Operator
Thank you for standing by, and welcome to UMA's second quarter fiscal year 2027 earnings conference call. Currently, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Matthew Robertson, Director of Investor Relations. Please go ahead.
Thanks, Lateef. Good day, everyone, and welcome to the second quarter fiscal 2027 earnings call of UMA, Inc. My name is Matt Robertson. I'm the Director of IR and Corporate Development. On the call with me today are UMA's CEO, Eric Stang, and CFO, Shig Hamamatsu. After the market closed today, UMA issued its second quarter fiscal 2027 earnings press release. This release is also available on the company's website, UMA.com. This call is being webcast live and is accessible from a link on the events and presentations page of the investor relations section of our website. This link will be active for replay of this call for one year. During today's presentation, our executives will make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today and those risks more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof and we disclaim any obligation to update any forward-looking statements except as required by law please note that other than revenue or as otherwise stated the financial measures to be disclosed on this call will be on a non-GAAP basis the non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP the discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures described in this call to the most directly comparable GAAP financial measures is included in our earnings press release which is available on our website On this call, we will give guidance for third quarter and full year fiscal 2027 on a non-GAAP basis. Also, in addition to our press release and 8K filing, the overview page and events and presentations page in the investors section of our website, as well as the quarterly results page of the financial information section of our website, include links to information about costs and expenses not included in our non-GAAP values and key metrics of our core subscription businesses. These are titled Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally, our investor presentation slides include gap to non-gap reconciliation that also provides resolution of gap expenses that are excluded from non-gap metrics. Now, I will hand the call over to UMA CEO Eric Stang.
Thank you, Matt. Hi, everyone. Welcome to UMA's second quarter fiscal year 2027 earnings call. Thank you for joining us. Q2 was another strong quarter for UMA. We are now halfway through our fiscal 2027, and I'm pleased to report that on both the top line and the bottom line, we are ahead of our original plan. I believe we have good momentum across our business, and I'm excited to talk with you today about our outlook. On the top line, we achieved $83.2 million in Q2 revenue, up from $66.4 million in Q2 a year ago. This represents 25% revenue growth year over year, driven mainly from business customers, including Airdial and our two acquisitions late last year. Our key business subscription and services revenue grew faster and was up 38% year over year. And within this, our Q2 Airdial services revenue grew 75% year over year. Looking forward, we believe we have good momentum across all major areas of our business, which we believe will be driven most of all by accelerating POTS replacement, new AI features, and our residential product, MyPhone. I will cover each of these later in my remarks. But first, regarding our bottom line performance in Q2, we delivered non-GAAP net income of $10.2 million and adjusted EBITDA of $12.4 million. These results are up year over year by 58% and 74% respectively. Adjusted EBITDA is now a solid 15% of revenue, up from 10% of revenue just six quarters ago. We are proud to have achieved steadily improving profitability over these last six quarters and longer. And looking forward, we're not done. We believe our business model can generate further increases in profitability. We outlined four key initiatives at the start of this year. Airdial expansion, new AI solutions, the launch of MyPhone, and capitalizing on our recent acquisitions. I'd like to update you on each, starting with Airdial. Airdial is, of course, our POTS replacement solution and currently the fastest growing part of UMA. We have created what we believe is the leading solution in the market, incorporating unique features such as multipath connectivity, extensive remote device management, and customer alerts. We are seeing the market for POTS replacement expand this year. In Q2, we added two new Airdial resale partners and are now well over 40 resale partners in One of the partners we added is a Verizon Platinum partner and supports our strategy to engage more closely with Verizon. On the customer front, I would like to highlight one highly competitive win that demonstrates UMA's growing strength in the market. In Q2, we won a large hospital system, which purchased close to 200 Airedial lines, over 1,000 UCAS seats, and UMA Connect for Internet backup. We believe we were chosen for our differentiated POTS replacement features, the flexibility of our solution, and our implementation expertise. Looking forward, it is our goal to add one to two new Airedale resale partners every quarter. Some resellers, especially if they are a carrier maintaining existing POTS lines, can make a big impact on Airedale growth. Our second initiative centers on introducing AI features on our UCAS platforms to drive increased customer and ARPU growth. I'm pleased to report we made significant progress in Q2 by introducing AI transcription and AI insights as part of our ProPlus service tier, and by introducing two standalone AI services, our AI