Q4 2022 Ooma Inc Earnings Call
Good afternoon, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the fourth quarter and fiscal 2022 financial results conference call all.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press. The star one. Thank you. Mr. Robison you may begin your conference.
Thanks, Devin and good day, everyone and welcome to the fourth quarter and fiscal year two.
2022 earnings call at Sonoma, Inc. My name is Matt Robison Hummus director of IR and corporate development on the call with me today are CEO , Eric Stang, and CFO Shake Hamamatsu.
After the market closed today.
Issued its fourth quarter and fiscal year 2022 earnings press release. This release is also available on the company's website and on the Dot Com. This call is being webcast live that 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.
This evening about eight <unk> P M eastern time.
Having 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 are more fully described in our filings with the Securities and Exchange Commission.
Forward looking statements in this presentation are based on information more 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 first quarter and full year fiscal 2023 on a non-GAAP basis.
So in addition to our press release and 8-K filing.
Review page and events and presentations page in the investors section of our website as well as the results page of the financial Info 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, one and supplemental financial disclosure two. 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 CEO , Eric Stang.
Sure.
Thank you, Matt Hi, everyone welcome to whom as Q4 fiscal year 2022 earnings call. Thank you for joining US today I'm pleased to report we exceeded expectations for Q4, and our full fiscal 2022 year and I'm excited to talk with you about our outlook and the many initiatives we have underway to drive growth in our upcoming.
Fiscal year.
We capped off our fiscal 2022 with Q4 revenues of $55 million, representing 14% growth year over year.
Total revenue for fiscal 2022 was $192 3 million up 23.3 million from fiscal 'twenty to 'twenty, one and also representing 14% growth year over year.
We accomplished this growth while increasing our our pool.
Generating EBITDA of $15 6 million and increasing our cash on hand to over $30 million.
FY 'twenty two was a strong year for us and one we're proud of.
Back in FY 'twenty two we're also proud of the investments we made in our future.
I'll go through my remarks today, I will highlight a number of growth opportunities that we put in place during FY, 'twenty, two and which hold tremendous potential for this year and beyond.
Looking first though at our progress in Q4.
We continued to execute our core strategy of growing our SMB and enterprise subscription revenues through feature enhancements and sales and marketing expansion.
For our SMB customers. We added features such as hot Desking, which facilitates shared workspaces.
Color I D, which allows individual control of color I D.
In calendar integration with Google G Suite, and Microsoft Office 365.
We also continued development of our upcoming pro plus tier, which will extend our range of features to serve even larger businesses and facilitate further ARPA growth room office.
I'm pleased to report we remain on track to launch Uber Office Pro plus in Q2 of this year.
For our enterprise customers, we launched our integration with jazz where to link <unk> features with <unk> cloud service and control of property management solutions are.
Our plan is for Uber and jazz worked together to enable advanced features for the hospitality industry.
We also continued our ongoing effort to modernize each of the ways our users interact with enterprise.
In this regard I'm pleased to report that we believe we will complete our updated enterprise in the first half of this year with the lease with the release of new mobile apps and an updated admin portal.
On the sales and marketing front, we made good progress, although we did face some headwinds driven by the intensity of omicron and typical Q4 seasonality.
One, particularly exciting new customer for whom office in Q4 is a large fast food franchise group with over 300 users.
We also added more than 150, new locations, representing nearly 500 users with franchises of a large services firm.
Bringing us in total now to over 5000 franchise users with this firm.
In hospitality, we landed six new properties in Q4 and are seeing our backlog of opportunities build since the recent launch of our jazz where integration.
We also signed with over 80, new agents in bars in Q4, and Q4 as part of our continued effort to expand sales through channel partners and resellers.
All in we made good progress expanding our business in Q4.
We also accomplished a lot in Q4 to enable our largest customer to rollout at scale to more users.
While we know this has been a long time coming we fully expect that rollout will begin in Q1 and accelerate through the balance of the year.
In addition through our efforts over the last couple of quarters, we have expanded the long longer term scope of opportunity for us with this customer or.
Our immediate goal as we stated previously is to add 25000, plus users taking us to 50000 users approximately in total and once that is achieved we anticipate further expansion will follow.
Last quarter, we made the exciting announcement that we are introducing Umar air dial.
As Youll recall Airedale provides analog to digital conversion remote management battery backup and wireless LTE over a controlled network to replace copper lines, serving critical building applications.
