Q4 2020 Vonage Holdings Corp Earnings Call
Greetings and welcome to the Vonage fourth quarter and fiscal year 2020 earnings Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the form of presentation.
Finally, what you require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce vector Blankenbaker, Vice President of Investor Relations. Thank 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 Reid Chief Executive Officer.
And Steve last year, Chief Financial Officer.
Also joining us is Jay Bill listened of Chief operating officer.
Marc debate.
<unk> of the API platform.
Rodolfo card of new tail head of unified Communications and contact Center and Tim has shown us that our previous interim CFO.
Rory will discuss our strategy and fourth quarter results.
Steve will provide a more detailed view on our fourth quarter and full year results and 2021 first quarter and full year guidance.
Slide that accompanies todays discussion are available on the IR website.
At the conclusion of our prepared remarks will.
We'll be happy to take your questions.
As referenced on slide two I.
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 rent per site.
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 our fourth quarter earnings press release.
Or the fourth quarter earnings slides posted on the IR website.
Additionally, during prepared remarks today all comparisons.
Parison to prior periods are year over year.
Otherwise noted at 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 vantage 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 'twenty 'twenty presented many opportunities.
To do just that and to make a real difference for our customers. We helped our customers address unprecedented challenges I, finding new ways to work connect and engage.
One example is story corps the national nonprofit that has brought together more than 600000 people to record intimate face to face conversation about their lives and leave a legacy.
It is the world's largest single collection of human voices ever gather and it is preserved at the U S Library of Congress for generations to come.
Story Corps adds for our help in making these human connections possible.
When in person interviews, we're no longer an option and we launched story of course connect.
Corey of course connect is a free video platform powered by vantage.
Created to reduce the impact of isolation and preserve People's story at this monumental point in our history.
Everyone at vantage 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 communications platform that powers, our customers' and partners' next generation engagement solutions, using our API unified communication and contact center of innovation to perform better.
<unk> 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.
Our strategic operating plan for the next three years.
Today I'll focus my comments on three areas one of our solid fourth quarter results to our 'twenty 'twenty, one product and go to market investment activities and three an update on the sale of our consumer business.
Steve Laxer, our new CFO will follow with a more detailed look at the quarter and full year as well as our 'twenty 'twenty one guidance.
I'll start with our 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 API.
And our unified communication and contact center applications service revenues grew 4% again slightly ahead of expectation.
Consolidated revenues totaled $323 million and we delivered adjusted EBITDA of $48 billion, both above our expectations.
As committed we announced this morning that we are making important new disclosures on our vantage communication 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 force as calculated by V. C piece service revenue growth percentage plus its adjusted EBITDA margin.
We exited the fourth quarter of 'twenty 'twenty with of V. C. P rule of 40 of 15%.
We are committed to steadily improve our rule of 40 results over the next three years.
We expect to exit fiscal 'twenty, 'twenty, one and the 20% range and our plan for 'twenty 'twenty two is to be in the mid twenties range and above 30 in 'twenty two 'twenty three.
I'll now provide a few fourth quarter highlights by product starting with API.
Revenues grew 33 per cent year over year to 100 of $19 million. We saw all of the momentum in nearly every industry and digital communication channels have become a primary differentiator in the way businesses engage customers.
A P. I products 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 and 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 of balanced growth trajectory.
Yeah.
I'll now highlight virtual events.
Vonage powers more than a dozen virtual events platforms on multiple continents, we signed several large customers in fourth quarter, winning against both competitors, who offer simple video conferencing solution.
And other feed pads companies spot.
Spot me is of new vantage customer that provides advanced solutions to more than 250 global brands, including Daimler S. A P and Johnson and Johnson.
Disrupted by the pandemic spot me 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 and cross sales not only in unified communication and contact center product, but also in combination with our programmable API as we work with our customers to help them drive better business outcomes. One example.
<unk> is good net company incorporated the largest U S newspaper publisher Gannett had several disparate onsite PBX systems from multiple acquisition.
They wanted a platform that unifies all team members and provided the flexibility to work from anywhere while delivering voice video messaging and social media from a single user interface.
He chose Vonage for our integrated unified communications and contact center solution that seamlessly integrate with their productivity and CRM applications as well as our ability to scale with them using our communication API.
Another example is great Wolf resorts of brand leader in the indoor family Waterpark resort category.
Great Wolf chose vonage, because it needed a partner that could provide a contact center solution with deep sales force integration and help them create a differentiated user experience great Wolf is using our bondage contact center solution along with our AI.
