Earnings Call Transcript - OOMA Q3 2023

Operator, Operator

Hello, and welcome everyone to the Ooma Third Quarter Fiscal Year 2023 Financial Results Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. Thank you. And I would now like to turn the conference over to Mr. Robison. Please go ahead.

Matthew Robison, Director of IR and Corporate Development

Thank you, Savannah. Good day, everyone, and welcome to the third quarter fiscal year 2023 earnings call of Ooma Inc. My name is Matt Robison, Ooma's Director of IR and Corporate Development. On the call with me today are Ooma's CEO, Eric Stang; and CFO, Shig Hamamatsu. After the market closed today, Ooma issued its third quarter fiscal year 2023 earnings press release. This release is also available on the company's website, ooma.com. This call is being webcast live and is accessible from a link on the Events and Presentations page of the Investor Relations section of our website. This link will be active for replay of this call for at least one year. A telephonic replay will also be available for a week starting this evening about 08:00 PM Eastern Time. Dialing information for it is included in today's press release. During today's presentation, our executives will make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize, and actual results are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today and those risks more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements, except as required by law. Please note that, other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non-GAAP basis. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures is included in our earnings press release, which is available on our website. On this call, we will give guidance for the fourth quarter and full year fiscal 2023 on a non-GAAP basis. Also, in addition to our press release and 8-K filing, the Overview page and Events and Presentations page in the Investors section of our website, as well as the results page or the financial info section of our website include links to information about costs and expenses not included in our non-GAAP values and key metrics of our core subscription businesses. These are titled Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally, our investor presentation slides include GAAP to non-GAAP reconciliation that also provides resolution of GAAP expenses that are excluded from non-GAAP metrics. Now, I will hand the call over to Ooma's CEO, Eric Stang.

