Ooma Inc (NYSE:OOMA). reported strong financial results for the third quarter of 2024, surpassing earnings expectations and posting significant revenue growth. The company's earnings per share (EPS) of $0.17 exceeded the forecast of $0.16, and revenue reached $65.1 million, topping estimates of $64.28 million. Following the announcement, Ooma's stock rose by 3.02% during regular trading hours and saw a further 0.67% increase in after-hours trading.
Key Takeaways
- Ooma's EPS of $0.17 beat the forecast by $0.01.
- Revenue for Q3 was $65.1 million, a 9% increase year-over-year.
- Stock price increased by 3.02% during regular trading and 0.67% in after-hours.
- Business subscription revenue grew by 13% year-over-year.
- Ooma paid off all its debt, achieving a debt-free status.
Company Performance
Ooma demonstrated robust performance in Q3 2024, with a notable 9% year-over-year revenue increase. The company continues to capitalize on the growing demand for modern communication solutions, particularly in the small business sector. This performance aligns with broader industry trends of digital transformation and communication platform modernization. Ooma's strategic focus on business subscriptions and innovative product offerings has positioned it well against competitors.
Financial Highlights
- Revenue: $65.1 million, up 9% year-over-year.
- Earnings per share: $0.17, exceeding the forecast by $0.01.
- Non-GAAP net income: $4.6 million, a quarterly record.
- Adjusted EBITDA: $5.7 million, representing 9% of total revenue.
- Cash flow from operations: $8.1 million, a new quarterly high.
Earnings vs. Forecast
Ooma's EPS of $0.17 was higher than the anticipated $0.16, marking a positive earnings surprise of approximately 6.25%. This performance is consistent with the company's recent trend of exceeding market expectations, supported by three upward EPS revisions over the past 90 days. The magnitude of the earnings beat this quarter underscores the effectiveness of Ooma's strategic initiatives and operational efficiencies.
Market Reaction
Following the earnings release, Ooma's stock price increased by 3.02% during regular trading hours, closing at $14.92. In after-hours trading, the stock saw a further rise of 0.67%, reaching $15.02. This upward movement reflects investor confidence in Ooma's financial health and growth prospects, with the stock now nearing its 52-week high of $15.52.
Company Outlook
Looking ahead, Ooma has provided Q4 revenue guidance in the range of $64.6 million to $65.1 million. For the full year, the company expects revenue between $256.3 million and $256.8 million, with business subscription revenue projected to grow by approximately 13%. Ooma aims for a double-digit EBITDA margin in the next fiscal year, signaling continued focus on profitability and operational efficiency.
Executive Commentary
CEO Eric Stange highlighted the company's strong recurring revenue base, stating, "We have 70 plus percent recurring margins and a very stable revenue base." Stange also emphasized Ooma's unique market position, noting, "We think we're serving very unique markets with AirDial and with 2,600 Hertz." CFO Shigeru Miyawatsu mentioned the company's strategic financial management, saying, "We continue to look at being opportunistic about buyback."
Q&A
During the earnings call, analysts inquired about potential partnerships, particularly with national cable companies and the developing Frontier/Verizon partnership. Executives reiterated their focus on expanding the AirDial and 2,600 Hertz platform opportunities, while also highlighting the stable macro environment and potential for further growth.
Risks and Challenges
- Supply Chain Issues: Potential disruptions could impact product availability.
- Market Saturation: Increased competition in the UCaaS sector may affect growth.
- Macroeconomic Pressures: Economic downturns could influence customer spending.
- Regulatory Changes: Shifts in telecommunications regulations may pose challenges.
- Technological Advancements: Keeping pace with rapid tech changes is crucial for maintaining a competitive edge.
Full transcript - Ooma Inc (OOMA) Q3 2025:
Conference Operator: Hello, and thank you for standing by. Welcome to Ooma Third Quarter Fiscal Year 2025 Financial Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to Matthew Robison. You may begin.
Matt Robison, Director of IR and Corporate Development, Ooma: Thank you, Towanda. Good day, everyone, and welcome to the fiscal Q3 2025 earnings call of Ooma, Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. On the call with me today are Ooma's CEO, Eric Stange and CFO, Shigeru Miyawatsu. After the market closed today, Ooma issued its fiscal Q3 2025 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 are fully described in our filings with the Securities and Exchange Commission. 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 issues prepared 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 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 Q4 and full year fiscal 2025 on a non GAAP basis. Also, in addition to our press release and 8 ks filing, the overview page and events and presentations page in the Investors section of our website as well as the quarterly results page 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 and also provides a resolution of GAAP expenses that are excluded from non GAAP metrics.
Now, I will hand the call over to Ooma CEO, Eric Stank.
Eric Stange, CEO, Ooma: Thanks, Matt. Hi, everyone. Welcome to Ooma's Q3 fiscal year 2025 earnings call. Thanks for joining us. Q3 was a great quarter for Ooma, not only financially, but also competitively.
