends too on what we do versus what the reseller does. Some of the resellers will bring the Internet -- the wireless Internet connection, the data plan, and marry that up with our capability. In that case, we would see less revenue, but we also have less cost. So it varies with that.

And then with the TELUS relationship, are their customers even going to know that you're part of the deal?

Yes. None of the carriers hide that it's Ooma. The portal shows Ooma. So we're not doing any custom white label branding, any of that for them. So -- and one more thing to add on for the reseller structure. The model goes deeper into how much they own in the value chain. So there's obviously the data connectivity, the Verizon partners, for instance, bring Verizon SIMs, so the reps get compensated. We have others that want us to do assist with the selling motion, handle all of the project management and install. So we charge kind of a la carte, if you will, the more they ask us to do, which raises that transfer price for them.

[ Jean ], was there a last question from the back?

One last question from Bill Wolfenden, Cottonwood. Slide showed AirDial goal of 333,000 lines. That's only 4% share of 8 million lines. Can it be much higher, like over 1 million lines?

It's so hard to make these predictions. We set our goal thinking $100 million of recurring revenue from AirDial would be a nice thing to aim for. And we remain confident we can get to that level. But yes, the industry is large. We've got 3 to 5, maybe even more years to go before this transition runs its course. And we see things accelerating at the moment. So we're going to push hard and see how far we can get.

With that, I think I will say thank you to all of you for joining us today. We really appreciate your attention and interest in Ooma. And we have lunch coming and we can chat more, but let's call the meeting at this point. Thank you.

Thank you. Thank you for standing by and welcome to ULMA's second quarter fiscal year 2027 earnings conference call. Currently all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again.

I would now like to hand the call over to Matthew Robertson, Director of Investor Relations. Please go ahead. Thanks, Lateef. Good day, everyone, and welcome to the second quarter fiscal 2027 earnings call of UMA, Inc. My name is Matt Robertson. I'm the Director of IR and Corporate Development. On the call with me today are UMA's CEO, Eric Stang, and CFO, Shig Hamamatsu. After the market closed today, UMA issued its second quarter, fiscal 2027 earnings press release. This release is also available on the company's website, umma.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 in actual results or subjects 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. Thank you. 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. The discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures described 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 2027 on a non-GAAP basis. Also, in addition to our press release and 8 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.

Now, I will hand the call over to UMA CEO, Eric Stang. Thank you, Matt. Hi, everyone. Welcome to UMA's second quarter fiscal year 2027 earnings call. Thank you for joining us. Q2 was another strong quarter for UMA. We are now halfway through our fiscal 2027, and I'm pleased to report that on both the top line and the bottom line, we are ahead of the of our original plan. I believe we have good momentum across our business, and I'm excited to talk with you today about our outlook. On the top line, we achieved $83.2 million in Q2 revenue, up from 66.4 million in Q2 a year ago. represents 25% revenue growth year over year, driven mainly from business customers, including Airdial and our two acquisitions late last year. Our key business subscription and services revenue grew faster and was up 38% year over year.

And within Q2, Airdial Services revenue grew 75% year over year. Looking forward, we believe we have good momentum across all major areas of our business, which we believe will be driven most of all by accelerating POTS replacement, new AI features, and our residential product, MyPhone. I will cover each of these later in my remarks. But first, regarding our bottom line performance in Q2, we delivered non-GAAP net income of $10.2 million and adjusted EBITDA of $12.4 million. These results are up year over year by 58% and 74% respectively. Adjusted EBITDA is now a solid 15% of revenue, up from 10% of revenue just six quarters ago. We are proud to have achieved steadily improving profitability over these last six quarters and longer.

And looking forward, we're not done. We believe our business model can generate further increases in profitability. We outlined four key initiatives at the start of this year. Airdial expansion, new AI solutions, the launch of MyPhone, and capitalizing on our recent acquisitions. I'd like to update you on each, starting with Airdial. Airdow is of course our POTS replacement solution and currently the fastest growing part of UMA. we have created what we believe is the leading solution in the market, incorporating unique features such as multi-path connectivity, extensive remote device management, and customer alerts. We're seeing the market for POS replacement expand this year.

In Q2, we added two new Airdial resale partners and are now well over 40 resale partners in total. One of the partners we added is a Verizon Platinum partner and supports our strategy to engage more closely with Verizon. On the customer front, I would like to highlight one highly competitive win that demonstrates UMA's growing strength in the market. Include In Q2, we won a large hospital system, which purchased close to 200 Airdial lines, over 1,000 UCAS seats, and UMA Connect for internet backup. We believe we were chosen for our differentiated POTS replacement features, flexibility of our solution and our implementation expertise. Looking forward, it is our goal to add one to two new Airedale resale partners every quarter. Some resellers, especially if they are a carrier maintaining existing POTS lines, can make a big impact on Airedale growth.

Our second initiative centers on introducing AI features on our UCaaS platforms to drive increased customer and ARPU growth. I'm pleased to report we made significant progress in Q2 by introducing AI transcription and AI insights as part of our ProPlus service tier, and by introducing two standalone AI services, our AI answering service and our AI receptionist. Our standalone services have a low monthly fee that includes a set amount of usage and offer increased usage for an additional charge. Whether a customer is stepping up to ProPlus for an additional $5 or $10 per month per user, or whether they are also paying us $15 to $50 a month or more for our standalone services, we have the potential to significantly increase our revenue per account and per user. Our new AI services were launched at the end of Q2, so we do not yet have reliable data on customer adoption. That said, our sales teams tell us the customer reaction has been strong. As is our intention, we believe AI is driving increased interest by customers in our top ProPlus service tier, and that our standalone AI services, namely AI Answering and AI Receptionist, are receiving a lot of customer attention.

Looking forward, we are now busy creating our next AI solution which we are quite excited about and expect to release this quarter in Q3. This solution will encompass a large number of business productivity applications which I believe almost all customers will find valuable to their business. As regards to UCAS and specifically UMA Office, I'm also pleased to report we established a partnership with Thrive, which will allow UMA and Thrive to introduce each of our solutions to one another's customers. Thrive provides innovative small business marketing and CRM solutions and excels in verticals such as healthcare, beauty and wellness, legal and finance, auto services, and many more. These are prime verticals for Ooma. We intend to launch our joint marketing activities in September. As part of this, Ooma will also provide an integration between Office and Thrive's CRM called Keep.

Lastly, regarding UCAS, I want to mention that UMA Office was recently named the top VoIP provider in the 2026 Spiceworks Voice of IT Survey. based on feedback from 236 IT professionals evaluating leading standalone VoIP providers. We are heartened to once again receive this recognition, especially since it is the result of voting by users themselves. Regarding our third initiative, we launched My Phone by UMA in Q2 as planned and began the process of building brand awareness and retail presence to drive its success. You'll recall this is a residential landline solution targeted at giving younger children an alternative to a cell phone and at giving parents the control they need to keep their kids safe. MyPhone offers unique features such as Trusted Circle to limit what phone calls can occur and Quiet Hours to limit when calls can occur. Some organizations have been formed to help warn parents of the dangers of early child cell phone use and many of them are now supporting my phone. And I really retailers have shown great excitement too.

We are sold online now at five major retailers, namely Costco, Amazon, Best Buy, Walmart, and Target. We expect to be offered in store at one retailer this fall, and we expect to launch in Canada before the end of Q3. Already for Q2, we were able to increase our residential user base by over 3,000 users, a reversal of the slow user decline we have historically experienced. Taking a page from the My Phone Playbook, I'm pleased to announce we will be launching another custom residential solution in Q3, branded StarDial. StarDial is designed to complement Starlink and provide an ideal phone service experience with Starlink. Stardial connects to Starlink over Wi-Fi, and most importantly, takes advantage of UMA's proprietary adaptive redundancy to maintain high-quality calls over sometimes high-latency satellite internet. Like my phone, we are optimistic that major retailers will carry Stardial, and I'm pleased to share that one major retailer has already told us they plan to sell Stardial in-store starting late this fall.

We are hopeful that MyFone and Stardial together will boost our residential revenue. And in addition, we believe that the shutting down of residential copper lines that is now underway will also boost our residential sales. Finally, as we've reported in previous quarters, we believe we are making good progress integrating our two acquisitions, Fluent Stream and Phone.com. We took some actions late in Q2 to capture additional synergies between UMA and phone.com. We expect those actions will contribute positively to our bottom line results starting in Q3 of this year. We're actively working to leverage UMA's AI developments for the benefit of Fluent Stream and phone.com, and we continue to utilize UMA's more extensive marketing capabilities to strengthen the phone.com brand. All in, we believe we have done well with the acquisitions we have made over the last several years, and we remain committed to executing on more acquisitions if and when we can find suitable opportunities at the right valuation.

As we stated previously, our ideal acquisition targets are smaller size UCaaS players that allow us to grow our SMB user base and capture scale economies cost effectively. As I hope is clear, we have a lot going on at UMA and significant opportunity in front of us. In order to give investors a more complete picture of UMA's strategy and outlook, I want to let you know we are planning to hold an investor day at the New York Stock Exchange in the morning on September 29. Meeting will be webcast as well. And attendants from UMA will be several of UMA's senior management team, and we will present our plans in more depth than we can here today, and also take Q&A. Please keep an eye out for a press release next week for more information about this. 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.

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 four-year fiscal year 2027. In the second quarter, we maintained strong momentum with revenue of $83.2 million, up 25% year-over-year. driven by the growth of UMA business, including Airdial, and the additions of FluentStream and Phone.com. Excluding the impact of these acquisitions, total revenue in Q2 grew 8% year-over-year. In Q2, business, subscription, and services revenue accounted for 70% of total subscription and services revenue as compared to 62% in the prior year quarter. Q2 product and other revenue came in at $7.6 million and was up 46% year-over-year, driven by the growth of Airdot installations, which increased 50%. over the prior quarter. Product revenue in Q2 also included initial shipments of MyPhone, which contributed to the growth of residential product revenue, both sequentially and year over year.

On the profitability front, Q2 non-GAAP net income was $10.2 million and grew 58% year-over-year as we continue to focus on operating leverage in R&D and optimizing our sales and marketing spend, as well as realizing synergies from our recent acquisitions. Now, some details on our Q2 revenue. Business subscription and services revenue grew 38% year-over-year in Q2, driven by user growth and output growth for UMA Business and the additions of Fluent Stream and Phone.com. Excluding the impact of the acquisitions, business subscription and service revenue in Q2 grew 8% year-over-year. On the residential side, subscription and services revenue was relatively flat year-over-year, as we saw two consecutive quarters of residential user growth in the first half of fiscal 2027. For the second quarter, total subscription and services revenue was $75.6 million or 91% of total revenue as compared to $61.1 million or 92% of total revenue in the prior year quarter. Now some details on our key customer metrics.

A blended average monthly subscription and services revenue per core user, or ARPU, increased 8% year-over-year to $16.95. driven by an increasing mix of business users. During the second quarter, we continue to see a healthy Office Pro and Pro Plus take rate with 58% of new Office users opting for these higher tier services over Overall, 40% of Umo office users have now subscribed to those higher tier services. Our NetDot subscription retention rate for the quarter was 99% as compared to 99% in the first quarter. We ended the second quarter with 1,427,000 core users, up from 1,420,000 core users at the end of the first quarter. At the end of the second quarter, we had 703,000 business users, or 49% of our total core users, an increase of 4,000 from Q1. Q2 business user growth was negatively impacted by 4,000 user churn from IWG and a small one-time user count correction in other areas. Excluding the impact of these items, business users grew 11,000 from Q2.

Our annual exit recurring revenue was $299 million, up 25% year-over-year. Now some details on our gross margin. Our subscription and service gross margin for the second quarter was 72% as compared to 71% in the prior year. Product and other gross margin for the second quarter was negative 25% as compared to negative 47% for the same period last year. The year-over-year improvement in product and other gross margin reflects an increasing mix of Airdial hardware and installation revenue within the product and other revenue. into product and other gross margin also benefited from a recovery of previously paid tariffs. Excluding the benefit of tariff recovery, Q2 product and other gross margin was around negative 30%. On an overall basis, total gross margin for Q2 was 63% as compared to 62% in the prior quarter.

And now some details on operating expenses. Total operating expenses for the second quarter were $41.1 million, an increase of $6.1 million year-over-year, mainly due to the additions of FluentStream and Form.com. Excluding the impact with the acquisitions, the total operating expenses increased $1.3 million, or 4%, from the same period last year. Sales and marketing expenses for the second quarter were $20.1 million or 24% of total revenue up 12% year-over-year due to the addition of Fluent Stream and Phone.com expenses. R&D expenses were $14.1 million, or 17% of total revenue, up 23% year-over-year, and due to the additional fluency stream of phone.com team members. G&A expenses were $7 million or 8% of total revenue for the second quarter compared to $5.6 million for the prior quarter. Non-GAAP net income for the second quarter was $10.2 million or diluted earnings per share of $0.35. as compared to 23 cents in the prior quarter.

Adjusted EBITDA for the quarter was a record $12.4 million, or 15% of total revenue, and grew 74% over the prior quarter. We ended a quarter with total cash and investments of $17.5 million. In Q2, we generated a record $13.1 million of operating cash flow and $10.8 million of free cash flow. On a trailing 12-month basis, we generated $37.1 million of operating cash flow and $30.2 million of free cash flow. We spent a total of $17.6 million over the last four quarters. including $4.4 million in Q2 to buy back stock through a combination of open market repurchase and our issue net share settlement. In addition, we paid down the term loan by $6.5 million in Q2 and reduced the outstanding debt balance to $47 million at the end of Q2. on 1,444 employees and contractors. Now, I'll provide guidance for the third quarter and full fiscal year of 2027.

Guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, M2C, and M2C. optimization of intangibles, and other expenses. We expect total revenue for the third quarter of fiscal 27 to be in the range of $83.7 million to $84.5 million, which includes $7 million to $7.5 million of product and other revenue. We expect the third quarter non-GAAP net income to be in the range of $9.8 million to $10.2 million. Non-GAAP diluted EPS is expected to be between $0.34 and $0.35. We have assumed 29.1 million weighted average diluted shares outstanding for the third quarter. For 4-year fiscal 27, we expect total revenue to be in the range of $332 million to $333.5 million. The 4-year fiscal 27 revenue guidance assumes business subscription and services revenue growth rate of approximately 32% over fiscal 26, while residential subscription revenue is now expected to be flat to an increase of 1% over last fiscal year.

In terms of revenue mix for the year, we expect 91% to 92% of total revenue to come from subscription and services revenue and the remainder from the products and other revenue. We expect non-GAAP net income for fiscal 27 to be in the range of $39.5 million to $40.3 million. Based on this guidance range, we estimate our adjusted EBITDA for fiscal 27 to be $47.5 million to $48.3 million. We expect non-GAAP diluted EPS for fiscal 27 to be in the range of $1.35 to $1.38. we have assumed approximately $29.2 million with average diluted shares outstanding for fiscal 2027. In summary, we are pleased with our continuing momentum with a record adjusted EBITDA of 12.4 million Q2, which grew 74% year-over-year, along with a record free cash flow of 30 million for the trailing 12 months. excited about both organic and inorganic growth opportunities in front of us, and remain focused on achieving another meaningful progress towards our long-term financial targets. I'll now pass it back to Eric for some closing remarks. Eric? Thank you, Sheik.

We're obviously now halfway through our fiscal 2027, and it can be a very strong year for UMA. We have exciting initiatives across our business. We're most focused on capturing what we see as accelerating market demand for Airdial, driving added growth through UMA AI, MyPhone, and now Stardial as well. driving further contributions for acquisitions of PhoneStream and Phone.com, and working to pursue new acquisitions in the future. We hope you'll join us at our upcoming Investor Day on September 29 at the New York Stock Exchange. Thank you. We'll now take your questions.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Alinda Lee of William Blair. Your line is open, Alinda.

Perfect. Thank you. My phone has now been in the market for several months. Can you discuss our early adoption trends, customer feedback, and any lessons learned so far? And more broadly, Eric, how do you think about the long-term market opportunity here?.

Sure, hi, Alinda. It's been in the market since June-ish timeframe, and it's off to a great start. We were declining each year in residential users. This past quarter we grew 3,000 users, and the bulk of that swing is driven by my phone. But we think it has a lot farther to go. There's 20 million households in the US with young children and several organizations talking a lot about the importance of keeping kids off of social media and cell phone use until they reach a certain age. In fact, huge news today about Metis settlement even on addressing some of those fears. We need to promote it. We've dialed up our efforts there, but it's going to take a little time.

We hope to get it in store at a major retailer late this fall as well. but we think it's got significant opportunity. You can see it when you talk to people who have young children, they get it very quickly, and it's a bit of a buzz. This whole idea of giving a child a landline a parent can control when they're young is a bit of a buzz in the schools too amongst PTA groups and such. So we're optimistic about it.

That's helpful. And you've been adding on a lot of AI products, both as standalones, but also additional capabilities onto the ProPlus SKU there. How should we think about AI as a driver to the ProPlus attach rate and ARPU over time? And can you just give us a little bit more color in terms of the newer standalone AI opportunities products here as well.

