Good day, ladies and gentlemen, and welcome to the Vonage Holdings' Fourth Quarter and Full-Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to hand the floor over to Hunter Blankenbaker, Vice President of Investor Relations. Please go ahead.

Okay, great. Thanks, Karen. Good morning and welcome to our fourth quarter and year end 2016 earnings conference call. Speaking on our call this morning will be Alan Masarek, Chief Executive Officer; and Dave Pearson, CFO. Also joining us are Joe Redling, our Chief Operating Officer and Tony Jamous, President of Nexmo. Alan will discuss our strategy, full-year, and fourth quarter results, and Dave will provide a more detailed view on our full-year and fourth quarter financial results as well as our 2017 guidance. Slides that accompany today’s discussion are available on the IR Web site. At the conclusion of our prepared remarks, we’ll be happy to take your questions. As referenced on Slide 2, I would like to remind everyone that statements made during this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s expectations, depends on assumptions that may be incorrect or imprecise, and are subject to risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties is highlighted on the second page of the slides and contained in our SEC filings. We caution listeners not to rely unduly on these statements, and disclaim any intent or obligation to update them. During this call, we will be making -- we will be referring to non-GAAP financial measures. A reconciliation to GAAP is available in the fourth quarter earnings press release or the fourth quarter earnings slides posted to the IR Web site. With that, I will turn the call over to Alan.

Thanks, Hunter. Good morning, everyone, and thanks for joining us. 2016 was a pivotal year for Vonage. We’ve established the foundation for long-term growth and leadership in cloud communications. Three key strengths that’s driven our success. First, our ability to leverage corporate assets from our consumer segment including our highly aware brand, strong cash flows and the scale of the Vonage voice network. These assets have propelled our transformation. Second, our ability to acquire great companies at attractive prices and grow them organically. And third, our ability to create a unique value proposition to drive better outcomes for our business customers. We are going to use slides today to accompany our remarks. So please let's move to Slide 3 to discuss 2016 highlights. Our team continues to deliver strong operational and financial results. We grew consolidated revenues to $956 million, a 7% increase in our third consecutive year of topline growth. For Vonage business, revenues increased 72% year-over-year. Adjusted OIBDA was $160 million, an 11% increase. We completed the acquisition of Nexmo, which continues to grow rapidly achieving 46% pro forma year-over-year annual revenue growth. Even more important than a strong revenue growth, Nexmo expands our capabilities by combining UCaaS and CPaaS into an integrated solution, which gives Vonage the right set of assets necessary to win in cloud communications. In addition to our product investments, we also used our strong cash flows to invest further in our growth, including significant investments in our sales infrastructure. We also strengthened our Board with the addition of two new Directors with substantial B2B experience. Gary Steele, CEO of Proofpoint and Hamid Akhavan, the former CEO of Unify and former CEO of T-Mobile. Lastly, as was press released this morning, we are partnering with Amazon Web Services to combine our UCaaS products with…

Thanks, Alan and good morning everyone. 2016 was the year in which we achieved our financial goals of producing record revenue strong cash flow, while funding organic growth and strategic acquisitions. Before we review the results for the fourth quarter and full-year 2016, I’d like to discuss the additional information we will be reporting starting today both for the year 2016 and going forward. As noted on Page 10, consistent with Vonage's continued transformation into a leader in business cloud communications, we’re providing more visibility into financial trends in the business and consumer segments. For each of consumer and business, which represents our UCaaS and CPaaS product offerings we will report both revenue and cost of service, each broken down by type. We believe this additional information in conjunction with our other KPIs will provide greater transparency into our progress and insights into our execution in each segment. As in the past, I would also like to note that the quarterly growth rates reflected in our presentation slides during our prepared remarks are on a year-over-year basis, unless otherwise noted as sequential. With that, let's begin on Slide 11. Consolidated revenue for the fourth quarter was $247 million, up $17 million or 7% due to organic business growth and the addition of Nexmo. For the full-year, consolidated revenue was $956 million, also up 7%. The increase was due to substantially higher business revenue, partially offset by planned reductions in consumer revenue. Moving to Slide 12. Let me now turn to our segment financial results for the fourth quarter starting with Vonage business, which consist of our UCaaS and CPaaS products. Segment results can be found in table 2 of our press release. We're now providing the following business revenue and direct cost metrics. Service, product, which consists of customer premise…

Okay, great. Thank you, Dave. Karen, let's please turn it over to the Q&A session.

