Ericsson Lm Telephone Co Q2 FY2020 Earnings Call

Greetings. Welcome to the Vonage Second Quarter 2020 Earnings Conference Call. I will now hand the conference over to your host, Hunter Blankenbaker, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning and welcome to our second quarter 2020 earnings conference call. Speaking on our call this morning is Rory Read, Chief Executive Officer; and Dave Pearson, CFO. Also joining us is Omar Javaid, President of the API platform; and Rodolpho Cardenuto, Head of the Applications Group. Rory will discuss our strategy and second quarter results, and Dave will provide a more detailed view on our second quarter results and third quarter and full year 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 second quarter earnings press release or the second quarter earnings slides posted on the IR website. Additionally, during prepared remarks today, all comparisons to prior periods are year-over-year unless otherwise noted as sequential. So with that, I'll turn the call over to Rory.

Thanks, Hunter. Good morning, everyone, and thank you for joining us today. I'm pleased to be speaking with you on my first conference call as Chief Executive Officer of Vonage. I hope you and your families are safe and healthy, and I look forward to meeting many of you over the coming months. Having been in the role for the past 30 days, I would like to cover the following key areas in my opening remarks. First, based on early learnings, my initial thoughts on how we can take Vonage to a new level of execution and further growth. Second, the process we have embarked upon to ensure we are efficiently and effectively allocating our skills and resources towards driving the best trajectory for our business moving forward; and finally, our strong second quarter results. The opportunity to join a company like Vonage is rare. Vonage was born out of innovation, and through that innovative spirit has reinvented itself into a global leader in cloud communications, helping businesses across the planet accelerate their digital transformation journeys. Vonage is in the right place at the right time in a very large and growing market. I'm excited to leverage my experience driving large global transformations and operational execution to help lead the company forward into its next chapter. I've been in the technology and software space for the past 38 years. I understand the power and value of cloud solutions and what they offer to global businesses. And I am passionate about innovation, execution, fact-based decision-making and accountability. Since joining on July 1, I have immersed myself in our business, conducting operational and strategic business reviews with team members across the company. I've also been meeting with partners and customers to understand where we're strong and where we can improve. I have a deep appreciation and respect for what our Vonage team has built and there is more to learn. We have a strong foundation, but it is clear we have work to do. I believe, together with the talented team here, we can lead Vonage through the changes required to reach its full potential. Today, I'd like to share my initial observations. First, the market opportunity is massive. We are at the beginning of a huge market-wide communications revolution. If there ever was a question, whether businesses needed to digitally transform not only to survive but thrive, COVID-19 eliminated any doubt. The need for customers to accelerate their digital transformation through communication is now essential. Our Vonage Communications Platform programmable API services are gaining momentum in almost every industry. And we see tremendous opportunities ahead for helping companies transform the way they engage with their customers. After spending time with our API services team and seeing new wins and new use cases every day, I think our CPaaS opportunity is even greater than many of the industry analysts project. We will continue to focus our resources here to capture this rapidly growing market. While COVID-19 is presenting its share of headwinds in the unified communications and contact center application space, with weakness in food and beverage and some businesses slowing down parts of their large technology projects, we are also seeing others continuing their digital business efforts. Businesses across the globe need to seamlessly connect to their employees and customers, no matter where they are. This will only accelerate the move from on-premise to cloud-based communications. Here, we need to build a highly scalable, efficient go-to-market engine, leveraging our direct and additional channel capabilities to improve our performance. Second, we have the right technology to capitalize on this accelerating opportunity. The Vonage Communications Platform brings unique value by using programmable API services to integrate multiple communication channels, video, voice, messaging, chat, email and verification into customers' applications, products and workflows. This delivers both the power and flexibility our customers need to disrupt their industries and enable the type of business continuity, remote work and remote delivery of services that are so critical in today's environment. Whether our customers are building their digital applications with our programmable API services or using our fully formed unified communications and contact center applications, we are providing it from our communications platform. Based on my initial reviews, I am confident in