Sure. So, you know, what we're starting to do with AI, it's an inflection point for us in our market. We can bring some pretty exciting features to our small business customers in particular that they've never had or seen before. And it gives us a whole new way to monetize those customers and drive more value for them. and value for us. We're off to a great start with some features in ProPlus that people can trade up a tier to get, and then a couple of standalone features that we think we've designed really well for a small business to kind of adopt them, customize them, make them work for them, but in a straightforward kind of paint-by-numbers, non-IT professional user way. And I think that's a great start for us. And what we have coming in Q3 we're super excited about. We're going to call it our UMA AI Productivity Pack.

And it's going to come in two phases. Phase one, which will come out in Q3, will have about 10 individual features in it. And these are things that can help a small business, you know, track their customers, see what's going on, you know, draft an SMS or a customer response, help with payments, things like that. Things people do every day that is, in a way, kind of busy work that AI could do for them. And we want to get that launched and see how it's going this quarter and then obviously get to phase two later this year. It's hard to give you real anything specific, but we think, I mean, we expect... You know, it's hard to know.

A double-digit percentage of our new customers adopting AI this quarter and, you know, building from there. Let me just leave it at that.

Yep, that's helpful. Thank you. Thank you. Our next question comes from the line of Brian Kinslinger of Alliance Global Partners. Your line is open, Brian.

Great, thanks. Congrats. It's what seems to be the strongest quarter and outlook that I've seen in five to six years covering the company. So congrats. I'm curious how How business development environment for Airdial has changed over the last few months is AT&T is clearly working aggressively, Sunset Pots lines,.

the sales cycle is narrowing as a result. Hi Brian, and thank you for those comments. Just a lot more activity, a lot more interest. You know, customers still want to do a POC. When they sign, they still go through a rollout schedule that's dictated really by their needs. It depends too whether the customer says, we'll install ourselves over time, or they say, Uma, why don't you handle it, and we'll bring in third-party installers and move it along faster. But no, we're seeing sizable opportunities.

We're even seeing some opportunities where a customer wants to replace a different solution that they've gone with, a competitor's solution, and put UMA in place. And we haven't done a lot of those, but it's pretty exciting to hear. You hear customers coming to us that way as well. Winning these next couple resale partners this last quarter was a great step forward. We're quite excited as well about the pipeline of potential partner resellers that we might be able to bring on in the back half of this year. So, you know, it's what we expected for Airdial. We're putting a lot of effort into this, but I do think the market's developing and going to keep developing over the next years.

I mean, there's still a long way to go in POTS reduction. So, you know, probably eight million lines out there, of that level to be replaced. So we're just trying to be everywhere we can be with it.

Great. A follow-up. You're focused on adding, obviously, resellers for Airdial. Maybe you can highlight which ones you've had the most success with. Maybe particularly, I'm curious how the performance with T-Mobile is working and even Comcast. I know Comcast had gone a little bit slower than you thought, but has huge potential. So maybe you can give us some updates on the reseller profile.

Yes, well, resellers are a very important channel for us to market for Airedial. One of the reasons is these resellers have great relationships with some very large entities across the market, and those aren't necessarily relationships Ooma would have if you look at our history. T-Mobile is a very valuable partner for us and doing great. And Comcast is bringing more deals now, but still has a lot of potential to get bigger with us. Where we've done the best is also with some of our partners who are our carriers themselves. and have their own POTS lines they need to replace. And we continue to work those. We have a couple in particular where we're actively involved helping them get through the transition.

So it's... It's going well, and as I said, we're excited that we think we can sign some important additional resellers here in the next coming quarter or two. Great. Thanks so much. Thank you. Thank you.

Our next question comes from the line of Eric Martinuzzi of Lake Street Capital. Please go ahead, Eric.

Yes, my congrats as well on the quarter and the outlook. I wanted to get a better feel for where the outperformance and the upward guidance revision is coming from, just because as you mentioned, you've got so many things going on. I'm sure kind of entering the year with the outlook with the two acquisitions, there might have been an element of conservatism and what those could contribute. You've got the rising business ARPU. You've got the rising business subscribers, you got Airdial, you got residential fall-offs less than we thought. What if we kind of Jack ranked those things. What's driving the guidance up in the big scheme?.

Well, let me start and I'll let Shig really address that directly. We entered the year not really knowing what we could achieve with some of these things. So we were obviously and we stated we were cautious in some areas. But as we see results, we're able to bring those to you and get a better perspective on where we're going.

take it further. Yes, thanks Eric and both Eric, I guess. But yes, to add what Eric said just now, The AIDA is certainly a contributor. as we said at the beginning of the year, we wanted to remain conservative on Outlook as we started the year and realize the upside as we realized those upsides. And that's exactly what's happening. I think so far, you know, first couple quarters of this year, you know, In Q1, we grew the subscription on ADA by 80% over a year. Q2, we just grew 75% over a year. So I think that momentum is carrying through to the second half. as well. So that's number one. Number two, You know, we didn't really build in the upside of my phone revenue much at all as we started the year and also even last quarter coming out of Q1. again, just for the sake of conservatism, and we are very pleased to see the first couple months of, you know, you know, sales related to my phone. We still remain conservative, but as you heard in my guidance statement, that we're now expecting the residential subscriptions grow either flat to 1% growth and as opposed to my original statement at the end of the year of down 1-2% so you know knowing that the residential subscription still accounts for around 30% of subscription revenue, that's turning from decline year over year to growth.

That makes a difference too. And so, And, you know, I would say those are two largest areas of the guidance contributor, Eric.

Okay, that's helpful. And then I wanted to talk a little bit more about the product that you mentioned, Eric, branded star dial definitely something that was not on my radar Sounds like a really interesting concept. Is this something that rings the register in 2020 fiscal? 27 or is it really? you're planting seeds now maybe it's it contributes in FY 28 what can you tell us about Stardial?.

Sure. You would have to know UMA well to know about our unique technology in the Umatello. But adaptive redundancy is really pretty amazing. We automatically send redundant packets when we observe latency over the connection. And we will dial up to one redundant, two redundant, and then back down. And that can happen throughout the day as needed to maintain a great voice call. We think that's a real powerful feature for communicating over Starlink Internet. And so... So to highlight that and to really position ourselves as the right choice for someone getting Starlink, we wanted to bring out a branded version called Startout.

We think it will make an impact this year. And I can tell you, a lot of people in rural areas are adopting Starlink. And we've seen particularly high attach rates of phone service in those areas, partially because people are isolated, they don't have that good of cell phone coverage. And so, a home phone is a very valuable tool in that situation. So, you know, Stardial is going to be a great way for us to really focus there with unique named product and a brand that we can promote right alongside Starlink.

Got it, thanks. Thank you. Our next question comes from the line of Patrick Walravens of Citizens.

Your line is open, Patrick. Hi guys, this is Nick on for Pat. Congratulations on the quarter and thank you for taking my question. Eric, one for you. So customers have a lot of AI products competing for their attention and budgets. Specifically with Ooma AI, how do you cut through the noise and how do you eventually get them to adopt the product?.

Well, actually, we don't know that we have to cut through that much noise. We are handling our customers' phone calls and messages. And if they want to leverage that to be more productive using AI, we're the logical folks to turn to for that. We see it even in the last month since we went GA with our existing AI features. Lots of customers want to talk to us about it. They're very intrigued and interested in it. So in that sense, I think that it's a natural fit for our type of solution and is going to be straightforward for us to sell because it's part of a bundled package.

You know, some of our standalone services particularly some of the other standalone services to come, which I haven't even talked about what they might be. They might face a little bit more independent competition from others. But again, we're integrated into the customer's workflow with our desktop app and mobile app and IP phones that the customer is using them, connected up into their CRM. and their contact center, it's a natural way to ingest AI. And so we're pretty excited that we can get pretty good we could attach with it. And currently we are not offering free trials of it. We may do that, but we do, at least for new customers, offer a 30-day money-back guarantee and people can get it and try it that way. But ultimately, we're going to have to focus, too, on our installed base and how we really market it well to our entire installed base.

And there we're working on some strategies, and we'll be launching some of those this quarter.

Great. And then just as a quick follow-up, assuming that you guys are reiterating the mid-term and long-term targets, given that there's a slide in it in the earnings deck. So what's giving you confidence on those numbers?.

Well, I think the simple answer is Well, there's a couple of ways to look at that. But we said a year or two years ago, we were going to drive more profitability. And we've done that. And we feel like we can continue to do that. So I think we have a good track record of where we've come over the last years. If you look at where going, we're serving markets at inflection points or with unique new things happening. And maybe there's a little bit of fortuitousness in all that, but pots replacing them in the next three or four years is a big deal. And we believe we've leaned in to be the leader in that space.

AI is an inflection point on our types of solutions, UCaaS, and there's a lot of creative things we can do with it to bring real value to the way our customers operate and to make them feel their jobs easier. And then, you know, the My Phone trend and keeping kids away from cell phones until they, for instance, wait till eighth grade. Who knew you would have several non-profit organizations promoting that? I even read where one was giving solutions away on an island in Washington State to help kids not have a cell phone. I mean, so you know we're perfect for that segment because we've built the most trusted solution in the market, honestly, for residential phone use. So I think we just have good opportunities in front of us, and we're going to go capitalize them.

Great. Thank you and congrats again on the quarter. Thank you.

Thank you. Our next question comes from the line of Matthew Herrigan of Benchmarkstonex.

Your line is open, Matthew. Oh, thank you. There's some interesting commonalities with what you're talking about and what Zoom talked about yesterday and certainly for a while now. Even the communications layer clearly is a natural entry point for added a lot of UCaaS features, AI, and all that. And there's sort of some parallels there. And I know you don't have a lot of compute costs and all that yet, but Zoom has made a point talking about federated AI and really taking the optimal model from the large LLMs and then doing things in-house with SLMs and really keeping the cost down that way. And you could even look at some of the performance and transcription. You can look at the Humanities Last Exam benchmark where their federated approach actually performs very well relative to open AI and anthropic even.

And when you go down that route, it's a huge opportunity. You may be bumping into some large, you know, facile competitors as well. as well, although clearly they're more focused on the enterprise side than you are. But am I exaggerating here and kind of what's your, I mean, if you really do graft on a lot of AI, I'm certain you've done things appropriately on the cost structure side so that you don't have a blow up there. I know it's probably a pretty small building block right now. I'm not sure it's something you have to be thinking about. I guess I should also congratulate you on the corridor, but you're probably a little tired of hearing that at this point. And it's well deserved.

Thank you. I'm never tired of hearing that, believe me. So we are running most of our AI in-house on our own machines, custom tailored for what we need to do. That's the only way to get the cost structure as low as we'd like to have it. We have looked at outside entities we can turn to for some of what we're doing, and in almost all cases, it's more, well, in all cases, it's more expensive than what we run internally. So we focused internally. scalable and I feel pretty good about what we're doing. And I don't, right now I don't see a cost challenge at all on the AI side for us. I see more, our biggest challenge is how fast can we execute on our roadmap for the new AI features we want to bring out.

And we are using a usage-based model, essentially. It's a low upfront fee for the initial base of usage, and then you can pay as you go. And I think that's a nice way to handle it so that we can always be sure that we're.

know making the margins we want to make. I guess we should be even more congratulated on being able to do that without miraculously without blowing up your R&D budget or you know sure not buying a lot of advanced NVIDIA chips but it's almost counterintuitive that you would be able to do that on a cost-effective.

basis, but you're confident you've done that? Yes, I am. I mean, not everything takes a large language model, as you know. Sure. We feel comfortable. We've worked through the economics of what we're doing today. We can also see how we can get at lower costs as we go forward, particularly with more scale.

we don't see an issue on that side. So would you say you're taking much more of a software-based approach on AI, and that's how you manage to really optimize costs and have the performance at the level that you want? Yes.

Yes, I would more say that by producing a solution tailored to what we need to do, and by purchasing hardware and running it ourselves, between those two things, we're able to create drive maximum value and lowest cost position that we can get. So yes, I mean, there's obviously software work too. But our solutions don't need to be everything to everybody. They just need to do what we need them to do really, really well. We will use transformer models or other models alongside our main models to offload and keep the processing costs as low as possible.

And then if you don't mind, this is kind of at the tail end of the call here, one more question. If my phone really takes off, are you going to see a blow up in your equipment rather.

revenues at a lower margin? Well, to some degree, that's a yes, because we We are not intending to raise prices on Umatello, and memory costs have gotten more expensive. And so there is going to be a little bit of an impact to our business from that. But that's factored into our guidance. And I would also say that, given we're 92% recurring revenue, and some of that 8% is Airdial, which has frankly got a pretty good margin structure, whatever happens here isn't going to be that big to us as a company overall.

And also, you know, MyPhone users, and Matt, just one more thing, all the MyPhone users, there may be upfront... you know negative margin associated with the product but it's followed by the.

MyPhone user subscription, which is on a premium tier. So it does help the subscription margin in that sense after we sell. That's a very good point. Every MyPhone user is a paying user. They're not a free just pay taxes and fees user. So we got more coming in too.

Got it. Beautiful. Thanks. You bet. Thank you. Once again, to ask a question, please press star 1-1 on your telephone. Again, that's star 1-1 on your telephone to ask a question. As there appear to be no further questions, I would now like to turn the conference back to Eric Stang for closing remarks. Sir?.

Well, thank you everyone for your time today. We're pretty excited about getting together on September 29. We're going to try and go deeper in each of these areas and really talk to you more about our AI roadmap, talk to you more about the partners we're bringing on for Airdial and what they can do for us. talk to you more about what success rate we're seeing with MyPhone and Stardial and how it's going, and hopefully some new things too. So hopefully you'll all be able to attend that, and we look forward to it. Thank you, everyone. Bye-bye.

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

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Hello, and welcome to Ooma First Quarter Fiscal Year 2027 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Matthew Robison. You may begin.

Thank you, Towanda. Good day, everyone, and welcome to the First Quarter Fiscal 2027 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 first quarter fiscal 2027 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.

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 second quarter and full year fiscal 2027 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 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 filed Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally, our investor presentation slides include GAAP to non-GAAP reconciliation that also provides a resolution of GAAP expenses that are excluded from non-GAAP metrics.

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

Thank you, Matt. Hi, everyone. Welcome to Ooma's First Quarter Fiscal Year 2027 Earnings Call. Thank you for joining us. We're pleased to report strong Q1 financial results and a good start to our fiscal 2027 year. I believe we are making good progress on our key initiatives for this year, and I look forward to reviewing them with you today. Financially, for Q1, I'm pleased to report that we exceeded expectations with revenue growing 25% year-over-year to $81.1 million, non-GAAP net income growing 73% year-over-year to $9.7 million and adjusted EBITDA growing 78% year-over-year to $11.8 million.

Subscription and services revenue from business customers grew 38% year-over-year and reached 69% of total subscription and services revenue. Excluding the impact of two acquisitions that we made late last year, we stepped up our organic growth rate of business subscription and services revenue by a couple of percentage points to 9% year-over-year. As expected, a key driver of our stronger business services growth was AirDial. AirDial services revenue in Q1 was up by 80% versus a year ago.

And on the residential side of our business, I'm happy to mention that for the first time in many quarters, we grew our base of residential users in Q1. All in, we believe we are off to a strong start for fiscal 2027, and so we'll be providing improved guidance for the balance of this year later in our remarks. As we discussed on our last conference call, we are focused on several key initiatives for this fiscal year.

The first that I would like to address is our commitment to expanding AirDial. We believe the market opportunity for POTS replacement is accelerating as more companies incur higher POTS charges or have their lines turned off by AT&T or others. And as you know, we have built AirDial from the ground up to provide a fully integrated solution incorporating unique features to best serve this market.

In Q1, we were proud to announce new features, including equipment disconnect detection, where we identify if the equipment that is connected to AirDial goes down. We also announced off-hook alerts to identify equipment connected to AirDial that goes off hook for an extended time. These features were added in response to a customer of ours in the health care space who must ensure working connections are always in place.

We believe that both of these new features are unique to AirDial and bring added differentiation to AirDial's remote device management suite of services. Commercially, Q1 was a record quarter for AirDial. New lines installed were more than double the number of a year ago. In general, we are seeing increased market interest in POTS replacement by many industry sectors. And in Q1, we achieved particular success serving health care customers, REITs and state and local government bodies, including schools.

In Q1, we also met our goal of securing two additional AirDial resellers in the quarter. One of these new resellers will be switching away from a competitor's product to exclusively sell AirDial. We are excited to be working with them and all of our 40-plus AirDial resellers. The second initiative for this year that I would like to discuss is our plans to introduce AI solutions on our Ooma Office platform.

I'm pleased to report that earlier this month, we announced Ooma AI, which is a suite of new AI-powered capabilities, including AI Transcriptions, AI Answering service, AI Receptionist, AI insights and an open AI integration. Together, these features enable Ooma customers to capture, summarize and analyze call information automatically while improving responsiveness and overall call handling efficiency.

To date, three of these features, namely AI Transcription, AI Answering service and the OpenAI integration have been released to customers and the two others are in beta and will be released soon. The AI answering service and the AI receptionist service carry a separate monthly charge and the other features have been made available in Ooma's top tier of service called Pro Plus. As such, we expect adoption of Ooma AI to bring increased revenue for Ooma.

In general, we believe AI can be a valuable tool for small businesses to help them automate routine tasks, deliver real-time insights, move faster and work smarter. One statistic we have heard is that over 50% of calls to small businesses go unanswered by a live person and close to 25% go unanswered at all. A key goal in our development of Ooma AI has been to create the right set of features that will be most useful to small businesses while also making the features very easy to enable and use.

