Well, good morning, everyone. Thank you for joining us today. I'm Eric Stang, of course, CEO of Ooma. We're excited to talk with you today about what's going on in the company. We're going to try to move through it fairly quickly so we can get to Q&A, but we do have a lot to talk about, including a couple of exciting announcements which we'll be making today. Hope you enjoy our presentation. By the way, welcome also to everyone who's dialed in and watching this online as well.
First, though, our safe harbor statement, which speaks to forward-looking statements that we'll be making during the day. I'll let you read this post the presentation. Ooma, we're obviously a cloud-based communications provider. We like to say that Ooma stands for Object of My Affection, but the real truth is we're named after Uma Thurman. If any of you know her, let her know she's got a public company named after her. Not everyone can say that. I'm very pleased to welcome many of our leadership team members here today.
Not everyone on the slide has joined us, but several folks have, and you'll meet them as they come up to present, so I won't take a moment now to introduce them, but excited to be here with you. Ooma today, just a little bit of background and perspective. As you know, we provide a set of services to customers using a multi-tenant SaaS platform, focused around telephony, messaging, video, and all kinds of unified communications solutions that go along with that.
We have over 1.4 million core users today. Core users for us excludes a small subsidiary that is a mobile app, Talkatone, and also our 2600Hz customers. About 1,500 people based in Sunnyvale, been public for about a little over 10 years. On the last trailing four quarters, we've driven $307 million in revenue, which is up 17% year-over-year, about $44 million in EBITDA.
Quite a lot of growth in EBITDA the last two or three years, and we're committed to driving EBITDA up further as we go forward. About $300 million in annual recurring revenue, and our recurring non-GAAP gross margins run in the 70% + range. We're driving a lot of value from our customers, and with 99% retention, we feel we're building a bigger business and a better business each quarter that we go forward.
Our strategy is pretty simple. We aim to bring together advanced features, superior ease of use, and uncommon value. When we can combine all three of those together, we believe we have a winning strategy. We do that in certain segments that we target, and that allows us, we believe, to be a leader in those segments.
We don't try to be everything to everybody, but we are going to take you through today the segments we're in and why we think we're winning. A little bit of a history of the company and where we've gotten to today. We started out over 20 years ago in the residential telephony business. That today is less than 30% of our revenue, but we quickly moved past that and moved into business UCaaS, unified communications as a service.
Started that segment for us over 10 years ago. We're very excited that third parties have rated us number one in both of those areas of our business. More recently, in the last few years, we've gotten into POTS replacement, replacing plain old telephone service with more advanced solutions. There, we're very excited because we have a very large partner reseller community, and that is growing for us every quarter.
We've also been recognized there as well for some of the leadership elements we bring, and we'll talk about what those are as we go further in the presentation. Then finally, most recently with our 2600Hz acquisition, we've also been able to use our platform as a wholesale platform for others to leverage, and we'll talk to you a little bit about where we're going there and the pretty significant longer-term potential that segment holds for us.
Looking at just a little more detail, what are customers looking for in each of these segments, and why Ooma? Why do we do well? When it comes to smaller business communications, businesses up to 100, 200, 300 employees, they really want to avail themselves of the newest methods and resources that they have not generally had access to before.
They want to portray a bigger business image and communicate with their customers more effectively. Now, why we win in that segment is we really put together a curated set of features for the smaller business customer. We do that so that they get everything they need, but they do not get a lot of extra that is confusing or too much for them.
Keep in mind, a lot of our small business customers have no IT professional in their business, so they have to be able to set up and operate that and use that system themselves. We marry that together with great ease of installation and use, good value, and very ready available support. We think when we put that package together with a focus on their needs, we can differentiate versus the general UCaaS industry. In POTS replacement, it is pretty simple.
Our customers are looking to reduce costs. The costs of POTS lines have gotten astronomical, and they are also trying to just keep their equipment operating. Their equipment is legacy equipment that needs an analog connection. What do they do if that POTS line goes away?
You are going to hear from us talk today about some very differentiated features that we bring to the space. We have built our system end to end so we can bring the control and reliability that is needed for this type of solution. With our wholesale communications software and services, we find our customers are probably using an older platform, and they want to stay competitive as things are evolving. Our platform really stands out, it is very modern in design, very API based.
It allows our customers to not only leverage pre-built applications, but really innovate on top of it to meet their needs. We will talk a little bit about what folks are doing there. Finally, in residential communications, it is really about the safety and convenience of having a home phone. We believe we bring a very reliable service with some advanced features at a very low cost.
We will talk more about that. Our strategic priorities as a business today, we want to win carriers and other resale partners in order to dramatically grow in AirDial and our POTS replacement solutions. We want to focus on AI to extend our leadership serving small business customers, and with that, dramatically grow our ARPU.
We want to continue to focus on the modern capabilities of our 2600Hz platform and position it as the choice for the future as carriers and others eventually decide to replace their legacy solutions. In residential, we have two new offerings, MyPhone and StarDial, which we will talk about, and those will allow us to reignite residential growth. At an overall level, we target certain segments where we believe we can be the best.
We are going to take you through why as we go further here. To do that, we have to have the leading solution and put together those three elements of the strategy that I talked about. We are also augmenting our growth with acquisitions primarily in the UCaaS space. I will talk about what our objectives there and goals are a little later.
But with that, we can build scale and drive more profitability as a business. Finally, the last one, driving profitable growth. We are very focused on what we are spending for what we are achieving, our customer acquisition cost, our payback, building scale to really bring that 72% gross margin that we run with today for recurring revenue on a non-GAAP basis to bring more and more of that down to the bottom line.
With that, this is our agenda for today. I have taken us through the first one on here. We are very excited to have Elka Popova with us from Frost & Sullivan. She is going to give us a general market perspective, and then we are going to go through each of our four segments, financial metrics. I will talk a little bit about acquisitions and closing remarks, and we will get to Q&A, although I know it is a lot.
Elka, thank you for joining us. She has got a lot of experience in our industry. She is the lead author for Frost & Sullivan's annual radar reports on UCaaS and CPaaS. She is going to be joining us for Q&A as well and lunch, so feel free to also ask her questions as we go through the day. Thank you, Elka.
Thank you, Eric. Thank you for having me here, and hi, everybody. I am here to talk to you about the growth opportunities in the UCaaS market, and there is a lot to talk about, so feel free to connect with me after the event or during lunch to take a deep dive. Throughout my brief presentation, I want to double-click on two trends that are defining this space.
More specifically, I want to talk about AI technologies, which are transforming the industry by elevating the service provider value propositions, enabling the providers to position as workflow orchestrators above and beyond simple providers of communications and collaboration solutions. I will also talk about a very distinct opportunity in POTS replacement. As you will find out, Ooma is particularly well-positioned in that space. But what is important to understand is that there is an urgency to replace legacy residential and business POTS lines.
Now, let us talk briefly about the key factors that are driving growth. Overall, we are in a relatively mature space, but going forward, the core benefits of cloud communications and collaboration solutions, more specifically the CapEx avoidance, the ability to flexibly adjust capacity, more rapidly gain access to advanced functionality, and so on, will continue to compel organizations to move their telephony from the premises to the cloud.
Also, we are seeing communications being perceived as strategic assets today, not just an expense center within the organization. This is again driven by the digital technologies, AI, APIs and so on, which are enabling organizations to embed communications into workflows and drive deeper transformation. Apologies.
Now, with the more rapid adoption of collaboration tools, video meetings, group chat, and so on, we are also seeing pull-through for telephony solutions to be integrated with the collaboration stack and moved from the premises to the cloud. There is a lot to say about AI, but in my opinion, in the next few years, we are going to see a significant impact on the UCaaS market, where service providers will be able to boost ARPU and drive accelerated revenue growth.
Hybrid work has become a common phenomenon across organizations. I know the pendulum has swung from a drastic shift to remote work back to the offices, but overall, organizations are a lot more distributed than they used to be, and that is where cloud communications offer the best solution to empower the employees. Last but not least, desk-less workers and different vertical organizations have been underserved in the past.
Today, we have an opportunity to create tailored solutions for healthcare, for retail, hospitality, and other industries using AI and APIs. This is my forecast for the UCaaS market without incorporating the impact of AI technologies. So this is a mature space if you do not count on the AI impact. I am still doing back-of-the-napkin calculations, and if some of you are also doing this, let us collaborate perhaps.
But I believe that by 2031, we can see a boost of about 15%-20% just driven by paid AI capabilities. There is a lot to say about this, but I will move on in the interest of time. Here is just some data from a survey we conducted this year among close to 1,200 IT decision makers, which included finance people, IT staff, and C-level executives.
