Earnings Call Transcript - OOMA Q3 2025

Operator, Operator

Hello, and thank you for waiting. Welcome to Ooma's financial results for the third quarter of fiscal year 2025. I will now pass the conference over to Matthew Robison. You may start.

Matthew Robison, Director of Investor Relations and Corporate Development

Thank you, Towanda. Good day, everyone, and welcome to the fiscal third quarter 2025 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 fiscal third quarter 2025 earnings press release. This release is also available on the company's website. 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. 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 2025 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 Quarterly Results page of the Financial Information section of our website includes links to information about cost 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 a 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

Thanks, Matt. Hi, everyone. Welcome to Ooma's third quarter fiscal year 2025 earnings call. Thanks for joining us. Q3 was a great quarter for Ooma, not only financially, but also competitively. I look forward to sharing our results, including two very significant new customer wins we secured in Q3. These new customer wins build on our big wins from Q1 and Q2 of this year and have us excited as we look forward. Financially, we exceeded expectations in Q3, achieving $65.1 million in revenue, $4.6 million in non-GAAP net income, $5.7 million in adjusted EBITDA, and $8.1 million in cash flow from operations. Each of these is a record result for Ooma. On the strength of our $8.1 million in cash flow from operations, we paid off the remaining debt on our credit line shortly after the end of Q3 and are now debt-free. Over the last 12 months, we have paid off $18 million of debt and also bought back $5.2 million of our stock for a combined $23.2 million. Strategically, our efforts to improve operating expense leverage, given the strong product solutions we have built and the synergies afforded by our 2600Hz acquisition, are starting to take hold. Looking forward, we believe we can both execute our growth strategy and drive further operating leverage with improvements in bottom line results in the coming quarters. Ooma Business contributed 62% of total revenue in Q3, up from 58% a year ago. Within Ooma Business, Ooma Office, our UCaaS solution for Main Street businesses and a significant component of Ooma Business revenue, performed well in Q3. We launched new customer engagement features, including one-to-many messaging and a website widget for our customers to allow their customers to create online bookings, and we continue to promote our caller info search, messaging templates, expanding set of integrations, and more. Our strategy to enable more advanced features in our premium tiers helped drive the percentage of new users taking a premium tier in Q3 to 60%. It also helped secure a growing number of larger-sized customers in Q3 as we work to expand the market opportunity for Ooma Office. Regarding AirDial, our solution for POTS replacement, we believe the market is heating up and that contributed to a step-up in sales for us in Q3. We learned in Q3 that a large carrier and provider of copper lines is once again implementing price increases. The pricing of copper lines is, of course, a key driver in customers' decision-making to take action and replace them. We also noticed late in Q3 a significant increase in the number of announcements for copper lines to be shut down in the coming months compared to prior periods this year. Market momentum in combination with our marketing, partner development, and expanding product features helped us achieve our best quarter yet and significant growth quarter-over-quarter for AirDial. We signed several larger customers in Q3, including a couple that we expect will surpass 1,000 lines each. On the partner front for AirDial, we have some very significant news to share. I'm very pleased to report that a top-tier national cable company has chosen to resell AirDial. To our knowledge, we are the only provider they are working with at this time, and they want to launch as quickly as possible, which we expect will be in calendar Q1. This is significant because of the large size of this partner, and there are many existing business relationships. It is our understanding that their business strategy encompasses bringing broadband to businesses and moving communications to the Internet. And now with AirDial, they can move the remaining copper lines, which until now were not easily handled. Our partnership gives them a way to continue to take share from other major national carriers who they view as competitors. As you can see, this is a major win for us and a partner that represents huge potential. I also have a second significant new partner win to share with you. I'm pleased to report we