Ooma Inc Stock

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.

Hello, and welcome to Ooma, Inc. Second Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Matt. You may begin.

Thank you, Tawanda. Good day, everyone, and welcome to the Fiscal Second Quarter 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 fiscal second 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 intently considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures is included in our earnings press release, which is available on our website.

On this call, we will give guidance for third quarter and full year fiscal 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 includes 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 us 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 Second Quarter Fiscal 2026 Earnings Call. Thank you for joining us. We're pleased to report strong Q2 financial results and to discuss the momentum we have going into the second half of our fiscal year. .

Financially, we grew our revenue in Q2 to $66.4 million, while also setting some bottom line records. In Q2, we achieved record non-GAAP net income of $6.5 million and record adjusted EBITDA of $7.2 million. GAAP net income was $1.3 million and cash flow from operations was $6.4 million. Currently, we are at 11% adjusted EBITDA as a percent of revenue, our highest to date, and now already at the low end of our midterm target range model of 11% to 14%. I believe these results show the power of our business to grow top line revenue while also driving improved bottom line profitability.

Regarding our revenue from business users, our metrics strengthened in Q2. User growth net of churn, average revenue per user, annual exit recurring revenue and the take rate of our Pro and Pro Plus higher-tier offerings were all up both sequentially and year-over-year. We believe we executed well to achieve these results.

Regarding our communications solutions for smaller-sized businesses, we will be strengthening our ability to provide a double-play offering by introducing the Connect 5000 later this quarter. Connect 5000 is a 5G Internet solution that incorporates WiFi and prioritizes voice traffic over the connection. Sold with Ooma Office, it will allow us to offer a more complete solution for our customers. It also affords us the opportunity to increase our revenue and have a deeper relationship with our customers.

In Q3, we will also continue our efforts to develop new AI-driven features. For smaller-sized businesses, we believe AI features need to be not only powerful, but also very easy to use and extremely low cost. We have already developed AI applications that we use internally and are learning from them as we craft new features for our customers. New AI features, along with more advanced contact center functionality and integrations with other vertical solutions will allow us to serve slightly larger-sized businesses, and we are already beginning to see some traction in that regard.

I'm pleased to report that AirDial ramped well in Q2. We more than doubled new bookings year-over-year and secured our largest customer win today with a large national retailer. We've started the rollout with this retailer and anticipate serving over 3,000 locations. We also closed several other significantly sized customers who placed initial orders. As is our goal every quarter, we expanded the number of partners who will resell AirDial and signed 3 new partner resellers in the quarter. We believe 2 of these new partners have experienced selling competitive solutions and will be able to ramp relatively quickly with AirDial. In total, we are now approaching 35 AirDial partner resellers.

Currently, real estate and REITs, colleges and universities, health care and senior living, state and local government and hospitality are very active segments for AirDial. And in general, we believe the POS replacement market is expanding as more businesses come to realize the need to act. We believe AirDial is the leading solution in the market today, and we intend to make it even stronger in the future by introducing further enhancements to our AirDial remote device management portal and by driving down the cost of AirDial hardware.

For 2600 Hertz, our wholesale UCaaS, CPaaS and contact center platform, we announced in Q2 the launch of new mobile and desktop applications. More recently, we also introduced video meetings and team chat. We signed 1 new customer in Q2 and expanded with several existing customers. Looking forward, we see continued sales momentum and remain focused on extending Ooma's IP to the 2600 Hertz platform.

On the residential front, we had a stronger quarter for new customer acquisition and experienced slightly reduced churn compared to Q1. Subscription and services revenue, though down year-over-year was up slightly sequentially. Retail and direct are our main sales channels, but we also sell to Internet service providers and receive customer referrals from T-Mobile. Currently, we have approximately 85 ISPs selling or referring Telo and we signed 7 new ISPs in Q2. While ISP driven users make up just a small percentage of our Telo user base today, we believe sales to ISPs represent additional opportunity for growth.

As we go into the second half of our fiscal year, our focus is on capitalizing fully on AirDial, continuing to enhance Ooma Office to drive higher ARPU and to expand to larger customers, and positioning 26 Hertz as the best wholesale platform. We hope to expand our list of AirDial partners and see our existing partners ramp sales significantly. Most of all, we are focused on executing well. We believe we have built outstanding solutions and have set goals to drive both growth and improved profitability going forward.