What you are seeing is the light blue is the data from 2026, and 2029 is projections. The darker blue is projections for 2029. Overall, we see an increase in the number of organizations or the proportion of organizations adopting agentic AI across multiple use cases. So this proportion will double from 15% to 29%. At the same time, we are going to see a drastic decrease in the ones that are still in the watching and proof of concept stages.
What the adoption of AI is driving is an accelerated shift to integrated platforms that unify telephony, meetings, messaging, presence, and even contact center capabilities. Why? Because that is how you create a common data pool across which you can run AI technologies for deeper insights into the organization, customer engagement, and so on. This is a particularly favorable trend for a company like Ooma.
Now switching gears, I talked about the urgency to replace POTS solutions, legacy technologies. Deregulation around the globe is driving price increases for legacy solutions, also limiting the availability of some of those legacy services. So the urgency is driving organizations to increase their investment in next-generation solutions, replacing specialty POTS lines. So more than 50% will be increasing, and practically no one is decreasing their investments.
Now I will take a moment to mention that we have a best practices recognition program as part of which we recognized Ooma specifically for its AirDial solution. We believe it creates an opportunity for Ooma to capitalize on at least 12 million POTS lines that needs to be replaced in the U.S. specifically, some of which are residential, some are business lines.
What we specifically value in Ooma's approach is the fact that the solution was tailored for those mission-critical analog applications, fire alarms, elevator phones, and so on, which are very common across many organizations. They also have an integrated solution that includes the hardware, the connectivity service, the voice applications, and also leverage patented technologies that improve the reliability and security of those applications.
Why do people have to replace POTS line?
Because the government authorities have deregulated the markets, and now the telcos are rapidly increasing the prices of these solutions and fully discontinuing the availability of some of these services. So you can't have an analog line, you've got to move on to a next generation solution. That's separate from the benefits you get in terms of functionality, in terms of security and reliability, and so on. I'll just quickly mention the POTS tracker, about which you will hear from Ooma itself.
But it's a new capability that provides additional visibility to organizations about their risk exposure. All of these capabilities combined really distinguished Ooma for us, and this is why we gave them that best practices award. With this, I need to introduce Thad White, who's going to talk about emerging products.
Great. Hi, all. Good morning. Chris Burgy, who's speaking later, will elaborate more on the POTS shutdown and what's driving that, and the rate. POTS replacement is different from UCaaS. Many of the reigning POTS lines are serving specialty equipment. This is things like elevators, alarm panels, door and gate entry phones.
This type of equipment has requirements that are not easily met by traditional voiceover IP solutions. Ooma AirDial solves these requirements in unique ways, and I want to share some of the differentiators from others in the market. First of all, Ooma owns and controls the full stack of the AirDial solution.
From the hardware device that sits on premise, which we design and manufacture ourselves, to the cloud call control layer, which we have built over many years and hardened to handle these special use cases, to the management plane, where we have built a custom portal to provide monitoring and management with unmatched visibility to a customer or partner's phone lines. What this owning the full stack allows is us to customize the firmware to serve these difficult applications.
We have full control over the reliability of the service, and we are able to create differentiated features. The first I want to talk about is multi-path redundancy. This type of specialty equipment requires redundant network connections, and usually what that means is failover. The problem with failover is that it takes time, and any calls in progress will be dropped.
Ooma has developed this patented solution to simultaneously transmit all of the voice traffic over multiple links at once. What this means is that calls in progress will not be interrupted if one of the network connections fails. It also means that if one of the network connections is degraded, perhaps because of congestion, but not enough to failover, our calls will not be interrupted on AirDial. Next is notifications.
Ooma AirDial provides more visibility to a customer or partner's lines than anyone else in the market. We provide standard device-based notifications, so if your device goes onto battery power or offline. Only Ooma AirDial provides call alerts, which can send an email or SMS if a call to a specific number is made, such as 911, or to any number. Only Ooma AirDial provides extended off-hook notifications.
If an emergency phone is accidentally left off hook, we can notify the IT group. Only AirDial provides equipment disconnect notifications. This is very important, and one of the reasons that healthcare customers choose Ooma AirDial.
Hospital phones, it is very important to the IT department that the emergency red phones are not removed from their place and put in a drawer. Ooma AirDial is the only service that can notify a hospital IT when that happens. Next, our Remote Device Management portal, or RDM, is a one-stop shop for monitoring and managing your AirDial devices and phone lines. It combines many features that competitors offer in separate portals from separate vendors. It is one of the reasons that retailers choose Ooma AirDial.
We have many large retailers who value the hierarchical approach that we provide to managing a portfolio of POTS lines across the U.S. We have customers with retail installations in more than 47 states, and we also provide APIs so that these customers and partners can integrate monitoring and management into their own in-house tools. Finally, installation and project management is critical to our customers when replacing their POTS lines.
We provide a third-party network of installers nationwide. We assign onshore project management to orders within 24 hours, and this is one of the reasons that schools choose AirDial. We have over 800 schools and school districts, many with large-scale deployments across dozens or even hundreds of sites. Here is a map of our schools and school districts. Now let us hear from one of our customers, Phoenix Senior Living.
Hello, my name is Darren Marinko. I am with EPIC360 IT. We are here in Roswell, Georgia, and we are an IT services and help desk provider. Phoenix Senior Living is one of our largest senior living community partners. They have over 46 communities in the Southeast. We started looking at POTS replacement solutions for Phoenix Senior Living for two main reasons.
One was the cost, two was the visibility. We looked at several other solution providers, and the reason we chose Ooma was the outstanding portal that gave us the visibility we needed, not only into the health of the system, but also the costs that are incurred. In addition to that, it allowed us to use our existing life safety equipment. One other great feature of the Ooma AirDial is the high availability.
There is an active-active multipath that leverages both the WAN and the LTE to provide a high-availability service. It is not unusual for our communities to experience a sustained internet outage, and when that happens, Ooma AirDial comes to the rescue to keep the service alive. In addition to that, if there is a power outage, the 12-hour battery backup keeps us running even when the lights are out.
Great. Even though we feel like we have a really strong lead in this POTS replacement market with differentiated features, we are not stopping. We have a whole roadmap of enhancements. Soon we will have a dual-modem device with active-active LTE connections. We are working on FedRAMP early start certification to open up federal deals. We will have a 5G version of AirDial. The use case for POTS replacement doesn't require the speeds of 5G, but we want to future-proof as carriers change their spectrum.
We are also developing a high-density solution for installations at buildings with more than 50 POTS lines to replace at once. We are also innovating on the remote device management cloud side. We are extending it to manage other Ooma products and devices, and we are building proactive monitoring capabilities and automated diagnosis and remediation capabilities. With that, I want to thank you and hand it off to Chris Burgy, our Senior Vice President of Corp Dev.
Thank you, Thad. Good morning, everybody. Excited to have the opportunity to share more information with you today around the transition and the process for POTS deprecation. This journey actually began about four years ago when the FCC began to lift restrictions for the carriers here in the U.S. This started with forbearance, which allowed them to effectively increase prices at whatever rate that they want, which was a measure that they used to obviously protect revenue, but also to encourage customers to migrate off the network that they want to shut down.
The FCC took further actions to remove the red tape over a series of other orders, including some this year, that effectively allow the incumbent carriers in the U.S. to fully deprecate the network at their own pace and desire. We've seen that journey commence in earnest.
We estimate, based upon the data that the FCC shares, that there are up to 8 million lines in businesses alone that still exist here in the U.S. that need to go through this migration. Also, bear in mind, this does impact the residential home phone service market, which is a separate category that they track. So there's mutual benefit for Ooma in two distinct categories of solutions that we offer.
The carriers are now taking this quite seriously, and it has become a factor that has weighed heavily on customers in determining what to do, including emergency shutdowns that occur often for things like copper theft, believe it or not, where companies may come out of compliance with their fire panel and other devices that Thad shared, and that forces an immediate decision.
The good news for us is this has woken up the market, and it is a forcing function for organizations to have to take action. We believe this journey for deprecation will continue for many years, and AT&T is the first to be most aggressive around this.
As Elka mentioned earlier, and one of the reasons that we're recognized by Frost & Sullivan, we developed a tool called POTSTracker that allows organizations to understand the risk profile for their locations. This tool ingests and analyzes the filings that are submitted by the carriers, both with the FCC and many of them do it on their own direct websites as well. This identifies the stages and the phases and the locations in which they're going to shut down the copper network. What we've seen incidentally through this system is an increasing wave of these actions.
The first one actually began in June of this year. AT&T has another major action coming up in November, and they're continuing to conduct filings that now go into 2027 and 2028. Incidentally, we've also seen with the acquisition of Frontier by Verizon, that they are now starting in earnest their journey to deprecate the legacy Frontier network as well.
