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Edited Transcript of OOMA.N earnings conference call or presentation 30-Nov-22 10:00pm GMT

Q3 2023 Ooma Inc Earnings Call PALO ALTO Dec 1, 2022 (Thomson StreetEvents) -- Edited Transcript of Ooma Inc earnings conference call or presentation Wednesday, November 30, 2022 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Eric B. Stang Ooma, Inc. - President, CEO & Chairman * Matthew Sewell Robison Ooma, Inc. - Director of IR & Corporate Development * Shigeyuki Hamamatsu Ooma, Inc. - VP, CFO & Treasurer ================================================================================ Conference Call Participants ================================================================================ * Joseph P. Goodwin JMP Securities LLC, Research Division - Director & Equity Research Analyst * Matthew Alan Stotler William Blair & Company L.L.C., Research Division - Analyst * Matthew Joseph Harrigan The Benchmark Company, LLC, Research Division - Senior Equity Analyst * Michael James Latimore Northland Capital Markets, Research Division - MD & Senior Research Analyst * Michael Joshua Nichols B. Riley Securities, Inc., Research Division - Senior Analyst of Discovery Group ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Hello, and welcome, everyone, to the Ooma Third Quarter Fiscal Year 2023 Financial Results Call. Today's call is being recorded. (Operator Instructions) Thank you. And I would now like to turn the conference over to Mr. Robison. Please go ahead. -------------------------------------------------------------------------------- Matthew Sewell Robison, Ooma, Inc. - Director of IR & Corporate Development [2] -------------------------------------------------------------------------------- Thank you, Savannah. Good day, everyone, and welcome to the Third Quarter Fiscal Year 2023 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 third quarter fiscal year 2023 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 at least 1 year. A telephonic replay will also be available for a week starting this evening, about 8:00 p.m. Eastern Time. Dialing information for it is included in today's press release. 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 fiscal 2023 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 Results page of the Financial Info 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. -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [3] -------------------------------------------------------------------------------- Thank you, Matt. Hi, everyone. Welcome to Ooma's Q3 Fiscal Year 2023 Earnings Call. Thank you for joining us. It's my pleasure to talk with you today about our excellent results for the Q3 quarter just ended and the many growth initiatives we have underway for Q4 and next year. I'm delighted to report for Q3 FY '23 that Ooma outperformed on both the top line and bottom line. Q3 revenue of $56.7 million was up $4 million sequentially and up $7.5 million year-over-year through a combination of growth across all parts of our business and the acquisition of OnSIP, which we announced last quarter. Similarly, non-GAAP net income of $3.5 million was up over previous periods, in line with our plan announced last quarter to trim spending modestly, bolster cash flow from operations and position ourselves better to take advantage of additional inorganic growth opportunities in the future should they come along. All in, Q3 was an excellent quarter. Turning now to Ooma Office, which, of course, is our solution for serving small- to medium-sized businesses. We announced during Q3 the addition of 5 new features to our top service tier plan, the Pro Plus tier. These added features bring even more sophisticated capabilities to small to medium businesses in an intuitive and easy-to-use way and include enhancements to improve simple call center activities and integration with Microsoft Dynamics 365. These new features represent one step in an ongoing effort we have underway over the next several quarters to add new features to the Pro Plus service tier, allowing us to serve even larger-sized businesses with Ooma Office and continue to raise our revenue per user. I'm happy to report that during Q3, 50% of our new Office users adopted a premium service tier, either Pro or Pro Plus. And then about 10% of the users who did select a premium tier chose our highest tier, Pro Plus. We believe our strategy to provide even more advanced features for small to medium businesses in an easy and intuitive way is working, and we are excited about our plans for Q4 and next year. Regarding Ooma Enterprise, which, of course, is our offering for serving larger-sized businesses that need extensive and customized solutions, we continued to make good progress in our targeted verticals. One such vertical is hospitality, where we added more than 40 new properties in the quarter, up from about 25 the quarter before and about 15 the quarter before that. To further support growth, we are developing relationships with larger hotel groups as part of our strategy to continue to expand in this vertical. We believe our strategy with Ooma Enterprise to target customers who need flexible solutions is finding traction in the market. Now in regard to international expansion with our largest customer, we continued to execute well in Q3. I'm pleased to report we now serve more than 50,000 users with this customer. We have achieved this one quarter ahead of the plan we set at the start of this year. Our outlook for growth in Q4 remains robust but lower than in Q3, given the holiday period in Q4. Looking out to next year, we believe at this time that Q1 will line up to be the highest growth quarter so far with this customer and that