Earnings Call Transcript - OOMA Q2 2025

Operator, Operator

Thank you for joining us for Ooma's Second Quarter Fiscal Year 2025 Financial Results Conference Call. All participants are currently in a listen-only mode. Following the speaker presentation, we will have a question-and-answer session. I would now like to turn the call over to Matt Robison in Investor Relations. Please proceed.

Matt Robison, Director of Investor Relations and Corporate Development

Thank you, Latif. Good day everyone and welcome to the fiscal second quarter 2025 earnings call of Ooma, Inc. My name is Matt Robison, and I'm the Director of IR and Corporate Development. On the call with me today are Ooma CEO, Eric Stang, and CFO, Shig Hamamatsu. After the market close today, Ooma issued its fiscal second quarter 2025 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 or 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 were 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 just 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 third quarter and a 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 investor 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 GAAP to non-GAAP reconciliation. It also provides resolution of gap expenses that are excluded from non-GAAP metrics. Now, I will hand the call over to Ooma CEO, Eric Stang.

Eric Stang, CEO

Thank you, Matt. Hi, everyone. Welcome to Ooma's second quarter of fiscal year 2025 earnings call. Thanks for joining us. We have great results to present for Q2 and new developments to report as we look ahead. I look forward to reviewing our progress and outlook with you. Financially, Q2 was a strong quarter as we outperformed on all of our major financial goals. Q2 revenue was $64.1 million, and Q2 non-GAAP net income was $4.1 million. Both results were above guidance and up nicely versus Q1 of this year. Q2 cash flow from operations was $7.1 million, which is close to double what we achieved both in Q1 of this year and in Q2 a year ago. With the improved cash flow, we were able to reduce our debt by $3 million in the quarter to $8.5 million at the end of Q2. We also spent approximately $1.8 million in Q2 to repurchase stock to help offset dilution from vesting of stock grants. It's great to be ahead of where we thought we would be financially at this point in our fiscal year. As in Q1, Ooma Business, which comprises our UCaaS, POTS replacement and wholesale solutions performed well in Q2. Ooma Office, our small business UCaaS solution, was buoyed by new feature releases, including several customer engagement features to enable our customers to connect more effectively with their customers and two new integrations, one with Square and the other with Intuit QuickBooks. The release of features such as these helps enable Ooma Office customers to trade up to a higher price service tier and also expands the appeal of Ooma Office to businesses of a larger size. In this vein, we're excited about our development roadmap for Ooma Office, which includes leveraging the capabilities of our 2600Hz acquisition to launch more sophisticated call center features later this year. Ooma AirDial, our POTS replacement solution, also made good progress in Q2. We further enhanced our differentiation versus other solutions with the launch in Q2 of Call Alerts, which informs customers when AirDial calls are placed and can be of critical value in life safety applications. We believe we are the only POTS replacement provider to offer this feature. Likewise, our investment to expand our sales and marketing reach is generating more opportunities and sales momentum. Once again, in Q2, we closed more new customers for AirDial than any previous quarter. As in prior quarters, we also added new AirDial resellers in Q2. Here I have some special news. We have been told by an incumbent local exchange carrier that they plan to resell AirDial beginning later this year. This is exciting because of the size and scope of this new partner, who we believe is one of the Top 10 largest service providers in America. As a large incumbent carrier, they have a vast number of customers they serve today with POTS lines that will ultimately need to be replaced. We expect to be able to provide more detail about this including the timing for launch on our third quarter conference call. We believe this is a breakout win for AirDial. 