This tool allows customers to upload all of their locations into watch lists and identify if there are matching restrictions or deprecation events, and equally as important, identify and notify them of future events as they happen so they can properly plan out the process to transition over. This allows us to assist them uniquely in the journey of working through phases, especially for large organizations with many thousands of locations. We take a multifaceted approach to go-to-market strategy.
This has been one of our greatest strengths as an organization for the AirDial solution. We believe that it gives us exposure and access to a wide variety of verticals and size of companies. Some examples of this approach include Tier 1 carriers like T-Mobile and Comcast, CLECs and wholesalers like Lingo, next gen aggregators like Spectrotel, and traditional channels in the UCaaS space, like the technology services distributors and the sub-agents, many of whom have a long background serving telecom for customers.
This gives us effective access to the Fortune 1000 market, gives us effective access into people who have vertical specializations, lots of different touch points, and it is not uncommon for us in large organizations to have multiple of our channel partners, in each of these categories bid, which sends a signal clearly to that customer.
If you have three organizations bidding on an RFP, for example, and it's all AirDial, the customer thinks, "Hmm, there's something really special here since everybody is positioning this." It also allows us to scale our go-to-market strategy because we're not dependent on our own direct selling motion, but we can lean on these other routes to market. I'm also very pleased and excited today to announce our newest relationship with TELUS.
TELUS is a Tier 1 carrier in the Canadian market. TELUS went through a journey of evaluating all of the POTS vendors in the space, all of our competitors, and out of that evaluation, they selected AirDial as the solution for their business POTS replacement. This is a testament to the journey that we've went through here in the U.S. and the credibility that we've built with a wide array of channels and carriers.
TELUS evaluated and selected us for all the same reasons that the carriers here in the U.S. have selected us for as well, many of the things that Thad shared with you. I think this sets us up for a strong position going forward. There are other carriers, of course, in Canada, and this is an exciting journey as Canada as a country goes through the same process as the United States.
TELUS Business Solutions, where we're first starting, has up to 300,000 lines. We're hopeful in that journey to assist them in converting as much as they'll allow us to. There are other divisions in TELUS that have their own POTS lines as well, so we'll continue discussions with them. The contract has been executed. We're starting the planning for launch.
TELUS intends to want to move quickly and launch with our U.S.-based infrastructure to get to market soon, and then we'll move into Canadian-based data center facilities to serve the government entities where this is a requirement there. We estimate the go live will happen in the second half of our fiscal year. The other attractive thing about AirDial is the structure of economics and the stickiness, if you will, about the solution.
Customers don't look at this like other technology solutions that they select. They want a contract. They want certainty that it's going to stay, and it's a put it in and forget it sort of scenario. We sell AirDial on a contract, to practically all of our customers, some on even longer than three-year contracts. Our ARPU, as we've shared previously in earnings, is approximately $25 per line.
That is a blend of our own direct sales, a blend of reseller partners who have a different structure. We also have an upfront capital model where they purchase equipment or rent it. Today, we have approximately 45 reseller partners. Exciting opportunity for us to continue to expand. We typically add approximately two or more per quarter.
This is really attractive to Ooma from an economic perspective because many of these reseller partners actually own the full selling motion. They will do service delivery. So it gives us a strong standing to accelerate growth as a company, and we do not have to bear the cost of things that normally you would in doing a direct sale. With that, I would like to introduce Dennis Peng, our Senior Vice President of Product Management.
Hi. I am Dennis Peng. I am here to talk about the UCaaS side of the business. UCaaS is the phone, messaging, and collaboration solution that businesses rely on every day. It encompasses a wide range of capabilities, but it basically includes everything that a business needs to communicate, from their phone number to text messaging, video conferencing, mobile and desktop apps, and now the AI services that layer on top of it all.
Ooma serves companies of all sizes today. Our customers are primarily located in 30 countries in North America, but we are in 30 countries, primarily to serve one of our biggest customers, IWG or Regus. This chart covers our entire UCaaS customer base.
While many of our customers are small businesses, we now have 45% of our seats, which are in accounts with 10 or more users, and 15% of accounts with 100 or more seats in them. Ooma serves two very distinct customer types with two different solutions because they have different needs. First are small businesses. Here, the buyer is an owner or an office manager. There is no IT professional in the building, so it has to be simple.
They just want to save money, sound professional to their callers, and talk to a human when they need help, and that is Ooma Office. Second is Ooma Enterprise. These are generally larger organizations, and the buyer is a CIO or an IT department. They usually have more sophisticated requirements and sophisticated needs. So they need a more flexible solution and a different engagement model.
We serve those customers with Ooma Enterprise. Ooma Office is purpose-built to serve small businesses, and it draws from our years of experience serving consumers. A small business owner should be able to order phone service and be up and running the same day. We find that small businesses prefer to use hardware phones, so we label them, test them, and pre-activate them, so that when they arrive, they are ready to be used.
We have onboarding specialists and support agents available 24 /7 to answer questions and to help them customize their setup. All this comes at a small business price and no contracts. Let us now hear from an Ooma Office customer.
My name's Keith Basinger. I'm an Optometrist for Miamisburg Vision Care and also the IT Director for Optometric Management Group. We have 15 locations at the moment, and it's pretty much all in the state of Ohio. Phone service is important for our group, mostly for patient contact. Ooma had a solution that would let us integrate all our offices together on an IP platform, so we didn't have to have 15 different phone systems.
We had one phone system that was integrated between all the 15 offices. Currently, we have about 90 lines that are using Ooma. As we add more locations, we'll be adding more lines. Ooma also does the cellular backup, so they have a backup system that if our land internet goes down, the internet kicks back right up to the cellular function, which is super important for electronic health record keeping because everything's cloud-based.
We do like the desktop app a lot, partly for the visual voicemail. It also does the e-faxing, which makes it very, very easy to use. The management for Ooma for me helps me out a lot as the IT Director. If one of my offices has an issue, they can call me, they can call Ooma. Sometimes it's something I can direct them over the phone, say, "Hey, get into the app and change this setting, and now it'll do what you want." So it gives us flexibility for any of the locations.
I can do it from my home, and they may be three hours away, so makes it easy. For other optometrist offices that are looking for a phone system, Ooma would be a good option. A lot of flexibility, so they'll be able to set up your phone system how you want it to, and it'll make your office very functional and very flexible in how you would like it to be.
Switching gears now to Ooma Enterprise, which is how we serve larger businesses. Here, you need to have a deeper set of features and more customization options, like open APIs and flexible deployment models. You also need to work with the customer to solve a broader range of issues, ranging from network, security, and telephony requirements and adapt to their specific needs. We found success in the hospitality segment of this market by addressing workflows specific to this industry, and in total, we now have over 1,000 hotels using our solution. Let's now hear from an Ooma Enterprise partner.
Hi, my name is Bill Hooper, COO of Renodis. Renodis is headquartered in St. Paul, Minnesota. We do bill auditing, contract management, procurement for commercial and hospitality accounts across the country. We currently have a big legacy maintenance base of PBX customers, those PBXs are end of life-ing. We are having to convert those out.
They are going to have to go to a cloud solution, we are proposing and selling the Ooma Cloud Hospitality PBX. We are seeing a huge interest from a lot of the customers in that base to now not only use Ooma AirDial to transition from their POTS services, but also use the Ooma PBX version of the cloud system with our hospitality features to convert their PBX portion also.
The good thing about that is Ooma takes it to a different level with their engineering design and how they are really taking it to discover what is actually in the customer environment before they do the proposal, before they do the contracting, or before they ever do an install. They know what needs to be replaced, that is not typically what happens in the industry.
As we look to the future, we are investing in three key areas that we think will drive growth. Number one is customer engagement. Today, we support customer contacts through voice, text, video, and a contact us widget that customers can put on their website. We want to expand to more web and digital channels so that a business can manage all their customer interactions in one place.
Number two, AI solutions. I am going to go into a lot more detail about AI later, so I will not say more about it now. Number three, CRM integrations. Customers find huge value in integrating their phone system with their CRM because they can see the customer history pop on their screen when someone calls. We support over 25 integrations today, including many in specialized verticals such as Clio for law firms.
We are more successful in selling our service when we have a product integration, so we want to build more. Our call center solution, called Ooma CX, is coming this fall. At $49.95 per agent per month, it is an affordably priced call center solution for teams that need more than what we currently offer in our Pro Plus tier of service, but also who do not need the cost and complexity of an enterprise contact center implementation.
We are excited about the call center functionality because it is an important capability to have to go up market and to win larger accounts. Ooma CX will check that box. Plus, it will give us a high-value upsell into our install base. Now to AI, which is the biggest product opportunity in front of us.
