Matthew Robison; Director of IR, Corporate Development; Ooma Inc
Eric Stang; CEO; Ooma Inc
Shigeyuki Hamamatsu; Chief Financial Officer, Senior Vice President; Ooma Inc
Mike Latimore; Analyst; Northland Capital Markets
Erik Suppiger; Analyst; JMP Securitites
Josh Nichols; Analyst; B. Riley Securities
Brian Kinstlinger; Analyst; Alliance Global Partners
Matthew Harrigan; Analyst; The Benchmark Company LLC
Arjun Bhatia; Analyst; William Blair & Company, L.L.C.
Hello, and welcome to Ooma third quarter fiscal year 2024 financial results. (Operator Instructions) I would now like to hand the conference over to Matt Robison, so you may begin.
Thank you, Towanda, and good day, everyone, and welcome to the Fiscal Third Quarter 2020 for earnings, call them. My name is Matt Robison, Ooma's Director of IR and Corporate Development on the call with me today are CEO, Eric Stang, and CFO, Shig Hamamatsu. After the market closed today, Ooma issued its fiscal third quarter 2024 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 one year.
During today's presentation, our executives will make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize, and actual results are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today and those risks more fully described in our filings with the Securities and Exchange Commission. The forward looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements except as required by law.
So please note that other than revenue or as otherwise stated, 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 2024 on a non-GAAP basis. Also, in addition to our press release and eight K filing, the overview page and Events and Presentations page in the Investors section of our website as well as the quarterly results page of the Financial Information section of our website include links to information about costs and expenses not included in our non-GAAP values and key metrics of our core subscription businesses. These are titled Supplemental Financial Disclosure, one and Supplemental Financial Disclosure to 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 the CEO, Eric Stang.
Thank you, Matt. Hi, everyone. Welcome to Ooma's third quarter fiscal year 2024 earnings call. Thanks for joining us. I can report that Q3 was another strong quarter for Ooma. We performed well financially and made a major advance by acquiring 2600Hz during the quarter and look forward to reviewing our progress with you.
Our Q3 results include $59.9 million in revenue, $4 million of non-GAAP net income, and $5 million of EBITDA. Organically for Q3, which is to say, excluding the impact of 2600Hz, we increased our business subscription and services revenue 14% year over year. We held our OpEx spending nearly flat to a year ago, and we grew our EBITDA by 17% versus Q3 last year. Our annual exit recurring revenue, including 2600Hz, is now $225 million. We feel these results demonstrate good progress for the Company and strong performance for the quarter.
During Q3, we continued to pursue the strategies we have outlined throughout this year to expand Ooma's revenues from business customers. Ooma offers our award winning solution for small to medium-sized businesses, added premium features and new integrations. One of our most exciting new integrations with Clio the number one software used in the legal industry. Users of Clio can now integrate their Ooma calling and communications with their Clio experience. This integration is available as part of Ooma's Pro plus service tier and contributes to our long-term strategy of increasing our premium office users and raising our average revenue per user. I'm pleased to report that in Q3, we once again sequentially increased our ARPU from business customers. I'm also pleased to report that 56% of our new office customers were premium users and net premium users now make up 28% of our total office customer base.
What's exciting Q3 to announced, finally, the name of our largest customer international workplace group, or IWG., which is also known by the name Regis. We made the announcement in conjunction with the launch of our services for IWG in Asia. In Q3, we rolled out our platform for the Africa region and started serving IWG. in South Africa. In total, we now serve IWG in 30 countries across five different regions, and we are working with them to expand further, we anticipate slower international expansion in Q4 given the holidays, followed by a pickup in Q1 as we roll out to new countries throughout the first half of next year.
Outside of North America. We also expanded with Ooma Enterprise, which began serving a new customer with locations spread across Australia, Netherlands, Spain and the UK. In addition, of course, to here in the USA. In our targeted hospitality vertical. We once again landed over 50 new hospitality locations, the largest of which being a property with 474 rooms and another being our second airport hotel in general, we believe our strategy in enterprise to focus on select verticals is giving us advantages in the market.
