OOMA

Hello, and welcome to Ooma first quarter fiscal year 2027 financial results conference call. At this time, all participants are on a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I would now like to hand the conference over to Matthew Robison. You may begin.

Thank you, Towanda. Good day, everyone, and welcome to the first 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 first 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 the link on the Events and Presentations page of the Investor Relations section of our website. This link will be active for replay of this call for one year. During today's presentation, our executives will make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance.

Our expectations and beliefs regarding these matters may not materialize, and actual results are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today and those risks more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements except as required by law. Please note that other than revenue or as otherwise stated, the financial measures to be disclosed on this call will be on a non-GAAP basis. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures is included in our earnings press release, which is available on our website. On this call, we will give guidance for second quarter and full year fiscal 2027 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 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 guidance and key metrics of our core subscription businesses. These are titled Supplemental Financial Disclosure 1 and Supplemental Financial Disclosure 2. Additionally, our investor presentation slides include GAAP to non-GAAP reconciliation.

It also provides a resolution of GAAP expenses that are excluded from non-GAAP metrics. I will hand the call over to Ooma CEO, Eric Stang.

Thank you, Matt. Hi, everyone. Welcome to Ooma's first quarter fiscal year 2027 earnings call. Thank you for joining us. We're pleased to report strong Q1 financial results and a good start to our fiscal 2027 year. I believe we are making good progress on our key initiatives for this year, and I look forward to reviewing them with you today. Financially, for Q1, I'm pleased to report that we exceeded expectations with revenue growing 25% year-over-year to $81.1 million, non-GAAP net income growing 73% year-over-year to $9.7 million, and adjusted EBITDA growing 78% year-over-year to $11.8 million. Subscription and services revenue from business customers grew 38% year-over-year and reached 69% of total subscription and services revenue.

Excluding the impact of two acquisitions that we made late last year, we stepped up our organic growth rate of business subscription and services revenue by a couple of percentage points to 9% year-over-year. As expected, a key driver of our stronger business services growth was AirDial. AirDial services revenue in Q1 was up by 80% versus a year ago. On the residential side of our business, I'm happy to mention that for the first time in many quarters, we grew our base of residential users in Q1. All in, we believe we are off to a strong start for fiscal 2027, and so we'll be providing improved guidance for the balance of this year later in our remarks. As we discussed on our last conference call, we are focused on several key initiatives for this fiscal year.

The first I would like to address is our commitment to expanding AirDial. We believe the market opportunity for POTS replacement is accelerating as more companies incur higher POTS charges or have their lines turned off by AT&T or others. As you know, we have built AirDial from the ground up to provide a fully integrated solution incorporating unique features to best serve this market. In Q1, we were proud to announce new features including equipment disconnect detection, where we identify if the equipment that is connected to AirDial goes down. We also announced off-hook alerts to identify equipment connected to AirDial that goes off-hook for an extended time. These features were added in response to a customer of ours in the healthcare space who must ensure working connections are always in place.

We believe that both of these new features are unique to AirDial and bring added differentiation to AirDial's remote device management suite of services. Commercially, Q1 was a record quarter for AirDial. New lines installed were more than double the number of a year ago. In general, we are seeing increased market interest in POTS replacement by many industry sectors. In Q1, we achieved particular success serving healthcare customers, REITs, and state and local government bodies, including schools. In Q1, we also met our goal of securing two additional AirDial resellers in the quarter. One of these new resellers will be switching away from a competitor's product to exclusively sell AirDial. We are excited to be working with them and all of our 40-plus AirDial resellers. The second initiative for this year that I would like to discuss is our plans to introduce AI solutions on our Ooma Office platform.

I'm pleased to report that earlier this month, we announced Ooma AI, which is a suite of new AI-powered capabilities, including AI Transcriptions, AI Answering Service, AI Receptionist, AI Insights, and an OpenAI integration. Together, these features enable Ooma customers to capture, summarize, and analyze call information automatically while improving responsiveness and overall call handling efficiency. To date, 3 of these features, namely AI Transcriptions, AI Answering Service, and the OpenAI integration, have been released to customers, and the 2 others are in beta and will be released soon. The AI Answering Service and the AI Receptionist service carry a separate monthly charge, and the other features have been made available in Ooma's top tier of service, called Pro Plus. As such, we expect adoption of Ooma AI to bring increased revenue for Ooma.

