We'll go ahead and get started. Dave Mossberg with Three Part Advisors. Ooma, we've been working with Ooma for several years now, and ticker symbol OOMA trades on the Nasdaq. Eric Stang and Shig Hamamatsu from the company. I guess I'll do the obligatory safe harbor. I encourage you to read that. It's with the SEC filings, and it's all in our decks. I won't go through it in detail, but we're gonna do a little bit of a different format for this one, kind of a fireside chat. There's no fire, but we're just gonna chat, I guess. Maybe just start off by saying, you know, congratulations, great quarter.
I know everybody says that at every quarter, but you guys really did seem to have quite a bit of momentum in this quarter. It seems like it's likely to continue. You beat the numbers, and then you raised guidance, so thank you for that. I know there'll be some people listening on the call that are new to the story.
So, maybe before we get into details of the quarter and kind of what some of the fun, really exciting things you have going on, maybe we could just kind of step back a little bit. I know you kind of have two main businesses right now, and you have two kind of major new growth initiatives to talk about, new lines of business. Maybe we can just start off with the basics of the company, talk about residential business customers, and maybe kind of each one of those businesses, how they're different, and etc.
Yes, sure. Happy to do so. Just by general overview, we're providing phone service from the cloud as a SaaS business with 90+% of our revenue recurring revenue. About $250 million in revenue, and generating around $5 million of EBITDA quarter, generated $7 million of cash last quarter. Very little debt, sub-$10 million, paying it down quickly at the moment. So we're financially strong and just excited about growing our user base over time to expand the company. As you said, we have two major components of the company. We have business customers and residential customers. We started out in residential 15+ years ago. Today, that's roughly $100 million of our $250 million in revenue.
Highly profitable, and it's essentially flat for us as a business. We sell new customers every year, but we have a little bit of churn, and kind of end up roughly flat. You can buy our product. It's called the Ooma Telo at Best Buy, Costco, Amazon, and Walmart, and it provides a great home phone service. Ranked number one by Consumer Reports. You can pay as little as just taxes and fees, $5 or $6 a month to have the service, but a lot of our customers trade up to a premium version and for $15 a month, and so all in, we average an ARPU close to $10.
On the business side, that's been our bigger focus as a company for the last seven to 10 years, and now business revenues make up about 60% of our total recurring revenue. We started out with a focus on small businesses, and today we have, through third-party surveys, we're ranked number one as the best small business solution out there. This is a UCaaS solution where you know the user's going to get a PBX in the cloud, extension dialing, a virtual receptionist that will answer the phone in off hours and such, video meetings, call recording, messaging, just a mobile app and a desktop app to use the service if you don't want to use it from a phone on your desk.
A very complete system, available to small businesses in an easy to digest way. We focus on the simplicity and ease of use of the solution because our customers don't have IT departments. They do it themselves, and I think that's what really sets us apart in that small business space. We're growing nicely there, and, you know, there are 6 million- 7 million small businesses in North America, with one to 20 employees, so there's this huge market potential there as we grow. But we do have two other legs to the stool of what we're doing on the business side. One of them is a brand-new product area for us called AirDial.
AirDial is an all-in-one solution for a business to use when their copper line is going away or getting too expensive, and you would use this for applications that don't convert over to an internet solution very easily. So let's say the business has fiber put in in their area, now the copper lines are being shut off, what do you do for the elevator phone or the front door phone or the alarm panel or, you know, maybe even fax machines that you want to use analog for HIPAA, or even an older PBX that has a copper line going into it? Well, you can put an AirDial in your business, and you have a turnkey solution that serves those applications.
It mimics a copper line, but then does all the required actions after that to hook you up with a wireless internet connection and provide you service. Third-party estimates are there are 10 million copper lines in the U.S. alone that need to convert to a solution like this. It's relatively early days. Vast majority of the market has not yet converted, but we believe we have the premier solution in this space and are really excited about the growth potential we see here, and I'm sure we'll get into it, but we've been adding partners who resell this solution for us and had a very big partner announcement just this last quarter.
