Vonage Holdings Corp.
Q1 2019 Earnings Call Transcript

Published: 8 May 2019

[Operator:]

Good morning and welcome to the Vonage Holdings Corporation First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. . After today's presentation, there will be an opportunity to ask questions. . Please note this event is being recorded. I would now like to turn the conference over to Hunter Blankenbaker, Vice President of Investor Relations. Please go ahead.

[Hunter Blankenbaker:]

Hey, great. Thank you, Carrie, and good morning and welcome to our first quarter 2019 earnings conference call. Speaking on our call this morning is Alan Masarek, Chief Executive Officer; and Dave Pearson, CFO. Also joining us is Omar Javaid, President of the API Platform. Alan will discuss our strategy and first results and Dave will provide a more detailed view on our first quarter results and second quarter guidance. Slides that accompany today's discussion are available on the IR website. At the conclusion of our prepared remarks, we'll be happy to take your questions.

[Alan Masarek:]

Thanks, Hunter. Good morning everyone. I am please report that first quarter results reflect a really strong start for 2019 and that our OneVonage programmable platform strategy is resonating well with customers. During the first quarter total business revenues were $180 million and service revenue grew 23% on an adjusted constant currency basis. Consolidated revenue was $280 million, a 10% GAAP increase and adjusted OIBDA was $32 million. From a customer perspective, during the quarter we accelerated revenue growth of application customers in mid-market and enterprise cohorts. We won the contact center contract with total contract value greater than $10 million, and we added the most API platform customers ever. This success is the result of Vonage’s coverage of the entire cloud communication TAM through our wholly-owned OneVonage Platform, the integration of the customer experience across our products and our omnichannel approach. We delivered solutions to our customers in two main product categories that leverage the same network infrastructure and underlying communication APIs. First, our application group which I'm currently leading consists of unified communication and contact center solutions. We have a combined go-to-market effort for applications because they are increasingly purchased together particularly by midmarket and enterprise customers. And second, our API platform, which consists of a broad set of programmable communication APIs including voice, video, SMS, IP messaging and several workflow APIs.

[David Pearson:]

Thanks, Alan and good morning everyone. As Alan noted we had a solid start to 2019 delivering guidance, moving upmarket and innovating products. With that, let’s begin with the review of the first quarter on slide 10. Vonage business total revenue was $180 million representing 64% of total revenues and a 31% GAAP increase. As we stated last quarter, business service revenue growth is our focus as we deemphasize access circuits, saw fewer desk phones, the pass-through USF revenues to the federal government. Business service revenue on an adjusted basis increased 20% in the first quarter. Constant currency that service growth number 23%, these organic growth numbers adjust revenue in two ways. Pro forma for the acquisitions of TokBox and NewVoiceMedia as if we owned both assets for the full year 2018 and add back the write-down of approximately $2.5 million of NewVoiceMedia’s deferred revenue balance under GAAP purchase accounting rules.

[Hunter Blankenbaker:]

Great. Thank you, Dave. Carrie, can you please log on the first question.

[Operator:]

Sure. We will not begin the question and answer session. Our first question will come from Rich Valera of Needham & Company.

[Rich Valera:]

Thank you. Good morning. Dave, you previously talked about your MME portion of your applications business as being about a third I guess of the total with two-thirds being kind of in the SMB side, and now you're talking about more of a 50/50 split. Just wanted to first make sure that we're talking about sort of the same thing apples-to-apples? And try to understand why that shift happened so quickly? I guess clearly NVM; our NewVoiceMedia would help, but if you can just talk about what's going on there with that mix shift?

[Alan Masarek:]

Yes, absolutely. We use to talk about this on the seats basis and think about 50 seats and below and 50 seats and up, and I think your quoting the data that came from that. That would be addition of NewVoiceMedia and the growth that’s coming from that. We are much more geared toward the MME market, but also it’s required for us to think about things in MRR terms at this point because it’s no longer seat based, because the ARPU difference between UCC, UCC and the CCC is very significant. CCC can be $100 to $125, UCC could be anywhere from $20 to $40 on a basis. So, the change is from the acquisition and from the fact that it really needs to be MRR based. At this point we think it's important that we did crossover to the point where MME is now 52% of the base and obviously that aspect of the base is going a lot faster.

[Rich Valera:]

Got it. And then one more follow-up just on the growth rate of the applications business, that 13%. If you factor in again the faster growing new voice that would suggest that UCaaS growing something less than that, so understanding you’re getting some decent traction on the MME bookings. Can you kind of talk about what's going on in the UCaaS business? Are you seeing unusual pressure on the SMB side of that or what's kind of keeping that from accelerating as you see some improvement on the MME side?