answering service and our AI receptionist. Our standalone services have a low monthly fee that includes a set amount of usage and offer increased usage for an additional charge. Whether a customer is stepping up to ProPlus for an additional $5 or $10 per month per user, or whether they are also paying us $15 to $50 a month or more for our standalone services, we have the potential to significantly increase our revenue per account and per user. Our new AI services were launched at the end of Q2, so we do not yet have reliable data on customer adoption. That said, our sales teams tell us the customer reaction has been strong. As is our intention, we believe AI is driving increased interest by customers in our top ProPlus service tier, and that our standalone AI services, namely AI Answering and AI Receptionist, are receiving a lot of customer attention. Looking forward, we are now busy creating our next AI solution, which we are quite excited about and expect to release this quarter in Q3. This solution will encompass a large number of business productivity applications, which I believe almost all customers will find valuable to their business. As regards to UCAS and specifically UMA office, I'm also pleased to report we established a partnership with Thrive, which will allow UMA and Thrive to introduce each of our solutions to one another's customers. Thrive provides innovative small business marketing and CRM solutions and excels in verticals such as health care, beauty and wellness, legal and finance, auto services, and many more. These are prime verticals for UMA. We intend to launch our joint marketing activities in September, and as part of this, UMA will also provide an integration between Office and Thrive's CRM called Keep. Lastly, regarding UCAS, I want to mention that UMA office was recently named the top VoIP provider in the 2026 Spiceworks Voice of IT survey, based on feedback from 236 IT professionals evaluating leading standalone VoIP providers. We are heartened to once again receive this recognition, especially since it is the result of voting by users themselves. Regarding our third initiative, we launched My Phone Bioma in Q2 as planned and began the process of building brand awareness and retail presence to drive its success. You'll recall this is a residential landline solution targeted at giving younger children an alternative to a cell phone and at giving parents the control they need to keep their kids safe my phone offers unique features such as trusted circle to limit what phone calls can occur in quiet hours to limit when calls can occur some organizations have been formed to help warn parents of the dangers of early child cell phone use and many of them are now supporting my phone and our retailers have shown great excitement too we are sold online now at five major retailers, namely Costco, Amazon, Best Buy, Walmart, and Target. We expect to be offered in store at one retailer this fall, and we expect to launch in Canada before the end of Q3. Already for Q2, we were able to increase our residential user base by over 3,000 users, a reversal of the slow user decline we have historically experienced. Taking a page from the MyPhone playbook, I'm pleased to announce we will be launching another custom residential solution in Q3, branded Stardial. Stardial is designed to complement Starlink and provide an ideal phone service experience with Starlink. Stardial connects to Starlink over Wi-Fi and most importantly, takes advantage of UMA's proprietary adaptive redundancy to maintain high-quality calls over sometimes high-latency satellite internet. Like MyPhone, we are optimistic that major retailers will carry Stardial, and I'm pleased to share that one major retailer has already told us they plan to sell Stardial in-store starting late this fall. We are hopeful that MyPhone and Stardial together will boost our residential revenue, and in addition, we believe that the shutting down of residential copper lines that is now underway will also boost our residential sales finally as we've reported in previous quarters we believe we are making good progress integrating our two acquisitions fluent stream and phone.com we took some eight actions late in Q2 to capture additional synergies between Uma and phone.com we expect those actions will contribute positively to our bottom line results starting in Q3 of this year we're actively working to leverage UMA's AI developments for the benefit of FluentStream and Phone.com, and we continue to utilize UMA's more extensive marketing capabilities to strengthen the Phone.com brand. All in, we believe we have done well with the acquisitions we have made over the last several years, and we remain committed to executing on more acquisitions if and when we can find suitable opportunities at the right valuation. As we stated previously, our ideal acquisition targets are smaller-sized UCAS players that allow us to grow our SMB user base and capture scale economies cost-effectively. As I hope is clear, we have a lot going on at UMA and significant opportunity in front In order to give investors a more complete picture of UMA's strategy and outlook, I want to let you know we are planning to hold an investor day at the New York Stock Exchange in the morning on September 29. Our meeting will be webcast as well. In attendance from UMA will be several of UMA's senior management team, and we will present our plans in more depth than we can here today, and also take Q&A. Please keep an eye out for a press release next week for more information about this. I will now turn the call over to Shig, our CFO, to discuss our results and outlook in more detail, and then return with some closing remarks.
