Ooma, Inc. (OOMA) Q2 2027 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to Ooma's Second Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Matthew Robison, Director of Investor Relations. Please go ahead.

Thanks, Latif. Good day, everyone, and welcome to the Second Quarter Fiscal 2027 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 second quarter fiscal 2027 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 1 year. During today's presentation, our executives will make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize, and actual results are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today and those risks more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements, except as required by law. Please note that other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non-GAAP basis. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures described 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 third quarter and full year fiscal 2027 on a non-GAAP basis. Also, in addition to our press release and 8-K filing, the Overview page and Events and Presentations page in the Investors section of our website as well as the Quarterly Results page of the Financial Information section of our website include links to information about costs and expenses not included in our non-GAAP values and key metrics of our core subscription businesses. These are titled Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally, our investor presentation slides include GAAP to non-GAAP reconciliation that also provides resolution of GAAP expenses that are excluded from non-GAAP metrics. Now I will hand the call over to Ooma's CEO, Eric Stang.

Thank you, Matt. Hi, everyone. Welcome to Ooma's Second Quarter Fiscal Year 2027 Earnings Call. Thank you for joining us. Q2 was another strong quarter for Ooma. We are now halfway through our fiscal 2027, and I'm pleased to report that on both the top line and the bottom line, we are ahead of our original plan. I believe we have good momentum across our business, and I'm excited to talk with you today about our outlook. On the top line, we achieved $83.2 million in Q2 revenue, up from $66.4 million in Q2 a year ago. This represents 25% revenue growth year-over-year, driven mainly from business customers, including AirDial and our 2 acquisitions late last year. Our key business subscription and services revenue grew faster and was up 38% year-over-year. And within this, our Q2 AirDial services revenue grew 75% year-over-year. Looking forward, we believe we have good momentum across all major areas of our business, which we believe will be driven most of all by accelerating POTS replacement, new AI features and our residential product, MyPhone. I will cover each of these later in my remarks. But first, regarding our bottom line performance in Q2, we delivered non-GAAP net income of $10.2 million and adjusted EBITDA of $12.4 million. These results are up year-over-year by 58% and 74%, respectively. Adjusted EBITDA is now a solid 15% of revenue, up from 10% of revenue just 6 quarters ago. We are proud to have achieved steadily improving profitability over these last 6 quarters and longer. And looking forward, we're not done. We believe our business model can generate further increases in profitability. We outlined 4 key initiatives at the start of this year: AirDial expansion, new AI solutions, the launch of MyPhone and capitalizing on our recent acquisitions. I'd like to update you on each, starting with AirDial. AirDial is, of course, our POTS replacement solution and currently the fastest-growing part of Ooma. We have created what we believe is the leading solution in the market, incorporating unique features such as multipath connectivity, extensive remote device management and customer alerts. We are seeing the market for POTS replacement expand this year. In Q2, we added 2 new AirDial resale partners and are now well over 40 resale partners in total. One of the partners we added is a Verizon Platinum partner and supports our strategy to engage more closely with Verizon. On the customer front, I would like to highlight one highly competitive win that demonstrates Ooma's growing strength in the market. In Q2, we won a large hospital system, which purchased close to 200 AirDial lines, over 1,000 UCaaS seats and Ooma Connect for Internet backup. We believe we were chosen for our differentiated POTS replacement features, the flexibility of our solution and our implementation expertise. Looking forward, it is our goal to add 1 to 2 new AirDial resale partners every quarter. Some resellers, especially if they are a carrier maintaining existing POTS lines can make a big impact on AirDial growth. Our second initiative centers on introducing AI features on our UCaaS platforms to drive increased customer and ARPU growth. I'm pleased to report we made significant progress in Q2 by introducing AI Transcriptions and AI Insights as part of our Pro Plus service tier and by introducing 2 stand-alone AI services, our AI Answering Service and our AI Receptionist. Our stand-alone services have a low monthly fee that includes a set amount of usage and offer increased usage for an additional charge. Whether a customer is stepping up to Pro Plus for an additional $5 or $10 per month per user or whether they are also paying us $15 