Ericsson Lm Telephone Co Q4 FY2020 Earnings Call

Greetings and welcome to the Vonage Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Hunter Blankenbaker, Vice President of Investor Relations. Thank you. You may begin.

Thank you operator and good morning and welcome to our fourth quarter 2020 earnings conference call. Speaking on our call this morning is; Rory Read, Chief Executive Officer; and Steve Lasher Chief Financial Officer. Also joining us is Jay Bellissimo, Chief Operating Officer; Omar Javaid President of the API Platform; Rodolpho Cardenuto Head of Unified Communications and Contact Center; and Tim Shaughnessy, our previous Interim CFO. Rory will discuss our strategy and fourth quarter results. And Steve will provide a more detailed view on our fourth quarter and full year results and 2021 first 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 and 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 fourth quarter earnings press release or the fourth 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 today. I hope you and your families are staying safe and healthy. I would like to start by thanking our Vonage team members around the world for their unwavering support and commitment to our customers during these extraordinary times. Our vision is to accelerate the world's ability to connect. And 2020 presented many opportunities to do just that and to make a real difference for our customers. We helped our customers address unprecedented challenges by finding new ways to work, connect and engage. One example is StoryCorps, the national nonprofit that has brought together more than 600,000 people to record intimate face-to-face conversations about their lives and leave a legacy. It is the world's largest single collection of human voices ever gathered and it is preserved at the U.S. Library of Congress for generations to come. StoryCorps asked for our help in making these human connections possible when in-person interviews were no longer an option and we launched StoryCorps Connect. StoryCorps Connect is a free video platform powered by Vonage created to reduce the impact of isolation and preserve people's stories at this momentous point in our history. Everyone at Vonage is extremely proud of the solutions we are creating to connect people and businesses across our planet and this is needed more than ever right now. As we have discussed, our strategy is to leverage our single global cloud communication platform that powers our customers and partners' next-generation engagement solutions using our APIs, Unified Communication, and Contact Center innovations to perform better, connect easier and to create new business models. To execute on this strategy for the past six months, we have focused on optimizing our business for improved operational efficiency. This has allowed us to make strategic investments to drive growth and we are starting to see the initial results of this work. In parallel, we have established our strategic operating plan for the next three years. Today I'll focus my comments on three areas: one, our solid fourth quarter results. Two, our 2021 product and go-to-market investment activities; and three, an update on the sale of our consumer business. Steve Lasher, our new CFO will follow with a more detailed look at the quarter and full year as well as our 2021 guidance. I'll start with the fourth quarter financial results. Vonage Communication Platform total revenues were $245 million, with service revenues of $230 million, a 17% increase year-over-year. Within this result, API revenues grew 33% year-over-year, highlighted by high-value APIs. And our Unified Communications and Contact Center application service revenues grew 4%, again, slightly ahead of expectations. Consolidated revenues totaled $323 million. And we delivered adjusted EBITDA of $48 million, both above expectations. As committed, we announced this morning that we are making important new disclosures on our Vonage Communications Platform operating expense and adjusted EBITDA. This is to provide greater transparency to help our investors better understand and value our business. And to enable them to track our progress on the Rule of 40, as calculated by VCP's service revenue growth percentage plus its adjusted EBITDA margin. We exited the fourth quarter of 2020 with a VCP Rule of 40 of 15%. We are committed to steadily improving our Rule of 40 results over the next three years. We expect to exit fiscal 2021, in the 20% range. And our plan for 2022 is to be in the mid-20s range and above 30% in 2023. I'll now provide a few fourth-quarter highlights by products, starting with API. Revenues grew 33% year-over-year to $119 million. We saw momentum in nearly every industry, as digital communication channels have become a primary differentiator in the way businesses engage customers. API product strength was driven by three key areas. First, high-value APIs grew 130% year-over-year, with voice and video usage accelerating sequentially, as customers continue to expand on our platform. Second, dollar-based net expansion increased to 121%, driven by momentum across most industries. We are also seeing additional improvement in travel and hospitality. And third, we remain well positioned with global scale and a diverse customer set across the world in multiple industries including health care, education, gaming, social, and virtual events, providing a broad-based balanced growth trajectory. I'll now highlight virtual events. Vonage powers more than a dozen virtual events platforms on multiple continents. We signed several large customers in the fourth quarter, winning against both competitors who offer simple video conferencing solutions and other CPaaS companies. SpotMe is a new Vonage customer that provides event solutions to more than 250 global brands, including Daimler, SAP, and Johnson & Johnson. Disrupted by the pandemic, SpotMe needed to build an online platform to keep operating and to meet customer needs. They chose Vonage because of our high-quality video API, ability to enable real-time streaming, and our secure platform with global reach. Now moving to Unified Communications and Contact Center products, service revenues grew 4%. Fourth quarter bookings were up sequentially for the second quarter in a row, but remained slightly down year-to-year. Within this, mid-market and enterprise bookings were up and accounted for more than half of our total bookings. We continue to see traction in cross-sales, not only in Unified Communications and Contact