Thank you, Eric, and good afternoon, everyone. I'm going to review our second quarter financial results and then provide our outlook for the third quarter and full year fiscal 2027. In the second quarter, we maintain strong momentum with revenue of $83.2 million, up 25% year-over-year, driven by the growth of UMA business, including Airdial, and the additions of FluentStream and Phone.com. Excluding the impact of these acquisitions, total revenue in Q2 grew 8% year-over-year. In Q2, business, subscription, and services revenue accounted for 70% with total subscription and services revenue as compared to 62% in the prior year quarter. Q2 product and other revenue came in at $7.6 million and was up 46% year-over-year, driven by the growth of Airda installations, which increased 50% over the prior quarter. Product revenue in Q2 also included initial shipments of MyPhone, which contributed to the growth of residential product revenue, both sequentially and year-over-year. On the profitability front, Q2 non-GAAP net income was $10.2 million and grew 58% year-over-year as we continue to focus on operating leverage in R&D and optimizing our sales and marketing spend as well as realizing synergies from our recent acquisitions. Now some details on our Q2 revenue. Business subscription and services revenue grew 38% year-over-year in Q2 driven by user growth and output growth for UMA Business and the additions of FluentStream and Phone.com. Excluding the impact of the acquisitions, business subscription and services revenue in Q2 grew 8% year-over-year. On the residential side, subscription and services revenue was relatively flat year-over-year as we saw two consecutive quarters of residential user growth in the first half of fiscal 2027. For the second quarter, total subscription and services revenue was $75.6 million or 91% of total revenue as compared to $61.1 million or 92% of total revenue in the prior quarter. Now, some details on our key customer metrics. A blended average monthly subscription and services revenue per core user, or ARPU, increased 8% year-over-year to $16.95, driven by an increasing mix of business users. During the second quarter, we continued to see a healthy Office Pro and ProPlus take rate with 58% of new Office users opting for these higher-tier services. Overall, 40% of UMO office users have now subscribed to those higher tier services. Our NetDOT subscription retention rate for the quarter was 99% as compared to 99% in the first quarter. We ended the second quarter with 1,427,000 core users up from 1,420,000 core users at the end of the first quarter. At the end of the second quarter, we had 703,000 business users, or 49% of our total core users, an increase of 4,000 from Q1. Q2 business user growth was negatively impacted by 4,000 user churn from IWG and a small one-time user count correction in other areas. Excluding the impact of these items, business users grew $11,000 from Q2. Our annual exit recurring revenue was $299 million, up 25% year-over-year. Now some details on our gross margin. Our subscription and service gross margin for the second quarter was 72% as compared to 71% in the prior year. Product and other gross margin for the second quarter was negative 25% as compared to negative 47% for the same period last year. The year-over-year improvement in product and other gross margin reflects an increasing mix of Airda hardware and installation revenue within the product and other revenue. Q2 product and other gross margin also benefited from a recovery of previously paid tariffs. Excluding the benefit of tariff recovery, Q2 product and other gross margin was around negative 30%. On an overall basis, total gross margin for Q2 was 63% as compared to 62% in the prior quarter. And now some details on operating expenses. Total operating expenses for the second quarter were $41.1 million, an increase of $6.1 million year-over-year, mainly due to the additions of FluentStream and Phone.com. Excluding the impact with the acquisitions, the total operating expenses increased $1.3 million, or 4%, from the same period last year. Sales and marketing