Earnings Call Transcript - OOMA Q4 2022

Operator, Operator

Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Ooma Fourth Quarter and Fiscal 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Q&A session. If you'd like to ask a question during this time, simply follow the operator's instructions. If you'd like to withdraw your question, again follow the operator's instructions. Thank you. Mr. Robison, you may begin your conference.

Matt Robison, Director of IR and Corporate Development

Thanks, Emma. Good day, everyone and welcome to the Fourth Quarter and Fiscal Year 2022 Earnings Call of Ooma, Inc. On the call with me today are Ooma's CEO, Eric Stang, and CFO, Shig Hamamatsu. After the market closed today, Ooma issued its fourth quarter of fiscal year 2022 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 8:00 PM Eastern Time. Further information 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 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 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 first quarter and full year fiscal 2023 on a non-GAAP. Also, in addition to our press release and 8-K filing, the Overview page and Events and Presentation page in the Investors section of our website, as well as the Results page of the Financial inflows 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 CEO, Eric Stang.

Eric Stang, CEO

Thank you, Matt. Hi, everyone. Welcome to Ooma's Q4 fiscal year 2022 earnings call. Thank you for joining us today. I'm pleased to report we exceeded expectations for Q4 and our full fiscal 2022 year. And I'm excited to talk with you about our outlook and the many initiatives we have underway to drive growth in our upcoming fiscal year. We capped off our fiscal 2022 with Q4 revenues of $50.5 million, representing 14% growth year-over-year. Total revenue for fiscal 2022 was $192.3 million, up $23.3 million from fiscal 2021, also representing 14% growth year-over-year. We accomplished this growth while increasing our ARPU, generating EBITDA of $15.6 million, and increasing our cash on hand to over $30 million. FY2022 was a strong year for us, one we're proud of. Looking back at FY2022, we're also proud of the investments we made in our future. As I go through my remarks today, I will highlight several growth opportunities that we initiated during FY2022, which hold tremendous potential for this year and beyond. First, looking at our progress in Q4, we continued to execute our core strategy of growing our SMB and enterprise subscription revenues through feature enhancements and sales and marketing expansion. For our SMB customers, we added features such as hot desking, which facilitates shared workspaces, dynamic caller ID, which allows individual control of caller ID, and calendar integration with Google G Suite and Microsoft Office 365. We also continued development of our upcoming Pro Plus tier, which will extend our range of features to serve even larger businesses and facilitate further ARPU growth for Ooma Office. I'm pleased to report we remain on track to launch Ooma Office Pro Plus in Q2 of this year. For our enterprise customers, we launched our integration with Jazzware to link Ooma's UCaaS features for Jazzware's cloud service and control of property management solutions. Our plan is for Ooma and Jazzware together to enable advanced features for the hospitality industry. We also continued our ongoing effort to modernize every way our users interact with Ooma Enterprise. In this regard, I'm pleased to report that we believe we will complete our update of Ooma Enterprise in the first half of this year with the release of new mobile apps and an updated admin portal. On the sales and marketing front, we made good progress, although we did face some headwinds driven by the intensity of Omicron and typical Q4 seasonality. One particularly exciting new customer for Ooma Office in Q4 was a large fast-food franchise group with over 300 users. We also added more than 150 new locations representing nearly 500 users with franchises of a large services firm, bringing us now to over 5,000 franchise users with this firm. In hospitality, we landed six new properties in Q4 and are seeing our backlog of opportunities build since the recent launch of our Jazzware integration. We also signed over 80 new agents and bars in Q4, as part of our continued effort to expand sales through channel partners and resellers. Overall, we made good progress expanding our business in Q4. We also accomplished a lot in Q4 to enable our largest customer to roll out at scale to more users. While we know this has been a long time coming, we fully expect that rollout will begin in Q1 and accelerate through the balance of the year. Additionally, through our efforts over the last couple of quarters, we have expanded the longer-term scope of opportunity with this customer. Our immediate goal, as we stated previously, is to add 25,000 plus users, taking us to approximately 50,000 users in total. Once that is achieved, we anticipate even further expansion will follow. Last quarter, we made the exciting announcement that we are introducing Ooma AirDial. As you'll recall, AirDial provides analog-to-digital conversion, remote management, battery backup, and wireless LTE over a controlled network to replace the copper lines serving critical building applications. The market reception to AirDial has been strong, and we have already signed multiple resellers. Currently, we have beta units in use at customers and production underway of AirDial units that will be available for sale starting late Q1. We anticipate our biggest challenge this year will not be demand, but rather our ability to build and supply units. At this time, we are conservatively forecasting AirDial and our business outlook until we