Now before I turn it over to Shig, I would also like to mention that this past July marked 10 years since Ooma became a public company. We are proud of this milestone. Since we went public, we have more than tripled our revenue, dramatically improved our bottom line, shifted to serving primarily business customers and reinvented ourselves to serve new markets. I'm proud of our accomplishments and excited as I look forward since I believe Ooma has never been stronger than it is today.

I'll now turn over the call 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 full fiscal year 2026.

Our second quarter revenue was $66.4 million, above our guidance range and was up 3.5% year-over-year, driven by the growth of Ooma business, including AirDial. In Q2, business subscription and services revenue accounted for 62% of total subscription services revenue as compared to 60% in the prior year quarter. Q2 product and other revenue came in at $5.2 million and was up 15% year-over-year due to growth in AirDial installations.

On the profitability front, Q2 non-GAAP net income was $6.5 million, above our guidance range of $5.6 million to $5.9 million and grew 59% year-over-year, primarily driven by our improving operating leverage. Q2 non-GAAP net income this year also included a small amount of tax benefit due to the recent changes in the U.S. tax law.

Now some details on our Q2 revenue. Business subscription and services revenue grew 6% year-over-year in Q2, driven by user growth and ARPU growth. On the residential side, subscription and services revenue was down 2% year-over-year. For the second quarter, total subscription and services revenue was $61.1 million or 92% of total revenue as compared to $59.6 million or 93% of total revenue in the prior year quarter.

Now some details on our key customer metrics. We ended the second quarter with 1,230,000 core users, up from 1,225,000 core users at the end of the first quarter. At the end of the second quarter, we had 508,000 business users or 41% of our total core users, an increase of 9,000 from Q1. Our blended average monthly subscription and services revenue per core user or ARPU increased 4% year-over-year to $15.68, driven by an increase in mix of business users, including higher ARPU, Office Pro and Pro Plus users.

During the second quarter, we continued to see a healthy Office Pro and Pros Plus take rate with 61% of new office users opting for these higher-tier services, which was up from 58% in the prior year quarter. Overall, 37% of Ooma Office users have now subscribed to these higher-tier services.

Our annual exit recurring revenue was $240 million, up 3% year-over-year. Our net dollar subscription retention rate for the quarter was 100% and as compared to 99% in the first quarter.

Now some details on our gross margin. Our subscription and services gross margin for the second quarter was 71.3%, as compared to 72% in the prior year. Product and other gross margin for the second quarter was negative 47% as compared to negative 69% for the same period last year. The year-over-year improvement in product and other gross margin was primarily due to a fully consuming higher cost components we had procured during the pandemic in the first half of the last fiscal year.

On an overall basis, the total gross margin for Q2 was 62% as compared to 62% in the prior year quarter. The flat overall gross margin in Q2 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 second quarter were $35.1 million and down $0.1 million year-over-year. Sales and marketing expenses for the second quarter were $18 million or 27% of total revenue, up 2% year-over-year, primarily driven by higher marketing and channel development activity for AirDial and 2600 hertz.

Research and development expenses were $11.5 million or 17% of total revenue, down 6% on a year-over-year basis, primarily driven by head count management as we continue to focus on R&D efficiency and operating leverage.

G&A expenses were $5.6 million or 8% of total revenue for the second quarter compared to $5.4 million for the prior year quarter. The year-over-year increase in G&A expense was primarily due to an increase in personnel-related costs.

Non-GAAP net income for the second quarter was $6.5 million or diluted earnings per share of $0.23 as compared to $0.15 in the prior year quarter. Adjusted EBITDA for the quarter was a record $7.2 million or 11% of total revenue and grew 27% over the prior year quarter.

We ended the quarter with total cash and investments of $19.6 million in Q2. We generated $6.4 million of operating cash flow and $5 million of free cash flow. On a trailing 12-month basis, we generated $26 million of operating cash, cash flow and $20 million of free cash flow. With strong free cash flow generation, we spent a total of $14.5 million over the last 4 quarters, including $4.5 million in Q2 to buy back stock through a combination of open market purchase and RSU net share settlement.

On the head count front, we ended the quarter with 1195 employees and contractors.