to $50 a month or more for our stand-alone services, we have the potential to significantly increase our revenue per account and per user. Our new AI services were launched at the end of Q2, so we do not yet have reliable data on customer adoption. That said, our sales teams tell us the customer reaction has been strong. As is our intention, we believe AI is driving increased interest by customers in our top Pro Plus service tier and that our stand-alone AI services, namely AI Answering and AI Receptionist, are receiving a lot of customer attention. Looking forward, we are now busy creating our next AI solution, which we are quite excited about and expect to release this quarter in Q3. This solution will encompass a large number of business productivity applications, which I believe almost all customers will find valuable to their business. As regards to UCaaS and specifically Ooma Office, I'm also pleased to report we established a partnership with Thryv, which will allow Ooma and Thryv to introduce each of our solutions to one another's customers. Thryv provides innovative small business marketing and CRM solutions and excels in verticals such as healthcare, beauty and wellness, legal and finance, auto services and many more. These are prime verticals for Ooma. We intend to launch our joint marketing activities in September. And as part of this, Ooma will also provide an integration between Office and Thryv's CRM, called Keap. Lastly, regarding UCaaS, I want to mention that Ooma Office was recently named the top VoIP provider in the 2026 Spiceworks Voice of IT survey based on feedback from 236 IT professionals, evaluating leading stand-alone VoIP providers. We are heartened to once again receive this recognition, especially since it is the result of voting by users themselves. Regarding our third initiative, we launched MyPhone by Ooma in Q2 as planned and began the process of building brand awareness and retail presence to drive its success. You'll recall this is a residential landline solution targeted at giving younger children an alternative to a cell phone and giving parents the control they need to keep their kids safe. MyPhone offers unique features such as Trusted Circle to limit what phone calls can occur and Quiet Hours to limit when calls can occur. Some organizations have been formed to help warn parents of the dangers of early child cell phone use, and many of them are now supporting MyPhone. And our retailers have shown great excitement, too. We are sold online now at 5 major retailers, namely Costco, Amazon, Best Buy, Walmart and Target. We expect to be offered in store at one retailer this fall, and we expect to launch in Canada before the end of Q3. Already for Q2, we were able to increase our residential user base by over 3,000 users, a reversal of the slow user decline we have historically experienced. Taking a page from the MyPhone playbook, I'm pleased to announce we will be launching another custom residential solution in Q3, branded StarDial. StarDial is designed to complement Starlink and provide an ideal phone service experience with Starlink. StarDial connects to Starlink over WiFi and most importantly, takes advantage of Ooma's proprietary adaptive redundancy to maintain high-quality calls over sometimes high latency satellite Internet. Like MyPhone, we are optimistic that major retailers will carry StarDial, and I'm pleased to share that one major retailer has already told us they plan to sell StarDial in store starting late this fall. We are hopeful that MyPhone and StarDial together will boost our residential revenue. And in addition, we believe that the shutting down of residential copper lines that is now underway will also boost our residential sales. Finally, as we've reported in previous quarters, we believe we are making good progress integrating our 2 acquisitions FluentStream and Phone.com. We took some actions late in Q2 to capture additional synergies between Ooma and Phone.com, and we expect those actions will contribute positively to our bottom line results starting in Q3 of this year. We're actively working to leverage Ooma's AI developments for the benefit of FluentStream and Phone.com, and we continue to utilize Ooma's more extensive marketing capabilities to strengthen the Phone.com brand. All in, we believe we have done well with the acquisitions we have made over the last several years, and we remain committed to executing on more acquisitions if and when we can find suitable opportunities at the right valuation. As we've stated previously, our ideal acquisition targets are smaller-sized UCaaS players that allow us to grow our SMB user base and capture scale economies cost effectively. As I hope is clear, we have a lot going on at Ooma and significant opportunity in front of us. In order to give investors a more complete picture of Ooma's strategy and outlook, I want to let you know we are planning to hold an Investor Day at the New York Stock Exchange in the morning on September 29. Our meeting will be webcast as well. In attendance from Ooma will be several of Ooma's senior management team, and we will present our plans in more depth than we can here today and also take Q&A. Please keep an eye out for a press release next week for more information about this. 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.