we will continue significant growth in users throughout next year. We are thrilled to enable a unique solution for this customer and are excited about planning for rollout to new regions next year beyond North America and Europe. We discussed at length on our last conference call that our acquisition of OnSIP affords us an additional opportunity for profitable growth. As a reminder, OnSIP operates its own internally developed UCaaS platform that is used today by approximately 5,000 customers comprising approximately 50,000 users. The short-term goals we laid out last quarter for OnSIP were to maintain low churn, integrate the team, drive cost synergies at the gross margin line and make the acquisition accretive in this Q4. I'm pleased to report that we are ahead on each of these goals and that OnSIP turned EBITDA accretive in Q3, 1 quarter early. We're very appreciative of the hard work that both the Ooma team and the OnSIP team have put into making this acquisition a success. As you know, in addition to our strategic efforts to grow Ooma Office and Ooma Enterprise, integrate OnSIP and expand internationally, we are heavily engaged in capturing the large opportunity to replace the sunsetting of copper lines with our new solution, AirDial. We continued to make great progress with AirDial in Q3. As was the case in Q2, AirDial orders outpaced installations as customers require time to test AirDial and to plan equipment installation across multiple sites. Our largest AirDial order in Q3 was for 300 lines to an organization with a large number of locations. As anticipated, AirDial was also opening up new agent relationships, and we were able to add more agents in Q3 than in previous quarters. One particularly exciting development is T-Mobile for Business began reselling AirDial in Q3. Based on the progress we've made over the last 3 months, we are excited about the potential of this partnership and anticipate that T-Mobile will become a significant reseller of AirDial. One particular benefit of our T-Mobile partnership is that T-Mobile opens up access for AirDial to government entities that procure through special purchasing vehicles. This can be essential in selling to state, local and educational entities. Including T-Mobile, we now have 6 strategic partners signed up or already reselling AirDial. Looking forward, we are in active discussions with several other potential resale partners, some of whom are national in scope. Finally, regarding AirDial, it was exciting in Q3 to win several awards. In August, we announced that AirDial won Best Endpoint Product for 2022 in the prestigious UC awards from the publication UC Today. And in November, we announced that TMC named Ooma AirDial as a 2022 TMC Labs Internet Telephony Innovation Award winner. There is growing awareness of the sunsetting of copper lines, and we are committed to building recognition of AirDial, which we believe is the best solution in the market today for serving elevator, gate, pool and door phones, fire and burglar alarm panels and other devices that require an analog line connection. I'm also excited to report that Ooma Business was named a UCaaS leader in Frost & Sullivan's October Frost Radar report. The report states that through innovation, organic growth and strategic acquisitions, Ooma has quickly earned a top spot in the North American hosted IP telephony and unified communications market. And the report goes on to say that Ooma's dedication to removing the complexity of purchasing and using business phone service makes the company particularly well positioned to capitalize on the rise in hybrid work. I'm very happy for the entire Ooma team to see Frost & Sullivan recognize our efforts. Switching now to the residential front. We continued to drive modest growth with subscription and service revenues up 2% year-over-year, in line with our residential strategy. Our sales made in conjunction with T-Mobile Home Internet were approximately the same as in Q2, and both we and T-Mobile continue to look for ways to increase the visibility of the Ooma offering for T-Mobile customers. Overall, for Q4, we remain excited about our many growth initiatives. Unlike the actions taken by some of our competitors, we are currently not cutting back on key investments, and we're currently not planning any personnel layoffs. As we've previously said, in these times, we do believe that customers are sometimes taking longer to make a decision and are sometimes being more careful in what they buy. But we also feel we have leading solutions for the marketplace, and there is significant demand for improved communication, especially at the price points we can offer. We're cautious about our outlook, most of all for the timing of AirDial installations and revenue, given that AirDial is a new product and market segment for us. But overall for our business, we continue to see significant opportunity and to execute our strategy to drive growth and profitability. 