Center products but also in combination with our programmable APIs, as we work with our customers to help them drive better business outcomes. One example is Gannett Co. Inc., the largest US newspaper publisher. Gannett had several disparate on-site PBX systems from multiple acquisitions. They wanted a platform that unified all team members and provided the flexibility to work from anywhere, while delivering voice, video, messaging, and social media from a single user interface. They chose Vonage for our integrated Unified Communications and Contact Center solutions that seamlessly integrate with their productivity and CRM applications, as well as our ability to scale with them using our communication APIs. Another example is Great Wolf Resorts, a brand leader in the indoor family water park resorts category. Great Wolf chose Vonage because it needed a partner that can provide a Contact Center solution with deep Salesforce integration and help them create a differentiated user experience. Great Wolf is using our Vonage contact center solution along with our AI capabilities and programmable voice and messaging APIs to offer new customized and interactive engagement experiences for all of their guests. We expect our improving bookings trajectory to continue throughout 2021 and translate into increasing Unified Communication and Contact Center growth rates in the second half of the year. 2021 will be a year of execution and targeted growth as we further invest in our product development and a tailored go-to-market so we can provide our customers with the communication solutions that best fit their needs and win a disproportionate share of the market. I'm confident we are putting the right sales structure and strategy in place. Our new e-commerce platform and self-service capabilities for micro and small business markets are new cost-effective ways to scale growth that will augment this with a more strategic focus on enterprise and VCP cross-selling leveraging our strong direct sales force. The channel is a key part of our growth strategy and we started building a stronger channel foundation in 2020. We will make further investments in 2021 to differentiate our channel program with additional support in key markets, new incentives, product innovation, and new infrastructure that will make it even easier to partner and win with Vonage. Finally, as we committed, we have completed a comprehensive nine-month strategic review of the consumer business through the assistance of financial, accounting, and legal advisers. Based on this review which included a detailed analysis of the consumer business financials, profitability and potential valuation, the Vonage Board has determined that it is in the best interest of our company's shareholders to terminate the sales process and retain the consumer business. We have reached out to approximately 70 strategic and financial sponsors to gauge their interest in a potential acquisition of the consumer business. A number of the potential acquirers expressed interest in the business, but none at the value that the Board believed was acceptable to move forward with a sales transaction. Our decision was driven by valuation and $600 million of cash generation we expect from consumer over the next five years. We can run this business easily, efficiently and without distraction. Moreover, this decision ensures a strong balance sheet and financial flexibility to invest in VCP capabilities and potential M&A. Importantly, the detailed financial reporting now available will enable investors to evaluate VCP in a manner comparable to a standalone business. In closing, Vonage is in the right place at the right time in a large and growing market. We have improved the business over the last six months by creating operational efficiencies that allow us to invest in growth opportunities and to consistently execute on our commitment. We will focus our execution on efficiently delivering a compelling solution portfolio in attractive markets to create differentiated value for our customers. We are making solid early progress, but we have much more work to do to build an even better Vonage. We are committed to delivering improved growth and profitability across 2021 and we'll drive further efficiencies and growth opportunities as we scale our business in 2022 and 2023. We look forward to sharing more details during our Analyst Day on March 5. I am pleased to enter this important year with a strong leadership team enhanced by our critical senior leadership hires since our last earnings call. With this leadership team now in place, we are set to execute. Jay Bellissimo joined us as Chief Operating Officer, leading sales, operations, and our go-to-market strategy across the Vonage Communications Platform. He has deep knowledge and operational expertise in software-as-a-service, cloud solutions, and artificial intelligence with a proven track record of helping organizations accelerate their digital and business transformation efforts by moving to the cloud. Steve Lasher, who we introduced earlier in the call has joined as our new Chief Financial Officer. Steve's deep knowledge of technology and the software space and a long history of leadership in finance, business transformation and business development will make a significant impact on helping Vonage drive revenue growth and increase profitability while we invest to strengthen our innovation capabilities to create differentiated value for our customers. And we announced yesterday that Savinay Berry will join as Executive Vice President of Product and Engineering, responsible for the global leadership of Vonage's engineering, product management, IT, and security team, focused on driving the company's technology strategy and innovation of the Vonage Communication Platform and its portfolio solutions. Savinay has extensive experience in technology, software, and the cloud with a track record of developing highly innovative products and spearheading results-driven transformational change. Each of these executives have deep cloud and SaaS experience with a long history of demonstrating results in building growth businesses at scale. Before turning the call over to Steve, I'd like to thank Tim Shaughnessy for his strong work as our Interim CFO, which has helped us to become more efficient and develop better operational execution. He has also played a key role in the consumer review and driving greater transparency in our financial reporting. Thank you, Tim. And with that, I'll turn the call over to Steve.