Certainly. [Operator Instructions] Our first question for today comes from the line of George Sutton from Craig-Hallum.

Thank you. And Dave, I appreciate the additional disclosures. So, Alan, you -- for the first time at least that I’ve heard you say this, you’re starting to talk about UCaaS and CPaaS as sort of an either/or model and some of the discussions you’re having with customers are driven by that. Can you go into a little more detail on that? In another words, are you literally coming and saying we got this or this and we can be very flexible in terms of how we set you up? Is that effectively what you're saying?

George, no its not. It's actually not an either/or. What I was trying to say that they are very complementary, and so when you go into a customer, they generally require both. All customers are communicating to their customers, of course, and also looking to bring their employee based communications to the cloud, their PBX system to the cloud. So what we’re finding is it's just changing the customer conversation. So there is an opportunity to syllable. That was really the rationale for when we bought Nexmo was that you saw this convergence between the need to link external customer facing communications with the internal employee based communications. So it's really not an either/or, it's both, but you can get the lead from one or the other, of course.

Got you. Okay. I just want to make sure I understood that. And then, as my follow-up I will migrate over to Amazon and just give us a better sense in terms of being a launch partner, what sort of resource dedication do you have to them? What sort of resource dedication did they have to you? My assumption is you will be reselling their services, I don't believe they will be reselling your services, but I just want to be clear about that.

It’s a shared deal. They'll be reselling the bundle, they will be, excuse me, selling the bundle through their web assets, while we will be selling the bundle as well through all of our channels. So it really is one plus one equals three proposition.

Perfect. Okay. Thanks, guys.

Thank you. And our next question comes from the line of Rich Valera from Needham & Company.

Thank you. I just wonder if you could give a little more color on the growth expectations for the respective parts of the business segment, particularly Nexmo and UCaaS, and maybe relate them to the fourth quarter growth rates? I think they were 43% and 18% respectively, but how do we expect those to trend into '17?

Hi, Rich. Its Dave. So, first of all, we’re thinking about this, we’re in a very dynamic and competitive market and we're thinking about increasingly CPaaS and UCaaS as one business across which we’re dynamically able to allocate capital. That being said, as we sit here today, CPaaS looks like a mid 30% organic grower and UCaaS looks like a mid teen percent organic grower. On UCaaS service revenue will actually grow a bit faster, mid to high teens. As I mentioned in my script, it will be a bit less access and a bit less product and service which is MMR is what we’re focused on.

I know you mentioned Dave, that you were going to deploy access more selectively in '17. Why is that?

Sure. Yes, it's not about withholding it in any way. It's really about the fact that the salesforce now has Essentials and Premier as kind of both products, the pure over the top products and the fully integrated QoS product in their sales bag across the sales channels. And so where it fits for a customer and they don't need QoS, we’ve got the ability to sell them Essentials, we’ve also in some cases have the ability to sell the Premier product over the top or without QoS. So it's simply making sure that the -- that it’s the right application for access, because there is cost that comes along with that. But we continue to believe in the right circumstances that it is the right product and especially in the Enterprise where people are very concerned about quality you’re still going to see access.

I will just add one follow-up to that. It's our SmartWAN tools which is SD WAN software-defined wide area networking, we branded as SmartWAN, let's us provide QoS even in a broadband situation. So, it's less necessary at times to pull the private circuit in that office to have a dedicated voice line SmartWAN can handle that. Now, in certain situations you to pull the private circuit when others you can provide QoS via SmartWAN. So you sort of think about the gradations of delivery, you go from sheer over the top, up the SmartWAN delivery, up further to leading -- to actually pull a private circuit and sell access. And because of the growth in SmartWAN, we’re seeing a lot of success and that’s really why you’re going to see less sale of that or a slower growth in access.