Eric Stang, CEO

Thank you, Matt. Hi, everyone. Welcome to Ooma's Q3 Fiscal Year 2023 Earnings Call. Thank you for joining us. It's my pleasure to talk with you today about our excellent results for the Q3 quarter just ended and the many growth initiatives we have underway for Q4 and next year. I'm delighted to report for Q3 FY '23 that Ooma outperformed on both the top line and bottom line. Q3 revenue of $56.7 million was up $4 million sequentially and up $7.5 million year over year through a combination of growth across all parts of our business and the acquisition of OnSIP, which we announced last quarter. Similarly, non-GAAP net income of $3.5 million was up over previous periods, in line with our plan announced last quarter to trim spending modestly, bolster cash flow from operations, and position ourselves better to take advantage of additional inorganic growth opportunities in the future should they come along. All in, Q3 was an excellent quarter. Turning now to Ooma Office, which, of course, is our solution for serving small to medium-sized businesses. We announced during Q3 the addition of five new features to our top service tier plan, the Pro Plus tier. These added features bring even more sophisticated capabilities to small to medium businesses in an intuitive and easy-to-use way and include enhancements to improve simple call center activities and integration with Microsoft Dynamics 365. These new features represent one step in an ongoing effort we have underway over the next several quarters to add new features to the Pro Plus service tier, allowing us to serve even larger-sized businesses with Ooma Office and continue to raise our revenue per user. I'm happy to report that during Q3, 50% of our new office users adopted a premium service tier, either Pro or Pro Plus. And then about 10% of the users who did select a premium tier chose our highest tier Pro Plus. We believe our strategy to provide even more advanced features for small to medium businesses in an easy and intuitive way is working and we are excited about our plans for Q4 and next year. Regarding Ooma Enterprise, which, of course, is our offering for serving larger-sized businesses that need extensive and customized solutions, we continue to make good progress in our targeted verticals. One such vertical is hospitality, where we added more than 40 new properties in the quarter, up from about 25 the quarter before and about 15 the quarter before that. To further support growth, we are developing relationships with larger hotel groups as part of our strategy to continue to expand in this vertical. We believe our strategy with Ooma Enterprise to target customers who need flexible solutions is finding traction in the market. Now in regard to international expansion with our largest customer, we continued to execute well in Q3. I'm pleased to report we now serve more than 50,000 users with this customer. We have achieved this one quarter ahead of the plan we set at the start of this year. Our outlook for growth in Q4 remains robust but lower than in Q3 given the holiday period in Q4. Looking out to next year, we believe at this time that Q1 will line up to be the highest growth quarter so far with this customer and that we will continue significant growth in users throughout next year. We are thrilled to enable a unique solution for this customer and are excited about planning for rollout to new regions next year beyond North America and Europe. We discussed at length on our last conference call that our acquisition of OnSIP affords us an additional opportunity for profitable growth. As a reminder, OnSIP operates its own internally developed UCaaS platform that is used today by approximately 5,000 customers, comprising approximately 50,000 users. The short-term goals we laid out last quarter for OnSIP were to maintain low churn, integrate the team, drive cost synergies at the gross margin line, and make the acquisition accretive in this Q4. I'm pleased to report that we are ahead on each of these goals and that OnSIP turned EBITDA accretive in Q3 one quarter early. We're very appreciative of the hard work that both the Ooma team and the OnSIP team have put into making this acquisition a success. As you know, in addition to our strategic efforts to grow Ooma Office and Ooma Enterprise, integrate OnSIP, and expand internationally, we are heavily engaged in capturing the large opportunity to replace the sun setting of copper lines with our new solution AirDial. We continue to make great progress with AirDial in Q3. As was the case in Q2, AirDial orders outpaced installations as customers require time to test AirDial and to plan equipment installation across multiple sites. Our largest AirDial order in Q3 was for 300 lines to an organization with a large number of locations. As anticipated, AirDial was also opening up new agent relationships and we were able to add more agents in Q3 than in previous quarters. One particularly exciting development is T-Mobile for Business began reselling AirDial in Q3. Based on the progress we've made over the last three months, we're excited about the potential of this partnership and anticipate that T-Mobile will become a significant reseller of AirDial. One particular benefit of our T-Mobile partnership is that T-Mobile opens up access for AirDial to government entities that procure through special purchasing vehicles. This can be essential in selling to state, local, and educational entities. Including T-Mobile, we now have six strategic partners signed up and are already reselling AirDial. Looking forward, we are in active discussions with several other potential resale partners, some of whom are national in scope. Finally, regarding AirDial, it was exciting in Q3 to win several awards. In August, we announced that AirDial won best endpoint product for 2022 and the prestigious UC Awards from the publication UC Today. And in November, we announced that TMC named Ooma AirDial as a 2022 TMC Labs Internet Telephony Innovation award winner. There is growing awareness of the sun setting of copper lines and we are committed to building recognition of AirDial, which we believe is the best solution in the market today for serving elevator gates, pool and door phones, fire and burglar alarm panels, and other devices that require an analog line connection. I'm also excited to report that Ooma Business was named a UCaaS leader in Frost and Sullivan's October Frost Radar Report. The report states that through innovation, organic growth, and strategic acquisitions, Ooma has quickly earned a top spot in the North American hosted IP telephony and unified communications market. The report goes on to say that Ooma's dedication to removing the complexity of purchasing and using business phone service makes the company particularly well-positioned to capitalize on the rise in hybrid work. I'm very happy for the entire Ooma team to see Frost and Sullivan recognize our efforts. Switching now to the residential front, we continue to drive modest growth with subscription and service revenues up 2% year over year, in line with our residential strategy. Our sales made in conjunction with T-Mobile Home Internet were approximately the same as in Q2. Both we and T-Mobile continue to look for ways to increase the visibility of the Ooma offering for T-Mobile customers. Overall for Q4, we remain excited about our many growth initiatives. Unlike the actions taken by some of our competitors, we are currently not cutting back on key investments and we're currently not planning any personnel layoffs. As we've previously said, in these times, we do believe that customers are sometimes taking longer to make a decision and are sometimes being more careful in what they buy, but we also feel we have leading solutions for the marketplace and there is significant demand for improved communication, especially at the price points we can offer. We're cautious about our outlook, most of all for the timing of AirDial installations and revenue, given that AirDial is a new product and market segment for us, but overall for our business, we continue to see significant opportunity and to execute our strategy to drive growth and profitability. I will now turn the call over to Shig, our CFO, to discuss our results and outlook in more detail and then return with some closing remarks. Shig?

