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Hello, and welcome to Ooma Third Quarter Fiscal Year 2024 Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to Matt Robison. Sir, you may begin.
Thank you, Towanda. Good day everyone and welcome to the fiscal third quarter 2024 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 fiscal third quarter 2024 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 & 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. 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 fourth quarter and full year fiscal 2024 on a non-GAAP basis. Also, in addition to our press release and 8-K filing, the Overview page and Events & Presentations page in the Investors section of our website as well as the 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 third quarter fiscal year 2024 earnings call. Thanks for joining us. I can report that Q3 was another strong quarter for Ooma. We performed well financially and made a major advance by acquiring 2600Hz during the quarter. We look forward to reviewing our progress with you. Our Q3 results include $59.9 million in revenue, $4 million of non-GAAP net income, and $5 million of EBITDA. Organically for Q3, which is to say excluding the impact of 2600Hz, we increased our business subscription and services revenue by 14% year-over-year. We held our OpEx spending nearly flat to a year ago, and we grew our EBITDA by 17% versus Q3 last year. Our annual exit recurring revenue, including 2600Hz, is now $225 million. We feel these results demonstrate good progress for the Company and strong performance for the quarter. During Q3, we continued to pursue the strategies we have outlined throughout this year to expand Ooma's revenues from business customers.
Ooma Office, our award-winning solution for small to medium-sized businesses, added premium features and new integrations. One of our most exciting new integrations is with Clio, the number one software used in the legal industry. Users of Clio can now integrate their Ooma calling and communications with their Clio experience. This integration is available as part of Ooma's Pro Plus service tier and contributes to our long-term strategy of increasing our premium office users and raising our average revenue per user. I am pleased to report that in Q3, we once again sequentially increased our ARPU from business customers. I am also pleased to report that 56% of our new office customers were premium users and that premium users now make up 28% of our total office customer base. It was exciting in Q3 to announce finally the name of our largest customer, International Workplace Group or IWG, which is also known by the name Regus.
We made the announcement in conjunction with the launch of our services for IWG in Asia. In Q3, we have rolled out our platform for the Africa region and started serving IWG in South Africa. In total, we now serve IWG in 30 countries across five different regions and we are working with them to expand further. We anticipate slower international expansion in Q4, given the holidays followed by a pickup in Q1, as we roll out to new countries throughout the first half of next year. Outside of North America, we also expanded with Ooma Enterprise, which began serving a new customer with locations spread across Australia, Netherlands, Spain, and the UK, in addition of course to here in the USA. In our targeted hospitality vertical, we once again landed over 50 new hospitality locations, the largest of which being a property with 474 rooms and another being our second airport hotel. In general, we believe our strategy in enterprise to focus on select verticals is giving us advantages in the market.
In Q3, we continued to pursue our AirDial strategy aggressively. In particular, we hired additional sales personnel and signed a total of four new AirDial resellers, one of which, TouchTone Communications, we announced in a press release. These resellers joined a number of others we are already partnered with for AirDial, including T-Mobile and more recently UScellular. We also announced that Viking Electronics, a manufacturer of more than 500 security and communications products including emergency phones, entry systems, elevator phones, and campus safety phones, began recommending AirDial to its customers and distributors after performing their own extensive testing of AirDial. As we've mentioned, we believe AirDial offers the best solution in the marketplace for replacing increasingly expensive and soon to be decommissioned copper lines that are connected to elevators, fire alarm panels, older PBX equipment, and more.
We are thrilled by the validation we are seeing from the many resellers we have signed up for AirDial. We are also thrilled to have announced in Q3 that Elevator World Magazine, the leading media voice in the vertical transportation industry, selected Ooma for the 2023 LEs Awards in the category of best communication system supplier, honoring the Ooma AirDial solution for POTS replacement. We're not standing still either in our continued improvement of AirDial. Just recently, we announced that AirDial now incorporates Ooma's patented MultiPath technology. MultiPath creates a continuous dual connection between AirDial and the public switched telephone network by transmitting data packets simultaneously through two separate data links. Unlike other approaches where calls are dropped and failover, where there can be delays before failover occurs and where other issues can occur related to the quality of individual transport links, Ooma's MultiPath technology provides seamless backup for customers who enable two Internet connections to their AirDial device.