Good morning, everyone, and thank you Rory for the warm introduction. I'm honored and excited to be the CFO of Vonage. I believe there is a huge opportunity in front of us, and I am looking forward to working with Rory and the leadership team to capture more market share while driving operational excellence and profitability. Turning to our results. I'll cover the following topics: first, I'll begin with a brief discussion of our consolidated Q4 and full year 2020 performance; second, as Rory mentioned, this quarter we began providing additional disclosures on our Vonage Communications Platform and Consumer segment. So I'll review these results in more detail; and third, I'll cover our first quarter and full year 2021 guidance. And with that, let me dive right in, beginning on slide 7. Consolidated revenues of $323 million increased 4% driven by a 12% increase in VCP revenues offset by declines in consumer. For the full year, consolidated revenues were $1.2 billion, a 5% increase. Fourth quarter consolidated gross margin was 54%, down slightly due to the faster growth of relatively lower margin VCP revenue, which now represent 76% of consolidated revenue, up from 70% in the prior year. Consolidated operating expenses were $169 million, down 1% year-over-year, improving our expense to revenue ratio by three points, as we continue to optimize the business for faster growth and improved profitability. I'll discuss OpEx in more detail in our segment results. Consolidated fourth quarter adjusted EBITDA of $48 million was up $3 million year-over-year due to improving revenue performance and cost structure actions. For the full year, adjusted EBITDA was $170 million, an 8% increase. Before turning to segment results, I would like to highlight that we've included an eight-quarter historical view of the VCP and consumer segment on slide 16 and 17 in the earnings presentation. Now, let's review fourth quarter VCP segment results beginning on slide 8. VCP service revenues increased 17% to $230 million. Service revenues exclude product, access circuits, and USF fees, which totaled $15 million in Q4, down $7 million. Full year 2020 VCP service revenues were $856 million, a 19% increase. Within VCP, API revenues, all of which are serviced, were $190 million in the fourth quarter, up 33%. High-value APIs grew 130% year-over-year with particular strength in video, voice, and IP messaging. High-value APIs represented roughly 20% of the total API revenue. Unified Communications and Contact Center service revenues were $111 million in the fourth quarter, up 4%. VCP revenue churn was 1.3% in the fourth quarter. Churn within UC and CC was at record lows. However, this was offset by higher churn on our API platform driven by a loss of certain customer traffic in Asia due to government regulations. Monthly service revenue per customer increased 16% to $552 due to increases in average customer size across the VCP platform. Moving to slide 9. VCP gross margin in the fourth quarter was 46%, down 100 basis points year-over-year, driven by mixed dynamics within the quarter. For the full year, VCP gross margins were 48%, up 100 basis points. VCP sales and marketing expense for the fourth quarter was $77 million, down $7 million versus the prior year and down $6 million sequentially due to our business optimization effort to improve the efficiency of our sales and marketing. This was offset by selective investments into our API sales team. VCP engineering and development expenses were $20 million, up 22% reflecting increased investment on the VCP platform, including video and voice functionality and scalability. E&D expenses plus capitalized software totaled $32 million, which represents 14% of VCP service revenue. VCP general and administrative expenses for the fourth quarter was $38 million, up $2 million due to higher restructuring charges primarily related to lease abandonments and consulting fees on the consumer strategic review. VCP adjusted EBITDA was negative $4 million, improving from negative $18 million in the prior year and negative $14 million in the third quarter. VCP adjusted EBITDA benefited from our efforts to drive greater operational efficiencies while growing revenue. Moving to Slide 10. Consumer segment revenues were $79 million in the fourth quarter and totaled $333 million for the full year, a 14% decrease. We ended the quarter with approximately 900,000 consumer subscriber lines. Two-year plus tenured customers now represent 94% of our consumer base and five-year plus customers are 79%, which has a churn rate of 1.6% and 1.5% respectively. Consumers' average monthly revenue per line was $28.13, up $0.56 reflecting higher USF fees and targeted price increases that we implemented during the year. Churn of 1.7% was stable compared to the prior year quarter and down 10 basis points sequentially. Consumer adjusted EBITDA was $52 million in the fourth quarter and $227 million for the full year. This business provides profitability and cash generation, which helped fuel our growth initiatives. On Slide 11, we ended the fourth quarter with $517 million of net debt down $20 million sequentially. As of December 31, net debt was three times last 12 months adjusted EBITDA. Given the strong cash flows of the consumer business and improving cash flow of VCP, we expect to continue to pay down debt in 2021 ending the year below 2.5 times. Moving on to guidance on Slide 12. For the first quarter, we expect Vonage Communication Platform revenues in the range of $240 million to $244 million. We expect Vonage Communication Platform service revenue growth of approximately 16% to 18%. Embedded in this guidance are the following trends. In API, we expect first quarter year-over-year growth in the 34% to 36% range, reflecting continued positive trends in high-value and messaging; with regard to Unified Communications and Contact Center, we expect service revenue growth in the low single digits. We believe first quarter service revenue represents the trough of the UC and CC growth rate decline and that we will see a modest improvement in growth rate in each quarter of 2021 thereafter. We expect first-quarter VCP adjusted EBITDA to be in the range of negative $7 million to negative $3 million. Within consumer, we expect revenues in the $75 million range and adjusted EBITDA of approximately $49 million. On a consolidated basis, we expect total revenue of $314 million to $318 million and adjusted EBITDA in the $42 million to $46 million range, with a sequential decline due to the reset of annual employee benefits and a step-up in sales and marketing activity. For the full year, we expect Vonage Communication Platform total revenues in the range of $1.038 billion to $1.054 billion. Within this, we expect service revenue growth of 15% to 17% driven by API growth approaching 30% and UC and CC service revenue growth in the low to mid-single digits. We expect VCP adjusted EBITDA to be positive for the full year of 2021 in the $5 million to $9 million range, a substantial increase from negative $57 million in 2020 reflecting our focus on continued operational efficiencies. For consumer, we expect 2021 revenue in the $285 million range and adjusted EBITDA in the $185 million to $189 million range. Total consolidated revenues are expected to be in the range of $1.323 billion to $1.339 billion. We expect full year 2021 adjusted EBITDA in the $190 million to the $200 million range. With that, I’ll turn it over to the operator to initiate the Q&A.