In general, we believe AI can be a valuable tool for small businesses to help them automate routine tasks, deliver real-time insights, move faster, and work smarter. One statistic we have heard is that over 50% of calls to small businesses go unanswered by a live person, and close to 25% go unanswered at all. A key goal in our development of Ooma AI has been to create the right set of features that will be most useful to small businesses while also making the features very easy to enable and use. While it is early days and too soon to evaluate customers' response to Ooma AI, we are excited about its potential. The third initiative for this year that I would like to update is our plans for our residential business.

Last quarter, I mentioned that Ooma Telo sales were remarkably robust, and I'm pleased to report that strong sales of Telo continued in Q1. In fact, as I mentioned earlier, for the first time in many quarters, we grew our base of residential users in Q1. We see several market drivers for residential phones. One in particular is parents' desire to give their kids a phone but avoid the screen time associated with mobile phone use. We estimate there are approximately 20 million households in the U.S. with children aged 5 to 14 years old. According to the Pew Research Center, 86% of parents say managing children's screen time is a day-to-day priority. That's not surprising, given studies have shown that smartphone use in children can lead to sleep disruption, negative mental health outcomes, and increased inattention symptoms.

Organizations like Wait Until 8th, Unplugged, Smartphone Free Childhood, ScreenStrong, Screen Sense, and many others have emerged to help parents with screen time concerns. To address this and give parents a solution, we recently launched MyPhone, a modern landline designed specifically for families with kids. MyPhone contains several features aimed at allowing parents to monitor and control their kids' phone usage. One is Trusted Circle Calling, which allows calls only between approved contacts, and another is Quiet Hours, which blocks all calls during homework, bedtime, or family time. Online call logs also allow parents to monitor incoming and outgoing calls. I'm pleased to report that we have received a strong retailer response to our announcement of MyPhone. MyPhone is now available at walmart.com and will soon roll out to other online retailers. We also expect that MyPhone will become available on the shelf in Walmart stores starting this fall.

The last initiative I'd like to touch upon is our plans to make the most of our two acquisitions from late last year and to pursue further acquisitions in the future. We believe the integration of each of our recent acquisitions is going well, and our rationale and plans for each acquisition continue to hold true. As a reminder, FluentStream is a solid business generating high EBITDA that brings us increased channel strength and another outlet to sell AirDial. Phone.com has low EBITDA, but we can take and are taking steps to improve its financial performance through scale economies, and Phone.com also affords us a second small business brand in the market with a powerful name and URL.

We anticipate driving further improvements over the next three quarters as we increasingly leverage Ooma's marketing and sales expertise, lean operations, product strengths, and vendor relationships. As Shig will note in his comments, we have now paid down our debt to about $53 million and intend to continue to pay it down further each quarter to strengthen our ability to make more acquisitions in the future. 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 first quarter financial results then provide our outlook for the second quarter and full year fiscal 2027. We had a strong start to fiscal 2027 with the first quarter revenue of $81.8 million, up 25% year-over-year, driven by the growth of Ooma business, including AirDial and the additions of FluentStream and Phone.com. On a combined basis, FluentStream and Phone.com added approximately $11.5 million of revenue in Q1, which was their first full quarter since the acquisition. Excluding the impact of these acquisitions, total revenue in Q1 grew 7% year-over-year. In Q1, business subscription and services revenue accounted for 69% of total subscription and services revenue, as compared to 62% in the prior year quarter.

Q1 product and other revenue came in at $6.6 million and was up 37% year-over-year, driven by the growth of AirDial installations with a record number of AirDial line installations again in Q1, which more than doubled over the prior year quarter. New bookings for AirDial also continued to be robust and grew more than 75% year-over-year in Q1. On the profitability front, Q1 non-GAAP net income was $9.7 million and grew 73% year-over-year. On a combined basis, FluentStream and Phone.com added approximately $2.7 million of non-GAAP net income in Q1. Excluding the impact of these acquisitions, non-GAAP net income grew 24% year-over-year as we continued to focus on operating leverage on R&D and optimizing our sales and marketing spend. Now some details on our Q1 revenue.

Business subscription and services revenue grew 38% year over year in Q1, 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 Q1 grew 9% year over year. On the residential side, subscription and services revenue was flat year over year as the residential user base continued to stabilize in Q1, following a trend we saw beginning in the second half of the last fiscal year. For the first quarter, total subscription and services revenue was $74.6 million, or 92% of total revenue, as compared to $60.3 million, or 93% of total revenue in the prior year quarter. Some details on our key customer metrics.