[David Pearson:]

Absolutely, so the vast majority of the revenue and applications still is UCaaS. Although is true that CCaaS, the old NewVoiceMedia if it’s were its own company is when we bought it was growing in 20s, but the complexion of that business is primarily UCaaS. It really is about the growth of applications in general and UCaaS specifically if we still have that really is about the cohorts. The lower cohort MRR, that market is simply growing more slowly right now. We believe that our shares there were still over indexing in that market and actually bookings were up for us 4Q to 1Q in that market, but fundamentally it is growing slower than where is the upmarket I think you’ve seen from us and our competitors is growing well and that's we’re in the 20s. I think Alan noted that the 10,000 and up MRR is growing even faster than the 1000.

[Rich Valera:]

Okay. Thank you for that.

[Operator:]

The next question will come from Dmitry Netis of Stephens.

[Dmitry Netis:]

Yes. Thank you, guys. I want to ask a similar to Rich is just to level the playing field here. If I may ask you maybe to look at it this way since now this is how you’re providing data going forward. On the $1000 MRR revenue business – in the business segment, 10,000 plus, and I assume that is under a 1000 MRR business there as well. So, can you give us a mix of those three categories so that we understand what it looks like; and if you put -- if you want to kind of talk about the growth potential of growth rates in those three categories that would be also helpful?

[David Pearson:]

Yes, absolutely. And we are committed to the reporting structure that we're rolling out today to talking about the below thousand and above thousand and we'll give anecdotal data on top of that when it warrants each quarter. So, the 1K and above cohort grew at 20% which is sequentially accelerating growth rate. And that includes all of MME. So below 1K MMR grew at 6% and that represented 48% of the applications business, but the above 1K representing about 52% of the applications business. Significant material portion of 1K is 10K, although that growth number of 10K tends to be fairly chunky. It does move around quarter-to-quarter because that is big deal driven.

[Dmitry Netis:]

And what's the mix of 10K, is there is any sense of what that?

[David Pearson:]

Yes. It's about a quarter of the total.

[Dmitry Netis:]

Got you. Thank you. Super helpful, Dave. And then one for Alan, maybe if I may. Alan, with Dennis and Kenny out now how you making sure there's no disruption in the sales function? Your bookings number looks solid heading into this year and Q2, but anything you doing you can walk us through that to ensure there's no disruption there?

[Alan Masarek:]

Yes. There is -- so good morning, Dmitry. There's no disruption. The key thing to remember is that the route to market leaders across inside feel channel, the sales force channel international with EMEA and APAC. The customer success organization, the sales engineering organization, all that leadership is been in place for some time it is unchanged. So, the exit of Kenny was all the way to Dennis. Again, Dennis a very fine executive and we wish him well in his new role. But I'm driving this as I've done in the past. And again because we have had consistency among the route to market leaders we're seeing no interruption. And so we're obviously searching for replacement. That search is underway. And think about, this is a -- in the application side is a $0.5 billion business with a global remit with over a 1000 employees and we're going to get the best person on the planet from an enterprise SaaS perspective who can help us drive that.

[Dmitry Netis:]

Very helpful. Thank you very much.

[Operator:]

The next question will come from Nandan Amladi of Guggenheim.

[Nandan Amladi:]

Hi, good morning. So, question on channel development. As your product mix has transformed quite a bit over the last year or so, what changes have you made on how you developed channel, the master agents and the sub tending value added resellers and so on both in terms of product differentiation and also perhaps if you could talk about the economics?

[Alan Masarek:]

Nandan, this is Alan. So, over the course of the last several quarters we have made a very concerted effort to improve our performance in what we all refer to is the master agent channel. That has included new leadership under Mario Draghi who is a very well-known leader in the Telco Channel, a new partner portal to makes us easier to buy, so that partners can track the status of installations, their commissions et cetera, et cetera. The creation of a partner program which again provides more benefits as you sort of go from bronze, silver, gold, platinum based upon the amount of business that you bring us. And we've also added staffing underneath in terms of just the regional channel managers. From a product point of view we've begun to develop product that we think, what we're seeing from market reaction sort of hits the mid-market which is the suite spot of the channel very effectively and that's why I mentioned on CX Cloud Express which is this integration of NewVoiceMedia fully integrated into Vonage Business Cloud. So we believe we have a better solution that's more suited for the Midmarket where many other contact center solutions are really much more heavier weight that require a lot of professional services and such, and therefore we don't think as suitable for the midmarket. So we believe we've addressed products that fit them really well. From an economics point of view in terms of what we pay the channel it's really relatively consistent across all the vendors. It's not dramatically different from one to the other. There are some vendors who will occasionally pop-up with SPEP programs that are very, very high. We have not generally played in that type of market. We've been trying to do this with a very simple philosophy which is if we can collectively ourselves and channel serves the downstream customers so that they stay on the books for forever, that's the key for us having successful relationship with the channel. Last thing is we've also teamed our direct sales organization with our channel organization, so there's never any contention in a market between whether something was registered as a channel deal or a field deal. All of those changes had just generated quarter-after-quarter substantial improvement both in terms of bookings growth, the size of deals that we see and currently what's in the current pipeline.

