Ladies and gentlemen, thank you for standing by and welcome to the Ooma, Inc. Second Quarter Fiscal Year 2023 Financial Results Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Matt Robison, you may begin your conference..
Thanks Josh. Good day, everyone and welcome to the second quarter fiscal year 2023 earnings call of Ooma, Inc. My name is Matt Robison, and I'm the Director of IR and Corporate Development. On the call with me today are the CEO, Eric Stang; and CFO, Shig Hamamatsu.
After the market closed today, Ooma issued its second quarter fiscal year 2023 earnings press release. This release is also available on the company's website ooma.com. This call is being webcast live and is accessible from a link on the Events and Presentations page of the Investor Relations section of our website.
This link will be active for replay of this call for at least one year. A telephonic replay will also be available for a week starting this evening about 8:00 pm Eastern Time. Dialing information for it is included in today's press release.
During today's presentation, our executives will make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance.
Our expectations and beliefs regarding these matters may not materialize, and actual results are subject to risks and uncertainties that could cause actual results to differ materially from those projected.
These risks include those set forth in the press release we issued earlier today and those risks 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 the third quarter and full year fiscal 2023 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 results page of the financial inflow section of our website includes 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 Q2 fiscal year 2023 earnings call. Thank you for joining us. This is an exciting time for Ooma and we have a lot to talk about today. My comments will start with a review of our results and major initiatives and then address our recent acquisition of OnSIP, which we are also announcing today.
Q2 FY 2023 was a strong order for Ooma across the board. Revenue of $52.7 million, non-GAAP net income of $3 million and EBITDA of $4 million, all exceeded expectations. In addition, our gross margins increased with Q2 services gross margin at 74% and Q2 total gross margin, which includes product sales, at 65%.
These results are influenced only modestly by our acquisition of OnSIP, which occurred very late in Q2 and added less than $300,000 of revenue to the quarter. Our balance sheet remained strong, with cash at $22.5 million and no debt after generating $2.2 million of cash from operations in the quarter and also paying to acquire OnSIP.
Later, when we discuss the OnSIP acquisition, I'll review our plans to regrow our cash going forward. As you know, we have several initiatives underway to grow Ooma Business. For Ooma Office, targeted at smaller sized businesses, we announced just last quarter the launch of our Pro Plus tier service.
Like our Office Pro tier, which came before, this is a way for Ooma Office to appeal to slightly larger sized businesses and to increase our business ARPU. Close to 50% of our new users in Q2, excluding our growth with our largest customer, signed up for either the Pro or Pro Plus tier.
We are now working on the next tranche of several features to add to the Pro Plus tier, with the goal of launching these additional features this quarter. Regarding Ooma Enterprise, we made progress on several fronts over the last three months.
As planned, we launched modernized versions of our desktop, mobile and video apps and of our administrator portal. We also significantly expanded our sales into the hospitality vertical by closing over 25 new properties. We secured a particularly large new Ooma Enterprise customer in early August.
It requires a solution that can adapt to their infrastructure, which is one of the strengths of Ooma Enterprise. In Q3, we expect to onboard 1,000 users with this customer and also to install close to 300 Ooma connect devices, one for each of their locations.
As we've discussed previously, we are now ramping users with our largest customer in both North America and Europe. We expect this ramp to continue through the balance of this year with the potential to onboard more than the 25,000 additional users we originally planned to add this year.
We also believe that further user growth with this customer will continue next year. It's great to see our efforts in full swing now with this customer. One of our most significant new initiatives, which took hold just this last quarter is, of course, Ooma AirDial.
AirDial is our integrated solution to replace aging and expensive copper phone lines that serve specialty equipment, such as fire and security panels and elevator phones that are designed to operate with analog lines. With tens of millions of copper lines now in use in the USA, we believe the market opportunity for AirDial is massive.
As planned, we were able to build AirDial units in Q2 and begin making sales. We also engaged with additional strategic partners, including new horizon communications and intelligence solutions, both of whom separately announced they will start reselling AirDial.
And as expected, we are finding that AirDial opens up relationships with new channel partners, which can also benefit Ooma Office and Ooma Enterprise. I'm pleased to report that our backlog of opportunity for AirDial is significant and growing daily as we anticipated.
We've learned since launching AirDial last quarter that while some customers will install AirDial themselves, others prefer or will require installation assistance. Accordingly, Ooma is partnering with a national organization that provides third-party installation services.
In addition, some customers tell us it is easy for them to take a phased approach, at least initially, rather than replace all their copper lines at once. We anticipate that these factors will influence the rate of growth for AirDial.
