Greetings and welcome to the Vonage Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Hunter Blankenbaker, VP of Investor Relations. Thank you. You may begin.

Thank you, operator. And good morning and welcome to our third quarter 2020 earnings conference call. Speaking on our call this morning is Rory Read, Chief Executive Officer; and Tim Shaughnessy, Interim CFO. Also joining us is Omar Javaid, President of the API Platform and Rodolpho Cardenuto, Head of the Unified Communications and Contact Center Applications. Rory will discuss our strategy and third quarter results. And Tim will provide a more detailed view on our third quarter results and fourth quarter and full year guidance. The 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. 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 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. And thank you to everyone for joining us this morning. I hope you and your families are staying safe and healthy. I have now been at Vonage for four months. I would like to start by thanking our team members for their support in my onboarding and for their passion and commitment to our customers, particularly during these unprecedented times. I've been in the technology space for a long time. And Vonage has some of the best talent I have seen in my career, including some of the most innovative engineers and technologists in the industry today. It is a truly interesting time to take the helm of a cloud technology company like Vonage. And it has been rewarding to see how the power and reach of our global communications solutions help so many customers digitally transform their businesses and engage with their customers and team members in new ways. As I have quickly focused on getting to know our business and our customers, we have been reviewing our business execution and performance and gathering feedback from customers, partners and team members from across the world. We are analyzing operational data and metrics to understand the efficiency and effectiveness of our business, our products' competitiveness and fit, the speed and quality of our innovation engine, and the power and reach of our sales and marketing initiatives. We are doing many things well, but we have also identified key areas where we can improve our execution and results. On today's call, I'll focus my comments on two areas. One, our third quarter results, which reflect solid performance; and two, the business optimization and alignment project my team and I have been working on to improve efficiency and execution while defining our strategy, operating plans and investment areas to accelerate future growth and profitability. First, turning to results. We executed well in the third quarter. The Vonage Communications Platform business total revenues were $234 million, with service revenues of $218 million, a 19% year-over-year increase. Within this result, API revenues grew 35% year-over-year highlighted by high-value APIs and another record quarter of new customer additions. Our Unified Communications and Contact Center Applications service revenue grew 7%, slightly ahead of expectation. On a consolidated basis, Vonage Communication Platform business and consumer revenues totaled $370 million and we delivered adjusted EBITDA of $42 million. Looking at our product categories in more detail. API revenue strength was driven by high-value API, which grew 143%, as well as broad-based momentum across the technology, healthcare, education, e-commerce and entertainment industries. We also saw some improvement in travel and hospitality. While geopolitical tensions in Asia caused a modest slowdown in usage for certain customers. Video continues to be our fastest growing API as companies seek to engage their customers in more meaningful ways. Video is introducing Vonage to a broader set of customers, enabling us to demonstrate the full capability of the Vonage Communications platform. Our platform scalability, security and ease of use were consistent areas of strength in our ability to win and we will continue to invest in these differentiators. Unified Communications and Contact Center Applications service revenue grew 7%. Within this result, mid-market and enterprise service revenue grew 13%, while revenue declines in the micro segment tempered the overall growth rate. The applications pipeline showed a modest quarter-to-quarter improvement, but remained below pre-COVID levels. We signed 17 seven-figure TCV deals in the quarter and saw a 28% increase in the average deal size. However, total bookings were down single digits year-over-year underscoring the opportunity for improvement. Now, I would like to focus on our business optimization and alignment project. This is a multi-quarter initiative with two main objectives. The first is to review and optimize our business operations by streamlining our processes and efficiently aligning our talent and assets. The second is to create a two to three-year business strategy and operating plan to deliver better business results by accelerating differentiated product innovations and implementing a powerful tailored go-to-market engine to reach more customers. To start, we focused our business optimization project on the assessment of all products and offerings, as well as our markets, customer needs, operations, investment requirements and expected returns. This work has provided clarity on where we need to create efficiency and strategically invest to drive Vonage's long-term growth and profitability. Based on this analysis, we have accelerated business process improvement, implemented changes to our real estate model, and have made the difficult decision to reduce our global workforce. We are eliminating acquisition redundancy, better aligning our talent, and using a portion of the resulting savings to increase investment in areas of strategic growth. We expect these actions will reduce our operating expenses by approximately $8 million to $10 million in the fourth quarter and approximately $50 million in 2021 net of our strategic investments. In parallel, we have been working on the strategy and operating plans for the next two to three years. With a key focus of using a portion of these operational savings to make strategic investments in areas where we can win a disproportionate share of the market, and where our communication platform solutions best fit the needs of our customers. We are seeing a secular shift in the way businesses need to operate. This shift is driving a communications revolution across all industries and modes of communications: video, voice, messaging, email, and verification. This is fundamentally changing how businesses communicate with their team members, as well as how they interact with, sell to, and support their customers. Additionally, the COVID-19 pandemic is causing market disruption across almost every industry; accelerating the need for businesses to transform their communication, connections and experiences for customers and team members. Our strategy is to leverage the Vonage Communications Platform, a single global cloud technology platform to deliver our wide range of powerful communications services and solutions to meet the evolving needs of our customers. Whether our customers are using our APIs to embed multiple modes of communication into their enterprise applications or workflows, or they're using our purpose-built Unified Communications and Contact Center Applications to ensure business continuity and accelerate their ability to work and service customers from anywhere. We're providing it from our Vonage Communications Platform. As part of our strategy, investments are being made in artificial intelligence, extending our high-value API leadership, advancements in mobility, omnichannel capabilities and expanding our addressable market. Additionally, we're focusing investments on go-to-market initiatives to strengthen our channel presence, effectively reach all customer segments, and increase our cross-sell and up-sell opportunities. The management team and our board are focused on delivering these strategic initiatives, and we expect to accelerate growth and profitability in 2021 and 2022. We plan to manage the Vonage Communications Platform business against the Rule of 40 operating model, which we define as the sum of service revenue growth and adjusted EBITDA margin. We expect VCP to be slightly negative adjusted EBITDA in the fourth quarter, and we expect to be profitable in the second half of 2021. We will provide additional reporting details to measure our progress on the next earnings call. And we will share details of business drivers and strategies at our Financial Analyst and Investor Day, which will be in the first quarter of 2021. Before closing, I'd like to update you on the consumer business. In the third quarter, the consumer business continued to perform well. We are completing our business review and have engaged advisors to proceed with a potential sale. The marketing process will begin later this month, and we expect to provide you an update as soon as a buyer is identified, or at the completion of the process, which is expected by the next earnings call. The consumer business is a valuable asset that is expected to provide $600 million of cash flow over the next five years. The decision on the consumer business will be based on what maximizes the value for our shareholders. In closing, Vonage is in the right place at the right time in a large and growing market. The world is undergoing a secular change in the way business is done, with a fundamental shift in how communications technologies are being leveraged in almost every industry. Our Vonage Communications Platform delivers our wide range of powerful communications services and solutions, APIs to embed multiple modes of communication at the customer's enterprise applications or workflows, and our purpose-built Unified Communications and Contact Center Applications to accelerate their ability to work and service their customers from anywhere on the planet. We are taking the right actions now to optimize our business operations and improve our executions. We expect you will see this progress beginning this quarter and across 2021. The true power of this improved efficiency and execution is our ability to strategically invest, to capture faster growth and better profitability. For a more detailed financial overview of the quarter and updated guidance, I'll turn it over to Tim. He is an accomplished finance, technology and management executive with a proven track record. We continue to evaluate a number of strong candidates for our permanent CFO position. In the meantime, we have benefited tremendously from Tim's contributions. Tim?