While it is early days and too soon to evaluate customers' response to Ooma AI, we are excited about its potential. The third initiative for this year that I would like to update is our plans for our residential business. Last quarter, I mentioned that Ooma Telo's sales were remarkably robust, and I'm pleased to report that strong sales of Telo continued in Q1. In fact, as I mentioned earlier, for the first time in many quarters, we grew our base of residential users in Q1.

We see several market drivers for residential phones. One in particular is parents' desire to give their kids a phone but avoid the screen time associated with mobile phone use. We estimate there are approximately 20 million households in the United States with children aged 5 to 14 years old.

According to the Pew Research Center, 86% of parents say managing children's screen time is a day-to-day priority. That's not surprising given studies have shown that smartphone use in children can lead to sleep disruption, negative mental health outcomes and increased inattention symptoms.

Organizations like Wait Until 8th, Unplugged, Smartphone Free Childhood, ScreenStrong, ScreenSense and many others have emerged to help parents with screen time concerns. To address this and give parents a solution, we recently launched MyPhone, a modern landline designed specifically for families with kids. MyPhone contains several features aimed at allowing parents to monitor and control their kids' phone usage.

One is trusted circle calling, which allows calls only between approved contacts and another is quiet hours, which blocks all calls during homework, bedtime or family time. Online call logs also allow parents to monitor incoming and outgoing calls. I'm pleased to report that we have received a strong retailer response to our announcement of MyPhone. MyPhone is now available at walmart.com and will soon roll out to other online retailers.

We also expect that MyPhone will become available on the shelf in Walmart stores starting this fall. The last initiative I'd like to touch upon is our plans to make the most of our two acquisitions from late last year and to pursue further acquisitions in the future. We believe the integration of each of our recent acquisitions is going well, and our rationale and plans for each acquisition continue to hold true.

As a reminder, FluentStream is a solid business generating high EBITDA that brings us increased channel strength and another outlet to sell AirDial. Phone.com has low EBITDA, but we can take and are taking steps to improve its financial performance through scale economies. And Phone.com also affords us a second small business brand in the market with a powerful name and URL.

We anticipate driving further improvements over the next 3 quarters as we increasingly leverage Ooma's marketing and sales expertise, lean operations, product strengths and vendor relationships. As Shig will note in his comments, we have now paid down our debt to about $53 million and intend to continue to pay it down further each quarter to strengthen our ability to make more acquisitions in the future.

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.

Thank you, Eric, and good afternoon, everyone. I'm going to review our first quarter financial results and then provide our outlook for the second quarter and full year fiscal 2027. We had a strong start to fiscal '27 with the first quarter revenue of $81.8 million, up 25% year-over-year, driven by the growth of Ooma Business, including AirDial and the additions of FluenStream and Phone.com.

On a combined basis, Fluenttream and Phone.com added approximately $11.5 million of revenue in Q1, which was their first full quarter since the acquisition. Excluding the impact of these acquisitions, total revenue in Q1 grew 7% year-over-year. In Q1, business subscription and services revenue accounted for 69% of total subscription and services revenue as compared to 62% in the prior year quarter.

Q1 product and other revenue came in at $6.6 million and was up 37% year-over-year. driven by the growth of AirDial installations with a record number of AirDial line installations again in Q1, which more than doubled over the prior year quarter. New bookings for AirDial also continued to be robust and grew more than 75% year-over-year in Q1.

On the profitability front, Q1 non-GAAP net income was $9.7 million and grew 73% year-over-year. On a combined basis, CarScreen and Form.com added approximately $2.7 million of non-GAAP net income in Q1. Excluding the impact of these acquisitions, non-GAAP net income grew 24% year-over-year as we continue to focus on operating leverage on R&D and optimizing our sales and marketing spend.

Now some details on our Q1 revenue. Business subscription and services revenue grew 38% year-over-year in Q1, driven by user growth and ARPU growth for Ooma Business and the additions of FluentStream and Phone.com. Excluding the impact of the acquisitions, business subscription and services revenue in Q1 grew 9% year-over-year.

On the residential side, subscription and services revenue was flat year-over-year as the residential user base continued to stabilize in Q1 following a trend we saw beginning in the second half of the last fiscal year. For the first quarter, total subscription and services revenue was $74.6 million or 92% of total revenue as compared to $60.3 million or 93% of total revenue in the prior year quarter.

Now some details on our key customer metrics. Please note that Q1 ARPU as well as net dollar retention rate include the impact of the 2 recent acquisitions for the first time as these businesses had their first full quarter with Ooma in Q1. Our blended average monthly subscription and services revenue per core user, or ARPU, increased 9% year-over-year to $16.77.

This year-over-year increase in blended ARPU reflects a meaningful increase in our business core user base with higher ARPU, which now accounts for 49% of the core users as compared to 41% a year ago. During the first quarter, we continue to see a healthy Office Pro and Probus take rate with 53% of new Office users opting for these higher-tier services.

Overall, 39% of Ooma Office users have now subscribed to these higher-tier services. Our net dollar subscription retention rate for the quarter was 99% as compared to 99% in the fourth quarter. We ended the first quarter with 1,420,000 core users, up from 1,404,000 core users at the end of the fourth quarter. At the end of the first quarter, we had 699,000 business users or 49% of our total core users, an increase of 15,000 from Q4.

Our annual exit recurring revenue was $294.6 million, up 26% year-over-year. Excluding the impact of the recent acquisitions, our annual exit recurring revenue grew 7% year-over-year. Now some details on our gross margin. Our subscription and services gross margin for the first quarter was 72% compared to 72% in the prior year.

Product and other gross margin for the first quarter was negative 31% as compared to negative 41% for the same period last year. The year-over-year improvement in product and other gross margin reflects an increase in mix of AirDial hardware installation revenue within product and other revenue. On an overall basis, the total gross margin for Q1 was 64% as compared to 63% in the prior year quarter.

And now some details on operating expenses. Total operating expenses for the first quarter were $41.4 million, an increase of $5.9 million year-over-year due to the additions of FluentStream and Pham.com. Excluding the impact of the acquisitions, the total operating expenses increased $0.3 million from the same period last year.

Sales and marketing expenses for the quarter were $19.7 million or 24% of total revenue, up 8% year-over-year due to the addition of FluentStream and Phone.com expenses. Research and development expenses were $14 million or 17% of total revenue, up 24% year-over-year due to the addition of FluentStream and Phone.com team members.

G&A expenses were $7.6 million or 9% of total revenue for the first quarter compared to $5.8 million for the prior year quarter. Non-GAAP net income for the first quarter was $9.7 million or diluted earnings per share of $0.35 as compared to $0.20 in the prior year quarter.

Adjusted EBITDA for the quarter was a record $11.8 million or 15% of total revenue and grew 78% over the prior year quarter. We ended the quarter with total cash and investments of $17.2 million. In Q1, we generated $6.4 million of operating cash flow and $4.9 million of free cash flow. On a trailing 12-month basis, we generated $30.3 million of operating cash flow and $24.5 million of free cash flow.

We spent a total of $17.7 million over the last 4 quarters, including $4.6 million in Q1 to buy back stock through a combination of open market repurchase and RSU net share settlement. In addition, we paid down the term loan by $5 million in Q1 and reduced the outstanding debt balance to $53.5 million at the end of Q1.

On the headcount front, we ended the quarter with 1,432 employees and contractors. Now I'll provide guidance for the second quarter and full fiscal year 2027. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization of intangibles and acquisition-related and other expenses.

We expect total revenue for the second quarter of fiscal 2027 to be in the range of $81.6 million to $82.3 million, which includes $6.3 million to $6.7 million of product and other revenue. We expect the second quarter non-GAAP net income to be in the range of $9.4 million to $9.8 million. Non-GAAP diluted EPS is expected to be between $0.33 to $0.34. We have assumed 28.9 million weighted average diluted shares outstanding for the first quarter.

For full year fiscal '27, we expect total revenue to be in the range of $326 million to $328.5 million. The full year fiscal ' 27 revenue guidance assumes business subscription and services revenue growth rate of approximately 31% over fiscal '26, while residential subscription revenue to be flat to a decline of 1%.

In terms of revenue mix for the year, we expect approximately 92% 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 '27 to be in the range of $37.5 million to $39 million. Based on this guidance range, we estimate our adjusted EBITDA for fiscal '27 to be $45 million to $46.5 million.

We expect non-GAAP diluted EPS for fiscal '27 to be in the range of $1.29 to $1.34. We have assumed approximately 29.1 million weighted average diluted shares outstanding for fiscal 2027. In summary, we are pleased with our strong start to our fiscal '27 with a record adjusted EBITDA of $11.8 million in Q1, which grew 78% year-over-year along with a record free cash flow of $24.5 million for the trailing 12 months.

We're excited about both organic and inorganic growth opportunities in front of us and remain focused on achieving another meaningful progress towards our long-term financial targets. I'll now pass it back to Eric for some closing remarks. Eric?

Thank you, Shig. With our strong start, we feel we're off to what can be a very strong year for Ooma. While we have exciting initiatives across our business, we are most focused on capturing what we see as accelerated market demand for AirDial driving added growth through Ooma AI and MyPhone driving further contributions from our acquisitions of FluentStream and Phone.com and working to pursue new acquisitions in the future.

Thank you, everyone, for joining us today. We'll now take your questions.

[Operator Instructions]

Our first question comes from the line of Arjun Bhatia with William Blair.

Congrats on the quarter here. Eric, if I can start with you, it sounds like Ooma AirDial really is picking up can you just give us a sense of your visibility into the future revenue there? What does the pipeline look like? And how are sort of the implementations going with those customers that you've already sort of one at this point?

Sure. Arjun, so implementations are going great. We're able to respond as needed as customers come in. And we're excited about all the opportunities we're seeing.

We including those where some of our customers have maybe had a bad experience with another competitor are switching to move to air dial. We we don't really discuss pipeline, so to speak.

But I can say that with 40-plus resellers now, we have quite a big footprint in the industry, helping us find opportunities. And that's part of the strategy here is to really leverage ourselves with all of our great partnerships.

I'm really excited about the 2 we added this last quarter. And obviously, our biggest partners today remain T-Mobile, Comcast and a couple of carriers that we've talked about in the past. Comcast is still not -- is still only doing a small bit of a small amount of what we think they can be in the future.

But still, it's a great relationship and one that is developing. So we think we have a lot of activity underway. And the market -- it's possible to see where AT&T and others are shutting off lines and a number of announcements just keep going up.

And I think a lot of -- we're talking a lot of companies today that weren't as focused on this a year or 2 ago, but now realize they need to do something, and they're really looking for the best solution in the market. And when we can get that kind of engagement with the customer, we do very, very well because there are things about our solutions that are unique and we think make it quite special.

So we're excited about the outlook in the U.S. and in Canada as we look forward and think that the market is building and we're growing -- we have opportunity to grow significantly as we move forward.

That's helpful. And -- maybe on the AI sort of announcements, those were very interesting to hear as well. It sounds like you're in different phases of deployment, depending on which AI service we're talking about, and they're monetized in different ways as well.

But I'm just curious to hear your kind of perspective on what the financial impact could be for talking about this in a year or 2 years out? Is this something customers have expressed interest in? And what is the upsell opportunity looks like for a transcription and answering service?

Yes, that's a good question. And it's one that we don't have a lot of experience with to give a very educated answer. The statistics on small businesses being able to respond to their phone calls while they're doing everything else they do. suggests that there's a real need for these capabilities.

And given that our AI voice mail and AI transcription are going to be very competitively priced and I think very easy to set up and use. We're hopeful that a lot of our customers will find value and adopt them, and it will become an extra charge to our customers. So from a revenue perspective, it's a boost for Ooma.

Today, a single-digit percentage of our customers take Ooma Pro+, which is the highest tier of service we have -- and some of our AI services are going into that tier. We'd like to think that with those services there and some education of our customer base, we could move that take rate up to double digit going forward.

So there'll be a boost there as well. It's hard to say, but I think we're all experiencing the power of AI in our businesses and there's no going back. There are going to be more features to come. We've only announced the first 4 or 5 that are coming out now, but we have a road map out years to pursue.

And we believe there's going to be a range of things we can do for small businesses. it's really a special opportunity for us because all of that customer's communications, their phone calls, their messaging, are flowing through Ooma so we can help them analyze that data and be more proactive with it.

So I think it's the start of a story for Ooma that we can unfold over the next couple of years.

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

Yes. Congrats on the quarter as well from me. I wanted to better understand the drivers of the upside, just going back to your guide for Q1, the midpoint of your revenue expectation was $80 million even, and you exceeded that by $1.1 million. Is the big driver here, just the core business customers -- is it more AirDial? What's the biggest driver of the upside.

Yes, thanks for the question. And the biggest driver of the upside was from AirDial. And as we said when we guided for Q1 and for the year, we wanted to remain conservative in piece in particular because it's not always easy for us to predict the timing of installation even though the bookings and demand has been increasing.

So we're cautious about that, and we're happy with the outcome a bit obviously exceeded by a good amount. And I think that's the biggest piece of it. The other piece, as Eric pointed out in his remarks, too, but the residential didn't decline.

And again, that's another area that we plan conservatively and we actually didn't see a decline there. So that helped a bit as well in Q1 in relation to what we had expected at the beginning of the quarter.

So I would say those were the two biggest drivers and EDA being the biggest of it.

Okay. And then just the follow-on would be for this -- you've also left your outlook for the full year. Do you expect -- does that refreshed guidance for FY '27.

Does that anticipate both of these trends that you outlined persisting? Or is it a Q1 was a bit of an anomaly, let's see how things play out in Q2.

I wouldn't say that Q1 was anomaly. Obviously, Q1 established. Obviously, the Q1 is taste baseline sort of speed to begin the year, which is a great baseline by the way. And -- but in our guidance, I think you'll see when you work out the model, though, we still remain conservative relatively speaking, especially the pace of ramp on air dial because, again, for the same reason I said it just now that we want to remain conservative in predicting the timing of the installation of the lines.

Again, the booking has been strong. Like I said in my remarks, the booking in Q1 year-over-year grew 75%. And that was like 3 or 4 quarters in a row. We had a growth write-down of bookings.

But again, timing of installation is still hard to predict, but we're optimistic, but we want to be conservative on that. And secondly, I don't know if you picked up, but I used to say in the guidance that residential is going to be down minus 1% to minus 2%.

But based on the recent trend, I improved that a little bit to say flat to minus 1%. Now we are going to see Walmart stores being started with MyPhones in the second half of the year. We're being conservative on that. We don't know quite frankly how much a take rate is going to be as much as we are excited about it.

So there's a little bit of conservative build on that. So long story short, Eric, that we're still being conservative for looking here, given some of the nature of these businesses, AirDial and MyPhone in particular, that I just mentioned.

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

Congratulations on the quarter. I just wanted to dig in on Ooma AI. I was doing the math a little bit on how much usage the customer is going to get for that $15.99 on AIsystem in the $49.99 on the receptionist -- and it seems like it's $0.38 a minute $0.50 for the receptionist. It'd be great to give us an understanding of what the COGS look like for something like that? Is that going to be positive for your margins?

Or is that something that's potentially going to hurt it? And then -- the press release wasn't very specific on how the usage -- additional usage is going to be priced. So it would be great to get some clarity on that.

Yes. We'll price additional usage per minute is the way we do it. And -- we -- if you look in the industry, you'll see prices that range quite a bit for these kinds of services.

We think we're pretty competitive with the package we put together. And actually, the AI answering machine is kind of a unique positioning in the market. You don't see that from others and it's a very useful capability at a lower price point than a full reception of service would be. So it's a nice entry point for a small business as well to get started with some added capability.

We're -- COGS wise, we are hosting internally the AI activities to transcribe calls summarized them and then work with the data. We also do utilize some outside capabilities as well.

And I can't tell you here exactly what our COGS are, but I can tell you that we think we'll be driving margins that are well in line with the margins we report overall.

Spectacular. And then just one quick follow-up on that. I guess when I think about it, it feels like the amount of time that a customer spends on spends talking to is something that the business itself doesn't have a lot of control over. If I have 1 customer that apps along with it for the full 40 minutes, I've blown through my usage without getting a lot of value.

Is there any way that you guys manage that on your end? Or how do you think about that kind of conundrum.

Well, you're talking now about the answering service and the reception of service. The other -- people leaving voice mails or just all your conversations throughout the day are part of Pros.

So there's not a usage-based elements to that. For receptionist to answering services, people tend to leave a message of a minute or 2 at most and not really go on. But I think different businesses will vary. And obviously, we're going to make this attractive to our customers.

So we may come out with other packages over time for high-power customers. you can enable these services on one line or many lines in the business as well.

So depending on how many numbers you have set up for -- reaching outside parties, you have flexibility there, too. I think that for a business that finds value in these services, I don't think our pricing is going to hold them back.

Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners.

Great. It's great to hear about the progress our business development with AirDial's making. Can you put any numbers behind your comments, for example, you mentioned AirDial lines service revenue, bookings, and more were up 75% to 80% and maybe that's not the exact range.

Can you share what any of those numbers are for us?

Yes. I mean, the number we gave you is lines installed. And that number was up -- sorry, a minute.

We -- I said that lines installed were more than double that of a year ago. and Shig said that bookings Bookings, go ahead, we're up over 75% -- and Yes. I mean that gives you some sense of how fast it's moving for us. We expect it to be up again in Q2 and up each quarter throughout this year.