expenses for the second quarter were $20.1 million, or 24%, of total revenue, up 12% year-over-year, due to the addition of FluentStream and Phone.com expenses. R&D expenses were $14.1 million, or 17% of total revenue, up 23% year-over-year due to the additional flu and stream of phone.com team members. G&A expenses were $7 million, or 8% of total revenue for the second quarter, compared to $5.6 million for the prior quarter. Non-GAAP net income for the second quarter was $10.2 million, or diluted earnings per share, of $0.35, as compared to $0.23 in the prior quarter. Adjusted EBITDA for the quarter was a record $12.4 million, or 15% of total revenue, and grew 74% over the prior quarter. We ended a quarter with total cash and investments of $17.5 million. In Q2, we generated a record $13.1 million of operating cash flow and $10.8 million of free cash flow. On a trailing 12-month basis, we generated $37.1 million of operating cash flow and $30.2 million of free cash flow. We spent a total of $17.6 million over the last four quarters, including $4.4 million in Q2 to buy back stock through a combination of open market repurchase and RSU net share In addition, we paid down the term loan by $6.5 million in Q2 and reduced the outstanding debt balance to $47 million at the end of Q2. On the headcount front, we ended a quarter with 1,444 employees and contractors. Now I'll provide guidance for the third quarter and full fiscal year 2027. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization of intangibles, and other expenses. We expect total revenue for the third quarter of fiscal 27 to be in the range of $83.7 million to $84.5 million, which includes $7 million to $7.5 million of product and other revenue. We expect the third quarter non-GAAP net income to be in the range of $9.8 million to $10.2 million. dollars. Non-GAAP diluted EPS is expected to be between 34 cents and 35 cents. We have assumed 29.1 million weighted average diluted shares outstanding for the third quarter. For full-year fiscal 27, we expect total revenue to be in the range of 332 million to 333.5 million The full-year fiscal 27 revenue guidance assumes business subscription and services revenue growth rate of approximately 32% over fiscal 26, while residential subscription revenue is now expected to be flat to an increase of 1% over the last fiscal year. In terms of revenue mix for the year, we expect 91% to 92% of total revenue to come from subscription and services revenue and the remainder from the products and other revenue. We expect non-gap net income for fiscal 27 to be in the range of $39.5 million to $40.3 million. Based on this guidance range, we estimate our adjusted EBITDA for fiscal 27 to be $47.5 million to $48.3 million. We expect non-GAAP diluted EPS for fiscal 27 to be in the range of $1.35 to $1.38. cents. We have assumed approximately $29.2 million with average diluted shares outstanding for fiscal 2027. In summary, we're pleased with our continuing momentum with a record adjusted EBITDA of $12.4 million Q2, which grew 74% year-over-year, along with a record free cash flow of $30 million for the trailing 12 months. We're excited about both organic and inorganic growth opportunities in front of us and remain focused on achieving another meaningful progress towards our long-term financial targets. I'll now pass it back to Eric for some closing remarks. Eric?
Thank you, Sheikh. We're obviously now halfway through our fiscal 2027 in what can be a very strong year for UMA. While we have exciting initiatives across our business, we're most focused on capturing what we see as accelerating market demand for Airdial, driving added growth both through UMA AI, MyPhone, and now Stardial as well, deriving further contributions for our acquisitions of PhoneStream and Phone.com and working to pursue new acquisitions in the future. We hope you'll join us at our upcoming Investor Day on September 29 at the New York Stock Exchange. Thank you. We'll now take your questions.
Operator
Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Alinda Lee of William Blair. Your line is open, Alinda.