Now I will provide guidance for the third quarter and full fiscal year 2026. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, and amortization of intangibles. We expect total revenue for the third quarter of fiscal '26 to be in the range of $67.2 million to $67.9 million, which includes $5.7 million to $6.2 million of product revenue. We expect the third quarter non-GAAP net income to be in the range of $6 million to $6.4 million. Non-GAAP diluted EPS is expected to be between $0.22 to $0.23. We have assumed 27.9 million weighted average diluted shares outstanding for the third quarter.

For full fiscal year 2016, we expect total revenue to be in the range of $267 million to $270 million, which is unchanged from our prior guidance. The full year fiscal '26 revenue guidance assumes business subscription and services revenue growth rate of 5% to 6% over fiscal '25, while residential subscription revenue to decline 1% to 2%. 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 products and other revenue.

In terms of full year fiscal '26 non-GAAP net income, we are raising the guidance and now expect it to be in the range of $24.5 million to $25 million. Updated non-GAAP net income guidance for fiscal '26 includes the impact of approximately $500,000 of tariffs, which is our current best estimate. Based on this guidance range, we estimate our adjusted EBITDA for fiscal '26 to be in the range of $28.5 million to $29 million. We expect the non-GAAP diluted EPS for fiscal '26 to be in the range of $0.87 to $0.89. We have assumed approximately 28.2 million with average diluted shares outstanding for fiscal '26.

In summary, we are pleased with our solid results for the second quarter with a record adjusted EBITDA of $7.2 million, which grew 27% year-over-year and improved our adjusted EBITDA margin to 11%. Free cash flow remains robust with $20 million generated for the past 12 months, along with $14.5 million of share repurchase for the same period. We're excited about growth opportunities in front of us and remain focused on executing to our long-term strategy to achieve profitable growth.

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

Thanks, Shig. I'm pleased to say we now have a strong first half of our fiscal year behind us and the momentum that goes with that. We're encouraged by our recent growth with AirDial and by the scope of market opportunity we see across our business. Our focus is on executing well, capturing the opportunities before us and in driving improved top and bottom line results.

Thank you, everyone. We'll now take questions.

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

Good to see the improvement, particularly on the bottom line and the company buying back some stock. I know you mentioned AirDial bookings more than doubled. And with the second half hardware ramp, I presume a lot of that is related to AirDial well. Is it they're not contributing any meaningful percentage to ARR at this point? Or at what point do you think you'd start giving a little bit more granularity on the breakout as that continues to build? .

Yes. I think -- Yes, AirDial is contributing to the growth of ARR and also the ARR as a whole, starting to contribute meaningfully. And if you also look up on the perspective of user has on the business side, which increased by 9,000 quarter-over-quarter. A good chunk of that came from AirDial. And so from these kind of data points, we think that -- especially if you look at a quarter-over-quarter basis, even on an annual basis, AirDial is starting to contribute more to the ARR itself. And also having double the booking year-over-year, as you heard it, Josh, that certainly helps to accelerate the growth further into the second half.

And then just to update, I mean you continue to add new partners on the AirDial front as well, too. When you look -- I think in 1Q, you launched with very large market cap telecom company, an aggregator CLEC and previously announced ILEC. Any updates here that you could give us on just like how that ramp is progressing since like the last quarter call update?

Yes. Josh, it's pretty exciting to have nearly 35 partners who are reselling AirDial in the marketplace. I think that a pretty strong vote of the strength of our solution as well to the resellers we brought on or signed, I should say, this last quarter are moving from a competitor's product to ours, which is also quite exciting. These resellers do take time to ramp. We announced a very important relationship with Comcast early this year. We have seen orders now from Comcast, but still, it's slowly moving forward as Comcast works deals and trains its sales teams. I think that the back half of this year, we could see acceleration there.

T-Mobile has never been stronger with us on AirDial. They are doing a fantastic job. And we are also seeing the CLEC that we announced pretty much this time last year, finally start to ramp with AirDial in a meaningful way. So -- and that's just 3 of the close to 35 resellers we have.

I feel well placed with -- I feel we're well placed with the range of companies we're working with. And I think all of them have plans to grow as we go forward. Our goal is to add a couple every quarter. And my expectation at this time is that we'll have more that we're adding in Q3 and a couple of them could be particularly exciting as well. So more to come, but yes, that's working well for us.

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

Congratulations as well on the improving profitability of the business. I wanted to talk about where you're pointing that incremental cash flow. Obviously, in Q2, with the, what was, $4.5 million or so on share repurchase program. Is that to say that we're not actively pursuing any M&A opportunities? Or is it just to say that your own shares are the better bargain in the market with that cash flow?