Please note that Q1 ARPU as well as net dollar retention rate include the impact of the two recent acquisitions for the first time, as these businesses had their first full quarter with Ooma in Q1. Our blended average monthly subscription and services revenue per core user or ARPU increased 9% year-over-year to $16.77. This year-over-year increase in blended ARPU reflects a meaningful increase in our business core user base with higher ARPU, which now accounts for 49% of the core users as compared to 41% a year ago. During the first quarter, we continued to see a healthy Office Pro and Pro Plus take rate with 53% of new Office users opting for these higher tier services. Overall, 39% of Ooma Office users have now subscribed to these higher tier services.

Our net dollar subscription retention rate for the quarter was 99%, as compared to 99% in the fourth quarter. We ended the first quarter with 1,420,000 core users, up from 1,404,000 core users at the end of the fourth quarter. At the end of the first quarter, we had 699,000 business users or 49% of our total core users, an increase of 15,000 from Q4. Our annual exit recurring revenue was $294.6 million, up 26% year-over-year. Excluding the impact of the recent acquisitions, our annual exit recurring revenue grew 7% year-over-year. Now, some details on our gross margin. Our subscription and services gross margin for the first quarter was 72%, compared to 72% in the prior year. Product and other gross margin for the first quarter was negative 31%, as compared to negative 41% for the same period last year.

The year-over-year improvement in product and other gross margin reflects an increase in mix of AirDial hardware installation revenue within product and other revenue. On an overall basis, the total gross margin for Q1 was 64%, as compared to 63% in the prior year quarter. Now some details on operating expenses. Total operating expenses for the first quarter were $41.4 million, an increase of $5.9 million year-over-year due to the additions of FluentStream and Phone.com. Excluding the impact of the acquisitions, the total operating expenses increased $0.3 million from the same period last year. Sales and marketing expenses for the quarter were $19.7 million or 24% of total revenue, up 8% year-over-year due to the addition of FluentStream and Phone.com expenses.

Research and development expenses were $14 million or 17% of total revenue, up 24% year-over-year due to the addition of FluentStream and Phone.com team members. G&A expenses were $7.6 million or 9% of total revenue for the first quarter, compared to $5.8 million for the prior year quarter. Non-GAAP net income for the first quarter was $9.7 million or diluted earnings per share of $0.35 as compared to $0.20 in the prior quarter. Adjusted EBITDA for the quarter was record $11.8 million or 15% of total revenue and grew 78% over the prior year quarter. We ended the quarter with total cash and investments of $17.2 million. In Q1, we generated $6.4 million of operating cash flow and $4.9 million of free cash flow. On a trailing 12 months basis, we generated $30.3 million of operating cash flow and $24.5 million of free cash flow.

We spent a total of $17.7 million over the last four quarters, including $4.6 million in Q1, to buy back stock through a combination of open market repurchase and RSU net share settlement. We paid down the term loan by $5 million in Q1 and reduced the outstanding debt balance to $53.5 million at the end of Q1. On the headcount front, we ended the quarter with 1,432 employees and contractors. I'll provide a guidance for the second 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 acquisition-related and other expenses. We expect total revenue for the second quarter of fiscal 2027 to be in the range of $81.6 million-$82.3 million, which includes $6.3 million-$6.7 million of product and other revenue.

We expect the second quarter non-GAAP net income to be in the range of $9.4 million-$9.8 million. Non-GAAP diluted EPS is expected to be between $0.33-$0.34. We have assumed 28.9 million worth average diluted shares outstanding for the first quarter. For full year fiscal 2027, we expect total revenue to be in the range of $326 million-$328.5 million. The full year fiscal 2027 revenue guidance assumes business subscription and services revenue growth rate of approximately 31% over fiscal 2026, while residential subscription revenue to be flat to a decline of 1%. In terms of revenue mix for the year, we expect approximately 92% of total revenue to come from subscription and services revenue and the remainder from products and other revenue. We expect non-GAAP net income for fiscal 2027 to be in the range of $37.5 million-$39 million.

