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

Okay, great. Thanks, William, and good morning and welcome to our third quarter 2018 earnings conference call. Speaking on our call this morning is Alan Masarek, Chief Executive Officer, and Dave Pearson, CFO. Also joining us is Kenny Wyatt, our Chief Revenue Officer; Omar Javaid, our Chief Product Officer and Dennis Fois, our CEO of NewVoiceMedia. Alan will discuss our strategy and third quarter results and Dave will provide a more detailed view on our third 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 third quarter earnings press release or the third quarter earnings slides which are posted on the IR Web site. And with that, I'll turn the call over to Alan.

Thanks, Hunter. Good morning and thank you for joining us. Vonage delivered another quarter of strong business growth. Total business revenues were $154 million and comprised 59% of total revenues. Of this business, service revenues grew 23%. Consolidated revenues were $262 million and adjusted OIBDA was $50 million and adjusted OIBDA minus CapEx was $45 million. I will start my comments this morning by reiterating our strategic vision. Simply stated, we believe that by creating fully programmable communications solutions, we can drive better business outcomes for our customers. We are executing this strategy via acquisitions of technology rich cloud communications companies, including Nexmo, TokBox and now NewVoiceMedia, coupled with fast follow-on organic development. As a result of our efforts, we believe we've created the world's most differentiated cloud communications company that can provide solutions for all other companies communications needs and addresses the entirety of the cloud communications TAM. And in doing so, we're helping define programmable communications as a new communications category. Central to our strategy, we are creating a single micro services architected software platform or OneVonage. The OneVonage platform combines Vonage business cloud, our proprietary UCaaS platform, with the technology stacks of Nexmo and TokBox. And in the future OneVonage will also include NewVoiceMedia's contact center functionality. With OneVonage, we will provide integrated communications solutions, all fully programmable that range from established use case applications like contact center, hosted PBX, collaboration and team messaging, all the way through programmable communication APIs. From the OneVonage platform, our solutions will seamlessly integrate customer communications with a company's employee communications and workflow tools. The need for an integrated communications experience is critical as businesses undergo digital transformation. That is deep integration between business applications and enterprise communication tools is necessary to improve the customers experience and therefore deliver those better…

Thanks, Alan, and good morning, everyone. I’m pleased to review our financial results for the third quarter of 2018 and update guidance for the acquisition of NewVoiceMedia. As in the past, quarterly growth rates reflected in the presentation slides and during my prepared remarks are on a year-over-year basis, unless otherwise noted as sequential. Starting on Slide 7, consolidated revenues for the third quarter were $262 million, up $8 million or 3% with business accounting for 59% of total revenues this quarter and growing significantly faster than consumers declining. We will continue to see accelerating consolidated growth rates. Consolidated gross margins improved to 60% due to continued improvement in margins across all of our services, partially offset by the changing mix of services. This gross margin result is despite the trend I discussed on last quarter's call, turning the CapEx that used to be spent in data centers into OpEx in the form of AWS cloud expense. Moving to Slide 8, let me now turn to our segment financial results. Vonage business total revenue was $154 million, a 19% GAAP increase. Within this, business service revenue grew 23%. I will now discuss some of the puts and takes that impacted business revenue. In the quarter, we reduced access revenues consistent with our plan to book and migrate certain customers onto VBC and deploy SmartWAN more widely, changed an accounting estimate relating to UCaaS customer deferred revenue, lowering revenue by $400,000, added two months of TokBox revenue, dropped several CPaaS customers who did not meet our increasing margin threshold, and experienced negative currency translation impact. Overall, business service margin for the third quarter was 55% in line with the prior year and up over two percentage points sequentially. Again, reflecting higher margin across all services and lower credits offset by mix…

Okay, great. Thanks, Dave. And William, could you open-up the queue for questions please.

[Operator Instructions] And the first questioner today will be George Sutton with Craig-Hallum. Please go ahead.