My phone has now been in the market for several months. Can you discuss the early adoption trends, custom feedback, and any lessons learned so far? And more broadly, Eric, how do you think about the long-term market opportunity here?
Sure. Hi, Alinda. You know, it's been in the market since June-ish timeframe, and it's off to a great start. You know, we were declining each year in residential users. This past quarter we grew 3,000 users, and the bulk of that swing is driven by my phone. But we think it has a lot farther to go. So there's 20 million households in the U.S. with young children and several organizations talking a lot about the importance of keeping kids off of social media and cell phone use until they read a certain age. In fact, huge news today about Meta's settlement even on addressing some of those fears. We need to promote it. We've dialed up our efforts there, but it's going to take a little time. We hope to get it in store at a major retailer late this fall as well. But we think it's got significant opportunity. You can see it when you talk to people who have young children. They get it very quickly. And it's a bit of a buzz. This whole idea of giving a child a landline a parent can control when they're young is a bit of a buzz in the schools, too, amongst PTA groups and such. So we're optimistic about it.
That's helpful. And you've been adding on a lot of AI products, both as standalones, but also additional capabilities onto the ProPlus SKU there. How should we think about AI as a driver to the ProPlus attach rate and ARPU over time? And can you just give us a little bit more color in terms of the newer standalone AI opportunities products here as well?
Sure. So, you know, what we're starting to do with AI, it's an inflection point for us in our market. We can bring some pretty exciting features to our small business customers in particular that they've never had or seen before, and it gives us a whole new way to monetize those customers and drive more, you know, value for them and value for us. We're off to a great start with some features in ProPlus that people can trade up a tier to get, and then a couple of standalone features that we think we've designed really well for a small business to kind of adopt them, customize them, make them work for them, but in a straightforward kind of paint-by-numbers, non-IT professional user way. And I think that's a great start for us. And what we have coming in Q3, we're super excited about, we're going to call it our UMA AI Productivity Pack. And it's going to come in two phases. Phase one, which will come out in Q3, will have about 10 individual features in it. And these are things that can help a small business track their customers, see what's going on, draft an SMS or a customer response, help with payments, things like that, things people do every day that are, in a way, kind of busy work that AI could do for them. And we want to get that launched and see how it's going this quarter and then obviously get to phase two later this year. It's hard to give you real anything specific, but we think, I mean, we expect, you know, it's hard to know. a double-digit percentage of our new customers adopting AI this quarter and, you know, building from there. Let me just leave it at that.
Operator
Mm-hmm. Thank you. Our next question comes from the line of Brian Kinslinger of Alliance Global Partners. Your line is open, Brian.
Great, thanks. Congrats. what seems to be the strongest quarter in outlook that I've seen in five to six years covering the company. So congrats. I'm curious how business development environment for Aerodial has changed over the last few months as AT&T is clearly working to aggressively sunset POTS lines. Are the sales cycles narrowing as a result?
Hi, Brian, and thank you for those comments. Just a lot more activity, a lot more interest. You know, customers still want to do a POC. When they sign, they still go through a rollout schedule that's dictated really by their needs. It depends, too, whether the customer says, we'll install this ourselves over time, or they say, Uma, why don't you handle it, and we'll bring in third-party installers and move it along faster. But, no, we're seeing sizable opportunities. We're even seeing some opportunities where a customer wants to replace a different solution that they've gone with, a competitor solution, and put Uma in place. And we haven't done a lot of those, but it's pretty exciting to hear customers coming to us that way as well. You know, winning these next couple resale partners this last quarter was a great step forward. and, you know, we're quite excited as well about the pipeline of potential partner resellers that we might be able to bring on in the back half of this year. So, you know, it's what we expected for Airdial. We're putting a lot of, you know, effort into this, but I do think the market's developing and going to keep developing over the next years. I mean, there's still a long way to go in POTS reduction. So, you know, probably 8 million lines out there or some number of that level to be replaced. So we're just trying to be everywhere we can be with it.