signed an aggregator/CLEC to resell both AirDial and Telo. You'll recall that we now believe there is also a sizable opportunity in the residential space for POTS replacement, and we believe our Telo solution is ideal for this market. We're thrilled that this aggregator has selected Ooma for both their business and their residential needs. We understand this new partner primarily serves business customers and provides around 100,000 copper lines to businesses today. They also provide approximately 10,000 lines to residential customers. This partner has already launched earlier this month with Telo and will be launching soon with AirDial. I also want to give an update on our partnership with the large incumbent local exchange carrier that we announced last quarter. I can tell you now that this customer is Frontier Communications, which, of course, is one of numerous legacy regional carriers in the U.S. As you also likely know, Frontier and Verizon recently announced that Verizon intends to acquire Frontier. This development has affected Frontier's launch timing, which may now not be until Frontier can formally start their business planning with Verizon. We believe Frontier continues to view AirDial and Telo as their chosen solutions for POTS replacement and that longer term, we now also have the exciting opportunity to engage with not only Frontier, but also Verizon. Overall, I'm pleased to report we now have more than 20 total partners contracted to resell AirDial. We believe the two major partner wins we have shared today further validate our strategy to secure large carrier partners for both AirDial and Telo. It is our goal to add new AirDial resale partners each quarter going forward, and we currently have several significant discussions underway. Switching now to 2600Hz, which is our platform used by resellers to create their own solutions. I'm excited to point out our recent press release, which identified ServiceTitan as the large new customer we won two quarters ago. ServiceTitan is a $685 million revenue company providing end-to-end workflows for the trades. They recently launched their new Contact Center Pro solution, which utilizes Ooma 2600Hz for enablement. As we've discussed previously, we're thrilled to be working with this marquee customer and look forward to supporting them as they expand and grow their business. 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 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 2025. Our third quarter revenue was $65.1 million, solidly above the high end of our guidance range and was up 9% year-over-year, driven by the strength of Ooma Business, including better-than-expected revenue contribution from AirDial as well as the addition of 2600Hz. During the quarter, we saw about half of IWG seat reductions we had forecasted for the second half of this fiscal year and expect additional reductions to occur in the fourth quarter. In Q3, business subscription and services revenue accounted for 61% of total subscription and services revenue as compared to 58% in the prior year quarter. Q3 product and other revenue came in at $5 million as compared to $4 million in the prior year quarter. The year-over-year growth in product revenue was primarily driven by growth in AirDial installations. On the profitability front, Q3 non-GAAP net income was $4.6 million, above our guidance range of $4.1 million to $4.3 million. Now some details on our Q3 revenue. Business subscription and services revenue grew 13% year-over-year in Q3, driven by user growth and the addition of 2600Hz. Excluding 2600Hz revenue contribution, business subscription and services revenue grew 7% year-over-year. On the residential side, subscription services revenue was down 1% year-over-year. For the third quarter, total subscription and services revenue was $60.1 million or 92% of total revenue as compared to $55.9 million or 93% of total revenue in the prior year quarter. Now some details on our key customer metrics. We ended the third quarter with 1,242,000 core users, which is slightly down from 1,244,000 core users at the end of the second quarter. The sequential decline in total core users was primarily due to the seat reductions with IWG I mentioned earlier. At the end of the third quarter, we had 504,000 business users or 41% of our total core users, an increase from Q2 as user additions for Ooma Office, Ooma Enterprise, and AirDial offset the impact of IWG. Our blended average monthly subscription and services revenue per core user, or ARPU, increased 3% year-over-year to $15.14, driven by an increasing mix of business users, including higher ARPU Office Pro and Pro Plus users. During the third quarter, we continued to see a healthy Office Pro and Pro Plus take rate with 60% of new Office users opting for these higher-tier services, which was up from 56% in the prior year quarter. Overall, 33% of Ooma Office users have now subscribed