Thank you. Alan, I appreciated your discussion around the programmable concept in moving and pushing out the services actually to customers -- of your customers. Have you been able to turn that into any sort of an ROI type sale where you can argue that using this creates ROI for your customers? And/or does that ultimately work its way into how you price your services?.

Thanks, George, and good, morning. I doubt we will -- let me just take those reverse. I doubt we will price our services, if you're referring to sort of a benefit basis, I think it's very difficult to capture, but what we're seeing is that using a tremendous -- a very, very robust demand for these programmable services. And the use case is -- this I put in my prepared remarks, the use cases that they're addressing are as varied as any businesses -- every business is a bit different in terms of their particular flow with their customers and sort of how they serve their customer, what their go-to-market, what their support models are and the like. The whole notion is they’re bringing these tools in because the macro goal is to improve customer engagement. And so if you think about every interaction with that customer, I want to be able to pull that customer in, in the -- in the channel of communication of their choice, with the mode of their choice to the right expert within my company and back again. So just by virtue of the growth, the ROI is embedded. Now they wouldn’t be doing it otherwise.

Understand. Okay. One other question really for Dave, I guess, the lowered OIBDA number, there are really three things I'm hearing. I don't believe any of them are fundamental. But number one, your engineering costs are higher because of lot of the work you're doing as we talked about. Number two, NewVoiceMedia had some deferred revenues that that aren't flowing through, and then some FX impact. Is there a way to break that down at all?

Absolutely. So in the last quarter we updated guidance to the $185 million area. Now we are $177 million to $180 million. The bridge there to the extent you were to go all the way to $177 million and we very much are within the range would be $5 million for NewVoice, now having seen a bit more detail on what their deferred revenue looks like and how we would account for that $1 million further CapEx to OpEx in addition to what we projected last quarter, and then $2 million of currency impact. And currency impact is fairly unique in the sense that it's attributable from a cost perspective on the disconnection between the British pound and the euro, due to Brexit. We have a significant cost base in British pounds. We take in most of our revenue in dollars and then some in euros. And that disconnection between the euro and the pound specifically is driving that. We don't view that as something that’s going to be an ongoing issue, and it hasn't -- really hadn't been an issue before this quarter.

Okay. Thanks for the detail. I appreciate it.

Sure.

And the next questioner today will be Rich Valera with Needham & Company. Please go ahead.

Thank you. Good morning. Alan, you mentioned you signed four large deals of $8 million plus deals that included advanced contact center. I was wondering if any of those included NewVoiceMedia? And if not, if you think -- if you had already closed NewVoice and had it for a couple of quarters, if that would be different, if you think you will be able to sell New Voice in cases where you wouldn't have in the past? Thanks.

Well none -- they were all -- the advanced contact center was in contact because we -- that’s the third-party product we’ve been representing. Had we owned it for a couple quarters and have the integration done? Of course, we would push those to NewVoiceMedia, because that scale, that’s for NewVoiceMedia plays best. And so, the whole idea is we're going to be integrating NewVoiceMedia in the Vonage business cloud, and as we progress forward we will be selling that as our default. Now that said, in contact we will remain in our product catalog because there are certain instances where you may not have particular involvement of CRM, particularly no involvement of sales force, added customer prospect and in contact may just fit well. So we’ve done as we’ve expanded our opportunity. We haven't shrunk at it any sort of way.

That’s great. And then I see you’re not -- it looks like you’re not going to be formally splitting out the UCaaS from the CPaaS, but can you give any color on how those two businesses performed individually during the quarter?

Let me let Dave take that.

Sure. Thanks.

