Good morning, ladies and gentlemen. And welcome to the Vonage Holdings Corp. Fourth Quarter of 2017 Earnings Conference Call. [Operator Instructions] 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, sir.

Okay. Thanks, Denise, and thanks, everyone, for joining us this morning on our fourth quarter 2017 earnings conference call. Speaking on our call this morning will be Alan Masarek, Chief Executive Officer; and Dave Pearson, CFO. Also joining us are Kenny Wyatt, our Chief Revenue Officer; and Tony Jamous, the President of Nexmo. Alan will discuss our strategy and fourth quarter and year-end results and Dave will provide a more detailed view on our fourth quarter and full-year financial results and our 2018 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. 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, depend 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 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 on site. With that, I would like to turn the call over to Alan.

Thanks, Hunter. Good morning, and thanks for joining us. I'd like to start this morning's call by reviewing the strategy I outlined for you a year ago. Critical to our strategy and to our success is the integration of our UCaaS and CPaaS platforms into one cohesive service. Our strategy includes the integration of our UCaaS services into businesses CRM and business applications and the use of CPaaS solutions to directly integrate with our customers' customers. We also provide market-leading CCaaS contact center as a service solutions, giving our customers a comprehensive communications and collaborations solution. This end-to-end approach is, particularly, critical as cloud adoption moves up-market and larger companies undergo their own digital transformations. With our solution, businesses are able to operate better and to engage their customers in new, connected ways that deliver better business outcomes. In fact, Frost & Sullivan awarded Vonage their Strategy Innovation and Leadership Award for our comprehensive capabilities. So given our unique strategy, how did we do? The answer, we did really, really well. I'm proud of what our team accomplished. We substantially completed the integration of Nexmo into Vonage, transforming Vonage into a leading cloud communications company. We successfully moved our UCaaS focus to mid-market and enterprise customers. In fact in 2017, we won 12 separate seven-figure deals with aggregate contract value greater than $60 million. Our integrated capabilities continue to be a strategic differentiator. In fact, Compass Health Brands signed a seven-figure TCV deal with us in the fourth quarter, because we integrated our UCaaS and contact center solutions into their workflow applications and provided Vonage reach of marketing automation solution built on top of the Vonage API platform. We also won a seven-figure deal with Zedi, a leader in oil and gas technology. We replaced Zedi's AVIA system with our…

Thanks, Alan, and good morning, everyone. 2017 was a strong year in which we met or exceeded all of our financial performance expectations. Let's begin with a review of the fourth quarter and 2017 on Slide 6. Consolidated revenue for the fourth quarter was $254 million, up $7 million or 3%. For the full year, consolidated revenue was $1.002 billion up 5%. With business now the larger of the two segments as of 3Q, and the business segment growing almost twice as fast as consumer is declining. Vonage is now positioned as a long-term consolidated revenue and cash flow growth company. Moving to Slide 7, let me now turn to our segment financial results, starting with Vonage Business, which consists of our UCaaS and CPaaS products. Vonage Business total revenue for the fourth quarter was $134 million, representing 53% of total revenue and a 21% GAAP increase. For the full year, Vonage Business revenue was $499 million, a 33% GAAP increase. Fourth quarter UCaaS revenue was $94 million, led by service revenue organic growth of 16%. Service revenue did not include access, which we are slowing by design for USF, which is a path through. For the full year, UCaaS revenue was $359 million representing 15% total and 17% service revenue growth on an organic basis, consistent with our guidance. The organic growth numbers reflect the completion of the sale of our hosted infrastructure business on May 31 and the adjustment of one-time items from the comparable 2016 quarter and year. As we have done in the past, we included a table in the press release and on Slide 16 of today's presentation, showing revenue from the hosted infrastructure business over the last five quarters and the one-time items to facilitate pro forma analysis. Revenue chart was 1.2%, flat sequentially,…

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

Thank you, sir. We will now being the question-and-answer session. [Operator Instructions] And your first question this morning will be from Rich Valera of Needham & Company. Please go ahead.

Thank you. Good morning. Al, and I think you said in your prepared remarks that you doubled your pipeline of mid-market opportunities. Just curious speaking, give more color on that, sort of doubling relative to what? And if you could give any sense of the magnitude of that, any kind of more color numbers around that? Thanks.

Hey, Rich. So we doubled the pipeline of enterprise customers and so we gave you the sum of mid-market and enterprise growth, which is really our area of focus in UCaaS. So we defined that as 100-seats and greater all the way up to super large enterprises. And so in aggregate, our focus in that segment, we'll grow that more than 25%. But within enterprise itself, where obviously, the larger end of those types of customers, we've doubled that pipeline.