MultiPath provides one more example of how Ooma stands out by providing the full end-to-end AirDial solution, encompassing both cloud and customer premise equipment. While not announced, we also made additional improvements in Q3 to AirDial's remote device manager or RDM, as we call it. RDM gives our AirDial customers the ability to provision, monitor, manage, and control all of their AirDial devices from one portal. We view RDM as another key differentiator for AirDial. I am pleased to report that in Q3, we landed what we expect will become our two largest AirDial customers today. One of these customers is a large retailer with many individual brands. We have already started rolling out AirDial to one brand of stores owned by this customer, where we are displacing another POTS replacement solution. We expect this rollout to be just Phase 1 with this customer. The other customer is a provider in the elevator industry with access to a very large number of opportunities.
I'm pleased to report our backlog of potential sales opportunities grew again in Q3, and we have many large opportunities that we are pursuing. I'd like to turn now to 2600Hz, which is the new business we acquired back in October. As a reminder, 2600Hz provides open-source core calling functionality named Kazoo that is in use today by many telecom providers. Since initially launching Kazoo over a decade ago, 2600Hz has also expanded to provide its own non-open-source suite of prebuilt UCaaS, CPaaS, and call center applications. Telecom providers have the choice of relying solely on open-source Kazoo and building applications themselves or contracting with 2600Hz for a more complete solution. 2600Hz today provides hosted cloud, private cloud, and customer-hosted solutions to approximately 130 paying customers who serve hundreds of thousands of end users. The Company runs data centers in eight locations, spread across North America, Europe, and Oceania, maintains a workforce of about 100 employees and contractors, and has revenues of approximately $7 million annually.
Three main reasons drove our decision to acquire 2600Hz. We made this acquisition to capitalize on the opportunity we see in the wholesale marketplace to unlock significant operational benefits between Ooma and 2600Hz and to enhance Ooma's strategic position and ability to serve the fundamental needs of large carriers and other partners. It's now been about six weeks since 2600Hz became part of Ooma. In that time, we have blended our two teams together, rationalized spending in certain areas, and established our new combined strategy. Central to our strategy is to strengthen 2600Hz in the marketplace by leveraging Ooma's application, technology, scale, and low-cost position and by launching new services. We're now actively working internally to provide 2600Hz customers telecom services delivered in a CPaaS business model. We're also working to leverage some of Ooma's key user applications for the benefit of 2600Hz customers.
2600Hz's customer base has responded with positive feedback on our acquisition. They are excited about our strategic direction and the intellectual property and resources we bring as a larger scale and more mature organization. Similarly, we already have active conversations underway with a number of possible new customers. These conversations will take time as possible customers evaluate Kazoo and get to know us, but we are optimistic about their potential. Overall, I believe our integration with 2600Hz is going well and we are on track, as promised, to make the acquisition adjusted EBITDA accretive to Ooma within six months. Finally, I'm thrilled to mention that a recent publication named the Kazoo Communications Solution from 2600Hz as the best white label solution at the prestigious UC Partner Awards 2023. Kazoo was chosen by a panel of 12 leading analysts in the cloud communications industry from a field of four finalists.
Of course, we're not surprised since we know Kazoo’s modern API-based architecture sets it apart in the industry. With that, 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. Before I dive into the third quarter financial results, I'd like to quickly recap the financial aspects of the 2600Hz acquisition we completed on October 20, 2023, right before the end of the third quarter. We acquired 2600Hz for approximately $33 million in cash, and there are no other contingent payments for this acquisition. With regard to funding of the cash purchase price, we used approximately $50 million from our balance sheet, and the remaining $18 million came from a new $30 million revolving line of credit from Citizens Bank. 2600Hz is expected to add approximately $7 million in annual recurring revenue to Ooma. The acquisition of 2600Hz is expected to be accretive to adjusted EBITDA within six months and to make increasing contributions to our overall adjusted EBITDA as operational synergies are realized in subsequent periods. Now, I'm going to review our third quarter financial results and then provide outlook for the fourth quarter and full year fiscal 2024.