Then the third part of our business side of our company is our wholesale platform for entities that want to provide their own solutions in the market, built off a platform kind of in a white label way, if you will. We believe we have a premier solution here as well. This is a business that we purchased just last year, but we've been very pleased with the way it's developing for us because the platforms generally in use out in the market, BroadSoft and Metaswitch, increasingly, customers are moving away from them. Metaswitch, in fact, is which is owned by Microsoft, had an end-of-life announcement put out for the platform just a few months ago. We're seeing a lot of interest in our 2600Hz platform.
We're also excited 'cause we won a very large customer for this platform just a quarter ago and are rolling out with them beginning this fall. A customer that could become, you know, one of our very largest customers as a company, as we look out to next year and beyond. So, we've got three strong segments where we believe we have leading solutions, small businesses, where the market environment, frankly, is different from what many competitors in UCaaS are seeing with larger businesses. I think it's more favorable. And then these new areas of growth with AirDial and with 2600Hz. Let me stop there.
Okay, yeah-
As an overview.
Yeah. So, you know, we could probably spend the whole time talking about AirDial and 2600Hz, so but I do want to start a focus there, so let's kind of start there. You know, maybe it would be helpful to kind of give. I know you'd mentioned some of the applications, but kind of talk about what the alternatives are out there in terms of replacing the POTS line and maybe if instead of replacing the whole equipment, you know, kind of how that works. We were talking a little bit earlier about having, instead of having to replace the whole alarm panel, you can just replace the connectivity to it, et cetera.
Yeah, I mean, the reason our AirDial solution is so attractive is that you can replace your copper line without having to touch the equipment that's gonna run off of it. You don't have to upgrade your elevator panel or upgrade your alarm panel, which can get expensive. We also generally now are providing good cost savings to our customers because the cost of these copper lines, the pricing of the copper lines, have gone up so much over the last couple of years. We've seen customers paying hundreds of dollars a month for each copper line they have. And obviously, you know, we're great savings compared to that. The reason I think our AirDial solution stands out in the market is we've engineered it end to end.
Both the hardware and the cloud solution that goes with it are developed by us, and it's given us the ability to create features and functionality that we don't see in other solutions. We work with a lot of applications in the universe that are out there, I believe, more than other competitors, and when we find an application that isn't working well, we'll put our engineering on it and get it to work well so that we then have it in our kit for, you know, further sales as we expand. We offer call alerts, where automatically, we will notify whoever's indicated if a call gets made off the alarm panel or the elevator or wherever. That's kind of a unique feature we have.
We offer something called MPT, Multi-Path Technology, which provides seamless, instant failover from... You know, let's say you're using a wireless connection for the internet back to us, but if that fails, you could have a corded line that will automatically pick up the call with no loss of experience, for the end call that's being made. We have technology that we call it RDM, Remote Device Management, where users of our solution can see all the installations they have and how they're operating and configure them as they wish from one pane of glass. You know, some of our customers go up to thousands of lines for this solution, so being able to manage it in that integrated way is a big value as well.
So you put all that together, and we clearly have, I believe, the most complete and dedicated solution for the space. Now, a year ago, customers we talked to, they'd say: "What do you mean copper lines are going away?" They didn't even know much about what was happening in the market. Today, I think things are evolving, and we talk to a lot of customers who know that they need to do something but haven't done it yet. You know, particularly larger entities are experimenting, learning, figuring out what they're gonna do, but we're excited about the pipeline of opportunity we're creating, and we feel that as customers decide to, you know, put their budgets in place and cut out the copper and make the switch, that we're a leading solution.
And so, let's maybe put-- I know you put some numbers on it, but just maybe kind of repeat this. The size of the addressable market, kind of what you initially put out a number in terms of what you think you can capture, you know, to start with, and then maybe just kind of what, right now, I think you have a rough idea of what percentage of the market you would address. Maybe just kind of run through that for us. And then maybe kind of how that would relate to the size of the business today and what it might look like at some level of maturity.
Yeah. So we're selling AirDial today in the U.S. and Canada. We're also developing a new version of the solution that can be sold in other international markets. I didn't mention this earlier, but as a company, we're in over 30 countries today. Third-party estimates have put the number of copper lines going into businesses that need this type of solution at 10 million or more, just in the U.S. Another analyst told us they thought only a very small single-digit % of those lines have converted so far. So there's clearly a very large market opportunity. In our view, if we can drive to 300,000 lines on AirDial at some point in the future, that will bring an extra $100 million of recurring revenue to Ooma.