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. Shig? -------------------------------------------------------------------------------- Shigeyuki Hamamatsu, Ooma, Inc. - VP, CFO & Treasurer [4] -------------------------------------------------------------------------------- Thank you, Eric, and good afternoon, everyone. I'm going to review our third quarter financial results and then provide our outlook for the fourth quarter and full year fiscal 2023. We delivered another strong quarter with a total revenue of $56.7 million, exceeding our guidance range of $56 million to $56.5 million. On a year-over-year basis, total revenue grew 15% in the third quarter, driven by the strength of Ooma Business, which included a full quarter contribution from OnSIP for the first time. In the third quarter, business subscription and services revenue accounted for 55% of total subscription and services revenue as compared to 49% in the prior year quarter. Q3 product and other revenue came in at $4.9 million as compared to $4.5 million in the prior year quarter, with accessory sales contributing to growth. On the profitability front, the third quarter non-GAAP net income was $3.5 million, above our guidance range of $2.7 million to $3.2 million and was the highest in the company's history. The team did an excellent job in balancing executing -- execution of our growth initiatives and managing expenses during the quarter. Now some details on our Q3 revenue. Ooma Business subscription and services revenue grew 30% year-over-year in Q3, driven by user growth and the full quarter contribution from OnSIP, which performed well with solid customer retention. Excluding the effect of OnSIP revenue contribution, Ooma Business subscription and services revenue grew 16% year-over-year. On the residential side, subscription and services revenue grew 2% year-over-year. For the third quarter, total subscription and services revenue was $51.7 million or 91% of total revenue compared to 91% in the prior year quarter. Now some details on our key customer metrics. We ended our third quarter with 1,202,000 core users, up from 1,181,000 core users at the end of the second quarter. As Eric mentioned earlier, we saw another quarter of robust user growth from our largest customer as they continued to deploy our solution. At the end of the third quarter, we had 417,000 business users or 35% of our total core users, an increase of 23,000 from Q2. Our blended average monthly subscription and services revenue per core user, or ARPU, increased 9% year-over-year to $14.38, up from $13.24 in the prior year quarter, driven by an increase in mix of business users, including higher ARPU Office Pro and Pro Plus users as well as inclusion of OnSIP users into this metric for the first time this quarter. During the third quarter, we continued to see a healthy Office Pro and Pro Plus take rate with 50% of new office users opting for those higher tier services, which was up from 48% in the prior year quarter. Overall, 25% of our business users have now subscribed to our Pro or Pro Plus tier. Our annual exit recurring revenue, which included OnSIP in Q3, grew to $207.4 million and was up 19% year-over-year. Our net dollar subscription retention rate for the quarter improved to 96% as compared to 94% in the second quarter. Now some details on our gross margin. Our subscription and services gross margin for the third quarter was 73%, which was consistent with 73% in the prior year. As expected, subscription and services gross margin dipped slightly from the second quarter as we had a full quarter impact of OnSIP gross margin, which is running lower relative to Ooma's subscription gross margin of 74% when OnSIP is excluded. Good news is that OnSIP gross margins is improving, as expected, through our integration effort to leverage Ooma's infrastructure, and we continue to believe it can reach 70-plus percent range within the next quarter or 2. Product and other gross margin for the third quarter was negative 35% as compared to negative 46% for the same period last year. The third quarter product gross margin was favorably impacted by sales of accessories that drove our product revenue higher in the quarter. On an overall basis, total gross margin for Q3 was 64% as compared to 62% in the prior year quarter. The higher total gross margin in Q3 this year was primarily due to the improvement in product gross margin. And now some detail on operating expenses. Total operating expenses for the third quarter were $32.8 million, up $5.5 million or 20% from the same period last year. Excluding the full quarter impact of OnSIP, the total operating expenses increased $3.8 million or 14% from the same period last year. Sales and marketing expenses for the third quarter were $16.9 million or 30% of total revenue, up 17% year-over-year, driven by higher marketing and channel development activity for Ooma Business, but sequentially lower on a percentage revenue basis, in line with our increasing focus on profitability and cash flow we discussed on our last earnings call. Research and development expenses were $11 million or 19% of total revenue, up 31% on a year-over-year basis from $8.4 million, driven by investments in new features for both Ooma Office and Ooma Enterprise as well as new products such as AirDial. A portion of the year-over-year increase in R&D expense was also a full quarter -- due to a full quarter impact of OnSIP team members who joined us at the end of Q2. G&A expenses were $4.9 million or 9% of total revenue for the third quarter compared to $4.5 million for the prior year quarter. The year-over-year increase in G&A expenses was primarily due to an increase in personnel costs and a full quarter impact of OnSIP. Non-GAAP net income for the third quarter was $3.5 million or a diluted earnings per share of $0.14 as compared to $0.13 in the prior year quarter. In addition to stock-based compensation and intangible amortization expenses, non-GAAP net income for the third quarter excludes approximately $0.6 million of acquisition-related costs as well as $1.4 million of facility consolidation costs incurred in connection with the OnSIP transaction. Adjusted EBITDA for the quarter was $4.5 million, a record for the company, or 8% of total revenue as compared to $4 million for the prior year quarter. We ended the quarter with total cash and investments of $24.5 million. Cash generated from operations for the third quarter was strong at $2.5 million compared to $1.9 million in the same period last year. On the head count front, we ended the quarter with 1,082 employees and contractors. Now I'll provide guidance for the fourth quarter and full year 2023. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization of intangibles and other acquisition-related costs. We expect total revenue for the fourth quarter of fiscal 2023 to be in the range of $56.3 million to $56.6 million, which includes $3.5 million to $3.8 million of product revenue. Product revenue for the fourth quarter is expected to be lower compared to the 2 previous quarters as we do not expect certain accessory sales we saw in those quarters to recur. We expect fourth quarter net income to be in the range of $3.5 million to $3.8 million. Non-GAAP diluted EPS is expected to be between $0.14 to $0.15. We have assumed 25.7 million weighted average diluted shares outstanding for the fourth quarter. For full year fiscal 2023, we expect total revenue to be in the range of $216 million to $216.3 million, which is within our previously issued guidance range of $215.5 million to $218.5 million. The adjustment to the high end of our guidance range primarily reflects our current expectation for the timing of AirDial revenue ramp, which is slower than we originally anticipated in the near term for the reasons I stated earlier. Despite the pace of revenue ramp in the near term, we remain very excited about our growth prospects for AirDial as its customer demand and engagement as well as channel development activity remain very strong. In terms of revenue mix for the year, we expect 92% of total revenue to come from subscription and services revenue and the remaining 8% from products and other revenue. We expect non-GAAP net income for fiscal 2023 to be in the range of $13 million to $13.3 million. Based on the midpoint of the updated non-GAAP net income guidance range, we estimate our adjusted EBITDA for the year to be approximately $17.1 million or 8% of revenue for fiscal 2023, which is an increase from our prior guidance of $15.6 million or 7% of revenue. The updated profitability guidance reflects our continued focus on cash generation and making progress towards our long-term profitability model. We expect non-GAAP diluted EPS for fiscal 2023 to be in the range of $0.51 to $0.53. We have assumed approximately 25.3 million weighted average diluted shares outstanding for fiscal 2023. In summary, we are pleased with our solid execution in Q3 with a record quarterly revenue and non-GAAP profitability, along with strong cash generation. We're excited about growth opportunities in front of us and remain focused on executing our long-term strategy to achieve profitable growth. I will now pass it back to Eric for some closing remarks. Eric? -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [5] -------------------------------------------------------------------------------- Thanks, Shig. As I said at the outset, we believe Q3 was an excellent quarter for Ooma. We now have over 1.2 million core users, and our Q3 annual exit recurring revenue of $207 million is up 19% year-over-year. We're proud of this progress and feel our strategy is working. As we look ahead, we believe our investments in feature enhancements for Ooma Office, new verticals and sales channel expansion for Ooma Enterprise, international expansion and AirDial will build Ooma into a larger and more profitable company. Thank you, everyone. We'll now take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question will come from Matt Stotler with William Blair. -------------------------------------------------------------------------------- Matthew Alan Stotler, William Blair & Company L.L.C., Research Division - Analyst [2] -------------------------------------------------------------------------------- Maybe just one on the updated full year guide. You obviously mentioned AirDial on the revenue side, a little bit of narrowing towards the lower end of the guide. Just double-click on kind of the breadth of what you're seeing in the macro, what's impacting AirDial if you're continuing to see kind of what you saw last quarter in terms of lengthening of some sales cycles and things like that? It would be great to kind of double-click on what's included in that Q4 revenue guidance. -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [3] -------------------------------------------------------------------------------- Sure. Let me start there, and we'll see if Shig wants to add. We've only really been selling AirDial for 2 quarters now, and we're very excited about how it's developing. We have learned that just getting orders and wins doesn't lead to revenue until we can get these things installed and working, and customers do have to test them and get comfortable with them and then plan installation. And so our revenue ramp is not consistent with our sales or opportunity ramp. I can tell you that the opportunity that we're going after, what's in Salesforce.com, for instance, deals that we are -- that we can see, grew markedly in Q3 versus Q2. We believe that went up something like 40% in Q3 from where it was in Q2, and we're excited about the size of that opportunity and what we're trying to do going forward. But it is going to take some time for AirDial to drive ramp in the revenue. And we're being a little more cautious about that. We're also being a little cautious about Q4 in general. With the Thanksgiving and the Christmas holidays, it's not quite as -- there are some things that can get in the way of particularly growing our business sales in the quarter, particularly since a lot of our business is done through inside sales, selling to smaller businesses that can be very busy this time of year. So we're just mindful of that a little