We delivered another solid quarter with a total revenue of $59.9 million, which included $0.23 million of subscription and services revenue from 2600Hz for the last 12 days of the quarter. Excluding 2600Hz revenue contribution, Q3 revenue came in at $59.6 million at the high end of our guidance range of $59 million to $59.6 million. On a year-over-year basis, total revenue grew 6% in the third quarter, driven by the growth of Ooma business, which accounted for 58% of total subscription and services revenue as compared to 55% in the prior year quarter. Q3 product and other revenue came in at $4 million as compared to $4.9 million in the prior year. The prior year Q3 product revenue included certain accessory sales that did not recur this year. On the profitability front, the third quarter non-GAAP net income was $4 million, excluding $0.3 million of net loss from 2600Hz. The third quarter non-GAAP net income was $4.3 million, exceeding our guidance range of $3.8 million to $4.1 million, and represented a 24% increase over $3.5 million in the prior year quarter.
Now, some details on our Q3 revenue. Excluding the impact of 2600Hz, Ooma business subscription and services revenue grew 14% year-over-year in Q3, driven by user growth. On the residential side, subscription and services revenue were flat year-over-year. As a reminder, we had a one-time churn event during the first quarter of this fiscal year with a particular customer with an unusual application where we lost approximately 4,000 tele users, which continues to impact our year-over-year comparison in Q3. For the third quarter, total subscription and services revenue was $55.9 million or 93% of total revenue as compared to $51.7 million or 91% of total revenue in the prior year quarter. Now some details on our key customer metrics. Please note that the key metrics I am about to discuss do not include any metrics related to 2600Hz users. Given the wholesale nature of 2600Hz's business, we do not intend to blend 2600Hz user metrics into our traditional core user metrics, which will continue to represent the key metrics related to Ooma business and residential users only.
We ended the third quarter with 1.241 million core users, up from 1.237 million core users at the end of the second quarter. At the end of the third quarter, we had 475,000 business users or 38% of total core users, an increase of 8,000 from Q2. Our blended average monthly subscription and services revenue per core user or ARPU increased 3% year-over-year to $14.63 driven by an increase in the mix of business users, including higher ARPU Office Pro and Pro Plus users. During the third quarter, we continued to see a healthy Office Pro and Pro Plus take rate with 56% of new Office users opting for these higher-tier services, which was up from 50% in the prior year quarter. Overall, 28% of Ooma Office users have now subscribed to our Pro or Pro Plus tier. Our net data subscription retention rate for the quarter was 99%, as compared to 99% in the second quarter. Our annual exit recurring revenue, which now consists of recurring revenue from Ooma core users and 2600Hz users, grew to $225 million and was up 10% year-over-year.
Now some details on our gross margin. Our subscription and services gross margin for the third quarter was 72%, as compared to 73% in the prior year. Q3 subscription and services gross margin this year was impacted by certain investments we made for our largest customer, as we started the further expansion into Asia and Africa in the third quarter, as well as investments in our customer support resources for ongoing AirDial ramp. Products and other gross margin for the third quarter was negative 73%, as compared to negative 35% for the same period last year. As mentioned on the previous calls, the decline in Q2 product gross margin this year versus last year was anticipated and primarily due to two factors. First, we saw the sell-through impact of certain higher-cost components that we had procured in the last fiscal year to stay ahead of pandemic-driven supply chain issues. And second, the prior Q3 product gross margin benefited from certain accessory sales that did not recur this year.
We continue to expect product and other gross margin for the remainder of fiscal 2024 to be negatively impacted by one-time excess component costs running through the P&L and currently estimate Product and Other gross margin for the fourth quarter to be in the neighborhood of negative 70%. On an overall basis, total gross margin for Q3 was 62%, as compared to 64% in the prior year quarter. And now some details on operating expenses. Total operating expenses for the third quarter were $33.4 million, up $0.6 million or 2% from the same period last year. Excluding the impact of 2600Hz, the total operating expenses increased by $0.1 million or effectively flat from the same last year. Sales and marketing expenses for the third quarter were $16.8 million or 28% of total revenue and flat year-over-year. Excluding the impact of 2600Hz, sales and marketing expenses for the third quarter were $16.6 million, a decrease of $0.3 million from the same period last year as we controlled our spending to increase profitability.
