Venture Global, Inc. (VG) Q2 2018 Earnings Report, Transcript and Summary

Good day and welcome to the Vonage Second Quarter 2018 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Hunter Blankenbaker, Vice President, Investor Relations. Please go ahead, sir.

Great. Thank you, [Muerdo] [ph], and good morning and welcome to our second quarter 2018 earnings conference call. Speaking on our call this morning will be Alan Masarek, Chief Executive Officer, and Dave Pearson, CFO. Also joining us is Kenny Wyatt, Chief Revenue Officer. Alan will discuss our strategy and second quarter results and Dave will provide a more detailed view on our second quarter results and updated 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, 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 second quarter earnings press release or the second quarter earnings slides posted on the IR Web-site. So, with that, I'll now turn the call over to Alan.

Thank you, Hunter. Good morning everyone. Thank you for joining us today and my thanks to our investors and analysts for your ongoing support. Vonage delivered another quarter of strong business growth while executing our transformation into a communications software company. Total business revenues were $148 million, up 20%. Of this, Business service revenues were up 24%. Consolidated revenues were $260 million, a 3% increase, and adjusted OIBDA was $45 million, a 10% increase. Our strategic focus is to deliver a differentiated fully programmable communications solution that drives better business outcomes for our customers. And to this end, we are proud to announce the acquisition of TokBox. Central to our strategy, we are creating a single communications platform, branded One Vonage, which is the integration of Nexmo, Vonage Business Cloud, and TokBox's platform. All three technology stacks leverage a micro services architecture with open APIs built on a public cloud infrastructure. With One Vonage, we can provide solutions, all fully programmable, that range from packaged applications like PBX, contact center, collaboration and team messaging, to programmable communication APIs, to integrations into other workflow applications via our Vonage Integration Suite. From the One Vonage Platform, our solutions will seamlessly integrate a business' customer communications with and into its employee communications and workflow tools. The result and our strategic focus is to deliver fully programmable communications solutions that drive better business outcomes for our customers. Now with that as a background, let's review the TokBox acquisition and its strategic significance. I'll ask you to turn to Page 5 of the slide presentation on the IR Web-site. TokBox is the global leader in programmable video APIs and we are thrilled to bring it onto our One Vonage Platform. With TokBox, our products span the full range of communication APIs across video, voice, SMS, and IP messaging. TokBox is headquartered in San Francisco, just up the street from Nexmo. In fact, we are hosting this morning's call from San Francisco to formally welcome TokBox's team to our growing Vonage family. Scott Lomond, CEO of TokBox, is with us on this call and available for questions following our prepared comments. TokBox was founded in 2007 and acquired by Telefonica in 2012. Telefonica invested to develop TokBox's video technology platform into the world-class leader it is today. When the opportunity to acquire TokBox presented itself, we acted decisively because we understood the strategic value of TokBox's programmable video technology. In fact, we believe all future communications solutions will be programmable. Nexmo gave us programmable voice, SMS, and IP messaging, and TokBox completes our portfolio by adding programmable video. TokBox is the most scaled and globally distributed video platform as a service and TokBox has the most advanced WebRTC video APIs in the market. TokBox's video solutions are fully programmable and they are available as open APIs with a set of SDKs and developer tools. Now moving to Slide 6, we are enormous believers in video. Video is the most personal and interactive mode of communication and there are myriad communication use cases that depend on video. For example, the 'See What I See' use case. So, if I'm in automobile body shop, I need the remote insurance claims adjuster to see what I see. The Many-to-Many use case; if I'm a teacher, I can host interactive virtual classes with students all over the world. The One-to-Many use case; so if I'm an expert with a large following, I can offer live interactive broadcasts over the Web. Moving to Slide 7, as with our voice, SMS, and IP messaging APIs, video use cases are limitless. In fact, we are on the cusp of widespread adoption of programmable video applications. IDC expects the video platform as a service market to exceed $7 billion by 2022, reflecting a CAGR of 140%. This growth is being driven by three key growth drivers. The first driver is the adoption of WebRTC as the worldwide standard. The second growth driver is that programmable video reduces the cost and complexity for developers to integrate live video into Web-sites and mobile apps. And the third driver is the near ubiquity of video camera-equipped devices coupled with 5G and improvements in networking infrastructure that minimize video latency. Now moving to Slide 8, TokBox has an impressive footprint of more than 2,300 global customers. Some current customer example use cases are; Royal Bank of Scotland uses video communications to accelerate the account