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 2027. In the second quarter, we maintained strong momentum with revenue of $83.2 million, up 25% year-over-year, driven by the growth of Ooma Business, including AirDial and the additions of FluentStream and Phone.com. Excluding the impact of these acquisitions, total revenue in Q2 grew 8% year-over-year. In Q2, business subscription and services revenue accounted for 70% of total subscription and services revenue as compared to 62% in the prior year quarter. Q2 product and other revenue came in at $7.6 million and was up 46% year-over-year, driven by the growth of AirDial installations, which increased 50% over the prior year quarter. Product revenue in Q2 also included initial shipments of MyPhone, which contributed to the growth of residential product revenue, both sequentially and year-over-year. On the profitability front, Q2 non-GAAP net income was $10.2 million and grew 58% year-over-year as we continue to focus on operating leverage in R&D and optimizing our sales and marketing spend as well as realizing synergies from our recent acquisitions. Now some details on our Q2 revenue. Business subscription and services revenue grew 38% year-over-year in Q2, driven by user growth and ARPU growth for Ooma Business and the additions of FluentStream and Phone.com. Excluding the impact of the acquisitions, business subscription and services revenue in Q2 grew 8% year-over-year. On the residential side, subscription services -- subscription and services revenue was relatively flat year-over-year as we saw 2 consecutive quarters of residential user growth in the first half of fiscal 2027. For the second quarter, total subscription and services revenue was $75.6 million or 91% of total revenue as compared to $61.1 million or 92% of total revenue in the prior year quarter. Now some details on our key customer metrics. Our blended average monthly subscription and services revenue per core user, or ARPU, increased 8% year-over-year to $16.95 driven by an increase in mix of business users. During the second quarter, we continue to see a healthy Office Pro and Pro Plus take rate with 58% of new Office users opting for these higher-tier services. Overall, 40% of Ooma Office users have now subscribed to those higher-tier services. Our net dollar subscription retention rate for the quarter was 99% as compared to 99% in the first quarter. We ended the second quarter with 1,427,000 core users, up from 1,420,000 core users at the end of the first quarter. At the end of the second quarter, we had 703,000 Business users or 49% of our total core users, an increase of 4,000 from Q1. Q2 Business users growth was negatively impacted by 4,000 user churn from IWG and a small onetime user count correction in other areas. Excluding the impact of these items, business user grew 11,000 from Q2. Our annual exit recurring revenue was $299 million, up 25% year-over-year. Now some details on our gross margin. Our subscription and service gross margin for the second quarter was 72% as compared to 71% in the prior year. Product and other gross margin for the second quarter was negative 25% as compared to negative 47% for the same period last year. The year-over-year improvement in product and other gross margin reflects an increasing mix of AirDial hardware and installation revenue within the product and other revenue. Q2 product and other gross margin also benefited from a recovery of previously paid tariffs. Excluding the benefit of tariff recovery, Q2 product and other gross margin was around negative 30%. On an overall basis, total gross margin for Q2 was 63% as compared to 62% in the prior year quarter. And now some details on operating expenses. Total operating expenses for the second quarter were $41.1 million, an increase of $6.1 million year-over-year, mainly due to the additions of FluentStream and Phone.com. Excluding the impact of the acquisitions, the total operating expenses increased $1.3 million or 4% from the same period last year. Sales and marketing expenses for the second quarter were $20.1 million or 24% of total revenue, up 12% year-over-year due to the addition of FluentStream and Phone.com expenses. R&D expenses were $14.1 million or 17% of total revenue, up 23% year-over-year due to the addition of FluentStream and Phone.com team members. G&A expenses were $7 million or 8% of total revenue for the second quarter compared to $5.6 million for the prior year quarter. Non-GAAP net income for the second quarter was $10.2 million or diluted earnings per share of $0.35 as compared to $0.23 in the prior year quarter. Adjusted EBITDA for the quarter was a record $12.4 million or 15% of total revenue and grew 74% over the prior year quarter. We ended the quarter with total cash and investments of $17.5 million. In Q2, we generated a record $13.1 million of operating cash flow and $10.8 million of free cash flow. On a trailing 12-month basis, we generated $37.1 million of operating cash flow and $30.2 million of free cash flow. We spent a total of $17.6 million over the last 4 quarters, including $4.4 million in Q2 to buy back stock through a combination of open market repurchase and RSU net share settlement. In addition, we paid down the term loan by $6.5 million in Q2 and reduced the outstanding debt balance to $47 million at the end of Q2. On the headcount front, we ended the quarter with 1,444 employees and contractors. Now I'll provide guidance for the third quarter and full fiscal year 2027. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization of intangibles and other expenses. We expect total revenue for the third quarter of fiscal '27 to be in the range of $83.7 million to $84.5 million, which includes $7 million to $7.5 million of product and other revenue. We expect the third quarter non-GAAP net income to be in the range of $9.8 million to $10.2 million. Non-GAAP diluted EPS is expected to be between $0.34 and $0.35. We have assumed 29.1 million weighted average diluted shares outstanding for the third quarter. For full year fiscal '27, we expect total revenue to be in the range of $332 million to $333.5 million. The full year fiscal '27 revenue guidance assumes business subscription and services revenue growth rate of approximately 32% over fiscal '26, while residential subscription revenue is now expected to be flat to an increase of 1% over last fiscal year. In terms of revenue mix for the year, we expect 91% to 92% of total revenue to come from subscription and services revenue and the remainder from the products and other revenue. We expect non-GAAP net income for fiscal '27 to be in the range of $39.5 million to $40.3 million. Based on this guidance range, we estimate our adjusted EBITDA for fiscal '27 to be $47.5 million to $48.3 million. We expect non-GAAP diluted EPS for fiscal '27 to be in the range of $1.35 to $1.38. We have assumed approximately 29.2 million weighted average diluted shares outstanding for fiscal 2027. In summary, we're pleased with our continuing momentum with a record adjusted EBITDA of $12.4 million in Q2, which grew 74% year-over-year, along with a record free cash flow of $30 million for the trailing 12 months. We're excited about both organic and inorganic growth opportunities in front of us and remain focused on achieving another meaningful progress towards our long-term financial targets. I'll now pass it back to Eric for some closing remarks. Eric?