Based on this guidance range, we estimate our adjusted EBITDA for fiscal 2027 to be $45 million-$46.5 million. We expect non-GAAP diluted EPS for fiscal 2027 to be in the range of $1.29-$1.34. We have assumed approximately 29.1 million with average diluted shares outstanding for fiscal 2027. In summary, we are pleased with our strong start to our fiscal 2027 with a record adjusted EBITDA of $11.8 million in Q1, which grew 78% year-over-year, along with a record free cash flow of $24.5 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. With our strong start, we feel we're off to what can be a very strong year for Ooma. While we have exciting initiatives across our business, we are most focused on capturing what we see as accelerated market demand for AirDial, driving added growth through Ooma AI and MyPhone, driving further contributions from our acquisitions of FluentStream and Phone.com, and working to pursue new acquisitions in the future. Thank you everyone for joining us today. We will now take your questions.

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star one on your telephones, then wait for your name to be announced. To withdraw you question, please press star one one again. Please standby while we compile the Q&A roster.

Our first question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Thank you so much, and congrats on the quarter here, guys. Eric, if I can start with you. It sounds like Ooma AirDial really is picking up. Can you just give us a sense of your visibility into the future revenue there? What does the pipeline look like? How are the implementations going with those customers that you've already won at this point?

Sure. Hi, Arjun. Implementations are going great. We're able to respond as needed as customers come in, and we're excited about all the opportunities we're seeing, including those where some of our customers have maybe had a bad experience with another competitor and are switching to move to AirDial. We don't really discuss pipeline, so to speak, but I can say that with 40-plus resellers now, we have quite a big footprint in the industry helping us find opportunities. That's part of the strategy here is to really leverage ourselves with all of our great partnerships. I'm really excited about the two we added this last quarter. Obviously, our biggest partners today remain T-Mobile, Comcast, and a couple of the carriers that we've talked about in the past. Comcast is still only doing a small amount of what we think they can be in the future.

Still, it's a great relationship and one that is developing. We think we have a lot of activity underway, and the market, it's possible to see where AT&T and others are shutting off lines, and the number of announcements just keep going up. We're talking to a lot of companies today that weren't as focused on this a year or two ago, but now realize they need to do something, and they're really looking for the best solution in the market. When we can get that kind of engagement with a customer, we do very well because there are things about our solution that are unique, and we think make it quite special.

We're excited about the outlook in the U.S. and in Canada as we look forward and think that the market is building, and we have opportunity to grow significantly as we look forward.

Great. That's helpful. Thank you. Maybe on the AI sort of announcements, those were very interesting to hear as well. It sounds like you're in different phases of deployment depending on which AI service we're talking about, and they're monetized in different ways as well. I'm just curious to hear your kind of perspective on what the financial impact could be if we're talking about this in a year or two years out. Is this something customers have expressed interest in, and what does the upsell opportunity look like for AI Transcriptions and AI Answering Service?

Yeah, that's a good question, and it's one that we don't have a lot of experience with to give a very educated answer. The statistics on small businesses being able to respond to their phone calls while they're doing everything else they do suggests that there's a real need for these capabilities. Given that our AI voicemail and AI Transcriptions are going to be very competitively priced and I think very easy to set up and use, we're hopeful that a lot of our customers will find value and adopt them, and it'll become an extra charge to our customers. From a revenue perspective, it's a boost for Ooma. Today, a single-digit percentage of our customers take Ooma Pro Plus, which is the highest tier of service we have. Some of our AI services are going into that tier.

We'd like to think that with those services there and some education of our customer base, we can move that take rate up to double digit going forward. There'll be a boost there as well. It's hard to say, I think we're all experiencing the power of AI in our businesses, and there's no going back. There are going to be more features to come. We've only announced the first four or five that are coming out now, we have a roadmap out years to pursue, we believe there's going to be a range of things we can do for small businesses. It's really a special opportunity for us because all of that customer's communications, their phone calls, their messaging are flowing through Ooma, we can help them analyze that data and be more proactive with it.

I think it's the start of a story for Ooma that we can unfold over the next couple of years.

All right. Got it. Thank you for the color.

Thank you. Our next question comes from the line of Eric Martinuzzi with

You bet

Legacy Capital Markets. Your line is open.

Yeah. Congrats on the quarter as well from me. I wanted to better understand the drivers of the upside, just going back to your guide for Q1. The midpoint of your revenue expectation was $80 million even, and you exceeded that by $1.1 million. Is the big driver here just the core business customers? Is it more AirDial? What's the biggest driver of the upside?