Our view is that we are ideally positioned to provide turnkey solutions to small business customers that will deliver real value. As their communications provider, we already see all the calls and texts going into and out of the business. We already connect to their CRM systems and calendaring systems, so we can build integrated AI solutions that will layer on top of this rich data source and the connectors that we already have.
We have spent years building for small businesses in a wide range of industries, so we know how to make it simple to put it into action. Our customers are price sensitive, so we try to offer features with a low upfront fee and charge based on usage.
Because we can build and host our own solutions, we will be able to capture the benefit of improving AI models and the declining cost of intelligence as we scale. We recently added four AI features to our Pro Plus tier service: transcriptions, summaries, insights, and Ask AI. We also started selling two voice agents as add-ons, a basic answering service and a full receptionist. Early results have been encouraging from our inside sales team who we first rolled out the program.
First, we are seeing customers step up to Pro Plus to access those AI features, and this has caused our take rates on Pro Plus to nearly double for new customers. We are also seeing double-digit attach rates of the voice agent on new deals. Keep in mind, we are still in our first quarter of selling these new solutions, and we think there is more growth opportunity to unlock.
The potential impact on revenue of AI is unmistakable. Take a small insurance group, which would have bought five Pro users before AI, and now with AI, they step up to Pro Plus and get the AI receptionist, and our total revenue jumps up by 60%. We also believe there will be a secondary benefit in terms of retention. Existing customers do not need to look elsewhere for a solution. We also believe that use of AI features generates a large trail of data, which will be harder to walk away from. Finally, let me talk about the AI productivity agent bundle that we are launching this week.
Our strategy is to look around the functions of the business, from front desk to customer service to sales, and ask how AI can streamline the work, take a task off someone's plate, or do the work that no one has time to do.
We have identified a list of jobs that agents can perform, and we are launching four agents now as part of phase one. To give you an idea of what these agents can do, one of them will review your calls and flag the ones that need your attention, such as the unhappy customer or the big new sales opportunity.
The benefit to the business, get on top of problems early, and don't let that opportunity drop through the cracks. Another agent will review calls from a customer, their recent calls, their recent texts, and generate a summary so the business is prepared for the next call. The benefit, it frees up employee time and it allows them to deliver more personalized service.
More agents will be launched through the balance of the year and early next year, and we're going to be offering access to all these agents through a single bundle instead of individual separate offerings. The business can try one and expand over time. They just pay for what they use. No matter which business you talk to, you'll likely find that they're short-handed, and these agents will allow them to add capacity without hiring. Let me now turn it over to Rob.
Thank you, Dennis. Good morning. My name's Rob Ferrer. I run business sales for Ooma. Let's refresh everybody's memory on the UCaaS market space. There's just under 8 million businesses that contribute approximately 57 million lines or users in this space. 95% of that is 50 users or 50 lines and below, which is commonly called the SMB marketplace.
Within that marketplace, about 50% of it is still available to convert to what we would now commonly call a full UCaaS solution like Ooma. From a go-to-market strategy perspective, we focus in on that SMB, and that's core to our message. The importance of that 95% and how we communicate to them is specifically around a business impact, ease of use, cost-effective solution. We do that through web-based marketing, which is the primary place where the buyer looks for their solution, so digital demand.
Our messaging is clear. Again, we focus on many calls to action, simple, cost-effective, high value, and delivers an immediate business impact. From an enterprise perspective, it's a little bit different. We focus, as Dennis had mentioned, more on some of the segments that we have specific competitive advantage in.
Things like hospitality, additionally, things like large healthcare and hospital systems where we can deliver a solution that is much more specific to their needs than a generic UCaaS one-size-fit-all solution that our competitors typically do. This is much more partner driven, so our marketing efforts go towards our partner community. Overall, the business, UCaaS and all of our segments, we have three main routes to market, and Chris did a good job of articulating a little bit of that earlier.
First is our direct sales organization, and this one is a high-velocity transaction organization optimized to convert marketing leads. Most of those leads come in from our SMB segments. We mainly have inside sales organizations, two in the U.S. and 5+ in Manila. We also have other routes to markets that we leverage for our direct selling efforts.
From a channel sales perspective, this is the telecom service brokers, the telecom distribution brokers, and this is the agent community. Chris also alluded to that a little bit earlier. That's the community that's historically been buying telecommunications, UCaaS solutions, POTS replacement solutions. Those are the entities that sell that to the large enterprises. We leverage those heavily within our channel partner environment, and we work side by side with them. Sometimes we lead in the sales, sometimes we sell together. Typically, it's one of those two.
Finally, the strategic partner aspect of it, which is commonly called the resellers. This is tiered. Chris did a great job of articulating this. We have the carrier sales, T-Mobile, Comcast, and excited to talk about TELUS. But also we have the other tier of 40, 45 + other resellers that we work through.
So between all of these, we have a unique coverage model to the marketplace to capitalize on the growth that we see not only in the UCaaS space but the AirDial space. I will take a moment just to give you some perspective from UCaaS environment. This is what our cost structure looks like. We do not have to go through this too much, but it gives you a really good sense. We have multiple tiers from a pure UCaaS perspective.
For an entry-level UCaaS user all the way to our Pro Plus, which is fully enhanced, has AI features. Then we have the AI and other add-on solutions, the CX, answering service, receptionist, and the productivity suite that we are going to be releasing. We announced we are releasing today. With that, I am going to bring back Chris Burgy.
Thank you, Rob. Also pleased to share some perspective on 2600Hz, which is a business that we acquired in October 2023. This is a wholesale platform that allows other entities to build UCaaS, CCaaS, and CPaaS solutions, and they have the flexibility to do this in a turnkey model or the flexibility to take parts and pieces and design their own differentiation off of this platform.
There are multiple different deployment models for how they can host this, and the entire architecture from the onset was designed to be API-driven, which gives us a lot of power in the tailor and customization of the solution. Additionally, since the acquisition, Ooma has been porting over our own intellectual property into the platform to make it more robust and more capable. Things like our desktop and mobile AI will be coming as well.
This will allow the platform to become very competitive out in the market and equip others to be successful in the same way that Ooma has been in the space. With that, I am pleased to share a testimonial from one of our largest customers, ServiceTitan.
Hi, my name is Vincent Payen. I am Senior Vice President and General Manager of Pro Product at ServiceTitan, the number one software for the trades. Contact center operations are absolutely critical to our customer. Most of their revenue go through it. As we thought about the future, as we thought about where AI was going, as we thought about the needs of our customers, we had to create an enterprise-grade world-class solution ready for the future.
As we were architecting our solution and making the decision, we looked at all the options, from building in-house to partnering with different partners who had different approaches and different level of capabilities. In the end, the 2600Hz platform was by far the winner because it is the one that gave us the flexibility we needed, the ability to create a fully native product to our system, the ability to innovate on top of it.
It ended up being absolutely the right choice, the right solution for us. This partnership has been an incredible success both for us and for our customers. Partnering with 2600Hz allowed us to launch our brand-new product, Contact Center Pro, native to ServiceTitan, AI-ready with built-in virtual agent, all of that in a matter of a few quarters, which would have been absolutely impossible if we had taken another path.
Above all, we did not build it with the 2600Hz team as just a support team. We built it in partnership. We benefited immensely from the knowledge, the expertise of that group, and together we actually created a product that is game-changing for our customers.
It was such a joy to watch the solution that they have built and how they have been able to transform the trades business. The market opportunity for 2600Hz is something that is very attractive to us over the long term.
There is a variety of different targets for us to pursue, companies that are operating legacy platforms that are lacking features like BroadSoft and Metaswitch, fiber companies that may have regulatory requirements to offer voice services to their customers in situations like ServiceTitan and many of our other customers that are vertical SaaS companies that want to incorporate voice capabilities, whether UCaaS or contact center, into their solution because they are now the system of record, and that is a whole data set that they can take advantage of and blend into the AI capabilities that many of these companies have.
This market is shifting because of the regulatory requirements that I mentioned, and there are lots of legacy providers out there that aren't maintaining their platforms. The investment that we've made by converting over the significant R&D expertise and intellectual property that we have really tees us up to have a compelling platform in the future. While there is a lot of addressable market here, the other thing to bear in mind is this is like an enterprise sales cycle, slightly more complex.
These are entities that are running thousands of users or hundreds of thousands of users. So the decision-making cycle takes a long time, and then you have to go through a migration process. Either way, we view this as a very interesting growth lever for Ooma in the future that we can tap into that additionally helps us to scale. With that, I'd like to introduce Jim Gustke, our Senior Vice President of Marketing and Residential Sales.