Thank you, Shig. We're obviously now halfway through our fiscal 2027 and what can be a very strong year for Ooma. While we have exciting initiatives across our business, we're most focused on capturing what we see as accelerating market demand for AirDial, driving added growth through Ooma AI, MyPhone and now StarDial as well, driving further contributions from our acquisitions of FluentStream and Phone.com and working to pursue new acquisitions in the future. We hope you'll join us at our upcoming Investor Day on September 29 at the New York Stock Exchange. Thank you. We'll now take your questions.

[Operator Instructions] Our first question comes from the line of Alinda Li of William Blair.

MyPhone has now been in the market for several months. Can you discuss the early adoption trends, customer feedback and any lessons learned so far? And more broadly, Eric, how do you think about the long-term market opportunity here?

Sure, Alinda, it's been in the market since June-ish time frame. And it's off to a great start. We were declining each year in residential users. This past quarter, we grew 3,000 users, and the bulk of that swing is driven by MyPhone. But we think it has a lot further to go. There's 20 million households in the U.S. with young children and several organizations talking a lot about the importance of keeping kids off of social media and cell phone use until they reach a certain age. In fact, huge news today about Meta's settlement even on addressing some of those fears. We need to promote it. We've dialed up our efforts there, but it's going to take a little time. We hope to get it in store at a major retailer late this fall as well. But we think it's got significant opportunity. You can see it when you talk to people who have young children, they get it very quickly. And it's a bit of a buzz. This whole idea of giving a child a landline a parent can control when they're young is a bit of a buzz in the schools, too, amongst PTA groups and such. So we're optimistic about it.

That's helpful. And you've been adding on a lot of AI products, both as stand-alones, but also additional capabilities onto the Pro Plus SKU there. How should we think about AI as a driver to the Pro Plus attach rate and ARPU over time? And can you just give us a little bit more color in terms of the newer stand-alone AI opportunities products here as well?

Sure. So what we're starting to do with AI, it's an inflection point for us in our market. We can bring some pretty exciting features to our small business customers, in particular, that they've never had or seen before. And it gives us a whole new way to monetize those customers and drive more value for them and value for us. We're off to a great start with some features in Pro Plus that people can trade up a tier to get and then a couple of stand-alone features that we think we've designed really well for a small business to kind of adopt them, customize them, make them work for them, but in a straightforward kind of paint by numbers, non-IT professional user way. And I think that's a great start for us. And what we have coming in Q3, we're super excited about. We're calling it our -- we're going to call it our Ooma AI Productivity Pack. And it's going to come in 2 phases. Phase 1, which will come out in Q3, will have about 10 individual features in it. And these are things that can help a small business track their customers, see what's going on, draft an SMS or a customer response, help with payments, things like that, things people do every day that are, in a way, kind of busy work that AI could do for them. And we want to get that launched and see how it's going this quarter and then obviously get to Phase 2 later this year. It's hard to give you real -- anything specific, but we think -- I mean, we expect -- it's hard to know. A double-digit percentage of our new customers adopting AI this quarter and building from there. Let me just leave it at that.