2600Hz, our wholesale and developing CPaaS solution, saw expanded customer interest in Q2, both domestically and internationally. We are increasingly excited by the level of interest in the 2600Hz platform and scope of market opportunity in part due to the Metaswitch end-of-life announcement and the effect this is having in the marketplace. We believe the leading capabilities of the 2600Hz platform, the enhancements we are making by integrating Ooma technology and applications into the platform, and the steps we are taking to broaden the platform to serve select CPaaS applications are all driving strong customer interest. As well, the aging nature of competitive platforms is driving market opportunity. You'll recall we announced a very large customer win for 2600Hz last quarter and believe this customer will become one of our largest customers in the future. I'm pleased to report that we are on track to launch with this customer this fall. I'm also pleased to report that in Q2, this customer chose to expand the scope of our relationship and adopt more capabilities of the 2600Hz platform than originally envisaged. We were able to upsell this customer to a more turnkey solution, thanks to our efforts to integrate Ooma applications and technology into the 2600Hz platform. While this customer is of course receiving a lot of our attention, I'm also pleased to report they are not the only new 2600Hz customer we expect to roll out with this fall and we see a significant and growing pipeline of opportunity. It's difficult to foresee the revenue we will drive in the back half of this year from 2600Hz expansion, but we anticipate positive momentum. On the residential front, Ooma Telo also performed well in Q2. We remain excited about the residential market opportunity, especially now that residential POTS lines are also increasing in cost and starting to sunset. We believe Telo can be an ideal solution to replace residential copper lines. In this regard, I'm extremely pleased to report that the large incumbent local exchange carrier I mentioned earlier has also told us that they plan to replace the residential copper lines across their business with Ooma Telo, and they are actively engaged with us to start doing so. Together, we have selected one local market to launch this fall as a test to refine the deployment process. We anticipate this carrier will resell the Telo solution and convert their residential copper base over time. We expect this first market rollout to begin late in our Q3, and we expect to be able to provide more information on our next earnings call. While we don't yet have clear visibility to predict the impact of this on our business, we can say that the market potential afforded by this carrier is very large indeed and is meaningful relative to the size of our current residential business. Before I turn it over to Shig, I'd like to make one more comment about Ooma's strategic direction. We are fortunate to have invested in several premier solutions with tremendous market potential. In doing so, we have spent heavily on creating these solutions and developing our current strategic position. As such, as we look forward, we feel we are reaching a turning point where we can increasingly capitalize on the investments we've made and the market opportunity they afford. In this regard, we also anticipate that we can drive increased bottom-line results as we endeavor to capitalize on our competitive advantage and succeed in our target markets. 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 second quarter financial results and then provide our outlook for the third quarter and full-year fiscal 2025. Our second quarter revenue was $64.1 million, solidly above the high end of our guidance range, and was up 10% year-over-year, driven by the strength of Ooma business as well as the addition of 2600Hz. In the second quarter, we saw better than expected revenue contributions from many of our offerings, including AirDial and 2600Hz. Also, we did not see any material seat reductions from IWG during the quarter, although we now believe the reductions we had originally anticipated in Q2 have been deferred to the second half of this fiscal year. In the second quarter, business subscription and services revenue accounted for 60% of total subscription and services revenue as compared to 57% in the prior quarter. Q2 product and other revenue came in at $4.6 million as compared to $3.6 million in the prior year quarter. On the profitability front, the second quarter non-GAAP net income was $4.1 million, above our guidance range of $3.6 to $3.9 million. Now, some details on our Q2 revenue. Business subscription and services revenue grew 15% year-over-year in Q2 driven by user growth and the addition of 2600Hz. Excluding 2600Hz revenue contribution, business subscription and services revenue grew 9% year-over-year. On the residential side, subscription and services revenue was down 1% year-over-year. For the second quarter, total subscription and services revenue was $59.6 million, or 93% of total revenue as compared to $54.7 million, or 94% of total revenue in the prior year quarter. Now some details on our key customer metrics. We ended a second quarter with 1,244,000 core users, which is up from 1,239,000 core users at the end of the first quarter. At the end of the second quarter, we had 500,000 business users or 40% of total core users, an increase of 