I look forward to sharing our results, including 2 very significant new customer wins we secured in Q3. These new customer wins build on our big wins from Q1 and Q2 of this year and have us excited as we look forward. Financially, we exceeded expectations in Q3 achieving $65,100,000 in revenue, $4,600,000 in non GAAP net income, dollars 5,700,000 in adjusted EBITDA and $8,100,000 in cash flow from operations. Each of these is a record result for Ooma. On the strength of our $8,100,000 in cash flow from operations, we paid off the remaining debt on our credit line shortly after the end of Q3 and are now debt free.
Over the last 12 months, we have paid off $18,000,000 of debt and also bought back $5,200,000 of our stock for a combined $23,200,000 Strategically, our efforts to improve operating expense leverage, given the strong product solutions we have built and the synergies afforded by our 2,600 Hertz acquisition are starting to take hold. Looking forward, we believe we can both execute our growth strategy and drive further operating leverage with further improvement in bottom line results in the coming quarters. Ooma Business contributed 62% of total revenue in Q3, up from 58% a year ago. Within Ooma Business, Ooma Office, our UCaaS solution for Main Street businesses and a significant component of Ooma Business revenue performed well in Q3. We launched new customer engagement features including one to many messaging and a website widget for our customers to allow their customers to create online bookings and we continue to promote our caller info search, messaging templates, expanding set of integrations and more.
Our strategy to enable more advanced features in our premium tiers helped to drive the percentage of new users taking a premium tier in Q3 to 60%. It also helped secure a growing number of larger sized customers in Q3 as we work to expand the market opportunity for Ooma Office. Regarding Aerodial, our solution for POTS replacement, we believe the market is heating up and that contributed to a step up in sales for us in Q3. We learned in Q3 that a large carrier and provider of copper lines is once again implementing price increases. The pricing of copper lines is of course a key driver in customers' decision making to take action and replace them.
We also noticed late in Q3 a several fold increase in the number of announcements for copper lines to be shut down in the coming months compared to prior periods this year. Market momentum in combination with our marketing, partner development and expanding product features helped us achieve our best quarter yet and significant growth quarter over quarter for Aerodial. We signed several larger customers in Q3, including a couple that we expect will surpass 1,000 lines each. On the partner front for AirDile, we have some very significant news to share. I'm very pleased to report that a top tier national cable company has chosen to resell AirDile.
To our knowledge, we are the only provider they are working with at this time and they want to launch as quickly as possible, which we expect will be in calendar Q1. This is significant because of the large size of this partner and there are many existing business relationships. It is our understanding that their business strategy encompasses bringing broadband to businesses and moving communications to
Shigeru Miyawatsu, CFO, Ooma: the
Eric Stange, CEO, Ooma: Internet. And now with AirDial, they can move the remaining copper lines, which until now were not easily handled. Our partnership gives them a way to continue to take share from other major national carriers who they view as competitors. As you can tell, this is a major win for us and a partner that represents huge potential. I also have a second significant new partner win to share with you.
I'm pleased to report we signed an aggregator CLEC to resell both Aerodial and TELO. You'll recall that we now believe there's also a sizable opportunity in the residential space for pots replacement and we believe our TELOS solution is ideal for this market. We're thrilled that this aggregator has selected Ooma for both their business and their residential needs. Our understanding is this new partner primarily serves business customers and provides around 100,000 copper lines to businesses today. They also provide approximately 10,000 lines to residential customers.
This partner has already launched earlier this month with Tello and will be launching soon with AirDile. I also want to give an update on our partnership with the large incumbent local exchange carrier that we announced last quarter. I can tell you now that this customer is Frontier Communications (OTC:FTRCQ), which of course is one of numerous legacy regional carriers in the U. S. As you also likely know, Frontier and Verizon (NYSE:VZ) recently announced that Verizon intends to acquire Frontier.
This development has affected Frontier's launch timing, which may now not be until Frontier can formally start their business planning with Verizon. We believe Frontier continues to view AirDio and Tello as their chosen solutions for parts replacement and that longer term we now also have the exciting opportunity to engage with not only Frontier but also Verizon. Overall, I'm pleased to report we now have more than 20 total partners contracted to resell Aerodial. We believe the 2 major partner wins we have shared today further validate our strategy to secure large carrier partners for both air dial and TELO. It is our goal to add new air dial resale partners each quarter going forward and we currently have several significant discussions underway.
Switching now to 2,600 Hertz, which is our platform used by resellers to create their own solutions. I'm excited to point out our recent press release, which identified ServiceTitan as the large new customer we won 2 quarters ago. ServiceTitan is a $685,000,000 revenue company providing end to end workflows for the trades. They recently launched their new Contact Center Pro solution, which utilizes Ooma 2,600 Hertz for enablement. As we've discussed previously, we're thrilled to be working with this marquee customer and look forward to supporting them as they expand and grow their business.
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.