bit. And then I think in my opening remarks, I did talk a little bit about how we see the market generally. We're still seeing the opportunity for significant growth and believe that with our solutions, we can power it through any minor market weakness that we see. Shig pointed out that we have about $1 million less of product revenue in Q4. And AirDial particularly affects that number because if you can -- the boxes sell for hundreds of dollars each. And the more you can install and the faster you can install, the more you can drive that. We were not able to install all the opportunity we had in Q3. We're still building up our capabilities to help our customers do that. That's also part of what's going on here. But no, we're excited about our outlook and see if Shig wants to add anything to what I said. -------------------------------------------------------------------------------- Shigeyuki Hamamatsu, Ooma, Inc. - VP, CFO & Treasurer [4] -------------------------------------------------------------------------------- No. Eric, I think you summed it up pretty well in that despite just the near-term pace of the installation revenue ramp, as I said in the script, we're seeing the increase in customer engagement. And I think you saw that, our press release on T-Mobile relationship on AirDial, we're very excited about it. So I think it's more of a timing issue near term as customer see our product, which is a great product. And so we're still excited about it despite the Q4 guide. -------------------------------------------------------------------------------- Matthew Alan Stotler, William Blair & Company L.L.C., Research Division - Analyst [5] -------------------------------------------------------------------------------- Yes. That's very helpful color. And then maybe just one follow-up on the OnSIP integration here. I guess, first, could you just clarify the revenue contribution from OnSIP in the quarter? And then maybe just give -- double-click on the -- what you're seeing in terms of progress in integration, talent retention and kind of the expectation for potential additional synergies going forward. -------------------------------------------------------------------------------- Shigeyuki Hamamatsu, Ooma, Inc. - VP, CFO & Treasurer [6] -------------------------------------------------------------------------------- Yes. I think if you sort of follow the -- what I said on the organic versus inorganic growth, I think you back into probably about $3 million per quarter kind of run rate on the OnSIP. And as we acquired OnSIP last quarter, we had a pretty conservative assumption on the churn. I think the team did very well postacquisition retaining customers, and we're pleased to see that. So I think the $3 million a quarter run rate is what we see. And from a P&L contribution standpoint overall, like I said, they're making a great gross margin contribution, making improvements. I see them getting closer to Ooma margin in the next few quarters, yes. So -- and made one quarter early on the EBITDA contribution. And so that's what I would like to say. I'm not sure, Eric, if you want to add anything from the sales and marketing standpoint. But... -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [7] -------------------------------------------------------------------------------- Just one thing. We knew when we acquired OnSIP, we were getting a great team. The folks running OnSIP really know their stuff, and they've become really valuable members of Ooma just in the short time they've been with the company. And we're not seeing any turnover issues. In fact, we're seeing employees excited to be part of Ooma. And together, we're going to grow the company. And so I think it's going extremely well. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question will come from Mike Latimore with Northland Capital Markets. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [9] -------------------------------------------------------------------------------- Yes. Congrats on the quarter there. See, the retention rate improved sequentially. Is that because of the acquisition? Or is that organic or both? -------------------------------------------------------------------------------- Shigeyuki Hamamatsu, Ooma, Inc. - VP, CFO & Treasurer [10] -------------------------------------------------------------------------------- It's a little bit of both. But certainly, I think I explained this last time, Mike, and I'll explain it again. But our retention rate is dependent upon year-over-year growth in ARPU and offset by the churn. And churn was very stable this quarter. We did not see any material change to the trend that we saw first half of this year. And we saw better year-over-year increase in ARPU growth. I think I said 9% year-over-year. Part -- a good chunk of that, obviously, was the OnSIP coming in to the equation for the first time this quarter. And so I think we said last time, without being too specific, that OnSIP's average pricing, seat pricing is a little bit below Ooma's average business pricing, but certainly above the overall blended ARPU of 13 -- high 13s to 14s. So that was having a good effect on the metric. And so maybe that was the biggest piece, yes. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [11] -------------------------------------------------------------------------------- Yes. Okay. No, that's a good clarification on ARPU there. On AirDial, how many units have you manufactured kind of year-to-date, let's say? And then I know you want to expand your installation capabilities. But what is the extent of the installation capabilities? Like how many can you sort of effectively install if you wanted to? -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [12] -------------------------------------------------------------------------------- Yes. So we've -- yes, we've built the first 10,000 units that we said we were going to build at the start of Q1 or Q2. And most of those we have here, some we don't have in inventory yet. That's not holding us back. What's -- the bigger challenge is getting customers to roll out. I announced, for instance, our largest AirDial sale in Q3 was a customer who needs 300 lines. But I don't think any of them are installed yet. And that's going to be a real process we plan with the customer. And the customer has to decide how they want to do it. They might have their own people to do it. They might want to use our third-party installers. They might want a combination of the two. It usually starts, frankly, with a site survey to figure out where the lines even coming into the location are located and what you're going to need to do to make the swap. So it's just a process. Now customers are very motivated. Because the FCC has removed its constraints on the pricing of analog copper lines to businesses, prices have gone up markedly. We've even seen them over $1,000 a month, believe it or not. And so customers are starting to become really aware that they're paying too much for these. And they do want to make the change, and it's economic to make the change. But spooling up the resources and the effort to do it, it just takes time. So I think it's a building wave for us. But we're not intending to disclose exact numbers of what we do each quarter for just competitive reasons, but the numbers do show up in our overall user growth metrics. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [13] -------------------------------------------------------------------------------- Got it. I guess just the last question, how much of the customer process ties to ability to install versus their discovering, well, we need a different feature and then it leads to more -- almost an R&D effort? Is it more kind of purely installation? Or is there some additional feature work that pops up here and there? -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [14] -------------------------------------------------------------------------------- For most applications, it's purely an installation. We -- where that can vary a little bit is with certain older pieces of equipment, particularly older alarm panels, which are supposed to work to a certain standard but you find have their own vagaries. And when we get a situation like that, we do have to do some diagnosing. But fortunately, the way our product works, it's easy for us to customize it, to download new firmware into the box. We're managing all these units remotely. And once we've done that alarm panel, we're set for any other one we run into going forward. So -- but there has been some of that, certainly. There have been some -- we're only 2 quarters really into this new product, and we are learning the wide variety of equipment that's out there. And -- but that's not the driving issue. We have had some customers who want to install our unit outside, and that has been an issue for us. We're not -- we did not design the unit for outdoor installation, but that's rare as well. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question will come from Josh Nichols with B. Riley. -------------------------------------------------------------------------------- Michael Joshua Nichols, B. Riley Securities, Inc., Research Division - Senior Analyst of Discovery Group [16] -------------------------------------------------------------------------------- I wanted to dial in a little bit more on the international opportunity and the key customer expansion. You've already kind of doubled the seats, right? You're at 50,000, I think, now and expect some good additions in the fourth quarter as well. Could you kind of talk about what the opportunity is for next year with that customer? Could they add another 25,000-plus seats? And then more broadly, you previously talked about expanding internationally beyond that key customer. Is that still in the works or an opportunity on that thing? -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [17] -------------------------------------------------------------------------------- Sure. Happy to double-click on that. Yes, this customer has a lot of scope for growth with us. And it's just like we were talking about for AirDial a minute ago, just the process of conversion and switching things over onto our platform, which is what they want to do worldwide over time. It does take effort. But I can tell you that as we sit here today, there's a desire on the customer's part to move faster, and we are laying plans to go faster next year than we went this year. And that means moving to multiple regions beyond Europe. We divide the world up into a number of regions based on how we would serve it. But yes, there's a lot of desire for us to add -- if plans come together, and we'll talk about more of this on our next conference call when we give guidance for next year, but the plans as we see them today, we will be looking at more user growth next year than we've achieved this year. And this year has been a strong year. So we're pretty excited about that. And I will say that with all that effort with that customer, I don't know if it will be part of our plan next year to try to sell to users beyond this customer in these regions. That takes a level of additional level of investment and particularly sales and marketing efforts that we'll have to balance with what we're already doing here in North America and what we're doing with this customer and what we're now doing with AirDial. But -- so that may not be part of our outlook next year. What