<unk> and programmable voice and messaging API to offer new customized and interactive engagement experiences for all of their guests.
We expect our improving bookings trajectory to continue throughout 'twenty, 'twenty, one and translate into increasing unified communication and contact center growth rate in the second half of the year.
'twenty 'twenty, one 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 solution that best fit their needs and win a disproportional share.
<unk> of the market.
I'm confident we're putting the right sales structure and strategy in place, our new E Commerce platform and self service capabilities for micro and small business market, our new of cost effective ways to scale growth.
We will augment this with a more strategic focus on enterprise and BCP cross selling and 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 'twenty 'twenty.
We will make further investments in 'twenty 'twenty, one 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 vantage.
Finally, as we committed we have completed a comprehensive nine months strategic review of the consumer business through.
Through the assistance of financial accounting and legal advisors.
Based on this review, which included a detailed analysis of the consumer business financials profitability and potential valuation. The vantage board has determined that it is in the best interest of our company shareholders to terminate the sales process and retain the.
<unk> 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 of.
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 BCP capabilities and potential M&A.
Importantly, the detailed financial reporting now available will enable investors to evaluate V. C. P. In a manner of comparable to a stand alone business.
In closing vantage is in the right place at the right time, and 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 commitments.
We will focus our execution on efficiently delivering a compelling solution portfolio in attractive markets to create differentiated value to our customers.
We are making solid early progress, but we have much more work to do to build an even better vantage. We are committed to delivering improved growth and profitability across 'twenty 'twenty, one and will drive further efficiencies and growth opportunities as we scale our business in 2020.
Two in 'twenty to 'twenty three we look forward to sharing more details during our analyst day on March 5th.
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.
Day, Melissa Moore joined US as Chief operating officer, leading sales operations and our go to market strategy across the vantage communications platform. He has deep knowledge and operational expertise in software as a service cloud solutions and artificial intelligence with a pre.
Moving track record of helping organizations accelerate 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 Deep knowledge of technology, and the software space and a long history of leadership in finance business transformation and business development will make our cigna.
<unk> impact on helping bondage drive revenue growth and increased profitability, while we invest to strength of our innovation capability to create differentiated value for our customers.
And we announced yesterday that sobbing, a Barry will join as executive Vice President of product and engineering responsible for the global leadership advantages engineering product management.
<unk> and security teams focused on driving the company's technology strategy and innovation of the Vonage communication platform and its portfolio of solution.
So having a 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 here.
Theory of demonstrating result 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 vantage.
I believe there is a huge opportunity in front of us and I am looking forward to working with worry 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.
As Barry mentioned this quarter, we began providing additional disclosures on our vantage 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 'twenty 'twenty one guidance.
And with that let me dive right in beginning on slide seven consolidated revenues of $323 million increased 4% driven by a 12% increase in BCP 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% day.
<unk> slightly due to the faster growth of relatively lower margin BCP revenues, which now represent 76% of consolidated revenue.
Up from 70% in net prior year.
Consolidated operating expenses were $169 million down 1% year over year.
Proving 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 DCP and consumer segments on slides 16, and 17 and the earnings presentation.
Now, let's review of fourth quarter of ECP segment results beginning on slide eight.
DCP 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, DCP service revenues were 856 million a 19% increase.
Within BCP API revenues, all of which are service were $119 million in the fourth quarter up 33%.
High value API its grew 132% year over year with particular strength in video voice and IP messaging.
High value API has represented roughly 20% of the total API revenues.
Unified Communications and contact Center service revenues were $111 million in the fourth quarter up 4%.
DCP revenue churn was one 3% in the fourth quarter.
Turn within UC and Cc was at record lows. However, this was offset by higher churn on our ATCA 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 <unk> platform.
Moving to slide nine.
DCP growth margin in the fourth quarter with 46% down 100 basis points year over year, driven by mixed dynamics within the quarter.
For the full year BCP gross margins were 48% up 100 basis points.
BCP 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 efforts to improve the efficiency of our sales and marketing this was offset by selective investments into our API sales team.
BCP engineering and development expenses were $20 million up 22%, reflecting increased investment on the visa b platform, including video and voice functionality and scalability.
Andy expenses, plus capitalized software totaled 32 million, which represents 14% of BCP service revenue.
DCP general and administrative expenses for the fourth quarter with $38 million up $2 million due to higher restructuring charges, primarily related to lease abandonment and consulting fees on the consumer of strategic review.