Shigeru Miyawatsu, CFO, Ooma: Thank you, Eric, and good afternoon, everyone. I'm going to review our Q3 financial results and then provide our outlook for the Q4 and full year fiscal 2025. Our Q3 revenue was $65,100,000 solidly above the high end of our guidance range and was up 9% year over year, driven by the strength of Ooma Business, including better than expected revenue contribution from air dial, as well as addition of 2,600 Hertz. During the quarter, we saw about a half of IWG seat reductions we had forecasted for the second half of this fiscal year and expect additional reductions to occur in the Q4. In Q3, business subscription and services revenue accounted for 61% of total subscription and services revenue as compared to 58% in the prior year quarter.
Q3 product and other revenue came in at $5,000,000 as compared to $4,000,000 in the prior year quarter. The year over year growth in product revenue was primarily driven by growth in air dial installations. On the profitability front, Q3 non GAAP net income was $4,600,000 above our guidance range of $4,100,000 to $4,300,000 Now some details on our Q3 revenue. Business subscription and services revenue grew 13% year over year in Q3, driven by user growth and the addition of 2,600 Hertz. Excluding 2,600 Hertz revenue contribution, business subscription and services revenue grew 7% year over year.
On the residential side, subscription services revenue was down 1% year over year. For the Q3, total subscription and services revenue was $60,100,000 or 92% of total revenue as compared to $55,900,000 or 93% of total revenue in the prior year quarter. Now some details on our key customer metrics. We ended our 3rd quarter with 1,242,000 core users, which is slightly down from 1,244,000 core users at the end of the 2nd quarter. The sequential decline in total core users was primarily due to the seat reductions with IWG I mentioned earlier.
At the end of the third quarter, we had 504,000 business users or 41% of our total core users, an increase from Q2 as user additions for Ooma Office, Ooma Enterprise and AirDile offset the impact of IWG. Our blended average monthly subscription and services revenue per core user or ARPU increased 3% year over year to $15.14 driven by an increasing mix of business users, including higher ARPU Office Pro and Pro Plus users. During the Q3, we continued to see a healthy Office Pro and Pro Plus take rate with 60% of new Office users opting for these higher tier services, which was up from 56% in the prior year quarter. Overall, 33% of Ooma Office users have now subscribed to these higher tier services. Our annual exit recurring revenue grew to $234,000,000 and was up 4% year over year.
Our net dollar subscription retention rate for the quarter was 99% as compared to 100% in the 2nd quarter. Now some details on our gross margin. Our subscription and services gross margin for the 3rd quarter was 72% as compared to 72% in the prior year. As a reminder, subscription and services gross margin for the Q3 this fiscal year included an impact of 2,600 Hertz gross margin, which is running lower relative to Ooma's subscription gross margin. Product and other gross margin for the Q3 was negative 56% as compared to negative 73% for the same period last year.
As anticipated, we saw a meaningful year over year improvement in product and other gross margin as we completed consumption of higher cost components we had procured during the pandemic. On an overall basis, total gross margin for 62% as compared to 62% in the prior year quarter. The flat overall gross margin year over year reflects a heavier mix of product revenue this year, which was 8% of total revenue in Q3 due to an increase in air dial installations, which offset the improvement in product gross margin. And now some details on operating expenses. Total (EPA:TTEF) operating expenses for the Q3 were $35,600,000 up $2,200,000 or 7 percent from the same period last year.
Excluding the impact of 2,600 Hertz, the total operating expenses increased $900,000 from the same period last year. Sales and marketing expenses for the Q3 were $17,500,000 or 27% of total revenue and was up 4% year over year, primarily driven by higher marketing and channel development activity for Aerodial. Research and development expenses were $12,100,000 or 18.5 percent of total revenue, up 7% on a year over year basis, driven mainly by the addition of 2,600 Hertz team members. G and A expenses were $6,100,000 or 9% of total revenue for the 3rd quarter compared to $5,300,000 for the prior year quarter. The year over year increase in G and A expenses was primarily due to increases in personnel and audit related costs.
Non GAAP net income for the Q3 was $4,600,000 or diluted earnings per share of $0.17 as compared to $0.15 of diluted earnings per share in the prior year quarter. Adjusted EBITDA for the quarter was $5,700,000 another record for the company or 9% of total revenue as compared to $5,000,000 for the prior year quarter. We ended the quarter with total cash and investments of $17,100,000 Cash generated from operations for the 3rd quarter was strong and at $8,100,000 it was another quarterly record for the company. On a trailing 12 months basis, we generated a record $24,000,000 of operating cash flow and $18,000,000 of free cash flow, which represented 367 percent and 141 percent increase respectively over the same period a year ago. We paid down the debt by $5,500,000 in the 3rd quarter and reduced the outstanding debt balance to $3,000,000 at the end of 3rd quarter.
Subsequent to the quarter end, we paid the remaining balance in full. And as of today, we have no debt outstanding. On the headcount front, we ended the quarter with 1157 employees and contractors. Now I will provide guidance for the Q4 and full fiscal year 2025. Our guidance is on a non GAAP basis and has been adjusted for expenses such as stock based compensation, amortization of intangibles and certain non recurring gains and expenses.