opening and identity verification process; InTouch Health uses video consultations to improve doctor-to-patient communication and quality of care; Chegg uses video to enable virtual classrooms, tutoring services, and exam proctoring; Kickstarter uses video for remote interviews, language translation, broadcasts and Webinars, and video customer service. From a go-to-market perspective, TokBox amplifies our growth opportunities. TokBox has almost 100,000 developers registered on its platform, and we can cross-sell video into Nexmo's existing base of customers and developers while selling SMS and voice into TokBox's customers and developers. We also plan to market programmable video to our base of UCaaS customers. Finally, TokBox brings a talented workforce of technologists to help accelerate our pace of innovation. Now, let's review second quarter highlights and our strategic progress. In the quarter, we launched a wave of new capabilities across the One Vonage Platform, and I'll highlight two new innovations. First, we introduced Vonage Flow, our new proprietary team messaging solution, fully integrated with Vonage Business Cloud. Vonage Flow enables customers to leverage team messaging, file sharing, SMS, and voice, within a single interface across any device. Secondly, we launched Vonage CX Cloud, an integrated solution within contact to offer customers an advanced omni-channel contact center suite. We also introduced the Vonage CX Enablement Suite, which includes several new contact center capabilities, such as real-time sentiment analysis and real-time text-to-speech translation, split recording, and WebRTC supported by our voice API. We demonstrated CX Enablement Suite at Google Next last week to rave reviews. Product innovations are key to our growth strategy. It is why more than 100,000 businesses use Vonage to drive digital transformation and to deliver better business outcomes. These product innovations are driving strong growth across specific product categories. For example, Advanced Contact Center revenues increased more than 50% in the second quarter. Revenues from SmartWAN, our SD-WAN solution, increased more than 100% in the quarter, and SmartWAN is critical to our customer success strategy because it gives customers an end-to-end QoS guarantee and we offer the market an unparalleled Five9's SOA. And finally, our Nexmo voice API is gaining traction and VAPI revenues increased 100% in the quarter. In addition to product innovations and the ongoing development of our One Vonage Platform, we continue to invest in go-to-market initiatives with the goal of increasing Business service revenue growth beyond the 24% rate achieved in the second quarter. These initiatives span four categories; one, focus on midmarket and enterprise customers; two, improve performance within each route to market; three, increase revenues via our land-and-expand customer strategy; and four, build our base of registered developers. Regarding our focus on midmarket and enterprise customers, we saw a 27% increase in Business service revenues for UCaaS accounts billing more than $1,000 MRR. We closed or renewed 28 UCaaS deals with MRR greater than $10,000 and 11 of these deals included contact center. Of these larger deals, seven had total contract values greater than $1 million. Regarding our route-to-market initiatives, our indirect channel initiatives are gaining traction. Agent productivity increased and average deal size more than doubled. We also added over 100 partners across UCaaS and CPaaS in the quarter. And we more than doubled the production of the CPaaS global mid account managers that we began ramping just last year. Now regarding our land-and-expand customer strategy, we saw a robust growth from existing customers. Revenues from customers added in the year ago quarter increased six-fold in the current quarter. We saw significant growth from long-time customers like Grab, Google, Microsoft, Shopify, and Tencent. And we saw accelerating traction from new customers. Revenues from new customers added in the quarter increased to 125% with new global brands like Globe Labs, [indiscernible], as well as the largest German athletic apparel company and the world's largest retail. Regarding developers, Nexmo ended the quarter with 546,000 developers, up 62,000 sequentially. Within this, U.S.-based developers increased 20% sequentially. And with the addition of TokBox, our number of registered developers is roughly 650,000. This developer footprint is a unique asset as well as a defensive moat that protects us from prospective competitors. In closing, these continue to be very exciting times at Vonage. We are building a communications software company based on One Vonage, our programmable cloud communications platform. From the One Vonage Platform, our solutions will seamlessly integrate a business' customer communications with and into its employee communications and workflow tools. The result and our strategic focus is to deliver fully programmable communications solutions that drive better business outcomes for our customers. I'm pleased with our financial results and I'm proud of our team's performance. We continue to make meaningful progress against our longer-term growth strategy and our pace of product innovation is accelerating. We now have the broadest portfolio of cloud communications solutions to enable customers to transform their businesses. And we've added a great team and great technology with the acquisition of TokBox. I'll now pass the call to Dave to discuss our financials and updated guidance.