Eric, thanks for the question. The biggest driver of the upside was from AirDial. As we said when we guided for Q1 and for the year, we wanted to remain conservative and AirDial piece in particular, because it's not always easy for us to predict the timing of installation, even though the bookings and demand has been increasing. We're cautious about that, and we're happy with the outcome of it, obviously exceeded by a good amount, and I think that's the biggest piece of it. The other piece, as Eric pointed out in his remarks, too, but the residential didn't decline. Again, that's another area that we planned conservatively, and we actually didn't see a decline there. That helped a bit as well in Q1 in relation to what we had expected at the beginning of the quarter.

I would say those were the two biggest driver and AirDial being the biggest of it.

Okay, then just the follow-on would be for this, you've also upped your outlook for the full year. Do you expect that refreshed guidance for FY 2027? Does that anticipate both of these trends that you outlined persisting, or is it a Q1 was a bit of an anomaly, let's see how things play out in Q2?

Thank you.

I wouldn't say that Q1 was anomaly. Obviously, the Q1 established a baseline, so to speak, to begin the year, which is a great baseline, by the way. In our guidance, I think you'll see when you work out the model that we still remain conservative, relatively speaking, especially the pace of ramp on AirDial. Again, for the same reason I said it just now, that we want to remain conservative in predicting the timing of installation of the lines. Again, the booking has been strong. Like I said in my remarks, the booking in Q1 year-over-year grew 75%, that's like three or four quarters in a row, we had a growth breakdown of bookings. Again, timing of installation is still hard to predict. We remain optimistic, but we want to be conservative on that.

Secondly, I don't know if you picked up, but I used to say in a guidance that residential going to be down -1% to -2%, but based on the recent trend, I improved that a little bit to say flat to -1%. We are going to see Walmart stores being stocked with MyPhone in the second half of the year. We're being conservative on that. We don't know, quite frankly, how much the take rate is going to be as much as we are excited about it. There's a little bit of conservatism built on that. Long story short, Eric, that we're still being conservative forward-looking here given some of the nature of these businesses, AirDial and MyPhone in particular, that I just mentioned.

Got it. Thanks for taking my question.

Thank you. Our next question comes from the line of Patrick Walravens.

Yep, thank you.

Citizens. Your line is open.

Hey, team. Congratulations on the quarter. I just wanted to dig in on Ooma AI. I was doing the math a little bit on how much usage the customer is going to get for that $15.99 on AI Assistant and the $49.99 on the AI Receptionist. It seems like it's $0.38 a minute and $0.50 for the AI Receptionist. It'd be great to give us an understanding of what the comms look like for something like that. Is that going to be positive for your margins or is that something that's potentially going to hurt it? The press release wasn't very specific on how the additional usage is going to be priced. It'd be great to get some clarity on that.

Yeah. We'll price additional units usage per minute, is the way we do it. If you look in the industry, you'll see prices that range quite a bit for these kinds of services. We think we're pretty competitive with the package we put together. Actually, the AI answering machine is kind of a unique positioning in the market. You don't see that from others, and it's a very useful capability at a lower price point than a full AI receptionist service would be. It's a nice entry point for a small business as well to get started with some added capability. COGS-wise, we are hosting internally the AI activities to transcribe calls, summarize them, and then work with the data. We also do utilize some outside capabilities as well.

I can't tell you here exactly what our COGS are, but I can tell you that we think we'll be jiving margins that are well in line with the margins we report overall.

Spectacular. Just one quick follow-up on that. I guess when I think about it feels like the amount of time that a customer spends talking to the AI assistant is something that the business itself doesn't have a lot of control over. If I have one customer that yaps along with it for the full 40 minutes, I've blown through my usage without getting a lot of value. Is there any way that you guys manage that on your end, or how do you think about that kind of conundrum?

Well, you're talking now about the Answering Service and the Receptionist Service. People leaving voicemails or just all your conversations throughout the day are part of Pro Plus. There's not a usage-based element to that. For Receptionist and Answering Services, people tend to leave a message of a minute or two at most and not really go on. But I think different businesses will vary, and obviously, we're going to make this attractive to our customers. So we may come out with other packages over time for high-power customers. You can enable these services on one line or many lines in the business as well. So depending on how many numbers you have set up for reaching outside parties, you have flexibility there too. I think that for a business that finds value in these services, I don't think our pricing is going to hold them back.

All right. Thank you so much.

Thank you. Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Your line is open.