We expect total revenue for the Q4 to be in the range of $64,600,000 to $65,100,000 which includes $4,500,000 to $4,700,000 of product revenue. We expect the 4th quarter non GAAP net income to be in the range of $4,500,000 to $4,800,000 Non GAAP diluted EPS is expected to be between $0.16 to $0.17 We have assumed 28,100,000 weighted average diluted shares outstanding for the Q4. For full year fiscal 2025, we are raising both revenue and profitability outlook. We now expect total revenue of $256,300,000 to $256,800,000 The full year fiscal 2025 revenue guidance assumes business subscription and services revenue growth rate of approximately 13% over fiscal 2024, while residential subscription revenue to decline 1%. In terms of revenue mix for the year, we expect approximately 93% of total revenue to come from subscription and services revenue and the remainder from products and other revenue.
As for non GAAP net income, we now expect it to be in the range of $16,700,000 to $17,000,000 Based on this guidance range, we estimate our adjusted EBITDA for fiscal 2025 to be $22,100,000 to $22,400,000 We expect non GAAP diluted EPS for fiscal 2025 to be in the range of $0.61 to $0.62 We have assumed approximately $27,600,000 with average diluted shares outstanding for fiscal 2025. In summary, we are pleased with our solid Q3 results with record adjusted EBITDA and free cash flow and remain focused on executing to our long term strategy to achieve profitable growth. I will now pass it back to Eric for some closing remarks. Eric?
Analyst: Thank you, Shay.
Eric Stange, CEO, Ooma: It's our pleasure to report to you today on our strong Q3 results and our new customer wins. We see accelerating momentum for Aerodial and also for residential pots replacement and hope to continue to announce significant new resale partnerships in the coming quarters. We're also leaning in on 2,600 Hertz given the capabilities of our platform and the market need to replace older aging solutions. And in UCaaS for smaller sized businesses, we are seeing success moving up market and growing premium tiers of service. In addition, we believe we can deliver improved bottom line performance as we execute our strategy.
We look forward to updating you on our progress as we capitalize on our growing community of partners. Thank you. We'll now take questions.
Conference Operator: Thank you. Our first question comes from the line of Josh Nichols with B. Riley. Your line is open.
Analyst: Yes, thanks for taking my question. Good to see some of the large partnerships announced for this quarter as well as the improving cash flow and margins. I'm just kind of curious on the 2,600 Hertz, it seems initially when you made that acquisition, expectations seem like relatively low, but you become increasingly optimistic about some of the long term potential for that. I'm just kind of curious if you could kind of comment a little bit about what you're seeing in the market dynamics and any benefit potentially from the planned sunset of Microsoft (NASDAQ:MSFT)'s Metaswitch on that front?
Eric Stange, CEO, Ooma: Yes. Hi, Josh. Well, you're right. When we made that acquisition, we justified it around synergies and full control of all the technology in Ooma. And since then, we've really seen tremendous opportunities.
We look forward and we're leaning in, as I said in my script, to capitalize on it. BroadSoft and Metaswitch both are older platforms that are not getting much investment today. Metaswitch, it's even one further. They've announced Microsoft who owns them has announced that they're end of lifing parts of that platform. And so there are carriers across the world who need to think about what their next solutions what their next capabilities are going to be and how they get there.
We estimate between 50,000,000 and 80,000,000 users on those two platforms around the world. So it's really massive. I didn't get into it in my script, but I talked mainly about ServiceTitan because it's a huge win for us and one that we hadn't really contemplated we could do when we acquired 2,600 Hertz because obviously with ServiceTitan, they've been on a CPaaS solution and they moved off of it at scale over to 2,600 Hertz. So the fact that we have those kind of opportunities as well is pretty exciting. But what I didn't get into my script is we also had a couple of other smaller wins on the 2,600 Hertz platform in the quarter, including 1 in Europe, which was great to see, as we do a little bit more over there with the platform.
There's some real uniqueness to our solution in space. One is, it's a very modern design with over 300 APIs, which customers can use to really craft the platform into whatever they want it to be. Now if they just want it turnkey, we can do that too and we're moving Ooma solutions onto the 2,600 Hertz platform, so that customers who want just to check a box and go have the best out there. But gosh, the API design of the platform creates great flexibility. And then also, we are very, flexible in our delivery model.
We will host it for the customer, but we'll also let the customer host it themselves in their own data centers and get as much or as little services from us in doing that. So we think we have a great solution for what is a quite significant market. And I think it's fair to say that just about every carrier you can think of has something they're doing in their business model that is built off of 1 of BroadSoft, BroadWorks or Metaswitch. And so, I think it's just a matter of time before a lot of change happens in this industry. I will say that when you land a new customer in this space, it can take several months, maybe even 6 months or more for them to craft the solution they want it, get it launched and start to do any customer conversions they want to do or what have you.