have more certainty on market development, our build quantities, and timing. Nonetheless, we see significant upside potential for AirDial in FY2023 and are actively working internally to execute on this opportunity. Last quarter, we also made the exciting announcement that T-Mobile will offer Ooma Telo to T-Mobile 5G home internet customers. Ooma and T-Mobile are working together to pursue this opportunity, and Telo is the only solution being offered. We're excited by T-Mobile's significant growth plans for home internet and by the continued market demand we see from customers who want to combine internet with home phone services. As of now, Telo is included as an add-on option on T-Mobile's website, and joint work is underway to implement other marketing initiatives. We're experiencing sales every day with T-Mobile, but it's still too early to forecast the full potential of this partnership. Looking forward to FY2023, we believe we have built a solid foundation for growth. We see ourselves today as a leader in each of our target segments, serving SME customers, select enterprise applications, and residential customers. We have built a robust and very flexible end-to-end platform that is operating at large scale, serving approximately 2.5 million users today. Online marketing and direct sales are strategic competencies of ours, and we are investing to build our channel reseller sales. Our scope now extends beyond North America to Europe and soon we'll expand beyond that to other regions. We're increasingly charting our own direction as we broaden our solutions to include integrated services such as Ooma Connect, Ooma Wi-Fi, and Ooma AirDial. Overall, we're not only driving growth, but also generating positive cash flow from operations. Our accomplishments today create a strong foundation for future growth. Strategically, our vision remains to provide leading communications and related services that deliver advanced features, superior ease-of-use, and uncommon value to businesses worldwide. As we seek to implement this vision, we are focused in FY2023 and find priorities for growth. First, execute to grow sales to business customers, particularly with the launch of Ooma Office Pro, which is a higher service tier to expand our sales and marketing activities and to continue to build our brand recognition. Second, develop new verticals and stronger channel sales. As part of achieving this, we intend to grow the number of agents and bars we work with and strengthen our support for channel resellers. Third, expand in Europe, which will be achieved in FY2023 by rolling out service to a large number of new users as part of our expansion plans with our largest customer. Fourth, capitalize on AirDial to replace copper lines that are sun-setting. Our intention is to create both the most extensive solution and the best value solution and be the leader serving this opportunity. Finally, leverage the transition to 4G and 5G internet to drive added growth. With Telo being offered by T-Mobile and with Ooma Connect, we have the first steps in place to achieve this. As you can see, while we have a lot to accomplish this year, we also have more opportunity in front of us than ever before. 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'll begin with a review of our fourth quarter and full-year fiscal 2022 financial results and then provide our outlook for the first quarter and the full fiscal year 2023. We delivered another quarter with strong financial results, achieving $50.5 million in total revenue, exceeding our guidance range of $49.7 million to $50.2 million. On a year-over-year basis, total revenue grew 14% in the fourth quarter, driven by the strength of Ooma's business subscription and services revenue, which accounted for 49% of total subscription and service revenue as we continue to make progress towards achieving more than 50% of our subscription and services revenue coming from business customers in the near future. On a full-year basis, total revenue was $192.3 million compared to $168.9 million in the prior year, representing 14% growth year-over-year, including 23% growth in Ooma's business subscription and services revenue. Non-GAAP net income for the fourth quarter was $3.2 million, which exceeded our guidance range of $2.3 million to $2.8 million. Net income for full-year fiscal 2022 was $12.6 million compared to $11.5 million in the prior year, driven by the growth in subscription and service revenue and expansion of related gross margin. Now, some details on our revenues for Q4 and fiscal 2022. Ooma's business subscription and services revenue grew 19% year-over-year in Q4, and 23% for fiscal year 2022, driven by user growth, as well as ARPU growth. Residential subscription and services revenue grew 3% in both the fourth quarter and full fiscal year 2022. For the fourth quarter, total subscription and services revenue was $45.8 million, or 91% of total revenue compared to 93% in the prior year quarter. During the fourth quarter, as expected, we saw product and other revenue increase to $4.7 million, compared to $3.1 million for the same period last year, driven by the sale of additional units of our fixed wireless products to the same strategic customer discussed in our third quarter earnings call. Now, some details on our key customer metrics. We ended fiscal 2022 with 1,100,000 core users, up from 1,074,000 core users at the end of the prior fiscal year, driven by the growth in business users. I'm excited to report that we now have 308,000 business users, which represents 28% of our total core users, up from 25% at the end of the prior fiscal year. Our blended average monthly subscription and service revenue per core user or ARPU increased 8% to $13.41, up from $12.46 in the prior year quarter, driven