The market reception to <unk> has been strong and we have already signed multiple resellers.
Certainly we have beta units in use at customers in production underway of Airtel units that will be available for sale starting late Q1.
We anticipate our biggest challenge through this year will not be demand, but rather our ability to build and supply units.
At this time, we are conservatively forecasting error dial in our business outlook until we have more certainty on market development or build quantities and timing.
Nonetheless, we see significant upside potential for error dial in FY 'twenty, three and are actively working internally to execute on this opportunity.
Last quarter. We also made the exciting announcement that T mobile will offer them, a tullow to T mobile <unk> home Internet customers.
And T mobile are working together to pursue this opportunity and <unk> is the only solution being offered.
We are excited by T Mobile's significant growth plans for home Internet and by the continued market demand, we see from customers, who want to combine internet with home phone.
As of now <unk> is included as an add on option on T. Mobile's website and joint work is underway to implement other marketing initiatives.
We are experiencing sales everyday with T mobile, but it's still too early to forecast the full potential of this partnership.
As we look forward to FY 'twenty three we believe we have built a solid foundation for growth.
We see ourselves today as a leader in each of our target segments, serving SMB customers select enterprise applications and residential customers.
We have built a robust and very flexible end to end platform that is operating at large scale, serving approximately $2 5 million users today.
Online marketing and direct sales, our strategic competencies of ours, and we are investing to build our channel reseller sales.
Our scope now extends beyond North America to Europe , and soon will extend beyond that to other regions of the world.
We are increasingly charting our own direction as we broadened our solutions to include integrated services, such as Uber connect from a Wi Fi and whom are dial.
Overall, we are not only driving growth, but also generating positive cash flow from operations. Our accomplishments today create a strong foundation for future growth.
Strategically our vision remains to provide leading communications and related services that deliver advanced features superior ease of use and uncommon value to businesses worldwide.
As we seek to implement this vision, we're focused in FY 'twenty, three and five priorities for growth.
First <unk>.
Execute to grow sales to business customers and.
In particular, we intend to launch <unk> office Pro which is a higher service tier.
To expand our sales and marketing activities and to continue to build our brand recognition.
Number two develop new verticals and stronger channel sales as part of achieving this we intend to grow the number of agents and Vars, we work with and to strengthen our support for channel resellers.
Number three expand in Europe , we will achieve this in FY 'twenty three by Rolling out service to a large number of new users as part of our expansion plans with our largest customer.
Number four capitalize on air dial to replace copper lines that are sunsetting or.
Our intention is to create both the most extensive solution and the best value solution and be the leader serving this opportunity.
And finally number five leverage the transition to <unk> and <unk> Internet to drive added growth with Tullow offered by T mobile and with Houma connect we are the first steps in place to achieve this.
As you can see while we have a lot to accomplish this year. We also have more opportunity in front of us than ever before.
I will now turn the call over to Chegg.
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'll begin with a review of our fourth quarter and full year of fiscal 2022 financial results and then provide our outlook for the first quarter and the full fiscal year 2023.
We delivered another quarter with strong financial results achieving $55 million in total revenue.
Exceeding our guidance range of $49 7 million to $50 2 million.
On a year over year basis total revenue grew 14% in the fourth quarter.
Given by the strength of <unk> business subscription and services revenue, which accounted for 49% of total subscription and services revenue as we continue to make progress towards achieving more than 50% of our subscription and services revenue coming from business customers in the near future.
On a full year basis.
Revenue was $192 $3 million compared to $168 $9 million in the prior year, representing 14% growth year over year, including 23% growth in aluminum business subscription and services revenue.
non-GAAP net income for the fourth quarter was $3 $2 million, which exceeded our guidance range of $2 3 million to $2 8 million.
Net income for full year fiscal 'twenty, two was $12 6 million compared.
Compared to $11 5 million in the prior year.
Driven by the growth in subscription and services revenue and expansion of related gross margin.
Now some details on our revenues for Q4 and fiscal and fiscal 2022.
With my business subscription and services revenue grew 19% year over year in Q4, and 23% for fiscal year 2022.
Driven by user growth as well as output growth.
Residential subscription and services revenue grew 3% for both fourth quarter and full fiscal year 2022.
For the fourth quarter total subscription and services revenue was.
$45 8 million or 91% of total revenue compared to 93% in the prior year quarter.
During the fourth quarter as expected, we saw our product and other revenue increased to $4 7 million as compared to $3 1 million for the same period last year.