to these higher-tier services. Our annual exit recurring revenue grew to $234 million and was up 4% year-over-year. Our net dollar subscription retention rate for the quarter was 99% as compared to 100% in the second quarter. Now some details on our gross margin. Our subscription and services gross margin for the third quarter was 72% as compared to 72% in the prior year. As a reminder, subscription and services gross margin for the third quarter this fiscal year included an impact of 2600Hz gross margin, which is ranged lower relative to Ooma's subscription gross margin. Product and other gross margin for the third quarter was negative 56% as compared to negative 73% for the same period last year. As anticipated, we saw a meaningful year-over-year improvement in product and other gross margin as we completed consumption of higher cost components we had procured during the pandemic. On an overall basis, total gross margin for Q3 was 62% as compared to 62% in the prior year quarter. The flat overall gross margin year-over-year reflects a heavier mix of product revenue this year, which was 8% of total revenue in Q3 due to an increase in AirDial installations, which offset the improvement in product gross margin. And now some details on operating expenses. Total operating expenses for the third quarter were $35.6 million, up $2.2 million or 7% from the same period last year. Excluding the impact of 2600Hz, the total operating expenses increased $0.9 million from the same period last year. Sales and marketing expenses for the third quarter were $17.5 million or 27% of total revenue and was up 4% year-over-year, primarily driven by higher marketing and channel development activity for AirDial. Research and development expenses were $12.1 million or 18.5% of total revenue, up 7% on a year-over-year basis, driven mainly by the addition of 2600Hz team members. G&A expenses were $6.1 million or 9% of total revenue for the third quarter compared to $5.3 million for the prior year quarter. The year-over-year increase in G&A expenses was primarily due to increases in personnel and audit-related costs. Non-GAAP net income for the third quarter was $4.6 million or diluted earnings per share of $0.17 as compared to $0.15 of diluted earnings per share in the prior year quarter. Adjusted EBITDA for the quarter was $5.7 million, another record for the company or 9% of total revenue as compared to $5 million for the prior year quarter. We ended the quarter with total cash and investments of $17.1 million. Cash generated from operations for the third quarter was strong and at $8.1 million, it was another quarterly record for the company. On a trailing 12-month basis, we generated a record $24 million of operating cash flow and $18 million of free cash flow, which represented 367% and 141% increase, respectively, over the same period a year ago. We paid down the debt by $5.5 million in the third quarter and reduced the outstanding debt balance to $3 million at the end of the third quarter. Subsequent to the quarter end, we paid the remaining balance in full. And as of today, we have no debt outstanding. On the headcount front, we ended the quarter with 1,157 employees and contractors. Now I will provide guidance for the fourth quarter and full fiscal year 2025. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization of intangibles, and certain nonrecurring gains and expenses. We expect total revenue for the fourth quarter to be in the range of $64.6 million to $65.1 million, which includes $4.5 million to $4.7 million of product revenue. We expect the fourth quarter non-GAAP net income to be in the range of $4.5 million to $4.8 million. Non-GAAP diluted EPS is expected to be between $0.16 and $0.17. We have assumed 28.1 million weighted average diluted shares outstanding for the fourth quarter. For full year fiscal 2025, we are raising both revenue and profitability outlook. We now expect total revenue of $256.3 million to $256.8 million. The full year fiscal 2025 revenue guidance assumes business subscription and services revenue growth rate of approximately 13% over fiscal '24, while residential subscription revenue is expected to decline by 1%. In terms of revenue mix for the year, we expect approximately 93% of total revenue to come from subscription and services revenue and the remainder from products and other revenue. As for non-GAAP net income, we now expect it to be in the range of $16.7 million to $17 million. Based on this guidance range, we estimate our adjusted EBITDA for fiscal '25 to be $22.1 million to $22.4 million. We expect non-GAAP diluted EPS for fiscal '25 to be in the range of $0.61 to $0.62. We have assumed approximately 27.6 million weighted average diluted shares outstanding for fiscal 2025. In summary, we are pleased with our solid Q3 results with record adjusted EBITDA and free cash flow 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