our platform and product portfolio. I believe the breadth and strength of our product portfolio is one of the reasons we are uniquely positioned to win. Third, we have been transitioning the company into a leader in cloud communications. Now we need to further optimize our business by being more efficient, speeding innovation and streamlining our organization and processes. We're committed to managing the company for strong growth and profitability. My team and I are working on a business optimization and alignment project to best focus our resources and drive stronger operational execution. We expect to complete this assessment over the next 90 days, and we'll set up our strategy and operating plans for 2021 and 2022 to strengthen Vonage's position to capitalize on these market opportunities. We will be customer-driven and focus on areas where Vonage products and solutions deliver differentiated value and where we can win a disproportional share of the market. We will complete the review of the consumer segment as part of this overall business optimization and alignment project. In the meantime, we are operating this business with efficiency, discipline and without distraction. Fourth and finally, I have been highly impressed by the talent and commitment of our Vonage team. We are a technology software company with huge opportunities in front of us; and we have the talent, innovation, drive and passion needed to capture them; and we continue to invest in talent. Yesterday, we announced a key addition to our executive leadership team. We are pleased to welcome Joy Corso to Vonage as our new Chief Marketing Officer. Joy's marketing expertise, leadership skills and operating experience will help further position the company as a software and technology leader. She will work with our marketing team to help drive Vonage's business execution and highlight our evolution into a world-class business software-as-a-service company. Now turning to results. We executed well in the second quarter. The business segment revenues totaled $226 million. Business service revenues were $212 million, an 18% year-over-year increase. API platform revenues now represent 47% of our business revenues, up from 41% a year ago and will become the majority of our business revenue in 2021. Within this result, API platform revenues grew 32% year-over-year, driven by high-value API services and a record number of new customers. The overall CPaaS market is accelerating, and we expect this trend to continue. Unified communications and contact center application service revenue grew 7%, in line with our expectations, but we have additional go-to-market and efficiency work to do here. Business segment churn remained low at 0.9%; and on a consolidated basis, revenues totaled $311 million, and we delivered adjusted EBITDA of $42 million. A very strong quarter for our API platform was driven by strength in three key areas. First, our revenue growth accelerated to 163% year-over-year in the high-value API services area, which includes programmable video, the largest portion; voice; IP messaging; and verification. High-value API services now account for more than 20% of API platform total revenue. As part of our business optimization and alignment project, this is an area where we will clearly focus additional resources and leverage our leadership in video to continue high growth. Within high value, video continued to show exceptional strength, driven by telehealth, remote education and virtual events, such as concerts. We are also seeing a lot of success in the social, fitness and dating industries, including some of the largest players in these spaces. Our video API services are supporting customers through this pandemic by enabling them to create new experiences and new ways of doing business. Video is introducing Vonage to many new customers, highlighting the depth and breadth of our complete communications platform. Second, our dollar-based net expansion was 119%. We expanded our relationships with several of the largest technology companies in the world, including Google and Amazon, offset by declining traffic and COVID-impacted related industries like travel, hospitality and transportation. Our dollar-based net expansion in our high-value API services exceeded 200%, highlighting strong customer retention and increased usage across our platform. For example, doxy.me, a U.S.-based telehealth leader, has continued to grow rapidly, adding more than 700,000 physicians to its platform since March and has now expanded into Europe. doxy.me is supporting more than 15 million patient visits monthly with 500 million minutes of video sessions powered by Vonage. And third, we signed a record number of new customers in the second quarter. Importantly, approximately 70% of these customers are leveraging our high-value services in industries like financial services, social, gaming and retail as well as in telemedicine and distance learning. One example of how the power of our platform API services translated into a strategic customer win this quarter is ujet, one of the fastest-growing private contact center companies. As one of the providers in ujet's multi-provider architecture, Vonage will provide programmable voice to power the connectivity and underlined telephony functions for ujet's customer support platform. This is a breakthrough win for Vonage in this growing market for contact center voice capabilities. Our unified communications and contact center application service revenue grew 7% as