Thank you for standing by, and welcome to the OOma Inc., Fourth Quarter and Fiscal Year 2025 Financial Results Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions]. As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Matthew Robison. Please go ahead, sir.

Thank you, Jonathan. Good day, everyone, and welcome to the fourth quarter and fiscal 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 fourth quarter and fiscal 2025 earnings press release. The 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 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 disclaim any obligation to update any forward-looking statements except as required by law. Please note that, other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non-GAAP basis. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. The discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures 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 first quarter and full year fiscal 2026 on a non-GAAP basis. Also, in addition to our press release and 8K filing, the overview page and events and presentations page in the investor's 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, but 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.

Thank you, Matt. Hi, everyone. Welcome to Ooma's fourth quarter and fiscal year 2025 earnings call. Thanks for joining us. We're pleased to report our results and to share our plans for our upcoming fiscal year. For Q4 FY'25, which of course is our quarter just ended, we achieved $65.1 million of revenue and $5.8 million of non-GAAP net income. Our growth was solid and our non-GAAP net income took a significant step up versus prior quarters. For all of FY'25, our revenue grew 8% year-over-year, and our non-GAAP net income grew 17% year-over-year. We generated over $20 million of free cash flow and spent approximately $9 million repurchasing Ooma stock. Looking forward, we believe we are well-positioned to serve market segments with significant growth potential. We also believe our higher non-GAAP net income represents a good start toward our plan to increase profitability going forward. As you know, we focus on four specific market segments, cloud communications specifically designed for smaller-sized businesses, POTS replacement for both business and residential customers, wholesale platform services, and residential telephony. We believe we are a leader in each of these segments. Given this is the start of a new fiscal year, I'd like to talk about our progress and plans for each. As we've shared previously, our strategy for serving smaller-sized businesses is built around continued customer outreach to generate awareness of our services, converting customers up to higher value tiers of service, and adding select bigger business features in a simple-to-use way to extend the appeal of our solution to slightly larger-sized businesses. Our progress in Q4 was on track with both the percentage of our customer base taking a premium tier of service and our average revenue per user growing in line with expectations. We were particularly pleased to win a…

Thank you, Eric, and good afternoon, everyone. I'm going to review our fourth quarter financial results and then provide our outlook for the first quarter and full fiscal year 2026. Our fourth quarter revenue was $65.1 million at the high end of our guidance range and was up 6% year-over-year, driven by the growth of our Ooma business, including AirDial. In Q4, business subscription and services revenue accounted for 61% of total revenue, subscription and services revenue, as compared to 60% in the prior quarter. Q4 product and other revenue came in at $4.5 million, as compared to $3.7 million in the prior quarter. The year-over-year growth in product revenue was primarily driven by growth in AirDial installations. On a four-year basis, total revenue was $256.9 million for fiscal 2025, as compared to $236.7 million in the prior year, representing 8% growth year-over-year, including 13% growth in business subscription and services revenue. On the profitability front, Q4 non-GAAP net income was $5.8 million, meaningfully above our guidance range of $4.5 million to $4.8 million, as we saw the benefit of R&D operating leverage we discussed in the last earnings call. Q4 non-GAAP net income also benefited from lower-than-expected tax expense. On a four-year basis, non-GAAP net income was $18 million, year-over-year growth of 17%, compared to $15.4 million in the prior year. Now some details on our Q4 revenue. Business subscription and services revenue grew 8% year-over-year in Q4, driven by user growth and output growth. On the residential side, subscription and services revenue was down 1% year-over-year. For the fourth quarter, total subscription and services revenue was $60.6 million, or 93% of total revenue, as compared to $58 million, or 94% of total revenue in the prior quarter. Now some details on our key customer metrics. We ended our…

Thanks, Shig. So, I talked with you today about our focus on four segments where we believe Ooma has crafted leading solutions. We want to extend our success providing communication solutions to smaller size businesses, capture the large POTS replacement market opportunity both directly and through resale partners, and solidify 2600Hz as the modern platform for the future used by Carrier worldwide. As we achieve these goals, we also want to drive enhanced bottom line results. It's an exciting time for us and I feel we're well-placed to succeed. Thank you. We will now take your questions.

Certainly. And our first question comes from the line of Arjun Bhatia from William Blair. Your question, please.

Hey, this is Alinda Lee here for Arjun. Eric, a question for you. What are you seeing in the SMB environment? Has it faded a little bit after the election?