Thank you very much, Chris. I'm here to talk about our residential business and why Ooma continues to win. So let's start with our core product, Ooma Telo. It's been rated number one by Consumer Reports magazine for over 10 years, and that's not a mistake. It's because of our technology, PureVoice HD technology, that makes it noticeably better quality than a typical landline. We work with handsets in the home, but we have the flexibility through the Ooma mobile app to also go on the road.
Most important is our freemium business model, which means the core service is free. All they pay are taxes and fees, with an optional Premier service at $9.99 for customers that want more. Today, we have over 723,000 customers, and I'm really happy to say and growing. So, the North America market, why does this matter?
It's still 27 million home phone lines in North America. But many people say, "Well, why do people even have a home phone?" Well, the answer is they like the convenience of having a home phone and especially the phones throughout their home. 911 plays a big role. They want the safety and security of address-based 911, and they know that their phone is always on in the house.
It never runs out of batteries. And finally, the presence of children in the household is a big driver to have a home phone. Oh, I'm sorry, let me go back. Down, let me point your attention to the lower right-hand corner, the market drivers for the residential phone market. First, many parents are now delaying smartphone use among their kids.
The second is the unbundling of cable service, and the third is what we have been talking about a lot today, copper sunset or the decommissioning of copper phone lines. Speaking of parents delaying smartphone use with their children, let me introduce MyPhone. MyPhone was designed specifically for families with kids.
For kids, it delivers simple screen-free calling, no texting, no social media. It has a trusted circle of contacts that the kids can communicate with. It has a party line so that they can talk to multiple friends at once, and they can also listen to voicemails. For parents, what it delivers is the safety of having real address space 911 in the home. It has scheduled quiet hours, so the phone is not available during bedtime or homework time. It has call logs so they can see who their kids are talking with.
Because it is from Ooma, it is easy set up with no technology background needed. What is the market opportunity? From the U.S. Census, there is a huge number of households with kids that is suitable for MyPhone, and this is a real issue for parents. Pew Research found that 86% of parents are managing their kids' screen time on a day-to-day basis. This is not a fad. There is a whole ecosystem of parent-led organizations throughout the country that are focused on reducing smartphone use and screen time.
Wait Until 8th is one, 8th as in eighth grade, Unplugged, and there are many others. Currently, MyPhone is online on ooma.com with major online retailers. I am very happy to announce here today that beginning in November, we are launching in-store with a major brick and mortar. I would like to play a video from one of our social influencers that really brings the MyPhone message alive for parents.
[Presentation]
Okay, now shifting gears to another opportunity. It is Starlink households. Starlink has been growing like crazy, and some forecasts are that it is going to reach 10 million households in North America by 2030. We designed StarDial specifically for satellite internet. It has got optimal sound quality, not only through HD Voice, but also through our adaptive redundancy, which is perfect for the latency of a satellite internet connection.
I am also really happy to announce today that a major retailer is taking StarDial in as part of their Starlink assortment. Finally, let me bring this all together. We have got four major drivers of the residential market. The first is the copper sunset, then unbundling of cable services, the delay of smartphone use, and Starlink.
We have specific products that address each of these entrants into the market. That is our strategy, and that is why we are confident that Ooma is going to win in residential. Now let me introduce Shig, our CFO.
Thank you, Jim. Good morning, everyone. I am going to spend the next few minutes talking about our key financial metrics and also how what you heard so far from my colleagues can translate into our long-term financial targets. So quick recap on our most recent quarter in the numbers coming out of Q2, most recent quarter.
Our current revenue guidance for fiscal year is about $333 million. We have achieved 38% year-over-year growth on business subscription revenue in the second quarter. We also maintain a high dollar retention rate. We also exited Q2 with $299 million of annual exit recurring revenue, which grew 25% year-over-year. In terms of free cash flow and the EBITDA profitability, we also achieved 50% and 68% year-over-year growth respectively. In terms of adjusted EBITDA, this is a trailing 12 months number as of Q2.
We did guide to about $48 million of EBITDA for the year. This is a historical graph on our total revenue going back to fiscal 2021, and far right we are showing the guidance number for the year. As you can see, we have almost doubled between 2021 to fiscal 2027 guidance number. We also maintain the very high proportion of a recurring revenue, providing a lot of visibility.
Over 90% of revenue coming from the recurring revenue, and we believe that trend will continue in the future years. Now, drilling a little bit more into the recurring portion of revenue you just saw. Here is a breakdown on recurring revenue going back to fiscal 2021. Blue bar at the bottom is residential recurring revenue, and the red bar at the top is the business subscription.
As you can see that we are maintaining the recurring revenue on residential subscription relatively stable. We continue to grow the business subscription coming from the UCaaS solution and also the AirDial solution. We believe that the proportion of the business recurring revenue continue to grow with the growth of AirDial and Business UCaaS, which also drives the gross margin, recurring gross margin improvement over time. Here's our ARPU trend.
It's the average revenue per user per month. This is a blended ARPU between business and residential recurring revenue, and it was almost $17 per user per month at the end of Q2. We also believe there is an opportunity to continue to increase the ARPU overall going forward with the increasing proportion of business users. It was about 70% coming out of Q2.
We think that can be much higher as we continue to grow the UCaaS users and AirDial users. You heard about the exciting AI offerings, which an upsell to our UCaaS users, which we believe that can add to the ARPU trend going forward. Here's our historical chart on the EBITDA and free cash flow generation going back 12 quarters.
Each bar in the line graph shows on the numbers on a trailing 12 months basis. At the end of Q2, on a trailing 12 months basis, we generated over $44 million of adjusted EBITDA and also $30 million of free cash. We believe we can continue to drive the higher on both metrics. By the way, we do convert about 70% of EBITDA into free cash, and we have a very low CapEx requirement.
We believe that's going to be the case going forward as well. We believe we can continue to grow free cash flow along with the adjusted EBITDA. Many of you have seen this, but our long-term target is to get to over 20%-25% of adjusted EBITDA from where we are today, which is 15%. Let me get to the next page here to just kind of bridge from where we are to how we get to that number.
On the left-hand side, what we're trying to say here is that we're looking at three to four year timeframe. That's our long-term target model timeframe, where we aim to double revenue, mostly coming from the Business UCaaS organic and inorganic growth, and also the AirDial. Those are two big chunks.
On the right-hand side, I'm bridging the EBITDA margin 15% in Q2 this year to over 20%. A good chunk of that's coming from the recurring margin, gross margin expansion. Again, bigger proportion of the recurring revenue coming from business users in the future years. We also think that there's a lot of operating leverage that can come from R&D leverage. It's about 17% today of revenue. That can be going down to low teens.
We have made heavy investments already in the growth areas. I'd like to end my section with this slide. In terms of delivering shareholder value, we believe it's all about execution. We are in this UCaaS market for small business. We believe we have the strong offerings. We have AI features that are coming on, and we want to supplement that with the inorganic growth, which we have a good history of.
We are very clear about the new growth strategies. You already heard from my colleagues in the middle column. Combining these things, we think we can expand the gross margin, realize the operating leverage, which all translating into greater EBITDA generation and free cash flow generation. With that, I'd like to give mic back to Eric for our M&A strategy and closing remarks.
Thank you, Shig. Thanks everyone for joining us through this conversation. We just have a couple slides left. We've talked a little bit about M&A and how that can augment our growth and outlook. Our primary objectives for M&A are around acquiring more UCaaS users cost effectively. We're not looking to get into a new segment.
There's no new technology that we feel we need to bring in. But where we can bring in more UCaaS users cost effectively, that allows us to broaden our sales and marketing reach, drive cost reduction with synergies, particularly with shared R&D, but also just in general from growing Ooma scale. Our goal when we do these is to have our acquisitions be accretive within just a couple quarters and to drive EBITDA in the 15%-40% range post-acquisition.
Depends a little bit on how much we want to grow the business after we've acquired it. Business that's not growing, we expect to be in the 30%-40% EBITDA range. Our ideal targets are really solid businesses that don't need fixing, but if they have some feature gaps, that's fine. We have a lot of technology in Ooma that we can bring to fill out those gaps.
We prefer our focus on North America, and $10 million-$50 million in revenue is a nice size. It's a nice size for us to digest. It's also an acquisition target that there aren't many companies like us going after, so it gives us leverage as we look for opportunities. We made two acquisitions late last year. Both have worked out very well for us.
We were able to purchase FluentStream at just 4.5x EBITDA and Phone.com at about 1 x revenue. I'm very pleased to say that with FluentStream, we've been able to expand with some channel opportunities, and at Phone.com, we've already moved the EBITDA up into double digits, and we're excited about where we can go with both these as we go forward. In quick closing, I hope we've shown you that we believe we're leading with differentiated solutions in the market.