Thanks, Alan, and good morning everyone. I'm pleased to review financial results for the second quarter of 2018 and update guidance for the acquisition of TokBox and financial results to date. As in the past, quarterly growth rates reflected in our presentation slides and during our prepared remarks are on a year-over-year basis, unless otherwise noted as sequential. Starting on Slide 11, consolidated revenues for the second quarter were $260 million, up $8 million or 3%. With Business the larger of our two segments and growing significantly faster than Consumer is declining, we are driving increasing consolidated growth. Consolidated gross margins were steady at 59%. We improved margins across all of our services, offset by the changing mix of services. Moving to Slide 12, let me now turn to our segment financial results. Vonage Business total revenue was $148 million, representing 57% of total Vonage revenue and a 20% GAAP increase. Business service revenue grew 24%. UCaaS service revenue was $75 million, growing at an organic rate of 14%, consistent with our expectations. CPaaS service revenue was $52 million, a 49% increase, reflecting the growth of the programmable communications market and the effectiveness of our land-and-expand strategy. The organic growth numbers reflect the completion of the sale of our Hosted Infrastructure business in 2Q of 2017. In addition, some customers on one instance of our third-party-based call processing software platform experienced a several hour service interruption in the quarter. As a result of this, we granted customer credits of almost $1 million, a direct reduction in quarterly Business service revenue, gross margin, and adjusted OIBDA. But we are disappointed with this event. We believe we have built significant customer goodwill based on our team's responsiveness. Moreover, with the strategic move to our own software platform, we are increasingly controlling the entire customer experience. As we have done in the past, we included a table on Slide 19 of today's presentation showing the last five quarters of the items I just noted. Overall, Business service margin for the second quarter was 53%, flat from the prior year, again reflecting higher margin on our services offset by mix. Moving to Slide 13, second quarter Business service revenue per customer was $348, a 6% increase from $327 a year ago, reflecting our successful efforts to move up market. Second quarter Business revenue churn was up 0.1%, to 1.2%, driven by the traffic volatility of a small number of APAC CPaaS customers. Moving on to Slide 14, Consumer revenue for the second quarter was $112 million, down 13%. Consumer customer churn was 1.7% down, from 1.9% a year ago and sequentially, marking record low churn. This improvement was driven by lower top-of-funnel churn, more tenured customers that now represent 84% of the base, and lowering of churn from these customers. Given this churn, we recorded our lowest net line loss in the past three years and ended the quarter with 1.4 million Consumer subscriber lines. We are proud of the churn improvements in Consumer and expect churn to stay low, although I want to point out that 2Q is a seasonally low quarter and churn can move around quarter to quarter. Average revenue per line of $26.37 was roughly consistent with $26.33 in the year ago quarter. Consumer service margin for the quarter was 88%, up from 82%, largely due to the allocation of certain costs to the Business segment as those revenues go up and organic cost improvements. Now moving to notable income statement cost items on Slide 15, consolidated sales and marketing expense for the second quarter was $78 million, down $2 million. The decline was driven by the effect of the adoption of ASC 606. General and administrative expense for the second quarter was $32 million, down $4 million. The main difference from the prior period is the much lower vesting payouts to Nexmo employees that were part of the 2016 deal consideration. In fact, there is no contingent deal consideration remaining as part of the Nexmo acquisition and we continue to be very happy with the strategic and financial value we derived from this transaction. Engineering and development costs were $10 million, a 56% increase, reflecting investments in our One Vonage Platform. GAAP net income of $9 million was up $4 million. Adjusted net income for the quarter was $17 million or $0.07 per share, up $2 million. The adjusted net income metric removes non-cash items, giving a clear picture of our strong operational performance. Turning ahead to Slide 16, second quarter adjusted OIBDA was $45 million, up $4 million. The increase in adjusted OIBDA was due to higher revenue and the lower sales and marketing and G&A expense. Moving to Slide 17, CapEx for the quarter was $6 million, down $3 million, driving adjusted OIBDA minus CapEx of $39 million, up $7 million. As we move away from private hosting of our solutions and data centers where we have to buy the hardware to public cloud hosting of the One Vonage Platform, this measure of operating cash flow will capture the net positive effect of the shift from CapEx to OpEx. This strong cash flow enabled us to pay down more than $35 million of debt in the second quarter. Pro forma for the acquisition of TokBox, net leverage as of June 30 was still only 1.1x trailing adjusted OIBDA. The total purchase price of TokBox was $35 million in cash, adjusted for certain working capital and other items. We believe this purchase price reflects a valuation of less than 2x 2019 revenue for a company that expects to grow well over 50% organically. We financed the transaction through a new $600 million credit facility that provides the Company with enhanced liquidity and greater financial and strategic flexibility. The facility is a significant improvement from the prior one, extending maturity to five years, lowering cost of capital, loosening covenants, lowering amortization, increasing revolver capacity, and increasing size by $150 million. Facility consists of a $100 million term loan and $500 million revolver which has a low carrying cost when not drawn. JPMorgan served as lead-left bookrunner, with all of our major existing lenders committing and Bank of America joining the bank group at a senior level. As Alan noted, we believe the acquisition of TokBox is very compelling. It operates the largest WebRTC video platform as a service offering in the industry in a large market that is poised for explosive growth. We believe it will create significant value for Vonage and our shareholders. With our strong cash flow and significant liquidity, we continue to be in a position to fund further growth and strategic acquisitions. Turning to Slide 18, consistent with our prior custom, we are updating annual guidance to reflect the acquisition of TokBox. In addition, in this update we are taking into account higher growth in Vonage Business and the accelerated adoption of the Vonage Business Cloud Platform. Specifically, we are raising 2018 consolidated revenue guidance to a range of $1,040 million to $1,050 million. Within this, we now expect Vonage Business revenue to be in the range of $600 million to $610 million. This incorporates the addition of TokBox as well as the higher growth in Vonage Business. There is no change to Consumer revenue guidance of $435 million to $440 million. We expect adjusted OIBDA to be in the $185 million area, with the adjustment attributable primarily to TokBox, as we plan to invest in its product, go-to-market, and growth. We expect TokBox to contribute to OIBDA in 2020. The remainder of the change in adjusted OIBDA is due to the accelerated adoption of VBC and corresponding shift of public cloud hosting expenses from CapEx to OpEx. A corollary to this is that we expect CapEx to come in materially lower than original guidance, in the $30 million area, meaning OIBDA minus CapEx, our operating cash generation is expected in the $155 million area. This means that all of the impact of the Hosting expense shift and part of the impact of TokBox is being offset by OIBDA minus CapEx. In conclusion, we feel very good about our financial performance for the quarter and the long-term strategic actions we took to acquire TokBox and raised the new expanded and extended credit facility. I'll now turn the call over to Hunter to initiate the Q&A.