Got it. Thanks for that clarification.

Thank you. And our next question comes from the line of Catharine Trebnick from Dougherty.

Hi, guys. Thanks for taking my question. Can you just give us a little bit more background on what percentage of revenue you expect Amazon Chime could be by the end of 2017 for modeling purposes? Thanks.

Hey, Catharine. Its Alan. I can't give you a percentage. The product we expect will release the end of Q2 and we're going to initially distributed to our base of customers as a -- an added element of functionality for free. And then they'll be selling and Amazon will be selling it through their web assets where they become a distribution channel for us. We're very excited about the prospect, but we don't know how successful it's going to be. So we can't provide a percentage, if you will, in terms of how significant it's going to be, but this is a important strategic relationship.

And then in addition to them, how much of Nexmo might be folded into the Amazon Chime opportunity going forward?

It's really not a Nexmo issue relative to the Chime situation. The Chime is a marriage between the UCaaS solution and the Chime -- audio conferencing, video and collaboration system. We separately have a lot of business through Nexmo with Amazon Web Services. I mentioned on the call, AWS has as one of their products, their simple notification service where we provide the SMS delivery for them. That is growing substantially. As I mentioned, that was up -- the volume of messages was up 73% sequentially in the quarter.

All right. Thank you, Alan. I will catch you guys on the post call. Bye, bye.

Thanks, Catharine.

Thank you. And our next question comes from the line of Dmitry Netis from William Blair.

Can you guys hear me?

Yes.

Okay. Thank you. Couple of questions. I joined a little bit late, so I apologize if I’m being repetitive. But for Nexmo, what are you guys projecting in 2017? The Street was baking in $124 million, I’m wondering are you still in that range lower or higher, and whether you’re going to continue to report? It sounds like maybe not, since you’re talking about unifying UCaaS and CPaaS into one reporting segment, but it doesn’t look like Nexmo will be split up going forward. Is that correct?

So the plan is to report the way we reported today, which is business as one segment and increasingly where we’ve put the two operations together. We will be giving color from a product perspective on CPaaS and UCaaS where it's relevant. We did answer before a question on CPaaS growth and we said it was going to be on an organic basis, so pro forma if we owned it for all of 2016, it will grow in the mid 30s. The implication there, as you recall when we bought it, we said that we thought it would do in 2017, because we’re buying it at 2x between a $115 million and $125 million of revenue in 2017. The mid 30s implies the very upper end of that guidance.

Got it. Okay, Dave. Thanks. And then, just in general, and if I take that comment, roll that into your guidance for 2017 and look where UCaaS is shaping [ph] out, consumer slightly down from what the Street has been predicting as well, I don’t think you will be penalized too much for that, given sort of the trajectory of that business there. But the expectation has been for both Vonage business, UCaaS side of the business there as well as Nexmo to reaccelerate in terms of organic growth going into '17. So is there anywhere along the line maybe second half that you would feel now that you got that guidance? I don’t want to put words in your mouth, do you feel that’s a conservative guide, to give you a little bit of room to outperform those numbers going through the year and show that growth that you’ve outlined last year?

I think we put together and communicated an achievable plan and throughout the year we did a lot of building in 2016, we still had building to do in 2017 and we got a new CRO and we feel very, very good about that. So we will be updating as we go, but there is certainly that opportunity.

Okay, great. And then a couple more, on the -- looking at the EPS missing by about two penny here, that’s entirely due to taxes? It seems like, but maybe I'm missing something, but if you could comment on that, Dave. And then that the prepayment that you mentioned that affected your free cash flow. Can you walk me over that one, once again and whether that’s still going to recur or is that one-time thing that …

Sure.

… you expect to recur in '17 timeframe?