Great. A follow-up. You're focused on adding, obviously, resellers for Airdial. Maybe you can highlight which ones you've had the most success with. Maybe, particularly, I'm curious how the performance with T-Mobile is working and even Comcast. I know Comcast had gone a little bit slower than you thought, but has huge potential. So maybe you can give us some updates on the reseller profile.
Yeah, well, resellers are a very important channel for us to market for Airdown. You know, one of the reasons is these resellers have great relationships with some very large entities, you know, across the market. And, you know, those aren't necessarily relationships UMA would have if you look at our history. T-Mobile is a very valuable partner for us. and doing great. And Comcast is bringing more deals now, but still has a lot of potential to get bigger with us. Where we've done the best is also with some of our partners who are our carriers themselves and have their own POTS lines they need to replace. And we continue to work those. We have a couple in particular where we're actively involved helping them get through the transition. So it's going well. And as I said, we're excited that we think we can sign some important additional resellers here in the next coming quarter or two. Great. Thanks so much. Thank you.
Operator
Thank you. Our next question comes from the line of Eric Martinuzzi of Lake Street Capital. Please go ahead, Eric.
Yeah, my congrats as well on the quarter and the outlook. I wanted to get a better feel for where the outperformance and the upward guidance revision is coming from, just because, as you mentioned, you've got so many things going on. I'm sure kind of entering the year with the outlook, with the two acquisitions, there might have been an element of conservatism and what those could contribute. You've got the rising business ARPU. You've got the rising business subscribers. You've got air dial. You've got residential fall-offs, less than we thought. What, if we kind of stack rank those things, what's driving the guidance up in the big scheme?
Well, let me start and I'll let Shig really address that directly. We entered the year not really knowing what we could achieve with some of these things. So we were obviously, and we stated, we were cautious in some areas. But as we see results, we're able to bring those to you and get a better perspective on where we're going. Let me let Sheik take it further.
Yeah, thanks, Eric, and both Eric, I guess. But yeah, to add what Eric said just now, Now, the EDA is certainly a contributor. You know, as we said at the beginning of the year, we wanted to remain conservative on Outlook as we started the year and realized the upside as we realized those upside. And that's exactly what's happening. I think so far, you know, first couple quarters of this year, in Q1, we grew the subscription on EDA by 80% of a year. Q2, we just grew 75% of a year. So I think that momentum is carrying through to the second half as well. So that's number one. Number two, you know, we didn't really build in the upside of my phone revenue much at all as we started the year and also even last quarter coming out of Q1. Again, just for the sake of conservatism. and we are very pleased to see the first couple of months of sales related to my phone. We still remain conservative, as you heard in my guidance statement, that we're now expecting the residential subscription to grow either flat to 1% growth as opposed to my original statement at the beginning of the year of down 1% to 2%. So, you know, knowing that the residential subscription still accounts for around number 30% of subscription revenue, that's turning from decline year-over-year to growth. That makes a difference, too. And so, you know, I would say those are two largest areas of the guidance contributor, Eric.
Okay, that's helpful. and then I wanted to talk a little bit more about the the product that you mentioned Eric the the branded star dial definitely something that was not on my radar sounds like a really interesting concept is this something that rings the register in 2020 fiscal 27 or is it really you're planting seeds now maybe it contributes in FY28. What can you tell us about Stardial?
You would have to know UMA well to know about our unique technology in the UMA Tello. But adaptive redundancy is really pretty amazing. We automatically send redundant packets when we observe latency over the connection. And we will dial up to one redundant, two redundant, three redundant, and then back down. And that can happen throughout the day as needed to maintain a great voice call. We think that's a real powerful feature for communicating over Starlink Internet. And so, you know, to highlight that and to really position ourselves as the right choice for someone getting Starlink, we wanted to bring out a branded version called Startout. We think it will make an impact this year. and I can tell you a lot of people in rural areas are adopting Starlink and we've seen particularly high attach rates of phone service in those areas partially because people are isolated, they don't have that good of cell phone coverage and so a home phone is a very valuable tool in that situation so StarDile is going to be a great way for us to really focus there with a unique named product and a brand that we can promote right alongside Starlink.