DCP adjusted EBITDA was negative $4 million, improving from negative $18 million in the prior year and negative $14 million in the third quarter.
BCP 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 900000 consumer subscriber lines.
Two year, plus tenured customers now represent 94% of our consumer base and five year plus customers are 79%, which had churn rate of one six and one 5% respectively.
Consumers to average monthly revenue per line was $28 13.
Up 56 cents, reflecting higher USF fees and targeted price increases that we implemented during the year.
Churn of one 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 help fuels 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 V. C. P. We expect to continue to pay down debt in 2021, ending the year below two five times.
Moving on to guidance on slide 12.
For the first quarter, we expect vantage communication platform revenue 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 and 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 cc growth rate decline and that we will see a modest improvement in growth rate in each quarter of 2021 thereafter.
<unk>.
We expect first quarter of ETP adjusted EBITDA to be in the range of negative 7 million day 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 day $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 <unk>.
$1.038 billion to $1 $54 million 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 DCP adjusted EBITDA to be positive for the full year of 2021, and the 5 million to $9 million range of substantial increase from negative 57 million in 2020, reflecting our focus on continued operational efficiencies.
For consumer we expect 2021 revenues 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 the operator to initiate the Q&A.
Okay.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for your questions.
Okay.
Our first questions come from the line of Ryan Macwilliams with Stephens. Please proceed with your questions.
Thanks for taking the question so just to dig in to start on the consumer decision.
The interest levels during the sales process from 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 something of the 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 consultant 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 BCP the.
<unk> communication platform and the consumer business. It was definitely robust seven day approaching 70 strategic and financial sponsor Theres. No question. We went through two rounds of discussions and we have had quite a number of interest but at the end of the day Ryan It.
It comes down to this is a very efficient access of capital for US we can run it efficiently without distraction and this just gives us real flexibility as we continue the strategic pivot of vantage from its traditional heritage to this leader and the.
Global communication platform space. There is no question, we will continue to invest in BCP 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 5th, but I believe that this is clearly.
<unk> the.
The right decision and clearly we've closed the book on this one.
End of discussion.
Thanks, and the guidance for positive adjusted EBITDA for <unk> was a nice surprise, especially like hearing about from the wins and the.
Video API segment, but since you are keeping consumer and its cash flows.
Why is it important to you to have this positive adjusted EBITDA next year for V. C P and why not drive even more investment through the API business in fiscal 'twenty, one to accelerate growth.
I mean, it's just modestly.
Positive Ryan there is no question about it and we want to keep it in that range. The optimal model in terms of D. C. P is always going to be focused on growth at the top in terms of the service revenue when it make that strategic pivot, but we also over the course of the next two to three year journey is to make sure of that business.
Is very sustainable on an ongoing basis and can fund the investment in 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 youre going to see we've tried to keep our.
Firepower in terms of marketing and sales investment quarter after quarter of this year to continue to improve that growth trajectory right and the work from J, Melissa Moe and his team as they come on with Rodolfo on Omar Joy of course, so on the sales and the marketing side youre going to see us invest.
First in velocity marketing to drive UC, and Cc and cross sell and Youre 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 as you mentioned focus women keep it in that general range, but then continue to focus on capturing more growth accelerating the business over the next two to three years as we've improved our efficiency and at the same time, Ryan invest in product innovation.
<unk> this year and next so that in 'twenty, two and 'twenty three of 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.
And look forward hearing more of the Investor day.
Me too thanks Ryan.
Thank you. Our next question is coming from the line of Tim Horan with Oppenheimer. Please proceed with your questions.
Thanks, guys can we delve into the API of little bit more we're seeing kind of viral growth from a a bunch of of more of the developer partner and 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 we're working on the platform can you give us an update there. Thank you Hey, Tim.
How are you good to speak to it Yeah, Hey, Tim from the standpoint of a P. I E. No question of BARDA, It's a kind of.
Key component to the strategy of the vantage communicate advantage communication platform is built on that API platform and really leverages those Apis to build once and sell many across the purpose built capability. We see that same kind of momentum and you saw of Steve's comments about.
Continued strong growth as he kind of looked at one Q, 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 the five to seven year trend and this kind of programming technique and this kind of approach around API youre going to see us continue to invest in that platform using the dollars and.
<unk> of the business to enable us to continue to grow that and youre going to see that I think will take a 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 a a P I going forward.