Our next question comes from the line of Brian Kinstlinger of Alliance Global Partners.

Congrats. It's what seems to be the strongest quarter and outlook that I've seen in 5 to 6 years covering the company. So congrats. I'm curious how business development environment for AirDial has changed over the last few months as AT&T is clearly working to aggressively sunset POTS lines. Are the sales cycles narrowing as a result?

Brian, thank you for those comments. Just a lot more activity, a lot more interest. Customers still want to do a POC. When they sign, they still go through a rollout schedule that's dictated really by their needs. It depends, too, whether the customer says, we'll install this ourselves over time or they say, Ooma, why don't you handle it, and we'll bring in third-party installers and move it along faster. But no, we're seeing sizable opportunities. We're even seeing some opportunities where a customer wants to replace a different solution that they've gone with, a competitor solution and put Ooma in place. And we haven't done a lot of those, but it's pretty exciting to hear customers coming to us that way as well. Winning these next couple of resale partners this last quarter was a great step forward. And we're quite excited as well about the pipeline of potential partner resellers that we might be able to bring on in the back half of this year. So it's what we expected for AirDial. We're putting a lot of effort into this, but I do think the market is developing and going to keep developing over the next years. I mean there's still a long way to go in POTS reduction. So probably 8 million lines out there or some number of that level to be replaced. So we're just trying to be everywhere we can be with it.

Great. A follow-up. You're focused on adding, obviously, resellers for AirDial. Maybe you can highlight which ones you've had the most success with maybe particularly, I'm curious how the performance with T-Mobile is working and even Comcast. I know Comcast had gone a little bit slower than you thought, but has huge potential. So maybe you can give us some updates on the reseller profile.

Yes. Well, resellers are a very important channel for us to market for AirDial. And one of the reasons is these resellers have great relationships with some very large entities across the market. And those aren't necessarily relationships Ooma would have if you look at our history. T-Mobile is a very valuable partner for us and doing great. And Comcast is bringing more deals now, but still has a lot of potential to get bigger with us. Where we've done the best is also with some of our partners who are carriers themselves and have their own POTS lines they need to replace. And we continue to work those. We have a couple in particular where we're actively involved helping them get through the transition. So it's going well. And as I said, we're excited that we think we can sign some important additional resellers here in the next coming quarter or 2.

Our next question comes from the line of Eric Martinuzzi of Lake Street Capital.

My congrats as well on the quarter and the outlook. I wanted to get a better feel for where the outperformance and the upward guidance revision is coming from just because, as you mentioned, you've got so many things going on. I'm sure kind of entering the year with the outlook with the 2 acquisitions, there might have been an element of conservatism in what those could contribute. You've got the rising business ARPU. You've got the rising business subscribers. You've got AirDial, you have residential falloffs less than we thought. What -- if we kind of stack rank those things, what's driving the guidance up in the big scheme?

Well, let me start, and I'll let Shig really address that directly. We entered the year not really knowing what we could achieve with some of these things. So we were, obviously, and we stated we were cautious in some areas. But as we see results, we're able to bring those to you and get a better perspective on where we're going. And let me let Shig take it further.

Yes. Thanks, Eric, and both Eric, I guess. But yes, to add to what Eric said just now, the AirDial is certainly a contributor. As we said at the beginning of the year, we wanted to remain conservative on our outlook as we started the year and realize the upside as we realize those upside. And that's exactly what's happening. I think so far, first couple of quarters of this year, in Q1, we grew the subscription on AirDial by 80% year-over-year. Q2, we just grew 75% year-over-year. So I think that momentum is carrying through to the second half as well. So that's number one. Number two, we didn't really build in the upside on MyPhone revenue much at all as we started the year and also even last quarter coming out of Q1. Again, just for the sake of conservatism, and we are very pleased to see the first couple of months of sales related to MyPhone. We still remain conservative, as you heard in my guidance statement that we're now expecting the residential subscription to grow either flat to 1% growth and as opposed to my original statement at the beginning of the year of down 1% to 3%. So knowing that the residential subscription still accounts for around 30% of subscription revenue, that's turning from decline year-over-year to growth. That makes the difference, too. And so -- and I would say those are 2 largest areas of the guidance contributor, Eric.