It really doesn't say either one of those. We do feel some share buybacks at this current share price in the market are sensible for us. So we are -- have started doing that as about 9 or 12 months ago. But we are always looking for M&A opportunities that fit our criteria. And our criteria are fairly specific. We don't want to overpay. We're looking for a strategic way to acquire users more than technology. And we're looking for businesses that are small enough in size that they can fit into what we're doing without upsetting our major plans as a company.

There are opportunities out there. We're -- from time to time, we have discussions. And we would like to do more almost call them tuck-ins like that as we go forward.

Okay. And then the growth on the business side, it's -- you've got 2 quarters in a row here growth in the core subscription service growth rate on the business side. You're talking about 5% to 6% for the year. Is that just conservatism? Or are we looking at maybe some incremental churn that we need to model for in the back half?

Yes, Eric. So it's not so much about incremental churn. But I think you may notice that we've given a little wide range for Q3 on revenue and also still for the whole year. I think the variability there is just the timing of the AirDial installation going into second half. Now we doubled -- more than doubled the booking, and we continue to ramp up the bookings going into second half. Sometimes the installation timing because of customer timing on their end, not so much about our readiness to install plays into it. So there's a little bit of conservatism from that perspective, but it's not about the churn that we're expecting.

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

This is Kincaid on for Pat. Super excited to hear about that new largest retail customer that you guys landed. I'd love to hear more about how that deal came about. What was the differentiator. What lets you win that? And are we going to start seeing that in the back half of the year? Or what's the time line there?

Yes. It's an exciting win for us. This is a very large national retailer. This is a company we've talked to for a long time. They went through a number of trials with our solution. We actually thought they might sign up in Q1 that moved into Q2. This is a customer we've also won with our partner, T-Mobile, which we're very excited about as well. They played a key role in winning this deal, too. We've done a limited amount of installations with them so far, and we are anticipating installations through the back half of this year. I don't know how fast it will move at this point. But yes, a very big validating win.

And frankly, we hope the first of many more. I mean, there are large business opportunities in the market like this. And with the strength of the partners we have and the increased focus on possible replacement by larger businesses now, we have a whole range of sizes of opportunity in our pipeline, and we're obviously working all of that. But yes, a really nice win. I wish I could say who it was. I can't. But it came together after a lot of validation on their part and a lot of testing of our solution.

Spectacular. If you can give you a little color on how much -- like you said 3,000 locations, how much revenue are you expecting to drive per location with these installations?

We don't -- we can't answer that for a customer. But we've given guidance to you on what to model for AirDial ARPU and that's around $25 a line per month. And that's a blend of -- across our go-to-market channels and the different pricing we have in them. And I think that's a reasonable number to use for AirDial going forward.

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

I know but to of an afterthought compared to AirDial, but can you talk a little bit about 2600 hertz and what kind of the organic growth rate there is? I know you introduced a number of new open APIs. And I think when you did the deal, there is some discussion they're trying to get better monetization for [Kazu]. And I know it fits well within your business portfolio, but it necessarily doesn't get as much bandwidth as AirDial perhaps understandably.

Yes. So 2600 Hertz is a wholesale platform and we sell it to companies that want to offer their own solutions in the market. And so our ARPU per user, if you look at that way, is pretty low. But obviously, we're not doing any of the rest of the business to get those users.

We are working this year to bring Ooma IP onto the 2600 Hertz platform. And I made some important announcements about that actually in my opening script and comments. The reason for that is that the real strength of 2600 Hertz is its flexibility and its API-based design. But it doesn't have as strong a turnkey applications as we'd like it to have. And by bringing Ooma IP onto it, we are making it a very good turnkey solution as well. For smaller customers in the market, that's important. For the larger customers in the market, they really care about the flexibility and what they can do with it. And our largest win to date on that platform was ServiceTitan, who uses, in particular, 2600 Hertz as contact center capability and was able to build a number of AI-based applications working with our platform to really create something bespoke to their needs. That's powerful. And our vision for 2600 hertz is to win other large customers like that who will use the platform in that way.

I would say this year, by the end of the year, we will have also filled out the boxes in terms of the turnkey solutions, and that will put us in a stronger position for next year for going after the smaller players who care more about that. I think we've added about a handful of customers so far this year on to the platform, but it's also a sale where once you win a customer, it can take many months to have them move their users over or grow with the platform. So we view it more as upside opportunity next year than this year. This year, we are really rounding out the solution.