Sorry, what I meant was, are we going from 2,000 to 4,000 lines or going from 10,000 to 20,000. Double is hard to understand where we really are same with services revenue and bookings. Or are you just not prepared yet, and there are 2 small numbers to share?

There are not too small numbers to share. We don't break out AirDial at maybe the level of granularity that you're asking for here. But we are comfortably over how best do I want to say it...

Long way to think about it, sorry, Eric, Brian, to say is that we reported about 15,000 core business user growth from quarter-to-quarter. Majority of that was AirDial.

Got it. That's helpful. And then are the sales cycles beginning to change? Is it just integrations are starting for bookings from several quarters ago. What's changed over the last quarter or so that you're starting to see this inflection point, it sounds like on the demand side?

Well, I think it's the things I've said in my conference calls. There are more lines being shut down than ever before. We have more partners reselling AirDial than ever before. We are seeing larger entities with many locations around the United States, get more and more focused on the need to do something and starting to take action. .

We are even seeing some of the partners we started working with our customers we won 6, 12 months ago, just go faster now -- it really varies by customer, but we're definitely seeing market movement.

Not surprisingly, there are millions of lines out there that are going to have to switch out over the next 2, 3 years. And so customers need to get in front of this. It's an exciting time for us.

I think for the next Three years, we're going to see AirDial as a very strong contributor to the business as the majority of lines go away. Now having said all that, most of the lines going away today are from AT&T.

There are others out there that have lots of lines, Verizon being one that are really not sunsetting many lines yet. So depending on how those parties move forward, there's a long-term road map here for potlines needing to be replaced.

So it's still, frankly, early days in the potline replacement business, I think, compared to where it's going. And that's why we're seeing the market acceleration.

Great. Last question I have. You talked about M&A. What are just some of the top priorities, maybe any details related to either technology? What sells out your stock or geography where maybe you're lapping presence? Anything you can share on that would be great.

Sure. Happy to. But neither of those are a particular concern to us. We viewed making smaller-sized acquisitions as a way to strategically grow Ooma cost effectively. .

And all three -- all -- if you look at our last 3 UCaaS acquisitions in fluenstream,phone.com and onset any business like those would be of interest to us or be in our target sweet spot.

It doesn't mean we wouldn't also look at other things or things that might broaden us in certain ways. But fundamentally, we're looking for cost-effective growth, increased scale, moving Ooma up to just be a larger business in the market.

And I think that when businesses that we're acquiring can be accretive 1 quarter out, which both Fluentstream and Phone.com were, it's a very viable strategy for us. So -- that's what we're trying to do.

And -- but the only constraint I'd say is we're focused in North America. We're not trying to expand geographically.

[Operator Instructions] Our next question comes from the line of Matthew Harrigan with Benchmark.

It's maybe quite a conjectural question, but I'll go there anyway. When you look at the family safety market, which actually would include predatory activity toward kids as well as not being too distracted by social media.

On the mobile side, I mean, it's an enormous TAM both in the U.S. and Europe as well. I'm aware of one small software company that's trying to address that and now Horizon done some things in-house. But is there anything that you're doing that would be appropriate to that market?

Because I mean, clearly, there's some opportunity with my Phone, but if you had something comparable on the mobile side where you had both kind of a safety element and not walking too much to the car Asians element as well, it would certainly have a pretty a huge TAM in the market relative to MyPhone. Thanks.

Yes, that's an interesting area to think about. And there are certainly other things one can do and other things certain companies are doing. Our focus today is MyPhone, which is specifically targeted at kids who have a defined list of others they want to be in touch with.

And there's a bit of a viral impact to this because when your kid gets one, you want the other kids that are their friends to get them to and the parents get together and they discuss what they're going to do.

And it really is a nice way to give your kids some freedom and ability to interact with others but still know that they're not subject to all the challenges of social media and connectivity that comes with a smartphone.

So it's a remarkably large movement. We were talking just the other day about an organization in Washington -- the state of Washington in a particular location there, where there's actually a nonprofit that's giving out phones like this to try and get all the kids on something that's safer.

It's a big deal. We've also seen social media band in some countries for kids below a certain age, not the U.S., of course, but I'm thinking countries, I believe, if I'm remembering right, Spain was one of them that did that recently.

So I think there's a real role for MyPhone. And I can tell you that when we talk to retailers, our buyers at retail are often individuals with kids at home and they get it instantly when we start talking about the use case.

If you've got a kid at home and you're facing these issues and you hear about what MyPhone is and what we're trying to do, it really resonates -- so as you can tell from Shig's guidance, our guidance, we don't really know what to expect for iPhone and we haven't put too much in the outlook for it.

But we are going to really put some marketing behind it, particularly through social media channels and influencers and see if we can't get a lot of parent interest in what we think is a great solution for younger kids.

So that's really our focus. And as we're successful with that, maybe we'll look more broadly from there.

Would you say that even if you didn't have anything in the hopper in terms of active developments or discussions, would you have a reason to believe that any of your technology would be readily transferable to the mobile side?

Or is it just no visibility on that? And in other words, it wouldn't be -- it would be an app -- I'm sorry.

Well, I don't want to get too specific or I don't know if you can hear me, but I don't want to try to get to specific on what we might be thinking about or what you're going towards.

But we do have our mobile app called Talkatone. -- and we're very aware of how mobile apps can be tailored to meet certain needs in the market.

And so we have that technology in-house along with the technology that obviously creates the special features that my phone brings. But yes, I think you're getting out ahead of where we are.

Our next question comes from the line of Matthew Miles with B. Riley Securities.

This is Matthew on for Josh. -- just to start off. So on the product gross margin side, it came in at around like negative 30% on I'm wondering like how much of that is sustainable AirDial-Gen2 cost savings? And is negative 30% of like around there a good run rate going forward?

Yes. Matthew, this is Shay. Thanks for the question. I do think, and I expect this right now is you're going to see a little bit worse product margin starting Q2 and rest of the year.

There are a couple of reasons. One would be the -- we're going to start to see the impact of the higher component prices, we may have talked about in the past a little bit.

So these are memory pieces. So it's not unique to Ooma per se. But so those components go into tell a residential product and the AirDial. So we're going to start to see some impact of it starting Q2 and rest of the year.

Secondary, again, we're not putting too much MyPhone estimate into the forecast for -- to be conservative. But to the extent that we see those units shut into stores in the second half when we do realize them.

We are going to lose some money upfront, really, customer acquisition costs from my perspective. So -- for those 2 reasons, you're going to see a little bit worse product margin Q2 and particularly in the second half.

So long so short here that I think that for the whole year, we're estimating about minus 40% for the entirety of the year. So maybe you can model to that around that number.

Got it. That's helpful. Okay. So then going into fiscal '28, right, after some of that second half weakness from launching more my phone products, like, I guess, how do you see that going from net 40 to I guess closer to 30%, like maybe 35%.

Yes. I mean I can't really predict yet of the -- but -- and I just -- nobody knows what the memory price is going either, right? So it's hard for me to say -- but if you have to model something for 28, maybe you want to keep it on -- maybe I want to keep it on minus reflow.

Got it. And then -- so I guess you mentioned my phone. I'm wondering like what the ARPU is looking like for MyPhone versus core Telo.

So MyPhone would be all premium subscription users when they sign up. So it will be accretive to our average residential ARPU, which is 9,000 change. So it will be accretive to that number.

Great. Super helpful. Last question for me. I know you guys had mentioned Verizon was still an active on bought shutdowns. I'm just wondering, do you see any signals on when that might change? Maybe it might be second half of this year, maybe next year? I'm wondering like as an upside lever what we should think about that?

I don't have any signals to share there now.

Thank you. Ladies and gentlemen, I am showing no further questions in I would now like to turn the call back over to Eric for closing remarks.

Well, thank you, everyone, for joining us today. We appreciate your time. It's just 1 quarter into the fiscal year, but it's a good start. And we see lots of opportunity to go capture and we're going to execute our best to do it. So thank you, everyone.

Bye-bye.

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

Good day, and thank you for standing by. Welcome to the Ooma, Inc. Fourth Quarter and Fiscal Year 2026 Financial Results Conference Call.

[Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Matthew Robison. Please go ahead, sir.

Thank you, Michelle. Good day, everyone, and welcome to the fourth quarter and fiscal year 2026 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 fourth quarter and fiscal 2026 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 & 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. 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 first quarter and full year fiscal 2027 on a non-GAAP basis.

Also, in addition to our press release and 8-K filing, the Overview page and Events & 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 the resolution of GAAP expenses that are excluded from non-GAAP metrics.

Before I turn this over to Eric, I'd like you to know that we will participate in the 38th Annual ROTH Conference at Dana Point on March 23 and 24.

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

Thank you, Matt. Hi, everyone. Welcome to Ooma's Fourth Quarter and Fiscal 2026 Year-End Earnings Call. Thanks for joining us. We're pleased to report strong Q4 financial results, to update you on our progress integrating our 2 Q4 acquisitions, FluentStream and Phone.com, and to discuss our strategy and the positive momentum we see for fiscal 2027.

Financially, we're pleased with our Q4 results, which included solid revenue growth and new records for net income, for adjusted EBITDA and for cash flow from operations.

Our adjusted EBITDA in Q4 reached $11.5 million, which equates to 15% of revenue. This result compares favorably to adjusted EBITDA of 11% of revenue just a year ago. Total adjusted EBITDA for fiscal 2026 was $33.9 million, up from $23.2 million the prior year and $19.8 million the year before that.

Looking forward, we expect our fiscal 2027 adjusted EBITDA to be comfortably above $40 million. And as we continue to grow and expand our business, we expect our adjusted EBITDA to go even higher, which is strategic to our outlook as higher adjusted EBITDA affords us greater opportunity to make acquisitions, repurchase stock and invest in business growth.

On the Business front, we achieved solid growth in Q4, particularly due to our 2 acquisitions and a record quarter for AirDial. The additions of FluentStream and Phone.com provide us new avenues for growth as well as the potential to capture significant synergies. To date, we have only just started the process of integrating these acquisitions and making the most of the opportunity they present.

Also in Q4, I'm pleased to report that AirDial added more lines than ever before. The number of Q4 AirDial lines installed was more than double the number that we installed in the same quarter a year ago.

I'm pleased to say too that other parts of Ooma also performed well in Q4, particularly our Residential solution, Ooma Telo. As was also the case for Q3, Ooma Telo in Q4 added more users than anticipated, such that our total Residential user base remained essentially flat in number. All in Q4 was a strong quarter that positions us well for fiscal year 2027.

And looking ahead now to fiscal 2027, I'd like to highlight a handful of our most exciting initiatives. The first is the introduction of AI solutions on our Ooma Office platform. This quarter, we intend to introduce several new AI solutions for our customers. These include transcription and summarization of calls, the ability to drive insights from call data using third-party AI platforms, such as ChatGPT or others, an AI-powered answering service and a full AI receptionist solution.

The first 2 of these will be part of our top Pro Plus tier of service, helping us to trade up customers to higher ARPU. The second 2 will be priced independently, in addition to the cost of our current service offerings. Communications is a fertile ground for the use of AI, and we believe AI can bring new business opportunity for Ooma.

The second initiative I would like to highlight is our plans for AirDial. We are seeing increased market interest as POTS prices continue to rise and the pace of POTS line shutdowns accelerates. AT&T announced POTS line price increases last fall and has signaled there will be further price increases this spring. We're also seeing an increasing number of shutdown announcements, with many forecasts for late this year. We believe these are quite positive trends that will expand the opportunity for AirDial.

In part due to these trends, we added 4 more AirDial reseller partners in Q4, bringing the total number of partners we have to 41. Some of these partners are switching to Ooma from competitive solutions, which we believe also validates the competitive strength of Ooma AirDial. And in select cases, our resellers are being driven to act as the cost they pay for the POTS lines they have purchased and resold can even sometimes exceed the revenue they're receiving from their end customers.

We are working more closely with our reseller partners than ever before and are seeing them increase their sales and marketing efforts and expand their sales pipelines. It remains our goal to add at least 2 new reseller partners each quarter. And in total, our goal remains to grow our number of AirDial reseller partners to over 50.

As far as we have already come with AirDial, we still believe it is early days. Most of the POTS line shutdowns we have seen announced far have come from AT&T. We don't see Verizon active yet. We also believe AT&T has years of shutdowns to go. AirDial remains a key investment area for Ooma in fiscal 2027, and we expect to continue our fast expansion.

The third initiative I'd like to mention is our plans for our recent acquisitions, FluentStream and Phone.com, and along with this, our desire to make further acquisitions in the future. In a nutshell, our plans haven't changed from the announcements we made last fall. FluentStream is a solid business generating high EBITDA that brings us increased channel strength and another outlet to sell AirDial.

Phone.com has low EBITDA today, but we expect it can be dramatically improved through scale economies, and Phone.com also affords us a second small business brand in the market with a name and URL that can be highly leveraged. While it's difficult to forecast the timing and impact, we'll be working through fiscal 2027 to bring Ooma's marketing and sales expertise, lean operations and product strengths to Phone.com.

As a reminder, we were able to acquire both FluentStream and Phone.com at prices that made their acquisitions accretive just 1 quarter forward. We believe acquisitions such as these provide highly cost-effective business expansion. It is a goal of ours for fiscal 2027 to move quickly to pay down the debt we assumed for our recent acquisitions and to make further acquisitions. At this time in our industry, we believe Ooma is well positioned to do so and there are many targets to consider.

For fiscal 2027, I would like also to comment on our Residential business. As I mentioned above, Telo sales the last 2 quarters have been remarkably robust. We believe there are 3 main drivers for this. One is POTS lines are also going away in the residential space; a second is wireless 5G home Internet, which allows more consumers to unbundle Internet from telephony; and the third is the desire of parents to give their younger kids a phone but avoid screen time.

There's a movement happening among parents to wait until eighth grade before letting a child receive a smartphone. Ooma's Family Bundle, consisting of the Ooma Telo and a family-friendly phone, is one way families use our solutions. In fiscal 2027, we intend to launch a new product called My Phone, which we hope parents will find particularly attractive for use by younger people in the home. We'll have more to say on this as our strategy unfolds.

We believe fiscal 2027 is shaping up nicely for us with upside opportunities in each of the 4 areas I've just mentioned and more. We also believe we are going into fiscal 2027 in our strongest position ever. Ooma now serves over 1.4 million core users, is growing solidly, has over $290 million in annual exit recurring revenue, is achieving approximately 99% net dollar retention and is driving meaningful double-digit adjusted EBITDA as a percent of revenues. With our growth and significantly improved adjusted EBITDA, we have built a more valuable company.

We're dismayed that our advances have not yet translated into a meaningfully higher market capitalization, but we're also confident that that will come in time. Our strong position in each of our 4 business areas, the market momentum we see in our favor, especially for AirDial, the great strategic partners we have secured who are helping propel our growth, our potential for further accretive acquisitions to layer on additional inorganic growth, and our estimation that Ooma can continue to increase adjusted EBITDA and become more profitable in the future all have us excited about the road ahead.

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.

Thank you, Eric, and good afternoon, everyone. Before I dive into our fourth quarter financial results, I'd like to quickly recap the financial terms of the 2 acquisitions we completed during the fourth quarter.

We completed the acquisition of FluentStream on December 1, 2025, for approximately $45 million in cash. We also completed the acquisition of Phone.com on December 26, 2025, for approximately $23.2 million in cash. The financial results of these acquired businesses are included in Ooma's financial results starting from their respective acquisition completion date in Q4. There are no other contingency payments for either of these acquisitions and the aggregate cash acquisition price was mostly funded by a $65 million term loan with an interest rate of 6.4%.

Now I'm going to review our fourth quarter financial results and then provide our outlook for the first quarter and full year fiscal 2027. We had a solid finish to fiscal '26 with the fourth quarter revenue of $74.6 million, up 15% year-over-year, driven by the growth of Ooma Business, including AirDial, and the additions of FluentStream and Phone.com. On a combined basis, FluentStream and Phone.com added approximately $6.1 million of revenue in Q4, of which $6 million was in Business subscription revenue.

Excluding the impact of these acquisitions, total revenue in Q4 grew 5% year-over-year. In Q4, Business subscription and services revenue accounted for 67% of total subscription and services revenue, as compared to 61% in the prior year quarter. Q4 Product and other revenue came in at $5.9 million and was up 30% year-over-year, driven by the growth of AirDial installations.

Despite Q4 being a holiday quarter, we had a record number of AirDial line installations, which more than doubled over the prior year quarter. New bookings for AirDial was also robust and grew approximately 80% year-over-year in Q4.

On a full year basis, total revenue was $273.6 million for fiscal '26, as compared to $256.9 million in the prior year, representing 7% growth year-over-year, including 10% growth in Business subscription and services revenue. Excluding the impact of the acquisitions, total revenue and Business subscription revenue for fiscal '26 grew 4% and 6% year-over-year, respectively.

On the profitability front, Q4 non-GAAP net income was $9.4 million and grew 62% year-over-year as we continue to focus on operating leverage in R&D and optimizing our sales and marketing spend. On a full year basis, non-GAAP net income was $29.2 million, compared to $18 million in the prior year, and also grew 62% year-over-year.