by an increase in the mix of business users including higher ARPU Office Pro users. During the fourth quarter, 44% of our new office users opted for Office Pro service and for the full fiscal year 2022, 45% of new Office users opted for Pro service, which was up from 40% in the prior fiscal year. Overall, 20% of our Office users have now subscribed to our Pro tier. Our annual recurring revenue in Q4 grew to $176.9 million and was up 10% year-over-year. Our net dollar subscription retention rate for the quarter was 96%, remaining stable compared to the prior year quarter. For the entirety of fiscal 2022, our quarterly net dollar retention rate averaged 98%, an improvement from 96% in fiscal 2021. Now, some details on our gross margin. Our subscription and service gross margin for the fourth quarter was 73%, an improvement from 72% in the prior year. This improvement was driven by our increase in scale and a greater mix of higher ARPU business customers. Product and other gross margin for the fourth quarter was negative 49% compared to negative 58% for the same period last year. This improvement over the prior year quarter was mostly due to the sale of fixed wireless products to the strategic customer I mentioned earlier. On an overall basis, total gross margin for Q4 was 62% compared to 63% for the same quarter in the prior year, as we had a higher mix of product revenue during the quarter. Now for some details on operating expenses. Total operating expenses for the fourth quarter were $27.9 million, up $3 million or 12% from the same period last year. Selling and marketing expenses for the fourth quarter were $14.5 million or 29% of total revenue, up 13% year-over-year, driven by higher marketing and channel development activities for Ooma business. Research and development expenses were $8.9 million or 18% of total revenue, up 9% on a year-over-year basis from $8.2 million, driven by investments in new features for both Ooma Office and Ooma Enterprise, as well as new products such as Ooma AirDial. G&A expenses were $4.5 million or 9% of total revenue for the fourth quarter, compared to $3.9 million for the prior year quarter. Our non-GAAP net income of $3.2 million resulted in a diluted earnings per share of $0.13 for the fourth quarter, compared to $0.12 of diluted earnings per share in the prior year quarter. Adjusted EBITDA for the quarter was $4 million or 8% of total revenue compared to $3.6 million for the prior year quarter. Adjusted EBITDA for full fiscal year 2022 was $15.6 million compared to $14 million in the prior fiscal year. The increases in non-GAAP net income and adjusted EBITDA were driven by economies of scale, especially the growth in subscriptions and services revenue and related gross margin. We ended the quarter with total cash and investments of $31.3 million compared to $28.3 million at the end of Q4 in the prior year. Cash generated from operations for the fourth quarter was $1.8 million compared to $2.2 million in the same period last year. For the full fiscal year 2022, cash generated from operations was a record $6.7 million compared to $4.4 million in the prior year. On the headcount front, we ended the quarter with 979 employees and contractors. Now, I'll provide guidance for the first quarter and full fiscal year 2023. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation and amortization of intangibles. For the first quarter of fiscal 2023, we expect total revenue to be in the range of $49.5 million to $50.2 million. The first quarter revenue guidance range assumes product and other revenue will normalize to the level we saw in the first half of fiscal 2022, as we do not anticipate additional shipment of fixed wireless products to the same strategic customer discussed earlier. The guidance range also reflects our normal seasonal decline of residential revenue in the first quarter, as residential revenue typically peaks in the fourth quarter driven by its ad-based revenue over the holiday season. We expect the first quarter net income to be in the range of $2.2 million to $2.8 million. Non-GAAP diluted EPS is expected to be between $0.09 to $0.11. We have assumed 25.1 million as the average diluted shares outstanding for the first quarter. For the full fiscal 2023, we expect total revenue to be in the range of $209.5 million to $212.5 million. Let me give you additional context for our fiscal 2023 revenue guidance. It's important to remember that fiscal 2022 revenue included approximately $3 million of product revenue to a strategic customer that we currently do not anticipate will recur in fiscal 2023. Excluding the impact of this product revenue in fiscal 2022, the midpoint of our fiscal 2023 revenue guidance represents approximately 11.5% revenue growth year-over-year, which assumes a subscription and services revenue growth rate of 20% for Ooma business and between 1% to 2% for residential. The revenue guidance for fiscal year 2023 also reflects our expectation that contributions from AirDial will be more meaningful in the second half of the fiscal year. We expect non-GAAP net income for fiscal 2023 to be in the range of $8.5 million to $10.5 million after incorporating increasing costs of labor, costs to expand our channel strategy, launch new products such as AirDial, and the enabling of significant expansion of services in international locations. We expect non-GAAP diluted EPS for fiscal 2023 to be in the range of $0.33 to $0.41. We have assumed approximately 25.7 million as the average diluted shares outstanding for fiscal 2023. In summary, we're very pleased with our solid performance in fiscal 2022, which demonstrates strength in our execution, while we made progress towards our long-term objectives. I will now pass it back to Eric for some closing remarks.