Thank you. We will now begin the question-and-answer session. Our first question comes from Ryan MacWilliams with Stephens. Please go ahead with your question.

Thanks for taking the question. So just to dig in to start on the consumer division how are the interest levels during the sales process? And what was the valuation that you were trying to achieve here? And just given how extensive this review was, does this really close the book on Vonage potentially selling its consumer business?

Hey, Ryan thank you for the question. There's no question we went through a comprehensive strategic review. First, we had to understand and we brought in accounting and professional consultants to really dissect the business and pull it apart, because it's always been our intention to give greater transparency to our investors so that they could understand VCP, the Vonage Communication Platform and the Consumer business. It was definitely robust, approaching 70 strategic and financial sponsors. There’s no question we went through two rounds of discussion. And we had quite a number of interests, but at the end of the day, Ryan, it really comes down to this is a very efficient access of capital for us. We can run it efficiently without distraction and this gives us real flexibility as we continue the strategic pivot of Vonage from its traditional heritage to this leader in the global communication platform space. There's no question, we'll continue to invest in VCP to drive faster growth, as I mentioned in the progression of the Rule of 40 over the next three years. And that's something we'll dig into at the Analyst Day on March 5. But I believe that this is clearly the right decision. And clearly, we closed the book on this one. End of discussion.

Thanks. And the guidance for positive adjusted EBITDA for VCP was a nice surprise, especially thinking about some of the wins in the video API segment. But since you are keeping Consumer and its cash flow, why is it important to you to have this positive adjusted EBITDA next year for VCP? And why not drive even more investment through the API business in fiscal 2021 to accelerate growth? Thank you.

Yeah. It’s just modestly positive, Ryan. There's no question about it. And we want to keep it in that range. The optimal model in terms of VCP is always going to be focused on growth at the top in terms of the service revenue. I want to make that strategic pivot. But we also over the course of the next two or three year journey is to make sure that business is very sustainable on an ongoing basis and can fund the investment and growth that we really want to drive in that space. We're not going to go heavy on the bottom line in terms of driving it. You're going to see we've tried to keep our firepower in terms of marketing and sales investment, quarter after quarter this year, to continue to improve that growth trajectory, right? And the work from Jay Bellissimo and his team as they come on with Rodolpho and Omar, Joy Corso on the sales – on the marketing side you’re going to see us invest in velocity marketing to drive UC and CC and cross-sell and you're going to see continued focus to extend that API momentum as we go forward. I think that's a really important part of the ongoing strategic direction of the company. This is not a bottom line focus as you mentioned. We're going to keep it in that general range, but then continue to focus on capturing more growth, accelerating the business over the next two or three years as we've improved our efficiency. And at the same time, Ryan, invest in product innovation this year and next so that in 2022 and 2023 those years become the year of the product. And those product enhancements give our next leg up in terms of additional product growth. That's where we're going and that's the strategy we're on.

Thanks. Look forward to hear more at Investor Day. Good luck guys.

Thank you. Our next question is coming from the line of Tim Horan with Oppenheimer. Please proceed with your question.

Thanks, guys. Can we delve into the API a little bit more? We're seeing kind of viral growth from a bunch of more developer platform-focused business models out there. Is this still an important part of the strategy? And maybe you used to give kind of developer numbers that were working on the platform can you give us an update there? Thank you.

Hey, Tim. How are you? Good to speak to you. Yeah. Hey, Tim. From the standpoint of API no question about it, it’s a key component of the strategy. The Vonage Communication Platform is built on that API platform. And really leverages those APIs to build once and sell many across the purpose-built capabilities. We see that same kind of momentum. And you saw Steve's comments about continued strong growth as you kind of looked at 1Q. We don’t know exactly how the moderation of the pandemic will occur and we all hope that it moderates as soon as possible. But there's no question that the market and the way people work has changed forever and it will continue to be more and more virtually based and more and more communications-driven. So we think we're at the beginning of a five to seven-year trend in this kind of programming technique and this kind of approach around API. You're going to see us continue to invest in that platform using the dollars and capabilities of the business to enable us to continue to grow that. And you're going to see that. I think we'll take a piece on the developer background at the Analyst Day so we could kind of go deeper there. Jay, Omar, anything you want to add in terms of API going forward?