projected. This growth rate was driven by our focus on mid-market and enterprise customers, offset by the micro-segment and some COVID-related headwinds. Despite the economic impact of COVID, our logo churn remained low, demonstrating solid business execution and customer loyalty. Mid-market and enterprise service revenues, defined as those customers with greater than $12,000 of ARR, increased 14% in the second quarter. Service revenues from enterprise customers, specifically defined as those with greater than $120,000 of ARR, grew 22% year-over-year. As expected, some mid-market and enterprise customers, most notably in the travel and hospitality space, continue to reduce their seat count, while others requested credits or payment deferrals. These impacts initially appeared to have peaked in May and started to moderate as the world economy gradually reopened. Given recent increases in COVID-19 infection rates, we have experienced some reduced pipeline visibility in the unified communication and contact center application space, impacting the quality of the pipeline for these products for the second half. Bookings from mid-market and enterprise customers grew 13% year-over-year and comprise 67% of the application product bookings in the second quarter. We continue to see strength in our large customers as we signed 11 seven-figure TCV deals, and the average deal size increased 26% year-over-year. While we saw growth in these customer segments, it is still under our expectations of fully offsetting the impact of our reduced focus in micro. Our micro customers are those with less than $3,000 of ARR comprised 29% of application product service revenue, contracted by 3% year-over-year. Given our limited sales and marketing investment in this cohort as well as continued impacts from COVID, we expect additional pressure here in the second half. As part of our business optimization and alignment project, we will focus on building a highly scalable, streamlined go-to-market engine over the coming quarters to drive pipeline and booking velocity. We will target those customer segments where our products best fit, where customer growth is strong and where we can win a disproportional share of the market. As part of this go-to-market work, we'll continue to accelerate investment in the channel where we have experienced significant growth over the last year. We are pleased that Curt Allen joined us in July as our new Head of Channel. Curt has more than two decades of channel experience and has been both a master agent and a leader of channel programs with large technology providers. I'm confident that Curt will accelerate our momentum within the channel, an increasingly important portion of our go-to-market. Our gross sales were up in the second quarter, not only in unified communications and contact center products but also in combination with our programmable API services. This was a significant differentiator in several large deals, and we will continue to build on the synergy across our products. A good cross-sell example is Domino's Pizza. Domino's is a technology pioneer that has developed innovative ordering platforms to drive digital sales and signed an agreement with us in the quarter. Domino's will leverage Vonage's unified communications solution and programmable voice API capabilities to connect more than 6,000 franchises and corporate locations across the United States. Our solution will help Domino's provide more personalized support to its customers and enhance the order-taking process and drive efficiencies while creating a better customer experience. This was a highly competitive deal, which we ultimately won because of our ability to provide a differentiated solution through the integration of multiple products across our communications platform. We are operating in unprecedented times, and I am proud of how the team performed. We had a strong second quarter driven by increased demand for our Vonage Communications Platform and its programmable API services. We will continue to focus investment here to build on this momentum. We were in line in unified communications and contact center applications products, where we continue to see some pressure on our growth rate. Building a highly scalable, efficient, streamlined go-to-market engine will be a strategic area of focus in the coming quarters. Longer term, we are in the early days of a huge market-wide communications revolution. I am excited about leading Vonage into this next level of growth. I am confident that through our business optimization and alignment project, we will increase efficiency, improve execution and accelerate our technology and innovation differentiation to provide the best communication solutions for our customers. Doing this will unlock our full potential and energize our customers, partners and Vonage team members. We look forward to updating you on our progress over the coming months. Before I hand the call over to Dave to cover the financial overview of the quarter, I would like to thank him for seven years of outstanding service as the CFO of Vonage and for delaying his retirement to help me in my onboarding. When Dave joined Vonage, it was a consumer-only company. He helped lead the strategic pivot, sourced the acquisitions and managed the capital that helped position Vonage as a leader in cloud communications. The search for Dave's replacement is active, led by me, and I expect to put a world-class CFO in this seat in the near future. I'll now turn the call over to Dave.