Today, we're about a $250 million revenue business, so AirDial is a key component of our goal to double the revenues in the company over the next three to five years, and I can say that with this recent announcement we made of our newest partner reselling AirDial, we have even more opportunity to drive towards that 300,000 line goal quickly. We have maybe 15 or so partners reselling AirDial on the market today. Our largest so far is T-Mobile, who's a close partner of ours and resells AirDial to their customers. But we announced that a top ten local exchange carrier, independent local exchange carrier, has adopted the AirDial solution and will begin selling it this fall.
And what's particularly exciting about this for us is they have hundreds of thousands of copper lines going to businesses, and it's their lines, and, you know, for them, expanding with our solution is a matter of reaching out to their customers and converting them at the pace and in the way they wish. And so, it's a tremendously significant upside opportunity for us, and we're extremely excited about this new relationship. We also are going to be doing POTS replacement with them on the residential side with our residential Telo solution, so there's also a massive opportunity on the residential side as well. But, you know, to have a new partner who's gonna be reselling our solution with hundreds of thousands of lines of opportunity is a real breakout for us.
Let's move on to 2600Hz. I think, you know, new end market, new wholesale, UC platform, maybe kind of talk about. I mean, you talked a little bit about the Microsoft discontinuing their platform, and then BroadSoft as well. Maybe just talk a little bit about kind of how you're different from the other options out there and kind of how you have a superior solution for that. And then I think you just announced a fairly, it might be first quarter, you announced a pretty significant customer there.
Yeah. So let me step back one and say, we acquired this business last fall to have 100% control of all our technology because, 2600Hz started out as an open source solution. We worked with them for over 10 years. We know the company well, and we've used some of that open source in our business. And we viewed this acquisition, at that time, primarily from the synergies we could drive, by taking advantage of their development and our development, which were increasingly converging as they developed more applications and we leveraged the technology as well. What's been a very pleasant surprise for us is the scope of market opportunity for growth with this business.
I've seen different estimates, but I think it's probably fair to say that there are 50 million+ users around the world that are running on either a BroadSoft or Metaswitch platform today. These are you know, carriers and others who provide UCaaS services of their own, built off of those core platforms. For reasons, I won't spend time here, both those platforms are essentially. Well, Metaswitch was in a, it was announced by Microsoft that Metaswitch is going to be end- of- lifing-- lifing here within the next two years, and, Cisco, who owns BroadSoft, has been moving customers in a different direction as well. So there are a lot of companies out there, a lot of carriers and other users of these solutions that are looking for their next platform.
And on top of that, there are a lot of entities out there that have built their own solutions off a CPaaS-type solution, where you use APIs to as your foundation, and you build what you want on top of that. The 2600Hz platform happens to be designed from an API-based perspective. It's a very modern design, and a large entity who's using a CPaaS foundation today can move to 2600Hz and get more flexibility, a greater range of APIs, the ability to host it themselves. Those can be very valuable attributes in some cases. And then similarly, people with BroadSoft and Metaswitch are looking for what are they gonna do to bring on their new platform?
And so we think the 2600Hz platform has some real advantages to be the platform of choice for these types of customers because of the modern API-based design, also because now that 2600Hz is part of Ooma, we are strengthening it by bringing some of the Ooma applications that we've built onto the platform. And for customers who want a more turnkey solution, that affords them the ability to just, you know, get what they need without having to put in much further investment. So there's a real market shift that's gonna go on over the next years, and there aren't many platforms to choose from, and there certainly aren't many that are built the way 2600Hz is built.
We're very optimistic of what we can do with this. Now, the large customer we won a quarter ago, we announced that they could be over 100,000 users with us and one of our largest revenue customers in the company, and that they would be bringing out their solution this fall, and we'd be able to give more guidance once the solution was out in the market. But they do intend to convert all their customers who use their platform over to this new platform built on 2600Hz. They are excited about working with 2600Hz because they're obviously trying to differentiate in the market with their solution.