Thanks, Rory, and good morning everyone. I'm excited to be part of this team and have the opportunity to help Rory frame his strategic and financial priorities here at Vonage. Let's begin with a review of the third quarter on slide 8. Consolidated revenues of $317 million increased 5%, driven by a 13% increase in Vonage Communications Platform revenues offset by declines in consumer. As Rory noted, Vonage Communications Platform revenues consist of Unified Communications, Contact Center and API revenues. Moving to 9; VCP service revenues increased 19% to $218 million. Service revenues exclude product, access circuits and USF fees, which totaled $15 million in Q3, down $7 million. Within VCP, API revenues, all of which are service were $108 million in the third quarter, up 35% and ahead of expectations. This outperformance was primarily driven by high-value APIs, which grew 143% year-over-year with particular strength in video and IP messaging. High-value APIs now represent roughly 20% of total API revenues. Unified Communications and Contact Center Service revenues were $110 million in the third quarter, up 7%. Moving to slide 10. VCP revenue churn increased 30 basis points sequentially to 1.2% as expected, primarily due to two unique customer circumstances. Monthly service revenue per customer increased 17% to $527, due to increases in average customer size across the VCP platform. Moving to slide 11, consumer segment revenues were $83 million. We ended the quarter with approximately 1 million consumer subscriber lines. Two-year-plus tenured customers now represent 96% of our consumer base, and five-year-plus customers are 80%, which have churn rates of 1.7% and 1.6% respectively. On slide 12, consumer's average monthly revenue per line was $28.31, up $0.75, reflecting higher USF fees and targeted price increases that we implemented earlier this year. Churn of 1.8% was stable compared to the prior year quarter, though up 30 basis points sequentially. Regarding churn, recall that in the second quarter, we took a lighter touch on terminating the service of customers who were behind on payments during the onset of the pandemic. In Q3, we executed a number of these customer terminations, resulting in higher churn sequentially, but still within historical averages. Now moving to the consolidated income statement on slide 13. As mentioned previously, consolidated revenues increased 5%. This was driven by the 13% increase in Vonage Communications Platform revenues, offset by declines in consumer, product and access and USF revenues. Consolidated gross margin was 55%, down slightly due to the faster growth of relatively lower-margin VCP revenues, which now represent 74% of consolidated revenue up from 68% in the prior year. VCP gross margin in the third quarter was 48%, up 200 basis points year-over-year. This reflects improving margins across nearly all of our products, as well as lower USF, partially offset by the increasing proportion of API revenues, which have a lower gross margin than VCP as a whole. Operating expenses increased 14%. Let's take a deeper look at OpEx on slide 14. Sales and marketing expense for the third quarter was $86 million, up $2 million versus the prior year and down $5 million sequentially, primarily driven by lower media and brand spend, a lack of in-person events and leveraging lower cost digital channels. We made selected investments into our direct sales and sales engineering teams, as well as customer care. Engineering and development expense was $20 million, up $3 million, and it included a higher proportion of spend under VCP platform including video and voice functionality and scalability. Engineering and development expense plus capitalized software totaled $30 million, which represented 14% of VCP service revenue, up from 13% in the prior year quarter. General and administrative expense for the third quarter was $57 million, up $16 million. In the quarter, we recognized a $15 million restructuring charge related to the business optimization and alignment project that Rory discussed. The charges primarily were related to severance, but also include changes to our real estate model and further business process improvements. We expect these actions will reduce our operating expense by $8 million to $10 million in the fourth quarter and approximately $50 million in 2021, net of our strategic investments. We also expect additional restructuring charges in 2021 as we realize additional savings. Turning ahead to slide 15, third quarter adjusted EBITDA of $42 million was down $3 million year-over-year, but better than expected primarily due to outperformance on revenue in some one-time items. Moving to slide 16, capital expenditures for the quarter were $13 million, down $1 million versus the prior year. Adjusted EBITDA minus CapEx was $29 million. On slide 17, free cash flow was near break-even due to roughly $10 million of consulting and annual license needs as well as executive costs that we paid in the quarter. We ended Q3 with $537 million of net debt, resulting in 3.2 times net debt the last 12 months adjusted EBITDA. We did reduce net debt by $5 million sequentially in the third quarter, and we expect to reduce it further in Q4. Moving on to guidance on slide 18. For the fourth quarter, we expect Vonage Communications Platform revenues in the range of $236 million to $239 million, including $6 million of USF revenues. Within this, we expect Vonage Communications Platform service revenue growth of approximately 13% to 14%. Embedded in this guidance are the following trends; in API, we expect fourth quarter year-over-year growth in the 30% area, reflecting continued positive trends in high-value and strength in education, healthcare, e-commerce and entertainment verticals. We also expect continuing improvement in travel and hospitality, but well below last year's seasonally strong fourth quarter. And with regard to Unified Communications and Contact Center, we expect service revenue growth in the low single-digits, reflecting continued pressure in the micro segment and the decline in mid-market and enterprise growth due to lower bookings in the first half of 2020. We expect consumer revenues in the $78 million area including USF revenues of $11 million. On a consolidated basis we expect total revenues of $314 million to $317 million and adjusted EBITDA in the $45 million area resulting in an adjusted EBITDA margin of 14% at the midpoint of total revenues. We expect 2020 total Vonage Communications Platform revenues in the range of $906 million to $909 million. For consumer, we expect 2020 revenues in the $332 million area. Total consolidated revenues are expected to be in the range of $1.239 billion to $1.242 billion. We expect full-year 2020 adjusted EBITDA in the $167 million area. This represents a substantial increase in 2020 revenues and adjusted EBITDA guidance, to reflect solid third quarter and the fourth quarter above our prior outlook, and the initial impact of our business optimization and alignment project. With that, I'll turn it over to the operator to initiate Q&A.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Tim Horan of Oppenheimer. Please proceed with your questions.