So yes, on net income, that difference is tax, is GAAP taxes. And just in general, net income has a lot of noise in it right now, because we made acquisitions, so we’ve amortization. We also have payments. As you recall, a portion of the considerations in Nexmo employees, and they owned a big part of the company, vests over the course of the year as an incentive tool, so that’s also in G&A and net income. As it relates to the prepayments, this was for a hosting capacity and several other products that we're able to acquire the services in bulk. We do not expect that'll be a regular occurrence and for instance this hosting capacity, it’s the amount which we pre-purchased is counted in years, not months. So I would not expect those types of payments occur on a regular basis and that will be bled off of the balance sheet into our operating cost as they’re consumed.

Thank you. And our next question comes from the line of Greg Burns from Sidoti.

Good morning. When we look at the EBITDA guidance for 2017, is more than 100% of that still coming from consumer or are we -- can we read or is the business segment is going to be a break even for 2017 or still at a little loss? Could you give us a little more color on the complexion of that EBITDA guidance?

Yes. So, first of all, yes, we can. We are a functional organization and you know we are able to segment from a gross margin perspective it's much more difficult to pull apart below that and get to OIBDA. But if you use some simplified allocation assumptions, obviously you have a lot of cash flow coming from consumer, you’re going to be around breakeven in business, and you’re going to be investing in Nexmo. Those are the three components that go into the 165.

Okay. So business ex Nexmo, UCaaS is about at a breakeven and Nexmo's …?

Yes, breakeven to positive in UCaaS.

Okay.

Investment in Nexmo and highly positive in consumer.

Okay. And then, I just wanted to dig in on the slowdown in the UCaaS growth. I guess, this quarter there was some items impacting it. Could you just touch on those items again? And then, just looking into 2017, is it something you are proactively doing, where we’re only going to see kind of a mid to high teens type growth as opposed to kind of what we saw in 2016, or is it just scale or market related issues that are kind of weighing on the growth number for next year?

Sure. So just to unpack the numbers, and then Alan can comment on this as well. If you look just -- if you go to table 2 in the press release, and you look at service revenue versus product revenue, you will actually -- in business, and you take out Nexmo which is the revenue of which is footnoted, you will actually see this product revenue that went down in the quarter. If you look at service revenue, it's actually up $2.6 million just in UCaaS in the quarter to that $2.6 million of organic growth you add service credits, which were $300,000 to $400,000 elevated in the fourth quarter, so you then got a quarter that has $3 million of service growth and did not benefit from some one-timers that we had in 3Q, which included a USF increase which is not in service, but it's in total and some other equalization of fees. So when you put that altogether, we actually had a strong organic growth quarter in UCaaS. The other component that is working against, that you’re seeing in product is bad debt on equipment. So we had about $300,000 there, but that cost a $600,000 swing because that $300,000 was -- it was $300,000 higher in 3Q and it should have been and we took that out of 4Q, so that actually made a $600,000 swing there. In addition, on equipment, we are increasingly moving to a rental model, so you’re taking money out of in quarter and you’re spreading it over subsequent quarter. So you can -- really a lot of the difference relative to expectations within product for the reasons that I cited. In terms of long-term growth and growth for the year, really goes back to what we said before, which is we believe this is an achievable plan that reflects a fully built machine at the low-end -- at the lower end of the market where we're absolutely doing everything we can and feel like we have a very, very strong position in that market and then continues to build out and continued execution of the longer sales cycles at the midmarket and particularly in the enterprise.

Thank you. And our next question comes from the line of Tim Horan from Oppenheimer.

Thank, guys. Can you give us more color on the Amazon relationship? Are they actually going to be using you for voice services, are they reselling your voice network? And the $15 price point that they have, is that kind of embedded with your service in that new product, the churn product? Thanks.

Hey, Tim. Its Alan. So they -- I mentioned before to an earlier question, they will sell our product, our UCaaS solution bundled with Chime on their web assets. What we’re doing is we’re taking their premium Chime and providing it free to our base and the -- as just a value adder. The opportunity is for us to then take a product that they sell at their premium at $15 and we can then go to our base and say here is this amount of value that is provided at no additional cost.

So would your voice capabilities embedded with Chime, how much are they going to be charging for that?