We plan to scale internal and external resources over the next couple of quarters to facilitate and accelerate customer onboarding. Lastly, regarding AirDial, I'm thrilled to report that AirDial was chosen by a panel of eight leading unified communications industry analysts as the best endpoint solution for 2022.
AirDial received this prestigious UC award among a large field of contenders from the publication you see today. Altogether, Ooma Business added 21,000 users in Q2, net of churn. This is an exciting and a substantial increase from prior quarters.
We expect to maintain this level of user growth in Q3 as we continue to execute on our key strategic priorities. I would now like to turn to our announcement today that Ooma has recently acquired Junction Networks, also known as OnSIP, from Intrado. OnSIP was founded in 2004 and is headquartered in New York City.
The company provides UCaaS services primarily to smaller sized businesses located in the USA Intrado purchased OnSIP just a couple of years ago as a core asset to enable a broader UC strategy planned at the time. However, changes in Intrado's strategic direction led to this opportunity for Ooma to acquire OnSIP for $9.75 million in cash.
OnSIP is expected to add a little more than $10 million in annual revenues to Ooma and to be accretive starting in Q4 of this year. OnSIP operates its own internally developed UCaaS platform that is used today by approximately 5,000 customers, comprising approximately 50,000 users.
The company provides a high quality and well-respected solution designed primarily for serving smaller sized businesses. On average, each OnSIP customer is approximately 10 users in size. OnSIP's go-to-market activities span both direct sales and sales through channel partners with customer referrals also contributing to growth.
The company's level of customer churn is low, nearly what Ooma experiences today. And OnSIP is known for its high touch and helpful customer support. The company has about 40 employees, many of whom are highly experienced and have been with OnSIP for at least several years.
In all these respects, OnSIP represents a solidly performing business that does not require fixing and aligns well with Ooma's strategy to be the leader in serving small businesses. Now obviously, just from a purely economic standpoint, this is a highly attractive acquisition for Ooma.
The amount we are spending in this transaction to acquire new users is substantially less than what we currently spend on average via our existing sales and marketing activities. We believe this alone makes this transaction a clear win for us. In addition, we believe we can drive strong profitability at OnSIP.
We estimate we can increase OnSIPs gross margin to above 70% of revenue through synergies we bring based on our scale. and given the maturity of OnSIP's platform, we do not anticipate unusual or high expenses to operate the business. As such our outlook, as mentioned previously, is for OnSIP to be accretive to Ooma starting in Q4 of this year.
Strategically we approach spending on inorganic growth opportunistically and almost all respects OnSIP lines up perfectly with our criteria for inorganic growth, which include a well performing business that is operating in the segments on which we focus is of a size that fits with our business and resources in which can be purchased for an attractive valuation.
Our go-forward plan for OnSIP is to improve the experience for OnSIP users by upgrading them at some point in the future to a more feature rich solution that takes advantage of capabilities now available in Ooma Office. This will take time to implement to ensure a seamless upgrade process for OnSIP users.
In addition to accomplish this, we first need to incorporate into Ooma Office certain features now only provided by OnSIP, including basic call center functionality and a wider range of support for IP phone models.
By and large, the additional features we will add to Ooma Office to enable OnSIP are capabilities that we're already on our Ooma Office roadmap. However, with the acquisition of OnSIP, we now plan to increase our R&D spending modestly over the next two to four quarters to accelerate development of these features.
Accelerating these roadmap items will also help bolster the attractiveness of Ooma Office to increasingly larger sized customers. Conversely, on the sales and marketing front, we plan to trim our spending modestly over the next two to four quarters. This is for two reasons. The first is to fund the accelerated R&D that we are planning.
The second reason is to increase net income and cash flow from operations. Given the depressed state evaluations in our industry, we would like to position ourselves to take advantage of other inorganic growth opportunities in the future should they come along.
All-in, we expect our realigned spending to result in R&D running at approximately 19% of revenues, and sales and marketing running at approximately 30% of revenues for the back half of this year. To summarize, we are excited to achieve the significant increase in users afforded by OnSIP.
Our primary focus for OnSIP at this time is on integrating the team and achieving operational synergies. We're also realigning our spending to establish increased flexibility to take advantage of further industry consolidation.
I will now turn the call over to Shig, our CFO, to discuss our results and outlook in more detail and then return with some closing remarks.
Shig?.
Thank you, Eric and good afternoon, everyone. Before I dive into our second quarter of financial results, I'd like to provide details about the financial aspects of the OnSIP transaction we've completed on July 22, 2022, right before the end of the second quarter.