Operator
Thank you. Our next question comes from the line of Patrick Walravens of Citizens. Your line is open, Patrick.
Hi, guys. This is Nick on for Pat. Congratulations on the quarter, and thank you for taking my question. Eric, one for you. So customers have a lot of AI products competing for their attention and budgets. Specifically with UMA AI, how do you cut through the noise and how do you eventually get them to adopt the product?
Well, actually, we don't know that we have to cut through that much noise. We are handling our customers' phone calls and messages. And if they want to leverage that to be more productive using AI, we're the logical folks to turn to for that. we see it even in the last month since we went GA with our existing AI features lots of customers want to talk to us about it and they're very intrigued and interested in it so in that sense I think that it's a natural fit for our type of solution and one that is going to be straightforward for us to sell because it's part of a bundled package You know, some of our standalone services, and particularly some of the other standalone services to come, which I haven't even talked about what they might be, they might face a little bit more independent competition from others. But again, you know, we're integrated into the customer's workflow with our desktop app and mobile app and, you know, IP phones if the customer is using them, you know, connected up into their CRM and their contact center. It's a natural way to ingest AI. And so we're pretty excited that we can get pretty good attach with it. And, you know, currently we are not offering free trials of it. We may do that, but we do, at least for new customers, offer, you know, a 30-day money-back guarantee, and people can get it and try it that way. But ultimately we're going to have to focus, too, on our installed base and how we really market it well to our entire installed base. And there we're working on some strategies, and we'll be launching some of those this quarter. Great.
And then just as a quick follow-up, assuming that you guys are reiterating the mid-term and long-term targets, given that there's a slide in it in the earnings deck, so what's giving you confidence on those numbers?
Well, I think the simple answer is, well, it's a couple ways to look at that. But, you know, we said a year or two years ago we were going to drive more profitability. And we've done that. And we feel like we can continue to do that. So I think we have a good track record of where we've come over the last years. If you look at where we're going, you know, we're serving markets at inflection points or with unique new things happening. And maybe there's a little bit of fortuitousness in all that, but, you know, pots replacing them in the next three or four years is a big deal. And we believe we've leaned in to be the leader in that space. AI is an inflection point on our types of solutions, UCAS. And there's a lot of creative things we can do with it to bring real value to the way our customers operate and to, you know, make their jobs easier. And then, you know, the MyPhone trend and, you know, keeping kids away from cell phones until they, for instance, wait till eighth grade. Who knew you would have several nonprofit organizations promoting that? I even read where one was giving solutions away on an island in Washington State to help kids not have a cell phone. I mean, so, you know, we're perfect for that segment because we've, you know, built the most trusted solution in the market, honestly, for residential phone use. So I think we just have good opportunities in front of us, and we're going to go capitalize them.
Thank you, and congrats again on the quarter.
Operator
Thank you. Our next question comes from the line of Matthew Hurrigan of Benchmark Stonex. Your line is open, Matthew.
There's some interesting commonalities with what you're talking about and what Zoom talked about yesterday and certainly for a while now. Now, you know, the communications layer clearly is a natural entry point for adding a lot of UCAS, you know, features, you know, AI and all that. And, you know, there's sort of some parallels there on that. And I know you don't have a lot of compute costs and all that yet, but, you know, Zoom has made a point talking about, you know, model from the large LLMs and then doing things in-house with SLMs and really, you know, keeping the cost down that way. And you could even look at, you know, some of the performance and transcription. You can look at, you know, the humanities last exam benchmark where their, you know, federated approach actually performs very well relative to open AI, the entropic even. And when you're going down that route, I mean, it's a huge opportunity. You may be bumping into some large, you know, facile competitors as well, although clearly they're more focused on the enterprise side than you are. But am I exaggerating here and kind of what's your, I mean, if you really do graft on a lot of AI, are you certain you've done things appropriately on the cost structure side so that you don't have a blow up there. I know it's probably a pretty small building block right now. I'm unsure of something you have to be thinking about. And I guess I should also congratulate you on the quarter, but you're probably a little tired of hearing that at this point, and it's well-deserved.