Thank you, Shig. It's our pleasure to report to you today on our strong Q3 results and our new customer wins. We see accelerating momentum for AirDial and also for residential POTS replacement and hope to continue to announce significant new resale partnerships in the coming quarters. We're also investing in 2600Hz given the capabilities of our platform and the market need to replace older aging solutions. In addition, we believe we can deliver improved bottom line performance as we execute our strategy. We look forward to updating you on our progress as we capitalize on our growing community of partners. Thank you. We'll now take questions.

Operator, Operator

Thank you. Our first question comes from Josh Nichols with B. Riley. Your line is open.

Josh Nichols, Analyst

Yes, thanks for taking my question. Good to see some of the large partnerships announced for this quarter as well as the improving cash flow and margins. I'm just curious about 2600Hz. It seems initially when you made that acquisition, expectations seemed relatively low, but you have become increasingly optimistic about some of the long-term potential for that. I'm just curious if you could comment a little bit about what you're seeing in the market dynamics, and any benefit potentially from the planned sunset of Microsoft's Metaswitch on that front?

Eric Stang, CEO

Yes. Hi Josh. Well, you're right. When we made that acquisition, we justified it around synergies and full control of all the technology in Ooma. Since then, we have seen tremendous opportunities. We look forward, and we're leaning in, as I said in my script, to capitalize on it. BroadSoft and Metaswitch both are older platforms that are not getting much investment today. Metaswitch has even gone further by announcing that Microsoft, who owns them, has stated that they're ending parts of that platform. There are carriers across the world who need to think about what their next solutions will be and how they get there. We estimate between 50 and 80 million users across those platforms globally. So it's really massive. I didn't get into it in my script, but I talked mainly about ServiceTitan, because it's a huge win for us and one that we hadn't really contemplated we could achieve when we acquired 2600Hz; because, obviously, ServiceTitan has moved off a CPaaS solution at scale to 2600Hz. So the fact that we have that kind of opportunity is exciting. What I didn't detail in my script is that we also had a couple of smaller wins on the 2600Hz platform in the quarter, including one in Europe, which is great to see as we do a little bit more over there with the platform. There's unique aspects to our solution in this space. One is, it's a modern design with over 300 APIs that customers can use to craft the platform into whatever they want it to be. If they just want it turnkey, we can do that too. We're also moving Ooma solutions onto the 2600Hz platform, so that customers who simply want to check a box can have the best out there. The API design of the platform creates great flexibility. We're also flexible in our delivery model. We can host it for the customer, or let the customer host it themselves in their data centers, getting as much or as little service from us in doing that. We believe we have a great solution for a significant market opportunity. Just about every carrier has something in their business model built off of BroadSoft, BroadWorks, or Metaswitch. I think it's just a matter of time before significant change happens in this industry. I will say that when you secure a new customer in this space, it can take several months, maybe even six months or more for them to craft the solution they want and begin launching. But we currently have discussions with potential clients across various platforms and that excites us. We've increased some sales resources recently in that part of our business due to this massive opportunity.

Josh Nichols, Analyst

Thanks. And then last question from me, you mentioned in your comments and then in the release about you're seeing some increased operating leverage. Last quarter, I noticed you took up your medium-term EBITDA margin targets. Based on the implied outlook for 4Q, you should be seeing a 9% plus EBITDA margin. I know you're not giving formal guidance, but is it fair to assume that you could potentially reach 10% plus for the full year based on your observations in business and some of the comments that you've made?

Shig Hamamatsu, CFO

Yes, Josh, thanks for the question. So directionally correct; if you take a midpoint of our, let’s say non-GAAP net income guidance and sort of back into the EBITDA, the midpoint would give you about 9.2% EBITDA margin in Q4. If you think about the progression we made this year—Q1 was 8%, Q3 was 8.8%, rounding to 9%. We expect to see further improvement in Q4, like I said, at midpoint 9.2%. In relation to the midterm model you referred to, which is in the back of our investor deck, we believe we're progressing well on the path to getting into a double-digit EBITDA margin next year. Obviously, we’re not ready to discuss guidance for next year, but I think we're making good improvements as Eric mentioned, and showing some operating leverage.