We paid $9.75 million in cash to acquire OnSIP and there are no other contingency payments for this acquisition. As Eric mentioned earlier, OnSIP is expected to add slightly more than $10 million in annual revenue to Ooma.
The acquisition of OnSIP is expected to be accretive to Ooma's adjusted EBITDA starting in the fourth quarter of the current fiscal year and make increasing contribution to Ooma's profitability and cash flows as operational synergies are realized in the subsequent quarters.
Now, I'm going to review our second quarter financial results and then provide our outlook for the third quarter and the four year fiscal 2023.
We delivered another quarter with strong financial results achieving $52.7 million in total revenue, which included approximately $0.3 million of subscription and services revenue from OnSIP for the last nine days of the quarter.
Excluding OnSIP revenue contribution, our Q2 revenue came in at $52.4 million exceeding our guidance range of $51.4 million to $51.9 million.
On a year-over-year basis, total revenue grew 12% in the second quarter driven by the strength of Ooma Business, which accounted for 51% of total subscription and services revenue for the quarter as compared to 48% in the prior year quarter.
In addition, due to product and other revenue came in at $4.7 million as compared to $3.5 million in the prior year quarter, primarily due to certain accessory sales. Non-GAAP net income for the second quarter was $3 million, which also exceeded our guidance range of $2.4 million to $2.8 million.
The impact of OnSIP on our Q2 profitability was immaterial given that the transaction closed very close to the end of the quarter. Now some details on our Q2 revenue. Excluding the impact of OnSIP, Ooma Business subscription and services revenue grew 16% year-over-year in Q2 driven by user growth as well as ARPU growth.
Residential subscription and services revenue grew 3% year-over-year. For the second quarter, total subscription and services revenue was $48 million or 91% of total revenue compared to 93% in the prior year quarter. Now some details on our key customer metrics.
We ended the second quarter with 1,181,000 core users, up from 1,111,000 core users at the end of the first quarter. The core users at the end of the second quarter includes approximately 50,000 Business users acquired in connection with the OnSIP transaction.
As Eric mentioned earlier, the increase in core users during the quarter was also boosted by additional users from our largest customer as they continue to deploy our solution. At the end of the second quarter, we had 394,000 Business users or 33% of our total core users, an increase of 74,000 from Q1.
Our blended average monthly subscription and services revenue per core user, or ARPU, increased 6% year-over-year to $13.80, up from $13.01 in the prior year quarter driven by an increase in mix of Business users, including higher ARPU Office Pro and Pro users.
ARPU for Q2 excludes the impact of OnSIP users as the acquisition was completed very close to the end of the quarter. During the second quarter, we continued to see a healthy Office Pro and Pro Plus take rate with 47% of new Office users opting for these higher tier services, which was up from 45% in the prior year quarter.
Overall, 24% of our Office users have now subscribed to our Pro or Pro Plus tier. Our annual exit recurring revenue in Q2, excluding the impact of OnSIP, grew to $186.8 million and was up 10% year-over-year. Our net dollar subscription retention rate for the quarter was 94% and as compared to 96% in the first quarter.
A few words about our net dollar retention rate, which is a function of year-over-year ARPU growth and churn. As mentioned earlier, we saw a robust user growth from our largest customer, which slowed the rate of ARPU growth in the second quarter.
As you can imagine, a customer with a large user base has lower pricing than our average business customer given its size and scope of our engagement. However, we expect a better upward growth in Q3 as we incorporate the Business users from OnSIP, which is priced closer to Ooma Office. Now some details on our gross margin.
Our subscription and services gross margin for the second quarter was 74%, which was an improvement from 72% in the prior year. The improvement in subscription and services gross margin was driven by our increasing scale and a greater mix of higher ARPU Business customers.
Product and other gross margin for the second quarter was negative 31% as compared to negative 53% for the same period last year. The second quarter product gross margin was favorably impacted by sales of certain accessories that drove our product revenue higher in the quarter.
On an overall basis, total gross margin for Q2 was 65% as compared to 63% in the prior year quarter. The higher total gross margin in Q2 this year was attributable to the year-over-year improvements in subscription and services gross margin, as well as the improvement in product gross margin. And now some details on our operating expenses.
Total operating expenses for the second quarter, which included $0.2 million of OnSIP operating expenses, were $31.1 million, up $4.7 million or 18% from the same period last year.
Sales and marketing expenses for the second quarter were $16.6 million or 32% of total revenue, up 22% year-over-year, driven by higher marketing and channel development activity for Ooma Business.