Driven by the sale of additional units of our fixed wireless products to the same strategic customer, which we discussed in our third quarter earnings call.
Now some details on our key customer metrics.
We ended fiscal 2022 with $1 million 100000 core users upfront 1.074 million core users at the end of the prior fiscal year.
Driven by the growth in business users.
I am excited to report that we now have 308000 business users.
This represented 28% of our total core users up from 25% at the end of the prior fiscal year.
Our blended average monthly subscription and services revenue per core user or <unk>.
Increased 8% to $13 41 up.
Up from $12 46 in the prior year quarter.
<unk> by an increase in mix of business users, including higher output office pro users.
During the fourth quarter, 44% of our new office users opted for office for service and for full fiscal year 2022, 45%.
New office users at the four cross service.
Which was up from 40% in the prior fiscal year.
Overall, 20% of our office users have now subscribe to a pro tier.
Our annual exit recurring revenue in Q4 grew to $176 9 million and was up 10% year over year.
Our net dollar subscription retention rate for the quarter was 96%, which remained stable compared to the prior year quarter.
For the entirety of fiscal 2022, our quarterly net dollar retention rate averaged 98%, which was an improvement from 96% in fiscal 2021.
Now some details on our gross margin.
Our subscription and service gross margin for the fourth quarter was 73%.
Which was an improvement from 72% in the prior year.
The improvement in subscription and service gross margin was driven by our increasing scale and the greater mix of higher <unk> business customers.
Product and other gross margin for the fourth quarter. It was negative 49% compared to negative <unk>, 58% for the same period last year.
This improvement over the prior year quarter was mostly due to the sale of fixed wireless products to the strategic customer I mentioned earlier.
On an overall basis total gross margin for Q4 was 62% as compared to 63% for the same quarter. Prior year as we had a higher mix of product revenue during the quarter.
And now some details on operating expenses.
Total operating expenses for the fourth quarter or $27 $9 million up $3 million or 12% from the same period last year.
Selling and marketing expenses for the fourth quarter were $14 5 million or 29% of total revenue up 13% year over year.
Driven by higher marketing and channel development activities, both alumina business.
Research and development expenses were $8 9 million or 18% of total revenue up 9% on a year over year basis from $8 2 million.
Driven by investments in new features for both little office and enterprise as well as new products such as agile.
G&A expenses were $4 $5 million or 9% of total revenue for the fourth quarter compared to $3 $9 million for the prior year prior year quarter.
Our non-GAAP net income of $3 $2 million dollars resulted in a diluted earnings per share of <unk> 13.
For the fourth quarter as compared to 12 <unk>.
Diluted earnings per share in the prior year quarter.
Adjusted EBITDA for the quarter was $4 million or 8% with total revenue as compared to $3 6 million for the prior year quarter.
Adjusted EBITDA for full fiscal year 'twenty, two was $15 6 million as compared to $14 million in the prior fiscal year.
The increases in non-GAAP net income and adjusted EBITDA were driven by economies of scale, especially for the growth, especially the growth in subscriptions and.
In services revenue and related gross margin.
We ended the quarter with total cash and investments of $31 3 million.
Compared to 28 $28 $3 million at the end of Q4 in the prior year.
Cash generated from operations for the fourth quarter was $1 8 million compared to $2 2 million in the same period last year.
Our full fiscal year 2020 to cash generated from operations was a record $6 $7 million as compared to $4 4 million in the prior year.
On the head count front, we ended the quarter with 979 employees and contractors.
Now I'll provide guidance for the first quarter and full fiscal year 2023.
Again, our guidance is on a non-GAAP basis and has been adjusted for expenses, such as stock based compensation and amortization of intangibles.
For the first quarter of fiscal 2023, we expect total revenue to be in the range of $49 5 million to $52 million.
The first quarter revenue guidance range guidance range assumes product and other revenue well normalized to the level. We saw in the first half of fiscal 2022, as we do not anticipate additional shipment of fixed wireless products to the same strategic customer discussed earlier.
The guidance range also reflects a normal seasonal decline of Taco tongue revenue in the first quarter as target on revenue typically peaks in the fourth quarter driven by its AD based revenue over the holiday season.
We expect the first quarter net income to be in the range of $2 2 million to $2 8 million non.
non-GAAP diluted EPS is expected to be between nine to 11.