[Nandan Amladi:]

Thank you. And a question for, Dave on capitalized software; how's that approach going to change now with your product portfolio having changed so much from last year or so?

[David Pearson:]

Yes, absolutely. So, the rest of the year is going to look a lot like the first quarter. The first quarter capitalized software was $4 million and that's because we're doing significant work on the OneVonage platform and that's work on in new functionality. That norm that we just established in the first quarter is what we'll see unfold for the rest of the year.

[Nandan Amladi:]

Thank you.

[Operator:]

The next question will come from Catharine Trebnick of Dougherty.

[Catharine Trebnick:]

Thanks for taking my question. Nice print gentlemen.

[Alan Masarek:]

Thank you.

[Catharine Trebnick:]

You had mentioned that you had 200 partners when you went through the API Nexmo section. Are those 200 partners just strictly for the Nexmo? Or how does that divvy up between your new application business?

[Alan Masarek:]

Hi, Catharine, it's Alan. Those 220 partners are all Nexmo. I should've clarified before my question -- my answer to none. Our indirect approach, our indirect channel approach; there really are three efforts. So you have 220 channel partners which were all the Nexmo side. These are SIs and ISPs who take our API tools and then embed them into the applications for their client enterprise customers. That's a global footprint of those partners and that's growing very quickly. I mentioned already in the Master Telco channel what I failed to mention before is the third effort is what we do principally around Sales force. So with NewVoiceMedia we have a very very substantial relationship with Sales force where from both go-to-market and a product perspective and so we've got a team of 12 people led by a Senior Executive and reports directly to me. Robert Gavin who is driving that Sales force channel. It’s a very good result. So that's the approach that we make across indirect distribution.

[Catharine Trebnick:]

So, how many master agents you have now you started revamping the program right now starting February, March of 2018?

[Alan Masarek:]

We have all of them. So the key is not whether you – I’m serious Catharine, we have all of them. It's not a function as to whether you have a master or not. All the vendors do. There is no exclusive relationship with the master nor the subs who then deliver their business under a master’s contract. The function is how -- the challenge is simply how you build your visibility and your performance and your recognition is being a solid vendor on behalf of the channel partner. And that's where the efforts gone. It is not about establishing new contracts whether it's intellisense Polaris , Sandler , ARG. Avon, TBI on and on and on and on. We have contracts with every relevant master.

[Catharine Trebnick:]

So then within that that all of these have and I understand you went through your whole with the last question, all that you think you done to change the channel to make it perform better. Of all these any particular partners you feel are accelerating more than others? You feel you have tighter relations with some than others. I'm curious on that answer.

[Alan Masarek:]

Simple answer is of course we do. We are targeting masters where we have rather than taking a shotgun approach. It's always smarter to take a more rifle approach targeting the masters who have and can deliver us greater volume and so that's precisely what we do with specific leadership representing those significant partners out there. And so as we track our growth in the targeted masters it is we're seeing as reflected in the bookings numbers that I’ve reported we're seeing very substantial improvement within those targeted masters.

[Operator:]

The next question will come from Will Power of Baird.

[Will Power:]

Okay, great. Thanks. Yes, look, continued strong API growth generally and I think you all called out a record number of new customers. I wonder if you could provide any further color as to the key drivers there. Is there particular geographies that are doing better than others, particularly products that are standing out, maybe any further color on what's driving that? Then I guess within that it would be interested any update on the VAPI product and how adoption is looking there?

[Alan Masarek:]

Let me. Omar is on the phone. He's the President of our API Platform. And we ask Omar to take that question.

[Omar Javaid:]

Sure. Sure. Good morning. So to your first question we're actually seeing a lot of interest across our product line. Obviously, we -- the messaging product has been doing well for us from the beginning, but I think particular standouts, so I'll go through some of the products themselves and then the geographies. As you may recall we acquired TokBox for video APIs late last year. That's been just a phenomenal product for us. So we seeing good, a lot of interest and growth both in terms of selling that to our existing base of customers and new customer wins around video. We've seen that with a updated messaging API as well. And I would say particular stand up for us from a geographic perspective, we had some really great wins in both Asia Pacific and in EMEA. And we've seen some really encouraging attraction as well in North America. I'm sorry, what’s the second question.