Thanks, Rory, and good morning, everyone. Let's begin with a review of the second quarter on Slide 8. Second quarter Vonage business total revenue was $226 million, ahead of guidance and representing 75% of consolidated revenue, excluding USF. Over the past year, business revenue grew from two-thirds to three-quarters of the Vonage total. From Slide 9, business service revenue increased 18%. Service revenue growth is our focus, as we deemphasize access circuits and desk phones. Service revenue also excludes USF, which was $5 million in Q2, down $3 million. As we discussed last quarter, we are now charging our customers lower USF fees, which are a pass-through, based on a study that concluded that our offering is mostly software rather than telco-related services. Within business, API platform revenue was $103 million, up 32% and well ahead of our expectations. Revenue from high-value APIs, primarily video, doubled sequentially versus Q1. API revenue now represents 47% of business revenue, excluding USF. Revenue from applications was $123 million, also ahead of our expectations. Of this, $109 million was service revenue, which increased 7% GAAP, led by 14% growth in mid-market enterprises. Moving to Slide 10. Vonage business segment revenue churn was 0.9%, down versus 1% in the year-ago quarter, and monthly service revenue per customer was up 16% to $509. Both KPIs demonstrate our continued move upmarket. On Slide 11, business service margin was 53%, up 1% year-over-year and the fifth straight quarter of flat or better business service margin. This reflects the move to our own higher-margin products, including Vonage Business Cloud and video APIs. Moving to Slide 12. Consumer revenue was $84 million. Churn of 1.5% was down from 1.7% in the prior year. In the quarter, we took a lighter touch on terminating the service of customers who were behind on payments, meaning normalized churn would have been 1.6%, still strong and a year-over-year improvement. Average monthly revenue per line was $27.59, up $0.70, reflecting higher USF and targeted price increases implemented in the first quarter. We ended the quarter with approximately 1 million consumer subscriber lines. Two-year-plus tenured customers now represent 93% of our consumer base and five-year-plus customers are 76%. Engagement with our product, measured by outbound calling minutes, increased in the second quarter due to COVID. Based on the performance and predictability of the consumer segment, we project it will produce in excess of $600 million of after-tax equity-free cash flow over the next five years with significant terminal value after that. Now moving to income statement cost items on Slide 15. Consolidated sales and marketing expense was $91 million, down $5 million versus the prior year and up $5 million sequentially due to higher brand spend. Engineering and development costs were $20 million, up $3 million. Sequentially, we added more than 70 team members in product, technology and engineering as we continue to invest in our platform. E&D expense plus capitalized software totaled $30 million, which represented 14% of business service revenue. General and administrative expense was $43 million, up $6 million. The increase is driven primarily by consulting fees and CEO succession costs, including search, legal and severance, some of which was noncash. Turning ahead to Slide 16. GAAP net loss was $8 million and adjusted net income for the quarter was $10 million or $0.04 per share, both lower than the prior year because of a significant tax benefit back in Q2 of 2019. Second quarter adjusted EBITDA was strong at $42 million, up $4 million year-over-year. Moving to Slide 17. CapEx for the quarter was $12 million, flat versus the prior year. Adjusted EBITDA minus CapEx was $30 million. On Slide 18, we ended the quarter with $543 million of net debt, resulting in net debt of 3.2 times LTM-adjusted EBITDA, leaving us significant liquidity under our 4.5 times borrowing covenant. We reduced net debt by $25 million in the second quarter and intend to reduce it further as the year progresses. Moving on to Slide 19. We are updating 2020 guidance to reflect the strong second quarter and our experience with how COVID is affecting our business. Clearly, the macroeconomic environment is uncertain, but with the visibility we have today, we are increasing our projection of 2020 GAAP business revenues to the range of $885 million to $900 million. Embedded in this guidance are the following trends: with regard to API, continued depressed levels of travel and hospitality usage, offset by elevated e-commerce and video usage; for video, we believe that we have seen the COVID stay-at-home peak, but continue to see very strong new customer formation; and with regard to applications, positive churn trends and high customer engagement, offset by ongoing customer credit requests and a pipeline that has not yet rebounded to pre-COVID levels. For consumer, we expect 2020 revenues in the $330 million area, a $5 million increase due to a projected increase in USF fees. We continue to expect full year 2020 adjusted EBITDA of between $150 million and $155 million. With regard to the third quarter, we project business segment revenues in the range of $226 million to $228 million, including $6 million of USF. Consumer revenues in the $81 million area, including USF of $11 million and adjusted EBITDA in the $36 million area. As this is my 30th and last earnings call as Vonage's CFO, after more than seven years in the seat, I would like to thank my colleagues at Vonage, the Board and investors for what has been an experience beyond what I could have imagined. It was a privilege to work with all of you. Knowing the team and assets of Vonage and having seen Rory in action over the past six weeks, I'm confident that Vonage's best days are ahead and look forward to being a shareholder for a long time to come. I'll now turn the call over to Hunter to initiate the Q&A.