I would like to see part of our outlook next year, but obviously, we'll have to come together before we can talk about it, is I would like to see us implementing AirDial outside of the United States. I think there are many countries that have the same challenges as we see here with the sunsetting of copper lines. And I do think AirDial could be a great product in several other countries. But again, that's down the road for us at this point in time. So I hope that -- it's a little speculative, what I just told you, and I have to be careful about that. But the one answer I can give is I do expect as of now that our large customer will add more users next year than they have this year. -------------------------------------------------------------------------------- Michael Joshua Nichols, B. Riley Securities, Inc., Research Division - Senior Analyst of Discovery Group [18] -------------------------------------------------------------------------------- And then I just want to touch a little bit -- looking at the fourth quarter guide, you should be north of 8% EBITDA margin, it looks like, or around 8% for the full year. I know there's been an increasing focus on profitability. It looks like cash flow and things have been moving upwards and to the right. As you complete some of these investments that you've made over this past year or so, do you expect that you'd be able to achieve some incremental EBITDA margin expansion next year given that's kind of what is a bigger focus for most of the investor base nowadays? -------------------------------------------------------------------------------- Shigeyuki Hamamatsu, Ooma, Inc. - VP, CFO & Treasurer [19] -------------------------------------------------------------------------------- Yes. Josh, obviously, we are not ready to guide for next year. But I think the -- directionally speaking, we want to start to show some level of additional operating leverage. And so I think we're happy with where we think we're going to land, about 8% for the year this year. And we certainly want to make next few years progress towards our long-term model, EBITDA margin. So I'll just leave it at that and look forward to chatting with you about guidance next time we talk. -------------------------------------------------------------------------------- Michael Joshua Nichols, B. Riley Securities, Inc., Research Division - Senior Analyst of Discovery Group [20] -------------------------------------------------------------------------------- And then last question for me. I guess like it's only been a couple of quarters since you launched AirDial, right? But you do have these new partnerships now. I think T-Mobile represents a pretty sizable opportunity. How long until you get a little bit better visibility into this? Do you think by the time you're reporting fiscal 4Q earnings that you have that pretty dialed in? I'm just -- or are you likely -- it's still too early and you've been taking a pretty conservative stance on this product offering? I'm just thinking about how long it will take till you have a better handle for what this demand could translate to and how long it may take to actually get these units and sale to install. -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [21] -------------------------------------------------------------------------------- Yes. That's a good question. I said one thing in my opening remarks, which I'll highlight again here. We are talking with other potential partners, strategic partners who would resell AirDial. And if some of those partners come to fruition, I think that would be a nice boost for us as well. I think we'll have a lot better visibility the next time we talk because we'll be talking kind of end of February, early March. And we'll have the momentum that comes with starting off the new year already underway. So yes, I'm thinking that, that timing should allow us to be more definite for you. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- (Operator Instructions) Our next question will come from Joe Goodwin with JMP Securities. -------------------------------------------------------------------------------- Joseph P. Goodwin, JMP Securities LLC, Research Division - Director & Equity Research Analyst [23] -------------------------------------------------------------------------------- I guess first on OnSIP, can you talk about any plans that you may have in the works now that you've had the asset for a few months here in actually increasing the average pricing per seat for an OnSIP user? Or if there's plan to maybe lift some of those folks onto a Pro tier or something like that? -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [24] -------------------------------------------------------------------------------- So it's our longer-term plan to bring the OnSIP users over on to the Office platform. But there's no urgency to that really. What matters more is that we do it well and don't cause any issues or challenges for customers. So we're just moving slowly, looking at what we need to do with the Office platform to tick all the boxes for an OnSIP customer. And there is -- are some things that Office already does better than the OnSIP platform. There are some things that the OnSIP platform has that are part of Office's road map that we have not yet implemented, but we were going to do these things anyway as a business. So we've been trying to pull in some of that development effort. So our view right now is that this will be an ongoing process with us -- for us with OnSIP over 12 months or longer. As long as an OnSIP customer is happy with the features they've got on OnSIP, we don't really need to do much for them. When a customer wants to enable more features that maybe are in Office