Now some details on our Q4 revenue. Business subscription and services revenue grew 23% year-over-year in Q4, driven by user growth and ARPU growth for Ooma Business and the additions of FluentStream and Phone.com. Excluding the impact of the acquisitions, Business subscription and services revenue in Q4 grew 7% year-over-year. On the Residential side, subscription and services revenue was down 1% year-over-year.

For the fourth quarter, total subscription and services revenue was $68.7 million or 92% of total revenue, as compared to $60.6 million or 93% of total revenue in the prior year quarter.

Now some details on our key customer metrics. Please note that Q4 ARPU as well as net dollar retention rate exclude the impact of the Q4 acquisitions as these businesses only had a partial quarter starting from their respective acquisition dates. We plan to incorporate them into these metrics starting in the first quarter of fiscal '27 when they have a full quarter with us, which is consistent with our past practice. As for the number of core users and annual exit recurring revenue at the end of Q4, they do incorporate the impact of the acquisitions.

Our blended average monthly subscription and services revenue per core user, or ARPU, increased 5% year-over-year to $15.99, driven by an increase in mix of Business users, including AirDial, as well as higher ARPU Office Pro and Pro Plus users. During the fourth quarter, we continued to see a healthy Office Pro and Pro Plus take rate, with 57% of new Office users opting for these higher-tier services. Overall, 39% of Ooma Office users have now subscribed to these higher-tier services.

Our net dollar subscription retention rate for the quarter was 99%, as compared to 99% in the third quarter. We ended the fourth quarter with 1,404,000 core users, including 164,000 Business core users from the acquisitions, up from 1,233,000 core users at the end of the third quarter. At the end of the fourth quarter, we had 684,000 Business users or 49% of our total core users, an increase of 171,000 from Q3.

Our annual exit recurring revenue was $291 million, up 24% year-over-year. Excluding the impact of the acquisitions in Q4, our annual exit recurring revenue grew 5% year-over-year.

Now some details on our gross margin. Our subscription and services gross margin for the fourth quarter was 72%, as compared to 72% in the prior year. Product and other gross margin for the fourth quarter was negative 42%, as compared to negative 55% for the same period last year. The year-over-year improvement in product and other gross margin was primarily due to fully consuming higher-cost components we had procured a few years ago.

On an overall basis, the total gross margin for Q4 was 63%, as compared to 63% in the prior year quarter. The flat overall gross margin in Q4 this year reflects the heavier mix of product revenue versus prior year due to an increase in AirDial installations, which offset the improvement in product gross margin.

And now some details on operating expenses. Total operating expenses for the fourth quarter were $37 million, an increase of $1.9 million year-over-year due to the additions of FluentStream and Phone.com. Excluding the impact of the acquisitions, total operating expenses decreased $0.7 million from the same period last year.

Sales and marketing expenses for the fourth quarter were $18.4 million or 25% of total revenue, up 4% year-over-year due to the addition of FluentStream and Phone.com expenses. R&D expenses were $12.2 million or 16% of total revenue, up 9% on a year-over-year basis due to the addition of FluentStream and Phone.com team members. G&A expenses were $6.4 million or 9% of total revenue for the fourth quarter, compared to $6.2 million for the prior year quarter.

Non-GAAP net income for the fourth quarter was $9.4 million or diluted earnings per share of $0.34 as compared to $0.21 in the prior year quarter. Adjusted EBITDA for the quarter was a record $11.5 million or 15% of total revenue and grew 67% over the prior year quarter. On a full year basis, adjusted EBITDA was $33.9 million or 12.4% of total revenue, compared to $23.3 million or 9% of total revenue in the prior year. We are pleased with the meaningful step-up in adjusted EBITDA margin realized in fiscal '26 as we continue to focus on growing profitability towards our long-term financial goals.

We ended the quarter with total cash investments of $20.1 million. In Q4, we generated $10.7 million of operating cash flow and $9.1 million of free cash flow. On a trailing 12-month basis, we generated $27.7 million of operating cash flow and $22 million of free cash flow. We spent a total of $16.8 million over the last 4 quarters, including $4.6 million in Q4 to buy back stock through a combination of open market repurchase and RSU net share settlement.

In addition, we already paid down the term loan by $6.5 million in Q4 and reduced the outstanding debt balance from $65 million to $58.5 million at the end of Q4. With strong free cash flow generation, we believe we can continue to maintain a reasonable level of stock repurchase while paying down the debt at a healthy pace. On the head count front, we ended the quarter with 1,420 employees and contractors.

Now I will provide the guidance for the first quarter and full fiscal year 2027. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization of intangibles and acquisition-related and other expenses.

We expect total revenue for the first quarter of fiscal '27 to be in the range of $79.6 million to $80.4 million, which includes $5.7 million to $6.1 million of product and other revenue. We expect the first quarter non-GAAP net income to be in the range of $8.8 million to $9.2 million. Non-GAAP diluted EPS is expected to be between $0.31 and $0.33. We estimate 28 million weighted average diluted shares outstanding for the first quarter.

For full year fiscal '27, we expect total revenue to be in the range of $321 million to $325 million. The full year fiscal '27 revenue guidance assumes Business subscription and services revenue growth rate of approximately 30% over fiscal '26, while Residential subscription revenue to decline 1% to 2%. In terms of revenue mix for the year, we expect 92% to 93% 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 '27 to be in the range of $35.5 million to $37 million. Based on this guidance range, we estimate our adjusted EBITDA for fiscal '27 to be $43 million to $44.5 million. We expect non-GAAP diluted EPS for fiscal '27 to be in the range of $1.26 to $1.31. We have assumed approximately 28.2 million weighted average diluted shares outstanding for fiscal '27.

In summary, we are pleased with our solid finish to our fiscal '26 with a record adjusted EBITDA of $33.9 million for the year, which grew 46% year-over-year, along with a record free cash flow of $22 million. As we start our new fiscal year, we are excited about both organic and inorganic growth opportunities in front of us and remain focused on achieving another meaningful progress towards our long-term financial targets.

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

Thank you, Shig. On nearly every metric, Ooma is a stronger company today than ever before. As we now enter fiscal 2027, we're encouraged by our past execution, the positive market tailwinds we see, particularly for AirDial, our expanding number of strategic partners and the addition of our 2 acquisitions last quarter. Our team is committed to making fiscal 2027 a great year for Ooma.

Thank you for joining our call today. We'll now take your questions.

[Operator Instructions] Our first question is going to come from the line of Josh Nichols with B. Riley Securities.

Always good to see record EBITDA margins and free cash flow profitability for the company. I just was curious, you mentioned it on the call that FluentStream is already doing quite well from an EBITDA margin perspective. But you mentioned that you think that there's room for pretty significant increases for Phone.com. Does the fiscal year '27 guidance that you laid out include very much in the way of potential cost synergies on that front? Or would that potentially be some upside to the 2027 outlook that you laid out?

Yes. Thanks for the question, Josh. Our profitability guidance, we don't assume the synergy yet. We want to start the year conservatively on that note. And as we said before, we have a pretty good track record going back to prior acquisitions to achieve the cost synergies ultimately, OnSIP as an example again.

And so as we start the year, we wanted to take that as an upside, as we realize them probably second half of the year, that's what we're targeting to see more meaningful cost synergies. So long story short, the guidance does not assume the synergy benefit yet.

Great. Well, that's good to hear. And then just in terms of the AirDial's catch-up, I know you said you thought there was like some customers, because of weather and seasonality, was going to be a little bit slower. But the numbers for 4Q that you kind of mentioned for AirDial seemed quite strong. And when you look at some of those like larger reseller partners, do you expect like the pace of deployments to increase pretty significantly this year relative to last year? Or what's the expectation there?

Josh, yes, in short, we do. It's difficult to forecast, and we don't want to get out in front of committed agreements that aren't in place yet. But if you look at funnels and backlogs of opportunity and the customer response we're seeing out in the market and just the momentum which AT&T is moving at to increasingly raise prices and retire more POTS lines, we think we have the potential for a very good year ahead. But we put some of that into our guidance, but we think there's definitely upside there as things unfold.

Great. And I guess last question for me, I mean you really have a pretty well-rounded capital allocation strategy, you're buying back stock, you're generating cash flow, improving the margins and you're also looking at M&A. Is the expectation right now with what's been going on in the market that you'd probably close at least like 1 additional acquisition this year based on the pipeline? Or what's the expectation there?

Well, as I said in my remarks, we think acquisitions like FluentStream and Phone.com are another great avenue for growth for the company, and it's part of our strategy today. You can never handicap when something is going to happen. There are targets out there. But I'm hopeful that every year we'll be doing some acquisition or acquisitions to augment what we're doing ourselves, just because of the opportunity we see.

Our next question comes from the line of Patrick Walravens with Citizens.

Great. This is Kincaid on for Patrick Walravens. Eric, I just wanted to follow up on 2 comments that you've made last quarter. Number one, you said that there was some of the AirDial installations that had been pushed out. You mentioned January, so I'd love to get a follow-up on that. And then I understand that you may not want to give this every quarter, but you mentioned 50 hotels per quarter was your goal. Would love to hear how that's going.

You bet. So yes, some of what was pushed out last fall did come in, in Q4, or particularly January, we had a very strong January for AirDial. And that momentum has actually carried into February as well. So I think we're off to a great start for the year on AirDial.

And then on the hotel hospitality front, our goal was to add 50 new hospitality customers every quarter. I think we did a little over 80 in Q4, which is a nice step for us. That might be a record in terms of the number in any particular quarter. And I will say our Marriott relationship is also finally starting to pay off some and contributing to that number. So continued good momentum there too.

Spectacular. And then just one last one for me. On the Family Phone Bundle, do you have a sense of what the TAM on that would look like?

That's a good question. The Family Phone Bundle is 1 of 3 or 4 bundles we have in the market today, more focused around giving something easy for families to use and have 911 capability for real landline 911 and things like that. But My Phone, when we announced it, will be specifically targeted towards that market opportunity we see where parents want to have something in their home for their kids to use that isn't putting the Internet and screen time in front of them. We think it's a very, very real segment there. And I think that's partly what's been buoying our last 2 quarters' success on the residential front.

So I think My Phone is going to take us to the next step. And we should have it out in the market in the first half of this year. We have previewed it with a couple of our retail partners, and they love it. And we really believe every family with kids at home, eighth grade or less, is a potential customer for that, so -- in U.S. and Canada. So it's a real opportunity.

That's great. I love it from a value perspective as well.

Our next question will come from the line of Matthew Harrigan with Benchmark StoneX.

Given the awareness of the copper line replacement quandary is increasing, what are the -- it really feels like you're making accelerations in the approval process and all that and you've kind of reached an inflection point. But the guys who aren't running with you yet, what are the kind of the ad hoc solutions that they're adapting? And I know -- adopting. I know that I've asked you this question before, but are you seeing anything in terms of competition from other providers where there's any innovation? Because it feels like, as we've also talked about before, this has been going on for a long time.

And you've made, I think, a fairly conscious decision not to push the sales and marketing that heavily right now. I know R&D is coming down a lot, hence, the improvement in margins. But are you just generating a tremendous amount of pull demand and you feel vindicated of not pushing sales and marketing harder? Or do you think you could still grow even faster if you push the sales and marketing?

Yes. We are growing sales and marketing in our outlook this year. But we have something buoying our efforts, which is all our partners, 41 now, who have signed up to resell AirDial. They're driving a lot of our success too. And yes, our pricing is lower with them because they're reselling, but they're taking the sales and marketing lift on their shoulders. So it's part of our business model to leverage ourselves with the strength of others to go faster than we could go just ourselves.

But I will say that I think we ended Q4 with sales and marketing about 25% of revenue. I certainly wouldn't want to see that go lower, and we may see it go higher a little bit as we go through this year. But we're definitely getting out ahead right now of additional growth opportunities that we think are coming our way on AirDial, and we are hiring in key areas.

Are you seeing anything in the way of presenting -- other people presenting alternative solutions?

Well, we do have a handful of competitors out there. And depending on the nature of the deal and who the customer is and all, they might be stronger or weaker in terms of relationship with that customer or opportunity. But I will say that I still believe -- I believe strongly that the features and capabilities in our solution are ahead of others in the market. And that allows us to really bring it all together for a customer. And I think that's why we're winning so many of these partner resellers, because they recognize the strength of our solution.

I think last fall we took some additional steps to make our remote device management even more robust for our partners to use. And we have other improvements planned on AirDial this year, or really, I'd say, feature additions. So I think we're going to stay ahead. But it's -- we -- I think that the AirDial market today or the POTS replacement market, somebody is going to break through as the winning solution in the market. And I think it's ours to go get, and we're executing to try to do that.

Our next question will come from the line of Arjun Bhatia with William Blair.

Can you guys just touch a little bit on the AirDial strength, and I know in the past you've talked about implementation hurdles. Just help us understand where we are on that. Is this like a permanent sort of -- or more durable tailwinds going into 2026? Or could there still be some kind of bumps just as sort of thinking about the outlook?

Yes. So AirDial grows in a couple of ways. There is a steady stream of business we know or can reasonably forecast we're going to drive every quarter through our channel agents, through our own direct sales, through what we know some of our partners have been doing and will keep doing. But there's also big deals out there, larger size deals. And they're lumpy and you don't know when a customer is going to pull the trigger.

I think that there's been a lot of budgeting to address this segment by larger customers this year, that wasn't in place last year. I know that some of our key reseller partners are putting more emphasis today than they were a year or 2 ago on this segment. And I'm hopeful we'll keep winning multiple partners every quarter to bring on board. It's not all perfect, but there is some -- there's certainly an increased momentum.

But because it's lumpy and because 1 customer can be 5,000 or 10,000 lines ultimately, if it's a very large customer, you just don't know when you're going to win those and who's going to win those. So we're a little more conservative on how we forecast AirDial today. But the business is certainly out there and we feel like things are going well for us for all these opportunities.

Okay. Perfect. Got it. And then just when we're thinking of the sort of Residential business, you had a better Q4, you're kind of talking about My Phone might come in this year. Can that be a growth -- can that grow in '26? Or how are you thinking about the sort of range of outcomes?

I do think it can grow. But I can tell you, in our guidance, we have not modeled it that way. But it's -- we don't expect it to decline either. And residential is close to $100 million of revenue for us and a very nice segment for us to be in. And these -- we've had a little bit of decline over last year, not a lot, but a little, like 1% year-over-year.

But I think with My Phone and some of the trends we're seeing -- I mean, essentially end users did not decline in Q3 and did not decline in Q4. And when My Phone comes in, maybe we'll see the users grow a little bit. I think that's all I want to predict at this time. Once we get My Phone in the market, depending on what retail placement it has, we'll be updating you.

But certainly, it's great to see that the residential phone is not dead. There's some very good powerful reasons to have one in the home, 911 being one, something for the kids to use, having a home office with better voice quality, having a parent or a mother- or father-in-law in the home. There's all kinds of reasons why it's a nice convenience. And it may not be a nice convenience at $30, $40 a month. But with Ooma, it can be as little as just a few dollars of taxes and fees a month, and that's powerful. So yes, we see real a market opportunity there, and we're not -- we're investing in it today.

[Operator Instructions] And our next question will come from the line of Maxwell Michaelis with Lake Street Capital Markets.

First one, just kind of want to focus on ARPU. You noted FluentStream and Phone.com weren't included in this year -- or this quarter's numbers. But can you give us a sense of what that looks like in Q1? And then -- or just give us a sense of what the ARPU looks like compared to Ooma?

And then if we look at sort of the AI offerings you guys mentioned earlier in the call, can you give us a sense of what ARPU looks like for a customer who is using the highest tier of all the AI offerings?

So in terms of what we could expect once we incorporate those 2 acquisitions, they're relatively comparable to Ooma Office ARPU. I would say, slightly lower than Ooma Office, but not too much. So you might see a little bit of pull-down on ARPU just because of that. But they're not too far off from Ooma Office is.

In higher-tier services, I think your second question was the higher-tier services on Ooma Office.

Well, with AI.

With AI. Okay, yes.

Okay. So the first 2 services I talked about will be part of Pro Plus, which sells for $29.95 a month. A single-digit percentage of our customers today take the Pro Plus tier. But we think with AI included in it, we could move that up and that will bring our ARPU up. Our Pro tier is $24.95, our Essentials tier is $19.95. Most of our customers take our Pro tier.

And then the other 2 services I mentioned will be priced separately. And they'll be both -- we haven't announced pricing on them so I can't give you a specific answer here today, I apologize. But there'll most likely be a fixed price per month and a usage charge as well, basically if you go over a certain level of usage.

I think you can look at these solutions in the market today and see they're priced above -- generally, those solutions on their own are priced above where our current Ooma Office ARPU is at. So I think that they have the potential to bring our overall average up as well.

And last one for me, just around acquisitions. I think the combined revenue multiple you guys paid for, for both the companies were around 1.4x sales. I mean is there a criteria you guys are following or a multiple you guys are willing to pay for higher growth that you guys can share with us?

Yes. It's interesting, if you look at the acquisitions we've done, we've bought 2 businesses for less than 1x revenue, 1 for about 1x revenue, and FluentStream for more than 1x revenue but with very strong EBITDA coming from the company.

We -- it's a balance and a trade-off. A business that has low EBITDA but we think, with our synergies, we can improve, that's work on our side and we're not going to pay up as much for that. But when we see a business with higher EBITDA that we think is stable and that we can leverage for the future, we're going to pay a little more.