In Q3, we continued to pursue our AirDial strategy aggressively. In particular, we hired additional sales personnel and signed a total of four new AirDial resellers, one of which touched on communications. We announced in a press release these resellers joined a number of others. We are already partnered with for air data, including T-Mobile and more recently, US Cellular. We also announced that Viking electronics, who is a manufacturer of more than 500 security and communications products, including emergency phones, entry systems, elevator phones and campus safety phones began recommending AirDial to its customers and distributors after performing their own extensive testing of AirDial. As we've mentioned, we believe AirDial offers the best solution in the marketplace for replacing increasingly expensive and soon to be decommissioned copper lines that are connected to elevators, fire and alarm panels, older PBX equipment and more. We are thrilled by the validation we are seeing by the many resellers we have signed up for airtime. We are also thrilled to have announced in Q3 that elevator World Magazine, the leading media voice in the vertical transportation industry selected Brumer for the 2023 Ellis' awards in the category of best communication system supplier, honoring the Ooma Eyretel solution for parts replacement. We're not standing still either in our continued improvement of AirDial. Just recently, we announced that AirDial now incorporates numerous patented multipack technology. Multi-pack creates a continuous dual connection between Air dial and the public switch telephone network by transmitting data packets simultaneously through two separate data links. Unlike other approaches where calls are dropped unsalable fail-over where they can, where there can be delays before fail-over occur occurs and where other issues can occur related to the quality of individual transport links, Ooma's multi-pack technology provides seamless backup for customers who enable to Internet connections to their airway device.
Both the multipart provides one more example of how Ooma stands out by providing the full end to end AirDial solution encompassing both cloud and customer premise equipment. While not announced, we also made additional improvements in Q3 to $8 remote device manager or RDM, as we call it RDM gives our AirDial customers the ability to provision, monitor, manage and control all of their devices. From one portal. We view RDM as another key differentiator for Airbus I'm pleased to report that in Q3, we landed what we expect will become our two largest airline customers today. Four of these customers is a large retailer with many individual brands and we've already started rolling out their routes in one brand. The stores on by this customer for we are displacing another parts replacement solution. We expect this rollout is just phase one with this customer. The other customer is a provider in the elevator industry with access to a very large number of opportunities. I'm pleased to report our backlog of potential sales opportunities grew again in Q3, and we have many large opportunities that we are pursuing.
I'd like to turn now to 2600Hz, which is the new business we acquired back in October. As a reminder, 2600Hz provides Open Source who are calling functionality named presume it is being used today by many telecom providers since initially launching pursue over a decade ago, 2600Hz has also expanded to provide its own non open-source suite of pre-built UCaaS, SafePath and call center applications. Telecom providers have the choice of relying solely on open source because you are building applications themselves are contracting with 2600Hz for a more complete solution. For instance, under person today provides hosted cloud private cloud and customer hosted solutions to approximately 130 paying customers who serve hundreds of thousands of end users.
The Company runs data centers in eight locations spread across North America, Europe and Oceania maintains a workforce of about 100 employees and contractors and has revenues of approximately $7 million annually. Three main reasons drove our decision to acquire 2600Hz. We made this acquisition to capitalize on the opportunity we see in the wholesale marketplace to unlock significant operational benefits between Ooma and 2600Hz and to enhance Ooma's strategic position and ability to serve the fundamental needs of large carriers and other partners. It's now been about six weeks since 2600Hz became part of Ooma in that time, we have blended our two teams together rationalized spending in certain areas and established our new combined strategy.
Central to our strategy is to strengthen 2600Hz in the marketplace by leveraging Lumera's application technology, scale and low cost position. And by launching new services, we are now actively working internally to provide 2600Hz customers, telecom services delivered in a seat past business model. We're also working to leverage some of Ooma's key user applications for the benefit of 2600Hz customers, 2600Hz purchased customer base has responded with positive feedback on our acquisition. They are excited about our strategic direction and the intellectual property and resources we bring as a larger scale and more mature organization. Similarly, we already have active conversations underway with a number of possible new customers. These conversations will take time as possible. Customers evaluate, pursue and get to know us but we are optimistic about their potential. Overall. I believe our integration with 2600Hz is going well and we are on track as promised to make the acquisition adjusted EBITDA accretive to Ooma within six months.