12,000 from Q1 driven by user additions for Ooma Office, Ooma Enterprise and AirDial. Our blended average monthly subscription and services revenue per core user or ARPU increased 4% year-over-year to $15.07 driven by an increase in mix of business users including higher ARPU Office Pro and Pro Plus users. During the second quarter, we continued to see a healthy Office Pro and Pro Plus take rate with 58% of new office users opting for these higher tier services, which was up from 55% in the prior quarter. Overall, 31% of Ooma Office users have now subscribed to these higher tier services. Our annual exit recurring revenue grew to $233 million and was up 8% year-over-year. Our net subscription retention rate for the quarter was 100% as compared to 99% in the first quarter. Now some details on our gross margin. Our subscription and services gross margin for the second quarter was 72%, as compared to 72% in the prior year. As a reminder, subscription and services gross margin for the second quarter this fiscal year included an impact of 2600Hz gross margin, which is running low relative to Ooma subscription gross margin. Product and other gross margin for the second quarter was negative 69% as compared to negative 73% for the same period last year. As anticipated, we have substantially completed consumption of higher-cost components we had procured during the pandemic in the second quarter. Accordingly, we expect product and other gross margin will start to normalize in the negative 55% range in the second half of this fiscal year. On an overall basis, total gross margin for Q2 was 62% as compared to 63% in the prior year quarter. Now some details on our operating expenses. Total operating expenses for the second quarter were $35.2 million, up $2 million or 6% from the same period last year. Excluding the impact of 2600Hz, the total operating expenses increased $0.2 million from the same period last year. Sales and marketing expenses for the second quarter were $17.6 million or 27% of total revenue, which was down 1% year-over-year as we controlled our spending to increase profitability. Research and development expenses were $12.2 million, or 19% of total revenue, up 15% on a year-over-year basis, driven mainly by the addition of 2600Hz team members. G&A expenses were $5.4 million or 8% of total revenue for the second quarter compared to $4.9 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 second quarter was $4.1 million, or diluted earnings per share of $0.15, as compared to $0.15 in the prior quarter. Adjusted EBITDA for the quarter was $5.6 million, a record for the company, with 9% for total revenue, as compared to $4.9 million for the prior year quarter. We ended the quarter with total cash and investments of $16.6 million. Cash generated from operations for the second quarter was strong and at $7.1 million, it was a new quarterly record for the company. On a trailing 12-month basis, we generated a record $18 million of operating cash flow and $12 million of free cash flow, which represented 69% and 154% increase respectively over the same period a year ago. We paid down a debt by $3 million in the second quarter and reduced the outstanding debt balance to $8.5 million. On the headcount front, we ended the quarter with 1,130 employees and contractors. Now, I will provide guidance for the third 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 non-recurring gains and expenses. We expect total revenue for the third quarter of fiscal ’25 to be in the range of $64.2 million to $64.6 million, which includes $4.3 million to $4.5 million of product revenue. We expect third quarter net income to be in the range of $4.1 million to $4.3 million. Non-GAAP diluted EPS is expected to be between $0.15 and $0.16. We have assumed 27.5 million weighted average diluted shares outstanding for the third quarter. For full fiscal 2025, we are raising both revenue and profitability outlook. We now expect total revenue of $254 million to $255.5 million. The full-year fiscal 2025 revenue guidance assumes business subscription and services revenue growth rate of approximately 13% over fiscal 2024, while residential subscription revenue is expected to decline 1%. In terms of revenue mix for the year, we expect 93% to 94% 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 $15.7 million to $16.2 million. Based on this guidance range, we estimate our adjusted EBITDA for fiscal ’25 to be in $21.5 million to $22 million. We expect non-GAAP diluted EPS for fiscal ’25 to be in the range of $0.57 to $0.59. We have assumed approximately 27.5 million weighted average diluted shares outstanding for fiscal 2025. In summary, we are pleased with our solid Q2 results, with record adjusted EBITDA and free cash flow, and remain focused on executing to a long-term strategy to achieve profitable growth. I'll now pass it back to Eric for some closing remarks.