I’m sorry, that was relative to which timeframe, Alan, the year-over-year?

Year-over-year, correct.

Got it. And then maybe this one's for Tony. On the Nexmo product, it sounds like you're developing some kind of higher level, let's call it, almost applications within that platform. Have you thought about changing your – having an alternative pricing model at all that is purely transaction based, having something where you would actually be licensing out any kind of higher level application there, or may be doing that, keeping it through the transaction base and using them to pull through more volume? Just curious, your thoughts on that?

Yes, hi, Rich. So indeed, the CPaaS pricing model is a transactional base model and that works well for a lot of the transactional APIs, sending a message or sending a phone call. However, as we move into the enterprise segment, we see that enterprises requires more stability in terms of their pricing, more predictability, so we're developing new models within the enterprise packages to provide them more certainty around that. So indeed, there is some, I would say, different type of pricing that is more recurrent and transactional.

Rich, it's Kenny. Just to add to that very quickly. In 2017, we launched VonageReach, which, as Tony mentioned, it is doing just great, right. Taking specific use cases out of CPaaS, out of transactional model, and putting them in a, what we call, finished product, if you will. In fact, one of the TCB deals that Alan mentioned in his script included just that, included a prepackaged CPaaS solution sold to the enterprise.

The next question will be from Dmitry Netis of William Blair. Please go ahead.

Hey, guys. This is Steven Sarver in for Dmitry. Thanks for taking my question. I guess, on Nexmo, you guys said that it's going to approach 40% growth. And 2018, again, which seems to be a little bit higher than what The Street would look, modeling I think about 30%. So this would kind of imply that the UCaaS growth expectation in 2018 is a little bit lower than we were expecting. So I guess what is going on with UCaaS? And then if CPaaS is expected to grow faster than expectations, I guess what would this do to gross margins in 2018? Could you still see expansion or could they stay similar to some 2017 because of the lower margin profile from Nexmo?

Sure. It’s Dave, I’ll take that question. CPaaS is growing – it's exiting the year at this high 30s growth rate, approaching 40, and we think it's going to grow that way off a higher base. Within UCaaS, we exited the year right on our guidance, which was mid-teens total growth and 17% service revenue growth, so two points higher. For 2018, as we discussed, as Alan referred to, we're actually remixing a bit where the dollars, where the sales and marketing dollars are going in within UCaaS and where the focus is, consistent with how the market's growing. So what you're seeing within UCaaS is a bit of a shift, whereby the less than 100 seats business is growing lower, consistent with the market, is growing lower than our average UCaaS growth. And the 100 plus seat cohort, it’s growing much faster than our average. And so as you see that mix, that's what's leading to the growth outcome. We started this business in the lower end of the market, we continue to believe that, that's a very good place to market in our brand and our product, is differentiated there, but we also positioning the growth of market and so the growth rates reflect that and the dynamics that have occurred between less than 100 seats and greater than 100 seats in terms of market growth. As it relates to gross margin impact, I don't see any gross margin impact, significant impact from that dynamic. This year, we're looking at relatively flat consolidated and business gross margins, with the slight upward bias. And so as you see the growth, even though the growth of CPaaS is greater, and that is a lower margin product, historically, on the SMS side, that's being offset by efficiencies and overall growth.

The next question will be from Catharine Trebnick of Dougherty. Please go ahead.

Thanks for taking my question. Alan, could you give us a bit more insight on the rollout Amazon and how that would work and this quarter quantifying any upside to what that might be to your current guide or is that in the guide? Thank you.

Hey, Catharine. It’s in the guide for Amazon. Are you referring to Amazon Chime?

Yes.

Yes. So it’s in the guide. We expect to be on AWS marketplace now in Q2 and we have yet to solve, our Amazon has yet to solve the SAT, the tax issue for the bundle on amazon.com. So is there a guide, we've basically taken out anything significant there. We continue to work on the Amazon relationship and there's tentacles all over Alexa for Business providing much of the SMS underpinning to their simple notification service. Obviously, they are a public cloud partner, very significant with our roll out of the new Vonage Business cloud. So very significant relationship, we have nothing yet on the sales through amazon.com.

The next question will be from George Sutton of Craig-Hallum Capital. Please go ahead.

Thank you. My first question is around the Vonage Business cloud, and congratulations for having that up and running now. So I'm curious as we look at the SMB and the mid-market parts of your business, how do you think they are influenced by this new offering? And you've talked about being at a 1,000-point – I'm sorry, 1,000 seats by the end of 2018, what limits your ability to scale that up substantially further over time? That's really what I'm curious about.