Research and development expenses were $9.9 million or 19% of total revenue, up 20% on a year-over-year basis from $8.3 million driven by investments in new features for both Ooma Office and Ooma Enterprise as well as new products such as Ooma AirDial.
G&A expenses were $4.5 million or 9% of total revenue for the second quarter compared to $4.5 million for the prior year quarter. Non-GAAP net income for the second quarter was $3 million or diluted earnings per share of $0.12 as compared to $0.13 of diluted earnings per share in the prior year quarter.
Non-GAAP net income for the second quarter excludes approximately $0.8 million of acquisition related costs incurred in connection with the OnSIP transaction. Adjusted EBITDA for the quarter was $4 million or 8% of total revenue as compared to $4.1 million for the prior year quarter.
We ended the quarter with total cash and investments of $22.5 million after paying $9.75 million of cash to acquire OnSIP. Cash generated from operations for the second quarter was $2.2 million compared to $2.6 million in the same period last year.
On the headcount front, we ended a quarter with 1,067 employees and contractors, which included new team members from OnSIP. Now, I will provide guidance for the third quarter and full fiscal year 2023.
Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization of intangibles and other acquisition related charges. Additionally, the guidance includes a full quarter impact of the OnSIP acquisition starting in the third quarter.
We expect total revenue for the third quarter of fiscal 2023 to be in the range of $56 million to $56.5 million which includes a similar level of product and other revenue as we had in the second quarter. We expect the third quarter net income to be in the range of $2.7 million to $3.2 million.
Non-GAAP diluted EPS is expected to be between $0.11 to $0.13. We have assumed 25.2 million weighted average diluted shares outstanding for the third quarter.
For full year fiscal 2023, we expect total revenue to be in the range of $213.5 million to $218.5 million, an increase from our previously issued guidance range of $210.5 million to $213.5 million. The increase in the full year revenue guidance range is primarily due to the addition of OnSIP revenue for the second half of this fiscal year.
In terms of revenue mix for the year, we currently expect 92% of total revenue to come from subscription and services revenue and the remaining 8% from products and other revenue.
We expect non-GAAP net income for fiscal 2023 to be in the range of $11.4 million to $12.4 million, up from our previously issued guidance range of $9.5 million to $11 million. We expect non-GAAP diluted EPS for fiscal 2023 to be in the range of $0.45 to $0.49.
We have assumed approximately 25.3 million weighted average diluted shares outstanding for fiscal 2023. I'd like to provide additional color on our non-GAAP net income guidance.
Based on the midpoint of the updated non-GAAP net income guidance range of $11.9 million for full fiscal 2023, we estimate our adjusted EBITDA for the year to be approximately $15.6 million or 7.2% of revenue.
This represents an increase from the midpoint of our original non-GAAP net income guidance of $9.5 million and implied adjusted EBITDA margin of 6% that were given at the beginning of this fiscal year. Our updated profitability guidance reflects the following factors.
First, we plan to be more judicious about our sales and marketing spend and target the spend level to be approximately 30% of revenue in the second half of this fiscal year as we successfully acquired approximately 50,000 Business users through OnSIP very cost effectively in the second quarter.
Second, we expect to accelerate our R&D spend over the next few quarters to align the features between Ooma Office and OnSIP to ensure consistent and enhanced user experience for our Business customers.
Lastly, we'll be focused on building back our cash balance to over $30 million in the next few quarters which will allow us to take advantage of inorganic growth opportunities in the future.
In summary, we are pleased with our solid execution on both organic and inorganic growth initiatives during the quarter and remain focused on executing to our long-term strategy to achieve profitable growth. I'll now pass it back to Eric for some closing remarks.
Eric?.
Thank you, Shig. This is certainly an exciting time for Ooma as we expand on multiple fronts. Ooma is investing in future enhancements for Ooma Office, new verticals and sales channel expansion for Ooma Enterprise, international expansion, AirDial and now the acquisition of OnSIP.
These investments are being made while also generating positive cash flow from operations and maintaining a debt-free balance sheet. We believe these initiatives now underway can drive significant growth. Finally, I would also like to welcome the OnSIP employees to the Ooma team and thank them for their commitment and hard work.
The OnSIP team is highly experienced and we are pleased to have them become a part of Ooma. Thank you. With that, we will now take your questions..
[Operator Instructions] Your first question comes from Matt Stotler with William Blair. Your line is open..
Thank you for taking the questions. Maybe just want to start off with on the OnSIP acquisition. Just wanted to kind of double-click on the strategy, I guess, go-forward strategy with that asset.