Eric Stang, CEO

Thank you, Shig. It's been a pleasure to talk with you today about our great Q2 results and our progress to grow our business. The next two quarters should be very interesting for Ooma as we attempt to roll out and expand new customer relationships. And we look forward to being able to share more with you as these opportunities unfold. Thank you. We will now take questions.

Operator, Operator

Our first question comes from Brian Kinstlinger of Alliance Global Partners.

Brian Kinstlinger, Analyst

Great. Thanks so much for taking my questions. Just a couple. The first one is, are there any updates on the sales cycle or install pace for AirDial customers, the enterprise ones?

Eric Stang, CEO

Nothing special to report. We've talked about the sales cycle and pace in the past and about how customers sometimes start with a portion of their needs and even proof of concepts before they move to full rollout. But all the pressures are there in the market and we do see the market developing as we'd expect as POTS lines become even more expensive and more sunset. But no, it's still a process with the larger customers. With the smaller customers, we can move pretty quickly. Most often when you've got a customer that just needs a few lines, we'll have it installed within a month.

Brian Kinstlinger, Analyst

Thank you. You mentioned that the Top 10 service provider in the US is selling AirDial to residential customers. Is the responsibility for the sales execution on them? Do you anticipate that the number of residential customers and users will start to increase in the second half of the year or early next year? How do you think this will affect your results on the residential side?

Eric Stang, CEO

Yeah. Well, first of all, to clarify, this incumbent local exchange carrier, I talked about they're doing two things with us, with their reselling AirDial, which will go to their business customers, which they have a lot, and reselling Ooma Telo, which will go to their residential customers, which they also have a lot. I think both are quite significant for us as a company, but I'm not yet ready to give guidance on what it will mean for next year. But these are terrific new opportunities for Ooma. We believe we're the only provider they're working with. And since they own or manage all of these residential and business copper lines, they have direct customer access, they have trucks they can roll out to switch customers over, and they have the ability to move at whatever pace they choose. And so, we expect it to be a very exciting opportunity for us that will unfold, particularly over the next three or four months as they go through the trial on the residential side, which I mentioned, and as they get the AirDial product launched into the market.

Brian Kinstlinger, Analyst

I wanted to follow up on that. You mentioned they can move as fast as they want, so the consumer, the user on the residential side won't have to opt in?

Eric Stang, CEO

These are residential consumers that they have today. They do have to give, I think, maybe a 90-day notice per some laws that exist around this. But if they're going to shut off your POTS line, your residential line, and they give you that 90-day notice, as a residential customer, I guess you have a decision to make. You can say, yeah, come in and switch it out with a Telo, or you can say, don't. But they have control over their customers and how they handle them, I believe.

Brian Kinstlinger, Analyst

Great, that's helpful. Last question for Shig. I think I asked this last quarter too, but with revenue in the third quarter and fourth quarter looking similar to what was just reported with a similar mix and the gross margin of hardware coming down by 15 points or more, I guess I'm wondering why the adjusted net income guidance looks similar in the third quarter and fourth quarter compared to what was reported in the second quarter? Hope that makes sense.

Shig Hamamatsu, CFO

Yeah, I understand. So part of it is, obviously the guidance for revenue, let's say first, includes the impact of anticipated churn. Now you have slip from Q2 to second half with IWG I talked about. So there's a little impact that is factored in in a second and a half. And also the product revenue, I think I guided to $4.1 million to $4.3 million in Q3. Some of those product revenue, by the way, what I'm going to say is unrelated to AirDial. So something other than AirDial, there's some one-time installations that we're expecting in Q3 that may not recur in Q4. So there's some one-time revenue plus in Q3 that's not recurring in Q4. And also this twist impacting the revenue pace, Q3 versus Q4. And yeah, so those are the main drivers. I think the Q3, excuse me, Q2 sales and marketing spend we controlled well. We made sure that we were investing in the right channel, but to the extent that we want to look closely at the opportunity to invest some more dollars into sales and marketing maybe in 28% range instead of 27%. So there's some puts and takes that lead into the guidance number. But having said that, we're still looking at the 9% EBITDA based on a guidance, EBITDA margin for the second half, which should put us to 9% EBITDA margin for the whole of the year. So I think there's some more work we can do to improve, but we're happy to see where we are going into second half to improve the profitability much better than what we've guided to at the beginning of the year.

Brian Kinstlinger, Analyst

Okay, thanks.

Shig Hamamatsu, CFO

I think that the other thing, Brian, so just to finish up my thought, there's a little bit of seasonality to the G&A expense, namely the audit fees. We get billed more in the second half as we get into the kind of a heavier set of audit cycle in the year. So that's the other factor impacting the OpEx a little bit higher for G&A in the second half.

Brian Kinstlinger, Analyst

Okay, that makes a little more sense because it sounds like you're going to save a million dollars on hardware gross margin, the exact same split of revenue. So to me that million dollars maybe it explained by G&A, but other than that it was a little bit…

Shig Hamamatsu, CFO

Yeah, maybe I should have probably said that first, but that's one of the bigger factors in thinking about how we model that next two quarters.

Brian Kinstlinger, Analyst

Okay, thank you.

Mike Latimore, Analyst

All right, great. Thanks. Yeah, great results and some interesting updates here. I guess first on 2600Hz, obviously you have a nice big customer you're launching. I guess as you look at the pipeline, is the pipeline more skewed towards sort of a wholesale model or a CPaaS customer?