We'll continue to give guidance every quarter on it. And we're super excited for the long term because the traditional platforms and use out there today, BroadSoft, BroadWorks, Metaswitch, others. They were built a long time ago. They don't have all the modern features that that a platform like 2600 hertz can enable. And so we feel there's a real opportunity over the next several years to be the platform in the future.

And we know that you have enough on your hands with AirDial in North America. But to the extent that you're getting full demand from Europe, I mean that's really a testament to the efficacy of the product relative to limited alternatives. Are you seeing more of that? And again, I know that's not a priority, but I was just curious.

Today, AirDial is being sold in North America, U.S. and Canada. We would move to other parts of the world if or when we have a large carrier or other entity that can be a lead customer in that market. And we don't have any announcements in that regard today. But that's how we would evolve with it.

Now we are able to achieve a customer like that. We already have Ooma services operating in 32 countries around the world as part of our IWG Regis customer relationships. So we already have a pretty good head start towards enabling a service like AirDial in other countries. But honestly, I don't want to make too much of this because our primary focus still is North America because we just see so much opportunity here.

Our next question comes from the line of Alinda Li with William Blair.

Congrats on the solid quarter and also on the 10-year anniversary. A quick question here. NRR was 100%. Can you give us more color in terms of what drove the 1 point uptick there? And what should we expect NRR to be going forward?

Yes. I think the biggest contributor just overall as we had a better churn quarter over last. And so obviously, last quarter, we saw the impact of the -- what we think is last or the large IWG churn. We don't have that this quarter. And just looking across the other service lines, I think we are, generally speaking, the improved churn quarter. So I think that's the biggest contributor to the better retention rate.

What's the second part of the question, Alinda? Sorry, I missed it.

Yes, no worries. The second part was what should we expect NRR to be going forward?

Yes. I think we've been very steady between 99% to 100%. sometime rounds up, sometimes round down kind of a situation. So I think that's a good zone to be in. And I think we -- that's what we think it's going to be.

And the other question is top line guidance was reiterated, but net income guidance is raised again by around 7.6% at the midpoint. So what are the efficiencies that you're looking to implement or to achieve the bottom line guidance? I know you mentioned also the tax benefit that is helping with the bottom line. Any other efficiencies that we should be aware of?

Yes. Just to kind of get the tax one out there. So part of the raise for net income, I would say, [$700,000] was related to tax law change that I talked about. It's just that our estimate for tax payment is much lower due to the One Big Beautiful Bill that we already heard about. And -- but a remainder, which is still a meaningful portion of the raise is really seeing the R&D efficiency. That's a big part because we more or less see flat R&D or maybe slightly less R&D going into second half. So as we said going into this year, we want to see the R&D leverage that we talked about. So I think that's the biggest driver in addition to the tax benefit.

But also, we've been very prudent about the sales and marketing expense. It's hovering around 27% of revenue. And as we said before, we are very disciplined about customer acquisition costs and making sure that we're putting into the right channel to realize that ROI that we can achieve. So both the sales and marketing efficiency, R&D leverage and the tax, those are 3 pieces.

[Operator Instructions] Our next question comes from the line of Brian Kinstlinger of Alliance Global Partners.

This is [Kevin] for Brian. Can you give us a sense on the new business line trends you're seeing with your largest UCaaS customer? And should we expect meaningful growth over the next 12 to 18 months?

If you're referring to IWG Regis, we have rolled out to the countries we're planning to roll out to. And so I think we expect them to be essentially stable we look forward in our outlook.

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. Thank you, everyone, for joining us today. It's interesting to put our results in a little bit of longer-term perspective. I think it was a couple of years ago, we did mid-teens, upper teens EBITDA. I think last year, we did $23 million. We've guided this year for around $29 million, Shig, if I'm correct. And we intend to drive EBITDA higher next year. I think we have built a business that has a potential to be highly profitable. And our solutions are well developed, and they're leading in the market. And so as we grow, we can get leverage on a lot of our spending.

So it is our plan to continue to drive both growth and bottom line performance and we feel that's -- the combination of those 2 is what's going to build the most valuable company as we look forward.

We appreciate your time today. We had a strong first half of the year. And as I said in my opening comments, we're glad to have that momentum as we go into the second half of the year. Thank you, everyone.

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