I believe in all of our markets, we're serving opportunities that are at inflection points. AirDial's at an inflection point. We even see that in residential with new things happening. We're attempting to accelerate our profitable growth through acquisitions. We would like to do an acquisition or two every year.
Obviously, that has to line up in terms of opportunities and valuations because we are pretty selective. That is our goal, and finally, trying to leverage our customer base to drive enhanced profitability as we go forward. With that, I want to thank you. We are all about creating amazing experiences and ultimately revolutionizing markets.
Now, we do have time for Q&A. We ran over a little bit, but we can go as long as you like. If you are joining us virtually, there is a tab, Ask a Question. If you submit your question there, someone will read it in the room. So why do not we bring our Ooma team up, so we can all be here to answer whatever you would like to talk about. Anyone want to start? Yeah, please.
On your acquisitions, what is the potential? Is it a target-rich environment for you? That $20 million in revenues, are there a lot of companies out there that you can go after?
There are actually quite a few players. Some of them happen to be resellers of BroadSoft or other platforms. Some of them have built their own platforms. It is not uncommon to come across a player in that $10 million-$50 million range that has struggled to keep up with the latest developments in technology, and also is spending a lot on sales and marketing just to stay where they are and not grow very much.
What holds us back from doing more acquisitions faster is, those businesses have to be at a point where they are ready to do a transaction. We do not want to overpay when we do these acquisitions. Yes, we think there is quite a number of targets. We have looked at some this year. Nothing has come together. We look at things every quarter.
Okay, one more. I do not understand why AT&T. Why are they trying to get rid of their copper? What is wrong with that business?
It is a good question. I will let Chris answer that. You want to stand here?
I will stand here, then. Yes, so it is a great question, and there are a couple factors that are contributing to this. One, much of the talent that understands how to maintain that network has retired, and the second is, it is very costly to maintain all of that infrastructure, the central office facilities, the copper in the ground, the nitrogen they have to pump in to keep water out of it. It is a degrading asset. You have weather conditions that occur.
So they view it as an OpEx savings, and another perspective to think about is those central offices are like mini data centers. So that is real estate footprint that they could look at selling or leveraging for distributed AI data centers, effectively.
Okay, thanks.
There is a question right behind you. Why don't we go there next, because he had his hand up first.
Great, thanks. My question is actually for Elka. How many companies were recognized with best practices for POTS replacement? That is my first part of it. Then can you speak to the competitive landscape? How many U.S. solutions providers for POTS replacement have a quality solution that your research suggests can compete with Ooma?
Oh, boy. That's a tough one. Ooma is the only company we've recognized with this particular award. We're trying to be very selective in general with the best practices award, so they're usually given in different spaces for different kind of capabilities. But in POTS replacement, it's only Ooma. Now, the issue with that space is that you have solutions that are only hardware-based or just a service offered by different providers.
The telcos sometimes simply get a device from a hardware vendor and use it for the same purposes. That's why I highlighted the fact that Ooma has an integrated approach. I would not want to mention any other competitors that have the same approach, but few, in my opinion, and based on my research, have the combination of capabilities.
Great. I've got a follow-up for the Ooma team. If AT&T has another wave of terminating POTS lines coming up in November, what does the sales cycle look for these users and when do the majority of these enterprises or small companies, when do they transact? When do they look to get ready for that termination? Thank you.
Sure. While they announced that there's going to be a wave, the wave has a date, right? So it's typically not 30 days out. We have on occasion seen 90 days out, but it's typically a year or so out. So that starts the process. And some folks are immediately made aware that this is happening to them. But the way that announcement is made, many of the affected parties may not know, right?
Chris kind of alluded to the fact that a lot of the carriers don't have that expertise in-house. A lot of our customers haven't thought about POTS lines for 20 or 30 years, so it takes a little bit of cure time. Now, the good news is this marketplace has matured in terms of awareness.
3+ years ago, when we got into the space, a lot of the questions we were getting were, "What are POTS and why would we even care?" Now we are much more aware. What we are seeing is we are seeing an acceleration. It still could take multiple months before they form a project, multiple months to evaluate the vendors, and then a deployment cycle after that. These announcements could have anywhere from a three-month to an 18-month tail on it.
Alinda? We will go that way. Don't worry, we will get to you, Eric.
Alinda Li here with William Blair. Thanks for taking my question here. With the existing AI products like the AI receptionist, answering service, and AI insights, what are the early customer feedbacks and adoption trends on that, and how should we think about success going forward with AI monetization in the next 12 - 24 months as you continue to add on new AI software add-ons here? Thank you.
I will let Dennis speak to that, but I will start by saying our goal with the AI productivity bundle is to have something that every one of our customers finds valuable so that we can spread AI across our customer base at large. We only have about a quarter of experience so far. Dennis, I will let you repeat some of the metrics we have seen so far from our inside sales team. We are very pleased with what we have seen in just one quarter in terms of impact. Go ahead.
Yeah. So in terms of the features that we have bundled with Pro Plus, we have seen the movement of Essentials and Pro customers into Pro Plus. For new customers, we are seeing a doubling of that take rate for Pro Plus, which indicates that they are upgrading for the AI features. We are also seeing double-digit take rates of the voice agents, the answering service, and receptionist. Around a 60/40 split between full receptionist and the basic answering service. Right now those programs are largely rolled out to new sales, and we are just starting our install-based marketing of those features.
Got it. That is helpful. And another question. With the multiple growth initiatives underway, including AirDial expansion, StarDial, MyPhone, and also the AI product developments, how are you prioritizing your investments across these opportunities, and which areas are receiving the greatest focus over the next year?
The way we organized our presentation today is our focus. We started by talking about AirDial, then we went to UCaaS, then we went to 2600Hz and residential. We have a lot going on in the company, but we are also fortunate that a lot of these solutions are built and in market, and now we are capitalizing on the growth opportunities. We have done a lot of the legwork now already, and we are not having to invest maybe at some of the levels we did in the past.
That is helpful. Thank you.
Let's go up to Eric, then we'll come down this side. Sorry, you guys.
My question has to do. Eric Martinuzzi from Lake Street Capital Markets. My question has to do with the AirDial and the traction. I think, Shig, you put up about $100 million of that doubling of the business over the next few years is going to be AirDial driven. I think we're in kind of an $18 million -$ 20 million marker right now for AirDial. So how do we close that gap? Is it we've got the 40+ resellers, and it's going to be linear between here and there? Or is it somebody like a TELUS shows up and we get a big slug all at once? I've got a follow-up.
Well, I'll start, then I'll let Shig or Chris or others jump in. We're super excited about the contract we just signed with TELUS. They are the best customer we can have for AirDial because they have the lines. It's their lines that they provide those customers, and they can go into their own customers and do the upgrades.
As far as we know, we are the only company they're working with, and they selected us after a long process. They are eager to move forward quickly. So when we look at a customer like that that has potential for 300,000 lines or more, it was really just one part of TELUS that we indicated with that 300,000 line number. There's significant potential. If you want to add.
Yeah. So I'll add a little more color to that. The reseller channels are certainly an interesting lever. We continue to add to that, and they vary in the nature of the types of accounts that they pursue. Comcast, which we're in the enterprise division, for example, is pursuing Fortune 1000 companies. That's how that team is compensated. So much longer sales cycles, but much larger opportunities, and you start to see those entities move, and that's a lever up for it as well.
What we did not share in the presentation as an example is the Verizon ecosystem we're also in. We have their top platinum level partners, and Verizon's strategy has shifted to channel first as the way that they fulfill. Verizon proper has not started their own copper deprecation yet. They're just working on the Frontier assets. They will begin that journey in the future, and we believe that's another interesting opportunity for us to be the preferred solution fulfilled through their critical platinum partners.
Okay. There's not like, AirDial has targets it needs to hit across or per reseller. Sorry, I put that backwards. Resellers don't have targets that they need to achieve to maintain their reseller status or anything like that.
It varies. There are some that have particular targets based upon how we structure the relationship. But to be frank, we were fairly relaxed in that approach to snag as many resellers as we can. Many of them converted from competitive POTS replacement products to us, so we think the coverage model of continuing to add and all of them attacking the market will be sufficient to capture the demand that we need going forward.
Okay. I know you've been working with resellers for as long as we've had AirDial, whatever it is.
Yes.
Three, four years. Any lessons learned with certain resellers as far as enabling them or holding them to investments in Ooma?
Yeah, I think there's been a lot of lessons learned between Rob's team and my team. We've invested a lot of effort in enablement strategy for resellers. Some of them are very capable on their own. Others are not as capable. So we have a team of sales reps that actually focus exclusively on the resellers. We have another team that helps with the enablement and product management and taking more of the lead where we're allowed.