No, I wouldn't say it's faded. Q4 is always the one quarter of the year where with everything else going on, holidays and a lot of business activity, small businesses may not be in the market quite as much. But then things were back in January and we've seen that. So I think it's been strong and it remains strong.

Awesome. And another question, can you give us more color on how you are thinking about assisting resale partners in driving sales, but also the strategic approach on adding new resellers every quarter in fiscal 26? Thanks.

Yes. It's pretty amazing to think we have over 20 partners that we've established a relationship with to resell, in particular Ooma AirDial. And it's really exciting to see that growing as we go forward. Some of those partners are reselling Office, a small number, and one or two are reselling Telo for POTS replacement as well. So this cuts across our business even beyond AirDial. We think there are lots of entities out there that need to replace POTS lines or want to be in the market to replace POTS lines, and that our solution is the clear winner when you really step back and look at what it can do and how it operates and how we built it as one complete solution. So we're excited to keep pursuing that. We have a small team of corporate development individuals who are focused on that. And as I said, our goal, and we've said this in the past too, our goal is to add a couple of resellers every quarter. And we think we can do that.

Thank you. And our next question comes from the line of Brian Kinstlinger from Alliance Global Partners. Your question, please.

So for someone like Marriott, how many POTS lines do they have and what's been communicated in terms of their plans and maybe timeframe for replacement?

So I can tell you that Marriott has over 5,000 properties in the U.S. alone. I actually haven't looked into Canada or other markets where we can sell AirDial today. And it's very early stages with this agreement. So I think we're going to have to give it some time to be able to answer your question fully. But I know that brand certification is fundamental within the Marriott community. And so having it and being the only POTS replacement solution to have it, I think is a very strong position to be in. I also think within the hospitality industry generally, Marriott is looked up to for the degree to which they review their solutions before they adopt them. And so we're hopeful that this will carry some weight with us too as we look at other players in the market. But no, it's essentially an open door now for us to go target their properties and bring them our solutions. I can tell you that a large Marriott property might need 20 to 40 lines if you think about all the different applications that might have a POTS line in them. So it can be sizable, but how big and how fast, it's too soon to say.

Okay. And then in terms of your large cable partner for POTS replacement, I think last quarter, you mentioned you would know more in March in regard to the ramp from either that partner or the market in general from other partners. Can you help us understand what has limited visibility, if I'm understanding you correctly, and why do you think customers might not be motivated to move much more quickly?

So the limited visibility we have is, will this partner launch in March as they are intending to do? We think they will. It's now March, but still, that's a first step. How fast will their sales force generate deals and generate business? We're going to wait and see. I can tell you though that with this large cable partner, vast majority of the Fortune 1000 have some relationship with them already. And we are involved with them not only in their enterprise business side of the company, but also with their public sector activities. And that's a door opener for us in the public sector. That's not an area that we've been able to do much in up to date. So we have lots of hopes, but we're going to have to go through the year and see how it materializes. In general, I think what's been happening in the market over the last year, businesses are more likely to move forward on POTS replacement than ever before. We still do win customers who we think are going to be quite large, but they start small. They start with a handful of properties or locations because that's where they face the immediate need. But we also do see them where they need hundreds or maybe even thousands of lines. And so we're excited about the market developing, but it's very hard to handicap or be certain just what's going to happen each month through this year.

Got it. The last question I have, you mentioned in the first quarter some more churns expected from IWG. Will we continue to see after the first quarter more churn? Do you think it's stable at that point? Just give us the short to medium term trajectory after the first quarter of how it's been communicated to you or what you expect.

Yes. We have a view on this, but things can change. But it's interesting that, as we said last quarter, there would be some more line reductions this quarter. When you look at it in aggregate over the last 12 months, we're just about right where we said we'd be a year ago. So it took them longer to do some reductions than what we said were going to happen literally this time last year. But they've been done now, and so we don't expect a lot more coming. We think we're pretty stabilized. I will say this too, and I can't give away too much, but up until now, almost everything we've done with IWG Regus has been to serve the businesses and users that they have in their buildings. They are testing and we are working with them on some opportunities that will take them beyond that into new areas. And if those plans unfold and turn positive, it could be an upside for us together. And we have very good working relationship with them, as you might expect, and we're excited to enable them to try some new things. So you never know, but I think after this quarter, we're going to be in a pretty stable spot, maybe with some growth opportunity.