that aren't yet in OnSIP, that's when we would want to move people over, particularly because we don't want to put development effort into the OnSIP platform. But right now, customers are very happy. They've got a good relationship with OnSIP. OnSIP is very good at customer support. And we're going to treat the -- it's not that long a list of customers. It's 5,000 total, but there's an 80-20 on this a little bit in terms of the largest ones. And we're going to approach those kind of one by one and see how to handle them. So it's a long way of saying we think we'll be operating the OnSIP platform for the foreseeable future as we go through this process in a careful way. -------------------------------------------------------------------------------- Joseph P. Goodwin, JMP Securities LLC, Research Division - Director & Equity Research Analyst [25] -------------------------------------------------------------------------------- Got it. Okay. Great. And then just last question for me. So you added around $20 million in ARR sequentially and -- of which there's about $12 million coming from OnSIP, so $8 million organic. And that's a pretty good add just looking at the historical ARR adds. Can you just talk about what's driving that incremental organic improvement? Is it all the international expansion with the large customer or any other things you want to call out? -------------------------------------------------------------------------------- Shigeyuki Hamamatsu, Ooma, Inc. - VP, CFO & Treasurer [26] -------------------------------------------------------------------------------- So yes, I mean, it's really the rest of the pieces, really what you're pointing out. International customer user adds, it's been pretty healthy the last 2 quarters, as you've heard. And we continue to add Office users. And as you also heard, again, half of the new customers are -- Office users are taking Premier tier services. So all these are contributing to the other pieces you're pointing out. -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [27] -------------------------------------------------------------------------------- I mean, I think you know, we have several growth vectors as a company. And we're fortunate to have that. And I think we're seeing results in each of them, and that's how we want to accelerate growth as we go forward. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- (Operator Instructions) And we will take our next question from Matt Harrigan with Benchmark. -------------------------------------------------------------------------------- Matthew Joseph Harrigan, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [29] -------------------------------------------------------------------------------- I was just curious on the hospitality side where you are showing nice sequential momentum. What are the prospects for landing a real elephant or even a revived woolly mammoth deal, if you would? I mean, it feels like that's a great vertical for you, and you're relatively nascent on the penetration at this point, to say the least. -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [30] -------------------------------------------------------------------------------- Yes. So the way we see that vertical operating is that even though you can have relationships at a, call it, corporate level with a large provider of hospitality, you still often end up having to sell at the individual property level. It might be that some of these properties that are independently owned. It might just be that every property has a different situation and needs to work under its situation. Now we are -- obviously, our drive there is for Ooma Enterprise, but we are also seeing AirDial need in these locations that are significant as well. So we get a nice combination of opportunity in this vertical now. I'm not sure what you call a woolly mammoth. But we do have hotels, for instance, that are hundreds of rooms that are now running on Ooma, and then we have smaller ones as well. We have ones in very major cities. We have ones in out-of-the-way locations. And you can see by how I talked in my script about how we've increased the number of wins, so to speak, each quarter through this year that it's a focus for us to keep doing that. We'll be -- yes. Let me just say, there are something like 80,000 hotel properties across North America. And then there's other kinds of managed living quarters that you can also look at for these kinds of solutions. So it's a pretty big vertical. And I think that we're starting to get recognized by -- at a more corporate level by some of the larger players in the space. And that's a good step forward for us. And I think that will help with getting us known across the opportunities. And that's our biggest challenge, customers knowing what we can do for them. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- And with no further questions, I'd like to turn the call back over to Eric Stang for closing remarks. -------------------------------------------------------------------------------- Eric B. Stang, Ooma, Inc. - President, CEO & Chairman [32] -------------------------------------------------------------------------------- Thank you. Thanks, everyone, for joining us today. We were excited to have a strong top line and a strong bottom line in Q3. I think we're trying to be cautious for Q4, but we're great to -- we're happy to have taken up the bottom line outlook for Q4. And we look forward to a strong Q4 and then giving you next year's guidance the next time we talk. Thanks for joining us today. Thank you. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- And that will conclude today's conference. Thank you for your participation, and you may now disconnect.