But we have people talking to us today about the solution on just about every platform that's out there and historically out there and we're excited that there's that level of interest. We are leaning in. We've increased some sales resources of late in that part of our business because it's just a massive market opportunity.
Analyst: Thanks. And then last question for me. You mentioned in your comments and then in the release about you're seeing some increased operating leverage. And then last quarter, I did notice you took up your medium term EBITDA margin targets. Based on the implied outlook for 4Q, you should be 9% plus EBITDA margin.
I know you're not giving formal guidance, but fair to assume that you could potentially get to 10% plus maybe or something like that for the full year based on what you're seeing in the business and some of the comments you already made?
Shigeru Miyawatsu, CFO, Ooma: Yes. Josh, thanks for the question. So you're actually correct. If you take a midpoint of our, let's say, non GAAP net income guidance and sort of back into the EBITDA, the midpoint will give you about 9.2 percent EBITDA margin in Q4. And so if you think about progression we made this year, Q1, we were 8%, 8.0 percent EBITDA margin Q1.
Last quarter, we just reported Q3, we just said 8.8%, it rounds to 9%. And then we're going to see further improvement in Q4, like I said, at midpoint, 9.2%. So in relation to the midterm model that you're referring to, which is the back of our investor deck that we publish every quarter, we think we're progressing pretty good and on the path to get into a double digit EBITDA margin next year. Obviously, we're not ready to talk about guidance next year, but I think we're making pretty good improvement, as Eric said, showing some operating leverage.
Eric Stange, CEO, Ooma: Yes. And I would add, Josh, without getting into guidance, it's important to remember just how profitable this business is. We have 70 plus percent recurring margins and a very stable revenue base. And that throws off the better part of $200,000,000 in gross profit, maybe $170,000,000 something like that. We do invest a lot of that back in development and growth, but frankly, we've made great strides over the last 3 or 4 years, creating several areas to the company where we have what we believe is the leading solution in the market today.
And now it's more a matter of exploiting them for growth. I don't feel like we need to invest in all areas at the level we have in the past. And honestly, at these gross margin, gross profit levels, we could be extremely profitable if we chose to go that far. So it's really a matter of driving leverage as we go forward to be on a continuous train here of improving bottom line performance.
Analyst: Thanks for the context. Appreciate it. I'll hop back in the queue.
Conference Operator: Thank you. Please standby for our next question. Our next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open.
Mike Latimore, Analyst, Northland Capital Markets: Great, thanks. Yes, congrats on the strong cash flow and new wins here. Just want to clarify on Aerodial. In the Q2, you said Aerodial had a record bookings. Is it fair to say, 3rd quarter, you had higher bookings in the Q2?
Eric Stange, CEO, Ooma: We did, yes.
Mike Latimore, Analyst, Northland Capital Markets: Okay. Got it. And then you talked about, obviously this improving margin dynamic. Does that assume that the revenue growth rate kind of remains where it is and sort of implied in the Q4? Or is that assuming some improvement in the revenue growth rate?
Shigeru Miyawatsu, CFO, Ooma: Yes. So in the context of this fiscal year and Q4 guidance we gave, Mike, that the I think you can take away that based on my revenue guidance range for Q4, the year over year growth is about 5% at the midpoint. And what we are seeing though, we're seeing the more leverage in R and D in particular. Directionally speaking, the absolute dollars on R and D to be down sequentially in Q4. So that's the other part that's giving us more leverage.
And also the overall gross margin too that to the extent that we anticipate a little bit less product revenue in Q4 versus Q3. So that helps the overall margin a little bit versus Q3. So these are a couple of places that gives us the incremental edge to improve on the profitability in Q4.
Mike Latimore, Analyst, Northland Capital Markets: Okay. And then just on the you said that there's a little more churn in the Q4 for IWG. Is it pretty definitive that that will be the end of this enhanced churn? Or is there something that could kind of go into 2026?
Eric Stange, CEO, Ooma: I think that there could be more churn as we look forward. It's hard to say how much. We don't think it's fundamental to our outlook. We work very closely with them and we're able to help them streamline and optimize, including which of their customers get phone service and which don't. And we're always doing that with them to frankly support them fully.
So there could be some. We also have ads. We have quite a number of new centers open every quarter. Sometimes it can be 25 to 50 new centers in a quarter opening. So it's hard to forecast exactly, but I think it's something that could be with us also in the next year.
Mike Latimore, Analyst, Northland Capital Markets: Okay. All right, great. Thank you.
Eric Stange, CEO, Ooma: You bet. Thank
Conference Operator: you. Please stand by for our next question. Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Your line is open.
Eric Martinuzzi, Analyst, Lake Street Capital Markets: Yes, I wanted to pick apart the Q4 revenue guide just one layer further. Is there can you quantify the impact of the IWG runoff? In other words, the midpoint guide is 5.1% organic growth. What would that be in the absence of or adjusted for IWG?
Shigeru Miyawatsu, CFO, Ooma: Yes. I mean, I'm not going to be too specific about it. Eric, I appreciate the question. It wouldn't be that huge because it happened in the middle of Q3. So half of the impact was already realized in Q3.