Rory, it’s Jay. I would just add also that we've got great diversity. When you look at our balance across the geographies, APAC 39% of our revenue; Americas 38%; and EMEA 23%. And we see a lot of great opportunity to really go across the geos and go deep in those geos. And that's providing some really good year-over-year momentum as well as quarter-to-quarter momentum. So we see a very positive outlook in terms of building that. And then the other point, I'd highlight is just the customer expansion. We're seeing more and more customers engage and use the wider portfolio of our APIs. With that over to you, Omar.

Thank you, Jay. And great question. I'm glad that you recognize the power of the developer community. So I'll just share some insights there for you. We have the second-largest developer ecosystem in the space. We have over one million registered developers. And just to give you some recent facts here. We've got I think recently about 3.1 million documentation views, 10.3 million SDK installs representing about 13.5 billion API requests. And as Rory mentioned we are going to be highlighting a lot of this and go through this in a lot more detail in the Investor Day. But this is an area that we have been investing in for quite some time and we see a lot of great momentum from it.

Exactly, what I was looking for. Thank you. I look forward to the Analyst Day.

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

Thank you. Good morning. At the risk of I guess front-running the Analyst Day, I'm going to ask a couple of questions on the apps business. First, I know you've had some initiatives to kind of shore up the base of that business particularly the VBE cohort and the micro SMB component. So I wanted to just kind of get your status updates on those initiatives. Have you seen some stabilization or improvement in that part of the base? And then just high level in terms of how you're thinking about go-to-market for MME there. I know historically you've really been aligned with Salesforce and going after accounts that were sort of standardized on Salesforce and leveraging that integration. Can you give us any high-level thoughts about how you're thinking about going to market and MME going forward? Thank you.

Thanks Rich. Rich, there's no question that the focus to tailor that go-to-market by customer segment where the products best fit and where we apply the right go-to-market is the right strategy. You're going to see us continue to build out this self-service and e-commerce at the bottom of that and the micro and beginning with small then you're going to see a lot of work around the channel particularly in the second and third quarter as we introduce new capabilities, new incentives, new programs make it easier and better to win with Vonage. And then that powerful Salesforce that's what's going to drive that direct salesforce at the top of the stack at mid and enterprise. It’s tailoring to each area to get the efficiency. And then the work that Joy Corso is doing from our CMO perspective to drive the velocity marketing particularly across micro, small and mid, we're seeing some really interesting traction on some investments that we've done here in the first quarter. And as we get that information, we'll accelerate that through the balance of the year. So why don’t I pass that over to Jay and Rodolpho just to add a little bit more color.

Rodolpho, do you want to start?

Thank you for the question. I believe you mentioned the VBE and the micro business. It's important to recognize that we are improving our revenue trajectory since the second quarter of last year. We have seen growth from the second quarter to the third and fourth quarters, and we anticipate this trend will continue throughout this year. This improvement is largely due to our efforts in the VBE and micro business. One key aspect to highlight is the micro investments we've made in e-commerce, which have simplified the customer acquisition process. We now offer easy self-provisioning and self-support for our customers. These initiatives have made our micro business more profitable and fostered growth. Regarding Salesforce, we are committed to deepening our partnership. We have had a positive experience with Salesforce and are also evolving our relationship with ServiceNow and Microsoft. We now have two connections with Microsoft: Microsoft Teams and Microsoft Dynamics. Our integration with Microsoft Teams is strong, and we also provide effective solutions for Microsoft Dynamics with TCaaS solutions, in addition to the traction we are gaining with ServiceNow. Therefore, we are not only focusing on strengthening our Salesforce contact center but also expanding our offerings with ServiceNow and Microsoft.

I'm sorry. I was just going to add a couple of quick points to Rodolpho. A couple of other things for the portfolio in the UC and CC space is, we've seen some really good sequential growth in the bookings and we're planning to exit the year in the high single digits in service revenue. And with that, we expect next year's service revenue to be in double digits based on the trends we're seeing today. Obviously, there are some unknowns with the impacts of the pandemic, but we're feeling good about this business and the growth. And to Rodolpho's point, yes, Salesforce has been a key part. But as he alluded to, we're also looking at the partnerships with ServiceNow and Microsoft. Over to you Rory.

Yes, Jay, that's an important point. What you want to do, Rich, is look for the trough in the first quarter. Then, we should start to see year-over-year bookings growth beginning in the second quarter. We anticipate a steady improvement into the mid to high single digits by 2021. Looking ahead to next year, I believe we can achieve a low to mid-double-digit growth rate in 2022 as we continue to move through this transition.