I think our platform, with its API design, will give them the tools to do that, and also, they are, in fact, moving off another CPaaS solution and will now be able to host the solution themselves, get more control, probably better economics out of moving to that approach. So, it's a win-win all around. And, we do have other new wins for the 2600Hz platform already that we'll be rolling out this fall that we haven't talked as much about. But, as you can imagine, we have lots of conversations underway with companies that are trying to figure out what their next direction is gonna be. And, you know, we're hopeful we'll be a leading solution for that.
We have a lot of generalist investors in our audience, and just maybe kind of step back a lot. But we tend to use a lot of acronyms, and I wanna make sure that everybody kind of understands what the applications are. There's obviously a well-known CPaaS, well, maybe not obvious, but for a generalist investor, but maybe just talk about some of the applications that CPaaS is used for and kinda how 2600Hz would go in there.
CPaaS is a platform that, as a service, and you know, any developer can connect up to that platform and write code, and the platform enables what they are trying to do. So, for instance, you wanna send messages, you wanna send calls, receive calls, heck, you could even build a you know, very elaborate solutions off that foundation. I think generally, CPaaS got its first beginnings in enabling messaging for a lot of customers and enabling people to provide calling and messaging off their websites, and such. And you know, it's become quite a strong segment of our industry. Now, UCaaS, Unified Communications Service, is more of a complete built solution as opposed to just providing you the tools to build your own.
With UCaaS, you usually pay per seat or per user. With CPaaS, you often pay on a usage-based model, how much you use the calling or the messaging or the other things that the CPaaS is enabling. We want 2600Hz in the future to offer both kinds of solutions: a turnkey platform you can just white label and use, or if you want to go a more usage-based approach, you can sign up with the capabilities of the platform and go that direction. We're still working towards having both of those fully developed and in place, but we think it gives us the ability to have the greatest market reach with the platform if we do both.
So maybe let's step back a little bit about Ooma Office and Ooma Business. Maybe just kind of give us an update on what you're seeing there. I know you've had a lot of progress there. You've been adding a lot of new features, such that kind of the progress that you're making on that side of the business.
Yeah, as for our small business solutions in particular? So our strategy there over the last two or three years has been to bring out more advanced features in premium tiers of service, in other words, tiers of service that cost a little bit more, but offer more capability. And if you go back a few years, we just had our basic service at $19.95 a month. We launched our Pro version at $24.99 a month, and now we've launched our Pro Plus version at $29.99 a month. And we've steadily watched the take rate of these premium tiers go up as we've added more features and capability into them. Today, I mean, last quarter, 58% of our new customers took a premium tier, which is exciting.
I think overall, our base, across our whole base, we have about 30% of our customers taking a premium tier. One of the things this has done for us is our ARPU, our revenue per user, has been trending up each quarter, and that's been a real positive for the company as well. On our last conference call, I talked about the next frontier for us being primarily around call center capabilities, which we'll bring to a more, to a greater extent into our small business Ooma Office solution, which will give us another tier of to monetize with customers. You know, all in, Ooma Office has become a very complete solution. We have integrations as well.
We announced recently we integrated with Square and with QuickBooks, but we probably have, you know, dozens of integrations that we've enabled or with our platform now, and that also gives it more extensibility to how customers want to use it. All that said, we don't want to over-engineer Ooma Office because it's meant to be a small business solution, super easy to set up and use, highly reliable, and, you know, curated for the needs of what a small business has. So, if a customer wants to go further with us, they would step up to what we call Ooma Enterprise, which is much more of a very configurable and extensive solution. Today, we focus in certain segments with Ooma Enterprise, particularly in hospitality and hotels, is one key area for us.
We add 50+ hotels a quarter on the platform today, and that's been a really nice area where we've put together kind of a unique set of capabilities for that type of customer need. But. Yeah, there's a vast market out there for small business. You can only succeed in it if you have a solution that's easy to understand and use, where a lot of customer support isn't needed, and a sales model that's highly efficient.
Because small businesses don't want to pay a lot, and you're often dealing with 1, 2, 3, 4, 5-user businesses where you can't afford to spend a lot to get the customer up and running, and I think that's where we excel. We do a lot of particularly online-type marketing, but even general advertising, and then a lot of inside sales of our solutions.