Okay. Thanks, Dave. [Muerdo] [ph], let's go to the first question please.

[Operator Instructions] The first question comes from the line of Tim Horan with Oppenheimer. Please proceed with your question.

Great quarter guys and congratulations, Alan, and good luck, and the whole team. On the One Vonage Platform, where are we like in the development of this platform? Is UCaaS available now with the APIs required that I can customize on my own services? And how long do you think it will take to get TokBox in here and all the other applications that you want? Thanks.

So, the development of the platform is an ongoing effort. So Vonage Business Cloud itself is the core of One Vonage. So it is already built on a micro services architecture. That work is underway and you see elements right now that are already delivering that programmability. For instance, we talked about Vonage CX Cloud where we bring in things like sentiment analysis as the programmable API into the contact center solution within a common UI. So, it's an ongoing effort that you'll continue to see more and more enhancements or more innovations that come from it over the next 18 months. Relative to TokBox, we think that process also will be incremental as we bring it together under the covers. I don't have a specific timeline just now.

And who is the primary competitor for this platform that you develop, do you feel is a primary competitor?

Within programmable video, it's Twilio. But we have been in this business for much, much longer than – or TokBox has been in the programmable video space much longer than Twilio. Let me actually introduce Scott Lomond. He can take that question specifically.

Thanks Alan. This is Scott. As Alan was saying, we've been – we started out as a video company. So that's where we really cut our 'T's and began in 2007. We got into platform business in 2010 and then the WebRTC business in 2012. So, pretty early on we bet big on WebRTC. And we've been serving customers commercially around the globe since then. So, having that heritage, we have solved a lot of problems for a lot of customers that some of our competitors who really just gotten into the business maybe a year, year and a half ago, are just starting to figure out. So, we're confident in our ability to continue to deliver video value propositions for customers and we're excited to be part of this Vonage story.