Eric Stang, CEO

Thanks, Shig. I mentioned at the outset of my remarks that in FY2022, we made significant investments in our future. Those investments in international expansion and higher-level service tiers, new developments of new verticals and channels, creating the most complete solution for replacing copper lines, and partnering Telo with T-Mobile and more, they have positioned us better than ever for FY2023. While our visibility on what we will achieve in FY2023 will improve throughout the year, we clearly have the potential to drive significant growth. As always, the Ooma team is 100% focused on building Ooma's long-term success. Thank you. We will now take your questions.

Operator, Operator

At this time, I would like to remind everyone in order to ask a question, please follow the operator's instructions. Your first question today comes from the line of Matt Stotler with William Blair. Your line is now open.

Matt Stotler, Analyst

Hey, Eric and Shig, thanks for taking the questions. First off, it's helpful color you gave on the guidance and the puts and takes, both of the large customer and some of the seasonality in Q1. It's been a tough environment towards the end of the year and early this year for a lot of people. Looking at some of the KPIs, net adds were a little bit down sequentially, retention took a little step-down, and there's a little deceleration in business revenue growth. Can you talk about some of the factors that impacted those KPIs, whether it's seasonality or what you saw with Omicron and some of those face-to-face channels potentially? How should I think about those going forward?

Eric Stang, CEO

Sure. Hi, Matt. You highlighted some of the issues right there in your question. If you look at Q4, December was the tough month of the quarter for us. With Omicron and seasonality, we had a tougher December than we expected, but we bounced back well in January. I would add that we did launch a new line of IP phones in the quarter, and we had some initial challenges as we first brought users up on them, which affected us a little bit as well. However, I can say that January was strong, and February is running at a pace that would bring us back to our previous churn levels and also back to our previous rate of adding net business users in the range of over $10,000 for the quarter. I'm feeling pretty good about the business and where we are today, but you are correct, Q4, particularly in December, was a bit challenging.

Matt Stotler, Analyst

Got it. That's helpful. And can you touch on the vertical-specific opportunities? You mentioned some specific opportunities in hotels and hospitality with the Jazzware partnership. How do you view the potential for additional vertical-specific opportunities going forward, and what are you focused on there?

Eric Stang, CEO

Yes, you've captured our strategy at the enterprise level quite well with your question. Rather than trying to be everything to everyone, we're focusing on applications and verticals where our unique capabilities can really make a difference. In hospitality, in conjunction with Jazzware, we have a great integrated solution that can combine UCaaS features with more basic features for powering individual rooms, combining analog and digital capabilities, connected to property management systems. This has become a key focus for us and a way to grow our business. It's also a strong way to convince new channel partners and resellers to work with us because we have something unique to offer. Similarly, AirDial is helping us open up new channel partner relationships because again, we have a unique product in the market. This year, we plan to develop additional verticals. While I can’t go into details just yet because it takes time to establish strong solutions, that is part of our strategy for building out our enterprise offerings. We aim to target a couple more verticals this year.