Shig Hamamatsu, CFO

Thank you, Eric. And good afternoon, everyone. I'm going to review our third-quarter financial results and then provide our outlook for the fourth quarter and full year fiscal 2023. We delivered another strong quarter with a total revenue of $56.7 million, exceeding our guidance range of $56 million to $56.5 million. On a year-over-year basis, total revenue grew 15% in the third quarter, driven by the strength of Ooma Business, which included a full quarter contribution from OnSIP for the first time. In the third quarter, business subscription and services revenue accounted for 55% of total subscription and services revenue, compared to 49% in the prior year quarter. Q3 product and other revenue came in at $4.9 million, compared to $4.5 million in the prior year quarter with accessory sales contributing to growth. On the profitability front, the third-quarter non-GAAP net income was $3.5 million, above our guidance range of $2.7 million to $3.2 million and was the highest in the company's history. The team did an excellent job in balancing execution of our growth initiatives and managing expenses during the quarter. Now some details on our Q3 revenue. Ooma Business Subscription and Services revenue grew 30% year over year in Q3, driven by user growth and the full quarter contribution from OnSIP, which performed well with solid customer retention. Excluding the effect of OnSIP revenue contribution, Ooma Business Subscription and Services revenue grew 16% year over year. On the residential side, subscription and services revenue grew 2% year over year. For the third quarter, total subscription and services revenue was $51.7 million or 91% of total revenue compared to 91% in the prior year quarter. Now some details on our key customer metrics. We ended our third quarter with 1,202,000 core users, up from 1,181,000 core users at the end of the second quarter. As Eric mentioned earlier, we saw another quarter of robust user growth from our largest customer as they continue to deploy our solution. At the end of the third quarter, we had 417,000 or 35% of our total core users, an increase of 23,000 from Q2. Our blended average monthly subscription and services revenue per core user or ARPU increased 9% year over year to $14.38, up from $13.24 in the prior quarter, driven by an increase in the mix of business users, including higher ARPU Office Pro and Pro Plus users, as well as the inclusion of OnSIP users into this metric for the first time this quarter. During the third quarter, we continued to see a healthy Office Pro and Pro Plus take rate, with 50% of new office users opting for those IoT services, which was up from 48% in the prior year quarter. Overall, 25% of our business users have now subscribed to our Pro or Pro Plus tier. Our annual exit recurring revenue, which included OnSIP in Q3, grew to $207.4 million and was up 19% year over year. Our net dollar subscription retention rate for the quarter improved to 96% compared to 94% in the second quarter. Now some details on our gross margin. Our subscription and services gross margin for the third quarter was 73%, which was consistent with 73% in the prior year. As expected, subscription and services gross margin dipped slightly from the second quarter as we had a full quarter impact of OnSIP gross margin, which is running lower relative to Ooma subscription gross margin of 74% when OnSIP is excluded. The good news is that OnSIP gross margins are improving as expected through our integration effort to leverage Ooma's infrastructure, and we continue to believe it can reach 70% plus range within the next quarter or two. Product and other gross margin for the third quarter was negative 35% compared to negative 46% for the same period last year. The third-quarter product gross margin was favorably impacted by sales of accessories that drove our product revenue higher in the quarter. On an overall basis, total gross margin for Q3 was 64% compared to 62% in the prior quarter. A higher total gross margin in Q3 this year was primarily due to the improvement in product gross margin. And now some detail on operating expenses. Total operating expenses for the third quarter were $32.8 million, up $5.5 million or 20% from the same period of last year. Excluding the fourth-quarter impact of OnSIP, the total operating expenses increased $3.8 million or 14% from the same period last year. Sales and marketing expenses for the third quarter were $16.9 million or 30% of total revenue, up 17% year over year, driven by higher marketing and channel development activity for Ooma Business, but sequentially lower on a percentage of revenue basis in line with our increasing focus on profitability and cash flow we discussed on our last earnings call. Research and development expenses were $11 million or 19% of total revenue, up 31% on a year-over-year basis from $8.4 million, driven by investments in new features for both Ooma Office and Ooma Enterprise, as well as new products such as AirDial. A portion of the year-over-year increase in R&D expense was also due to a four-quarter impact of OnSIP team members who joined us at the end of Q2. G&A expenses were $4.9 million or 9% of total revenue for the third quarter compared to $4.5 million for the prior year quarter. The year-over-year increase in G&A expenses was primarily due to an increase in personnel costs and the four-quarter impact of OnSIP. Non-GAAP net income for the third quarter was $3.5 million or a diluted earnings per share of $0.14 compared to $0.13 in the prior year quarter. In addition to stock-based compensation and intangible amortization expenses, non-GAAP net income for the third quarter excludes approximately $0.6 million of acquisition-related costs, as well as $1.4 million of facility consolidation costs incurred in connection with the OnSIP transaction. Adjusted EBITDA for the quarter was $4.5 million, a record for the company, or 8% of total revenue compared to $4 million for the prior year quarter. We ended the quarter with total cash investments of $24.5 million. Cash generated from operations for the third quarter was strong at $2.5 million compared to $1.9 million in the same period last year. On the headcount front, we ended the quarter with 1,082 employees and contractors. Now I'll provide guidance for the fourth quarter and full year 2023. Our guidance is on a non-GAAP basis and has been adjusted for expenses, such as stock-based compensation, amortization of intangibles, and other acquisition-related costs. We expect total revenue for the fourth quarter of fiscal 2023 to be in the range of $56.3 million to $56.6 million, which includes $3.5 million to $3.8 million of product revenue. Product revenue for the fourth quarter is expected to be lower compared to the two previous quarters as we do not expect certain accessory sales we saw in those quarters to recur. We expect fourth quarter net income to be in the range of $3.5 million to $3.8 million. Non-GAAP diluted EPS is expected to be between $0.14 to $0.15. We have assumed $25.7 million with average diluted shares outstanding for the fourth quarter. For the full year fiscal 2023, we expect total revenue to be in the range of $216 million to $216.3 million, which is within our previously issued guidance range of $215.5 million to $218.5 million. The adjustments to the high end of our guidance range primarily reflect our current expectation for the timing of our AirDial revenue ramp, which is slower than we originally anticipated in the near term for the reasons Eric said earlier. Despite the pace of revenue ramp in the near term, we remain very excited about our growth prospects for AirDial, as its customer demand and engagement as well as channel development activity remain very strong. In terms of revenue mix for the year, we expect 92% of total revenue to come from subscription and services revenue and the remaining 8% from products and other revenue. We expect non-GAAP net income for fiscal 2023 to be in the range of $13 million to $13.3 million. Based on the midpoint of the updated non-GAAP net income guidance range, we estimate our adjusted EBITDA for the year to be approximately $17.1 million or 8% of revenue for fiscal 2023, which is an increase from our prior guidance of $15.6 million or 7% of revenue. The updated profitability guidance reflects our continued focus on cash generation and making progress towards our long-term profitability model. We expect non-GAAP diluted EPS for fiscal 2023 to be in the range of $0.51 to $0.53. We have assumed approximately $25.3 weighted average diluted shares outstanding for fiscal 2023. In summary, we are pleased with our solid execution in Q3 with a record quarterly revenue and non-GAAP profitability, along with strong cash generation. We're excited about growth opportunities in front of us and remain focused on executing to our long-term strategy to achieve profitable growth. I will now pass it back to Eric for some closing remarks.