Finally, I'm thrilled to mention that the publication you see today recently named the consumer communications solution from 2600Hz as the best white label solution at the procedures. You see Partner Awards 2023 because it was chosen by a panel of 12 leading analysts in the cloud communications industry from a field of four finalists. Of course, we're not surprised since we know because use modern API based architecture, sets it apart in the industry.
With that, I will now turn the call over to Shig, our CFO, to discuss our results and outlook in more detail and then return with some closing remarks.
Thank you, Eric, and good afternoon, everyone. Before I dive into our third quarter financial results, I'd like to quickly recap the financial aspects of the 2600Hz acquisition we completed on October 20, 2023, right before the end of the third quarter. We acquired 2600Hz for approximately $33 million in cash, and there are no other contingency payments for this acquisition.
With regard to funding of cash purchase price, we used approximately $50 million of our cash from balance sheet, and the remaining $80 million came from a new $30 million revolving line of credit from Citizens Bank. 2600Hz is expected to add approximately $7 million in annual recurring revenue to Ooma. The acquisition of 2600Hz is expected to be accretive to adjusted EBITDA within six months and to make increasing contribution to our overall adjusted EBITDA as operational synergies realized in subsequent periods.
Now I'm going to review our third quarter financial results and then provide our outlook for the fourth quarter and full year fiscal 2024.
We delivered another solid quarter with a total revenue of $59.9 million which included $0.23 million of subscription and services revenue from 2600Hz for the last 12 days of the quarter. Excluding 2600Hz's revenue contribution, Q3 revenue came in at $59.6 million at the high end of our guidance range of $59 million to $59.6 million. On a year-over-year basis, total revenue grew 6% in the third quarter, driven by the growth of Ooma business, which accounted for 58% of total subscription and services revenue as compared to 55% in the prior year quarter.
Q3 product and other revenue came in at $4 million as compared to $4.9 million in the prior year. The prior year Q3 product revenue included certain accessory sales that did not recur this year. On the profitability front, the third quarter non-GAAP net income was $4 million, excluding $0.3 million of net loss from 2600Hz the third quarter Non-GAAP net income was $4.3 million, exceeding our guidance range of $3.8 million to $4.1 million and represented 24% increase over $3.5 million in the prior year quarter.
Now some details on our Q3 revenue. Excluding the impact of 2600Hz Ooma Business Subscription and services revenue grew 14% year-over-year in Q3, driven by user growth. On the residential side, subscription and services revenue were flat year-over-year as a reminder, we had a one-time churn event during the first quarter of this fiscal year with a particular customer with an unusual application where we lost approximately 4,000 total users, which continued to impact our year year-over-year comparison in Q3.
For the third quarter, total subscription and services revenue was $55.9 million or 93% of total revenue as compared to $51.7 million or 91% of total revenue in the prior year quarter.
Now some details on our key customer metrics. Please note that the key metrics I'm about to discuss do not include any metrics related to 2600Hz's users. Given the wholesale nature of 2016 efforts as business, we do not intend to blend 2600Hz user metrics into our traditional core user metrics, which will continue to represent the key metrics related to Ooma Business and residential users only.
We ended the third quarter with 1,241,000 core users, up from 1,237,000 core users at the end of the second quarter at the end of the third quarter, we had 475,000 business users or 38% of total core users, an increase of 8,000 from Q2. Our blended average monthly subscription and services revenue per core user or ARPU increased 3% year-over-year to $14.63, driven by an increase in mix of business users. Including higher auto Office Pro and Pro plus users.
During the third quarter, we continued to see a healthy Office Pro and Pro plus take rate with 56% of new office users opting for these higher-tier services, which was up from 50% in the prior year quarter. Overall, 28% of Ooma Office users have now subscribed to a Pro or Pro plus tier. Our net dollar subscription retention rate for the quarter was 99% as compared to 99% in the second quarter. Our annual exit recurring revenue which now consists of recurring revenue from Ooma core users and 2600Hz users grew to $225 million and was up 10% year over year. Now some details on our gross margin.
Our subscription and services gross margin for the third quarter was 72% as compared to 73% in the prior year. Q3 subscription and services gross margin this year was impacted by certain investments we made for our largest customer as we saw the further expansion into Asia and Africa in the third quarter as well as investments in our customer support resources for ongoing direct Product and other gross margin for the third quarter was negative 73% as compared to negative 35% for the same period last year.