Yes. Absolutely. I will give you the numbers. So UCaaS revenue was $98.5 million and the accounting policy change took $400,000 out of that. So the clean number would be $98.9 million, basically $99 million total UCaaS. That represents service revenue growth of 13%. On the CPaaS side, the number was $55.1 million of CPaaS. Again, I talked about in my script there were that's a -- we’re happy with that number. That being said, there were two impacts negatively to that number. One was $2 million of currency and again you saw a very large move in the euro that we had not seen before. And secondly, about $2 million from the customers that I talked about that we dropped, that simply not only weren't meeting our margin target, but they weren't going to meet our margin target through product mix or any other kind of growth. And that was just -- those are just one of those trade-offs that we make every day, but happen to be material in this quarter.

Got it. And just one follow-up, if I could, on the 13% UCaaS service growth. I guess, that -- I think it was maybe 14% the prior quarter. And I know you’ve been working pretty hard on the sales and channel aspect of that business. Any thoughts about how that business trend from a growth perspective as we head into '19?

Sure. Let me ask Kenny to take that.

Hey, Rich. Good morning. Yes, you mentioned it right. We’ve invested heavily in distribution as you know throughout '17 and '18. We are seeing a nice take up from channel and contact center as Alan mentioned in his remarks, which obviously benefits the UC bookings. So as we look at bookings what I can consider midmarket bookings above that $1,000 MRR threshold, we're seeing a 65% growth in those bookings as a result of really those kind of three main areas of focus: expanding distribution, field sales, continuing to invest heavily in the channel and making sure that we've got access to all the deals in the market through the channel as well as adding contact center in the bag of this -- as the sales professionals continues to improve bookings and I think we will see that come through in revenue as a result.

Got it. That’s all for me. Thanks, gentlemen.

And Rich, it's Alan again. You may recall, as a reminder, I said -- in the current quarter, across all our routes to market, contact center bookings were up fivefold. So what Kenny is referring to is that focus there is really beginning to bear fruit.

Got it. Thanks, gentlemen.

And the next questioner today will be Michael Rollins with Citi. Please go ahead.

Hi. Thanks for taking the questions. So -- and maybe just at a high level, if you think about all the additional services that you’re putting on your menu for customers to bundle together, how do you think about totality of growth versus your cloud communications competitors? Should you be able to grow in total for business revenue faster than them, because you have all these capabilities. And over what time frame do you expect to kind of effectuate that the aspiration? Thanks.

Hey, Mike. It's Alan. Simple answer is, I believe that we will be able to -- because of the totality of the offerings that we have, that we will be able to overtake our competitors in terms of our revenue growth. And so that the 23% -- and I’m adjusting service revenue growth of 23% this quarter, it's roughly been 24%, 23% through the first three quarters of the year. My expectation is that’s going to move up. And I think we will overtake all competitors. Those who are focused -- those who are -- other than perhaps those who are focused specifically on CPaaS, CPaaS as its own piece is growing the fastest. But I think the other names that we can get compared to all the time, I have every confidence that we're going to exceed their growth rate.

And as you look to accomplish that, what’s the biggest hurdle that the organization needs to overcome?

Well, I think I -- Kenny, address that in part and I did as well. We have within -- if you parse it back and I prefer not to, but if you parse it back to, you -- in just sort of the as a service component, the efforts that we're doing on you UCaaS are to grow up market because again we have been over indexed in the SMB market. We are seeing great success within the channel, growing over 40% where the average deal size has more than tripled and we're seeing contact center, which has a very high tickets to growing as well and we are adding distribution in terms of numbers of salespeople, seniority of salespeople and we are seeing better productivity. So it's those levers which are just happening. Concurrent with that again if you parse it back to the CPaaS side, we have been executing on really a mix and geography strategy, supplementing the -- where our Nexmo was strongest when we bought it, which was international termination of SMS to add voice and other higher margin and fast-growing products like VAPI as well as geography in the United States. We are just executing on all those pieces and what we can uniquely do is serve the whole TAM and others can't. As we execute and you're seeing the greenshoots -- each quarter we’re seeing more and more of that, the greenshoots of that execution that growth rate is going to count.