The next question comes from the line of Rich Valera with Needham & Co. Please proceed.

Congratulations on the acquisition and the fine quarter, gentlemen. Dave, I was hoping you could give us maybe more specifically what you're expecting on the revenue line from TokBox in 2018 and in 2019, and likewise on the bottom line, what specifically are you expecting from them, if you could, in both of those years? Thank you.

So, for 2018, to be clear, we closed the transaction last night. So we'll own the company for five months in 2018. We expect in that period of time to contribute roughly $5 million of revenue and about $7 million, just about $7 million of drag on EBITDA as we accelerate investment into the platform and into the route-to-market. In 2019, we expect it to contribute, to grow at least 50% and potentially well more than 50% on an organic basis, and we do expect a small EBITDA drag as we start to get some synergies. We don't expect synergies to really have any material effect in 2018, but to be a relatively small EBITDA drag in 2019 and then to be positive EBITDA in 2020. In terms of what the asset can do from a revenue perspective, we think about what it's doing today, which again is growth north of 50%. How high that can go, I think we need to own it and think about what the revenue synergies and revenue opportunities are.

That's great. Just to be clear, the baseline revenue for 2018 for the full year, what definitely would be basing the 50% growth off of, can you give that number?

For 2018, it's in the $11 million area.

Perfect. And then separate question, but I know you mentioned you're focusing more on sort of channel and midmarket, any update you can give in terms of specific initiatives you're taking there and any kind of things we should look for in the future as far as your progress on that sort of channel initiative? Thank you.

It's Kenny. So, as we announced earlier this year, we introduced channel teaming to the organization in first quarter, essentially turning our field sales organization into channel kind of from a liability more towards an asset, where now we are working together with the channel, leveraging the distribution we have through a direct field sales organization with inbound channel deals, and we're starting to see traction against that. That's not only from a route-to-market perspective but also from a cohort standpoint as we're seeing – as Alan announced this morning, we're starting to see traction in that midmarket where that distribution is pointed, as witnessed by the 27% growth for deals above $1,000 of MRR. So, the investments that we've made in channel, the investments that we've made in field, we're certainly starting to see traction around it.

That's great. Thank you for that. Congrats gentlemen.

The next question comes from the line of Dmitry Netis with William Blair. Please go ahead.

Let me add my congrats on a nice quarter and good momentum. Couple of questions. Just to follow on Rich's question, I think you gave the number before on the channel as a percent of new bookings, what was this contribution this quarter, ahs it improved? I think it was around 10% maybe last quarter. Has it gone up?

It is Alan. It is definitely going up. We said that sort of in the year ago quarter, it bounces around quarter to quarter, but it was in the low double-digits. So it's clearly moving up, but it's bookings initially and then obviously driving into revenue.

Okay. And then another housekeeping item, I didn't see on the press release the number of business seats exiting this quarter. Are you guys still providing that metric, and if so, what would that number be?

We're not providing that metric. We moved to essentially a customer ARPU on all of our Business customers, excluding auction and algorithmically trading CPaaS customers. You can get the customer number just by dividing that out by the service revenue, and I can get you that specific number if you want.

Okay, I appreciate that, Dave. Okay, very good. And then just to kind of go back on this UCaaS or a CPaaS split, I mean Nexmo has done very, very well this quarter obviously, accelerated from 42% to 49%. You had talked about on the UCaaS side everything above sort of $1,000 MRR growing 27%. Correct me if I'm wrong, that was roughly in the same range last quarter, is that right?

That's correct, it's in the high 20s.

High 20s, okay. And then, but if you look at it on the whole, service revenue was 14, and then if I add product, it was only up about 10. So there still continues drag on that business. Maybe it's the low-end. Just kind of maybe, Alan, walk us, what are you doing to improve that growth rate? I know it's been sort of several quarters now in the making that you're trying to step it up, and channel obviously is contributing to the high end of that segment, but is there something on the low end, midmarket, that you need to be doing also to kind of improve the overall growth rate, including product or including service revenue, pure service revenue?