Eric Stang, CEO

Thanks, Shig. As I said at the outset, we believe Q3 was an excellent quarter for Ooma. We now have over 1.2 million core users and our Q3 annual exit recurring revenue of $207 million is up 19% year over year. We're proud of this progress and feel our strategy is working. As we look ahead, we believe our investments in feature enhancements for Ooma Office, new verticals and sales channel expansion for Ooma Enterprise, international expansion, and AirDial will build Ooma into a larger and more profitable company. Thank you, everyone. We'll now take your questions.

Operator, Operator

Our first question will come from Matt Stotler with William Blair. Please go ahead.

Matthew Stotler, Analyst

Hey, there. Thank you for taking the questions. Maybe just one on the updated full year guide. You obviously mentioned AirDial on the revenue side, a little bit of narrowing towards the lower end of the guide. Just double-click on kind of the breadth of what you're seeing in the macro. What's impacting AirDial that you're continuing to see kind of what you saw last quarter in terms of lengthening of some sales cycles and things like that. It would be great to kind of double-click on what's included in that Q4 guidance.

Eric Stang, CEO

Sure. Let me start there, and we'll see if Shig wants to add. We've been selling AirDial for only two quarters and are excited about its development. We've learned that simply receiving orders and wins doesn't immediately translate to revenue; we need to install the products, and customers have to test and get comfortable with them before planning installation. Therefore, our revenue growth isn't aligned with our sales opportunities. The opportunities we're pursuing, as tracked in Salesforce.com, have significantly increased in Q3 compared to Q2, showing a growth of around 40%. We are enthusiastic about the potential of these opportunities and our plans moving forward. However, we anticipate that it will take time for AirDial to translate into revenue growth, and we're approaching Q4 with a level of caution. The upcoming Thanksgiving and Christmas holidays can pose challenges to boosting our business sales during this quarter, particularly since much of our sales happen through inside sales to smaller businesses that tend to be busy this time of year. We're mindful of these factors. In my opening remarks, I also mentioned our perspective on the market. We're still optimistic about the potential for significant growth, and we believe our solutions can help us navigate any minor market weaknesses.