So we got 4 quarter effect, another 1.5 months or so impact in Q4. So it's not as large as you think, to answer your question, specific to that impact of IWG churn. But I guess to your point, there's a little more churn that we're expecting in Q4, the residual of what we thought. But it's not that big of an impact.
Eric Stange, CEO, Ooma: You might recall too that we've talked very early this fiscal year about churn at IWG, and then it didn't happen for a while. And some of what we're talking about now is what we already talked about earlier in the year and just got pushed out.
Shigeru Miyawatsu, CFO, Ooma: Yes. And Eric, just to remind you context too that IWG itself, we talked about being low single digit percentage revenue in relation to our total revenue. And you're realizing churn off of that relatively small concentration. So that gives you another context of the impact of it too.
Eric Martinuzzi, Analyst, Lake Street Capital Markets: Okay. All right. And then the disruption delay, congratulations on the Frontier actually being able to name the customer. You did talk about with the acquisition by Verizon, we
Eric Stange, CEO, Ooma: do
Eric Martinuzzi, Analyst, Lake Street Capital Markets: have this disruption delay. How long versus what was the prior expectation? And what are you guys kind of spitballing as the potential delay here in the ramp up with the Frontier relationship?
Eric Stange, CEO, Ooma: Yes. It's interesting. When that announcement came out in early September, Frontier was telling us they still wanted to go and move forward now. And it wasn't until close to the end of Q3 that I think that there are a lot of programs in Frontier that are kind of getting just thought about. And ours is this is just one of many that are getting thought about.
We continue to have discussions with them. They continue to think about what they want to do. There are some reasons why they might want to move sooner. There are some reasons why they might want to wait until they can do planning with Verizon. You can handicap as well as I can probably when they might be able to start their planning with Verizon.
But I can tell you that they have a lot. Now I can say who they are. They have 100 of 1000 of residential customers with phone service only that need to be replaced. And that problem is not going away. And we went through an RFP process and a lot with them over 18 months to get to where we are.
So we still remain pretty excited about where this could go. And actually being able to be involved with Verizon in this matter as well is quite exciting for us because to our knowledge to date, Verizon has not really determined a solution on their end for what they will do about stranded residential phone lines where the POTS lines are going away or going up in price. So, I think it's unfortunate. Obviously, we'd like to move forward starting kind of now, but I don't think it's going to affect us that much also because the other win I talked about today, the national top tier cable company, this is a big win for us. If I was to make a very short list of the most important partners I'd like to win, they'd be on it.
And they are strong with a lot of enterprises, they're strong in government and federal and state and local. I think they I mean, I can't say for sure, but I think they have customers even now that are asking for solutions and they want to move fast to provide them. So we have a new partner in hand here who wants to launch as soon as possible. And so that can that we can work that a little bit while Frontier figures out what it's going to do. Also these things do take a long time to gestate.
And I wouldn't give guidance that we expect more partnerships to happen if we didn't have things that we were talking about and doing. And if you think about the 10,000,000 plus business copper lines in the U. S. And all need to be replaced over the next 3 or 4 years, that's a big nut to go crack. I read just recently where AT and T in a conference call or something says they're going to completely sunset all their copper lines now by 2029.
That's not a lot of time. So we think we've got I think we're winning the big ones. And with that, we're demonstrating we can win substantially here with these partners. So that's maybe more than what you just asked, but that's the way I see it in the bigger context.
Eric Martinuzzi, Analyst, Lake Street Capital Markets: Yes, it is I appreciate the added steps and certainly want to congratulate you on that win with the national top tier cable company as well as the good results for the quarter and the outlook.
Eric Stange, CEO, Ooma: Thank you.
Conference Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Patrick Walravens with Citizens JMP. Your line is open.
Eric Martinuzzi, Analyst, Lake Street Capital Markets: Hi. Thank you for taking my question. This is Nick on for Pat. Eric, what does the macro environment look like in regards to customer behavior? And are there any implications post election?
Eric Stange, CEO, Ooma: That's a good question. So, let me start with one angle and then I'll take a second. Q4, the quarter we're in now, is always the hardest one for us to predict because of the holidays involved during the quarter and small businesses being very busy during this time. That said, we see the market still strong and I don't know that the election has changed things, but certainly things have not gotten worse. Let me put it that way.
We think we're serving very unique markets with air dial and with 2,600 Hertz and those markets are driven off their own dynamics. And then when you look at small business UCaaS with Ooma Office, we feel we've got a unique position at serving small businesses with a type of solution that's different from what others have and easier to adopt and use. And there's a vast small business market out there, 6,000,000 plus small businesses with 1 to 20 employees in North America to go after. So and a good portion of them have yet to move to the cloud. So we just kind of keep doing our thing.
But I'd say if anything the macro environment is similar or maybe a little better since the election, but Q4 always has us a little concerned about how it's going to go and we're careful about forecasting for Q4 because of the holidays.