As mentioned on previous calls, the decline in QC product gross margin this year versus last year was anticipated and primarily due to the following two factors: First, we sort of sell through impact of certain higher cost components that we had procured in the last fiscal year to stay ahead of pandemic-driven supply chain issues. And second, the prior-year Q3 product gross margin benefited from certain accessory sales that did not recur this year.
We continue to expect Product and other gross margin for the remainder of fiscal 2024 to be negatively impacted by onetime excess component costs running through the P&L and currently estimate Product and other gross margin for the fourth quarter to be in the neighborhood of negative 70%. On an overall basis, total gross margin for Q3 was 62% as compared to 64% in the prior year quarter.
And now some details on operating expenses. Total operating expenses for the third quarter were $33.4 million, up $0.6 million or 2% from the same period last year. Excluding the impact of 2600Hz, the total operating expenses increased $0.1 million or effectively flat from the same period last year. Sales and marketing expenses for the third quarter were $16.8 million or 28% of total revenue and flat year-over-year. Excluding the impact of 2016, includes sales and marketing expenses for the third quarter was $16.6 million or a decrease of $0.3 million from the same period last year as we controlled our spending to increase profitability.
Research and development expenses were $11.3 million or 19% of total revenue, up 3% on a year-over-year basis from $11 million, driven by investments in new features for Ooma Office and enterprise as well as AirDial.
Excluding the impact of 2600Hz, R&D expenses for the third quarter was $11 million, flat compared to the same period last year. G&A expenses were $5.3 million or 9% of total revenue for the third quarter compared to $4.9 million for the prior year quarter. The year-over-year increase in G&A expenses was primarily due to an increase in personnel costs. Non-gaap net income for the third quarter was $4 million, or diluted earnings per share of $0.15.
Excluding the impact of 2600Hz, Non-gaap net income for the third quarter was $4.3 million, or diluted earnings per share of $0.16 as compared to $0.14 in the prior year quarter. Adjusted EBITDA for the quarter was $5 million or 8% of total revenue, excluding the impact of 2600Hz, adjusted EBITDA for the quarter was $5.2 million or 9% of total revenue and represented 17% increase over $4.5 million for the same period last year. We ended the quarter with total cash and investments of $18.9 million. We generated cash from operations of $1.9 million as compared to $2.5 million in the same period last year.
As mentioned earlier, we funded a cash purchase price of 2600Hz with a combination of cash from our balance sheet and an $18 million drawn from a new $30 million revolving line of credit. The new credit facility has a three year term and the borrowing under it will bear interest rate based on so far plus 210 basis points or approximately 7.5% of all in bond rate at the time of the drawdown in October. The additional details on the credit facility are available in our Form 8-K filed on October 23=, 2023, as well as in our Form 10-Q to be filed later this week.
On the headcount front, we ended the quarter with 1,192 employees and contractors, which included new team members from 2600Hz.
Now I'll provide guidance for the fourth quarter and full fiscal year 2024. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization of intangibles and certain nonrecurring items. Additionally, the guidance reflects a full quarter impact of 2016 efforts starting in the fourth quarter as well as interest expense for the outstanding balance under the new credit facility and a partial benefit of related restructuring activities took place earlier in the fourth quarter.
We expect total revenue for the fourth quarter of fiscal 2024 to be in the range of $61.2 million to $61.8 million, which includes $3.8 million to $4.1 million of product revenue. We expect the fourth quarter net income to be in the range of $3.1 million to $3.4 million.
As mentioned earlier, Q4 net income guidance includes a full quarter impact of interest expense related to the new credit facility, which is estimated to be approximately $0.4 million. Additionally, the guidance assumes interest expense will be sequentially lower by approximately $0.2 million given that $15 million of cash from balance sheet was spent towards a cash purchase price of 2600Hz non-GAAP diluted EPS is expected to be between $0.12 and $0.13. We have assumed 26.7 million weighted average diluted shares outstanding for the fourth quarter. For full fiscal year 2024, we expect total revenue to be in the range of $236.3 million to $236.9 million.