Thank you. And our next question comes from a line of Josh Nichols from B Riley. Your question, please.

Yes. Thanks for taking my question. I'm just curious what you're seeing a little bit more in the SMB market, if you were to just like to strip out what your assumptions are for AirDial overall, if you could provide a little bit of context. I know you said you were being pretty conservative on the AirDial recurring revenue piece of the business, but if you could provide a little bit more granularity, that would be helpful.

Sure. And let me frame this more in the context of Ooma's strategy and our priorities, than maybe the SMB market per se. We have expanded our business scope to include an incredible POTS replacement market opportunity and also a longer term wholesale services market opportunity. And we have shifted some of our sales and marketing activities into those areas without growing substantially our sales and marketing spend. And we've done that in part because we're also committed to driving improved bottom line performance. We were thrilled to grow non-GAAP net income 17% last year and to give guidance this year that's even higher in the amount of growth we're going to drive there. So we're always balancing across our business. We see good opportunities in the small business segment. We're going after them and we'll grow this year nicely, but it's in the context of the overall growth we're trying to do for the company. We still estimate there are millions of small businesses in North America that have yet to move to the cloud. We've seen data that are around 7 million businesses with one to 20 employees in North America. And that's a lot of opportunities. Still the majority of the new customers we get, we're taking them, I was going to say, we're taking them from just a few phone lines from maybe a cable provider or maybe even someone like a POTS line provider into the cloud and into all the features that come with that. It's less often that they're actually switching from another cloud provider. So we continue to see good market opportunity, but we are balancing our outlook across all the segments of growth we have.

Thanks, understood. And then just taking a step back, I know you're not providing formal guidance for anything like longer term. Given that you have a little bit of churn headwinds with your largest customer and are being a little bit conservative about some of these new AirDial rollout opportunities, I guess one thing to say that you would hope to see the revenue growth, particularly on the recurring piece, start to accelerate more meaningfully next year. And then longer term, you talked about the focus on increasing profitability, and I see a bit of margin expansion. Do you expect to continue marching along that path beyond this year?

Yes. I think another way to say that is if you look at the segments that we're targeting today, they have, I don't know what it is, but many years of growth potential in them. I think as big as AirDial and POTS replacement is going to be this year, it's going to be even bigger next year and maybe even the year after that. Wholesale services, carriers are just beginning to pick their head up and realize that the BroadSoft and MetaSwitch solutions they have are not going to take them forward over the next five to 10 years. And there's a huge small business community still to be gone and gotten. So we're viewing the investments we've made in our business, particularly in building our product portfolio, to be something we can leverage for years to come. And we're committed to doing that while we also improve the bottom line. And we think because we've built leading solutions in the market, we're going to continue to evolve them, improve them, but we don't have to invest in them at the level we've invested in the past. And so our guidance this year does reflect a bit better leverage on R&D, which we're already set up to achieve. So, yes, I don't see any reason why we can't grow and be more profitable as we go forward. And that's the goal we set.

Thank you. And our next question comes from the line of Max Michaelis from Lake Street Capital Partners. Max ask your question, please.

It's good to hear that you guys are on track. With that top-tier cable company, it sounds like March is still in play. Can you remind me, are we in conversations with any other of the top national cable companies around the United States?

So we're in a long list of conversations at different stages in their process. And I can't really say who we're talking to and who we're not talking to, but certainly we have aspirations to win more large players in the market, whether they be CLEC and ILEC who have their own POTS lines in place, aggregators who bring solutions together, or cable companies and others that play in the market. So yes, we are excited to talk to anyone who's interested in our solutions.

All right. And then we look at the business segment. I believe you said 5% to 6% growth in 2026, or fiscal year 26, that is. I mean, help me think about first half and second half. Maybe are we low single digits first half, maybe double digits second half, or just mid-single digits across the board? I guess kind of help me out there how that should spread out throughout the year.

Yes. So Max said the way we think about it is, we aim to grow at the faster pace in the second half. That's how we think about it. To the extent that you were taking a conservative stance on AirDial in particular, how the installation goes, and we see installing more in the back half than first half. So once we install, as you know, the subscription revenue follows that. So as we think about how that 5% to 6%, that's the business subscription growth that I guided to for the year, how it's distributed, I would say second half is more than the first half.

Thank you. [Operator Instructions]. And our next question comes from the line of Matthew Harrigan from Benchmark. Your question, please.