Thanks, Rich. Next question?

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

Thank you. I'd like to ask about the UCC business. Are there any noticeable differences in trends between the contact center segment and the UC segment? I understand they are quite integrated, but I'd appreciate your insights. Additionally, I want to touch on gross margins. While it's clear that the higher-margin API business is performing well and experiencing growth, we’re seeing a decline in the gross margins for the segment overall. Can you elaborate on the competitive landscape and margins for the remaining API business? Thank you.

Thanks, Meta. This is Rory. So, the first comment would be on the UC CC, we're seeing some very good cross-sell activity across that portfolio. And again, where we see the CC strength, it's definitely in mid and enterprise, where we can definitely leverage the strength of our direct sales force to go to market. UC, we have it's not only there on that cross-sell, but then across the bottom of mid, small, and into micro, where we're going to use those more efficient techniques with the channel and with e-commerce to drive that growth. I think CC is continuing to have strength particularly as it's related around Salesforce and then the expansion of the TAM with ServiceNow and Microsoft that opens up more opportunity. That's really going to be a direct Vonage sales play and to leverage that continued growth. And when we gave those kind of feel for the next several quarters, that movement of the business is really a UC CC combination going from the trough here in low single digits into the mid and high single digits across the 2021 timeframe and then further in '22. But I'll let Steve Lasher give an update on gross margin I think to give you a feel for where we're sitting on that. Steve?

Thank you, Rory, and thanks to Meta for the question. Looking at our VCP gross margins, we observed strong growth in API with a 33% increase in revenue, alongside a 4% growth in UC CC. The margins across our products remained relatively stable, primarily due to the mix of our offerings. Our aim is to enhance margins while focusing on scaling our API-oriented businesses. As we expand, we plan to utilize our global reach and portfolio to also improve margins moving forward.

Thanks, Meta. Next question?

Thank you. Our next question comes from the line of James Breen with William Blair. Please proceed with your question.

Thanks for taking the questions. Just a couple. One on the balance sheet side. I think you said that you're looking to get below sort of 2.5 times leverage sort of implies paying off around $30 million or so of debt this year. Is that sort of the goal, operating cash flow generation on the consumer side is around $120 million based on your estimates and sort of running VCP at breakeven?

Steve?

Yes. Sure. Thank you very much really for the question. We are. As we look to continue to operationalize the business, we are looking to pay down debt. Obviously, we want to make sure we are optimizing the business. And if there are other opportunities for acquisition or the like, we will make sure we prioritize those. But as you've seen we've made some real strong improvement in our profitability. And as we've given the guidance as we move forward towards the end of 2021, we want to be second half profitable and full year profitable. So again within that, we're going to evaluate what do we do and continue to pay down the debt is one of our priorities.

And again on that one really the focus again is, if there's opportunities for us to do strategic M&A we're going to look at that hard and then also the work to invest for faster growth across VCP. This gives us more firepower and more flexibility.

Thank you. Can you provide some insights on how our relationships with channel partners and agents have evolved, particularly in terms of invitations to participate in deals and our win rate, both on a quarter-to-quarter and year-over-year basis?

Yes. Over the last six months, I have dedicated significant time to meeting with various channel partners to enhance our collaboration and understand what drives momentum. Both Rodolpho and Jay have extensive experience in utilizing the channel's potential to foster growth globally, even while we are not actively engaged. This highlights the channel's strength. We have evaluated our products, portfolios, and documentation recently, making necessary adjustments and adding new capabilities. Additionally, we are currently collaborating with feedback from our channel partners to develop better incentives aimed at driving growth. You will see the launch of these initiatives in the second quarter, and we plan to expand on them throughout the year. It is fair to say this will become an even more crucial component of our growth strategy. As you observe our progress along the VCP Rule of 40, we exited 2020 at 15%, reached around 20% in 2021, and are projected to be in the mid-20s for 2022. This is a key focus for us. We look forward to providing further updates as we advance.

Thank you. Next question.

Thank you. Our next question comes from the line of Mike Latimore with Northland Capital Markets. Please proceed with your question.

Great. Thanks. I guess just two questions here. You just threw out the notion of strategic M&A. I guess can you give a little more detail on what you're thinking as a potential kind of criteria there. It seems like your product portfolio is pretty well-rounded out now. So just kind of curious what you might think about in terms of strategic M&A? And then second in terms of new bookings opportunities for your API business, how important is this notion of cross-selling into the application base there? It seems like a lot of the growth is just coming from direct at this point.

Sure. So let's talk about M&A. M&A is opportunistic. We always are looking to potentially augment our technical innovations and there's lots of opportunities out there. But it has to make sense, if it expands our reach, our revenue base and our capabilities in terms of routes, that's also attractive. At this point we've done a really good job over the past 3, 4 years and strategically pivoting the business, Vonage Communication Platform. I think we've got the base products as you pointed out Mike. I think if there's any of that activity. It's opening up market expansion and TAM where it's augmenting technical innovation. It's going to be opportunistic and we're going to look at that going forward. Then from the API standpoint I'll swing it over to Omar.