Thanks, so much. Rory, can you elaborate a little bit more on what you're thinking on strategy at this point, you know, both product, go-to-market, and kind of where you fit into the overall market? Thank you.

Sure. Thanks, Tim. Hey Tim. I think the key where we want to go is to build on this concept of the Vonage Communications Platform, which is truly powered on a global basis. We have an amazing set of customers across the globe. They're going to leverage our APIs to embed into their workflows, their enterprise applications. They're going to use those purpose-built applications around Unified Communications and Contact Center. We're starting to see movement in the pipeline around cross-sell and up-sell across all parts of the Vonage Communications Platform. So, it's clear that the strategy is, continue to invest in differentiation around the products. We tackled some of the efficiency and operational effectiveness of the company to free up dollars not only to improve our profitability, but most importantly to invest. We'll continue to invest for growth with balanced profitability. That investment will tackle innovation around product differentiation, as I mentioned, and then to make our go-to-market more effective. There’s no question, we can target and meet our customers' needs in a more efficient way and target our products where they have a disproportionate amount of share gain. So, our strategy is really straightforward, Tim. Let's make ourselves efficient, effective, and streamlined; invest in our future around innovation and product differentiation; get our go-to-market tailored to each of the customer segments, micro, small, mid enterprise; and then allow us to effectively market. We spend a lot of time breaking apart our marketing investments to understand where the return was. We now can better target and drive better leads and closure rates. That's what we want to do. And the strategy ultimately is to improve over a two to three-year period the performance of Vonage Communications Platform, our strategic business, in terms of both steady increases in growth and continued performance on the bottom line or profitability. Does that help, Tim?

Great color. Just one quick follow-up. So, what's the timing on when you think you're really integrated from a product perspective and a go-to-market perspective?