We have assumed $25 1 million weighted average diluted shares outstanding for the first quarter.
For full fiscal 2023, we expect total revenue to be in the range of $209 5 million to $212 $5 million.
Let me give you additional context for our fiscal 2023 revenue guidance.
It is important to remember that fiscal 2022 revenue included approximately $3 million of product revenue to a strategic customer that we currently do not anticipate will recur in fiscal 2023.
Excluding the impact of this product revenue in fiscal 2020 to the mid point of our fiscal 2023% revenue guidance represents approximately 11, 5% revenue growth year over year.
Which assumes subscription and services revenue growth rate of 20% of alumina business and between 1% to 2% for residential.
The revenue guidance for fiscal year 2023 also reflects our current expectation that contribution from <unk> will be more meaningful in the second half of the fiscal year.
We expect non-GAAP net income for fiscal 2023 to be in the range of eight 5 million to $10 5 million.
After incorporating increasing cost of labor.
Cost to expand our channel strategy launched new products, such as agile and to enable significant expansion of services and international locations.
We expect non-GAAP diluted EPS for fiscal 2023 to be in the range of 33 to <unk> 41.
We have assumed approx approximately $25 7 million weighted average diluted shares outstanding for fiscal 2023.
In summary, we are very pleased we are with our solid performance in fiscal 2022, which demonstrates strength and execution, while we make progress towards our long term objectives.
I will now pass it back to Eric for some closing remarks, Eric.
Thanks, Greg.
I mentioned at the outset of my remarks that in FY 'twenty, two we made significant investments in our future.
Those investments in international expansion.
And higher level service tiers.
And the development of new verticals and channels.
In creating the most complete solution for replacing copper lines.
In partnering partnering Tullow with T mobile and more.
They all position us better than ever for FY 'twenty three while our visibility in what we will achieve in FY 'twenty three will improve through the year. We clearly have the potential to drive significant growth as always the <unk> team is 100% focused on buildings building <unk> long term success.
Thank you we will now take your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question today comes from the line of Matt Stotler with William Blair. Your line is now open.
Hey, Eric Thanks for taking the questions I guess first off.
Helpful Color you gave on the guidance and kind of the puts and takes both the large customer and some of the seasonality in Q1.
It's been kind of a tough environment towards the end of the year early this year for a lot of people.
And we saw looking at some of the Kpis net adds were a little bit down sequentially.
Retention took a little bit of a step down.
Theres, a little bit of a deceleration in business revenue growth. So can you just talk about maybe some of the factors that you saw that impacted those kpis, whether it's seasonality or what you saw the omicron in someone's face to face channels potentially and then thoughts on how those.
How do we think about those going forward.
Sure Hi, Matt.
You hit some of the issues right there in your question.
If you look at Q4.
It was December that was the tough month of the quarter for us we.
With omicron and seasonality, we had a tougher December than we'd expect but we bounce back well in January .
I would add is secondary.
Our comments this was less significant for us, but we did launch a new line of IP phones in the quarter and we had some teething pains with those phones as we first.
Users up on them and that affected us a little bit as well, but what I can say is that January was strong February is running at the kind of run rates that would lead to us back at our previous middle of last year churn levels and also.
Back at our previous of last year.
Adding adding net business users in.
How do I say five figures.
Over 10000 for the quarter, so I'm feeling pretty good about the business, where we are today, but youre right Q4, particularly in the December period was a little challenging.
Got it got it that's helpful. And then maybe one on the vertical specific opportunities you talked a little bit about the.
Specific opportunities and hotels and hospitality and you've made some announcements around that after the Jasmine partnerships.
Or do you think about the potential for additional obviously, it's still early right. So maybe some thoughts on how that plays out and then the potential for additional.
Vertical specific opportunities going forward and maybe what you're focused on there.
Yeah.
You've captured our strategy at the enterprise level pretty simply with the question.
Rather than try and be everything to everybody we're finding.
Applications in verticals, where our unique capabilities can really differentiate.
In hospitality, particularly in conjunction with <unk>, where we have a great kind of integrated solution that can bring ucas features together with more basic features for powering individual rooms analog and digital combined.
Connected up to Pms systems, so it's become a bit of a focus for us it's a way to develop our business and also frankly.
Convinced new channel partners and resellers to work with us because we've got something special to bring to them in that vein are dial also is helping us open up new channel partners New channel reseller.
Relationships, because because again, we have something that's fairly unique in the industry that.