Thank you. I'm never tired of hearing that, believe me. So we are running most of our AI in-house on our own machines, custom-tailored for what we need to do. That's the only way to get the cost structure as low as we'd like to have it. We have looked at outside entities we can turn to for some of what we're doing, and in almost all cases it's more – well, in all cases we've seen it's more expensive than what we run internally, so we've focused internally. That's scalable, and I feel pretty good about what we're doing. and I don't, right now I don't see a cost challenge at all on the AI side for us. I see more, our biggest challenge is how fast can we execute on our roadmap for the new AI features we want to bring out. And, you know, we are using a usage-based model essentially. You know, it's a low upfront fee for the initial base of usage and then you can pay as you go. So, and I think that's a nice way to handle it so that we can always be sure that we're, you know, making the margins we want to make.
So, I guess you should be even more congratulated on being able to do that without, miraculously, without blowing up your R&D budget or, you know, I'm sure not buying a lot of advanced NVIDIA chips. but it's almost counterintuitive that you would be able to do that on a cost-effective basis, but you're confident you've done that?
Yeah, I am. I mean, not everything takes a large language model, as you know. And, yeah, we feel comfortable. We've worked through the economics of what we're doing today. We can also see how we can get at lower costs as we go forward, particularly with more scale. but we don't see an issue on that side.
So would you say you're taking much more of a software-based approach on AI and that's how you manage to really optimize costs and have the performance at the level that you want?
You know, I would more say that by producing a solution tailored to what we need to do and by purchasing hardware and running it ourselves, between those two things, we're able to drive maximum value and lowest cost position that we can get. So, yeah, I mean, there's obviously software work, too. But, you know, our solutions don't need to be everything to everybody. They just need to do what we need them to do really, really well. And we'll use transformer models or other models alongside our main models to, you know, offload and keep the processing costs as low as possible.
And then if you don't mind, this is kind of at the tail end of the call here. one more question. If my phone really takes off, are you going to see a blow up in your equipment revenues at a lower margin?
Well, to some degree, that's a yes, because we are not intending to raise prices on Umatello, and memory costs have gotten more expensive. And so there is going to be a little bit of an impact to our business from that. But that's factored into our guidance. And I would also say that, you know, given we're 92% recurring revenue and, you know, some of that 8% is airdial, which has frankly got a pretty good margin structure, you know, whatever happens here isn't going to be that big to us as a company overall.
And also, you know, MyPhone users, and Matt, just one more thing, also MyPhone users, there may be upfront, you know, negative margin associated with the product, but it's followed by the MyPhone user subscription, which is on a premium tier. So it does help the subscription margin in that sense, after we sell.
That's a very good point. Every MyPhone user is a paying user. They're not a free just-pay-taxes-and-fees user. So we've got more coming in, too. Got it. Beautiful. Thanks.
Operator
Thank you. Once again, to ask a question, please press star 11 on your telephone. Again, that's star 11 on your telephone to ask a question.
As there appear to be no further questions, I would now like to turn the conference back to Eric Stang for closing remarks. well thank you everyone for your time today we're pretty excited about getting together on September 29 we're going to try and go deeper in each of these areas and really talk to you more about our AI roadmap talk to you more about the partners we're bringing on for Airdial and what they can do for us talk to you more about what success rate we're seeing with MyPhone and Stardial and how it's going and hopefully some new things too So hopefully you'll all be able to attend that, and we look forward to it. Thank you, everyone. Bye-bye.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