Sure. From a go-to-market perspective, I think we're doing a very good job in that already. We're sharing leads across all the product areas. We've seen wins across that. What we're trying to do is on a global basis across all of the Vonage Communications Platform is to really have that understanding each week to look at those leads, to look at those opportunities as we're developing, and Joy Corso is making sure that we're applying our marketing investments and dollars that enhance, and we're seeing progress. I like the amount of UC and CC cross-sell. I wouldn't say we've got it completely nailed, but we're definitely seeing progress there. I think that's a really important part of the long-term answer. And then from the product standpoint, we're making investments into the platform, making sure that we close up those integration gaps from the past several years of all the different acquisitions. We need to make sure that there is more common building, more common execution, verification, et cetera because we're seeing more product, and more customers want to use the breadth of the portfolio. I think you'll see steady deliverables. We run an agile engineering model, so you'll see deliverables every month. We continue to move down that journey over 2021 and 2022. And that will then allow each customer to scale and really take advantage of the full capability of the Vonage Communications Platform. That's how we'll tackle it.

Yeah. Very helpful. Thank you.

Thank you. Our next question comes from the line of Rich Valera of Needham & Company. Please proceed with your question.

Thank you, and good morning. Rory, on the UC/CC business, understanding this is a process in kind of turning this around. Looks like you're guiding for low single digits in the fourth quarter, I think before we've been thinking that this is maybe a mid-single digit kind of grower in the near-term. Is there anything you can say about how we should think about the growth of this over the near to medium-term really into 2021? And then, any specific milestones we should be looking for that might give us a sort of signpost that this business is turning around. Sort of what are you looking forward to give you evidence that your turnaround is working in that business? Thank you.

Yeah. Hi, Rich. I think that's a great question. And thank you for it. You know, as we look at that, UC and CC business, the key is really always to understand and focus on the pipelines and leads first. So, we spent a lot of time with the sales and marketing team to really get underneath exactly how that's performing. It took time because operationally and execution-wise, a lot of that data wasn't really available in the business management system. We have a very good understanding of what tactics are working, how do we get the best return, lifetime value, what's the CAC, the cost of acquisition. And based on that, we can really tailor how we generate the lead. So, the first guidepost you want to see – we want to see is improvements in leads. We're starting to see some of that. Then you want to see bookings, right? Because you want to confer, you want to make sure that you're targeting the right segments where the product that sticks. And then you want to see equal or improving close rates and bookings increase. We've seen some modest improvements quarter-to-quarter and beginnings of a trend in that direction. But that's the key thing. And then finally, you'll see it manifest itself in installs and revenues. I look at it over a two, three, four, five-quarter period. I want to give you indications that I'm seeing signs of progress in terms of lead generation, in terms of bookings, and then in terms of revenue. I think you should look at it for the balance of this year and through 2021. And like I said, we're seeing some progress in terms of that understanding. But we really had to spend the first three, four months to really get underneath the data, put the operational discipline in place to understand what was working and why. And then, we've taken feedback on the product analysis to understand where is our strength? What do customers like about it? Where do they see our gaps, and where – we understand that much better? Well, from both the micro level through small, through mid-market up to the specialized distributed use cases we see in enterprise. So, we make the spot investments and we'll continue to invest. Make no mistake about this. This is a technology cloud company. Our future is in innovation. We must continue to invest in that, and at the same time develop the channel. And we've had communications about our VBE business, historical business. I think that wasn't really properly communicated. And I think we can do a much better job of running that business in a more effective way. I look forward to giving you more information about the Vonage Communications Platform in terms of revenue growth rate and adjusted EBITDA in the next earnings call. Rich, did that help?

Yeah. It's very helpful. Thank you, Rory. And then just a quick follow-up if I could on the consumer business. Nice to see you're initiating the process of a potential sale there. But it's been no secret that business has potentially been for sale for a while. I'm wondering if you've had any sort of pre-process indications of interest on that, which might give you a sense of where the bid ask spread is relative to what you'd like for it and what the market might be for it out there.

Sure. So, the consumer business is a valuable asset. You guys have been tracking the company for a long time. It's been the basis of generating valuable cash flow that we've used strategically to invest in transforming the company and building out this Vonage Communications Platform and the API capabilities that we have. That business is going to generate, say approximately $600 million of cash flow over the next five years, and potentially a couple hundred million more after that. So, it's valuable. We'll make the decision on what the best return for our shareholders is. We've gotten inbound interest for sure. And we're going through the marketing of the process this month, and we'll go through the full process. Safe to say there's interest in it, but we have to make sure we really understand – they understand the business to really put the proper value on it. And I think that'll come through the process. All right?

That's very helpful. Thank you, Rory.

Thank you, sir. Appreciate it, Rich. Operator, next question, please.

Thank you. Our next questions come from the line of Ryan MacWilliams with Stephens Inc. Please proceed with your questions.

Thanks for taking the question. Rory, I loved hearing about what's next for Vonage. Can you just provide some more detail on the cost savings initiatives that are planned for next year? And maybe some more color around where and how much of that $50 million you plan to reinvest in the business?