Debt.
Causes causes this resource to want to work with us through this year, we are intending to develop additional verticals. We have some that I could talk with you about here, but.
Take time to.
Really come together.
And then R. R.
They are strongest when we can bring some real extra dimensionality around the feature set as well, but but no. That's part of our strategy for building enterprise.
<unk>.
At least target a couple more this year.
Very helpful. Thanks again.
Yes.
Your next question comes from the line of Josh Nichols with B Riley. Your line is now open.
Yes, thanks for taking my question.
I'd like to touch on T mobile seems like an interesting longer term opportunity.
Realize it's early stage, but any commentary you can make like what type of traction you're seeing and I'm curious how conservative you're being.
In your guidance for T mobile for this year on the revenue side given that you did mention it's relatively early stage could you elaborate on that a little bit. Please.
Yes happy to.
It starts with T mobile's own comments around their intentions with home Internet.
They are very committed to the space they've talked about.
Building out their user base to millions of users as we look forward. The next next few years.
Won't try to re quote what they've said, but I'm sure you can look back at that.
It's exciting.
And.
Alongside that.
That effort, they feel and I think the market has spoken that some customers want to have a what we call a double play solution have phone service and Internet together. So there is a natural fit between the two of us.
In addition.
Some customers may be switching away from cable based.
Solutions, where they may already have both services and they want to continue to get both in order to switch. So it's a great partnership to work together on this.
We do have.
Our cadence of.
Planning and marketing meetings with them as we develop the next steps that will happen to try to.
Capture this opportunity so far the only thing Thats happened is.
Theres been a section put up on their website when you buy a home Internet you can also click on that section to get phone service, we're seeing sales everyday from that but I would say.
What compared to what this could be there it's not it's not big numbers today, but as I said its early stage.
I think that.
You asked about how we forecasted in our outlook, we forecasted at fairly low because we just want to wait to see how it unfolds.
We.
If we take the forecast that they gave us for how many units we should be planning for this year. It is a much much bigger number than what we have in our forecast today. So let me just leave it at that it's we thought we'd have a little bit more visibility than I can give you right now by this time, but.
December and January were the easiest times to kind of pursue this and it's but it's developing well now.
Thanks, Ed that provide some really good clarity and then just to touch on that one one more historically 30 ish percentage of the company's revenue is now it came to sales and marketing one of the really interesting things at least my perspective with T. Mobile is the idea that.
You wouldn't have a lot of those expenses that you may have some is that is it fair to assume or is there going to be some joint marketing that you made you partner with T mobile how should we think about the flow through.
No what we're doing with T mobile were enabling their marketing and sales efforts.
We have put together a special offer for their customers.
Aside from that we're.
We're really an enabler to them doing the things they want to do and.
So far we're just on their internet website.
The joint plans discussed between both of US is to do more than that.
Got it and then last question for me then.
I'm back in the queue just two.
Elaborate a little bit.
Looking at the guidance for this year I think everything kind of makes sense on the revenue side, given what you said.
Some of the conservatism that's built in there, but I know the EPS guidance.
It is going to be down year over year, where those additional investment dollars going to be allocated to is it going to be more front half back half weighted how should we think about the operating side of the guidance.
Yes, Josh Thanks for the question and.
With respect to the areas of investments.
The biggest piece going to be in charge of marketing and.
As we said before we want to continue to invest into channel development.
To drive the user growth in the business side and I think in the hall of 'twenty, two we spent about 29%.
Eric and I said before that's a little bit lower than we probably would like to be to drive growth in <unk>.
So between that channel development and and also hiring.
<unk>.
Front, which we are well behind <unk> in FY 'twenty, two and also just in general as we come out of a pandemic here and things normalize that we see that activities and trade shows and travel will probably start to pick up towards the second half of the year.
So those are the investments in charge of market and I think.
We'll probably see that.
Selling and marketing as a percent of revenue to be more like in the range of 31, 5% to 32% by the way.
That level, it's still a low end of mid term model that we talked about in the past, but you want to invest and then.
Other area just across Opex said as I said in my remarks that this is a general increase in cost of labor, which is not unique to us.
But in an international expansion.
That with our largest customer we talked about that piece I mean, one can say that.
Some of that AD spend it on our projecting in FY 'twenty three is something that we originally intended spend in 'twenty, two but because of the timing of the <unk> debt.
The largest customer that's kind of moving into next year. So hopefully that gives you a little color there.