Shig Hamamatsu, CFO

No, Eric, I think you summed things up quite well. Despite the short-term pace of the installation revenue ramp, as I mentioned in the script, we are experiencing an increase in customer engagement. You may have noticed that in our press release regarding our relationship with T-Mobile on AirDial. We are very excited about it. I believe it’s primarily an issue of timing in the near term as customers familiarize themselves with our excellent product. We remain enthusiastic about it, even considering the Q4 guidance.

Matthew Stotler, Analyst

That's very helpful color. Thank you. And then maybe just one follow-up on the OnSIP integration here. I guess, first, could you just clarify the revenue contribution from OnSIP in the quarter? And then maybe just give a double-click on what you're seeing in terms of progress integration, talent retention, and kind of the expectation for potential additional synergies going forward?

Shig Hamamatsu, CFO

Yes. If you consider what I previously mentioned about organic versus inorganic growth, it seems we are looking at a run rate of around $3 million per quarter for OnSIP. Since acquiring OnSIP last quarter, we had fairly conservative expectations regarding customer churn, and I believe the team has performed very well in retaining customers since the acquisition, which we are pleased to see. Therefore, we anticipate a $3 million per quarter run rate. From a profit and loss perspective, they are significantly contributing to our gross margins and showing improvements. I expect them to get closer to Ooma's margin in the coming quarters. Additionally, we saw a positive EBITDA contribution a quarter earlier than anticipated. I'm not sure if Eric would like to add anything from the sales and marketing perspective.

Eric Stang, CEO

Just one thing. We knew when we acquired OnSIP, we were getting a great team. The folks running OnSIP really know their stuff, and they have become really valuable members of Ooma just in the short time they've been with the company. And we're not seeing any turnover issues. In fact, we're seeing employees excited to be part of Ooma. And together, we're going to grow the company. And so, I think it's going extremely well.

Matthew Stotler, Analyst

Great. Thank you again.

Operator, Operator

Our next question will come from Mike Latimore with Northland Capital Markets. Please go ahead.

Mike Latimore, Analyst

Okay. Thank you. Congrats on the quarter there. The retention rate improved sequentially? Is that because of the acquisition? Or is that organic or both?

Shig Hamamatsu, CFO

It's a combination of both. I explained this in our last call, and I'll reiterate it. Our retention rate is influenced by year-over-year growth in ARPU, which is balanced by churn. This quarter, churn remained stable, with no significant changes in the trend we observed in the first half of the year. We experienced an increase in ARPU growth of around 9% year-over-year, partially due to the inclusion of OnSIP for the first time this quarter. While OnSIP's average seat pricing is slightly below Ooma's average business pricing, it remains higher than our overall blended ARPU in the high 13s to 14 range, positively impacting the metric. This was likely the most significant factor.

Mike Latimore, Analyst

Yes. Okay. That's a good clarification on ARPU there. On AirDial, how many units have you manufactured kind of year-to-date, let's say? And then I know you want to expand your installation capabilities, but what is the extent of the installation capabilities say? Like how many can you sort of effectively install if you want to?

Eric Stang, CEO

We have produced the first 10,000 units we planned for the beginning of Q1 or Q2. While most are in our inventory, some are not, but that isn’t hindering us. The bigger challenge lies in getting customers to implement the rollout. For example, our largest AirDial sale in Q3 involved a customer requiring 300 lines, but none have been installed yet. This process needs to be coordinated with the customer, who must decide how they wish to proceed—whether by using their own team, third-party installers, or a mix of both. Typically, it begins with a site survey to identify where the lines will be installed and what changes are needed for the swap. It's a process that takes some time. Customers are increasingly motivated since the FCC has lifted pricing constraints on analog copper lines, leading to significant price increases, with some exceeding $1,000 a month. As a result, customers are realizing they are overpaying and are eager to make the switch, which is economically viable. However, ramping up the necessary resources and efforts requires time. We view this as a developing trend for us, but we do not plan to disclose exact quarterly figures for competitive reasons; nonetheless, these numbers will reflect in our overall user growth metrics.