Josh Nichols, Analyst

Thanks for taking my question. I'd like to touch on T-Mobile, which seems like an interesting long-term opportunity. I realize it's early stage, but any thoughts on the traction you're seeing? Additionally, how conservative are you being in your guidance for T-Mobile this year on the revenue side?

Eric Stang, CEO

Yes, happy to. It starts with T-Mobile's own comments regarding their intention to grow the home internet segment. They are committed to expanding their user base to millions over the next few years. I won’t re-quote their statements, but they are exciting, and the market has confirmed that some customers prefer a double-play solution, combining phone and internet services. So there’s a natural synergy there. In terms of our collaboration, we are in regular planning and marketing meetings as we develop next steps to capture this opportunity. So far, the only thing that’s happened is there’s a section on their website where home internet customers can also add phone service. We are seeing sales daily from that; however, I would say it doesn’t represent the full potential at this stage, but as I said, it's early days. Regarding the forecast for this year, we are quite conservative because we want to wait and see how things unfold. If we took into account the forecast they provided for how many units to expect this year, it would be a much larger number than what we currently have in our estimate. So let's just say we are being prudent as we navigate these early stages.

Josh Nichols, Analyst

Thanks for that clarity. In the past, about 30% of the company's revenue has been allocated to sales and marketing. I see T-Mobile as an interesting opportunity where you may not have a lot of those expenses. Is that a fair assumption?

Eric Stang, CEO

With T-Mobile, we are supporting their marketing and sales efforts. We have created a special offer for their customers. However, aside from that, we really enable them to take the lead on sales. Currently, we're on their internet website, and joint plans are in discussion between both of us to expand our initiatives.

Josh Nichols, Analyst

I have one more question regarding your guidance for this year. It appears that while revenue guidance makes sense given your comments, I know the EPS guidance is set to be down year-over-year. Where will those additional investment dollars be allocated? Will it be more front-half or back-half weighted? How should we view the operating side of the guidance?

Shig Hamamatsu, CFO

Thanks for the question, Josh. Regarding the areas of investment, the largest portion will be in marketing. We want to continue investing in channel development to drive user growth on the business side. Throughout fiscal 2022, we spent around 29%. As Eric and I have mentioned before, this is lower than we'd like for driving growth. We plan to increase spending in areas of rising channel development as we missed targets for hiring last year. As things normalize post-pandemic, we expect costs in trade shows and travel to pick up, especially in the second half of the year. This will result in marketing as a percentage of revenue coming in around 31.5% to 32%. This level still aligns with the lower end of our mid-term model. Other areas will also see a general increase in labor costs, met with expansion. Some spending related to our largest customer previously slated for FY2022 will now shift to next year due to timing. So hopefully that gives you a bit of context.

Sharon Kiruba, Analyst

Can you please discuss the pipeline for AirDial and the marketing strategies you're currently utilizing?

Eric Stang, CEO

Sure. The pipeline we have built up is much larger than we believe we can produce this year, which is encouraging. We don't feel the need to do extensive marketing because there are several viable paths for this product to market. One path involves channel resellers who can bring AirDial to the enterprises they serve. We are seeing interest from distributors and aggregators who want to offer this solution. Some businesses have significant needs to replace copper lines, and we have signed several partners to work with us. Many are waiting for us to ramp up availability.

Sharon Kiruba, Analyst

Do you believe that your largest customer will move significantly forward this year internationally?

Eric Stang, CEO

Yes.

Matthew Harrigan, Analyst

It feels like you have several growth initiatives. It’s great that you’re focused on growth and seeking a reasonable ROI. Do you sense that the timing for the transition from mid-term to long-term margins is pushed out slightly by the level of activity? Are there any fluctuations in the long-term model?

Shig Hamamatsu, CFO

Matt, thanks for that question. Regarding the gross margin model we've discussed, I see we aim for 62% to 65% total margin. Currently, I feel positive about our subscription margin, which is in the mid-70s. As we scale further through user additions and ramping up our business side with AirDial, we expect the subscription margin to improve. Overall gross margin reported at 62% this past quarter was impacted by a higher mix of product revenue. In the coming year, we expect to see a shift back towards subscription revenue, normalizing to 93%. This should improve our total gross margin due to the higher subscription mix. By the second half of next year, we expect this to transition to around 92% subscription and 8% product, mostly impacted by the anticipated ramp with AirDial. We remain optimistic about our mid-term and long-term forecasts and feel we are progressing well towards those.