That's perfect. Thanks.
Okay.
Your next question comes from the line of Sharon carrier that with Northland Capital markets. Your line is now open.
Hi, this is <unk>.
On behalf of Mike Lattimore can you. Please talk about the pipeline for agile and what are the marketing strategies are currently using.
Sure Hi.
So.
The pipeline that we.
Yes.
Add up even now is more than we think we can produce this year.
It's pretty encouraging.
We don't know that we need to do that much marketing we see.
Three or four ways in which the product will go to market one is through channel resellers, who.
As I spoke earlier can bring eurodollar and to meet the needs of their of their enterprises. They go to.
We are seeing some column distributors are aggregators, who.
I want to be able to offer the solution and we are also finding some sea lacks that.
Have a real need to be able to replace copper lines with this type of solution. So.
Those activities.
I mentioned, we've already signed multiple.
<unk>.
Ups, we had already signed up multiple parties to work with us on going to market for <unk>.
I think theres a lot of interest in it I think everyone's waiting for us to two.
Get going with it and get products flowing in quantity.
Okay. Thank you.
In regard with your largest customer do you think that they will be moving materially forward this year internationally.
Yes.
Okay. Okay.
Sure.
Your next question comes from the line of Matthew Harrigan with benchmark. Your line is now open.
Thank you our actually reverting back to the target model you alluded to.
It feels like you've got a number of growth initiatives and I know that the.
Priority I mean, if you can get sales growth youre going to offer that.
Reasonable ROI versus just trying to top out the margins.
Immediately, but do you see the timing on the transition from the midterm to long term margins getting pushed out a little bit by the level of activity that you have.
On is there any blocks at all in the long term model I know that some of this is probably the advise but by shakes.
But I just want to know if there's any.
And timing of the new initiatives or even though some of the longer term objectives of maybe even been tweaked a little bit.
Color wise thanks.
Yeah. So Matt Thanks for the question there I think when I look at gross margin model, we talked about midterm or long term model in the past and I am looking at this now mid term we aim to be in the 62 to 65 total margin I'm talking about.
Subscription 70 to 75, we do feel good about the subscription model.
<unk> I think we're on the right met all of our 73% and as we scale further with user adds and our business side.
And you know when add around stats that business users. So.
We think we have a path to continue to improve incrementally from where we are so.
We feel good about the subscription that's number one data point I think the total gross margin I know, we reported 62% total this past quarter, but thats more a function of.
Having a heavier product mix to that strategic customer.
Last two quarters, so do keep in mind that product mix that.
At the beginning of this past year did not expand happened in the last half of this past year that threw us off a little bit that so good.
Going into next year.
As I said.
Q1, we.
We expect the product the revenue mix excuse me between subscriber churn.
<unk> go back to where it was in first half of last fiscal year, which means that.
More like a 93% subscribed share and 7%.
Product.
I see that in our first half and so that should.
Improve our overall gross margin because it's going to be tilted more towards a subscription margin.
One data point and I think if we go into second half of next year.
I am seeing that.
Right now that the product mix I just described at revenue mix excuse me.
Is probably shift towards 92 subscription, 8% product only because we're anticipating a more meaningful ramp on agile, which is a product component to pick up and so that change in mix of the revenue a little bit.
But overall.
To answer your question, we still feel good about our midterm and long term model and I think it will.
<unk> pretty well towards those.
And then on Air Giles.
The circumstances pumps.
Functionally only alternative in the market might be on this point of the Cys as you just said and.
I'm curious how long do you think youre going to have that circumstance, where you are.
Real innovator in fact, the only alternative is that something that's kind of in your business plan or would you anticipate getting getting more competition.
Some competition at some point.
The market is big enough that there is already competition today and there will be more in the future, but when we look at that competition.
It isn't approaching the solution that we have we are a unique company in that we can design hardware to work in conjunction with our cloud to provide an integrated service and through our partnership with T. Mobile on this as well that includes the wireless internet debt.
That is part of the controlled network that these devices require so.
I think that we have.
There are competitors out there, but they tend to be small and they tend to be just product makers and we have put together.
Or a complete solution. So I feel like we're in a very good spot in that.
That will we'll be able to maintain the FERC for a while.
These things.
We worked on this solution for about a year to get to where we are today and now we're scaling up production and scaling our production in this product environment is difficult because we don't have an existing supply chain for the product we've got to create it and trying to get components. These days can be difficult.