So just to kind of follow on, talk about small business and kind of, maybe kind of just in general, how the macroeconomy might affect your customer, and then obviously, you're going after some other businesses or new business lines that might have maybe a little bit of a different customer set. Kind of how do you think about the macroeconomy in terms of how it might have affect your business? Is it fairly shielded, or, you know, kind of how it might be different than maybe some of the larger, more well-known other players out there?
So, with the segments we're focused on, we're almost always allowing the customer to save money, and get something more, for their dollar. And that's buttressed us through ups and downs over, you know, many years. When economy gets a little tougher, people look around: Where can I, where can I, where can I cut? Where can I save? And switching to Ooma's residential solution, as low as $4 or $5 or $6 a month, switching to Ooma Office, for the features and the capabilities you're getting, we're usually a savings for the customer. So that's one thing that's been a positive for us from a macro standpoint. We think of. When you think about AirDial, and our wholesale 2600Hz platforms, again, these are customers who need to act.
Copper lines are getting sunsetted, and they're going up in price, so we can bring a savings story. Also, on the 2600Hz platform side, you know, we've had customers switch to us who, one of their competing platforms had raised prices. They weren't gonna pay it, and they, you know, went off of support and felt like they had to move quickly so that they could not risk their business and moved to our platform. So, you know, so far, we've been very steady.
We do see some churn from small businesses going out of business, but we also see a lot of new customers from small businesses getting formed. Our churn rates, if you look at it from that perspective, have been steady for years and years, and you know, pretty reasonable, what around, at around 1% a month. So, we don't have any reasons to think the business isn't gonna be stable going forward.
And then just maybe we talk a little bit about financials. Maybe talk a little bit about, you know, kind of the trade-off between growth. I know you're making investment, sales and marketing, R&D, and maybe how that might be transitioning, you know, over the next couple of years or kind of. I know you've been making a lot of heavy investment, particularly in R&D, and kind of how you think about, you know, the next several years in terms of, how that trade-off might change or, or, in terms of more focus on profitability and less on growth, or kind of you could do both now that you've already made all these big investments, et cetera.
Sure. Thanks, Dave. You know, we always focused on profitable growth. You know, we were never, grow-at-any-cost kind of company, so we're gonna continue that path. And in particular, we see a lot of leverage coming from R&D. Today, 19% of revenue being spent on R&D. You know, we see that going down to low teens % in a longer-term model, let's say four to five years, as we strive to double revenue. And you know, the reason for that is, a lot of the growth drivers that Eric talked about, whether it's AirDial or Ooma Office features, you know, a lot of the heavy investments we already made up front.
And so, you know, that's one of the major reasons why that we don't believe we need to make heavy R&D investments to drive the growth we talked about, 'cause it's already behind us. And in terms of sales and marketing, we were 27%. You know, we're gonna be opportunistic, but we also are careful about not spending too much customer acquisition costs in a channel that has a too, too high of a cost, and so we are always reallocating or optimizing it. So just to sum it up, you know, we just reported a 9% adjusted EBITDA margin. It's a record for the company for the quarter, and we see a fairly clear path to be in the low teens the next one to two years. That's a short-term model we just updated.
In the longer term, we have a goal to get into the 20s for adjusted EBITDA margin. Again, the number one driver would be reducing the R&D, as I said earlier, but also, we think we can drive the gross margin percentage through the growth of Ooma Business Solutions, which is really made up of Ooma Office, Enterprise, AirDial, and 2600 Hz. All these growth drivers should drive the subscription margin higher. So, we know exactly what we need to do to get to that 20% adjusted EBITDA margin in, let's say, four- to five-year timeframe.
Okay, so that was the next question was kind of you could maybe talk about some aspirational targets, and I think you mentioned the margin profile. You just updated that recently? I guess,
We didn't change the long-term model.
Yeah.
But, you know, what we really strive to do is to show progress towards that, long-term model. So again, we just hit 9% adjusted margin for the first time in the company's history. And again, we did update in a deck, a quarterly deck, the one to two-year timeframe for the short-term goal, and that's now. It's up to 10%-12%--
Okay
... adjusted to the margin.
I've heard you say kind of double sales. You know, now you've got 2600Hz, which obviously brings maybe another very large addressable market. Is it maybe kind of time to think about an even greater aspirational target? I don't want to push it too hard, but.