Matthew Harrigan, Analyst

With AirDial, do you anticipate significant competition in the market, or do you think you will retain your position as the primary innovator?

Eric Stang, CEO

The market is vast enough that competition exists today and will likely grow. However, we feel we differentiate ourselves since we can design hardware that seamlessly fits into our cloud and provide integrated services. We’ve been able to partner with T-Mobile for this as well, connecting wireless internet to controlled networks these devices require. While other competitors exist, they tend to be smaller and merely product-focused, whereas we provide an all-encompassing solution. We invested a year into creating this solution and are now scaling production with some supply chain challenges. Our preparation has placed us ahead of anyone looking to enter the space.

Andrew King, Analyst

What hurdles exist in ramping your sales force to sell specialized solutions in hospitality, and how many of the 80 bars you added this quarter were hospitality-focused?

Eric Stang, CEO

Typically, when we work with agents and bars, they aren’t solely focused on one industry. However, success in a vertical typically leads them to prioritize it. Of the 80-plus bars and resellers we added, roughly half focused on selling Ooma Office and the other half leaned more toward enterprise sales, including a significant number capable of selling into hospitality. Some of those resellers specialize in that area, and we’re excited about an ongoing relationship with one in particular. Essentially, it’s our traditional strategy: targeting hospitality businesses burdened by antiquated solutions that they need to modernize, providing them significant value as we present our solution. Success in a vertical helps enhance our reputation. In terms of seasonality, I do not perceive any major fluctuations. Our growth will depend mainly on onboarding agents and resellers and getting them comfortable with our solutions to market.

Brian Kinstlinger, Analyst

Regarding T-Mobile and the Ooma Telo Air program, I looked on their website, and it's hard to spot. When are they planning to improve home internet user awareness of the program, and how much inventory do you have for delivery?

Eric Stang, CEO

I can't comment too specifically on their plans as it's at their discretion. However, they have expressed intentions to promote beyond what's currently on their website. Regarding product availability, we have been planning for quantities indicated by them since fall and have had foresight in acquiring necessary components before they become scarce. Therefore, I believe we are well-positioned to meet growing demand.

Brian Kinstlinger, Analyst

Once this program ramps, will there be a significant hardware impact on margins as opposed to the recurring revenue piece? Also, what impact will the ramp of AirDial have on gross margin?

Shig Hamamatsu, CFO

Yes, regarding Telo, there will indeed be a product margin component. However, we anticipate that the total gross margin profile shouldn’t drastically shift. Post normalization, product gross margins historically have been around negative 50% to negative 55%. For AirDial, it includes subscription and product components; we think it will help improve product margins and positively impact subscription margins as well.

Joe Goodwin, Analyst

Regarding your five-part growth priorities for FY2023, can you rank those in order of importance?

Eric Stang, CEO

Sure. The number one priority is executing to grow sales to business customers. This includes launching Ooma Office Pro, which is a higher service tier to expand our sales and marketing activities and bolster our brand recognition. After that, it’s challenging to rank the next four. However, we are focused on developing new verticals and enhancing channel sales, which is longer-term. We believe we will significantly expand with our largest customer, ready to start this quarter. Growth in Europe is on the horizon as well. AirDial and the transition to 4G and 5G, particularly with T-Mobile, present significant upside. Each of these priorities is material, but after the first one, they all hold value, and we made considerable investments in them last year. While it's ambitious to say we can achieve all five areas this year, a lot of groundwork has already been done.

Joe Goodwin, Analyst

Thanks, Eric.

Operator, Operator

We will pause for just a moment to compile any final questions.

Shig Hamamatsu, CFO

Thank you for joining us. I want to share a fun item. In January, Ooma was named one of the best tech brands for 2022. We were ranked in the top 10 alongside Tesla, Apple, and Sony. It was exciting to receive this recognition from PC Magazine, based on a reader survey. It highlights our focus on delivering an excellent customer experience, which has helped drive our growth. We appreciate your time today and look forward to our next discussion. Goodbye.

Operator, Operator

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