Okay. Thank you, Dave. Operator, let's go ahead and turn it over to Q&A, please.

Our first question is from Rich Valera with Needham & Company.

Welcome, Rory, and best of luck in your new role. I have a couple of questions about the API business. You mentioned in your prepared remarks that you believe the CPaaS market is larger than what industry analysts estimate. Could you elaborate on that? Additionally, I would like your thoughts on the sustainability of the trends you're observing in that business both in the near term and over the longer term. Lastly, what are the margin implications for the API business as your mix shifts toward higher-margin offerings? I know that's a lot to cover, but I'm hoping you can provide some insights.

Sure, Rich. Thank you for having me. From an industry perspective, CPaaS is clearly part of a significant communications trend that is emerging across all sectors. I've spent 38 years in the industry, and it's evident that the way companies engage with individuals through communication and digital relationships is rapidly increasing, especially accelerated by COVID-19. This shift is not temporary; it will continue to grow. Over the next five to seven years, we can expect communications, APIs, and solutions to be integrated into virtually every workflow, industry, and application worldwide. This is a key reason I decided to join the team at Vonage. The company is uniquely positioned to take advantage of these changes, and I am impressed by the diversity and strength of its product portfolio. The development of API services and workflows represents a major trend and a technological tipping point, particularly with advancements in video, voice, and verification. The way customers expect support and sales interaction marks a fundamental change. It’s important to recognize that this is not merely a temporary shift due to the pandemic but a long-term change in how customers and businesses will engage over the next five to seven years. This growth is already underway, and our product set is well positioned to capitalize on it. While some moderation may occur as the pandemic stabilizes—though it's uncertain whether that will happen in the next two to three quarters or in six to seven—we can be confident that the overall upward trend will continue in this segment. Currently, over 20% of our CPaaS revenues come from a high-value segment, especially due to our leadership in video, which will enhance our margins over the next couple of years. The growth trend is strong, and I believe it will persist, as evidenced by our impressive year-over-year growth rate. Does that clarify things?

Yes, very helpful. And again, best of luck.

Thank you, sir. Omar, did you want to add any color on that one before we move on?

Thank you, Rory, and great question, Rich. I think Rory covered a lot of ground. The only thing I would add is that we've discussed this in previous calls: part of our belief, which predates COVID, is that the opportunity in this market is larger than many analysts believe. Historically, this market has been driven by digital natives, and we expect that trend to continue strongly. However, we observed a shift with enterprises coming online, as indicated by Gartner Research, showing an increase from 5% to 30% of enterprises. That alone presents a significant opportunity, and with COVID, that shift has accelerated tremendously. To Rory's point, many organizations are reevaluating their digital strategies, undergoing digital transformation, and investing heavily. What's critical here is that every app, including those companies are considering, is part of this landscape, and that's where my conviction stems from.

Our next question is from Alex Kurtz with KeyBanc Capital Markets.

Yes, welcome, Rory. Could you elaborate on your earlier comments regarding the UCaaS and CCaaS platforms and the necessity for optimization? How do you envision this developing over the next 12 months? Many investors we speak with about the stock and the company have questions about the independent platforms integrated into Vonage and how you plan to create value with all three in-house. You're clearly succeeding with CPaaS, as the market is quite strong. However, how do you plan to grow the UCaaS and CCaaS businesses to match the growth rates of independent competitors currently in the marketplace?

Thank you for your question, Alex. As I join the new company, I believe it's essential to deeply understand our operational execution, efficiency, business strategy, and plan. We have initiated a project focused on business optimization and alignment that will establish our strategy and operating plans for the next 30 to 36 months. I see very good products and assets that we have acquired, and I don't think we need to add much strategically at this point. Of course, we'll consider any opportunities that enhance what we have, but overall, we have the right assets in place at the right time. The Vonage Communications Platform is essentially an API platform that includes various API services. We are developing purpose-built applications in unified communications and contact center areas. Our goal is to reflect the thought processes our customers apply in their workflows. The market approach has been somewhat singularly focused in the past, with a direct model that was more intensive per customer segment. I see a significant opportunity to refine our go-to-market strategy for efficiency and effectiveness. At a granular level, we have good customers who could be engaged through e-commerce with self-help and self-provisioning. There are also tremendous opportunities among mid- and small businesses, where our products fit well. We need to utilize our channel effectively and ensure that support is streamlined while enhancing velocity by providing our business partners with the necessary tools and capabilities. The decision to hire Curt Allen was a strong move, as he brings energy and expertise to the space. We can shift our trajectory with supportive programs and activities. We have seen notable progress at the enterprise level, evident from our growth rates. Our direct team is adequately equipped to reach significant customers like Domino's, and we aim to maintain a targeted approach across all market segments. The applications we build are specifically designed for our communications platform, utilizing the same API services available to our customers. We must align our support and sales models with various customer segments. There are ample opportunities to enhance our capabilities. Our contact center product is strong and focused on CRM, which we will continue to prioritize. Our Vonage Business Cloud solutions also show promising margins, and we will focus on the most effective go-to-market strategies to achieve efficiency and disproportionate growth. That is the direction we will take for optimization and alignment. Rodolpho, would you like to add anything?

Yes. Thank you, Rory, and thanks, Alex, for the question. The market and channel have a significant need for our excellent products. If you look at UCaaS, the market is growing at 14% with a combination of the two products.

We are experiencing some technical difficulties on your line, Rodolpho. Let's move on to the next question. I appreciate your input, Alex. Do you have any follow-up questions before we continue with Ryan?