I think when you initially announced the 2600Hz deal, you pointed out that there were a number of aspects of their business that were almost completely unmonetized. And I know it would have to be a gradual push over time. When you look at the growth there, is that more new customer acquisition? Is it broadening the offering to a particular customer? Or is there really kind of the novel opportunities to monetize what was kind of open source before? And then secondly, presumably the incremental growth on your top new product is going to be higher this year than last year. And you've got some 2600Hz growth on top of that. So does that imply you're seeing a slowdown or at least plateauing in the Ooma office side, on the SMB side, maybe out of caution on the economy? I know in some other calls, you talked a fair bit about caution on the economy. And clearly, a lot of the other names I follow, some of them are not in your area, are really expressing a lot of concerns over the economy right now. Thanks.

Hi Matthew. So on the second part of your question first, we think of it more as 2600Hz will take time for the revenue to ramp. Because when you secure new customers, they have to adopt the solution and make it work for them. And then if they're going to convert existing customers over, that's a whole process as well. So I think the impact on our business will be greater next fiscal year than this fiscal year from 2600Hz. But in order to achieve that, we're going to have some major wins this year in 2600Hz. And that is what we're setting out to do. And then you asked about 2600Hz and how we monetize it. I think most of the growth that we're looking to achieve there is going to come from new customer wins. We do have services that we are adding to the platform that can be monetized with the existing base. One of them comes from just the Ooma IP and apps that we're bringing onto the platform. Some of our customers are going to want to adopt them, and that can lead to some revenue. And then we also have launched carrier services to go with the 2600Hz solution, leveraging our low-cost structure for our customer base there. And so some of those activities can also be some incremental growth from the existing base. But I think that what you're really hearing from us is just what I said in my opening remarks, that the pace at which AirDial expands and the pace at which these resale partners join us and the ones we have ramp and how fast new 2600Hz customers expand with us, we're going to be cautious until those things are materializing. But we haven't reduced our outlook in any part of what we're doing.

And then on the Frost & Sullivan commentary on the accelerating need for the POTS replacement, the awareness, really kind of the predatory pricing on some of the copper lines, if you're being cautious and moderating your pace, that either implies the market's not making the necessary adjustments that fast or there's someone else there. You have to have some competition. Where are you seeing alternatives to your offering? And I know you're not pushing hard in Europe or certainly not Asia right now, but you've got some issues in those markets as well. If you're in Germany or the U.K. and someone has the same problem, how are companies addressing it? Are they not addressing it? Is there a smorgasbord of solutions over there? In other words, it feels like your pace of growth there may be a little bit inconsistent with the dynamics of the market that Frost & Sullivan and yourselves have spoken about.

I've seen some analyst commentary that suggests that less than 10% of the market has converted yet away from their POTS line in terms of the remaining lines that we see out there. It's very hard to know what that number exactly is. I will say it's a little baffling. I think I've learned through this process, there's customers who we could save a seven-figure amount of money and still they take a year to get it done when they could have done it in three months. I don't know if these decisions aren't making it up to the CFO ranks or what, but it is shocking to me. I know some of the local business here in the Bay Area who told me they just got Ooma AirDial for two buildings they have recommended to them by their elevator servicing company, which was great to see. They had never looked at their POTS lines and they were shocked to find out they're paying over $600 a month per line at each place. They were thrilled on how much we're saving them, but they just didn't know. I think it's a matter of getting the word out. I think it's a matter of this rising up to a level where companies understand what's happening, because it's not uncommon to see $100 to $200 a month or more for the cost of a POTS line, which is just nuts when you think about it. If you've got a lot of them, it's quite substantial. We think all the trends are there for the market to get bigger and go faster. We've talked about our competitors in the past here. Our biggest two competitors are aggregators who, with larger sized accounts, may have an existing relationship. That relationship is how they will…

And I know you can't be too definitive, but I would assume that Verizon will look at Frontier's best practices when they assimilate the acquisition?

I'm sure they will. Yes. And when those two companies can start having strategic conversations, which they can't do yet, I'm told, that the door will be open for us to engage in a bigger way there again.

Great. You have a lot of nice problems with AirDial. Thanks, Eric. Bye.

Thank you. [Operator Instructions]. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Well, thanks everyone for joining us today. We appreciate your support for Ooma and we're going to work hard here to have a great year. Thank you, everyone. Bye-bye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.