In terms of revenue mix for the year, we expect 93.5% of total revenue to come from subscription and services revenue and the remaining 6.5% from products and other revenue. We expect non-GAAP net income for fiscal '24 to be in the range of $14.9 million to $15.2 million. Fiscal 2024 net income guidance also reflects an increase in interest expense related to the new credit facility of approximately $0.4 million, as well as a reduction in interest income of approximately $0.2 million for the reasons stated earlier.
Based on this non-GAAP net income guidance range, we estimate our adjusted EBITDA for fiscal 2024 to be $19.4 million to $19.7 million or approximately 8% of revenue. We expect non-GAAP diluted EPS for fiscal '24 to be in the range of $0.57 to $0.58. We have assumed approximately $26.3 million weighted average diluted shares outstanding for fiscal 2024.
In summary, we are pleased with our solid performance in the third quarter. The team has done a great job of growing business subscription revenue 14% year-over-year organically, while keeping operating expenses effectively flat in today's economic environment, which resulted in year-over-year organic non-GAAP net income and adjusted EBITDA growth of 24% and 17%, respectively.
I'll now pass it back to Eric for some closing remarks. Eric?
Thanks. Q3 was a busy quarter for us. We worked to grow our business user base and to expand internationally. We also invested significantly to increase our AirDial sales team number of resellers and pipeline of opportunities with those our AirDial installed user base. On top of these, we also closed on our 2600Hz acquisition and took steps to integrate 2600Hz into Ooma. And along with that optimize our cost structure. I feel we're well along on our plans for 2600Hz and the acquisition is going smoothly. Our plans for Q4 entail continued focus on our multiple strategies for growth in combination with sensible expense management and continued cash generation from operations. Thank you. We'll now take questions.
Question and Answer Session
(Operator Instructions) Mike Latimore, Northland Capital Markets.
Yes, thanks so much. On the largest customer, which is our Aegis, how many users do you think they will have by fiscal year end now? And then I think you said you expect to launch new countries next year. I guess what's the kind of incremental opportunity next year?
Yeah, hi, Mike. So hello, we're on we're over 85,000 users with them now and we did not have as much growth in Q3 as we might have because some of these new countries are taking a little bit more work on both sides, too, to bring up and get going on and Q4 will be a little slower to just with a lot of work to do this. And the teams need a little bit of a break. But on track, we'll be we'll be up over 90,000 at the end of the fiscal year. And I've talked in the past that we could get to on maybe 120,000 or so. And that's what we're working towards for the first half of next year. But you know, each year it's an extra effort. Every country we add and the countries are smaller now than the ones at the outset.
So how fast we get there? I'm not exactly sure, but we're anticipating first half of next year still busy with adding users and then how much is the US small business market, any noticeable change versus last quarter in terms of just sales cycles, collections, just general activity and sort of small business you guys land and actually no on sales cycles are similar on no collections issues other than the normal ones we have on where we're a little cautious for Q4 because as we remember last year with the holidays and all on side and small businesses were busy or finishing up their years.
And then obviously, we kicked off in January with that with it with a good market opportunity on, but we think the market's ready. It was stronger during the COVID time when everyone was figuring out new solutions, but it's still robust. And most importantly, there's a big market that's yet to be brought up to a modern communication solution like Ooma provides. So we see lots of opportunity to go after.
Great. And just last one on product gross margin. Once some of the anomalies come out of the mix here, what should that product gross margin normalize to?
Yes. So it's probably we're talking about Q2 next year once we get through the consumption of the higher cost components might. But I think a normalized range, I would say 50% to 55% kind of range. We traditionally were there before we had this component. So that's what I would say.
Okay. Very good. Thanks a lot.
Erik Suppiger, JMP Securities.
We are going to take a question from first off just on on the on the outlook for Q4 it does seem as though you're looking for relatively flat sequential growth on the subscription revenue on an organic basis, is there any reason you're more conservative there?
So on all of our total revenue basis, one of the reasons we had about $400,000 of nonrecurring product revenue in Q3 that we had to have had in Q4. Tthat's one of the total revenue seems flat quarter over quarter. And then there is one adjustment that on the Business subscription side that in a sequential basis we're making that really just onetime in nature. And it's now fundamentally nothing different about the trend itself. So if we take out these two items, fundamentally, we see still the subscription revenue growing at more normalized level, which is, I would say, [$700,000] quarter over quarter. So it's a little bit hard to see. Obviously with that at some of these partners, but that's what we see.