It sounds like one of the opportunities there is obviously to kind of eventually migrate those customers -- that customer base over to more feature-rich core Ooma products. But it also sounds like there are some things in the OnSIP portfolio that are very much additive to what you provided today.
So, I'd love to just double-click on that, specifically on kind of what's additive and how you expect that will expand the portfolio for you guys going forward and add value for customers..
Yeah. Hi, Matt. So, first of all, we want to serve OnSIP's customers as effectively as possible. And so rather than consider this a migration, if you will, we really want to make it an upgrade from their point of view.
And so, we want to be able to enable enhanced features from what they have today in line with the way they do business and the way they operate with OnSIP. It so happens that there are some great features in Office that are not in the OnSIP platform today.
Office has stronger mobile apps, a stronger video calling capability, incorporates SMS and some other things that OnSIP customers don't take advantage of today. So, we will be able to provide a better overall experience for OnSIP customers over time.
But that said, there's a couple of things in OnSIP that are on the roadmap for Office, but not yet available. There are very logical next steps for the Office platform. They are things that are in our roadmap, but we would like to accelerate how fast we can bring them out. And the two I mentioned on the call, one is basic call center capability.
It shouldn't surprise you we're going in that direction. We launched Call Queues for Ooma Office, part of the Pro Plus tier just a quarter ago, which is kind of a foundation towards moving towards a call center capability. We have call center today on Ooma Enterprise for instance, as well. So we know how to do it.
But that's one area where we want to advance Ooma Office before we try to upgrade OnSIP users. Another is OnSIP has done a very nice job of being very complete in the amount of -- in the types of IP phones and models that they can bring on to their network. We've been much more controlled with Ooma Office.
And so, we're going to be expanding what Ooma Office can do on that front as well. There are some other areas too. There are some business model way customers are build and things like that, things that need to get aligned. But all-in, it's development we were going to do anyway. And frankly, it's only a modest impact on R&D to accelerate these things.
R&D rounded up to 19% of revenues this past quarter, Q2, and we're forecasting for the back half of the year to be 19% of revenues as well. So, we're going to easily fund that with our new approach with sales and marketing spending. Hopefully, that answers your question..
Yeah. That's very helpful. Maybe just one follow-up on the go-to-market front. You obviously mentioned that you've been spending on higher marketing and channel activity. And it seems like part of this acquisition was a way to efficiently kind of go and take in a nice chunk of customers and seats.
Going forward, how do you think about where you're going to continue to kind of press on the sales and marketing front as you're looking for efficiencies? Where are those sales and marketing dollars are going to be prioritized from here?.
So, we're going to continue doing most, if not all, of the things we're doing today on the sales and marketing front. Certainly, the most significant elements that I've shared with investors and on calls about the things we do on the sales and marketing front.
But on the margin, we're going to be more -- I can't think of the right word, but we're going to be a little more discerning on the margin around where we choose to spend and how much we choose to spend so that we know we're optimizing each thing we do. And frankly, this is -- because this is being driven off the OnSIP acquisition.
We just brought on board 50,000 users, and that's a huge step forward for us. And we feel like we can balance that with a little bit of an adjustment in sales and marketing and still come out ahead, frankly. And that ability to do that, to come out ahead with faster growth this year and also come out ahead with more profitability on the bottom line.
It seems like a win-win all the way around for us in doing this. So, again, in context of the overall sales and marketing budget, which runs today -- I mean, last quarter, it ran -- it rounded up to 32% of revenues.
We're talking about a relatively modest adjustment, targeting around 30% of revenue for our sales and marketing spend in the back half of this year..
Got it. That’s helpful. Thanks again..
Your next question comes from Mike Latimore with Northland Capital. Your line is open..
Thanks, gents. Congratulations on the quarter and the acquisition here. The subscription gross margin was really strong in the quarter. It seems like the variables that drive that will continue going forward.
So, I guess, should we think about the organic subscription gross margin kind of remaining at this level? And then, any guidance on what the blended might look like?.
Yeah. Mike, this is Shig. Thank you for the question. Yeah. I would say that when we look at 74% this quarter, a few factors that drove that improvement what it's year-over-year sequentially. One is that we took certain cost savings initiatives in the first quarter, and we're seeing the benefit of that in Q2.
And we always do some of those initiatives constantly, but we saw a big benefit coming into Q2. So that's one factor. There were some costs in Q1 that didn't recur. So that helped us a little bit sequentially there.
But also overall, the benefit of growing the high ARPU Business revenue, we continue to do so, whereas the fixed cost is not increasing as fast. So, we see the economy of scale benefit there. And I think second part of your question, next quarter what we see is, we might see a slight dip in the 74% as we blend in OnSIP 50,000 users in.