Sure. I'll let Tim make some comments about the cost savings next year, et cetera. But I'll say this, before I pass it to Tim. I want to make sure I acknowledge the contribution and the assistance that I've gotten from Tim throughout his coming on-board as the Interim CFO. As I mentioned, we're looking at some amazing candidates and talent, but having a person with Tim's background onboard, to help me and the leadership team execute through this, given his experience and knowledge, that's priceless. So, I wanted to acknowledge that upfront. In terms of what we want to do strategically, you can't save your way to success. That's not technology, a software business, we have to invest and grow the business with a balance on profitability. There are efficiencies in terms of the optimization project and what we've looked at: streamlining our processes, cleaning up those acquisition gaps that are still there, automating. These are things that will give us the flexibility this quarter and throughout 2021 to invest, where, into the product, into the go-to-market. Product for differentiation because we're getting that feedback from our customers on what they need and if anything, this market has continued to see just a fundamental secular change in the way business is done. We're not going back, even after the pandemic is over, to this old world where everyone was in the same location. This idea of working remotely, connecting remotely and using communication, this is a three, five, seven-year trend that's underway. It's only accelerated and will continue to accelerate. We'll look for efficiencies across our procurement activities. We'll look around our cost of service. We want to look around in terms of finishing some of those acquisition integrations in 2021. That gives us the flexibility. And I think there's a significant amount of opportunity to continue to move that direction, so that we can invest in the product, features and functions and the go-to-market, the marketing dollars to generate the leads and the proper tailored go-to-market to prosecute those leads and to drive higher conversion. So, Tim, why don't you give them a sense about what we're doing in that space? Tim, please.

Sure. Great. Thanks, Rory, and Ryan, thank you for the question. I think Rory touched on a number of areas. So let me just provide maybe just a little bit of commentary. We'll see benefits across the income statement. So as Rory mentioned, we will look to optimize our cost of sales. We will look to automate onboarding activity with clients and automate some of our customer care. And you'll see some of that benefit in our gross profit margins. We will be very disciplined around prioritizing our development and marketing initiatives, where we are getting the most impact in yield, and Rory touched on that. We're looking Ryan at where work is best done. What is the nature of the work, and where is it best done? We are optimizing our transactional processes and you'll see the benefit of that in our G&A functions. And then finally, Rory commented, and I think I made a remark as well about our real estate model both because of the acquisitions that we have done and the locations of our global workforce. We're relooking at where we have real estate and where we need real estate going forward. And we'll be looking at making some changes in that regard. So, it's across a number of functions and across a number of different income statement lines. And this work will continue. We talked about the business optimization project as a couple of year project, but frankly, running a business in a disciplined fashion requires you to do this every day. So, this is going to be an ongoing effort. I hope I answered your question, and that was helpful. Thank you.

Yeah. And Ryan, I just – again emphasize, we're looking to improve steadily over a two to three-year period. And that's really where we come from. You asked a question about the $50 million. From our perspective, that's net investment. And there's a number of other activities going on within the business. But bottom line is we're going to continue to balance improving profitability while giving our ability to invest in those differentiated functions. Ryan, any follow-up?

Really appreciate that level of detail. And quick follow-up on the consumer sales process. Just given the indications of interest you've seen so far and let's say there is an event like a strategic action here. What's the best way for us to gauge what the most likely outcome here is? Is it a outright sale, sale leaseback, maybe selling majority of the business, anyway to think about that could be helpful. Thanks.

Yeah, it's really hard to put a finger on that at this point. We've had a lot of inbound interest in the asset. It's valuable. We've got to make sure that we get the right return for our shareholders on it. There's no question when we get to the February earnings call, we're going to look at the Vonage Communications Platform business to be able to show not only the revenue growth but also the adjusted EBITDA performance, and that's really helpful. In terms of it, I think that business is kind of a one whole piece. So, I think that probably makes the most sense in terms of the structure. Retaining technology elements; that probably makes some sense. But that sales structure, we have some flexibility on, and let's see how we go through the process. We'll give you information as it goes back – as we go through it, and look for more at the next earnings call. Thanks, Ryan.

Appreciate the color. Thanks.

Of course. All right, operator, next question please.

Thank you. Our next questions come from the line of George Sutton with Craig-Hallum. Please proceed with your questions.

Thank you. This is Adam on for George. Rory, on your initial call, you suggested this was a rare and better opportunity than people thought. I was hoping today you could give us a little more detail.

Sure, Adam. From my perspective what makes this unique is a couple of factors. One, I think the industry is seeing this secular change. So, in the technology space, you want to be in the right place. Where are these major technology shifts or waves occurring, right? We saw with clients – you know, I'm old enough to have seen it go from mainframe to client-server. Then you saw it in terms of the Internet. Then you saw mobility. Then we saw cloud. This communications transformation and how people work is a three to seven-year shift. And people have now become tethered to their mobile devices and the flexibility that that gives them in their work, their life and how they engage companies. Our technology is really put in place to do that. The API business, I think is one of the key ways that businesses will use to leverage this type of API technology. Remember, I'm a programmer by my background. They're going to use that technology to build applications, workflows and experiences. They don't need to rewrite every one of those micro-services. That API energy, I think is really important. And I think the third thing that I don't think people appreciate is that people have always talked about the pure plays in this industry, right. I think all of the industry is moving to try and look more like Vonage, then they're going to try and look like a pure play over time. I think the power of a full-function communications platform with those capabilities knitted together, I think that's where everyone's going to try and go. Now, we have a head start. It's our job to execute better, more efficiently, understand our marketing and our customers better, build better channel relationships, a more and more efficient business, so we can make those investments in engineering and go-to-market to grow. That's what we're going to do. And I'm going to apply my experience in business transformation and operational execution to work with the leadership team and the board to make a difference. And the other cool thing about it that I don't think people appreciate, Adam, is the talent. There are some of the smartest technologists and engineers and sales and passionate people about changing the world and changing the industry here at Vonage. That's something you can't underestimate the power of it. And those I think are the key areas. I hope that helps.