Mike Latimore, Analyst

I have one last question. How much of the customer process is related to the installation capability versus their realization that they need a different feature, which could lead to additional research and development efforts? Is it primarily about installation, or do extra future tasks arise occasionally?

Eric Stang, CEO

For most applications, the installation is straightforward. However, it can vary with some older equipment, especially older alarm panels, which are expected to meet certain standards but often exhibit inconsistencies. In such cases, we need to do some diagnosing. Luckily, our product allows for easy customization and firmware updates, and we manage all these units remotely. Once we've addressed the alarm panel issue, we’re prepared for future installations. We’re still early in our product's launch and are getting to know the diverse range of equipment available. Though it hasn't been a major concern, some customers have requested outdoor installations, which is problematic since our unit was not designed for that use, but such requests are uncommon.

Mike Latimore, Analyst

Okay. Thanks very much.

Eric Stang, CEO

You bet. Thank you.

Operator, Operator

Our next question will come from Josh Nichols with B. Riley. Please go ahead.

Josh Nichols, Analyst

Thank you for taking my question. I wanted to explore more about the international opportunity and the expansion with key customers. You've already increased the number of seats to around 50,000 and are expecting further growth in the fourth quarter. Can you discuss the potential for next year with that customer? Could they add another 25,000 seats? Additionally, you mentioned plans for international expansion beyond that key customer. Is that still being pursued? Thank you.

Eric Stang, CEO

Sure. I'm happy to elaborate on that. This customer has significant growth potential with us. Similar to our earlier discussion about AirDial, the transition process to our platform, which they plan to implement globally over time, requires effort. However, I can say that the customer is eager to accelerate this process. We are preparing to move more quickly next year compared to this year, which includes expanding into multiple regions beyond Europe. We have segmented the world into various regions based on our service strategy. There is a strong interest from us to add more users, and if everything aligns, we'll provide additional details in our next conference call when we discuss guidance for the upcoming year. As things stand, we anticipate greater user growth next year than what we have achieved this year, which has already been a robust year. We are quite excited about this. I want to mention that, despite all the effort with that customer, I'm unsure if we will plan to sell to users beyond this customer in these regions next year. This would require an additional level of investment, particularly in sales and marketing efforts, which we will need to balance with our current initiatives in North America, our engagement with this customer, and our work with AirDial. Therefore, this may not be part of our outlook for next year. However, I would like to see us implement AirDial outside of the United States, as many countries face similar challenges with the decline of copper lines. I believe AirDial could be a valuable product in several other countries, although this remains a future consideration. I must emphasize that my insights are a bit speculative, and I need to proceed cautiously. Nevertheless, I can confidently say that I expect our large customer to add more users next year than they did this year.

Josh Nichols, Analyst

Thank you for the detailed information. I would like to discuss the fourth quarter guidance, which suggests you should achieve over an 8% EBITDA margin, with around 8% expected for the entire year. I understand there has been a growing emphasis on profitability. It appears that cash flow is improving. As you finalize some of the investments made over the past year, do you anticipate being able to realize further EBITDA margin expansion next year, especially since this is becoming a major concern for many investors?

Shig Hamamatsu, CFO

Yes, Josh, we are not ready to provide guidance for next year. However, we aim to demonstrate some level of additional operating leverage. We are satisfied with our projection of around 8% for this year. We also aim to make progress towards our long-term EBITDA margin model in the coming years. I'll leave it at that and look forward to discussing guidance next time we talk.

Josh Nichols, Analyst

I have a final question. It’s only been a couple of quarters since you launched AirDial, but with the new partnerships, particularly with T-Mobile, I see a significant opportunity. How long do you think it will be before you gain better visibility on this? Do you expect to have a clearer understanding by the time you report your fiscal fourth quarter earnings? Or do you believe it’s still too early and that your approach to this product offering remains conservative? I’m curious about how long it might take to assess the demand and how long until these units are available for sale and installation.

Eric Stang, CEO

Yes. That's a good question. I said one thing in opening remarks, which I'll highlight again here. We are talking with other potential partners, strategic partners who would resell AirDial. If some of those partners come to fruition, I think that would be a nice boost for us as well. I think we'll have a lot better visibility the next time we talk because we'll be talking kind of end of February, early March. And we'll have the momentum that comes with starting off the New Year already underway. So yes, I'm thinking that, that timing should allow us to be more definite for you.

Josh Nichols, Analyst

Appreciate it. Thanks.