So Dmitry, the answer really is, you described it in your question, which is we continue to be over-indexed into the micro segment, into the 1 to 9 segment, which is growing in the single digits, consistent with market growth, but again, it's a drag to overall service revenue growth. The major sort of actions in order to drive overall revenue growth is precisely what we talked about, which is how we enhance our route-to-market's channel, how we enhance our larger ticket deals, contact center, and our ability to up-sell our existing base with sort of a next product to buy. So, we're focused on all of those. It will just take time for us to grow out of our over-indexation into micro, because that market is growing more slowly and we're not investing as meaningfully in that market simply because there's greater growth up-market. Our view again is we look at Business revenues on a combined basis. The fact that service revenues grew 24% in the quarter is a nice number and our hope is to continue to drive that even higher.

Okay. And if I may, just one last one here…

Apologies. The next question comes from the line of George Sutton with Craig-Hallum. Please proceed.

Alan, I wondered if you could address your go-to-market strategy, your competitive advantages you laid out when we now combine TokBox and when we combine Vonage Flow. I want to bring Vonage Flow into the conversation. It seems to me those are starting to create some interesting competitive advantages.

Actually they exactly do. So the notion, actually just fall back to our strategy, our strategy is that by virtue of having a single platform that is programmable, whether you are working in the large application categories, like PBX or contact center, or in down to the raw materials if you will, the individual APIs that get programmed in, by virtue of making the entire staff programmable to integrate customer communication, that business' customer communications, with its employee communications and integrating then into its workflow tools, productivity, CRM, help, et cetera, you do drive those better business outcomes. Vonage Flow is an example of that because now we have in a fully integrated way the whole team messaging and collaboration solution. Things like I mentioned before on Vonage CX Cloud, the same notion again, it's an integrated solution to improve the contact center experience. Our whole go-to-market strategy is to get away from I'll refer to it sort of as a PBX feature sale. As I often day, you don't want to be in a position where you're pounding the table in a sales pitch saying, buy me because my auto attendant is better than my competitors, because it's baseline functionality. You've got to present a solution and that's what we're putting together. Our salespeople in virtually every pitch lead with that differentiated story, because again, everyone wants to avoid getting into this more sort of commoditized feature by feature PBX sale. That we have to stay away from. And so, all the things that we're doing are driving towards that differentiated offering.

It seems like you're making Kenny's job too easy. I have one other question. You mentioned you added 100 channel partners and we are definitely hearing your name more prominent in the channel space. So I just wondered, what does 100 channel partners mean on a relative basis?

George, it's against a base of a couple of thousand total agents. The more important piece is the quality of the partners that we're bringing on. If you take that 100 and you split it, it's roughly half-and-half between UCaaS traditional channel partners and CPaaS brand-new partners in areas like SI, systems integrators, as well as ISVs, independent software vendors. And so, we're really trying to expand the aperture, if you will, of the quality of our partners to make sure that we're covering kind of all channel partner types, not just additional telco.

Got you, okay. Thanks guys. Appreciate it.

The next question comes from the line of Will Power with Baird. Please proceed with your question.

Just a couple of questions. Maybe coming back to the CPaaS growth, looked like particularly strong growth sequentially, greater than I think we've seen historically. Does that just continue to be some of the traction you're seeing in Asia, anything else you'd call out there? And then I guess my second question relate to those. As we think about the Business service gross margins moving forward, and obviously that mix to CPaaS presumably works against that, but I'd also just be interested in any color with respect to TokBox, what that means to gross margins, is it similar to this CPaaS business? Any color there would be helpful.

It's Kenny. I'll take the first one on CPaaS growth. We do continue to see strong geographic performance. You mentioned Asia. That continues to perform well for us in the geography, as do the rest of geographies, but that one specifically stands out. I'll also tell you, we're seeing acceleration. You may remember, we introduced as part of our go-to-market mid account managers in 2017 of last year that we started ramping those kind of mid to late in the year. We're really going after the midmarket for CPaaS and we're seeing significant traction for that piece of the go-to-market. So, not only hitting on what we call key accounts, our largest accounts, and continue to grow those, but brand-new logos in the midmarket for CPaaS is we're seeing kind of disproportionate traction there as well.