Great. Thanks. It's great to hear about the progress your business development with AirDial is making. Can you put any numbers behind your comments? For example, you mentioned AirDial lines, service revenue, bookings, and more were up 75%-80%, and maybe that's not the exact range. Can you share what any of those numbers are for us?

Yeah. The number we gave you is lines installed. That number was up. I said that lines installed were more than double that of a year ago. Shig said that.

Bookings.

Bookings. Go ahead, Shig.

Were up over 75%.

Yeah.

Yeah.

Yeah. That gives you some sense of how fast it's moving for us. We expect it to be up again in Q2 and up each quarter throughout this year.

Sorry. What I meant was, are we going from 2,000 to 4,000 lines? We're going from 10,000 to 20,000? Double is hard to understand where we really are, same with services revenue and bookings. Are you just not prepared yet, and they're too small numbers to share?

They are not too small numbers to share. We do not break out AirDial at maybe the level of granularity that you are asking for here. We are comfortably over. How else do I want to say it, Shig?

One way to think about it, sorry, Eric, or Brian Kinstlinger, to say is that, we reported about 15,000 core business user growth from quarter-to-quarter. Majority of that was AirDial.

Got it. That's helpful. Thank you. Are the sales cycles beginning to change? Is it just integrations are starting for bookings from several quarters ago? What's changed over the last quarter and a half or so that you're starting to see this inflection point, it sounds like, on the demand side?

Well, I think it's the things I've said in my conference calls. There are more lines being shut down than ever before. We have more partners reselling AirDial than ever before. We are seeing larger entities with many locations around the United States get more and more focused on the need to do something and starting to take action. We are even seeing some of the partners we started working with or customers we won 6-12 months ago, just go faster now.It really varies by customer, but we're definitely seeing market movement. Not surprisingly, there are millions of lines out there that are going to have to switch out over the next 2-3 years. Customers need to get in front of this. It's an exciting time for us.

I think for the next three years, we're going to see AirDial as a very strong contributor to the business as the majority of lines go away. Now, having said all that, most of the lines going away today are from AT&T. There are others out there that have lots of lines, Verizon being one, that are really not sunsetting many lines yet. Depending on how those parties move forward, there's a long-term roadmap here for POTS lines needing to be replaced. It's still, frankly, early days in the POTS line replacement business, I think, compared to where it's going, and that's why we're seeing the market acceleration.

Great. Thanks. Last question I have, you talked about M&A. What are some of the top priorities, maybe any details related to either technology, what fills out your stack or geography where maybe you're lacking presence? Maybe anything you can share on that would be great.

Sure, happy to. Neither of those are of particular concern to us. We viewed making smaller-sized acquisitions as a way to strategically grow Ooma cost-effectively. If you look at our last three UCaaS acquisitions in FluentStream, Phone.com, and OnSIP, any business like those would be of interest to us or be in our target sweet spot. It doesn't mean we wouldn't also look at other things or things that might broaden us in certain ways, but fundamentally, we're looking for cost-effective growth, increased scale, moving Ooma up to just be a larger business in the market. I think that when businesses that we're acquiring can be accretive one quarter out, which both FluentStream and Phone.com were, it's a very viable strategy for us. That's what we're trying to do, and about the only constraint I'd say is we're focused in North America.

We're not trying to expand geographically.

Great. Thanks a lot.

As a reminder, ladies and gentlemen, let's star one to ask a question.

Thank you.

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

Thank you. This may be quite a conjectural question, but I'll go there anyway. When you look at the family safety market, which actually would include predatory activity toward kids as well as not being too distracted by social media on the mobile side, I mean, it's an enormous TAM both in the U.S. and Europe as well. I'm aware of one small software company that's trying to address that. I know Verizon's done some things in-house. Is there anything that you're doing that would be appropriate to that market? Because, I mean, clearly there's some opportunity with MyPhone, but if you had something comparable on the mobile side where you had both kind of a safety element and not watching too much of the Kardashians element as well, it would certainly have a pretty huge TAM in the market relative to MyPhone. Thanks.

That's an interesting area to think about. There are certainly other things one can do and other things certain companies are doing. Our focus today is MyPhone, which is specifically targeted at kids who have a defined list of others they want to be in touch with. There's a bit of a viral impact to this because when your kid gets one, you want the other kids that are their friends to get them, too. The parents get together, and they discuss what they're going to do. It really is a nice way to give your kids some freedom and ability to interact with others, but still know that they're not subject to all the challenges of social media and connectivity that comes with a smartphone. It's a remarkably large movement.