Operator, Operator

Our next question will come from Joe Goodwin with JMP Securities. Please go ahead.

Joe Goodwin, Analyst

Great. Thank you so much for taking my question. I guess first on OnSIP, can you talk about any plans that you may have here in the works now that you've had the asset for a few months here and actually increasing the average pricing per seat for OnSIP user or if there's plans to maybe lift some of those folks onto a different service offer?

Eric Stang, CEO

Our long-term plan is to transition OnSIP users to the office platform, but there's no immediate rush. The priority is to ensure we do this smoothly without causing any problems for our customers. We are progressing gradually, assessing what is needed for the office platform to meet the requirements of OnSIP customers. There are already aspects where the office platform excels compared to OnSIP, and some features from the OnSIP platform are on the office roadmap but have yet to be implemented. We intended to develop those features anyway, and we're integrating some of that development effort now. Currently, we view this transition as an ongoing process that could take 12 months or longer. As long as OnSIP customers are satisfied with their existing features, there's less need to make changes for them. When customers express interest in additional features available in the office platform that OnSIP lacks, we would look to transition them at that point, especially since we prefer not to invest further in the OnSIP platform. At present, customers are quite satisfied; they have a solid relationship with OnSIP, which excels in customer support. We will also consider the relatively small number of customers—5,000 in total, with a significant focus on the largest ones—on an individual basis to determine the best approach. Essentially, we believe we'll continue operating the OnSIP platform for the foreseeable future while proceeding carefully with this transition.

Joe Goodwin, Analyst

Got it. Okay. Great. Thank you for that. And then just last question for me. So you added around $20 million in ARR sequentially and of which is about $12 million coming from OnSIP. So $8 million organic and that's a pretty good add just looking at the historical ARR adds. Can you just talk about what's driving that incremental organic improvement? Is it all the international expansion with the large customer? Or any other things you want to call out?

Shig Hamamatsu, CFO

So yes, I mean it's really the rest of the piece is really what you're pointing out. International customers, user adds. It's been pretty healthy the last two quarters, as you heard. We continue to add office users. And as you also heard again, half of the new customers that take office users are taking Premier tier services. So all these are contributing to the other pieces you're pointing out.

Eric Stang, CEO

I mean I think you know we have several growth vectors as a company. And we're fortunate to have that. And I think we're seeing results in each of them, and that's how we want to accelerate growth as we go forward.

Joe Goodwin, Analyst

Got it. Thank you.

Operator, Operator

And we will take our next question from Matt Harrigan with Benchmark. Please go ahead.

Matthew Harrigan, Analyst

Good afternoon. I was just curious on the hospitality side where you are showing nice sequential momentum. What are the prospects for landing a real elephant or even a sizable deal, if you would? I mean, it feels like that's a great vertical for you, and you're relatively nascent on the penetration at this point to say, at least. Thanks.

Eric Stang, CEO

The way we view operating in this vertical is that while it's possible to establish corporate-level relationships with large hospitality providers, the actual sales often occur at the individual property level. This is mainly because many properties are independently owned or have unique circumstances that require tailored solutions. We are focused on Ooma Enterprise, but we are also seeing success with AirDial in these locations, creating a strong combination of opportunities within this vertical. We consider deals of varying sizes; for example, we have hotels with hundreds of rooms using Ooma, along with smaller properties. Our reach extends to both major urban areas and more remote locations. As noted in my earlier comments, we've consistently increased our wins each quarter this year, underscoring our commitment to this growth. There are approximately 80,000 hotel properties across North America, along with other types of managed living spaces that could benefit from our solutions, making this a significant vertical. We are beginning to gain recognition at the corporate level from some larger players in the industry, which is a positive development for us. This recognition will enhance our visibility and help address our primary challenge: ensuring potential customers are aware of the solutions we offer.

Matthew Harrigan, Analyst

Thanks, Eric. Perfect.

Operator, Operator

And with no further questions, I'd like to turn the call back over to Eric Stang for closing remarks.

Eric Stang, CEO

Thank you, everyone, for joining us today. We are pleased to report strong performance in both our top and bottom lines for Q3. While we are taking a cautious approach for Q4, we are happy to have raised our bottom line outlook for that quarter. We look forward to a solid Q4 and will provide guidance for next year during our next meeting. Thank you for being here today.

Operator, Operator

And that will conclude today's conference. Thank you for your participation, and you may now disconnect.