Okay. That's helpful. And then I wanted to talk a little bit more about the product that you mentioned, Eric, the branded StarDial, definitely something that was not on my radar. It sounds like a really interesting concept. Is this something that rings the register in fiscal '27? Or is it really you're planting seeds now, maybe it contributes in FY '28. What can you tell us about StarDial?

Sure. You would have to know Ooma well to know about our unique technology in the Ooma Telo. But adaptive redundancy is really pretty amazing. We automatically send redundant packets when we observe latency over the connection. And we will dial up to 1 redundant, 2 redundant, 3 redundant and then back down. And that can happen throughout the day as needed to maintain a great voice call. We think that's a real powerful feature for communicating over Starlink Internet. And so to highlight that, and to really position ourselves as the right choice for someone getting Starlink, we wanted to bring out a branded version called StarDial. We think it will make an impact this year. And I can tell you, a lot of people in rural areas are adopting Starlink, and we've seen particularly high attach rates of phone service in those areas, partially because people are isolated. They don't have that good a cell phone coverage. And so a home phone is a very valuable tool in that situation. So StarDial is going to be a great way for us to really focus there with unique named product and a brand that we can promote right alongside Starlink.

Our next question comes from the line of Patrick Walravens of Citizens.

This is Nick on for Pat. Congratulations on the quarter. Eric, one for you. So customers have a lot of AI products competing for their attention and budgets. Specifically with Ooma AI, how do you cut through the noise? And how do you eventually get them to adopt the product?

Well, actually, we don't know that we have to cut through that much noise. We are handling our customers' phone calls and messages. And if they want to leverage that to be more productive using AI, we're the logical folks to turn to for that. We see it even in the last month since we went GA with our existing AI features. Lots of customers want to talk to us about it, and they're very intrigued and interested in it. So in that sense, I think that it's a natural fit for our type of solution and one that is going to be straightforward for us to sell because it's part of a bundled package. Some of our stand-alone services and particularly some of the other stand-alone services to come, which I haven't even talked about what they might be. They might face a little bit more independent competition from others. But again, we're right -- we're integrated into the customers' workflow with our desktop app and mobile app and IP phones that the customer is using them, connected up into their CRM and their contact center. It's a natural way to ingest AI. And so we're pretty excited that we can get pretty good attach with it. And currently, we are not offering free trials of it. We may do that, but we do, at least for new customers, offer a 30-day money back guarantee and people can get it and try it that way. But ultimately, we're going to have to focus too on our installed base and how we really market it well to our entire installed base. And there, we're working on some strategies, and we'll be launching some of those this quarter.

Great. And then just as a quick follow-up, assuming that you guys are reiterating the midterm and long-term targets given that there's a slide in it in the earnings deck. So what's giving you confidence on those numbers?

Well, I think the simple answer is, there's a couple of ways to look at that. But we said a year or 2 years ago, we were going to drive more profitability. And we've done that, and we feel like we can continue to do that. So I think we have a good track record of where we've come over the last years. If you look at where we're going, we're serving markets at inflection points or with unique new things happening. And maybe there's a little bit of fortuitousness in all that, but POTS replacement over the next 3 or 4 years is a big deal. And we believe we've leaned in to be the leader in that space. AI is an inflection point on our types of solutions, UCaaS. And there's a lot of creative things we can do with it to bring real value to the way our customers operate and to make their jobs easier. And then the MyPhone trend and keeping kids away from cell phones until they, for instance, wait until eighth grade, who knew you would have several nonprofit organizations promoting that? I even read where one was giving solutions away on an island in Washington State to help kids not have a cell phone. I mean -- so we're perfect for that segment because we've built the most trusted solution in the market, honestly, for residential phone use. So I think we just have good opportunities in front of us, and we're going to go capitalize them.

Our next question comes from the line of Matthew Harrigan of Benchmark StoneX.