Either way, I think our biggest metric is: Is it accretive and do we think putting our dollars there is going to have more impact than putting them into sales and marketing? And I think that we're kind of a unique company in this whole UCaaS space as well because these businesses in the kind of the $10 million to $30 million revenue range, they're meaningful for us but there aren't a lot of other players out there who would want to buy something that size or have the financial position to do so.

So I think we've got good opportunities. And it's -- but always, it's a case-by-case discussion for us over what's appropriate for that business and what it's doing.

Thank you. And I'm showing no further questions at this time. And I would like to hand the conference back over to management for any further remarks.

Well, thank you, everyone. We're up to around -- I think we got it around $320 million, $325 million in revenue for this year. If we can do more acquisitions this year, we'll be moving that up. And I think that part of what we're doing here is becoming a bigger company with more reach and more breadth and I think also appealing to a larger investor base, which is also something we're trying to do as we look forward.

We're excited about these initiatives we went over with you. Four clear initiatives: one around AI, one around AirDial, one around capitalizing the acquisitions we've done and one around our better-than-expected performance on Residential. And I think those are great trends for us as we go into fiscal 2027.

So thank you for your time today and I'll stop there. Thank you, everyone. Bye-bye.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Hello, and welcome to Ooma Inc.'s Third Quarter Fiscal Year 2026 Financial Results. [Operator Instructions] I'd now like to hand the conference over to Matthew Robinson. Sir, you may begin.

Thank you, Tawanda. Good day, everyone, and welcome to the Fiscal Third Quarter 2026 Earnings Call of Ooma, Inc. My name is Matt Robison, I'm Director of IR and Corporate Development. On the call with me today are who is CEO, Eric Stang; and CFO, Shig Hamamatsu. After the market closed today, Ooma issued its fiscal third quarter 2026 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. 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 fourth quarter and full year 2026 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 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.

Thank you, Matt. Hi, everyone, and welcome to Ooma's Third Quarter Fiscal Year 2026 Earnings Call. Thank you for joining us. We're pleased to report solid Q3 financial results and to discuss the progress we are making across our business. We will also provide more information about the 2 acquisitions we recently announced, one of which FluentStream has now closed. Financially, we grew our revenue in Q3 to $67.6 million and ended the quarter with $242.7 million of annual exit recurring revenue. We achieved new records in the quarter for non-GAAP net income, which increased to $7.7 million and adjusted EBITDA, which increased to $8.6 million. Our adjusted EBITDA for Q3 as a percentage of revenue was 13%, up from 11% of revenue in Q2 of this year and 10% of revenue in Q1 of this year. We are proud of our increased bottom line results and believe our business has significant potential not only for revenue growth, but also for further bottom line expansion.

Our Business Solutions performed well in Q3. We continue to invest in growth across Ooma Office, Ooma Enterprise, AirDial and 2,600 hertz. Ooma Office and Ooma Enterprise added new customers in line with our expectations, and we maintain our development efforts focused on AI, contact center, vertical integrations, and other features, which will boost our Pro and Pro Plus service tiers and appeal to larger-sized businesses. We expect to launch our AI solutions early next year. I'm pleased to note too that Ooma Enterprise secured its largest hospitality win to date, a hotel in Las Vegas with nearly 1,000 rooms. Regarding AirDial, we made solid progress in Q3 as we continued our efforts to expand sales and increase awareness of our solution.

I'm pleased to report that we continue to add new resale partners every quarter. In fact, in Q3, we added 9 new resale partners, our strongest quarter to date. In general, we are seeing an influx of interest in reselling AirDial from entities wanting to take advantage of the pots replacement market opportunity, including from some wanting to move away from competitive solutions. I'm also pleased to report that in Q3, we launched an updated version of Air dial, which incorporates a new processor and is designed to provide improved cellular band support and longer battery life. It is also less costly to manufacture. Along with this, we launched new remote device management features for used by partners reselling AirDial. Overall, we remain committed to our long-term goal to secure 300,000 Air doll lines, generating $100 million of air annual recurring revenue.

Regarding 2,600 Hertz, we made further progress in Q3, adding Ooma's IP and applications onto the platform, and we're able to upsell a significant number of existing 2,600 herbs customers. We also continued our sales and marketing to new customers focused mainly on carriers and other UCaaS providers. On the residential front, a combination of good user additions and slightly lower churn allowed us to hold our user count close to flat with Q2. And so far, we are off to a good start this quarter as well.

Turning now to the 2 acquisitions we recently announced. This is an exciting time for Ooma. As a reminder, we announced that we recently closed on the acquisition of FluentStream and are expected to close on the acquisition of Phone.com around the end of this month. Combined, these 2 businesses are expected to add more than 165,000 users, $45 million of revenue and $10 million of adjusted EBITDA to Ooma annually before synergies. Each acquisition is expected to be accretive to Ooma's adjusted EBITDA and non-GAAP earnings per share starting on the closing date of the transaction. Approximately 155 employees and contractors will be joining Ooma as a result of these 2 transactions. Strategically, we believe that FluentStream and Phone.com fit well with Ooma's focus on serving small- and medium-sized businesses. We believe each company is well regarded by its customers performing well and presents an opportunity to leverage Ooma's scale and investment spending over a larger base. Furthermore, we believe we have been able to acquire each business at a price, which allows us to achieve cost-effective growth.

Overall, these acquisitions allow us to optimize how we spend to grow our business to achieve greater scale and to bring new capabilities to Ooma. In the case of FluentStream, our focus will primarily be to continue FluentStream's business success and a high level of profitability. There are, however, a few select areas where we believe synergies are possible. These include bringing Ooma's scale to FluentStream's vendor relationships, combining certain initiatives involving new feature developments, and leveraging FluidStream's channel relationships to sell other Ooma products, most notably AirDial. In the case of Phone.com, our focus will be to strengthen the Phone.com brand in the market. We believe Phone.com's memorable URL and website and they're focused on providing a streamlined and relevant e-commerce experience represents an attractive opportunity for Ooma. We also believe significant synergies are possible. Once the acquisition closes, we intend to leverage our vendor relationships, R&D activities, customer support systems, and G&A processes to make Phone.com both stronger and more profitable.

In sum, we believe these 2 acquisitions present a tremendous opportunity for Ooma to build shareholder value. It is our intent to capitalize on them to increase Ooma's adjusted EBITDA, cash flow and growth, and we are excited as we look out toward the years ahead. 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.

Thank you, Eric, and good afternoon, everyone. Before I dive into our third quarter financial results, I would like to recap the status and financial aspects of the 2 acquisitions we announced last month. Please note that these 2 acquisitions did not impact our fiscal third quarter results. I'm going to discuss in a minute as each of these acquisitions either completed or expected to be completed in our fourth fiscal quarter. We completed the acquisition of FluentStream on December 1, 2025, for approximately $45 million in cash, which was funded by a $45 million term loan. FluentStream is expected to add $24 million to $25 million of revenue and $9.5 million to $10.5 million of adjusted EBITDA to Ooma annually based on current run rates. As for the acquisition of Phone.com, it is expected to be completed later in the fourth fiscal quarter. The cash purchase price will approximately $23.2 million is expected to be funded by a combination of cash on hand and the bank loan. Phone.com is expected to add $22 million to $23 million of revenue and $0.5 million to $1.5 million of adjusted EBITDA to Ooma annually based on current run rates and before synergies. There are no other contingency payments for either of these acquisitions.

Now I'm going to review our third quarter financial results and then provide our guidance for the fourth quarter and full year fiscal '26. Our third quarter revenue was $67.6 million, up 4% year-over-year, driven by the growth of Ooma business, including AirDial. In Q3, business subscription and services revenue accounted for 63% of total subscription and services revenue as compared to 61% in the prior year quarter. Q3 product and other revenue came in at $5.7 million and was up 14% year-over-year due to growth in installations. On the profitability front, Q3 non-GAAP net income was $7.7 million, meaningfully above our guidance range and grew 68% year-over-year. Higher-than-expected non-GAAP net income was mainly driven by an additional operating leverage realized in R&D, continuing effort to optimize sales and marketing spend and lower-than-expected impact of tariffs.

Now some details on our Q3 revenue. Business subscription and services revenue grew 6% year-over-year in Q3 driven by user growth and ARPU growth. On the residential side, subscription and services revenue was down 1% year-over-year. For the third quarter, total subscription and services revenue was $61.9 million, or 91.6% of total revenue as compared to $60.1 million or 92.3% of total revenue in the prior year quarter. Now some details on our key customer metrics. We ended our third quarter with 1,233,000 core users, up from 1,230,000 core users at the end of the second quarter. At the end of the third quarter, we had 513,000 business users or 42% of our total core users, an increase from 5,000 from Q2. Our blended average monthly subscription and services revenue per core user or ARPU increased 4% year-over-year to $15.82 and driven by an increase in mix of business users, including higher ARPU Office Pro and Pro users.

During the third quarter, we continue to see a healthy office Pro and Pro Plus take rate with 57% of new office users opting for these high-tier services. Overall, 38% of Ooma Office users have now subscribed to these higher-tier services. Our annual exit recurring revenue was $242.7 million, up 4% year-over-year. Our net direct subscription retention rate for the quarter was 99%. Now some details on our gross margin. Our subscription and services gross margin for the third quarter was 71.5% and as compared to 71.6% in the prior year. Product and other gross margin for the third quarter was negative 45% as compared to negative 56% for the same period last year. On an overall basis, the total gross margin for Q3 was 62% as compared to 62% in the prior year quarter. The flat overall gross margin in Q3 this year reflects a heavier mix of product revenue versus prior year due to an increase in AirDial installations, which offset the improvement in product gross margin.

And now some details on operating expenses. Total operating expenses for the third quarter were $34.2 million and down $1.4 million year-over-year. Sales and marketing expenses for the third quarter were $17.9 million or 26% of total revenue, up 2% year-over-year, primarily driven by higher channel development activity for air dial. Research and development expenses were $10.8 million or 16% of total revenue, down 10% on a year-over-year basis, primarily driven by headcount management as we continue to focus on R&D efficiency and operating leverage. G&A expenses were $5.5 million or 8% of total revenue compared to $6.1 million for the prior year. Non-GAAP net income for the third quarter was $7.7 million or diluted earnings per share of $0.27 as compared to $0.17 in the prior year quarter. Adjusted EBITDA for the quarter was a record $8.6 million or 13% of total revenue and grew 50% year-over-year.

We ended the quarter with total cash and investments of $21.7 million. In Q3, we generated $6.9 million of operating cash flow and $5.4 million of free cash flow. On a trailing 12-month basis, we generated $25 million of operating cash flow and $19 million of free cash flow. With strong free cash flow generation, we spent a total of $16.2 million over the last 4 quarters, including $4 million in Q3 to buy back stock through a combination of open market repurchase and our issue net settlement. As mentioned earlier, we completed the acquisition of FluentStream with a $45 million term loan with an interest rate of approximately 6.4% on December 1, 2025. Although the new term loan has a 5-year amortization schedule, we expect to use a portion of free cash flow in the future to pay it down faster. We also expect to draw an additional $20 million in term loan with a similar interest rate when we complete Phone.com acquisition later in the fourth quarter.

The additional details on the term loans are available in our Form 8-K filed on December 2, 2025, and as well as in our Q3 Form 10-Q to be filed later this week. On the headcount front, we ended a quarter with 1,223 employees and contractors. Now I'll provide guidance for the fourth quarter and full fiscal year '26. Please note that the guidance does include the impact of FluentStream acquisition completed on December 1, 2025, but does not include the impact of Phone.com acquisition as it is expected to close later in the fourth quarter. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortizational intangibles and acquisition-related expenses. We expect total revenue for the fourth quarter of fiscal '26 to be in the range of $71.3 million to $71.9 million, which includes $4 million to $4.1 million of revenue contribution from FluentStream. Within this total revenue guidance, we expect $5 million to $5.3 million of product revenue.

We expect the fourth quarter non-GAAP net income to be in the range of $8.4 million to $8.9 million which includes approximately $1.5 million to $1.6 million of non-GAAP net income contribution from FluentStream. Q4 non-GAAP net income guidance also includes an impact of interest expense related to the $45 million term loan, which is estimated to be approximately $0.5 million. Non-GAAP diluted EPS is expected to be between $0.30 to $0.32 and we have assumed 28 million weighted average diluted shares for the fourth quarter. For full year fiscal '26, we're raising the guidance in expect total revenue to be in the range of $27.3 million to $27.9 million, which includes approximately $4 million to $4.1 million of revenue contribution from FluentStream. The updated revenue guidance also reflects our current expectation for the timing of AirDial installations, some of which have been pushed out in the next fiscal year due to the timing of customer orders and the impact of normal seasonality associated with the holiday schedule in Q4, which limits customers availability for installations. The full year fiscal 2016 revenue guidance assumes business subscription and services revenue growth rate of approximately 9% over fiscal '25 and while residential subscription revenue to decline 1% to 2%.

In terms of revenue mix for the year, we expect approximately 92% of total revenue to come from subscription and services revenue and the remainder from products and other revenue. As for the full year fiscal 2016 non-GAAP net income, we are also raising the guidance and now expect it to be in the range of $28.2 million to $28.7 million which includes approximately $1.5 million to $1.6 million of contribution from FluentStream and $0.5 million of term loan interest expense I mentioned earlier. Based on this guidance range, we estimate our adjusted EBITDA for fiscal '26 to be $32.4 million to $32.9 million. We expect non-GAAP diluted EPS for fiscal 2016 to be in the range of $1 to $1.02. And we have assumed approximately 28.2 million weighted average diluted shares for fiscal '26.

In summary, we are pleased with the solid results for the third quarter with a record adjusted EBITDA of $8.6 million, which grew 50% year-over-year and improved our adjusted EBITDA margin to 13%. We are also very excited about the prospect of adding Fluentstream and Phone.com to the Ooma family and continuing to grow revenue, profitability and free cash flow in the fourth quarter and the next fiscal year. I will now pass it back to Eric for some closing remarks. Eric?

Thank you, Shig. Our focus remains on executing well, capturing the opportunities before us and driving improved top and bottom line results. We see growth opportunities across our business and believe our recent acquisitions will propel us faster towards becoming a bigger, stronger and more profitable business. Thank you. We'll now take your questions.

[Operator Instructions] Our first question comes from the line of Josh Nichols with B. Riley.

Great to see the company having another record EBITDA margin during the quarter here. It looks like there's a healthy step-up in profitability in fiscal 4Q as well with the FluentStream acquisition closing. Is that because is there a significantly higher subscription and services gross margin components or I'm just kind of curious like below the revenue line, what gets you to that big jump up in EPS EBITDA for fiscal 4Q?

Yes. So I can point to a few things there, Josh. Thanks for the question. And first of all, the -- certainly, we're seeing more operating leverage and we made some -- we took some actions in late Q3 on R&D side of spend and that we're going to see a full quarter impact of that in Q4. So that's number one. And we continue to manage sales and marketing spend as well. I think we started the year with 28% and we continue to monitor the customer acquisition costs, both organically but also inorganically to balance things out, optimize them. And lastly, I think the tariff impact that we were estimating going through the second half, we didn't see that in Q3. And as of today, we're not seeing that in Q4. So I guess that's good news for us, obviously. And I think all of those things combined, we're seeing a better, more flow through to the bottom line for Q4.

I appreciate the context. And then I know obviously, FluentStream is closed, but you're still within Phone.com, which is in the guidance, obviously, for the fourth quarter. Eric, you mentioned that there's like those numbers that you kind of laid out in terms of full year run rate numbers for those 2 acquisitions don't include any synergies. Is there any way for you to maybe kind of quantify any expectations that you may be able to see around those? Or is this something that you think you may start to see some synergy benefits in like the second half of next fiscal year or a little bit longer?

Josh, so with FluentStream, we expect the synergy benefits, at least on the cost side, to be relatively modest. There are some benefits on the revenue side with AirDial and also just being able to bring some of our developments over onto their platform. With Phone.com, we're going to have to see once we get it closed, but we do think there's more overlap in what we're doing and what they're doing, and we can work together to drive both scale economies and also just rationalize the things we're doing so that we share the work over a larger base. It's hard to say, but I'm sure we'll see some early wins out of the gate, particularly with vendor relationships, and then we'll assess from there.

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

Yes. I wanted to understand on the legacy business, given the Q4 guide was a little bit below where we were expecting. Shig, I think you mentioned that there were some AirDial pushouts. I've got basically between what I was looking for and what you guys guided to on the legacy business, I'm off by about $1.5 million. Is that all attributable to AirDial push-outs?

Yes. Most of that pretty much the push out. The earlier in the quarter, I would say, during the Q3, we obviously, so far Q4, customer engagement continues to be strong, I would say. And by the way, the AirDial bookings actually in Q3 grew 50% year-over-year. But in terms of customer deployment timing and also the new order timing that we were expecting originally to be much earlier, so both installation and all the timing being pushed out to next year. It is also disappointing that it's all on the customer side. We are obviously ready to deliver and install some of those customers were -- have been engaged with us for some time, doing proof-of-concept installations. But for one reason or another, they decided to install next year versus this year. So most of that difference you talked about in guidance prior versus now is related to that.

Okay. And is this something -- I know you've been at this for a couple of years now with the air dials a different behavior than 12 months ago. just kind of a one-off? Or do you think there's something a read-through on the macro?