A good example of this is T-Mobile. Their sellers are used to selling cell phones, to be candid. We have different programs where now they're letting us lead the sales process. We're much more expert at doing this. So I think that helps us make them more successful. They get access to the accounts and all the right tools.
There's been a lot of positive feedback that's come from resellers on product capabilities that product management and engineering have built that have really strengthened the solution versus the other offerings that are available in the market. So we've hit this maturity point, I guess, to put it more succinctly, in how we're handling go-to-market, and it's very well packaged and very well structured now as we bring on new resellers.
Got you. Thank you.
Let's go to Tim. Thanks for your patience, Tim.
Thank you. Great presentation, by the way, and very, very well done. Two broad questions. On AirDial, the primary reason people need to use this is because they require connectivity that is always on with backup and multiple paths of connectivity. Is that right?
Yes. There is a multitude of legacy devices out there that they do not want to swap out or they cannot swap out, and they need to maintain that same old-school POTS copper connectivity into that device. Give you an example. We have a natural gas company. They monitor their pipelines over POTS lines and modems, for example. We are at the Sunoco fuel tanks at NASCAR tracks, same thing.
It presents an opportunity that they have to act because these are critical devices, and in some cases, there are legal requirements with fire panels and elevators, for instance, in how they have to work. The fire inspector can come in and fine you or even revoke your certificate of occupancy. Folks just want the easy swap on this. They know it is going away. There is a lot of price pressure, of course, with the bills that they are seeing. That is what puts this in a bit of a unique situation versus other categories in the voice space.
Yeah, I am looking at these buildings would have a dozen of those connections each for fire elevators and
Yeah. We have a number of customers here in New York, same. Yeah, same thing. They just want to swap.
Your market estimates seem very low to me. Who else is providing this service? You mentioned TELUS. AT&T is going to have to swap out 3 million lines.
A lot of lines.
Where else are they going to go to if they're not using you?
AT&T does have a separate solution that they're currently utilizing for it. There are a handful of vendors in this space that I would consider our material competitors, two in particular. But there are not a lot of choices, and there have been a lot of product-related struggles with the other solutions.
For us, this goes back to the point where, and Thad made this, we own the whole stack, and that's really unique for us because we can go turn the knobs in lots of different places to make the fire panel work that nobody else can get to work, for example. It's a fairly concentrated market in terms of the vendors that are available and the choices that are available.
Yeah, just the other choices I've seen, yours, they don't even seem to compare, but good luck.
Well, thank you.
Then just switching gears to the AI side, Eric, can you maybe just step back a little bit and talk about where do you get your data? How have you built this platform? What other suppliers are you using? What kind of security? How important is your AI platform for the solution here?
I will say a couple of words, but either Dennis or Toby can join me after. We have developed a fair bit internally, not all the models we run. Sometimes we do work with outside models, but we also run some models internally. We do that with the goal of driving to the lowest cost structure we can get. That is kind of permeated Ooma as a fundamental core competency in everything we do. We will invest and design our own in order to get the lowest cost structure possible.
We do think it is dynamic, so when we are using an outside model, we usually use more than one, and we can switch between them based on what is working best or frankly, where costs go. But we are running equipment in data centers to get this done. I think that addresses your question, at least in part, but I do not know if Dennis or Toby want to add to that.
No, I think I will just reiterate the point. We do use a combination of both in-source and outside models. AI models are progressing very quickly. There is constant change in that market. The advent of open-weight models is also changing pricing structure in the industry. So we are staying flexible right now. We do use some outside models right now for time to market and for instant capacity. But at the same time, we are basically model agnostic, and we are constantly experimenting with other models to try to find the right price point, the right value for delivering what a specific agent or task needs to do. Yeah.
And maybe just, do your customers let you use their data or where do you get the data? Then, I guess you're alluding to on the hardware side, do you actually own some of your own GPUs that you're running this on? Yeah.
Yes, we do, and one of the things about AI that I think the industry's going to learn is AI does not read loyalty at the infrastructure layer. It's very easy to move from one model to another at the infrastructure layer. At the application layer and the harness around it and the user interface, that's something that you have to get eyeballs to be used to a particular way of using it. That's sticky. But what we approach this from an infrastructure point of view is to give ourselves that flexibility so we can move to different solutions.
Yes, we do own GPUs and the trick there is to figure out how to spread the load so that you're not overbuilding just for your peak usage, but actually figure out how to spread that out. If you think about it from a residential point of view, residential use of AI, the peak load is in the evening. For business, it's in the morning or it's in the afternoon. They actually overlap very nicely to get maximum use of the infrastructure. We pay attention to that, and we pay attention to being able to be flexible about what models we move to based on market.
The data we're using is the customer's data, their phone calls, text messages, other things they're doing, and we just use that data for that customer. We're not asking our customers to share their data.
Lastly, have you built your own harness capabilities?
That is essentially what, when you-
Hang on. You got to speak here if you are going to speak.
Sorry. When you use the product, when an actual user uses the product, he is using the user interface that the team has built. That is what they get used to using, and they do not want to switch once they figure out exactly how that works and how to get the most out of it.
Congratulations.
One of the things we cut from our presentation because we were worried about time, but we had a pretty detailed look at our AI receptionist product. A business has to educate that product for their situation, their vertical, what they want customers to know about them. We have built automated tools to make it easy for a business to do that and set it up in, I think, a very elegant way.
That is that harness capability that really makes it come to life for a small business situation. That is where we think the competitive advantage is, along with the fact that we are bundling together in one solution. So instead of trying to put things together themselves as a customer and deal with inefficiencies, we can put it all together in one package. Sorry, go ahead.
Just to follow up on that. It seems to me that it is pretty impressive that you were able to get this to market pretty quickly. Could you maybe describe the process of how you decided to pursue these products? How long have you been working on it? How much have you invested, either from an operating expense or capitalized expense?
Then as you think about the revenue from here, I would think that the contribution margin from that revenue is going to be extremely high. Is that sort of a correct assumption, that there is very little in the way of incremental operating expense, as you sell these products?
On your second question first, there is a lot of leverage in our pricing today. We are able to leverage what we have done across these customers and make it work well for us. We are excited about the margins we see as we get into AI. Now, how did we get into this in the first place? We started, boy, it is maybe a year and a half ago or more, but we started building systems for our own use internally.
We launched those, particularly in our inside sales and customer support teams, and it was very dynamic. We were changing models and changing ways of doing things almost every month for a long time. What we wanted to do through that process is get to a point where we really understood it and could make it simple and easy to use.
We kind of used ourselves as the test case to see what worked and what didn't, to learn from it. It wasn't until we had been at that for over a year that we started working on our solutions for customers. I think that's partly why we've been able to move so fast since we made that transition, because we had a lot built and ready to go. I'll go to the very back because Jean is going to read questions from outside the room, then I'll get back to you.
We'll start with the first two virtual questions.
Yeah.
Peter Lowry with Citizens. AirDial is growing rapidly and seems like a great market opportunity. Is there anything you can speak to in terms of its current scale?
Shig, do you want to address that?
Sorry, could you repeat the question?
Oh, sure.
Yeah.
Go back to it. Ooma AirDial is growing rapidly and seems like a great market opportunity. Is there anything you can speak to in terms of its current scale?
Sure. We have been talking about our intermediate goal to hit 300,000, 330,000 lines, to hit $100 million of recurring revenue. We are a little bit over a fifth of the way at the end of Q2. I think you also heard us say coming out of Q2 that we grew the subscription revenue in Q2 year-over-year by 70%. Again, you heard about the runway that is remaining, which is still large, and we got good new partners and carrier sign-ups. We believe that we continue to have good momentum on the Ooma AirDial.
Okay, and the second question comes from Matthew [inaudibe] with B. Riley. How much of the growth in the revenue bridge factors is contributions from acquisitions, or would acquisitions add upside to the long-term roadmap?
Yeah. I do not know if we have been explicit about that, but there is certainly some acquisitions included in the UCaaS bar that we are showing on that breakdown. If we can accomplish our goal of an acquisition every year or more, in the $10 million - $50 million range over two to three years, we could certainly exceed that $100 million of growth for sure. But we cannot handicap whether those acquisitions will happen and whether we will be able to bring them to fruition. But we have had-
Yeah
a pretty good track record. If you think back, we acquired Broadsmart, we acquired Voxter, we acquired OnSIP, we acquired FluentStream and Phone.com, and we have every reason to think there are going to be more as we go forward.
Just to add what Eric said, again, the timing itself is hard to predict, but again, just the FluentStream and Phone.com as an example that we did almost a year ago, and those two brought in $46 million of revenue. So you can see that it does not take too much to actually fill the gap on that UCaaS growth that I showed on the bridge.