Okay. And then you said done Regis could reach, I think said 120,000 end users. How many countries would you anticipate that that will be?
70 or so. Over 50 for sure. We're already able to serve more countries than there. And we're now in with them as we wait for conversions and rollout to happen. But I believe we'll be in on vast majority of the countries that are now in there is a total of about 100 countries, but I need to be a little conservative because I think we'll see how it runs out in the tail of some of the countries are quite small.
Okay. And then how do you anticipate generating follow-on business with those countries? Is that kind of -- can you talk a little bit about the timing around that? (multiple speakers) with additional customers, that is.
Sure, sure. So obviously, the next six to nine months is just rollout phase of on. As we've discussed here, they are a growing organization. So that's potential growth for us. And also on we're serving there. But the kinds of users of theirs that we're serving are the ones that have on that are operating in their buildings. They have other users that do other things with them that are that are potential for us down the road as our more premium solutions that we could roll out and with them as well.
I don't want to get too much into where we see it evolving next. But, we think we'll have more opportunities for growth after we get this rollout under our belt.
Got it. Okay. Thank you.
Josh Nichols, B. Riley.
Thanks for taking my question. I was wondering if you could elaborate a little bit. I think you mentioned that in the quarter you landed two AirDial customers that you think ultimately are probably going to become the largest customers on? I know AirDial is taking a little bit longer to ramp than originally as anticipated, but could you provide a little bit more clarity on the type of market opportunity that those two customers represent? And do you have any visibility into what type of install units these two customers alone could represent if we think about over the next 12 to 18 months?
Sure, Josh. Yes, we mentioned I need to clarify my words. We mentioned there could be the two our two largest customers today. We do have other customers. We are pursuing them in our sales funnel that are that are even larger. But each one is thousands of users and let me put it that way, not over 10,000 but thousands of potential on the other thing we've seen is all through this year of the first three quarters of this year. The number of opportunities in our sales funnel funnel, particularly the number of on potential users in our late stage on sales process has grown each quarter and that also on helps us get a better understanding of where we can go with this. But we did make a big step in Q3. We were able to fill several sales positions for Ergo, which allow us to go after on the market more strongly. We have 10 different verticals that we're pursuing with their dial. And if you if you look at the opportunities we have in even just what these couple of customers can represent. It's it continues to be a very positive opportunity for us. But obviously, as you said, we need to on a get get, we'd like to move faster and we're doing -- and we're investing to do that.
Thanks. And then just one or two small things. Shig, did you mention I think you said product revenue would be between $3.8 million for $4.1 million for first quarter?
And then last question, I know there's like a big delta between the GAAP and non-GAAP guidance for 4Q. I know that that's not super surprising given the acquisition. I was just kind of curious what you were expecting for one-time costs. Just trying to think about how to manage or model the cash flow for 4Q?
Yes, for the fourth quarter and know we're going to have a few one-time costs. So one items or restructuring cost restructuring activities. We undertook a cause resources associated with a press release, Josh, it's $0.5 million that we we're incurring there in Q4. We also have some additional some acquisition-related costs, but and we can get it actually press released in the press release to happy to get you in more detail there.
Sounds good. I appreciate it. Thank you.
Brian Kinstlinger, Alliance Global Partners.
Great. Thanks so much for taking my question and congrats on the successes that were AirDial. My one question is last quarter you talked about there were challenges in the pace of installation, some of it were people, some of it were the various places where installers might happen and what progress has the Company made, especially within its control, the future governance control, if any to help improve installation rates. Thank you.
Yes, hi, Brian. So we've got that well in hand. Actually, we have a customer right now who wanted to roll out quite significant quite significant number of locations and do it all in a week and we did it. And so when a customer's ready to move and if the customer knows what their needs are and where their needs are and has the access and all that planned out, we can move quickly with them on. We're not all our customers are like that. Some customers can take several months just to even, you know, stand up a proof of concept and test something for Then a couple of months more, but sometimes you get sometimes your customers who have a deadline and they want to move. So I feel like the pace of rollout is being driven more from what customers can accomplish them, what on them than our team where we're ready to go.