Eric Stang, CEO

Well, I think it's more skewed towards the wholesale model today. We have many customers talking with us who haven't met a switch in particular and are trying to figure out what they're going to do next. And the CPaaS model is something that's evolving for us. We did make some advances on that front in Q2 that I didn't even get into in my script to start the process of strengthening what we do for that type of service delivery. But no, the very big opportunities that we're chasing today are largely wholesale opportunities. One though that comes to mind is CPaaS, where we'd be replacing another CPaaS provider. So it's a little bit of both, but that's how we see it.

Mike Latimore, Analyst

Okay, good. I mean, the ILEC announcement is very interesting. I guess, did you say that you are the exclusive vendor into the business channel there, or is it the preferred vendor?

Eric Stang, CEO

We believe we are the only provider offering a solution to replace POTS and residential copper lines. We expect to work exclusively with this partner, which should come as no surprise given that our AirDial solutions feature capabilities that outshine competitors. Additionally, our residential service has been recognized as the top phone service in America by Consumer Reports for the past decade. This partnership is particularly significant as it marks the first time we have teamed up with a partner that possesses its own residential lines to replace, as well as the first instance of taking our residential solution into the broader residential market. Both of these developments represent major achievements for us. Considering that this partner is likely among the top 10 ILECs in the country, it could prove to be quite impactful for Ooma over the long term.

Mike Latimore, Analyst

And do they have a sort of drop-dead date where their POTS lines go away and would be a catalyst for both these segments, sir?

Eric Stang, CEO

I will answer that a little bit differently by saying I think they are eager to move forward.

Josh Nichols, Analyst

Yeah, thanks for taking my question. Good to see some upside on the top line, not just for the quarter but for the year. It sounds like you got a few irons in the fire, but I'm kind of curious if you were to think about the back half and the upside revenue guidance, how would you attribute that if you were kind of bifurcated between the core business offering that you guys have, AirDial and 2600Hz? How is that being driven?

Eric Stang, CEO

Our main business offering is our business solutions. These are provided in various ways, whether through wholesale with 2600Hz, to smaller businesses with Ooma Office, or to larger companies, especially in the hospitality sector with Ooma Enterprise or our cost replacement solution that shares similarities with our residential offering. We are focused on expanding all these areas, and they are all experiencing growth. The market dynamics differ among them, as do our competitive landscape and positions. Two of these areas, wholesale and POTS replacement, do not fit the traditional UCaaS model. Having such diversity across the company is beneficial. Furthermore, our UCaaS solution, which targets small businesses, distinguishes us from much of the industry. We aim to grow all three segments effectively. It’s important to note that AirDial, while starting from a smaller base, is currently the fastest-growing segment. A significant customer win was announced a quarter ago, which will begin implementation this fall, and we expect them to become one of our largest customers over time. This is just one success story in the wholesale sector. We see exciting prospects across all three segments and consider them collectively as Ooma Business. Many of our teams are integrated, and we strive to create synergies among these areas.

Josh Nichols, Analyst

Thanks, Eric. I know the 2600Hz margin profile is a little bit lower, but the company has actually seen subscription and services gross margins start to increase again, sequentially, at least for the last couple quarters. I'm just curious when you look at that piece of the business, Shig, do you think that there's room for that margin to continue to expand from current levels in the back half now that the integration is largely complete or what are the margin thoughts for the subscription piece in the back half?

Shig Hamamatsu, CFO

Yeah, we certainly think that there's more room to improve on 2600Hz, and the team is constantly working on the opportunity to do that. I think for the remainder of the year, we're still projecting around 72% margin, round number. Part of it is, while we continue to increase the 2600Hz specific gross margin, that we probably will continue to invest a little bit more into AirDial support and things of that nature. So there's a little bit of offsetting going on, but certainly going into next year, obviously we're not guiding to next year, but we should start to see another additional step of improvement on subscription gross margin as we continue to grow the business subscription revenue.

Josh Nichols, Analyst

Thanks. And then I guess like last question for me in terms of timing, it looks like you have a lot of stuff that's starting to come online in the second half of this year, some new AirDial opportunities as well that we've talked about recently as well as 2600Hz that seems to be benefiting from the Metaswitch news. Fair to assume, whenever you look at how you guys have laid out the guidance for this year, that, while you're not providing any formal guidance for next year, that you would expect at least a decent acceleration in growth rate based on kind of the irons that you guys have in the fire today, at least on the subscription biz?