Thanks very much.

And the next questioner today will be Jonathan Kees with Summit Insight Group. Please go ahead.

Hi. Thanks. I appreciate taking -- you taking my questions. I wanted to ask about, I guess, maybe this is a question more for Alan here. In regards to his discussion about -- your discussion about fully programmable solutions, you’ve gone to good lengths here detailing about the cross-sell with contact center. Just curious how the cross-sell has been with customers in regards to Nexmo? How many of your UCaaS customers have been buying Nexmo? How much of that was included in like the large deals?

The way to think about it is not from a go-to-market point of view. It's from a product point of view. And what I mean by that is you clearly -- as I mentioned in the remarks, you're absolutely seeing UC and CC, so that sort of the hosted PBX and the contact center been bought together. We are seeing that everywhere and we highlighted that specifically, for instance, all four enterprise deals reflected both UC seats and contact center seats. And the contact center seat added a third to the total contract value of those deals. On the CPaaS side, what you're seeing is not a specific go-to-market connection, you’re seeing a product connection. So as I talked about the -- you'll sell more UC because all the phone numbers are programmable, which is functionality that comes from the Nexmo side or in contact center you'll sell more of that because of functionality that’s delivered because of the programmable pieces. For instance, last quarter we announced -- again, this was built on in contact -- Vonage CX Cloud, which took Nexmo's sentiment analysis and paired that within contact. Now that we have new voice media where we obviously control the roadmap, we will be able to make those integrations ever tighter.

Okay. That was helpful. So if I can dig a bit deeper there, in regards to those -- I can understand you sell more because it's more robust, you can program it. How many of the -- are you getting a greater rate interest of customers who have purchased UC and the CC solutions? And now they're like saying we wanted to be able to utilize that programmable aspect it?

Yes. You are seeing that in the examples that I gave you. And you are also seeing it where we're winning deals because of the Nexmo capability, even before it's even implemented. We are winning deals because of that. So, a couple quarters ago, we announced, just to give you an example, MedXM 5000 seat disease management company. And that was contact center and UC. We won that deal because of the Nexmo functionality because they were very interested in the ability to program the communications out to their patients, because that's how that business works. It's all about compliance with the patients. And so, it's very intensive as to communications back and forth with the patients. That functionality, which was not present in the deal day one is the reason that we won relative to competitors. That has played out over and over and over again. Our salespeople, very interestingly, even within, I will call it sort of a fairly vanilla UC deal will start by selling the Nexmo differentiator -- the ability to differentiate with Nexmo first, because that's what future-proofs that customer. It's not -- you want to avoid in a sales call getting into a feature sale. As I often say, you don't want to go to a customer and say, buy me versus a competitor because my auto attendant is better than the competitors, because it's basically very -- it's a baseline utility. It's hard to differentiate that way. But when you pair it with the programmability and now with NewVoiceMedia, pair it often with the contact center, now you’ve a differentiated offering.

Okay, great. That helps. Thanks a lot. Good luck.

Thank you.

[Operator Instructions] And the next questioner today will be Mike Latimore with Northland Capital Markets. Please go ahead.

Yes, great. Thanks a lot. On NewVoiceMedia, how quickly will you be able to sell that through the Vonage U.S channel, like the master agents? How long will it take to onboard them if you are going to do that?

Well let me have Dennis take that.

Hey, good morning. Thanks for the question. Well, the answer is we are starting immediately. Kenny, I, and the teams are working together on that. So, we are actually looking forward to make some progress on that in this quarter.

Okay, great. And then what is the OIBDA profile of NewVoiceMedia?

Yes, it will be so -- as it relates to 2019, organically, there's a slight drag and then you have the deferred revenues. So from a GAAP perspective, it's going to end up dragging OIBDA next year in the $10 million type area, almost all of which is from deferred revenue. So, there's a small organic OIBDA drag and then a fairly material deferred revenue which is noncash drag from it.