And just my second question for shared would be when the installations start ramping and they become a more meaningful piece of revenue. Just remind us the puts and takes to product revenue and margin. Our shares are subscription and services.
Yeah. So as the in-store installation last buy in that, so we're reporting the cost of installing a cost and revenue related the installation activity itself in a product along with the product itself. And so, you know, we're going to start to see that product revenue increase as we ramp on the installation. And I think we talked about earlier about, you know, our intent is to not lose money on the installation activities and meaning that we pass on a cost per customer to achieve that. And so my take on that is, as we have more data related product installation revenue, product margins should improve as well over time. Obviously, that will precede the ramp on the subscription revenue related to Agile because installation is happening in front of it, and we're still seeing a pretty good trend on the RPU on the service side, and we think it's going to be accretive to our subscription margin today as we ramp on a subscription side as well.
Great. Thank you so much.
(Operator Instructions) Matthew Harrigan, Benchmark.
Well, thank you. Firstly, since you're not including 2600Hz in your KPIs, and it's pretty evident we're going to be modeling that longer-term, you talk about some of the growth opportunities there with some of the customized apps and certainly even the better monetization of consumer, what's your ambition in terms of the long-term growth rate there, which presumably exceed that your core business?
And then secondly, on your existing subscription business, you said that 28% are taking Pro or Pro plus right now you've got a good product incrementally at pretty low incremental cost. Why is that? I know I've asked you this before, but how often do you consider devoting more to marketing to upgrade the installed base. I don't know whether it's much more of a further release of them looks like on the surface to get people to upgrade, but presumably you could be affording more utility for customers and ramping growth rate while you do it at the same time effects?
Yeah. Hi, Matthew from well, we do do a bit of outreach to our existing customer base around Pro and Pro plus on got to keep in mind that money, they came on board as users are they self selected at the time with our solution? So they're pretty happy with what they've got. Many of those users are, in some cases, it's hard to reach out to them to because on your marketing e-mails don't always get the flow through but on. But we do we do see customers on as they expand on starting to tap into some of our new capabilities. And as I said, the new customers coming on board are coming on more than half of them are taking a premium premium premium on I'm here we have some it might be part of it a little bit might be to just you really need to explain that to customers. And our salespeople are able to do that with the new customers a little bit hard to on how those conversations at that level with our installed base. But it's something we work on and we can devote more resources to our resources to going forward.
First question again?
the new capabilities we would bring that whether you are sort of a push free trial for like a month or three months, just certain capabilities, I assume the expenses wouldn't be I wouldn't be that high to do it or is that just offered in terms of the software upgrade?
No, we do different kinds of things on sometimes more or less of that nature on yes, yes, it's on, but it's a good question. And what we tend to do today is just send e-mails with a little bit information of some of the features that people could get, but on free trials aren't a bad way to go either and keep that in mind.
On thinking about your first question was something along the lines of what despite the 26 efforts, what sort of growth rate that you could assume in relation to the core business or something like that.
I like that because you're pretty unfortunately modeling that separately since you're not including that in your cohort KPIs as you stipulated ?
/Yeah. We're a little reluctant to trying to answer that question with too much detail because it's only been six or seven weeks that we've been on developing this opportunity now is in owned it, but we do see real meaningful opportunities on their of their users out there of the consumer platform from an open source perspective that could be converted over into paying users by offering more than what they have today. There are significant opportunities for new customers to be brought onto the platform, some of whom would be moving off another on a platform that's out there and others that just are going to sunset, maybe something they've built internally and want to move to something more modern.
I think we are close to getting our first customer to move off of another company's platform and onto Unocal do, but we'll have to wait and see if we close that in Q4.
And then thirdly, the C past services, and we have a very specific effort in place today to bring almost cost structure and scale in telecom services, as I see pass offering to the installed base and then move from from there, I'm predicting what that will be for next fiscal year is hard for us. I think that we'll learn a lot the next three months in our sales efforts and then be able to give better guidance at the end of next quarter.
Thank, Eric. Thanks, Shig.
Arjun Bhatia, William Blair.