And OnSIP, as we acquired today, is a little bit below 70%, let's say, subscription margin. We do see them coming up to 70%-plus in the next couple of quarters, so it's sort of a temporary thing. But we're going to see some impact there, but not much. I think we're going to still be in the 73% range.
But from there, I think as we continue to scale on the Business users, as we continue to do that, and as we continue to look at cost saving initiatives that we always have, we feel pretty comfortable about progressing towards 75%-plus subscription margin in our long-term model..
Okay. Great. Sounds good.
And then on AirDial, any general guidance on how many units you might envision selling in the back half of the year? And then for the ones that you have sold so far, are they -- are you seeing two users per unit, four users per unit? What's been sort of the average?.
Yeah. So, we -- competitively, we don't really want to disclose exactly what our sales are each quarter here. We also have a second factor going on, which was we sold more in Q2 than we installed. And until they're installed, they don't show up in the financials.
But we talked last quarter about how we were working hard to build 10,000 pieces of equipment, 10,000 of the product, the box. And I still believe we will get those and more sold this year. Whether they all get installed this year, I don't know. We're working to kind of improve our rate of being able to do that with customers.
But it's substantial any way you look at it. In terms of users per box, yes, we're seeing a little over two as the average that we're running, which is kind of in line with what we expected..
Okay. And then just last on the kind of macro environment. Obviously, a lot of software companies have talked about a little bit longer sales cycles emerging or maybe a little more churn even.
What's your kind of view on that as it relates to your business?.
Yeah. I wish the macro environment were better. It's not great. It kind of affects our business mainly in two respects. We do see some cost inflation, whether it's salaries or what we pay for external advertising or things like that. And also, I think customers out there. We're finding we need to talk with them a little bit longer before they buy.
They're a little more careful. But those things said, I think our business is going to power through, it's fine. We were able to take up our guidance again here. And I believe we'll achieve -- we'll beat the goals we set out at the start of the year even in the face of those challenges.
So, it does affect us a little bit, but I think we will move through it pretty effectively..
Okay. Thank you..
Your next question comes from Brian Kinstlinger with Alliance Global Partners. Your line is open..
Great. Thanks so much for taking my question. One follow-up on AirDial. I'm curious you've added two solid partners or resellers.
Is that in any way help your ability to source supplies to build that 10,000? Or is that -- does that not impact your purchasing power?.
So, I mentioned on the call two resellers. You recall as well, we mentioned a quarter ago, Spectrotel which makes a third reseller. And those are the three we've been able to announce. We do have others, but they may not be in the market yet or they may not have publicly stated what their plans are yet.
But we're excited about the number of resellers we're working with. We are finding each reseller takes time to work with the product, understand it, train their sales folks, kind of roll it into their systems and processes. So to be honest with you, almost very little of our sales in Q2 came through resellers we're working with yet.
And we're expecting that to ramp, frankly, this quarter and in Q4. But we are seeing good traction with a lot of parties who need a solution. They' got tough lines so they sell tough lines and they need a solution like AirDial. In terms of sourcing supply, it doesn't really help with that.
We have found supply a little bit easier to manage now for two reasons. One is we've done some redesign of AirDial that allows us to swap in other components to give them more flexibility in purchasing. The other reason isn't a great reason, but we also found that if we pay a little bit more in some areas. We can get things.
And so, we have had to pay a little bit more to build some of the AirDials we've built. But we factored that into our guidance and we'll work through that without too much trouble. I hope that answers your question..
Great. And then, I didn't hear anything on T-Mobile, maybe I missed it, but any updates on sales plans, ability to source inventory for those phones as well as attach rates to T-Mobile's 5G platform..
Yeah. You're right. I didn't speak too much about residential in my opening statements. We had another good quarter with T-Mobile in Q2, similar to the way we performed with them in Q1.
There are a number of initiatives T-Mobile wants to do, but they didn't really take hold in Q2, and we're now looking at Q3 when we think some of those initiatives will start to happen. So, I think there's still a lot of opportunity with T-Mobile. They did one thing in Q2.
They started to put some messaging in their stores about the Ooma Telo solution to go with their home Internet. And I think that's a step forward. And it was one of the things -- one of several things that they believe are intending to do to promote our solution better.
Right now, mainly most of our sales are coming when someone visits their website and purchases home Internet of their website or researches on their website and comes across us on their website. There are other channels with them that could do more. But it's a great partnership. We do have other things we're discussing with T-Mobile.