Okay, got it. And then in terms of your UCaaS deployment timeframe, sort of the time to install deals, particularly midsize and enterprise, has that been stable, shrinking, growing? How is that been working out?

Hey, Mike. It's Kenny. I will take it. We are actually seeing our quote to cash, if you will, the install time from contract signature to when we start billing and post install coming down, decreasing. And a lot of that is due to the shift towards VBC. VBC, as -- just the way we've built it, the way Omar and team have built it is much easier to provision and easier to install, even with things like SmartWAN, as we've integrated those features into that product set. Our install days are much, much shorter than the VBE platform. So as we shift more bookings, in fact, 70% -- just a little bit above 70% of the bookings in third quarter were on VBC. As we continue to shift even more bookings towards that platform, we expect those install times to continue to come down.

Okay, great. Thank you.

And the next questioner today will be Catherine Trebnick with Dougherty. Please go ahead.

Thanks for taking my question. Sorry, if I'm repeating. I got bounced off the line. One is just to give an idea, how much of the revenue was through the channel this year or this quarter versus a year-ago? To get a good sense of -- you've invested in the channel, I am just looking for some progress, some more data on progress? Thanks, Kenny.

Yes, you bet. Good morning, Catherine. So, from a -- let me start just with bookings. As Alan mentioned on his prepared script, we’re seeing inbound deals -- so, deals that we’re booking through the channel -- up just over 40% year-on-year. So -- in fact, the number was 43% year-on-year from third quarter of 2017. So that's one indicator of the investment that we’ve talked about in the last several quarters that we’re making back into the channel by offering the new portal, the new programs, and just making kind of deeper inroads with the masters and their subs. So bookings are up 43%. We are also seeing the size of those deals improve pretty dramatically. So the size -- the average size of a deal that a channel partner brings us is roughly 3x what it was in the first quarter. And so that -- we are seeing very, very good progress from both deal inflow as well as size deals. The last stat I would share with you is, that the -- of all the large deals we sold, all the way down to $10,000 in MRR, three quarters of those came from the channel. As we’ve mentioned, some of those obviously were CCaaS, some of those were both CCaaS and UCaaS, but three quarters of that volume came from the channel. So seeing nice progress based on the investment we’ve made with partners.

How long does it take you to ramp up your new partners?

It depends on the partner. We are recruiting daily to bring partners into the fold. Some of those partners are ready to ramp immediately. They’ve the background to sell UC, they’ve the background to sell contact center solution. Others take a little bit longer because they may have been on on-prem partner that, for instance, AVAR, that’s looking to move towards cloud and takes a little bit more enablement and education. So, we are seeing deals pop from the partner inside of 30 days all the way to as long as kind of six months to get them ramped.

Okay. And then another -- Alan, this is for you. On Nexmo, how much of the -- what percentage would you say are you getting traction in North America with the Voice API? I know that’s a real key piece of driving the gross margins for that product up. Can you give us some more color around that? Thank you.

Yes, Catherine. I will start and I will turn it to Kenny. I think we are seeing continued progress and high growth rates on VAPI, but still off of a small base. So the largest proportion of the business is still international, where it was two years ago. So, again, we feel we’ve the right product, and we've developed the distribution and the training and the sales enablement, etcetera, pushing hard into the United States, not just for voice but also for SMS as well because even SMS terminated in the U.S is much, much better margin than it is overseas. Kenny, you want to augment that?

No, I think you covered it, Alan. I think that’s it.

All right. Thanks.

Thanks, Catharine.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Hunter Blankenbaker for any closing remarks. Hunter Blankenbaker Okay, great. Thanks, William. And that does wrap up the Q&A portion. We look forward to seeing many of you in the coming months at various investor conferences. And for those unable to attend in person, these events will be webcast. And you can follow our comments on the Vonage IR Web site. Please contact us for any additional details, and thank you again for joining.

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