Look, on the consumer side, there was a decision, I think, earlier this year to think about exiting that business. I don't know if you want to provide an update on that. I didn't see any content in the deck that would suggest that, maybe I missed it, but maybe just a really quick view about that process.

Sure. We did briefly cover it. I think what we would say is, we're going through that process. We continue to go through that process. We've incorporated that into the business optimization alignment, a project that we have underway, and we expect to complete that project later this year. That business is throwing off at least $600 million of cash over the foreseeable future. So it's a good business, and I've had an opportunity to look at it in terms of its execution. Mr. Walker and his team are really doing a fine job of executing there. I think they are doing it without distraction, and they are doing it efficiently. But we're going to continue that process, look at it and complete that process and give you an update in the fourth quarter. Thanks, Alex.

Our next question is from Ryan MacWilliams with Stephens.

Perfect. And Dave, congrats again on the retirement, even though this may not be how you exactly envisioned it, given COVID. Just on the API side, can you talk about any changes to the geographic revenue breakdown or the geographic additions of new developers since COVID, just given the different tailwinds and headwinds to different customer verticals and use cases as a result of COVID?

Sure. I'll pass that to Omar in just a second, but basically, we continue to see strength across all geographies and across all of the high-value APIs. If anything, that's definitely accelerated at 163% year-over-year growth. And we expect that that's, again, a fundamental shift. I don't think that as COVID, the pandemic, dissipates at some point in the future that things go back to the way they were. I think there will be some moderation, but there's no question that this has only accelerated the move to digital transformation, and that move to digital communications and relationships will only continue to go over. Okay. Omar, why don't you give a little bit of color on that for Ryan, please?

Thank you, Rory, and thank you for the question, Ryan. To elaborate further, we are experiencing growth across all areas, with no specific geography standing out. I can tell you that in the second quarter, we observed a recovery in traffic in the Asia Pacific region, returning to pre-COVID levels, which was excellent for that quarter and certainly promising for the second half of the year if this trend continues. Overall, our performance has been robust, which is definitely positive. Additionally, we're witnessing increased traction, especially in the Americas, and particularly in the U.S., highlighted by some significant logo wins and strong usage as mentioned in Rory's opening remarks.

Our next question is from Catharine Trebnick with Colliers Securities.

Dave, I'll be sad to see you go. Good luck in your retirement and Rory, welcome. So can we put a finer point on sales and marketing and G&A? You're down in sales and marketing, but up significant year-over-year in G&A? And how should we think about that going forward?

Sure. I'll have Dave provide more detail on the drivers for this quarter, but I want to set expectations for the future. There is certainly a chance to improve efficiency and streamline operations in both areas, focusing our capabilities and resources on the highest growth opportunities. I've highlighted these areas, especially regarding API services and contact center work, along with the UCaaS space, by tailoring our go-to-market approach. I anticipate that we can achieve greater efficiency and streamline operations in the long run within these segments, but I'll let Dave clarify things for this quarter.

Thank you for your comments, Catharine. Regarding sales and marketing, it's important to consider that customer care is a significant factor in this area. You'll notice that in certain quarters, sales and marketing may decrease, which reflects a drop in consumer-related customer care and other efficiencies. Overall, we did see a sequential increase in sales and marketing due to the launch of our new brand campaign, primarily in the second quarter. We anticipate maintaining this level for the remainder of the year as we continue our brand advertising. Additionally, we have seen a reduction in commission payments and travel expenses. I expect sales and marketing expenses to remain at this level or slightly increase if we see more activity in commissions and travel expenses. As for general and administrative expenses, there were two key factors in the quarter. One was the consulting fees, which will persist and are accounted for in G&A but excluded from adjusted EBITDA. Initially related to consumer insights, this has now been integrated into the project Rory mentioned, which we will see in the third quarter. Additionally, in the second quarter, we incurred significant costs related to the CEO transition, which affected the income statement but not EBITDA. Generally speaking, organic G&A should remain stable for the rest of the year, and as we implement Rory's project, we expect G&A to decrease over time.

Our next question is from Tim Horan with Oppenheimer.

Good luck, Rory, and thanks, Dave, for your help. Domino's, can you give a little bit more color what was differentiated about your product? And I guess maybe the same thing for your five-value API services. How differentiated are you? Do you think you're taking share in that high-value side?