Yeah, yeah. So, you know, I think there's opportunity to aim further. But, you know, I think when we think about. So we're about $250 million today on our annual revenue run rate, and if you think about the next $250 million to double revenue, you know, we are pretty clear about where we are. So $100 million, we want it to come from AirDial. That's the 300,000 lines, and we should drive the recurring revenue, $100 million, and then we want to grow Ooma Office solution also another $100 million, continue to build upon the small business solutions. We also have aspiration to go overseas eventually on Ooma Office Solutions too.
Let's say maybe $50 million could come from 2600Hz, quite frankly, to get there. You know, when we speak about AirDial, the 300,000 lines to drive $100 million is only 3% of 10 million lines we think there are in the United States alone. This is before we talk about international opportunity. The market's there to drive even beyond what we said. But for the time being, you know, we're aiming for that, you know, doubling revenue in four,five years and, you know, drive the margin.
Maybe I can add to that. It's kind of a turning point time for us. These last two quarters where we've had large customer wins have given us a new outlook to think about, and we haven't been able to get concrete yet on how much growth we think they'll drive, how fast. But each is a very big opportunity, and I can tell you that these two wins hopefully are the beginning of more wins to come because I think our solutions are needed in the market and standing out.
So I think over the next few quarters it could be interesting to see if we can bring more wins with large customers and partners who will resell our solutions. You know, I think by the time we're giving guidance for our next fiscal year, next year, we'll know a lot more about how we think the growth can evolve.
I always have to ask a question about the balance sheet. So maybe just kind of for those who are not maybe that familiar with it, I know you paid down some debt, I think, recently, and was it a record quarter for cash flow this quarter?
It was a record quarter for cash flow. We generated $7.1 million of operating cash flow, and on a trailing 12 months basis, we generated $18 million operating cash and $12 million of free cash. And, you know, we think we can grow that further on a 20 months basis going forward because, you know, again, we are becoming more profitable, and we're generating more cash for that. We are not a CapEx-heavy company. We incur about, on average, $1.5 million per quarter on CapEx, and as we grow bigger, we don't believe that the-- It shouldn't, you know, it should not require material CapEx investment. Typically, we use money for, you know, server upgrades or maintenance CapEx.
Some portion of the CapEx relates to internal R&D costs we incur that for the new features that gets capitalized as the CapEx and so forth. But again, a lot of the heavy R&D is behind us too. So what that means is as we become more profitable, more operating cash flow, you know, CapEx stays more or less similar. I think that just expands if we cash flow. And then if I just kind of dive into the kind of our capital allocation philosophy, you know, we have a few buckets where, you know, one would be in the short term, we've been paying down a debt. We incurred a little bit of a debt when we purchased 2600Hz about nine months ago.
We paid down quite a bit already, so there's very little debt on the balance sheet today, and continue to generate cash. We spent about $2 million buying back stock. Half of that was open market repurchase of stock. We just started that this past quarter, and we wanna continue to do that opportunistically, especially to offset the share dilution from employee share issuances. We also always look out for customer-base acquisition.
So two years ago, we bought a company called OnSIP. We spent about $10 million, and we paid, you know, less than 1x revenue on the multiple there, but it was a nice acquisition. We got 50,000 customer for that $10 million, and that was a very cost-effective acquisition. We integrated the business very well. It's very profitable today. That'll be a template for us to, you know, when the time is right and when the opportunity presents at the right valuation, we want to do more of those acquisition to supplement our organic growth.
I think we're out of time. Did you have a question, or-- Yeah, anything else that we, or is important, that what question didn't I ask you that's important to ask? Any?
I think you covered it pretty well. We are, you know, 93% recurring revenue with net dollar retention of 100% last quarter, and that generates about $170 million in gross profit a year right now. We think about spending that wisely for growth and building a stronger company in the future. We could be extremely profitable today if, if that were our strategy, to just go that direction, but we think we're serving big new market opportunities. That said, by bringing on partners to resell our solutions, we control our sales and marketing spend, and the fact that we've invested so much in the past now to build our solutions, we can get R&D leverage. So we're excited that we can drive both top line and bottom line as we go forward.
Well, great. Well, thanks for coming on today. I really appreciate it.
Thank you.
All right.