Perfect. Thank you, guys for taking the question. If I could just go back to the user growth. I know it sounded like it was your largest customer region that was driving some of the headwinds there. But if we look to other customers, are you seeing similar kind of muted growth there in Q3 and Q4? Is it largely related to regions where we're seeing slower growth from that customer base from these arrays rather?
Yes, hi, um, what we're thinking for both Q3 and Q4, particularly Q4 now on we're going to see as you said, muted growth with our large customer on. But on beyond that, we want to be cautious because Q4 is an interesting quarter with the holidays involved on and small businesses taking time off for being very busy with the holiday time on. It's not always the best time for customer acquisition. We're being very sensible about that. And our investment strategies we are controlling our sales and marketing spend.
We are happy with our customer acquisition costs, and we're improving the EBITDA on commensurately on our EBITDA is growing faster than our and are the growth part of their metrics. So I think we have a good plan for Q4. And but yes, we're being a little guarded on just to wait and see how it turns out. I can give one more data point. I know you didn't ask about residential, but we're pleased with our residential business thus far into the quarter.
We're through Black Friday and Cyber Monday and that Thanksgiving period when we want to drive some sales on the residential front. And we were happy with what we achieved this year compared to a year ago. So that's one piece of it of positive news that we already have.
Okay, perfect. That's helpful. And then maybe going back to bridges, I know you're talking about expanding into other countries and the opportunity that it could pose longer term, how should we think about what what that process is like to go into other countries? How long does it typically take to open up a new geography, how many resources are required? What are the challenges? Maybe just help us understand that process some a little bit better?
Sure. I'm going to repeat some of the things I may have said in previous calls, I apologize but on. So it starts with putting our capabilities into the region and because we're dealing with communication services, you have to be mindful of the Internet distances and and delays that can affect the quality. So so we have to have fully standalone on instances of what we do in each region where we want to serve the countries there. As I said, we're in five regions today and we can serve all the countries now pretty much in those regions although we aren't yet.
And then we have two more regions to stand up between now and the middle of next year. Once we have those seven regions in place, we'll have very good coverage. And then it comes down to what you need to do to be in that particular country.
There may be certain laws and regulations you have to conform to certainly language and other IT adaptations to the platform, maybe calling patterns. You have to decide how you're going to deliver services from a carrier partner status. And then on once you have that in place a plan, a rollout strategy that involves, you know, converting away from something already in place, and there's a lot of work to do that. So we tend to roll out with our large customer kind of country by country or a couple of countries in the region at a time.
And then you move on to the next one's on and I we went into Hong Kong, some in Q3, we went into South Africa and Q. three. There are other countries in Asia that we're expanding in in Q4. And we'll be finishing up South Africa in Q4, and we'll just be rolling out from there on it's giving us an incredible footprint on a much bigger stage than we've operated on in North America. And I think that's a really valuable asset for Ooma as we look forward, not only for our UCaaS solutions, but also on, frankly, for AirDial and we're going through the thinking right now on what our priorities will be for next year to start to capitalize on this asset on beyond North America and on the air data will be a very strong contender for that because we think we have such unique solution there and kind of a unique market opportunity at this time.
So it's an exciting for us to have this in place. We're well down the train on all of this, not to go on, but it's been years in the making to be where we are today and we're just getting over, I think the final hurdles.
And sorry, one more if I can just follow up. On the is the subscription and services gross margin following this international build-out, meaning once this is once you have the additional region stood up by the middle of next year, should that be the trough in and subscription gross margins or are there other factors that maybe I'm not considering there?
Yeah. So certainly am Ito. We talked about a little bit, but we're making some investment related investments related to the expansion there. Again, I talked about we just talked about the so it's point down revenue a little bit upfront. I mean, the gross margin a little bit upfront on the subscription side I think going into second half of next year, I think we started to see more scale efficiency there.
It will we expect the largest customer as well and also near term remember that 20% of first gross margin on recurring revenue isn't quite at the level of that corporate margin is either. So as we walk through the know further expansion of our largest customer, along with the synergies related to 20 centers, adding second half of next year is a good point to start to see some improvements on a subscription margin.
Okay. Very helpful. Thank you for taking my questions.
Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Eric for closing remarks.
Well, thank you, everyone. We've gone the full hour, so I won't say more. But I appreciate your attendance today, and thank you very much. Bye bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.