Thanks, George. We’re very excited about Vonage Business Cloud. We’ve been working on this for three years. And it is our platform of the future, and over some extended period of time, beyond 2018, it could very well be our platform for everything. Remember, on the BroadSoft based sales, it's all success-based CapEx. And so if we need a BroadSoft license, we buy a BroadSoft license. But we are putting our resources into developing our own technology. What's significant also about the Vonage Business Cloud, is it's the platform that will underpin all of our solutions, whether it's UCaaS in the PBX use case, CCaaS in contact center use case and CPaaS itself, it's the platform ultimately that will underpin all those APIs. So very excited about it and the way it was architected as well. We've now moved those Vonage Essentials customers, virtually all of them, over to the new platform, so they've been running for some time and that's what enabled us to retire Vonage Essentials.

And next question will come from Jonathan Kees of Summit Insights Group. Please go ahead.

Great, thanks for taking my questions. Just wanted to ask in regards to the SmartWAN. I know you mentioned that you're expecting gross margins to be kind of flat for the year. But going the software content in SmartWAN, do you expect that to be a boost to gross margins? And I guess, I also wanted to dig further in terms of, you said you retired Essentials and you migrated all the customers onto Vonage Business Cloud. So it sounds like that's a seamless cutover. Were the customers aware in terms of the transition? I would think that, that's something that will require also change in terms of their end terminals but yeah, but more details on that would be helpful. Thanks.

Yes, I'll take the first part of that. So it relates to SmartWAN, that is a higher margin product and access. And actually, access we're projecting in 2018, that access revenue will actually decline. So that is a net positive to gross margin, all things be equal. That increases in SmartWAN and decrease in access has built into that flat margin profile with the risk to the upside in margin that I talked about for 2018. That's part of that mix.

And I'll the second on the switch to Vonage Business Cloud, it is seamless to the endpoint, so it happens in the background, the underlying call prop that whole re-architected solution is, again, not apparent to the end customer, other than to actually get an increase in functionality, but it requires no change at the endpoint. And that's how we've been able to move literally tens of thousands of customers to it.

The next question will come from Michael Rollins of Citi. Please go ahead.

Hi, thanks for taking the question. Couple if I could. The first topic is, if you could discuss the relationship between investing in sales and marketing and growing revenue and is there anything holding you back from investing more to pursue more revenue growth following all the things that you described around the product enhancements, improvements and the focus that you have? And then if I could switch gears and just ask strategically, what's more important to the company at this point, expanding the product portfolio as you look at M&A opportunities or enhancing scale, whether it's from an service perspective or a marketing perspective. Thanks.

Hi, Michael, it's Kenny. I'll take the first one. As you know, in 2017, we did quite a bit of investment in distribution, particularly in the mid-market and the enterprise. In fact, as promised we grew, we opened our 20th market in the fourth quarter of last year. And we will come to look at incremental markets as we see fit for incremental growth and mid-market and enterprise. We also that – which you may not see is, we shifted and are continuing to shift the mix of where those investments are placed, right? A fair amount of our sales and marketing emphasis was focused on that micro business, if you will, way down market. And we've done a good job of changing that mix where we see additional growth opportunities in the mid-market enterprise, that's both sales and marketing dollars. As it relates to our financial flexibility, we will continue to invest where we see accretive growth. So as we see additional markets, as we see opportunities to spend additional OpEx from markets, obviously, we'll use that flexibility to generate incremental growth in mid-market and enterprise.

Then Mike, on your M&A question. So first off, we're not limited to product or scale necessarily or just choosing one, and we feel like we can pursue a number of opportunities and execute on a number of opportunities, if that's what makes sense. Consider on the product side, it really is a buy versus build. And I think right now, we've got the products to take to market in terms of the big products where we, of course, innovating and adding features, but we've got the products we want to go-to market with, so it really comes down to do a buy versus build on certain things such as contact center, we're constantly assessing that. As it relates to scale, we think that's another bucket of M&A opportunity. In general, buying UCaaS seats from smaller providers is a good trade for us and it's not getting more expensive and I think it won't get more expensive over time. And we think that, that's pretty attractive and we're simply kind of weighing that smaller deals on that side relative to larger deals that could help the order of the industry. And so those are things that we're constantly assessing.

Your next question will come from Tim Horan of Oppenheimer. Please go ahead.

Thanks, guys. With the new cloud services, can you talk about how quickly you can customize services and may be how this kind of compares to some of your larger OTT voice competitors? And then, Alan, just a high level question, can you talk about the ability to kind of integrate more collaboration based services over time, like flack and some of the other products that are out there. Are you, kind of, able to create those type of products? Thanks.