Eric Stang, CEO

Yes, and I would add, Josh, without getting into guidance, it’s important to remember just how profitable this business is. We have 70 plus percent recurring margins and a very stable revenue base. That generates the better part of $200 million in gross profit, possibly $170 million. We do reinvest a lot of that back into development and growth, but we've made significant strides over the last three or four years to create several areas within the company that offer, we believe, leading solutions in the market today. Now, it's more about leveraging those for growth. I don't feel the need to invest in all areas at the same level we have in the past. With our gross margins and profit levels, we could be extremely profitable if we chose to. The focus moving forward is on driving leverage and continuously improving bottom line performance.

Josh Nichols, Analyst

Thanks for the context. Appreciate it. I'll hop back in the queue.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open.

Mike Latimore, Analyst

Great, thanks. Yes, congrats on the strong cash flow and new wins here. Just want to clarify, on AirDial in the second quarter, you said AirDial had record bookings. Is it fair to say that in the third quarter you had higher bookings than in the second quarter?

Eric Stang, CEO

We did, yes.

Mike Latimore, Analyst

Okay. Got it. And then you talked about obviously, this improving margin dynamic. Does that assume that the revenue growth rate remains where it is, or does that assume some improvement in the revenue growth rate?

Shig Hamamatsu, CFO

Yes. In the context of this fiscal year and Q4 guidance we provided, Mike, you can take my revenue guidance range for Q4 as about 5% year-over-year growth at the midpoint. We are seeing more leverage in R&D specifically, directionally speaking, the absolute dollars on R&D are expected to be down sequentially in Q4. This provides incremental leverage, as does the overall gross margin since we anticipate a little less product revenue in Q4 compared to Q3, contributing to improved profitability.

Mike Latimore, Analyst

Yes. Okay. And then just on the churn for IWG, you mentioned some enhanced churn in Q4. Is it clear that this will be the end of this enhanced churn, or could there be residual effects into '26?

Eric Stang, CEO

I think there could be more churn as we look forward. It’s hard to say how much, but we don't think it’s fundamental to our outlook. We work closely with them and can help streamline and optimize, including determining which of their customers require phone service. We are always collaborating to support them fully. There could be some churn, but we also have quite a number of new centers opening every quarter. It can be anywhere from 25 to 50 new centers in a quarter. So it’s difficult to forecast precisely, but I think it's a possibility that we might see some effects carry into next year.

Mike Latimore, Analyst

All right, great. Thank you.

Eric Stang, CEO

You bet.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Your line is open.

Eric Martinuzzi, Analyst

Yes, I wanted to dig deeper into the Q4 revenue guide. Can you quantify the impact of IWG runoff? In other words, the midpoint guide is showing 5.1% organic growth. What would that be in the absence of or adjusted for IWG?

Shig Hamamatsu, CFO

Yes, I'm not going to be too specific, Eric. It wouldn’t be a huge impact since it happened in the middle of Q3. Half of the impact was already realized in Q3, so we have a full quarter's effect and a bit more impact in Q4. Therefore, it's not as large of an impact as you might think. To address your question on IWG churn, I would say there’s a little more churn than we anticipated in Q4, but it is not a significant effect.

Eric Stang, CEO

You might recall that we discussed the churn at IWG earlier in this fiscal year, then it didn’t materialize for a while. What we're currently addressing is what we talked about before, but pushed out.

Shig Hamamatsu, CFO

Yes, and Eric, a reminder on context—IWG has been a low-single-digit percentage of revenue relative to our total revenue. Thus, the impact of churn on that relatively small concentration is also another context to consider.

Eric Martinuzzi, Analyst

Okay. All right. And then on the disruption delay. Congratulations on Frontier’s ability to confirm as a customer. You discussed the Verizon acquisition announcement. How has this impacted the launch timing versus your prior expectations, and what is the potential delay in ramping up with the Frontier relationship?