Sure. I'll take the second question and then have Omar address it. After spending the last four to six weeks immersing myself in the business and learning about the API, I was already familiar with our API services before I joined Vonage. There’s no doubt that our API services are strong. I believe we have a leadership advantage in the video segment as well. Additionally, the way we've used our services to create integration points sets us apart. And there was another question at the beginning, Tim. Were you asking about Domino's? I couldn't hear you clearly, and I apologize.

Yes. Sorry, can you hear me okay, Rory?

Yes. I can now. Thank you.

Yes, sorry. So the question is Domino's, I think you said you want it because you had differentiated services. Just trying to understand what that differentiation was.

Yes. This one is kind of interesting, right? So there's a couple of things that really made us strong in that space. And in an enterprise solution, particularly because of the multi-location capability, we've built that into the unified communications space. I think that's really an important driver in our wins in that enterprise. And remember, when I talked about the go-to-market around those unified communication and contact center app that we had to tailor it and the product was particularly strong and small and mid. This is just the idea that, that same kind of multi-location implementation with the control points that we put over top of it gave it strength. And then the voice API and the API work on top of that, really, I thought, gave us differentiation. But why don't we go to Omar first on the high value, and then we will continue? Omar, want to add a little bit of color on high value and our differentiation? I touched on it at the beginning.

Sure. Regarding high-value differentiation, let's discuss a couple of different products. We highlighted video. You may remember we acquired TokBox in late 2018. Through that acquisition, we gained numerous high-profile customers and valuable experience in that area. We have been doing pioneering work in the underlying technology known as WebRTC, which gives us significant intellectual property and strong customer references. Additionally, we have been investing in security and certification, which are crucial in various markets such as health care, financial services, and certain social networking applications. These strengths are noteworthy. Another point is that our API products are particularly appealing to technical engineers and savvy customers. We have won awards in this regard as well. We have made substantial efforts to ensure our software is user-friendly and easy to implement, which is another differentiator. Regarding Domino's, to expand on what Rory mentioned, we need to consider their structure, which includes corporate and numerous franchisees. They required more than just a basic phone system in their stores, and we can offer that solution. While many companies can provide phone systems, what sets us apart is our market approach. As Rory discussed, our platform strategy, with apps built on top, allows us to provide the flexibility they need uniquely and implement it easily. This truly supports their digital transformation. Lastly, it's important to note that while Domino's is significant in the U.S., they are also expanding rapidly worldwide. Our global presence, which has been a strong foundation in our API business, enables us to operate and support our customers on a global scale.

Our next question is from Meta Marshall with Morgan Stanley.

This is Eric from Meta. I have a question regarding your relationship with Salesforce. I understand that the application pipeline is not as full as before, but how has that relationship evolved? Are you noticing any positive effects when it comes to contact center sales?

Sure, Eric. I think two good points on your question. From the standpoint, of Salesforce, there's definitely continued activity and that's a really good strategy in terms of contact center focusing on that kind of build-out on that CRM contact center with our capability and having that deep integration. We're also doing two additional areas in that space, and you'll see more on that over the coming weeks and months, in terms of additional capabilities in CRM and service areas, where we will drive that same deep integration. I think that will definitely drive a disproportional share. And I think that there's no question that that's the right space. And again, very good product in the right space. Any follow-up, Eric, there?

No.

Oh, the pull-through, right?

Right. Yes. Is there anything else you can add on that topic?

Absolutely. Yes, no question. If we focus on contact centers that are related to Salesforce, service applications, or other CRMs, and select just a few because we want to excel and ensure strong integration, these often tend to be midsized contact centers built on that foundation. This approach allows for effective unified communication. Rodolpho has shared several excellent examples with me. The integration of contact centers with unified communication is a significant differentiator since we are concentrating on the right segments rather than stretching ourselves too thin. By targeting specific areas like Salesforce in the service field, we can achieve a focused approach, enhancing integration with those applications and our unified communication. We are definitely observing positive pull-through in both pipeline and closures that reinforce that integration, which has contributed to net expansion in those accounts and our successes. Thank you for the great question, Eric.

Our next question is from Sterling Auty with JPMorgan.

This is Drew on for Sterling. Congrats, Rory, on your first call; and Dave, on your last. So in the past, you've mentioned the 20% exposure to industries like travel and hospitality on the API side of the business specifically. I was wondering if you could provide some more color on how those verticals are performing and like how many customers are requesting concessions and what type of concessions you're offering them?