We will not -- well, they will be charging what we charge in effect, because they’re not going to -- we cannot obviously have them create channel conflict in the sale of our products. So that’s all been addressed in the deal and this has been a relationship, it's been underway for very long, it's been in the works for a very long period of time, they actually have an incentive to sell our product as well as a distribution channel for us.

So your product embedded with Chime, what do you think they’re going to be charging for that?

It will be our -- this is Joe, it will be our standard pricing. We are actually their UCaaS provider in their web assets. So those links will come into our channel and we will be pricing that based on the number of seats just like we did today in our own channel. So we control the pricing of the entire process.

Okay. Are they your customers or Amazon's customers, who chose then?

They’re our customers.

Okay. Sorry, that makes a lot more sense. And is this going to be more of a global offering or is it more U.S based?

U.S based.

Thank you. And our next question comes from the line of Mike Latimore from Northland Capital Markets.

Hey, guys. Thanks a lot. On the UCaaS business, is it -- should we assume Essentials and Premier growth at a similar rate, or do you think one will clearly grow faster than the other in '17?

I think it's fairly even. Clearly there's a lot less friction at the lower end and so that is a positive for Essentials and historically it has grown faster. At the same time, our data and our experience shows that the upper end of the market is actually growing faster now to just the TAM and the adoption because it's earlier. So those two things are cancelling each other out for the year at a high-level.

Got it. And then, again with regard to Amazon Chime, do you think that offering is more attractive to the Essentials or Premier base? And also, I mean, you guys already have conferencing [ph] applications. So I guess, if a customer wants to have the conferencing feature, how do you sort of position Chime versus what you already have?

Yes, Mike. So, obviously the collaboration suite, this productivity suite is pretty compelling. We think it's you really got to get above 10, 20 seats for this type of suite, so what we’re excited about is across both our platforms, whether it's Essentials or Premier, this is an option we think will be very attractive to the customer base. So on the Essential side we believe that helps us to move up market to a 10 plus 20 plus seat through our inside sales channel that is filling a collaboration suite void we had before. So we think that’s a very positive thing for us on that side. We do have collaboration features through our Premier offering, but either one of those will be up to the customer's choice to choose. So it gives us both a much richer feature set for what I would call the small to mid, which is 10, 20, 30, 40 seats that we can put across all our channel. So it gives us advantages across all.

Yes, okay. Thanks.

Thank you. And our next question comes from the line of Will Power from Baird.

Great. Thanks. Just a couple of questions. I know you’ve gotten asked this a couple of times, but just thinking about the UCaaS market, some of your competitors have been talking about accelerating growth in the mid market and enterprise. It sounds like you’re seeing that to a degree, but you’re not perhaps manifested to the same degree on the revenue growth outlook for 2017. So, I was just trying to understand, is there anything new competitively from Skype or others or some of your other competitors? And, again, just trying to -- just parse the growth rate expectations for '17, versus what you’ve had here over the last one to two years?

No, we’ve not seen a change in the competitive landscape, make clearly as I’ve just noted the mid market in enterprise is -- has lower penetration and therefore it is growing faster. The competition there is intense. It is more intense than it is at the lower end, but it hasn’t increased or decreased as of late. I would say that our model is one that where we’ve been very focused on building a balanced set of sales channels. I think you’ve seen various competitors swing very hard away from direct and towards channel. We’ve been doing a lot of state work to make sure that we're very balanced across that and I think that that takes a little bit more time, but I think it will put us in very good stead in terms of the infrastructure. The other thing is that we mentioned it a little bit before, but that lot of enterprises the key for them to go to the cloud is having that QoS, because they’re just not willing to be over the top. And so, we think that is the approach that we offer at the high-end with Premier. At the same time, those entities that want QoS also tend to have a longer sales cycle and when you are offering access and that type of service delivery, which these companies want, you also have a longer install cycle. So you’re just seeing that in the numbers and I think that help to explain the difference.