Eric Stang, CEO

Well, that's certainly what we're driving towards. And I do think these large customer wins have the potential to be a real adder to our growth rate. We said at the start of this year that the guidance we gave, we wanted to drive north, which is to say either grow faster or make more money or both. I think we'll be able to do both next year. And obviously we have to get to the end of this year and be able to give you guidance and so we'll know at that time. But the two large customer wins we've announced the last two quarters are just, have the potential to be massive for us. And we're not done. We are hopeful to have further wins here, even this year. So yeah, we're trying to build up the building blocks that can be very clearly looked at to estimate what we hope will be a faster growth rate next year.

Eric Martinuzzi, Analyst

Yeah, I wanted to follow up on the ILEC win. Was there any other competitor on either the business side or the residential side that kind of gave you a run for your money or caused the awarding of it to maybe get slowed down versus what you thought, or is it pretty much you're writing the RFP and winning the RFP?

Eric Stang, CEO

We are definitely in a competitive market. Most companies have competitors, and this new customer did their research. We've been collaborating with them for a while, particularly during Q2, to prepare for the Q3 residential rollout we mentioned. However, Ooma has distinct advantages that allow it to stand out. Our AirDial and residential solutions offer numerous competitive benefits and excellent value. The key is helping customers like this recognize the need to act and start the process. Regarding the POTS replacement market, we discussed that a year ago, where the need was not well known. Now, most customers are aware, but we haven't quite reached the turning point where widespread action is taken. One analyst mentioned that only around 5% of the necessary lines in the US have converted so far. Although I'm not sure how they arrived at that figure, I can confirm we have a large customer, and there are also other discussions progressing with potential major partners who realize they need to act, which is encouraging. This is what we've been working toward for the past two years, and it's exciting for us.

Eric Martinuzzi, Analyst

So that's a pipeline that could potentially convert here in FY ‘25?

Eric Stang, CEO

Yeah, we will get sales in FY ‘25, which is to say the back half of this year, and we should go into FY ‘26, which starts February next year, with a lot of momentum.

Matthew Harrigan, Analyst

Thank you. It's encouraging to see that the carrier is considering Telo as a complement to AirDial, as it hasn't received as much attention. Could you elaborate a bit more on the total addressable market for Telo and its potential internationally, particularly in Europe, given the different regulations? I have two additional questions after that.

Eric Stang, CEO

We do not currently sell Telo in Europe. While we could enter that market, we have not tailored the product for it yet. In North America, the FCC reports that there are approximately 40 million residential POTS lines still in use. This indicates a significant transition that needs to happen. An interesting point is that when a more rural partner collaborates with us to deploy Telo, they typically see a 20% to 25% uptake from the homes they service. This suggests that there is still demand for home phone services, especially for reliable 911 access in areas where cellular service may be limited. The main challenge for residential services is reaching those customers, and having an established partner who already serves them would be a key advantage.

Patrick Walravens, Analyst

Hey, great. This is Oliver on for Pat. Could you provide an update on the UScellular and T-Mobile reseller partnerships, how they contributed this quarter and how you expect those to ramp throughout the back half of the year?

Eric Stang, CEO

T-Mobile has been a very strong partner for us with AirDial. They have fully embraced the product and have established large customer relationships that we, at Ooma, do not have. As a result, we are experiencing significant activity with AirDial at T-Mobile, and I expect this momentum to continue. Our relationship with UScellular is also thriving. Last quarter, we noted that in addition to selling AirDial, they will begin to offer Ooma Office, which is progressing well, albeit still in the early stages. Both of these partnerships are strong for us, and we anticipate growth from them as we move forward. Thank you everyone for joining us today. It has been a busy second quarter for us. We are excited about some new developments in the company and, more importantly, we feel our strategic position is strong as we look ahead. Our annual exit recurring revenue for the second quarter was $233 million with a 72% gross margin, resulting in approximately $167 million in gross profit from our business services, including both business and residential services. I believe we have a solid balance sheet and good opportunities to execute based on our financial position. We will continue to work on that and look forward to providing more updates during our next call. Thank you, everyone.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.