We -- there are other areas of alignment between us and them and we'll see how those things transpire. There's nothing to announce at this time. But we're hopeful that we'll have more to say about things we're doing with T-Mobile as we go forward..
Great. Thank you..
You bet..
Your next question comes from Matthew Harrigan with Benchmark. Your line is open..
Thank you. You remarkably barely alluded to the consumer business during the entire call, apart from the question just now on the T-Mobile opportunity.
Can you talk a little bit more about that? And when you look at M&A activity and the multiples loosening up a little bit, is there anything on the consumer side that you would also consider at an appropriate price? I mean, clearly, the holy grail was always to get the business sales above 50% and certainly higher.
But it sounds like you've got a much more favorable M&A environment than you had even a few months ago by virtue of the difficult macro in the markets that are hurting everyone right now. Thank you. .
Sure. By the way, I did not mean at all to short change or skip over residential. I think ended up with an opening statement here about four pages longer than usual, and I was ready to stop. Residential had another good quarter of growth. Last quarter we grew subscription service revenues 3% year-over-year, right in line with our target.
We did decline marginally in the number of users we have on the Residential platform, not a lot, but a little bit. And that's something we would like to turn around. We had -- one of our products that we sell in Q2 have to be end of life and replaced.
And that caused us a little bit of -- it wasn't the best for sales to have to go through that process with that product. But that's behind us now. And that was our Telo 4G product, which we replaced now as a product we call Telo LTE, and it has a new dongle adapter with it for the LTE connection.
But all that said, Residential is strong and very stable and growing at the revenue line. We don't focus on inorganic growth for Residential. I would never say never for the right opportunity. We're about making money here, and it's a business we know very, very well. So, it wouldn't be a bad thing to do something there.
But honestly, where we think about resources and effort and concentration and focus in the company, it's on the Business side. So it's much more likely that if we do more inorganic growth, it would come on the Business side..
Consistently consistent. Thanks Eric..
Sorry about that..
Your next question comes from Josh Nichols with B. Riley. Your line is open..
Yeah. I just wanted to touch on the large customers. So, it sounds like that's growing a little bit faster. I think you mentioned that, that may actually exceed 50,000 users by the end of this year. You were at 27,000 subs at the end of last quarter.
Where were you at the end of this quarter? And where are you today one month into the fiscal 3Q?.
I'm not exactly sure just where we are. But I can tell you that we guided last quarter that we were going to add 8,000 or more subs -- users, I should say. And we beat that number by a little bit. We're a little over $10,000. So, we made good progress.
And I think we can have -- not exactly, but we can have a similar level of growth in Q3 with this customer. So, it's pretty material now. It's really happening. So, yeah, hopefully that addresses your question..
Yeah. I guess the last question is just -- looking at the 3Q and fiscal year guidance, so I assume around 2.5 million, right, for the acquisition is what's included in 3Q and 5 million for the full fiscal year.
Is that correct?.
That's a ballpark. Yeah. You think it right ballpark, yes..
Yeah. So, my follow-up to that is like you've added over 20,000 business subs this quarter, right, compared to like 12,000 last quarter and 6,000 or something like the quarter before that and your ARPU is increasing. But effectively, the entire guide up on the revenue side is really attributable to the acquisition.
It seems like you're being pretty conservative given how fast the business subs are growing.
Could you kind of help me reconcile the fact the subs are growing so much faster, but the guide is almost entirely bumped up from the acquisition?.
Yeah. No, part of -- good question, Josh. Thank you. So part of that is, do recall the second half of last fiscal year, our business user add performance weren't at the level that we wanted. So, I think we're feeling some of that carryover effect going into second half of this year, which we've been very open about.
And the other thing is what I mentioned earlier in my script that the number of user adds from the largest customer we just talked about, we're very pleased with the progress. But I also made a point in my script that their price point is lower than our normal business users.
And given the overall user base, you can imagine the large customer gets a little bit of pricing than normal business customers, let's say. So, again, I can't be too specific more than that, but I think those are a couple factors that contributing to sort of a little bit gap in terms of how you thought about it versus how I guided to it..
Yeah. That's fair. I mean, although ARPU is still up quarter-over-quarter, right, despite the adds that we saw. I guess are you still targeting -- I think at the beginning of the year, you mentioned targeting 20% business subscription revenue growth.
On an organic basis, if we strip out the acquisition, is that still the case?.
Eric?.
Yeah. In a way, yes. I mean, we're going to beat that number, but we're looking at holistically now. I mean the changes we're making on the sales and marketing front have a bearing on that kind of plan. But we're looking at it all-in in terms of what we spent for the acquisition, what we're going to spend in sales and marketing going forward.