Research and development expenses were $11.3 million or 19% of total revenue, up 3% on a year-by-year basis from $11 million driven by investments in new features for Ooma Office and enterprise, as well as AirDial. Excluding the impact of 2600Hz, R&D expenses for the third quarter were $11 million flat compared to the same period last year. G&A expenses were $5.3 million or 9% of total revenue for the third quarter compared to $4.9 million for the prior year quarter. The year-over-year increase in G&A expenses was primarily due to an increase in personnel costs. Non-GAAP net income for the third quarter was $4 million or diluted earnings per share of $0.15, excluding the impact of 2600Hz non-GAAP net income for the third quarter was $4.3 million or diluted earnings per share of $0.16 as compared to $0.14 in the prior year quarter. Adjusted EBITDA for the quarter was $5 million for 8% of total revenue.
Excluding the impact of 2600Hz, adjusted EBITDA for the quarter was $5.2 million for 9% of total revenue and represented a 17% increase over $4.5 million for the same period last year. We ended the quarter with total cash investments of $18.9 million. We generated cash from operations of $1.9 million as compared to $2.5 million in the same period last year. As mentioned earlier, we funded the cash purchase price of 2600Hz with a combination of cash from the balance sheet and an $18 million draw from a new $30 million revolving line of credit. The new credit facility has a three-year term and the borrowing under it will bear an interest rate based on SOFR plus 210 basis points or approximately 7.5% of the all-in bond rate at the time of the drawdown in October. The additional details on the credit facility are available in a Form 8-K filed on October 23, 2023, as well as in a Form 10-Q to be filed later this week.
On the headcount front, we ended the quarter with 1,192 employees and contractors, which included new team members from 2600Hz. Now, I'll provide guidance for the fourth quarter and full fiscal year 2024. Our guidance is on a non-GAAP basis and has been adjusted for expenses such as stock-based compensation, amortization, intangibles, and certain non-recurring items. Additionally, the guidance reflects a full quarter impact of 2600Hz starting in the fourth quarter, as well as interest expense for the outstanding balance under the new credit facility and the partial benefit of related obstruction activities took place earlier in the fourth quarter. We expect total revenue for the fourth quarter of fiscal 2024 to be in the range of $61.2 million to $61.8 million, which includes $3.8 million to $4.1 million of product revenue. We expect the fourth quarter net income to be in the range of $3.1 million to $3.4 million.
As mentioned earlier, Q4 net income guidance includes a full quarter impact of interest expense related to the new credit facility, which is estimated to be approximately $0.4 million. Additionally, the guidance assumes interest expense will be sequentially lower by approximately $0.2 million, given that $15 million of cash from the balance sheet was spent towards the cash purchase price of 2600Hz. Non-GAAP diluted EPS is expected to be between $0.12 and $0.13. We have assumed 26.7 million weighted average diluted shares outstanding for the fourth quarter. For the full fiscal year 2024, we expect total revenue to be in the range of $236.3 million to $236.9 million. In terms of revenue mix for the year, we expect 93.5% of total revenue to come from subscription and services revenue and the remaining 6.5% from products and other revenue. We expect non-GAAP net income for fiscal 2024 to be in the range of $14.9 million to $15.2 million.
Fiscal 2024 net income guidance also reflects an increase in interest expense related to the new credit facility of approximately $0.4 million, as well as a reduction in interest income of approximately $0.2 million for the reasons stated earlier. Based on this non-GAAP net income guidance range, we estimate our adjusted EBITDA for fiscal 2024 to be $19.4 million to $19.7 million, or approximately 8% of revenue. We expect non-GAAP diluted EPS for fiscal 2024 to be in the range of $0.57 to $0.58. We have assumed approximately 26.3 million weighted average diluted shares outstanding for fiscal 2024. In summary, we are pleased with a solid performance in the third quarter. The team has done a great job of growing business subscription revenue 14% year-over-year organically while keeping operating expenses effectively flat in today's economic environment, which resulted in year-over-year organic non-GAAP net income and adjusted growth of 24% and 17% respectively.
Thanks, Shig. Q3 was a busy quarter for us. We worked to grow our business user base and to expand internationally. We also invested significantly to increase our AirDial sales team, the number of resellers, and the pipeline of opportunities, and with those, our AirDial installed user base. On top of these, we also closed on our 2600Hz acquisition and took steps to integrate 2600Hz into Ooma, and along with that, optimize our cost structure. I feel we're well along on our plans for 2600Hz and the acquisition is going smoothly. Our plans for Q4 entail a continued focus on our multiple strategies for growth in combination with sensible expense management and continued cash generation from operations. Thank you. We will now take questions.