Eric Stang, CEO

Yes, when the announcement came out in early September, Frontier told us they still wanted to move forward. However, it wasn't until close to the end of Q3 that many programs at Frontier were subject to reevaluation, and ours is just one among several being reconsidered. We continue to have discussions with them, and they’re considering what they want to do. They have many reasons to potentially move sooner, as well as reasons to wait until they can plan with Verizon. It’s hard to predict when precisely they’ll begin their planning with Verizon. But, they have a lot of residential customers with phone service that needs to be replaced. This challenge isn't going away. Going through the RFP process with them took over 18 months to reach where we are now. We're excited about the direction this could take, and being involved with Verizon is also intriguing. To our knowledge, Verizon has not yet settled on a solution for handling stranded residential phone lines, especially with the cost of POTS lines increasing. While we would have liked to move forward sooner, it shouldn't negatively impact us significantly due to other wins, such as the cable company mentioned today. This is a substantial win for us, and we believe they could be a fast mover in the market. We're also actively pursuing more potential partnerships and expect our strategy for AirDial will ultimately work well.

Eric Martinuzzi, Analyst

I appreciate the additional context. Congratulations on your new agreement with the national cable company, as well as your solid quarterly results and outlook.

Eric Stang, CEO

Thank you.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Patrick Walravens with Citizens JMP. Your line is open.

Unidentified Analyst, Analyst

Hi, thank you for taking my question. This is Nick on for Pat. Eric, what does the macro environment look like in terms of customer behavior, and are there any implications post-election?

Eric Stang, CEO

That's a good question. Let me start with one angle and then expand. Q4, the current quarter, is always the hardest to predict due to the holidays impacting small businesses, make it a busy period. That said, we see the market still strong and I don’t believe the election has changed things significantly, but certainly, things have not worsened. We think we serve very unique markets with AirDial and 2600Hz, which are driven by their own dynamics. When considering small business UCaaS with Ooma Office, we have a unique solution that is different than what others provide and is easier to adopt. There’s a vast small business market out there—over 6 million small businesses in North America with 1 to 20 employees. Many of them have yet to transition to the cloud. I would say that if anything, the macro environment is stable or maybe slightly improved since the election. However, Q4 remains a period where we are cautious in forecasting due to the holiday activity.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Unidentified Analyst, Analyst

Hi, this is Chris on for Arjun, and thanks for taking my question. I want to echo earlier congratulations on a solid quarter. I’m happy to see that you were generating record cash flow. With the debt completely cleared and behind you, are there any changes in terms of capital allocation moving forward?

Shig Hamamatsu, CFO

Yes, I appreciate the question, Chris. One area we continue to focus on is being opportunistic regarding stock buybacks. Eric discussed spending $5 million in stock buybacks in the last year or so. We plan to be strategic in pursuing this as well as in customer base acquisition, which we discussed previously. As we increase cash on the balance sheet, we will have more resources to make strategic buybacks at favorable prices. We plan to invest a bit more in inventory going forward. Given the strong cash flow, we benefitted from a reduction in inventory over the past 18 months, allowing for positive operational cash flow. But we need to prepare to build more inventory for AirDial, as we explore exciting opportunities in the residential market.

Unidentified Analyst, Analyst

Got it. Thank you for that insight. Also, regarding the IWG trend. Assuming that the anticipated churn is behind you, do you expect to see net revenue retention increase back to the 100% level or above in the latter half of fiscal '26?

Shig Hamamatsu, CFO

Yes, regarding Q4, the expected churn I mentioned may slightly impact our current retention rate of 99%. As we enter next year, we hope to stabilize the rate but expect a range between 98% to 99% in the short term. However, there is positive momentum in AirDial and other areas to balance that retention rate.

Unidentified Analyst, Analyst

Great. Thanks for taking my questions.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Matthew Harrigan with The Benchmark Company. Your line is open.