So I think what we've been doing over the last year puts US ahead of anyone else who may be looking at this today as well.
Look like it's going to get any easier immediately thanks, Eric Thanks Jay.
Sure. Thank you.
Your next question comes from the line of Andrew King with Colliers Securities. Your line is now open.
Hey, guys. Thanks for taking my question.
Eric.
Really good to see this partnership with <unk>, we're going forward.
Yes.
What hurdles yet to go and work to get the sales force ramp.
I'll have more specialized solution in hospitality services area and then off of that also how many of these <unk>.
This quarter, we're hotspot hospitality focused.
So generally when we work with agents and Vars Theyre not focused on just an industry, but what they do fine.
What we do find is that when they get success and a vertical they will follow it up with focus on it because its.
Something they know they can build.
Of the 80, plus vars and resellers, we added about.
About half would be the type that I would say would be more focused on selling home office and about half were of the type that I would say we'd be more focused on larger company enterprise type sale and all of those.
Resellers that we added from an enterprise perspective.
I don't.
I can't say, all but I think.
Significant majority would be.
Easily capable of selling into the hospitality space there are some.
Resellers out there that are focused on that space and one in particular, we have just recently started to work with and we're excited about that so.
So we're looking at it that way as well but.
No. These.
These are these are.
It's traditional <unk> space has traditionally developed which is you've got in this case hotels, motels et cetera, where they've got all the integrated solutions.
That are expensive to run and they need to modernize and our kind of stock and you can come in with a solution that really.
Take some.
Two.
To a modern modern result, and Thats the way you sell it.
The more the more success, we have in the vertical though the more we get known for it and that helps us to as we grow but.
I Hope I've answered your question there with the different comments I just made.
Yeah, that's great and then also just looking at the hospitality vertical can you give us any color there.
Material differences in the sales process in the hospitality vertical versus the other vertical.
If there is any seasonality we should expect.
And that business.
Well.
Like any vertical it helps if you can talk to their needs and and walk in with solutions to the problems you know theyre going to have in this case one of the key issues is problems is how to.
Integrate analog and digital capabilities together in one solution.
A lot of these hospitality industry it doesn't want to change the phones and rooms, but they do obviously need modern capabilities at the front desk and otherwise.
So I think through focus you can.
Establish that also keep in mind, what's really underlying what we're doing in this vertical underlying what we do in other verticals as our enterprise solution is very flexible. It's API based it's a very modern design and we can use it both the customized for very large customers, but also to do something like what we're talking about here with you about the hub.
<unk> space, where we can put together something that is kind of unique to their needs and.
<unk>.
With that I think we're well placed to serve the vertical in terms of seasonality I don't see any particular seasonality in this regard I think that.
It's just something we're going to have to build over time, and what we will pace our growth a little bit is how fast we can bring on the agents and the resellers and get them comfortable with the solution and taking it to market.
Great I appreciate you taking my questions.
Sure. Thank you.
Your next question comes from the line of Brian <unk> with Alliance Global Partners. Your line is now open.
Great. Thank you.
In terms of T mobile and new Mike Hello Air program like you said I looked at and T Mobiles website.
And the ISP website and to be honest, it's exceptionally hard to find you get a squirrel down you almost have to be looking for it. So can you talk about when the other ways first at T. Mobile is playing to make home Internet users aware of the program how much inventory do you have to deliver that and what are the lead times of our suppliers.
Yes. So on the first question I really shouldnt comment because it's.
I don't really want to talk about our partner and what they're going to do I can tell you that they have plans to do significantly more than what youll see on their website today, but I really can't get into.
What theyre planning until they do it.
Yes, we.
We have.
Are we on the product availability side.
Since last fall, we've been planning for the kinds of quantities that they've told us they'd like to get from us for this year.
And I think in terms of the components needed that are unavailable. If you don't plan ahead.
Put those plans in place some components that we need to scale up to big quantities will probably cost us more in short term to get them, but we would work through that so.
I feel we are placed well enough today that if as they do more things and more customers come to us through that relationship will be able to satisfy it.
Okay, and then in terms of once that program ramps.
We are going to be a hardware piece yet.
Pressured the margin one and there is also the recurring piece and then same question kind of on air Guy and when that starts to ramp whats the impact it's going to have on the overall gross margin.
Sure.
Yes, Brian Thanks for the question on the first piece on the Tallo, Yes. So there is a product piece and subscription piece and by the way just a reminder.