Hi Mike. Thank you for the question. I think what you were asking is about the size of the opportunity in cross-selling APIs to apps and vice versa, compared to focusing solely on APIs. As we've outlined, the opportunity within the API space is very robust, and we remain committed to it. Rory, Jay, and the team have been instrumental in this effort, and I wouldn't want it to be any other way. However, we've made significant investments and have a solid customer base on the app side, so it makes sense for us to enhance our efforts in selling those solutions to our existing customers. I see that as an opportunity, but we are also deeply dedicated to excelling in the API business.

Thank you. Next question.

Thank you. Our next question comes from the line of Catharine Trebnick with Dougherty. Please proceed with your question.

Thank you for taking my question. I have two inquiries. First, it appears that you've recently expanded the senior management team. Are you transitioning to a more traditional management structure with clear roles for CTO, engineering, sales, and marketing, moving away from the dual centers of power that existed last year with API and the UC and CC Group? I'm trying to understand the new organizational structure and how it will affect responsibilities and roles.

Sure Catharine. Hey, there's no question. I love the power of the Vonage Communication Platform, an API-based platform with global reach leveraging this global carrier network, a cloud-based infrastructure around the world. We can reach any customer, any partner, anywhere. And our APIs give us this build-able base. And these purpose-built applications, built on top of it. And UC and CC, that's the power of Vonage. It's diverse in terms of the geography, representation of revenue, the industry representation, let’s leverage that. That's the power and one of the differentiators of Vonage. And when you have the opportunity and you get into this. And we're going to drive a culture around accountability, collaboration, trust and driving excellence. We're going to do what we say. And own what we do. And that's going to be our culture. Want to make sure that we augment an already strong senior leadership team with really amazing talent. I mean, first Joy joins us, in terms of CMO. Then we go. And get, Jay, Steve Lasher, look at the scale there. And then, Savinay Berry just yesterday. These are opportunities and combination with the skills that we already have on board, that are now building a company not for today but for the next three years, and the next five years. That's the kind of idea that we're tackling here. And we want to leverage that, Vonage Communication. That's what customers are looking for. Communications are going to rule the day, over the next five to seven years. We're in the right place, at the right time, with the right team. And then, under that, the technical team that we have in engineering and product, I'll go into any battle, with that team anywhere. Thanks, Catharine.

Yeah. And then, the follow-up is on, could you parse for us what the high-value API gross margins are? I know at one point in time, I was thinking the video API was around 60%. Any possibility you can parse some of that information out for us? Thanks.

Yeah. At the product level, we're not going to kind of get into that level. Suffice to say, high value is definitely on the higher end of the portfolio, in terms of the mix. There's no question. And we're growing a higher-and-higher percentage of that, as we go forward. But there's no question. It's the power of VCP. And with the new disclosures now, you can see that business much more clearly, over the past several years, how that's progressing and growing. And then, with the work that we're going to do at Analyst Day, we kind of set the vision for where we're going to go over the next three years. Thanks, next question.

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

Thank you. Rory you gave about a 1,500 basis point suggestion of improvement, in your Rule of 40 over the next three years. I wondered if you could just break that down into, growth versus margin plans.

George, as we discussed earlier with Ryan, growth must be the primary focus. Looking ahead three years, aiming for a growth rate of 30% or more will require us to target something in the mid-20% range for growth. While higher growth is preferable, we also want to maintain mid-single-digit profitability. The growth potential is clear; currently, we are seeing revenue growth in the high teens for VCP and need to increase that over the coming years. There are various strategies to achieve those goals, but our priority is definitely to position ourselves for growth. Does that clarify things for you, George?

That's very helpful. Thank you.

Okay, next question.

Thank you. Our next question comes from the line of Will Power with Baird & Co. Please proceed with your questions.

Okay. Great. Thanks. Yeah, I guess, a couple I'll try to sneak in here. I guess, Rory, now that you've concluded the consumer strategic review. I wonder if you could just remind us, of the strategic importance of having API. And the UC contact center businesses together, how intertwined are those? And could it make any sense to look at strategic alternatives for the UC Contact Center business, just to help shine a brighter light on the API segment?

From my standpoint, Will there's no question, we're better together. The power of Vonage is in that reach and scope. I have no hesitation at that at all. The Vonage Communication Platform will be based on API-based platform. And we're going to use that global carrier network, that global infrastructure reach to be able to reach any customer, anywhere, anywhere around the planet. And then, what we're going to do is use those APIs and build those once. And then, build those into the UC and CC capabilities as we move forward. Sure. There's no question that there's some different sellers, but we already are seeing examples and I referenced a couple in the prepared remarks where customers are definitely seeing the power of UC and CC in that combination and we're seeing a lot more in terms of our Salesforce flow in terms of combined cross-sell opportunities. But then they love the API work to build out and give them scale and reach as they build out this communications reach. Does that help?