Shigeru Miyawatsu, CFO, Ooma: Thank you.
Conference Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Arjun Bhatia with William Blair. Your line is open.
Chris, Analyst, William Blair: Hi, this is Chris on for Arjun and thanks for taking my question. I want to echo about some of the earlier congrats on a solid quarter. So it's good to see you're having some record cash flow coming in. And now with the debt completely paid off and behind you, are there any changes in terms of how we should think about capital allocation going forward?
Shigeru Miyawatsu, CFO, Ooma: Yes. I appreciate the question, Chris. And one of the areas that we continue to look at is being opportunistic about buyback. Eric talked about spending $5,000,000 in the last year or so, and we want to be opportunistic in doing so prospectively. And we also are, as we said before, we also look at the customer base acquisitions we talked about in the past.
So to the extent that we are able to put a little more cash on the balance sheet at the same time buying buyback the stock, it just gives us more resource to do so when we want to do so at the right price. And I think the other one is we do think we're going to buy more a little more inventory going forward. It's obvious that when you look at our cash flow that we benefited from. Team did a great job of reducing inventory over the last 18 months and that gave us a good cash flow from operations. And we at some point soon, we need to build another batch of the bio dollar inventory.
We talked about exciting opportunities for residential and so forth. So that's going to be another use of cash that we see to grow our business.
Chris, Analyst, William Blair: Got it. Thank you. That's all very helpful color. And then one other question. In terms of the IWGC churn, so that largely being behind us, at least what you had anticipated throughout this year kind of going into the Q4, do you expect to see NRR inflect up in the back half of fiscal 'twenty six back to sort of the 100 level or above?
Shigeru Miyawatsu, CFO, Ooma: Yes. It's we're not ready to talk about, Chris, the question around I think you're asking, do we see an increase in the users for IWG coming back in the second half. I think that's what you're asking, correct?
Mike Latimore, Analyst, Northland Capital Markets: Next (LON:NXT) year? I was just
Chris, Analyst, William Blair: thinking about net retention. I think we saw a kind of pickup last quarter when you had lighter than expected seat churn from IWG. And so I was just wondering, as we move past the anticipated churn, if you were expecting to see or as we lap the churn that we saw this year, if you would expect net retention to inflect sort of back to that 100% level or
Shigeru Miyawatsu, CFO, Ooma: I see, I see. You're asking about the retention rate. Yes, thank you for clarification. Yes. So I think in Q4, given the expected churn that I described, it may have a little impact from where we are at 99% we just reported.
And I think as we get into next year, we hope to see the stabilization there on retention rate. But in any case, I think there's a good momentum in Aerodial and the other areas too to offset that retention rate in good ways too. So I think it's going to stabilize in the 98%, 99% range in the short term.
Chris, Analyst, William Blair: Great. Thanks for taking my questions.
Conference Operator: Thank you. Please standby for our next question. Our next question comes from the line of Matthew Harrigan with The Benchmark Company. Your line is open.
Matthew Harrigan, Analyst, The Benchmark Company: Thank you. As far as the 2 national cable companies, so I'll refer to as Thing 1 or Thing 2, I'm not sure which one it is, but I have a suspicion. But as you know, they pretty much do everything in tandem in terms of the technology roadmap and the product bouquet. I don't know whether you've ever been to the SCTE Cable Engineering Show, but it's pretty much a bit of a me too phenomenon when they talk about their technology strategies. Are you already in discussions with whichever one you didn't do an arrangement with?
And I assume at the very least it would accelerate the RFP process given the reciprocal confidence that you would have in each other's due diligence process. And then secondly, I think on the last call you expressed fair confidence on double digit EBITDA growth over the next couple of years. Are these deals kind of incremental to that or does it was already wired into a certain extent? And I'll follow everyone else congratulating you on all those developments. Thanks.
Eric Stange, CEO, Ooma: Yes. That's a good the first part of the question, that's a good question, but I can't really comment on who we're talking to or not about what. But I can say it's a long list and it's keeping us quite busy. And it's the price increases we've seen on copper lines of late and the continued announcements about shutting them down, about places where they are getting shut down are just really fueling the market and the momentum I talked about. So we think we have the best solution in the space.
We could go through wire again, I won't, but and I think some of the wins we've had helped demonstrate that. We are going to drive meaningful increase in EBITDA going forward whatever happens with on the partnership front. The partnerships can help us scale faster and get bigger faster, which we think they will. That will be additive to our plans already on EBITDA. I kind of said it earlier in a lot of words, but we have a lot of gross profit dollars as a company and we need to leverage that into more bottom line as we go forward.
And fortunately, we've done the building to be in a position now to do that.
Matthew Harrigan, Analyst, The Benchmark Company: And presumably, you're looking hard at Europe on Aerodial as well even though North America is the first priority?
Eric Stange, CEO, Ooma: Yes. We are mindful of the potential for Aerodial in Europe and what the product would need to do differently in Europe and things like that. We don't have anything to announce on that front, but yes, this is an application that could go beyond North America.