Okay. And then, maybe just quickly on the buyback from here, what’s the key driver? What kind of underpins, the plans to utilize the rest of that timing or magnitude as you look over the next 12 to 24 months?

Sure. So the Board authorized two years ago $100 million and we intend to execute that $100 million buyback. We, after two years we're at exactly halfway through it, we're exactly -- we bought almost exactly half the amount of stock. So we intend to continue to execute that. I think for the last several quarters we reached up and bought Nexmo, which was an irreplaceable asset and used cash to do it. We decided that the strategic flexibility was important and we wanted to use some of that capital to deleverage over the last couple of quarters, and also have the flexibility to do what we did back in May when the stock hold back we acquired well over $20 million of stock in a two weeks period not only providing -- I think a very good backstop to investors, but also just making some highly accretive trades. We want to continue to have that ability, we want to continue to delever, so really it’s a question of balancing those things. But we fully intend to execute on the $100 million and two years from now, be finished with the program.

Thank you. And our next question comes from the line of Adam Ilkowitz from Citi.

Hi. Thanks for taking the question. I was wondering -- you were talking about the costs and the investments being made to Nexmo. If we look at your service revenue margin in business as you reported, how would we look at just the UCaaS side of the business? Do you feel you are at a margin that is similar to a peer level, or your consumer business or if not, how long would it take to get there? And is the question more about scale, or is it about something else? Thank you.

Sure. So you we are -- you get a sense of what service margin is without Nexmo when you look back to the fourth quarter of last year, that’s the UCaaS business by itself, although its improved since then just with bigger scale. And Nexmo, we talked about and with Nexmo service margin and gross margin are the same, because there is no USF and there is no product or service delivery or anything like that. We made a filing over the summer which after the acquisition, which talk specifically about Nexmo gross margin and service margin and that right now during this land grab [ph] phase is in the 20% area. We think that there is near and medium-term upside to those numbers. But clearly during this land grab, we’re trying to optimize adoption of the APIs and repositioning Nexmo or diversifying Nexmo into other markets and in particular U.S voice. That has the benefits of greater -- of a longer tail of customers, greater diversity in customers, but it also happens to be where the higher margin is -- voice is, it’s a higher-margin product, U.S is a higher-margin market. And for us in U.S voice that’s where we really get the advantages of our network, which is where I think there's is a good amount of margin accretion. So as that mix shift occurs towards U.S voice and its going to take time, because we’re still growing on the international SMS side as well, and we get the benefits of scale, you’re going to start to see that gross margin or service margin go up.

And just one final one, you mentioned on the slides, in talking about your own remarks about having financial flexibility, and you talked about the buyback program being somewhat dependent on M&A. Can you just talk about the landscape, and what, if anything you need, whether it's from a product or geographical standpoint, what interests you in the market these days? Thanks.

Sure. So we, first of all, we think see everything, just based on our position in the industry and the fact that we’ve been acquisitive, and so really falls into the three categories. One is continued UCaaS consolidation and that’s there the assets of the smaller players are not getting more expensive. And so those are things that we can execute on, but that’s -- those are purely -- in general, they’re purely customer acquisition or sales force acquisition place for us. So they’re almost like organic growth, you're just increasing organic growth. Second would be things like Nexmo that are technology driven, add-ons or product enhancements. We don't feel like we need to do anything there, for instance in contact center we got very good products there. Some are embedded in Broadsoft, simple versions are embedded in central, and then we’ve retail relationships where necessary. But we still look at things like that like Nexmo and technology enhancements, don't feel like we have to do anything. And the last piece would be industry consolidation and as we think that’s heating up, and there won't be as many UCaaS companies in two years as there are today. Again, we don't feel like we need to do anything there or that there's anything eminent, but we think it's going to happen and with our balance sheet and cash flow, we can be a driver and control our own destiny in that if it occurs.

Thank you. And this concludes our question-and-answer session for today. I’d like to turn the conference over back to Hunter Blankenbaker for any closing comments.

Okay. Thank you, Karen, and that concludes our call today. We look forward to speaking you throughout the quarter as well as next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.