Yes. No that helps. Thank you. I guess maybe just a second quick follow-up. As we look at the API segment and guidance I think you all are expecting an acceleration in revenue growth from what was just reported. So I'd love any further color as to kind of the key drivers behind the API outlook?

There’s no question from an API standpoint. We've seen some impact from the pandemic in the hospitality and travel sectors. However, we've also experienced growth in video, voice, and verification services, among others. It's difficult to predict how the recovery from the pandemic will unfold throughout 2021. We all hope for a better situation, as it's essential. This shift in the way business is conducted will likely persist. I believe that momentum will continue. We've carefully considered the entire year, balancing what we observe in the short term with the uncertainties surrounding the pandemic's recovery. Ultimately, we want to ensure we provide information that we will act on and execute with excellence. Thank you, Will. Next question.

Thank you. Our next questions come from the line of Michael Rollins with Citi. Please proceed with your question.

Thanks and good morning. First, could you provide an update on your view of the addressable markets for the key product categories in terms of revenue over the next three to five years, considering how enterprise firms and their customers are increasingly engaging with each other? Secondly, regarding business management, with the completion of your strategic review and enhanced financial disclosures for consumer, will you operate the consumer segment like a smaller company within the Vonage portfolio, complete with its own balance sheet and specific objectives that differ from how you manage VCP? Thank you.

Yes. So, Michael, I’ll take the second one first and then you can remind me of the first one guys on the screen. The second one in terms of the consumer business in terms of that we definitely run that almost as a separate business today. There are some synergies across that, but they’re relatively minor. This runs well. It's efficient. We have a strong small team that's working that. And I believe that we can run that business easily, efficiently, and without distraction. So you should think about that as a separate business segment set off to the side running where it makes sense. We’ll use some synergies. But for the most part that’s pretty standalone. And then the market opportunity around API in terms of and in terms of the Vonage Communication Platform, there's no question. From my standpoint, it's the reason I came to Vonage. I believe that this is a secular change in the way communication and programming is done across multiple modes of communication to embed in every workflow, every application, every business process. It's going to change. And the pandemic as unfortunate as it's been has only accelerated that. And we're going to see that continue to happen for the next three to five years. We are in the right place at the right time. Thanks, Michael. Next question.

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

Hi, good morning. Thank you for taking my question. I'll just fit one in since we're already past 9:30. Considering the changes in the senior management team you've mentioned and the depth you've added over the last 18 months, how should we view the turnover rate within the quota-carrying sales representative organization? What were the churn and retention rates in 2020? How should we approach backfilling or supplementing those positions in 2021? I also know you have an Analyst Day coming up in a few weeks, so I don’t want to take away from that, but could you share how we might think about additional strategic changes regarding the management of the business?

Yes, I feel confident about our organizational structure and the leadership team we have assembled. While there can always be minor adjustments, we have completed the significant work over the past six months. With the four new additions, I believe we are well-positioned. Regarding your question about our sales team, my experience shows that the primary factor in sales productivity is time and territory. We have observed a strong and consistent flow-through, meaning that the longer someone spends selling our products and capabilities, the more productive they become. We aim to foster an environment where they feel invested and can continue to grow with the business. Over the past two years, our attrition rates have been at or below industry levels, and they have actually declined over the past 12 months. I know Jay is very committed to the idea that productivity is driven by time and territory, and we will definitely keep a close eye on that. You should understand that we are maintaining team attrition rates at industry levels or lower, and we are keeping these individuals focused on growing the business.

Thanks. Next question?

Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.

Hi. This is Drew on for Sterling. You've mentioned this e-commerce self-service platform that will drive growth with micro businesses and SMBs. Is that a completely new solution? And if so, could you provide some more color on the strategy surrounding that?

Sure, Drew. That's a great question. I want to highlight that there are two important aspects to consider. First, it’s not just the capabilities we've introduced in recent quarters; it’s also about the strategy that Rodolpho has been developing, starting with a small segment. The second part involves the work that Joy Corso and the marketing team are doing to enhance our marketing efforts. As I mentioned earlier this year, we've adopted several new marketing tactics aimed at increasing velocity, and we've seen encouraging results. We plan to focus more on that to drive growth. This has been our strategy since Rodolpho joined us at the end of 2019, and he has been leading these changes. We will discuss this in greater detail at the Analyst Day.

Thanks, Drew.

Thank you. There are no further questions at this time. I would like to turn the call back over to Rory Read for any closing comments.

Hey, I want to say thank you to everyone for participating. As committed, we communicated greater and more transparent disclosures. We closed on the strategic review of Consumer, and we delivered a solid quarter in fourth quarter. We have a strong leadership team and a committed Vonage set of team members that want to create a better Vonage going forward. We're excited to tackle 2021 and beyond. And we look forward to sharing more information with you at our Analyst Day on March 5. I want to thank everyone for joining and the entire team that answered questions today. We appreciate it. Everyone have a great day. Stay safe and stay strong. Thank you everyone.

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.