分析師問答
Thank you. Our first question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open.
Thanks very much. On your largest customer, which is now Regus, how many users do you think they will have by fiscal year-end now? And then, I think you said, you expect to launch new countries next year. I guess, what's the kind of incremental opportunity next year?
Hi, Mike. We currently have over 85,000 users. Our growth in the third quarter wasn't as strong as expected due to the additional effort required to establish operations in new countries. The fourth quarter will also move at a slower pace as our teams need some rest. However, we anticipate surpassing 90,000 users by the end of the fiscal year. I've mentioned before that we could potentially reach around 120,000, which is our goal for the first half of next year. Each new country presents additional challenges, and the newer countries are smaller than our initial ones. I'm not entirely sure how quickly we will achieve this, but we expect the first half of next year to remain active as we continue to add users.
Great. And then how much is the U.S. small business market, any noticeable change versus last quarter in terms of just sales cycles, collections, just general activity in sort of small business UCaaS landing?
Actually, no. Sales cycles are similar, no collections issues other than the normal ones we have. We are a little cautious for Q4 because, as we remember last year with the holidays, small businesses were busy finishing up their years. And then, obviously, we kicked off in January with a good market opportunity. But, we think the market was stronger during the COVID time when everyone was figuring out new solutions. But it is still robust. Most importantly, there is a big market that's yet to be brought up to a modern communication solution like Ooma provides, so we see lots of opportunity to go after.
Great. And just last one on product gross margin. Once some of the anomalies come out of the mix here, what should that product gross margin normalize to?
Yes. So, it is probably we are talking about Q2 next year, once we get through the consumption of the higher-cost components, Mike. But I think the normalized range, I would say, 50 to 55 percent.
Our next question comes from the line of Erik Suppiger with JMP Securities. Your line is open.
First off, just on the outlook for Q4, it does seem as though you're looking for relatively flat sequential growth on the subscription revenue on an organic basis. Is there any reason you're more conservative there?
So, on an overall total revenue basis, one of the reasons is we had about $400,000 of non-recurring product revenue in Q3 that we're not going to have in Q4. So, that's one of the total revenue themes being flat quarter. And then, there's one adjustment on the business subscription side that is really just one time in nature. And fundamentally, there’s nothing different about the trend itself. So, if you take out these two items, fundamentally, we see still the subscription revenue growing at a more normalized level, which I would say $700,000 a quarter of a quarter. So, it's a little bit hard to see, obviously without some of these pointers, but that's what we see.
And then you said, Regus could reach I think you said, 120,000 end users. How many countries would you anticipate that that will be?
70 or so, over 50 for sure. We're already able to serve more countries than we're now in with them as we wait for conversions and rollout to happen. But I believe we'll be in the vast majority of the countries that are now in, they're in a total of about a hundred countries. But I need to be a little conservative because I think we'll see how it runs out in the tail. Some of the countries are quite small.
And then how do you anticipate generating follow-on business with those countries? Can you talk a little bit about the timing around that as follow-on business with additional customers?
Sure. The next six to nine months is just a rollout phase of, as we've discussed here, they're a growing organization, so that's potential growth for us. We’re serving their kinds of users of theirs that we're serving are the ones operating in their buildings. They have other users that do other things with them that are potential for us down the road as are more premium solutions that we could roll out with them as well. I don't want to get too much into where we see it evolving next, but we think we'll have more opportunities for growth after we get this rollout under our belt.
Our next question comes from the line of Josh Nichols with B. Riley. Your line is open.
I was wondering if you could elaborate a little bit. I think you mentioned that in the quarter you landed two AirDial customers that you think ultimately are probably going to become the largest customers. I know AirDial has taken a little bit longer to ramp than originally anticipated, but could you provide a little bit more clarity on the type of market opportunity that those two customers represent? And do you have any visibility into what type of install units these two customers alone could represent over the next 12 to 18 months?