[Will Power:]

Okay. Well, just trying to on the VAPI product, just trying to get a feel for what the trend lines look like there particularly in North America which just seemed like an upside opportunity for sometime?

[Omar Javaid:]

Yes. It is – exactly, I think that's the best way to put it. It's an upside opportunity. We've seen some really good traction there. I think the way to look at that particular product and how it's adopted is a lot of the prospective customers and let's say, the volume use cases are going to be in contact center like use cases, so customer care inside sales, just as two examples. So, we have been pushing that and I've seen some good success in North America. We've seen it in other parts of the world as well. But I think Dave had talked about the nature of this business. You get this. You have these API developers incorporate them into apps than those apps get distributed. And so there is a lag time before you see volume build up. So and those are those are some of the enterprise use cases we do have given the nature of the business there's also companies who are enterprise customers of ours, but are sort of B2C use cases or right-share companies for example. So we are seeing good growth in that product. But I think it's just going to take time to percolate some more.

[Will Power:]

Okay, great. Thank you.

[Operator:]

The next question will come from Tim Horan of Oppenheimer.

[Tim Horan:]

Thanks guys. So, Dave, you've had a pretty amazing product lineup improvement. Can you just give a little bit more color on what customers really like about the product? I know you said you have a very unique product that others can't replicate. Could you just dive into it a little bit more, please?

[David Pearson:]

Let me ask Omar to take that as well. Tim.

[Omar Javaid:]

Yes. I think if you refer to Alan's opening comments what we did and this has been a multiyear strategy and investment for us starting with some of the early acquisitions that we made. I think if we go back to the acquisition of Nexmo which was us really getting into API platforms. So the way to look at it is the -- so we sell a set of products as APIs. And then we have applications, right, in UC and in contact center. And what we've done starting with UC is build that product and rebuild that product. We've talked about being first to public cloud as an example. But we've taken aspects of that product, for example, messaging and started leveraging the API that we ourselves have. So those are APS that we market to third parties, but we use them ourselves internally. So the point is that we have multiple areas where we can scale and leverage. So, people for example in our B2C product which is our flagship, UC product, we don't need to build another messaging team. We don't need to build say another videoconferencing team. They can use those APIs that we have that are deployed globally at scale, right with big, big customers on them. So there's a tremendous amount of leverage there that we that we can employ. So in terms of -- one vector of it, yes, the other the other side of it we've kept growing the product line itself. So, for example, one of the areas that we thought we -- that we really needed to build and scale on was video. And we fixed that with getting – with acquiring TokBox last year, mid last year, late last year. So I'm not sure if that fully answered your question.

[Tim Horan:]

Yes. Just one clarification. Do you think the OneVonage programmable platform, is it basically complete at this point. I mean, I know you always be tweaking on it, but – when would that really completed and is the go-to-market strategy now pretty much aligned around that one platform?

[Alan Masarek:]

Yes. I think. So, I think just putting my product hat on for a second. I think you're always going to be working on product so this is an investment that will continue to make. So I think we're -- given where we started and where we are today we're in a very very good place. So I think we have the core set of capabilities. But like any product and technology company we're always evaluating either products that we -- product areas that we should get into that we currently aren't in or take the existing products and build them out in new ways. So I think this is going be an investment that we continue to make. So that's one. I think you're going to hear that from probably any product company. Ours is no exception in that regard. Now, in terms of the alignment with go-to-market and a lot of those is the way to – the way to look at it is we have a scale platform both in terms of geographic scope and product set on APIs. Those APIs in turn are being increasingly incorporated into our applications themselves mentioned VBC and messaging as an example. So we've done it in stepwise function and sort of go-to-market. So it's embedded in those products and so it's able to leverage the existing go-to-markets for those -- for both APIs and applications. We are beginning to look at ways to sort of arguments that go-to-market itself around OneVonage. But I think this will be more around marketing as sort of the mess -- sort of the how we market and message it as opposed to sort of changing the sales mechanics. Does that make sense?

[Alan Masarek:]

Tim, this is Alan. Just real quickly. The key thing from an applications point of view, if you think about core PBX and contact center, much of the functionality is tried and true, not particularly different from one supplier to the other. Where you win deals and I cited these in my examples, in my script, is in the -- because of the way it's built from the programmable APIs it has a level of extensibility and customizability that others that are not built the same way cannot do. So the go-to-market strategy in applications is a product differentiation effort that is rooted in that OneVonage platform.