And Will, you're right, the sequential increase in CPaaS was $10 million. That's the highest we've ever seen. I don't think that's a trend. I think that was unusually good quarter. But the business is growing very strongly and above our expectations going into the year, which is why we took up guidance accordingly in addition to adding TokBox into that mix. As it relates to margin, I think it's basically flat, which is margin improvements in all the services being offset by mix depending on the growth of some of the lower-margin services. You could see it come down 1 point, but generally that's the trend. We do look at corporate margins consolidated as a very important metric because there is an allocation between Consumer and Business that gets done every quarter and that puts more and more cost on Business as time goes by, and I think in the consolidated margin you can clearly see the benefit of the assets together. I would just note lastly that TokBox we believe is gross margin accretive to Business gross margin. TokBox's video PaaS service has a good strong gross margin in the 50s, and as you can see from our published segment reporting, that eventually when it becomes material, will be additive or accretive to gross margin.

Okay. That was great. Thank you.

The next question comes from the line of Jonathan Kees with Summit Insight. Please proceed with your question.

I want to add my kudos to the financial performance and business performance. So, just wanted to follow-up on that last question, I understand that that may have been a more unusual quarter in terms of the CPaaS revenues, sequential increase in CPaaS revenues, so I guess taking a step back, in the past you've talked about CPaaS growth rate, you're anticipating it to be in the high 30s, early 40s. Is that still the case, are you bringing it up, especially since you had recently higher CPaaS growth rates? And I have a follow up after that too please.

Sure. So yes, as we thought about, when we gave guidance at the start of the year, we talked about a number in the high 30s, approaching 40 for CPaaS. Two things happened. Number one, we increasingly started operating the business as a combined entity and moved our KPIs to combined, and we have full integration of our sales force and routes-to-market and so on. So, we really think about Business revenue as the objective here, Business revenue growth. That being said, the increase in the guidance does imply a faster than 40% growth rate in the CPaaS services part of our Business revenue, so faster than we originally thought.

Okay, great. I guess what should we say like early 40s or is it – help me in terms of…

I'm not going to parse that too much, but again, within the quarter it grew 49%. We don't think we can put on $10 million every quarter. So I think that helps guide your analysis.

Okay, great. [Indiscernible] range, thanks. My follow-up is, if you can possibly share I guess couple of things, why Telefonica Digital sold it and you're thinking in terms of buying it versus building it? I mean, my understanding of TokBox is that they also have some voice and messaging programmable APIs too. So, that overlaps with Nexmo. So, how would that integrate in terms of their platform?

I mean I'll take sort of the Telefonica piece initially. Really it's just a change in strategy. Beginning around the time of their acquisition, Telefonica had spun up a subsidiary, Telefonica Digital, to make a series of investments outside the core wireless business. They had decided for whatever reason to retrench on that strategy and have divested those assets. As a matter of fact, TokBox is the last of the assets within Telefonica Digital to be divested. Relative to the portfolio of APIs, let me turn that to Scott and have him take that question.

Thanks Alan. So you are right, we do have additional APIs around straight video, because if you're going to have a video application, you're going to have to have voice with it, you're going to have to have screen sharing, you may have text messaging you need to supplement the video as a total package. So yes, we have that. The degree to which there's overlap with some other Nexmo products I think is something we're still going to work through in the coming weeks as we start to focus on integration.

Okay, great. Thanks for the additional color. Good luck.

The next question comes from the line of Mr. Mike Latimore with Northland Capital. Please proceed with your question.

This is [Vijay] [ph] here for Mike Latimore. Question is on the recent Google Contacts and their AI integration, how do you see the integration in terms of the importance with regards to your contacts and the customers or do you see any incremental revenue opportunity?

[Vijay] [ph], I want to make sure I understand your question. You're talking about the AI integration with Google's AI engine?

Yes.

Let me ask Omar Javaid, he's our Chief Product Officer, let me ask him to take that.

So I think your question is as a result of that release, do we expect incremental revenue opportunities from that? I think, so we're very excited about that partnership with Google. We think that AI in particular has a lot of utility in the contact center space. I think, I guess the only caution I would put there is that it's still early days for everybody. So, we see an opportunity, we're very excited about it, and we're working closely with Google on some prospects, but I think we don't – we think any of that would just be kind of upside to our plans.

I think, [Vijay] [ph], the key thing is that there's lots of innovation across the contact center space and what's interesting about that is that the natural connection is between CPaaS and CCaaS, the contact center space, because most of what CPaaS has been about is about those communications external to the business, to the customer. And so, think of the customer as a task. I need to route that task intelligently using AI tools to the appropriate agent, to the appropriate expert. That's where the natural integration happens. And so, there's a ton of innovation that we're working on and we've demonstrated some of that. Vonage CX Cloud is one example of that integrating sentiment analysis with contact center.