Well, I would say this, again, I don't know if it's necessarily new, but also it's a reflection of -- in a good way, I guess, one can say, it's a reflection of the fact that we are now engaged with larger -- more larger opportunities and larger opportunity means that sometimes it takes time to get through the proof-of-concept installation and get into orders and actually get into the installation -- and so part of it is the growth we see in the type of larger cans that we engage with today with the opportunity. So I don't know if, Eric, you would add anything to add, but...

No, I think that says it well. I mean, I suppose we've known this in the past, but it's -- we're seeing customers say, you know what the holidays coming, we'll just start in January and with rollout. And that's a little bit of what all this is about to.

Got you. And Eric, the -- post close, I realize we've only technically owned FluentStream for a week now. But what are your intentions or what kind of out of the gate actions are you taking as far as embracing that FluentStream customer base?

We've said on our previous calls, we think FluentStream a very well-managed business. And the CEO of FluentStream, Karen Parker, some we've known for a long time, have great respect for and we're thrilled. She's now part of Ooma. They are they are driving approximately $10 million of EBITDA on their approximate $23 million or $24 million of revenue. That's pretty good performance. We do think there's opportunities on the vendor relationship side. There's opportunities to leverage their channels with their dial because they are almost 100% go-to-market through channel relationships. They are -- on the R&D side, they're doing some investment in areas that we're also investing in. And so we can get together and either go faster, go faster on those developments or work on more things faster because we have a bigger team to do stuff, and we don't need to duplicate the work.

So there's obviously a whole bunch of areas to kind of come together. But one of our operating principles with acquisitions and particularly in this case, is not try to go too fast and certainly to not assume we know what is right for their business. we need to learn and understand each other and offer more than Drive. And we have a lot of confidence that Karen will make the smart decisions with us to make the opportunities come together. So yes, it's a good performing business. We don't want to mess it up. We want to optimize it and make it better, and that's what we're going to do kind of over an extended time period.

Our next question comes from the line of Patrick Walravens with Citizens.

Great. This is Kincaid on for Patrick. Congratulations on the quarter. Eric, I just had a question on the Phone.com acquisition call, you had mentioned that you had very significant AI developments in the work. Could you give us any color on what that looks like?

Yes, a little bit. being a company that handles a customer -- a business of phone calls and messages means we have a lot of data and a lot of opportunity to leverage that data with AI type services. Now what you see in the AI space today and the kind of things you'll certainly see from Ooma have to do with being able to parse all that data and get understanding from it. To evaluate it, things like sentiment analysis, and then also to use AI in other ways with the business to help the business gain productivity. It will be an area where we roll out features through the year next year, but we're excited about what we have coming in just the first quarter of next year. And it will go into our -- most of this will go into our pro plus tier, which we think will help drive a little bit higher adoption of our highest tier service, which also helps our ARPU growth, which has been steadily growing on the business side, as you know.

So yes, it's -- that's how we look at it. And I guess I can't really say too much that's too specific at this point. But it's certainly an area where we've been -- we've done development in this area for over a year, and we're already using some of these capabilities internally at Ooma and we've learned a lot through that. And I think that's also important because when it comes to small businesses, and our secret sauce is our ability to understand the environment of a small business, you need to offer very clear value and make it very simple and easy to set up and use. And I think we're going to come out with a solution that ticks all those boxes well for our customers.

And then a quick follow-up. This is your eighth acquisition in 11 years. I'm just curious if there's any learnings going from the first one until now that you can highlight for us?

Yes, there are. I hadn't counted 8 actually, but I appreciate you're doing so I think the first observation is an obvious one that everyone would talk about with acquisitions, which is the close to the acquisition is to what you already know how to do. The easier it is for you to understand it and the easier it is for you to leverage it and make it a success. And so if you look at our -- perhaps our worst acquisition, it was one where we were branching out into the camera space with a small acquisition we made. And we never really did get that right. And the acquisitions we've made the last several, we're very happy with. The OnSIP acquisition going back 3 or more years now, that business continues to perform very well, in fact, better than our expectations when we acquired them. 2600Hz, we really bought them mainly for technology control and synergy, but then the market opened up with opportunity for wholesale platforms in general, and we've been able to also drive a revenue story there.

And now with these 2 acquisitions, I think we're very well placed to leverage them as part of having a greater scale and therefore, better economics overall as a company. It -- we do look at our cost of acquiring customers through sales and marketing and our cost of acquiring customers through acquisition. And we are balancing both of those -- and it's 1 reason why you saw our sales and marketing down at 26% of revenue for Q3 because with these acquisitions, we're able to drive very strong growth for the company and we can really optimize across all areas with that. So that's a little bit -- I probably went on a little bit, but that's how we're seeing things, and that's a little bit of what we've learned.

Our next question comes from the line of Matthew Harrigan with the Benchmark Company.

This is just a nit, but you're so careful on guidance. Do you have any feel for what the non-GAAP charges on the acquisition FluentStream would be the noncash comp and the sorry, the stock compensation and the acquisition expenses, I assume it might be high 6 figures. And then secondly, the Vegas hotel, more than 1,000 rooms, is that presumably a gaming company with material other assets outside Las Vegas where you could get further penetration.

I'll answer the first one, I guess, I'll let answer the second one. But the -- so with respect to FluentStream, we're not able to give you the range of estimate around non-GAAP charges in terms of intangibles, there will be some tax related entries for the intangibles were going to book, so we can't give you that because that process takes some time to figure out after the close, we just occurred a week ago. And there's almost no minimal stock comp charge associated with the -- there's no stock issued by the way, in closing the transaction. But prospectively, too, there's very minimal stock comp. So we expect the stock com to be stay at similar level even post close.

Yes. Regarding the hotel win in Las Vegas, it was nearly 1,000 rooms, it wasn't over. But yes, really excited to win this customer. Our goal internally is to add more than 50 hotels every quarter on our Ooma Enterprise platform. We did that again in Q3. And this hotel I actually don't know if they're part of a larger train or not. They are -- I just don't know. But there's certainly a major hotel in Las Vegas.

And are you seeing anything on the SMB side that gives you pause on the economy, to the extent that, that business is economically sensitive?

We are not. No.

[Operator Instructions] Our next question comes from the line of Arjun Bhatia with Win Blair.

Eric, I'm just curious, you're kind of acquisition of FluentStream and Phone.com, presumably, they'll be -- you'll be integrating those and working through the acquisitions at the same time. They're decent-sized deals. And you've obviously done M&A in the past, but you're going to have to deal with these 2 together. Can you just give us kind of your capacity to absorb both businesses at the same time throughout fiscal '27.

Yes, happy to. It's obviously something we thought a lot about. Our -- one of our key goals is not to derail in any way the things Ooma is already doing as we bring these businesses into the family. We feel pretty comfortable partly because FluentStream is already operating at a very high level. And Phone.com is as well, but Phone.com is more of an opportunity for the future, given the strength of the Phone.com brand and URL and the high level of e-commerce business the company does. E-commerce is a very cost-effective means for growth as well. So we really want to bring our sales and marketing strength to that business. Our team is probably -- I wouldn't be surprised if it's 10x the size of theirs in terms of just the marketing side of what we do. And we're going to see how that unfolds over time. But there's nothing that neither 1 of these businesses has something that has to get done tomorrow, the exception of 1 or 2 very small things. So it gives us the luxury to take them at the pace that works for us.

And so I think we'll be able to bring them on board very straightforwardly. And at some point, we would like to do more acquisitions because this is proving to be a very cost-effective and good method of growth for us. And if we can find more opportunities, we're open to that.

Understood. That's very helpful. And then just on the business segment, you obviously had the nice win with the hotel in Vegas. When you're looking at the competitive dynamics there, just curious, where are you seeing the most sort of incremental share gains from like who are the incumbents you're booting out there? And how is that competitive landscape changed over the last year or so.

So in hospitality, hotels, you're almost always replacing a legacy on-site PBX or something that's really quite old. And so that's the trend of moving to the cloud that's been going on for quite a number of years now. But hotels and hospitality have some unique requirements, and we've been able to customize our enterprise solution to fit the needs there very well. Competitively, we haven't seen much change.

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

Thank you, everyone, for joining our call today. And we look forward to -- well, please do have a happy holidays as well coming up. Thanks, everyone. Goodbye.

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

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ooma Management Discussion of the Phone.com acquisition. [Operator Instructions] I would now like to turn the conference over to Matthew Robison. You may begin.

Thank you, Desiree. Good day, everyone, and welcome to our call to discuss the pending acquisition of privately held Phone.com. My name is Matt Robison. I am the Director of IR and Corporate Development. On the call with me today are Ooma's CEO, Eric Stang; and CFO, Shig Hamamatsu.

Before today's trading session, Ooma issued a press release announcing that it entered into a definitive agreement to acquire Phone.com. This release is 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. Forward-looking statements generally relate to future events, including the confirmation of the transaction 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.

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

Thank you, Matt. Hi, everyone, and welcome to today's special investor call to discuss Ooma's pending acquisition of Phone.com. Thank you for joining us.

Before the market opened today, Ooma issued a press release communicating we have signed a definitive agreement to acquire Phone.com for $23.2 million in cash. We expect the acquisition to close in about 30 days once required regulatory approvals and other closing conditions are satisfied. We intend to finance the acquisition through a combination of cash on hand and bank debt financing.

Phone.com is a provider of unified communication services with a focus on small- and medium-sized businesses. The company maintains the memorable Phone.com URL and website and acquires most of its customers through e-commerce and inside sales activities. As is the case for Ooma Office, many of its customers are Main Street businesses who value the powerful features of a UCaaS solution but require it to be simple to use, flexible and affordable. We believe Phone.com represents a natural fit for Ooma and view this acquisition first and foremost as a cost-effective means to expand our customer base and grow Ooma Business. We look forward to welcoming Phone.com's customers and employees to Ooma.

Based on current run rates, we expect that Phone.com will add $22 million to $23 million of revenue and $1 million to $1.5 million of adjusted EBITDA to Ooma annually before synergies. Phone.com has about 36,000 customers and about 87,000 users today in North America, all served by its proprietary UCaaS platform. The company offers a complete solution for smaller-sized businesses to enable them to take advantage of advanced calling, texting, video meetings, receptionist solutions and more through Phone.com's desktop and mobile applications and available IP desk phones. Phone.com utilizes the Phone.com URL and website along with online marketing, inside sales, and specialized features designed for smaller sized businesses to attract new customers.

We believe Phone.com is a solidly performing business today and are glad to mention that the company won the 2025 Internet Telephony Excellence Award from TMC. This award is primarily based on customer success stories and is intended to represent companies who are setting the standard for excellence in IP communication.

Phone.com's current level of profitability reflects the company's small scale and continued investment in platform development and marketing. As such, we believe the combination of Phone.com and Ooma can afford significant synergies over time. Our focus once the acquisition closes, will be to leverage our vendor relationships, R&D activities, customer support systems and G&A processes to make Phone.com both stronger and more profitable.

Our focus will also be to strengthen the Phone.com brand in the market. We believe Phone.com's memorable URL and website, they're focused on providing a streamlined and relevant e-commerce experience and their specialized features for smaller sized businesses represent an attractive opportunity for Ooma.

As we've discussed, our strategy includes making smaller-sized acquisitions of businesses that serve our target customers when we can acquire the business at the right price and achieve cost-effective growth. Our announcement today comes on top of our announcement just 3 weeks ago that we signed a definitive agreement to acquire FluentStream. Together, Phone.com and FluentStream have the potential to add over $45 million of revenue and over $10 million of adjusted EBITDA to Ooma next year. I look forward to welcoming Phone.com to Ooma and believe this will be another strong step forward for us.

Thank you. I will now turn the call over to Shig, after which we'll take your questions.

Thanks, Eric. Good afternoon, everyone. As Eric mentioned earlier, we intend to finance a cash purchase price of approximately $23.2 million for this acquisition through a combination of cash on hand and bank debt financing. Cash transaction price reflects approximately 1x transaction multiple based on Phone.com's current annual revenue run rate. We expect Phone.com will add $22 million to $23 million of revenue and $1 million to $1.5 million of adjusted EBITDA to Ooma on an annual basis before synergies.

In terms of historical revenue composition, substantially all of revenue represents recurring service revenue. Financial contribution from Phone.com will start from the closing date of the transaction, which is expected to occur in Ooma's fourth quarter of this fiscal year. We expect to add approximately 87,000 core business users from this acquisition. The average revenue per user per month or ARPU for these users is around $20 and Phone.com's historical net retention rate has been in the mid-90% range.

We expect Phone.com's core user metrics will be incorporated into our quarterly key customer metrics starting in the first quarter of fiscal 2027, which will be the first full quarter after the acquisition. In addition to revenue and adjusted EBITDA contribution, we are also acquiring Phone.com's net operating loss tax benefit of over $8 million, and that is expected to benefit Ooma's tax position in the future. We are welcoming approximately 100 employees and contractors from Phone.com in this transaction.

With that, we're now opening up this call for questions. Operator?

[Operator Instructions]

And our first question comes from the line of Eric Martinuzzi with Lake Street Capital Markets.

Congratulations on the transaction. Eric, I was just curious to know the business that you're acquiring. Is Phone.com a growing business? And can you put a growth rate on it if it is?

Yes. Eric, it is a growing business, although slowly today. They have not had a lot of capital to invest in sales and marketing, but they have a great solution and a really great URL and website with Phone.com, and we're optimistic about what we can do together with them. But no, as you look at them today, they are slowly growing.

Okay. And then the technology plan, I know 3 weeks ago when you talked about FluentStream, it was that, "Hey, we're going to leave the acquired entity technology platform untouched." What's the thinking here with Phone.com?

The thinking here is similar and touched is maybe too strong a word that I may have used last time. We will continue the Phone.com platform in the market. But when it comes to new feature development, we'll coordinate activities so we're not duplicating efforts. So for instance, Ooma has some very significant AI development underway in the company for our customers. I'm sure we'll leverage that in the Phone.com platform and the FluentStream platform so that net-net, we can go faster across the teams we've got doing work.

Okay. And then technology wise, it looks like they have an offering called ProSIM. It seems like they have a heavy percentage of users that use their mobile app. I want to say I read something today that about 60% of users on Phone.com use that mobile app. What's the percent of Ooma kind of installed base users using the Ooma mobile app?

I don't know the exact number here, but I can tell you that we do not have as much as 60% using the mobile app to my knowledge, but we have a substantial portion of our base that does use it. Something about Phone.com a little bit different from Ooma. They are very much e-commerce first and a lot of their new users will start off with the mobile app and then maybe add an IP phone later.

Ooma is a little bit more IP phone first. We -- almost all of our customers start off with an IP phone and then may add the mobile app, depending on what their needs are and how they operate. I think this is an opportunity there for each of us to maybe embrace a little bit what the other has done.

Our next question comes from the line of Josh Nichols with B. Riley Securities.

It looks like you guys have been on a little bit of an early Black Friday shopping spree for some of the smaller SMB M&A opportunities. I know you mentioned FluentStream was already very accretive, right, based on the margin profile. This one a little bit more subscale, but you mentioned it's still going to be positive to contributions before. Any synergies? Still really early, deal hasn't closed. But is there any kind of targets over the next 12 or 18 months that you would get that to kind of be in line with at least like Ooma's corporate EBITDA margin profitability over time?

I don't think there are specific targets to share today. But I can say that one of the driving goals of Ooma is to improve or increase our EBITDA as we go forward. We feel we've built a very strong base of loyal customers at high margins, and we want to capitalize on that more as we go forward. Now that can only be inconsistent with the different investments we need to make in the business for growth. But as we get bigger and achieve more scale, we have more flexibility.

And in the last 2 years, you've seen our EBITDA go up substantially. And with these 2 acquisitions, even before synergies, we're going to take another nice job, but we do expect and plan to drive more EBITDA as we go forward. I think when we give guidance for next year, we'll give you a more concrete outlook on where we expect to go with this.

And then just about going forward, I mean, historically, you've done some M&A. Clearly, it's becoming a little bit bigger of a focus. Are you seeing a growing number of opportunities to buy some of these subscale SMB operators at what would be much more attractive rates than maybe like a few years ago overall?

I wouldn't say we're seeing a growing number. I do think there's been some swings and roundabouts in the market. For a while, I think these companies were more accessible, then for a while, maybe a little less so. But today, you don't see as much activity by other companies or private equity firms in our space. And I think it does open up the market a little bit to find opportunities like this and others at a fair price.

We -- but our strategy is to get to know a company well to make sure they fit with what we do and to make sure that they are solid and they don't need a lot of fixing and then to negotiate a fair price. And sometimes that can take a lot of time. So it's not uncommon for us to talk to the company for well, year or more even before we might come to a mutual agreement. So these things kind of happen when they happen.

But it is our strategy each year to try to add inorganic growth through an acquisition to augment what we're doing internally. And ultimately, it's a make-buy decision in a way. If we're going to acquire more companies, then we're going to probably spend a little bit less in sales and marketing, trying to acquire users directly through that channel. So that on balance, we're kind of putting together the business the way we want to go.

So this was a great opportunity. We're thrilled to be joining forces with the Phone.com. I believe they are equally excited to be part of Ooma, and it just happened to line up at this time.

Last question for me. Just curious, like a little bit on the background, I know you said you've been in the space a long time, and you probably know a lot of these companies. Was this something that was a little bit more proprietary or a competitive bid situation. And generally, when you were looking at this, is this something that kind of has like margin -- gross margin profile given most of it is recurring is kind of in line with Ooma or a little bit lower given the subscale nature of it?