[Tim Horan:]

That's really helpful. Thank you.

[Operator:]

The next question will come from Michael Rollins of Citi Investment Research.

[Michael Rollins:]

Hi. Thanks for taking the question. Alan, just going back to something that you and team discussed on the last call. You describe the expectation for business service revenue growth to approach 30% exiting 2019. So, is that still a plan? And how should we think about the trajectory for business service revenue growth?

[Alan Masarek:]

We ask Dave to take that question, Mike.

[David Pearson:]

Mike. Yes. We stand by that statement. The statement was that business service revenues would grow to number approaching 30% and that still is our plan and that's what’s baked into our annual guidance that we did not change today. In order to do that we'd have to finish with service revenue kind of the $200 million area in order to get into the kind of high 20s approaching 30. That means putting on about $40 million of revenue between the first quarter and the fourth quarter. What's embedded in the guidance we just gave is we're putting on $15 million just in the second quarter. Now, we do have a business that is dynamic on API. That API business also has seasonality. So I wouldn't necessarily straight line that or say that. The addition each quarter, the sequential additions will be the same, but we have been adding each quarter anywhere between kind of $8 million to $9 million and $15 million per quarter. So, if you think about that and what's happening in 2Q, you can get that $40 million sequential increase which gets you to the number to hit the objective that we set forth.

[Michael Rollins:]

Thanks.

[Operator:]

The next question will come from Mike Latimore of Northland Capital.

[Unidentified Analyst:]

Hi. This is BJ for Mike Latimore. Two quick questions. One is on the NewVoiceMedia. Could you tell us how much or what it’s contribution? Is it as per your expectations? And second, how is the cross-sell of Vonage Business Cloud into NewVoiceMedia international base and channels?

[David Pearson:]

Yes, taking the second one first. We have started cross-selling. We launched a new product CX Cloud which is actually in the bag of the full application sales force and so that cross-selling has begun. And I think as Alan discussed and as you see in the slides there were a number of examples for the year already in the year that show that dialogue happening in actual -- we're getting customers who are taking multiple products. In terms of NewVoiceMedia itself that's now totally intermixed into what we call the applications group or that that revenue stream. So it's not broken out. The organizations are fully integrated. They aren't on the org chart at this point. There's no distinction between Sales force, so it really is more of a product difference and we are substituting increasingly our own product which is NewVoiceMedia and the product that we launch instead of selling a third party contact center software. So there's some substitution effect which also makes it difficult to break out NVM itself. All that being said, NVM is performing. If it were its own company today absolutely to plan and in the first quarter we achieved about $1.5 million of actual hard dollars synergies on the cost side with the integration that I talked about.

[Alan Masarek:]

B.J. as well this is Alan. I think you asked about international. So VBC is now been brought to the UK. It went live 1st of February, in Australia it'll come to continental Europe probably by Q1 of 2020. It is the go forward unified communications platform and it will be increasingly globalized as we move forward in future periods.

[Unidentified Analyst:]

Okay, great. Thank you very much.

[Operator:]

The next question will come from George Sutton of Craig-Hallum.

[George Sutton:]

Hi guys. I jumped on late, so I apologize if you've addressed component to this. I only have one question, but it's a little complicated. I agree OneVonage is a NexGen platform. And I haven't felt you been seeing your fair share deals largely due to the low channel index that you've had. Can you help quantify what percentage of relevant deals do you think you're seeing today? And what kinds of percentages do you think you need to see the hit the near-term guidance and then ultimately how much more significant do you think you can expand the distribution side?

[Alan Masarek:]

Hey, George, good morning, it’s Alan. I’ll just start with the notion that we are omnichannel. And so – and even within being omnichannel we team filled with the macro agent channel. I had earlier answered earlier question about all the specifics that we've done to basically accelerate what's going on in the master agent channel over the course of the last several quarters, which has reflected itself in much much faster bookings growth, larger deal size and at this moment I talk about sales pipeline which is at record levels. So with all heading absolutely in the right direction and so as we look at what Dave just commented on in terms of our ability to hit our guidance we feel very comfortable about that because of the success on omnichannel basis.

[Operator:]

And this concludes our question-and-answer session. I would now like to turn the call back over to Hunter Blankenbaker for any closing remarks.

[Hunter Blankenbaker:]

Great. Thanks Carrie. That wraps up the Q&A portion of today’s call. We look forward to seeing many of you in the coming months at various investor conferences. And for those unable to attend in person these events will be webcast and you can follow our comments that the Vonage Investor Relations website. Please contact us if you need any additional details and thank you again for joining.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.