Yeah, hi Tim. So, Vonage Business cloud is, relative to the competitors, is a platform for which we can innovate faster than they can. It would – it architected entirely in a public cloud with a public cloud approach. All the elements of the design lend themselves to fast innovation cycles, the ability to expand that platform internationally, which we intend to do. That architecture, and I said this to my comments, is incredibly different than what our competitors have tried to do, who have had those stacks around for 10, 12 years that they're now trying to lift and shift those into public cloud. They currently today, all sit in private cohorts, not in a public cloud infrastructure like AWS. But it goes beyond just where it's hosted, it's really how it's architected. So that's a very, very important point to recognize and it is already replaced Vonage Essentials. And as you remember, Vonage Essentials was 55% of the revenue and two-thirds of our seats. So we've now built a platform that has greater scalability and the opportunity for greater innovation cycles than the competition. Your second question, relative to collaboration, so we have built our, or we've included in Vonage Business Cloud, our collaboration built on Amazon Chime through that broad relationship. We have other elements on our own technology there, that relative to integrations whether it's slack or stride or whatever, we have built-in, and certainly, even in Vonage Essentials, we've built in the integration with Team-One already. So we're not trying to play king maker, if you will to say, we're going to build a solution that is going to defeat stride or going to defeat slack, rather we'll integrate into those increasingly.

The next question will come from William Power of Robert W. Baird. Please go ahead.

Great, thanks. First question, I guess, perhaps, for Tony, just looking at the CPaaS growth and trends there. Maybe you could just speak to what the key drivers in the quarter were, sources of growth, U.S. versus international. And just any update of what you're seeing competitively on the CPaaS front, I guess, in both those geographies? And then, Dave, just on EBITDA, looking at Q1 guidance versus full year. Maybe just reminder us with some of the seasonal aspects and why it looks like you expect that to improve more in the second half of the year? Thanks.

Yes, maybe I can give some high-level on kind of what's driving the growth and we can dive into more details with Dave here. But especially there is few drivers of the CPaaS growth, primarily around enterprises needing to use more software when they can engage with their customers. So they need to embed communication in every app they have that needs to be interacting with their customer. That's kind of the high-level trend driven by the digital transformation. Specifically, to our business, we see growth in the – as we've grown the business and the asset faster last year than any other region and we see also growth happening with the expansion of our platform by adding new products such as the programmable voice API and also the contextual communication APIs as well. So this is kind of the high-level trend and lastly, the enterprise adoption is also increasing. We see a shift from the early adopter, is where your digital native companies, your startups into the early maturity and these are the enterprises and there's much more enterprises out there than early stage companies.

And then on your OIBDA question, last year we saw the same trend, we did $37 million in Q1 of 2017 and we finished the year with $51 million. The first quarter is a very heavy quarter for us in terms of payroll taxes as well as resetting the bonus accrual and other employee benefits. We also think that consistent with last year we're going to see gains – operational gains throughout the year on things like churn where there'll be some OIBDA benefits. So it's a similar ramp to last year and that tends to be the way our EBITDA unfolds.

The next question will be from Mike Latimore of Northland Capital Management. Please go ahead.

Yes, thanks. On the Vonage Business Cloud, what is sort of the sweet spot you're going to target that in terms of seats. Is it under 1000 now, or like what's the seat range and then where does that go over time in terms of the ceiling on seat count?

Hey, Mike. Vonage Business Cloud is our platform of the future. So it will serve to – it already does serve customers from one line up to hundreds and hundreds and hundreds. The – over a period of time it will be more and more capable to serve even the very largest customers. BroadSoft still fits in enterprise used cases in certain specialized needs but it makes a great deal of sense and we'll continue to buy those licenses on a success basis, where it makes the most sense. So there isn't really a sweet spot per se, other than the sweet spot from our sales and marketing approach, which is the growth is in the upmarket, mid-market and enterprise. Our focus is shifting to that, our platform is completely capable of taking us there and the – we're simply just following the growth in the underlying market. We come from a traditional strength in micro and that segment is getting more and more saturated, so growth is slowing in the micro and so we're pushing aggressively our growth in the mid and enterprise.

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference back over to Hunter Blankenbaker, for any closing remarks.

Okay, good. Thanks, Denise. That does concludes the Q&A portion of the call. We look forward to seeing many of you in the upcoming various Investor Conferences and Enterprise Connect, and for those unable to attend in person, these events will be webcast and you can follow our comments on the Vonage Investor Relations website. And please contact us if you need any additional details. So thanks, again, for joining.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.