Sure. Hi Josh. To clarify, we mentioned those could be our two largest customers today. We do have other customers we are pursuing in our sales funnel that are even larger, each potential customer being thousands of users. Throughout this year, particularly in the first three quarters, the number of opportunities in our sales funnel, especially the number of potential users in our late-stage sales process, has increased each quarter, helping us better understand our future prospects. We made significant progress in Q3 by filling several sales positions for AirDial, enabling us to pursue the market more aggressively. We're targeting 10 different verticals with AirDial. The opportunities we have, including what these couple of customers could represent, continue to look very promising. However, as you mentioned, we would like to move faster, and we are investing to achieve that.
Thanks and then just one or two small things. Shig, did you mention, I think you said product revenue would be between $3.8 million and $4.1 million for the fourth quarter?
That's correct.
So it's kind of in line. And then last question, I know that there's like a big delta between the GAAP and the non-GAAP guidance for Q4. I know that that's not super surprising given the acquisition. I was just kind of curious what you were expecting for one-time costs, just trying to think about how to manage or model the cash flow for Q4?
Yes, so in the fourth quarter, we are going to have a few one-time costs. One is restructuring costs associated with activities we undertook, which has cost associated with it. We're estimating about $0.5 million that we're incurring in Q4. We also have some additional acquisition-related costs but we can get more detail on that in the press release.
Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Your line is now open.
Congrats on the success with AirDial. My one question is, last quarter you talked about challenges in the pace of installation, some of it were people, some of it were the various places where installs might happen. What progress has the Company made especially within its control, the pieces under its control, to help improve installation rates? Thank you.
Yes. Hi, Brian. I feel we have got that well in hand actually. We have a customer right now, who wanted to roll out to quite a significant number of locations, and do it all in a week. And we did it. When a customer is ready to move and if they know what their needs are and where they need it, and have access planned out, we can move quickly with them. Not all our customers are like that. Some customers can take several months just to set up a proof-of-concept and test something for a couple of months more. But sometimes you get customers who have a deadline and want to move. I feel like the pace of rollout is being driven more from what customers can accomplish than our team. We are ready to go.
I guess my second question for Shig would be when the installations start ramping and become a more meaningful piece of revenue, just remind us the puts and takes to product revenue and margin versus subscription and services?
Yes. As the installation lands, Brian, we are reporting cost and revenue related to installation activity itself in a product along with a product itself. We are going to start to see that product revenue increase as we ramp on the installation. My take on that is, as we have more AirDial-related product installation revenue, product margin should improve as well over time. Obviously, that would precede the ramp on the subscription revenue related to AirDial because installation needs to happen first. We are still seeing a good trend on AirDial ARPU on the service side, and we think it is going to be accretive to our subscription margin today as we ramp on the subscription side as well.
Our next question comes from the line of Matthew Harrigan with Benchmark. Your line is now open.
Firstly, since you are not including 2600Hz in your KPIs, and it is pretty evident we are going to be modeling that in the longer-term. You talked about some of the growth opportunities there with some of the customized apps and certainly even better monetization of Kazoo. What's your ambition in terms of the long term growth rate there, which would presumably exceed that for your core business? And then secondly, on your existing subscription business, you said that 28% are taking Pro or Pro Plus right now. I mean, you've got a good product incrementally at pretty low incremental cost. Why is it? And I know I've asked you this before, but do you consider devoting more to marketing to upgrade the installed base?
We do some outreach to our existing customer base around Pro and Pro Plus. You have to keep in mind that when they came on board, they self-selected at the time with our solution so that they're pretty happy with what they've got many of those users. In some cases, it's hard to reach out to them too because marketing emails don't always get through. But we do see customers as they expand starting to tap into some of our new capabilities, and as I said, new customers coming on board are taking a premium tier. It might be part of it, a little bit about needing to explain it to customers. It’s a little bit hard to have those conversations at that level with our installed base. But that's something we work on, and we can devote more resources to you going forward.
Would there be any way to do a sort of a push free trial for like a month or three months to just show them the capabilities? I assume the expenses wouldn't be that high to do it.
No, we do different kinds of things sometimes more or less of that nature. It's a good question and what we tend to do today is just send emails with a little bit of information on some of the features that people could get. But free trials aren't a bad way to go either. We will keep that in mind.
I think, Matt, your first question was about 2600Hz, what sort of growth rate could you assume in relation to the core business?