Sure. I'll just give you a quick update, and then I'll pass it over to Omar. We saw that kind of impact appear to peak in the May time frame. And as he mentioned in his earlier remarks, you've seen Asia Pacific return to more pre-COVID activities in terms of that velocity. There's still pressure there. There's no question, particularly in the U.S. and travel and even in Europe. But we have seen them come off of the lows, and they've definitely been improving. Why don't I pass it to Omar to give you a little bit of detail on that, Drew, and thank you for the welcome. Omar?

Thank you, Rory. There's not much more to add. We have exposure to travel and hospitality, and globally, those sectors will struggle to return to pre-COVID levels. However, in the Asia Pacific region, we have observed activity and usage returning to those previous levels, especially in Mainland China, where there has been an increase in travel and hospitality. Additionally, there is considerable traffic that is expected to drive retail activity, and we have noticed a similar uptick in Asia Pacific. Overall, that situation looks quite positive, and we are keeping a close eye on it, as I believe everyone else is as well. Regarding your other question about requests for concessions due to COVID, we have not encountered that. We haven't seen struggling customers coming to us for price breaks or similar requests, which I had expected early on, but that activity has not materialized.

Our next question is from Will Power with Robert Baird.

Great. I would like to follow up and delve deeper into the app services segment. I'm trying to understand some of the key trends there. In this quarter's digital transformation, a major beneficiary for many of your competitors has been the contact center. I would love to gain a clearer understanding, beyond Salesforce, of what you're seeing in the contact center space. Is it experiencing the same challenges in pipeline and go-to-market strategies that you're facing overall? Or is this more specifically related to UCaaS? I'm really trying to grasp the larger trends in contact centers. Rory, as you examine this and communicate with customers about what improvements are needed, what additional features do you think would enhance that product?

Yes. I think, from a perspective of contact center, that area had the strongest trajectory. I think the focus in terms of the product and the way we're targeting it at Salesforce and then in the service space and then additional maybe one more CRM, I think it's the right strategy. Keep it focused. Put the energy of the organization there, get the pull-through through the ISV ecosystem. We've already seen higher growth rates compared to the unified communication space in contact center. I expect that to continue. Contact center grew in the mid-teens. I suspect that we can continue to build on that by keeping that focus and expanding that base. I think that that's the right strategy in terms of the capability. I think there's more pressure on unified communications, in general, but I think that's more about how we've gone to market versus the product. I think the power, though, of the combination in contact center, when we win those contact centers around Salesforce or service activities, and then we combine it with unified communication, it's really a differentiated capability. Then you get that full integration across call, activities, routing, all of the data and information shared, I think it's a powerful offering, and I think we will build on that. The main purpose of the business optimization and alignment project is to put in additional operating discipline and drive execution excellence. I think we're on the right space and right focus on contact center. I think we can lift that growth rate. But what we have to do is continue to build on that focus and augment it with the unified communications. All right? Thanks, Will.

Our next question is from George Sutton with Craig-Hallum.

Welcome, Rory. Dave, I hope I never need your help when I call 911. Rory, and this is also for Omar, several months ago you changed the branding and the logo to shift Vonage more toward a business environment. I'm interested in your thoughts on how that transition has gone and whether you believe the Vonage brand is successfully moving into that business-focused area.

Sure, I’ll take the first part of this. I’m really excited about enhancing our team with new talent. We recently welcomed Joy Corso as our Chief Marketing Officer. Joy has extensive experience in all marketing areas and excels in delivering messages and communications throughout our portfolio. With a strong operational background, she will help us reinforce that Vonage operates as a business software-as-a-service company. This is our focus and our direction, uniquely positioning us to capitalize on the significant shift in communications and digital transformation. We’ll continue to build on this momentum and communicate our identity clearly, as it aligns with our offerings in API services, our API platform, and targeted applications for unified communications and contact centers. I’m thrilled to be part of this team, and you can expect us to keep strengthening our messaging and building trust as we execute our business strategy over the next couple of years. Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Well, I wanted to say thank you to everyone joining the call. It's very exciting to be part of the Vonage team. And as we talked about through the earnings call, I think we have made real tangible progress over the past several years to position the company well for the future. I think we're at the beginning of an industry-wide communications revolution in this digital transformation space. And I think our products and capabilities are well positioned to take advantage of that. We're going to apply operating discipline and drive execution excellence across every part of our business to change and to fully realize our full potential of our business trajectory. So with that, I'll pass it to Hunter. Any final comments, Hunter?

No, Rory. Thank you for that closing. We look forward to seeing many of you at some virtual conferences over the coming months, and we will talk then. Bye-bye.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.