On a subscription piece.
They are our premium users on hotel side.
But the way I would say it is that we're not expecting right now that wanted Williams debt.
Catoe tullow cost of sales and product side would have.
Materially different impact on the profile the gross margin profile product side right now so.
If you look at like I said on the earlier remarks.
Q2 last year.
As we go into this Q1 and forward in FY 'twenty three.
I look at a normalized level of product revenue and our gross margin profile for product revenue. It's about minus 50 to minus 55%. So I think that's a good range, even with the ramp of tallow through Tmall. So thats one reference point for you.
Agile.
It does have both the subscription component and also the product component.
I do think that on a product side.
Revenue, we do think that has a positive impact on our product margin when we do ramp.
So I'll just leave it at that without quantifying too much there since it's early.
And also Asia.
Sure.
Positive impact on our subscription margin as well and Thats a business subscription by the way.
Hopefully that gives you some color there.
Great. Thanks, so much.
Thank you.
Your next question comes from the line of Joe Goodwin with JMP Securities. Your line is now open.
Great. Thank you for taking my questions.
Eric on the five priorities for growth for FY 'twenty, three because you stack rank those in order of importance for you this year.
Sure Hi, Joe.
So I started off with number one is just executing to grow sales to business customers I think that.
That is number one for us to continue to bring our pro plus and expand our sales and marketing activities. We did not grow our sales and marketing team. This last year likely wished hiring and other things were challenges.
But we.
Believe we will achieve it this coming year.
After that it's hard to rank the next four.
We're very focused on developing new verticals and stronger channel sales, but that is a longer term multi year strategy of ours.
Which will some things will happen this year something will happen thereafter.
I feel pretty comfortable as I've stated in these in my remarks, very comfortable actually that we are going to expand our user significantly with our largest customer and we're ready to go.
And they are.
Moving forward now starting this quarter so.
Expanding in Europe will happen I believe we are not intending to expand beyond serving.
Users at this large customer we want to get that to happen and have that under our belt before we try to look at doing more with EMA in Europe .
<unk> office in Europe before.
So our focus this year is really expanding with our largest customer <unk> and the transition.
<unk> transitioned to <unk> and what we're doing with T mobile those have tremendous upside.
In the first case will depend on how many units we can build in the second it will depend on.
What sales and marketing activities T mobile chooses to do and how they do them, but in the market response, but I think each of US is materials. So I don't know if I've answered your question very well, but after number one.
We thank all of the next four important then and.
We are we invested in all four of these last year. So as I look at this year, while it's a lot to say we're going to go do I actually think most of the work on these next four has done.
So at least.
Europe are dial in Tullow with T mobile so.
I feel like we can.
Accomplish all of them as well this year.
Got it okay. Thank you for that and then just another question for me.
Can you talk about that.
Current strategy that you're employing to upsell.
Your existing home office customers to whom office pro.
Are you reaching out are you, providing any sort of offers or anything like that or just kind of how do you actually approached the upselling to your existing base.
So the up selling to our existing base is relatively simple as we bring out a new feature in home office Pro we just let our base no.
It's a way to reach out them out to them and show them. What we can do and if they are interested they will take it from there and so we do have an installed based marketing program in the company and that's essentially how we do it we're not we're not we're not getting too aggressive with that we don't give free trials we don't.
Offered.
Special promotions or anything like that but we do make a point to tell people about the exciting features as they as they say.
Come along so.
Pro plus launches this year that will give us a whole new basis to go out to our customer base with and tell them about now what's also available there.
Great. Thank you.
Thank you.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile any final questions.
Okay.
Yeah.
I think we're pausing.
Okay.
Everyone. Thank you for joining us today I'll close with one final comment it's just a fun thing I don't want to make too much out of this but in January we were named Umar was named one of the best Tech brands for 2022, we were in the top 10 list along with names like Tesla and Apple and Sony It was it was a lot of fun.
This is something that PC magazine put out I think based on some kind of reader survey, though don't quote me on that but.
It's just fun to see that kind of recognition for Umar, we're very focused on the customer experience and are our users.
Having a good experience and telling their friends is helping to drive our growth in <unk>.
It was it was rewarding to us as a team to see that.
Thank you everyone I appreciate your time today and look forward to next time, we can talk bye bye.
This concludes today's conference call. Thank you for attending you may now disconnect.
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Yes.