We're a little reluctant to try to answer that question with too much detail because it’s only been six or seven weeks that we've been developing this opportunity and owning it. But we do see real meaningful opportunities. There are users out there of the Kazoo platform from an open-source perspective that could be converted over into paying users by offering them more than what they have today. There are significant opportunities for new customers to be brought onto the platform, some of whom would be moving off another platform that's out there and others that just want to move to something more modern. I think we will be close to getting our first customer to move off another company's platform onto Kazoo, but we'll have to wait and see if we close that in Q4. We have a specific effort in place today to bring Ooma's cost structure and scale in telecom services as a CPaaS offering to the install base and then move from there. Predicting what that will be for next fiscal year is hard for us, and we think that we'll learn a lot in the next three months in our sales efforts, and then be able to give better guidance at the end of the next quarter.
Our next question comes from the line of Arjun Bhatia with William Blair. Your line is open.
If I could just go back to the user growth, I know it sounded like it was your largest customer Regus that was driving some of the headwinds there, but if we looked to other customers, are you seeing similar kind of muted growth there in Q3 and Q4? Or is it largely related to Regus?
Yes. Hi. We're thinking for both Q3 and Q4, particularly Q4 now. We're going to see, as you said, muted growth with our large customer. But beyond that, we want to be cautious because Q4 is an interesting quarter with the holidays involved and small businesses taking time off; we're being very busy. It's not always the best time for customer acquisition. We're controlling our sales and marketing spending. We're happy with our customer acquisition costs, and we're improving the EBITDA commensurate. Our EBITDA is growing faster than the growth of our other metrics. I think we have a good plan for Q4. But yes, we're being a little guarded just to wait and see how it turns out. I can give one more data point. I know you didn't ask about residential, but we're pleased with our residential business thus far into the quarter. We're through Black Friday and Cyber Monday, and that Thanksgiving period when we wanted to drive some sales, and we were happy with what we achieved this year compared to a year ago. So that's one piece of positive news that we already have.
Okay. Perfect. That's helpful. And then maybe going back to Regus, I know you were talking about expanding into other countries and the opportunity that could pose longer-term. How should we think about what that process is like to go into other countries? How long does it typically take to open up a new geography? How many resources are required? What are the challenges? Maybe just help us understand that process a little bit better.
Sure. It starts with putting our capabilities into the region because we are dealing with communications services; you have to be mindful of Internet distances and delays that can affect the quality. We have to have fully standalone instances of what we do in each region, where we want to serve the countries. We are in five regions today and we can serve all the countries now pretty much in those regions, although we aren't yet. We have two more regions to stand up between now and the middle of next year. Once we have those seven regions in place, we will have good coverage. Then it comes down to what you need to do to be in that particular country. There may be certain laws and regulations you have to conform to, certainly language and other adaptations to the platform, maybe calling patterns that you have to decide how you are going to deliver services from a carrier partner status. We tend to roll out with our large customer country-by-country or a couple of countries in a region at a time and then move on to the next ones.
We went into Hong Kong in Q3, we went into South Africa in Q3, and we will be rolling out from there. It has given us an incredible footprint on a much bigger stage than we have operated on in North America, and I think that's a really valuable asset for Ooma as we look forward, not only for our UCaaS solutions but also for AirDial. We are going through the thinking right now on what our priorities will be for next year, to start to capitalize on this asset, beyond North America. And AirDial will be a strong contender for that because we think we have such a unique solution there and kind of a unique market opportunity at this time.
Is the subscription and services gross margin following this international build-out? Meaning, once you have the additional regions stood up by the middle of next year, should that be the trough in subscription gross margins? Or are there other factors that maybe I'm not considering there?
Certainly, we talked about this a little bit. But we are making some investments related to the expansion that Eric and I talked about. It is pulling down revenue a little bit upfront and gross margin on the subscription side. I think going into the second half of next year, we should start to see more scale efficiency there. We will expect the largest customer as well. Remember that 2600Hz's gross margin or recurring revenue isn't quite at the level that corporate Ooma margin is either. As we walk through the further expansion of our largest customer along with the synergies related to 2600Hz, I think second half of next year is a good point to start seeing some improvements in the subscription margin.
Thank you. I'm sure no further questions in the queue. I would now like to turn the call back over to Eric for closing remarks.
Thank you everyone. We've gone the full hour, so I won't say more, but I appreciate your attendance today. Thank you very much. Bye-Bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.