Certainly. One quick follow-up for me. Can you give us just a little more detail as well on the go-to-market with respect to your partners such as Salesforce and ServiceNow?

Sure. I'm going to pass that to Rodolpho in just a second. But there's a couple of things you need to think about go-to-market. Before you tailor a go-to-market, you must understand the customer, the product, and your marketing and sales effectiveness. That's what we've been working on the past four months, data. If you understand the data and you prosecute it properly, it will come fast. We need to understand directly from our partners and our customers how effective it is, and we need to make sure that we understand our sales effectiveness and marketing. We're starting to see some really good ideas and make sure that we get those things done so that people can make that, that we can make that kind of improvement. Anyway let me pass it to Rodolpho to add a little bit of specifics around Salesforce and ServiceNow. Rodolpho?

Sure. Thank you, Rory, and thanks for the question. Of course, we have a long experience and partnership with Salesforce, and we continue to have that for the CRM market and CCaaS solutions. We are expanding that from a portfolio perspective and from a go-to-market perspective to ServiceNow and Microsoft. Microsoft, we have two partnerships: one with Microsoft Dynamics for the CCaaS, one with Microsoft Teams for the UCaaS, where the customer has the opportunity to have the single pane of glass from both solutions into applications. So, what we are doing is expanding our go-to-market partnership knowledge, experience from what we have with Salesforce. Now, with the ServiceNow and Microsoft Dynamics and Microsoft Teams, expanding the TAM, expanding the opportunities for our solutions.

Thanks. Thanks, Rodolpho. Operator, let's go to the next question. Oh, sorry. Was that something, someone saying? Operator, let's go to the next question please.

Thank you. Our next questions come from the line of Alex Kurtz with KeyBanc Capital Markets. Please proceed with your questions.

Yeah. Thanks. Thanks for taking the questions. And good morning everyone. Back to the sale of the consumer business, Rory, it seems like you're putting up a soft line in the sand for Q1. I guess my first question is, a question we often get from investors, and I don't know if you've really gotten to a framework on this, but what is the remaining profitability of VCP, and can we get to a starting point for investors to think that this is a breakeven business excluding consumer? I think that will be helpful for people as it gets really close to happening.

Yeah. Thanks, Alex. So, two things that I think you need to think about. I think you, as I mentioned in the prepared remarks, we'll provide VCP details around revenue growth and adjusted EBITDA performance in the next earnings call. And that we felt – no, that we expect the VCP business to be slightly negative in the fourth quarter and to be profitable and we expect it to be profitable in the second half of 2021. Any follow-up on that?

Yeah. Just I guess the follow-up I want to ask on that is, if you look at the UC and CC business, the competitors that you're going after and seeing in bake-offs and RFPs are spending a lot of money on their platforms. And I guess back to the longer-term profitability of the standalone VCP business, do you feel like you can invest in the platform competitively to compete against the standalone companies that are out there that are public and still hit those targets you just mentioned? Or do you think there might be another kind of layer of investment needed post the divestiture?

No. So, I think that they – I think that those businesses all fit together well. And again, I think that the power and breadth of our portfolio is an asset. Those cloud-based solutions that you see in CC, they're very effective. They’re effective in understanding what use cases and what market segments do they really excel in. Where do we get at that disproportionate road? That's how you have to tailor the go-to-market and then build-out the marketing. And then expand your TAM opportunity by targeting certain enhancements and feature functions. That cloud business generates strong profitability. It's a competitive product. It's making sure – and we don't have to be everything to everybody in that space. We need to know exactly where it plays and how it wins a disproportionate share. I think we have much better data on that over the past four months than we've had before. So, I think that would be how I would give the color, Alex.

Thank you.

Thanks, Alex. Operator, next question please.

Thank you. Our next questions come from the line of Samad Samana with Jefferies. Please proceed with your questions.

Hi. Good morning, everybody. Appreciate all the color on the long-term and I think some of the changes. But if I could maybe recalibrate on to 3Q. I'm just curious how bookings growth for mid-market and enterprise how it went from growth in the second quarter to – if I heard correctly, down slightly year-over-year in the third quarter. I guess we're just trying to understand with all the positive commentary on the technology. What drove that bookings number, especially in the upmarket to be down in the third quarter?

Well, I believe what we said was that, sequentially we saw improvements in that bookings trend, and you've seen that trend for a period of time, in the mid-market and enterprise, it grew. And I think we talked about that in the prepared remarks in terms of the numbers, was up in the teens kind of level. I think that's an important kind of – and higher. But what we want to do is we want to see the whole segment growing. And what tempered the bookings growth or trends was some of the focus around – defocus around micro and small. So, we've seen good progress around the mid-market and enterprise. And I think that's reflected in the comment. But we need to make sure that we're balancing that with the micro. And there was this previous decision to kind of de-emphasize that. I think making sure that we do that effectively. And then the historical VBE, might – there's no – I don't want to leave you with the impression that we're not seeing momentum in mid and enterprise because we definitely are. But we have to have a balance across all those segments. Do you want to follow-on?