So I know that there have been other potential acquirers that Phone.com has talked to over time. Some more recently, some lesser recently. I know we were one of them over those times and I think in this instance, things just came together. So it wasn't -- there were bankers involved on Phone.com side of the transaction.

Their margin profile is good. I think not as good as ours, gross margin profile, I should say, but we'll get better with our scale economies and as we work together with them.

[Operator Instructions]

There are no further questions at this time. I would like to turn the call back over to our CEO, Eric Stang for closing remarks.

Well, thanks, everyone, for joining us today. It's an exciting step for us. We expect this will take about 30 days to close, if everything goes according to plan, and we'll be starting off the new year with substantially more revenue and EBITDA in the company and a great outlook for next year. So we believe we'll have a great outlook for next year. So we look forward to talking to you about that in our next earnings release and then again early next year. Thanks, everyone. Bye-bye.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the management discussion of the FluentStream acquisition. [Operator Instructions] I would now like to turn the conference over to Matt Robison. You may begin.

Thank you, [ Jericho. ] Good day, everyone, and welcome to our call to discuss the pending acquisition of privately held FluentStream. 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. Before today's trading session, Ooma issued a press release announcing that it entered into a definitive agreement to acquire FluentStream.

This release is available on our company's website, ooma.com. This call is being webcast live and is accessible from our link in 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. Forward-looking statements generally relate to future events, including the consummation of the transaction 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. Now I will hand the call over to Ooma's CEO, Eric Stang.

Thank you, Matt. Hi, everyone. Welcome to today's special investor call to discuss Ooma's pending acquisition of FluentStream. Thank you for joining us. Before the market opened today, Ooma issued a press release indicating we have signed a definitive agreement to acquire FluentStream for $45 million in cash. We expect the acquisition to close in about 30 days once regulatory approvals and other closing conditions are satisfied.

We intend to finance the acquisition through a combination of cash on hand and bank debt financing. FluentStream is a provider of unified communication services with a focus on small- and medium-sized businesses. The vast majority of its customers are of the same type that Ooma targets today, making FluentStream a natural fit with Ooma's current strategy and operations. We view this acquisition, first and foremost, as a cost-effective means to expand our customer base and grow Ooma business.

We look forward to welcoming FluentStream's customers and employees to Ooma. Based on current run rates, we expect that FluentStream will add $24 million to $25 million of revenue and $9.5 million to $10.5 million of adjusted EBITDA to Ooma annually. FluentStream has about 5,000 customers and 80,000 users today, most of which are served by its proprietary UCaaS platform.

The company grew significantly over the last several years through a series of small acquisitions, and most of their acquired customers have been moved to the FluentStream platform. Through these acquisitions, FluentStream secured a significant number of channel partners and agents, which make up its primary go-to-market strategy today. They also continue to provide a highly responsive level of customer support via their U.S.-based support team.

We believe FluentStream is a highly regarded provider in the market today with high customer satisfaction scores and award-winning customer support. Due to the work FluentStream has already performed to integrate its acquisitions, streamline operations and focus on serving customers well, we believe the company is currently performing at a high level. Our focus once the acquisition closes will primarily be to continue FluentStream's business success rather than seek to capture significant synergies.

There are, however, a few select areas where we believe synergies are possible. These include bringing Ooma's scale to FluentStream's vendor relationships, combining certain initiatives involving new feature development and leveraging FluentStream's channel relationships to sell other Ooma products, most notably AirDial.

Historically, FluentStream has primarily achieved growth through acquisitions rather than through its core business activities. Once the acquisition closes, we intend to optimize our sales and marketing investment across all of Ooma, including FluentStream to achieve the most cost-effective growth possible. We also believe FluentStream's expertise and experience at completing and integrating acquisitions will benefit Ooma going forward.

Overall, our plan is to maintain the FluentStream brand and strategy in the marketplace and to leverage our resources across a larger corporate scale. As we've discussed, our strategy includes making smaller-sized acquisitions of businesses that serve our target customers when we can acquire the business at the right price and achieve cost-effective growth. I look forward to welcoming FluentStream to Ooma and believe this will be another strong step forward for us.

Thank you, I'll now turn the call over to Shig, after which we will take your questions.

Thanks, Eric. Good afternoon, everyone. As Eric mentioned earlier, we intend to finance cash purchase price of approximately $45 million for this acquisition through a combination of cash on hand and bank debt financing, which is expected to be finalized concurrently with closing of the transaction. Cash transaction purchase price of $45 million reflects approximately 4.5x transaction multiple based on FluentStream's current annual adjusted EBITDA run rate, which compares very favorably to Ooma's EBITDA multiple.

We expect FluentStream will add $24 million to $25 million of revenue and $9.5 million to $10.5 million of adjusted EBITDA to Ooma on an annual basis. In terms of the historical revenue composition, substantially all of revenue represents recurring service revenue with a very small portion generated in the product and other revenue category.

Financial contribution from FluentStream will start from the closing date of the transaction, which is expected to occur in Ooma's fourth quarter of this fiscal year. We expect to add approximately 80,000 core business users from this acquisition. The average revenue per user per month or ARPU for these users is similar to Ooma's and FluentStream's historical net dollar retention rate has been in the mid-90% range.

We expect FluentStream's core user metrics will be incorporated into our quarterly key customer metrics starting in the first quarter of fiscal 2027, which will be the first full quarter after the acquisition. In addition to revenue and adjusted EBITDA contribution, we are also acquiring FluentStream's net operating loss tax benefit of over $20 million that is expected to benefit Ooma's tax position in the future. We are also welcoming approximately 50 employees and contractors from FluentStream in this transaction.

With that, we're now opening up this call for questions. Operator?

[Operator Instructions] Our first question comes from Alinda Li from William Blair.

First question is, can you elaborate more on how Ooma can leverage FluentStream's channel partner program to accelerate its growth?

Sure. Most of Ooma's business today on the business side of our revenues is done through online marketing and inside sales. We do have a channel program, and we sell primarily Ooma Enterprise and increasingly AirDial through that program. But it's not been the first focus of Ooma. FluentStream is built almost entirely off a very strong channel and partner base. And that base was built through the many acquisitions they've done over the years. And we think that's a key asset.

We will be able to leverage that primarily for AirDial, which we think would be a very synergistic addition into that network of channel partners and agents. But over time, we'll have to see where we build from there. One of the nice things about FluentStream's model is selling through channel agents like they do, they don't have a lot of marketing costs, in particular, in their P&L, and that helps their bottom line results. And most of their business is sold on contract. Usually, I believe, 3-year customer contracts. So we believe we bought a well-performing stable business. And as you said, with the opportunity to leverage with some of the other things Ooma is doing.

Got it. That's helpful. And you mentioned optimizing sales and marketing across Ooma's platform also with FluentStream. Can you give more color in terms of what that could look like after the acquisition here?

Sure. We do this throughout our business today. We've made acquisitions in the past of you'll recall OnSIP and Broadsmart and others. We're always evaluating where we spend our sales and marketing dollars and the return we get on them. And we track that pretty carefully. We're going to keep the FluentStream brand name in the market and continue to invest in the business.

And we'll -- obviously, we'll weigh the results of those investments versus other parts of Ooma to steer our spending to the most successful areas. We do think, too, that we can strengthen Ooma's -- sorry, FluentStream's solution in the market with some of the features we have on the Ooma side that we can also either leverage to their solution or jointly develop over time.

So time will tell whether we grow more on the FluentStream side, grow more on the Ooma side or other parts of our business. But really, I made the point to say that we have the opportunity here to optimize amongst all the different parts of our business.

Our next question comes from Josh Nichols from B. Riley.

Just a little bit curious if you could elaborate a little bit on how you came about this opportunity. Was this something that they were going through a competitive bid process or something that you kind of found out about through your industry relationships and context overall. So a little bit of background would be helpful maybe.

Sure. So I've actually known the team at FluentStream for years. And in fact, the current CEO of FluentStream is someone that Ooma has had business dealings with in the past. We think very highly of that team and the leadership at FluentStream. And so having known them well over years, this -- that made this an easier decision for us.

We have a lot of confidence in the management team that's coming over with this. That said, FluentStream did go through a competitive process. I think there's some real things to like about selecting Ooma as your partner for a transaction like this, given our size and our ability to close a deal like this and ability to really strengthen the business after doing so. So I feel like we put a very good foot forward. But yes, I do believe they went through a process in completing this transaction.

And then just one follow-up for me. One, I mean, clearly, they got pretty attractive EBITDA margins, a lot less on sales and marketing as you kind of touched on. Is the gross margin profile comparable given that most of it's recurring? And is there opportunities for you guys to maybe take their distribution relationships and maybe with that, save a little bit on your sales and marketing over time by using those relationships instead of just internal and online marketing that you do today more so?

Yes. In terms of gross margin, Josh, it's very comparable to Ooma's recurring margin. And I think in the sales and marketing, as Eric said earlier, in the short term, I think we want to work with them, integrate with them fully and look at how we can work together to optimize sales and marketing. Perhaps the longer term, there's maybe some synergy there. But I think short term, we're focused on ensuring the smooth transition with them and then with their customers. So that's what I would say about the sales and marketing.

Yes. And I would add, Josh, I mean, sales and marketing is a discretionary expense for us at some level. We decide how much we're going to spend based on our overall goals for the company and also the productivity of the spending. I think FluentStream being part of Ooma will give us an opportunity to improve the productivity of our sales and marketing spending and do more with our dollars. And that's powerful for us. It also gives us just bigger corporate scale. And that can be powerful, too, in vendor relationships and in presence in the market and just channel reach. So it's part of taking Ooma up to the next level of being a larger company.

Our next question comes from Brian Kinstlinger from Alliance Global Partners.

I wanted to follow up on the channel partner question. You mentioned a strong base of partners, but you also highlighted in the PR and your comments that revenue growth is mostly M&A and not organic growth, at least that's the implication. Maybe you can share what organic growth has been for the last year or 2? And how do you evaluate the effectiveness of these channel partners -- of your channel partners?

So the kinds of acquisitions that FluentStream was making were smaller-sized companies that are almost like a channel partner or a reseller in the marketplace. And those -- so FluentStream was able to make those acquisitions and keep those partners and now work with them in a new way, basically running the services that those partners used to run themselves.

It's a little bit difficult to give you an answer on the organic side because FluentStream has done a lot of the heavy lifting with these acquisitions to convert the customers over to their core platform. And you're always going to have a little bit of churn when you go through a process like that. That's behind FluentStream now, but it's also part of how they got such strong EBITDA for the business.

But we do believe that FluentStream's level of growth going forward will be a function of the level of investment we want to make in marketing and channel support. And that, as I said, will be balanced with what we do across the rest of Ooma to ensure we're driving the most optimal results for our spend. So it's a little bit hard to give you a direct answer on that, but it's clearly an asset to have those relationships.

Those companies and partners have worked with FluentStream for many years or at least the previous provider who then became FluentStream for many years. And those are tight relationships and something we can build on. We can also build on that because some of Ooma's most advanced development around contact center capabilities, what's coming in AI, some things like that, I think, can also be leveraged to make FluentStream's offering in the market stronger. So more to come on all that.

How -- I'm just curious, how are they able to complete this rollout strategy? Were they giving pieces of equity? Were they using debt? Did you have to also -- are you taking on any debt or any payables as a result?

Yes, they mostly finance through debt. And we're not taking over the debt from them. The debt they carry will be paid off at closing.

Got it. And [ your net to settle at the ] $45 million?

Yes, correct.

I think it's worth pointing out, too, Brian, for just a moment. FluentStream has developed a very good model for this. They've been very successful at integrating over a dozen acquisitions over the last few years. That capability is, I think, a real asset for us as Ooma continues to be opportunistic for acquisitions in the future.

Well, I would think so, too. I mean you buy something at 5x and you trade at 10 to 11 makes a lot of sense. So the -- are there a number of verticals, they're mostly generating revenue from? Is there any one or two that they've been -- I take a look at their website, but is there one or two that generate the majority? And is it all U.S.-based revenue?

It is all U.S.-based revenue. There are no particular verticals. If you just do the math on what we shared in our scripts, their average customer is about 15, 16 users. And very much like the typical small business space we target.

Yes, last question, I may have missed it, you may have commented on this. Based on their margins, I assume there is no real hardware component where you have that loss leader selling the hardware before you sell the service. Is that right? Or do they also have a hardware component?

Well, they have a hardware component, but it's much, much smaller compared to ours. So my comment earlier, Brian, was substantially all their revenue. So think of it as a high 90%. So it's 97%, 98% of their revenue is recurring service revenue. And a very small portion is hardware, but they don't lose much margin on that small portion of hardware either.

Our next question comes from Josh Nichols from B. Riley.

Just one follow-up question. I agree. I think the industry is ripe for some consolidation. People have been waiting for that for some time, and it looks like an attractive purchase price multiple. One question I did want to ask, whenever you see these acquisitions, ultimately, longer term, there's some synergy opportunities with moving everyone over to the Ooma platform.

Presumably, that would be over a longer-term horizon since most of these customers are on like 3-year contracts. I'm not sure what the expiration time line looks like, but ultimately, is the plan to kind of integrate these customers onto the Ooma Business platform over time and that way you don't have to run redundant platforms at some point in the future?

Actually, that's not our direct strategy, Josh. The expense comes in, in developing a platform, not in running it. And we are putting our R&D on the Ooma platform. That's for sure. But as we do that R&D, we do develop capabilities that can be easily extended to other platforms, and we will do that to augment what FluentStream provides today.

But we intend to keep most of the FluentStream customers on the FluentStream platform for the foreseeable future. The work to convert them is substantial, and you run the risk of creating customer churn and other issues. We'd rather focus our energies on growth in the new areas that we're building right now. The day may come for that, but we don't actually see much of a financial penalty to just running customers on the FluentStream platform going forward.

Now FluentStream had a dozen platforms because they acquired -- they hadn't consolidated all the acquisitions they've done. That would be a different matter. But here, FluentStream has an efficient team in place. They're running their platforms well. And we don't really need to make changes there.

Our next question comes from Eric Martinuzzi from Lake Street.

Yes. I apologize if you went over this, I jumped on late, but the $24 million to $25 million in revenue, is that a -- is there -- can you tell us anything about the growth rate over the prior 12 months?

Yes. So again, the -- their strategy has been, Eric, that they've been acquiring their partners, resellers along the way to grow. So if you look at the, I would say, last 1 year or so, most of that incremental revenue came from the acquisition. So it's a little hard to say the organic growth rate in that context because that's a strategy they employed for, I would say, last 5 to 6 years, quite frankly.

Okay. And then it looks like they're using AWS infrastructure. Is there anything cloud infrastructure-wise that there's the potential to leverage the Ooma infrastructure?

I'm sorry. They are using AWS today. That's correct. That still leaves open the ability to leverage Ooma's vendor relationships and scale for some of the cost structure of completing calls and operating the service from that perspective. But being in AWS, there are some things we can do. But I think over time, it will take us a longer-term time period if we want to make any more significant change than that.

Our next question comes from Brian Kinstlinger from Alliance Global Partners.

Great. Just one follow-up. I thought I heard what you say is there aren't significant revenue synergies other than potentially better economics with vendors. But to get to this 20% EBITDA margin, are there cost synergies assumed in that? And/or is there potential, if not, for some cost synergies as well?

Let me frame this and see if this helps. Applying Ooma's larger scale to their business is a cost synergy, as would optimizing sales and marketing be across our businesses. A revenue synergy would be introducing Ooma AirDial into their channel partner network so that we can expand the sales of AirDial alongside FluentStream's applications.

Another revenue synergy would be bringing some of the more advanced capabilities that we've developed in our platform onto their platform so that their platform can offer more features and capabilities. So a little bit of both going on. But in the biggest picture sense, this is a well-run business, driving a strong EBITDA today. And most of the synergies that we might drive if this business were not so well run have already been streamlined and captured by their own activities. So I don't know if that answers your question, but...

Mostly. Just to be sure, I mean, oftentimes, there's cost-cutting opportunities, right? Duplicate staff on the finance side or founders aren't going to stay. Is there any cost coming out that creates this 20% EBITDA margin? Or are they already running at 20% EBITDA margin without you taking out a penny of their expense structure?

So they are already running at 40% -- close to 40% EBITDA margin today without us doing anything, Brian, right? Because we set a $24 million to $25 million run rate and $10 million of EBITDA they are already generating before we acquired them. But to your question -- yes, so -- but to your last point, we do anticipate in the short term, some low-hanging fruit like G&A related.

They don't need to be audited anymore, for example, on a stand-alone basis, things like that. So we do anticipate some amount of G&A synergy, for example. I think longer term, that's what Eric is saying that we can evaluate further as we fully integrate given our larger scale and sales and marketing optimization, there may be some opportunity. But the big piece is already done in terms of optimizing.

Yes, to be clear, we believe FluentStream has a strong team, and we're bringing the full team over to Ooma.

That concludes the question-and-answer session. I would now like to turn the call back over to Eric Stang for closing remarks.

Well, thank you, everyone, for joining us today. It's obviously an exciting time for Ooma. We're looking forward to getting through the next 30 days or so through the regulatory steps and closing this and talking with you in December at our next call. Thanks, everyone, for joining us. Bye-bye.

This concludes today's conference call. You may now disconnect.