The next question comes from the line of Catharine Trebnick with Dougherty & Co. Please proceed with your question.

I have just two questions. One, competitive landscape, and in particular in the UCaaS, and then really how – it seems from reading the tea leaves and you can tell me if I'm right or wrong, you're getting more traction with CPaaS in the contact center than you are maybe with the UCaaS, and either prove me right or wrong on that question. Thanks Alan.

I think there's no change in the competitive environment relative to the existing competitors within UCaaS, and quite frankly within CPaaS. CPaaS is growing more quickly, the market itself is growing more quickly, and we're riding that wave along with our closest competitor on this in the CPaaS products, Twilio. The activities or the efforts that we're making in UCaaS, we fully expect to accelerate our growth in UCaaS. And so, what I – in my prepared remarks all I'm commenting on, what's happening from a product specific area. So we talk about growth in contact center, we talk about growth in SmartWAN, and then what's happening from a route-to-market perspective and within that customer segment, so how we focus on larger customers. So, seeing a 27% increase among starting in midmarket up, and then doing 28 deals greater than $10,000, and seven what we refer to as enterprise deals in quarter above $1 million TCB. Those are all the greenshoots that are happening to build the overall service revenue growth. Yet, our growth is going to be muted because we are over-indexed to the micro segment which is growing at mid-single digits. It's just the math. But all the activities that we're doing are beginning to bear fruit in the way I just described.

All right, thanks. And then just another one, you've really launched in the last I don't know six months seems a really rapid-fire of many, many new products, just the Vonage Flow and the Contact Center ones within contact. What has really changed in the engineering department that has enabled you to put these products out at a faster clip and be more, seem to be more innovative? Thanks.

So first of all, Catharine, Omar is sitting next to me and you're making him blush. So, he's very appreciative of that comment. But we are focused, we are laser-focused on product innovation and building this platform, and what you're seeing is the result of that effort. In the P&L you see our R&D number is increasing in terms of our investments to build precisely this. Let me turn it to Omar and he can give you more color.

So Catharine, these sorts of things I think we've talked about partly. We've talked about previously about just kind of the things that we're doing to turn into a software company. I think the reality today is that we are one and a number of the things that we did under the hood that I think probably are less visible to investors are just people and processes and culture. We operate all over the world. We have very strong development centers. Some of the things that we've done is consolidate them. We have a very, very strong development presence in Israel, a very, very skilled team that has been with us, and Alan and the team have invested in that with respect to R&D. Our CTO, Sagi Dudai, he and I have partnered very, very effectively to get these products out there as quickly as you are noticing. And in addition to leveraging the strength that we have in Israel, we have built other centers of excellence, for example in London bolstering that through the Nexmo acquisition. So, I think a lot of what you're seeing now is sort of, it's kind of that adage. The overnight success is never overnight. There's always a stuff, there's a lot of stuff going on underneath the covers, and that's really what this is.

All right, thank you very much. Keep up the good work.

We have a follow-up question from the line of Mr. Dmitry Netis with William Blair. Please proceed with your question.

Thanks for letting me queue right back up here. Wanted to ask the contact center question once again. So, with Fuze choosing to partner with Five9s and maybe some other competitors looking to bring contact center in-house, does that have a direct impact on your partnership within contact? And I know you launched the product maybe a month, maybe a month and a half ago, the CX one, has there been any traction so far as far as lead gen goes? And I would think that both of those sort of actions that I just mentioned would help shift kind of lead gen in your favor. Let me know if I'm wrong about that, but any perspective on that would be helpful.

Let me start and I'll take it to Kenny. So, relative to Fuze's announcement with Five9, I don't think it kind of has any impact per se. I know Five9 wants to have additional partners for its own distribution, is my understanding. And so, where you have ourselves, RingCentral, and Fuze, today have been mostly focused within contact as our advanced contact center partner. It stands to reason that the other competitors of the market are going to try to find distribution partners. We are seeing nice activity following up from the release at Contact Center Week with CX Cloud. Let me turn it to Kenny. He can comment.

We believe we do have a differentiator product.

Ladies and gentlemen, please hold the line. We lost connection to the management. Please hold the line. Thank you. We'll get back to you shortly. Ladies and gentlemen, the conference has now ended and you may disconnect your telephone. Thank you for calling. Have a good day.