And in that sense, yes, we're going to do very well. If we weren't doing this acquisition, we wouldn't be trimming our sales and marketing spend and kind of realigning where we invest. But to us, this seems like a natural move. This acquisition has much better cost per user, if you will, than on the margin, what we're seeing in sales and marketing.
So, in a way, from our point of view, they're fungible, and this is a better way to spend our money to drive growth..
Fair enough. Just to put a bow on it, so I mean, organically, you think that the company could beat the 20% number and that the acquisition that you bought is actually coming at a lower customer acquisition cost than you would normally. So that's going to add a little bit more juice to the opportunity to allow you to expand the bottom line as well.
Is that right?.
That is a good summary. Yeah. It also -- all this also depends a little bit on what estimates we put on AirDial. And that's a new product for us. And it's off to a great start from a customer interest and backlog. And we're talking to customers who say, I need 1,000 of them. I mean it's amazing some of the customer opportunities we're talking to.
But how fast products get installed and get into the revenue line, we're still learning as we go. And that -- but yes, absolutely, we were targeting 20% growth for the year. And if we weren't doing this acquisition, we'd still be targeting that..
Great. Thanks Eric..
Thank you..
[Operator Instructions] Your next question comes from Joe Goodwin. Your line is open..
Great. Thanks guys for taking the question. Can you talk about the stability of the OnSIP user base? Was it shrinking or growing in recent quarters? And then, that $10 million of revenue, is it all recurring? Is that growing? And I apologize if I missed any comments here related to the growth..
Yeah. No, happy to. So, almost all of that $10 million-plus in revenue is recurring revenue. And it's with a pretty stable customer base. Their rate of churn on their base is not too dissimilar from what we have on Ooma Office today.
And so, to be honest, I don't think -- as they were owned the last couple of years by another entity, they did not see a lot of investment in growth. So, they have kind of grown slowly while they nurtured their existing customer base. And so, we feel pretty confident that we've got a very stable and loyal customer base.
It's a great solution in a lot of respects, particularly for how a lot of their customers use it. And so, we think that it's going to be solid recurring revenue going forward..
Okay. Thank you.
And then, I guess, should we think about that $10 million over time kind of coming up towards your business ARPU level as you guys kind of bring them on to the Ooma products? Is that a fair way to think about it?.
I don't know yet on an answer to that. I can tell you that the new users that OnSIP is onboarding, call it, recently, this year -- whatever time period you want, recently, those new users have been at ARPUs closer to what Ooma Office is at today. But their blended ARPU with the whole mix of customers they have is a little bit lower than Office.
As we bring new features to the customer base, I think we'll be able to bring up pricing for customers who value those features and need them. But if some of the customers don't need those features, we may not. So, we're going to have to see on that. I think it's too soon for us to try to model that.
I can tell you that we're really excited that we can move their overall recurring margins and overall margins frankly up into the 70%-plus range. And that means there will be a strong contributor here at Ooma regardless what their ARPU is. .
Understood. Okay. And then just switching gears over to the T-Mobile partnership. And Eric, this is probably the most questions you've received on a call related to the Residential in recent quarters. But they're adding a ton of their net subscribers at T-Mobile. And the way they're talking about it is it is pretty durable there.
And so, I'm just wondering, has that partnership gone? Are you pleased with the progress of that partnership -- how that's been going? And I guess, what are some of the reasons why you haven't seen kind of at least a stop of the Residential core user shrinkage?.
So, I kind of answered the second part of that a little earlier in this call by talking about a product change we made in Q2 and all. But everything that has happened with T-Mobile, I'm pleased with it. I think they've made some real efforts in some areas. And what has happened has been terrific. I do think there's a lot more potential.
And I think that I can go into business reasons they have, why things get delayed or things don't happen as fast as originally the thinking is they might. But I think there is still commitments, and I think we're going to see more things happen going forward. So yeah, I'm pleased with it. And I'm glad to have them as a partner.
And you're right, the home Internet that they're providing is really selling well and I think that's opportunity for us..
Thank you..
Sure..
There are no further questions. I'll turn the call back to CEO, Eric Stang for closing remarks..
End of Q&A:.
Well, everyone thank you. We're really excited about the -- everything we had to talk about today. And we think this OnSIP acquisition is a real find for us as a company in terms of what will make a difference for us and how we approach the market and what we're doing.
And we're excited about driving higher revenue, higher profit year this year on the back of it and the other things we're doing. So, thank you everyone, and have a good day. Bye-Bye..
This concludes today's conference call. You may now disconnect..