Yeah. I appreciate the clarification that I must have just misheard. And then, I guess just as a follow up, as I think about, for customers, obviously, there's a lot of at least changes being discussed. And I'm curious if your – how customers are responding to maybe some of the changes that are going on at Vonage, and how that's either improving or whether it's having an impact or not on the sale cycles.

Sure. From a customer standpoint, I'll probably let Omar just add a comment on it. On the API side, a lot of momentum. Customers see the power of our APIs and our API platform and they continue to see that and they appreciate the investment and focus to grow that capability. And you see in CC there are – we're seeing that – I think they're seeing a more tailored set of messaging, a clarity around our execution. But that's just beginning. So, why don't I pass it to Omar if you could add a little color about how customers are reacting to our Vonage API trends and what we're doing? Omar? Omar?

Oh, sorry. I was on mute. Thanks, Rory. Great question. So, what we – to Rory's point what we saw, what we've been seeing really all year is the bookings growing. So, we've had really strong sales growth. A couple of things that also have been happening throughout the year is that the sales cycle has shortened. We saw that sort of at its apex in Q2. But we still see shorter-than-average sales cycles than we've seen historically. So, that's a positive trend. I think we've seen, as others have seen in this space, particularly in API is that there has been an acceleration in digital transformation projects and digital transformation investments in our customers and in our prospects.

Thanks, Omar.

All right. Thanks for taking my questions. Have a great day.

Of course. Thank you. Omar, how about we go to the next question please?

Thank you. Our next questions come from the line of Meta Marshall with Morgan Stanley. Please proceed with your questions.

Hi team. This is Erik on for Meta. Thanks for taking our questions and congrats on the quarter. Maybe just kind of penciling back in on the API business. Understand there's a different type of buyer from kind of UC and CC. But looking at video being the driver there. How are you thinking about cross-sell or up-sell opportunities into those customers? Are they naturally more product-by-product focus and volume growth is more of the driver? Do you see an opportunity to also position additional features or APIs into that base?

Yeah. I can have Omar add a little bit of color in a second, but Erik, there's no question that getting that introduction with video is opening up clearly the opportunity to sell multiple APIs as they have experienced with Vonage. And we see lots of cross-sell and up-sell across APIs, whether they come in through SMS, for higher function messaging or email or video. We're seeing a lot of expansion on that. And what we want to do is to get that cross-sell and up-sell. They tend to be lots of different styles of customers in terms of small, mid, and enterprise level. So, there are lots of different opportunities and what we're doing is making sure we're sharing those opportunities with our Unified Communication experts and our CC experts because then they see the whole breadth, and we've seen some really interesting traction. I wouldn't say again that we have that code completely cracked yet, but we're gathering the data to understand it. Omar, a little color there?

Thanks, Rory. Hi, Erik. On the first part of your question about buyers, you're right. I think the – if you look at all of our different product lines, what is unique about API is generally our economic buyers are developers, right? They could be developers as Rory has pointed out. The kind of the proverbial two kids in a garage, right. The small developer or the large enterprise developers, and we have all of those. You may remember we have the second-largest developer ecosystem in the communications API space. We have over 1 million developers. So, we have a lot of small developers, but we have a lot of large developers. Now, specifically with video. We have seen a lot of digital natives, and that's historically been a very strong part of our business. So, these are companies typically new entrants or disruptors. But we've also seen in the last, really in the last two years, and it's growing. A lot of incumbent enterprise-type companies that are getting into space as they're investing in digital transformation as they're also trying to become nimble, right, like these digital natives. Now, specifically with video, we do see – video actually is our strongest product in terms of cross-sell and up-sell. In particular, we have a lot of good attach with video on enterprise service plans. And then, as Rory mentioned, with other follow-on products be it SMS, voice, Verify which is our two-factor authentication product, those typically go very, very well. If they are not bundled with the sale they typically follow shortly after that. Did that answer your question Erik?

Yeah. That's very helpful. Thank you.

Thanks Erik. Let's go to the next question operator, so we can try and get the last few in here before we finish up.

Thank you. Our next questions come from the line of Will Power with Baird. Please proceed with your questions.

Well, great. Thanks for fitting me in. I guess a couple of quick questions for you. First I'd love to take a little more color on the higher revenue churn you alluded to in the application services segment. I think you noted a couple of contact center customers that may have churned off. So, I was just trying to understand how isolated that is versus any broader expectations there going forward of higher churn.

Sure. Tim, do you want to take that one?

Yeah. Thank you. Let me jump in, Will. Thanks for the question. Yeah, Will, the two incidents of churn that I referenced are really unique client situations. One of them was a function of an acquisition that had been done and they were consolidating the activity under the acquisition. And then the second client was going through a consolidation of the various partners that they use. So, I'm not particularly disturbed by that. I think that they were true anomalies. I think we are in a very stable position.