Matthew Harrigan, Analyst

Thank you. As far as the two national cable companies whom I’ll refer to as Company One and Company Two, they tend to coordinate closely when it comes to technology strategies and product offerings. Are you already in discussions with the one you didn’t finalize an arrangement with? I assume at the very least it would accelerate the RFP process for you due to the confidence they would have in each other’s due diligence process. Additionally, on the last call, you expressed confidence in achieving double-digit EBITDA growth over the next couple of years. Are these deals incremental to that, or were they somewhat anticipated in your plans?

Shig Hamamatsu, CFO

Yes, you ask a good question there but I can’t comment on specifics regarding who we are or aren't discussing with. However, I can confirm it’s a long list of engagements that keep us quite busy. The recent price increases we witnessed on copper lines, along with announcements of their shutdowns, fuel the market’s momentum I discussed. We believe we have the best solution available, which is evidenced by our wins. Any partnership expansion will inherently increase our EBITDA moving forward. But our already established partnerships will also drive the bottom line, irrespective of further engagements.

Eric Stang, CEO

Yes, we are indeed looking at the potential for AirDial in Europe. We recognize that the product will require adjustments to meet European regulations and standards. However, this is a consideration we've had in mind for some time.

Matthew Harrigan, Analyst

Thank you, Eric. Happy Holidays.

Eric Stang, CEO

Thank you. You too.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from Brian Kinstlinger with Alliance Global Partners. Your line is open.

Brian Kinstlinger, Analyst

Hi, thanks so much for taking my question. I know it's hard to predict, Eric. In terms of AirDial, you've announced several partners that sound very bullish. They own their own copper line, so they should be motivated. It even sounds like they're trying to move quickly in the first quarter, one of them. You talked about the recent market heating up. How should investors interpret what this means for fiscal '26? Is it in terms of bookings, revenue, or some progress measure? When do you see AirDial having a more pronounced impact on the P&L?

Eric Stang, CEO

That's a fair question, Brian. We'll have clearer insights when we provide annual guidance in March next year. By then, partnerships secured over the last two quarters will have had ample time to gain traction, allowing us to assess their progress. The market is ripe for this, and we anticipate growth. However, there is a ramp-up time involved. When partners sign with us, they will be reselling our solutions under their name and managing their billing. This means coordination, sales force training, and customer transitions that may take months. For larger clients, that could extend over a longer timeline. When we announce guidance in March, we will have a clearer picture of this, but right now it's not something I can specify.

Brian Kinstlinger, Analyst

Yes. But, judging from your earlier statements, it seems more likely that the significant impact will come in the second half of fiscal '26 rather than the first half, am I right?

Eric Stang, CEO

It depends on what you define as “impact.” The top-tier national cable company wants to launch in Q1 of next year, but I can't predict their demand. We'll take it step by step and keep you updated as we gather more information.

Brian Kinstlinger, Analyst

We have asked this before, but for 100 lines on the Enterprise and 10,000 lines on residential, what does the market opportunity for AirDial with a partner like that look like?

Eric Stang, CEO

If a customer has that level of opportunity, let's say 100,000 lines for business and 10,000 for residential, those lines are potential opportunities because each needs to be addressed. Some clients may do without the line, or opt for upgraded solutions. However, we believe a significant majority will convert to AirDial or Telo. This could take three to four years, but our expanding partner base gives us time to explore these avenues efficiently. To give you an idea on revenue, we suggest modeling AirDial at about $300 in annual recurring revenue, translating to around $25 monthly. I cannot disclose the pricing for specific partners, but margins remain favorable. We expect a majority of lines to convert.

Brian Kinstlinger, Analyst

Great, thank you.

Eric Stang, CEO

You bet.

Operator, Operator

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to management for closing remarks.

Eric Stang, CEO

We appreciate everyone's attendance today. Thank you. We'll keep working hard here and look forward to the next time we can talk. If we don't connect before the holidays, Happy Holidays to everyone. Thank you. Bye-bye.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.