Go ahead. Hang on.
Oh, sorry.
Okay.
Hi there. Thanks for taking my question. Andrew King at Rosenblatt Securities. Just wanted to go into the AI bundle that you launched today. First off, can you just give us a little bit of your reasoning behind bundling those solutions rather than offering them as standalone products? Then, any further color that you can give us into the pricing of that bundle would be great.
Sure. We are always thinking, particularly for our smaller business customers, how do we keep this simple? So, putting it all together in one bundle is $15 a month for the account. That is almost nothing to sign up to have it. Then, you have all this stuff to play with. We will charge based on usage. There are certain credits that the customer will buy, and they will be able to use them up as they do different work with those agents.
So, it is just a simple way to bring it to market. Also, all of those items are built around improving productivity at the business. So, they do go together well in that sense. We thought it was just an easy entry way to get started. I do not know if you want to add, Dennis.
Yeah. I think our strategy there, like Eric said, was to make it easy and accessible for small businesses. We find that they're interested in AI, but also hesitant. They want to be able to try it. They want to test it. They want to see. They might start with one feature, then as they see that, build on that success, enable more.
We think that giving them access to everything at once encourages that experimentation and eventually the adoption of the feature in production. It is a usage-based system. For $15 per month, they do get a certain number of credits. The agents, based on which agents they select, which workflows they use, they're deducted from their credits.
It gives us a way to let them experiment and use the features, and we have control over our margins and our cost, because inevitably there's a cost aspect to it. It just allows us to tune the knob so that we're always right side up.
Go ahead. Go ahead, Brian
Okay. A couple more. Thanks, Brian from Alliance Global Partners, for taking my follow-ups. First, congrats on the TELUS win. How long was the evaluation process? Are you aware of how many vendors were evaluated? You said there were all of your competitors. Are you willing to share what your pricing was and how it compared to those competitors?
Well, we will not share the last.
That is why I said, "Are you willing?
That's-
That's why I said, "Are you willing?" I knew.
Yep.
The process was, for a Tier 1 carrier, relatively quick. End-to-end, I would say it was approximately six months, so pretty quick. All of our competitors were in there. They evaluated the major vendors. If you do your research, you'll see who those are. The top five solutions, basically, as part of that process. They went through thorough testing, incidentally, of all of the solutions, including a fire panel that is unique to Canada.
Again, much to our strength and our talent on the engineering side, we're able to make adaptations to the firmware on our device within a couple of days and make it work. Our ability to act that quickly thoroughly impressed TELUS, to be honest, that we have that sort of bench on the development side.
It was a quick process, and Canada is going through the same journey as the U.S. CRTC, which is their equivalent of the FCC, has a new head that wants to, in effect, parallel what the FCC did by removing all the red tape for the Canadian carriers. It really opened up optionality for them, where that was not the case at all because it was highly regulated and difficult to shut down the network.
I have two more. The first is, this was 300,000 lines. Your medium-term target is 300,000 lines. I want to make sure I understand, how long do you expect it's going to take to fully replace all of these lines?
Yeah. So one point of correction, 300,000 lines in just TELUS Business Solutions. They have other divisions that have their own lines. We are in conversations with them. I think that they will follow a similar journey and path as what AT&T has done here. They will likely take action over a number of years, three to five, maybe.
For example, you have to send out notices, give customers sufficient time plan. You do not want to shut off critical life safety devices, elevators, and fire panels, et cetera, and have liability issues. So it will be a pragmatic approach over time. They intend to use their own techs to also do this, so other carriers have done this, where they are dispatching the tech out. You get a letter that, "We are changing your service. Here is your new device.
Here is the tech that is going to plug it in and operate it for you." So that becomes, kind of to Rob's point earlier, much like enterprise customers, a project management cycle that you have to address over time and do in stages because you cannot just rapidly go convert 100,000 lines, for example, in 12 months.
Right. Some of those lines will go away, I am sure. Some will get upgraded where they decide to put a new elevator panel in or something that will work, and not require legacy capability. But I think, in our experience, majority of the lines that we see out there, the best and easiest solution for the customer is to just pop in AirDials. Salesforce Tower in San Francisco, every elevator in that tower has an AirDial powering the call button, and it was a very simple way for them to upgrade. And that is why the solution is so powerful.
Great. I got one last question. Thanks for taking them all. When you look at your active pipeline for POTS replacement, how many active opportunities do you have that are similar to TELUS with a network operator where you are already addressing an RFP and being evaluated, if you can share that?
We can maybe say a couple words around that. I don't think we can give that in absolute numbers. Chris, if you have any thoughts.
Sure. We're engaged in a number of conversations, as you can imagine, both here in the U.S., in Canada. Of course, we have, outside of AT&T, relationships established with the key tier 1 carriers here in the U.S. There's still ample opportunity, and one of the benefits that I will share is a lot of people are approaching us now about AirDial. Either they've lost in an opportunity against one of our other resellers, or they've heard about it, or they've had a failed experience with one of the other solutions. So it's equally become an inbound exercise for us, as much it was an outbound exercise for outreach before.
Thank you.
Let's try to take There was a question over here that I skipped past, but let's take one or two questions, and then we can keep talking at lunch, if that sounds good. Was there another question? Yeah, go ahead.
No, I have it.
Oh, I do not mind, whichever way we want to do it.
Thank you. Great presentation. Shig, I would like to ask you a question. On the 3 to 4-year framework to roughly double revenue, could you help us think about the composition of that growth? Specifically, how much of the incremental revenue do you expect to come from AirDial versus organic UCaaS growth, AI, and 2600, and how much assumes the future M&A? As the mix shifts towards those businesses, which of those drivers should contribute most to getting your goal EBITDA margins above 20%? I am from Freedom Capital Markets, Dilrukh.
Well, I appreciate the question. You saw that in terms of bridging where we are today to long-term model. On a high level, I showed the similar amount of bucket, $100 million coming from UCaaS and the $100 million coming from AirDial. AirDial could certainly be bigger than that, depending on what we achieve prospectively with new partners and new carriers and large accounts. As I said earlier, we're seeing the AirDial subscription growth being a high double digit.
We've done that in the last few quarters, and we think there's opportunity to continue to do that in the short term. At some point, the law of large number comes in, obviously. That might be a little smaller. I think, in terms of pure growth rate, because AirDial is growing from a smaller number versus a UCaaS, we're going to continue to see the higher growth rate for AirDial.
In terms of the small business UCaaS, in the recent quarters and years, it's been steadily growing about mid-single to a little bit higher than that year-over-year. I think this AI opportunity is a very interesting, exciting opportunity for us that could accelerate that further to high single digit or even double digit. We need to see that come through that. That's a magnitude of growth rate between the two. Obviously, UCaaS growing from the larger base, you're going to see those numbers I just described. That's what I can tell you right now. Does that answer your question?
Thank you.
The best I can.
Was there one last question over here? This gentleman. Here, take the mic so that they can hear you out externally, too.
In general, how do you generally deal with your resellers? Is there a general revenue split here? Or can you-w ithout getting specific, but-
Yeah. Well, first of all, I will say that when we tell investors to model around $25 per line per month, that is a blend of our direct sales that are often above that and our resellers, which can be below that. We are putting that together that way for you. It depends, too, on what we do versus what the reseller does. Some of the resellers will bring the wireless internet connection, the data plan, and marry that up with our capability. In that case, we would see less revenue, but we also have less cost.
Sure.
It varies with that.
With the TELUS relationship, are their customers even going to know that you are part of the deal?
Yes. None of the carriers hide that it is Ooma. The portal shows Ooma, so we are not doing any custom white label branding, any of that for them. One more thing to add on for the reseller structure, the model goes deeper into how much they own in the value chain. There is obviously the data connectivity. The Verizon partners, for instance, bring Verizon SIMs, so the reps get compensated. We have others that want us to assist with the selling motion, handle all of the project management and install. So we charge kind of à la carte, if you will, the more they ask us to do, which raises that transfer price for them.
Okay.
Jean, was there a last question from the back?
One last question from Bill Wolfenden. Cottonwood slide showed AirDial goal of 333,000 lines. That is only 4% share of 8 million lines. Can it be much higher, like over 1 million lines?
It is so hard to make these predictions. We set our goal thinking $100 million in recurring revenue from AirDial would be a nice thing to aim for, and we remain confident we can get to that level. Yes, the industry is large. We have three to five, maybe even more years to go before this transition runs its course, and we see things accelerating at the moment.
We are going to push hard and see how far we can get. With that, I think I will say thank you to all of you for joining us today. Really appreciate your attention and interest in Ooma. We have lunch coming, and we can chat more. Let us call the meeting at this point. Thank you.