Matthew Harrigan, Analyst, The Benchmark Company: But you'd have to do some re tinkering on account of some of the electrical regulations over there presumably?
Eric Stange, CEO, Ooma: The product would have to be a little different. There'd be a different modem in it, different bands, but that's all stuff that, we've been thinking about for a while.
Matthew Harrigan, Analyst, The Benchmark Company: Thanks, Eric. Happy holidays.
Eric Stange, CEO, Ooma: Thank you. You too.
Conference Operator: Thank you. Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners (NYSE:GLP). Your line is open.
Brian Kinstlinger, Analyst, Alliance Global Partners: Hey, great. Thanks so much for taking my question. I know it's hard to predict, Eric. In terms of Aerodial, you've announced several partners that sound very bullish. They own their own copper line, so they should be motivated.
It even sounds like they're trying to move quickly in the Q1 of 1 of them. And then you talked about the recent press in the market heating up. So how should investors think about what this means in fiscal 'twenty six?
Eric Martinuzzi, Analyst, Lake Street Capital Markets: Is it in terms
Brian Kinstlinger, Analyst, Alliance Global Partners: of bookings, revenue, some measure of progress? I guess, when do you think Aerodyne will be more impactful catalyst to the P and L?
Eric Stange, CEO, Ooma: That's a fair question, Brian. And I think we'll know a lot more when we give annual guidance in early March next year, because some of these partnerships I've been talking about the last two quarters will have a lot more time under them and we'll be seeing what rate they're moving at. The market's there and the market's going to happen. And so I don't see a reason why we aren't going to play well in it or do well with it. But there is a ramp up time to all of this.
When these partners signs with us, they're going to be reselling the solution under their name, with their billing. And so there's coordination work to be done. There's sales force training to be done. Customers take time. They do proof of concepts, then they maybe roll out at a pace that works for them and the bigger the customer, the longer it takes to get it all rolled out.
So that's certainly true. But I think when we get to giving guidance in March, we'll be able to give you a much firmer picture on how we think that'll work out next year and what to expect when. I'm just not prepared to do it right now.
Brian Kinstlinger, Analyst, Alliance Global Partners: Yes. But given your answer to the ramp, it's not going to be the first half of fiscal 'twenty six, it's more likely to be the second half. Is that right?
Eric Stange, CEO, Ooma: It depends on what you mean by ramp. It depends on what you mean by ramp. I mean, this top tier national cable company wants to launch in Q1 next year. And I don't know what they have pent up for demand, but we'll see. We'll see.
We'll take it step by step and obviously tell you everything we know as we know it.
Brian Kinstlinger, Analyst, Alliance Global Partners: I'm sure we've asked this in the past, but for 100 lines on the enterprise and for 10,000 lines on residential, what's the market opportunity for air dial on a partner like that?
Eric Stange, CEO, Ooma: You're talking about the 2nd large partner
Shigeru Miyawatsu, CFO, Ooma: I spoke about. Right.
Matt Robison, Director of IR and Corporate Development, Ooma: I think
Shigeru Miyawatsu, CFO, Ooma: it's a big
Analyst: 8th bird.
Eric Stange, CEO, Ooma: Yes, fair enough. We also, by the way, won some smaller partners that don't even take time to mention here. So if a customer has that kind of opportunity, call it 100,000 lines in business, 10,000 residential, every one of them in theory is a potential opportunity because every one of those needs to be addressed. In some cases, customers may just do without the line or their equipment that works with it may get upgraded to a new solution. But when we look at numbers like that, we think a significant majority will ultimately convert to Aerodial or to TELO.
And so, that's the way we see it. It could take 3 or 4 years to get all of them converted, but that's okay. We're 20 plus partners now. And if we keep adding them at the rate we're adding them, that kind of timing works fine. So, but yes, that's how we see it.
Brian Kinstlinger, Analyst, Alliance Global Partners: But 100,000 lines equates if they all converted, there's no loss of lines, for example, 100,000 lines on a rough basis adds what kind of revenue?
Eric Stange, CEO, Ooma: Well, now I have to be careful. We suggest to you as investors to model, air dial at about $300 in revenue a year to us in recurring revenue. That's about $25 a month. So, you can multiply that out. We can't I can't share what the pricing is for that partner or other partners.
And by the way, the partner pricing can vary a little bit depending on whether we're providing the cellular connection or the partners doing it. But the margins are strong regardless. And as I said, we think a majority to a significant majority of these lines when we give these numbers are ultimately going to convert for us.
Brian Kinstlinger, Analyst, Alliance Global Partners: Great. Thank you.
Eric Stange, CEO, Ooma: You bet.
Conference Operator: Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to management for closing remarks.
Eric Stange, CEO, Ooma: Well, we appreciate everyone's attendance today. Thank you. We'll keep working hard here and look forward to the next time we can talk. And if not before the holidays, happy holidays to everyone. Thank you.
Bye bye.
Conference Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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