There are some interesting commonalities with what you're talking about and what Zoom talked about yesterday and certainly for a while now. The communications layer clearly is a natural entry point for adding a lot of UCaaS features, AI and all that. And there's certainly some parallels there. On the -- and I know you don't have a lot of compute costs and all that yet, but Zoom has made a point talking about federated AI and really taking the optimal model from the large LLMs and then doing things in-house with SLMs and really keeping the cost down that way. And you can even look at some of the performance and transcription. You can look at the humanity's last exam benchmark where their federated approach actually performs very well relative to OpenAI, Anthropic even. And when you're going down that route, I mean, it's a huge opportunity. You may be bumping into some large, facile competitors as well, although clearly, they're more focused on the enterprise side than you are. But am I exaggerating here? And kind of what's your -- I mean, if you really do graft on a lot of AI, are you certain you've done things appropriately on the cost structure side so that you don't have a blow up there? I know it's probably a pretty small building block right now. I'm sure it's something you have to be thinking about. And I guess I should also congratulate you on the quarter, but you're probably a little tired of hearing that at this point, and it's well deserved.

I'm never tired of hearing that, believe me. So we are running most of our AI in-house on our own machines, custom tailored for what we need to do. That's the only way to get the cost structure as low as we'd like to have it. We have looked at outside entities we can turn to for some of what we're doing. And in almost all cases, it's more -- well, in all cases, we've seen it's more expensive than what we run internally. So we focused internally. That's scalable, and I feel pretty good about what we're doing. And I don't -- right now, I don't see a cost challenge at all on the AI side for us. I see more -- our biggest challenge is how fast can we execute on our road map for the new AI features we want to bring out. And we are using a usage-based model essentially. It's a low upfront fee for the initial base of usage and then you can pay as you go. And I think that's a nice way to handle it so that we can always be sure that we're making the margins we want to make.

So I guess you should be even more congratulated on being able to do that without miraculously, without blowing up your R&D budget or I'm sure you're not buying a lot of advanced NVIDIA chips, but it's almost counterintuitive that you would be able to do that on a cost-effective basis, but you're confident that you've done that?

Yes, I am. I mean, not everything takes a large language model, as you know. And we -- yes, we feel comfortable. We've worked through the economics of what we're doing today. We can also see how we can get at lower cost as we go forward, particularly with more scale. But we're -- we don't see an issue on that side.

So would you say you're taking much more of a software-based approach on AI, and that's how you've managed to really optimize costs and have the performance at the level that you want?

Yes. I would more say that by producing a solution tailored to what we need to do, and by purchasing hardware and running it ourselves, between those 2 things, we're able to drive maximum value and lowest cost position that we can get. So yes, I mean, there's obviously software work, too. But we're trying -- our solutions don't need to be everything to everybody. They just need to do what we need them to do really, really well. And we'll use transformer models or other models alongside our main models to offload and keep the processing costs as low as possible.

And then if you don't mind, just kind of at the tail end of the call here, one more question. If MyPhone really takes off, are you going to see a blow up in your equipment revenues at a lower margin?

Well, to some degree, that's a yes because we are not intending to raise prices on Ooma Telo and memory costs have gotten more expensive. And so there is going to be a little bit of an impact to our business from that. But that's factored into our guidance. And I would also say that given we're 92% recurring revenue and some of that 8% is AirDial, which has frankly got a pretty good margin structure, whatever happens here isn't going to be that big to us as a company overall.

And also MyPhone users -- and Matt, just one more thing. Of the MyPhone users, there may be upfront negative margin associated with the product, but it's followed by the MyPhone user subscription, which is on a premium tier. So it does help the subscription margin in that sense after we sell.

That's a very good point. Every MyPhone user is a paying user. They're not a free just pay taxes and fees user.

[Operator Instructions] As there appear to be no further questions, I would now like to turn the conference back to Eric Stang for closing remarks. Sir?

Well, thank you, everyone, for your time today. We're pretty excited about getting together on September 29. We're going to try and go deeper in each of these areas and really talk to you more about our AI road map, talk to you more about the partners we're bringing on for AirDial and what they can do for us, talk to you more about what success rate we're seeing with MyPhone and StarDial and how it's going and hopefully, some new things, too. So hopefully, you'll all be able to attend that, and we look forward to it. Thank you, everyone. Bye-bye.

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