We were talking just the other day about an organization in the state of Washington, in a particular location there, where there's actually a nonprofit that's giving out phones like this to try and get all the kids on something that's safer. It's a big deal. We've also seen social media banned in some countries for kids below a certain age. Not the U.S., of course, but I'm thinking countries, I believe, if I'm remembering right, Spain was one of them that did that recently. I think there's a real role for MyPhone. I can tell you that when we talk to retailers, our buyers at retail are often individuals with kids at home, and they get it instantly when we start talking about the use case.

If you've got a kid at home and you're facing these issues and you hear about what MyPhone is and what we're trying to do, it really resonates. As you can tell from Shig's guidance, our guidance, we don't really know what to expect from MyPhone, and we haven't put too much in the outlook for it. We are going to really put some marketing behind it, particularly through social media channels and influencers, and see if we can't get a lot of parent interest in what we think is a great solution for younger kids. That's really our focus. As we're successful with that, maybe we'll look more broadly from there.

Would you say that even if you didn't have anything in the hopper in terms of active developments or discussions, would you have reason to believe that any of your technology would be readily transferable to the mobile side, or is it just no visibility on that? In other words, it would be.

Oh, no, I do think some of our technology is transferable.

I'm sorry?

I don't want to get too specific. I don't know if you can hear me, but I don't want to try to get too specific on what we might be thinking about or what you're going towards. We do have our mobile app called Talkatone, and we're very aware of how mobile apps can be tailored to meet certain needs in the market. We have that technology in-house, along with the technology that obviously creates the special features that MyPhone brings. Yeah, I think you're getting out ahead of where we are.

Okay, great. Thanks, Eric. Congratulations again on the numbers.

Please stand by for our next question.

Thank you.

Our next question comes from the line of Maxwell Michaelis with B. Riley Securities. Your line is open.

Hi, this is Matthew on for Josh. Thanks for taking my questions. Just to start off, on the product gross margin side, it came in at around -30%. I'm wondering how much of that is sustainable AirDial Gen 2 cost savings, and is -30%, around there, a good run rate going forward?

Matthew, this is Shig. Thanks for the question. I do think, our expectation right now is you're going to see a little bit worse product margin starting Q2 and rest of the year. There are a couple of reasons. One would be we're going to start to see the impact of higher component prices that we may have talked about in the past a little bit. These are memory pieces, so it's not unique to Ooma per se. Those components go into Telo, our residential product, and AirDial. We're going to start to see some impact of it starting Q2 and rest of the year. Secondary, again, we're not putting too much MyPhone estimate into the forecast to be conservative.

To the extent that we see those units shipped into stores in the second half, when we do realize them, we are going to lose some money up front, really customer acquisition cost from our perspective. For those two reasons, you're going to see a little bit worse product margin in Q2 and particularly in the second half. Long story short here, I think that for the whole of the year, we're estimating about -40% for the entirety of the year. Maybe you can model to that, around that number.

Got it. That's helpful. Okay. Going into fiscal 2028, after some of that second half weakness from launching more MyPhone products, I guess, how do you see that going from negative 40 to, I guess, closer to 30, maybe 35?

Yeah, I mean, I can't really predict yet of the 2028. Nobody knows where the memory price is going either, right?

Right

it's hard for me to say. If you have to model something for 2028, maybe you want to keep it on -40 for now.

Got it. Thanks. I guess you mentioned MyPhone. I'm wondering what the ARPU is looking like for MyPhone versus core Telo.

MyPhone would be all premium subscription users when they sign up. It'll be accretive to our average residential ARPU, which is $9 and change. It'll be accretive to that number.

Great. Super helpful. Last question from me. I know you guys had mentioned Verizon was still inactive on POTS shutdowns. I'm just wondering, do you see any signals on when that might change? Maybe it might be the second half of this year, maybe next year. I'm wondering as an upside lever, what we should think about that.

I don't have any signals to share there now.

All right. That's fair. Thanks for taking my questions.

Thank you. Ladies and gentlemen, I am showing no further questions in the queue.

Thank you.

Thank you.

I would now like to turn the call back over to Eric for closing remarks.

Thank you everyone for joining us today. We appreciate your time. It's just one quarter into the fiscal year. It's a good start. We see lots of opportunity to go capture them. We're going to execute our best to do it. Thank you, everyone. Bye-bye.

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