Thanks.

Okay. All right. Thanks.

Will, how about a follow-up? Anything else you want to hit? Are you good?

Yeah. No. That'd be great. I'd love to kind of circle back on the API business. And you know if there's any other color that can be provided with respect to different geographic trends, what the growth rates look like across the different geos? And then I guess as you look further out, Rory, you talked about go-to-market for the app services business, but what are you thinking about in terms of investment opportunities to maybe or at least accelerate API growth both in terms of potential go-to-market and product breadth? Are there – is there a line of sight on other APIs that would be natural additions to what you're focused on today?

Sure. I think from an API product perspective, continue to enhance the capabilities that we have. Video leadership, that's key and upfront. Keep the differentiation flowing into the other high-value, but definitely add different messaging solutions, continue to create more flexibility in the programmable or configurable API type solutions. We'll have a strategy here that every technology, whether it's built for Unified Communications or Contact Center, it's built as an API. That will apply. That way we can use it and apply it into our purpose build applications and then sell it across the API ecosystem. I think that's key. And as we emphasized through the prepared remarks and questions, the whole idea about business optimization alignment is to understand the opportunity and invest for the growth that will transform the company with balanced and improved profitability. But this takes a period of time. It's a two to three-year journey, steady progress, and that's what we're going to go do. So, I appreciate it well. Why don't we go, operator, Darryl, to the next question?

So, thank you for fitting me in. Mine is around your channel, you really didn't discuss the performance of the channel on the call. And could you discuss or parse for us more actions you're taking to make that more effective. And then how are you working with the channel versus competing maybe also with your Microsoft and ServiceNow relationship? Thank you.

Sure. Thanks, Catharine. The point about the channel is a couple of things. First, hire the right people that understand it. I've been spending a disproportionate amount of time understanding the channel. I've met and spoken with many of the key channel partners to understand what works for them. And I think a couple of things you're going to see that are fundamentally different. One, we need to enable the channel to sell, right. And not only identify leads to us. That I think was a flawed strategy. I think Rodolpho can add some color about how we're tailoring our solutions and support and our channel program to not only drive leads but to enable them to truly in a much more efficient way sell and deliver the product. So, Rodolpho, would you like to add a little color?

Yeah. Thank you, Rory. And thanks for the question. Yeah, it's about having more people selling more and more frequently – frequency, it's important with the channel, and how we support the channel during the sales process is important. We cannot only gather the lead and leave the channel on the – with a blind structure there. So, we're going to invest in this structure, invest in technology, to support a channel from lead to cash perspective. Give the channel more visibility on the business that they have with us. That's why the channel always asking us. They want more visibility. They want more engagement with us. And we are going to support them from a technology perspective, from a process and governance perspective. The focus here is on channel success. It's not only like getting the referral and move away from the channel but making sure that we are investing in our channel success. That's from a metrics, from a governance target and support perspective for the channel.

Yeah. And Catharine....

I would expect then that you will – part of your strategy then would be update the portal, put together probably better tools for quoting – quote-to-cash systems. That type of activity.

Exactly.

Absolutely.

Exactly. We both agree on that one, Rodolpho 100%. Think about this as the process we're going through. Understand the customer, understand the partner, understand the product, get the data and metrics and then structurally and fundamentally adjust. You're spot on how you look at it, Catharine. Operator, next and final question please.

Thank you. Our final questions come from the line of Sterling Auty with JPMorgan. Please proceed with your questions.

Hey. This is Drew on for Sterling. I'm just wondering if you could provide some more color on the segmentation of your success in the market across the product areas. So, in which segment of the market are you having the most success in Unified Communications versus Contact Center versus APIs and how do those differ?

Sure. I think Drew what's important to think about is, again, as we've gone through the data and understand the data there's areas where the products in each product. I think APIs are a powerful set of offering. They play anywhere in the market, anywhere on the globe. And we see that in terms of its breadth across all three regions. And we see that from small digital emerging natives all the way up through enterprise, existing big firms. So, we're seeing interest in all those areas. When you go into Unified Communications, that space we're particularly strong, small, mid-market, those areas. I think there's a lot of opportunity in that space. I think it's a bit underserved, and I think we can make some hay. On the additional side of that, we've won some really amazing enterprise customers with some specific use cases, particularly distributed enterprise models. That's a powerful offering. There are companies that you probably stopped into over the last week that we're supporting in that space. And they are big enterprises, but they're on more of a digital – a distributed model. And then when you looked at Contact Center, it's really around CRM and around that collaboration. But I think the ultimate power of that is the combination of these three capabilities, the breadth of our API platform, transforming the business and how we leverage that architecture and then cross-sell and up-sell on Unified Communication and Contact Center, there is a lot of opportunity particularly in mid-market through specialized use cases or tailored use cases in enterprise. And then even into small. So, I think that would be how I would give the color, Drew.

Got it. Thank you.

Thank you. Hey, everyone. I appreciate that. I'll pass it to Hunter to close up the call. Hunter, any final comments?

No, I think that's it, Rory. I appreciate everyone's participation. And look forward to speaking throughout the quarter.

Thank you. That does conclude today's call. You may disconnect your lines at this time. Thank you for your participation and have a great day.