Worry it's J I would just add also that we've got great diversity. When you look at our balance across the geographies APAC, 39% of of revenue Americas 38 per cent and EMEA 23 per cent 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 real.
Good year over year of 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 or Apis with that over to you Omar.
Thank you Jay.
Great question and 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 this space, we have over 1 million registered developers and.
And just to give you some recent.
Recent facts here we've got.
I think recently of about $3 1 million documentation views $10 3 million SDK installs, representing about $13 5 billion API request and as already 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 of this is an area that we have been investing in for quite some time and we see a lot of great momentum from it.
What I was looking for thank you look forward to the analyst day.
Tim.
Thank you. Our next question is coming from the line of Rich Valera with Needham <unk> Company. Please proceed with your questions.
Thank you good morning.
At the risk of I guess front running the analyst day, I kind of 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 VB cohort and the micro SMB component. So I wanted to kind of get your status updates on those initiatives have you seen some stabilization of improvement in that part of the base and then just high level in terms of how youre thinking about go to market for <unk> there.
I know historically, you've really been aligned with sales force and going after accounts that were sort of standardized on sales force and leveraging that integration can you give us any high level thoughts about how youre thinking about going to market and MMA going forward. Thank you.
Thanks, Rich Hey, Rich Theres 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 Youre going to see US continue to build out this self service and E commerce at the bottom of that.
The micro and beginning of a small than when youre 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, making it easier and better to win with vantage and then that powerful sales force, that's what's going to drive that.
Direct sales force at the top of the stack at mid and enterprise, it's tailoring to each area to get the efficiency of the work. The Joy Corso is doing from our CMO perspective to drive the velocity marketing, particularly of cross micro small and mid we're seeing some really interesting track.
Actions on some investments that we've done here in the first quarter and as we get that information will accelerate that through the balance of the year. So why don't I pass it over to Jamie and Rodolfo just to add a little bit more color.
Okay.
Rodolfo did you want to start.
Yeah.
Yeah. Thank you part of question, maybe I think of you commented about that D. D. N of micro business. It's important to notice that our we are bending the curve as you've seen the revenue progression of <unk> Q2 last year, we have been progressing from Q2, Q3, and Q4 and we expect that to continue in a dream D C or this.
This is because of we are bending the curve of EV and Michael abuses one important thing to notice in terms of bike would be asking that we did in the E. Commerce now we have an easy acquisition now for our customers using farmers self provisioning. So south of you all of that easy profusion of product cost smart and self support also those sort of.
Lord of the process up and out of we implemented to make our microbial is a very profitable and growth of <unk>.
For us.
And in terms of up sales force. So we are doubling down with sales force we have the best experience with sales force now, but we are also implementing.
Implementing and actually you of albeit with a service now and Microsoft with Microsoft We have the two connections now Microsoft teams, Microsoft dynamics, we have a very good integration with Microsoft teams and you'll see our solutions and we have a very good a solution also for Microsoft dynamics, you would see cash of solutions not true.
It is now that we are getting a lot of attractions with them. So we are moving from a W. With a sales force of a contact center, but also of moving with the service now and and of solutions with Microsoft.
Hey, rich.
Okay I'm sorry.
I was just kind of add a couple of quick points to Rodolfo 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 and of high single digits in service revenue and with that we expect next year of service revenue to be in double digits.
Based on the trends, we're seeing today, obviously, there are some of unknowns with the.
The impacts of the pandemic, but we're feeling good about this business and the growth into <unk> point, Yes sales force has been a key part but as he alluded to we're also looking at the partnerships with service now in Microsoft or where do you worry yeah and Jay I think that's an important point what do you Wanna do look rich is let's see.
And we talked in Steve's comment that looks for the trough in one Q and then we should see year to year bookings growth starting in <unk>, we should see a steady improvement into the mid high.
High single digits in 'twenty 'twenty, one time frame.
And as we look into next year I think we can get into that you know low mid double digit.
Growth rate in 'twenty, two as we continue to progress through this transition.
Thanks Rich.
Great.
Next question. Thank you. Our next question comes from the line of made of Marshall with Morgan Stanley. Please proceed with your questions.
Okay, great. Thanks.
And just a little bit more on the UCC business. Just is there any different trend that you're seeing between maybe the contact center of pieces of business and they use the piece of the business signed out of there fairly well integrated at this point, but just any commentary there.
And then the second piece would be.
Just on kind of the gross margins.
Clearly you're doing well with the higher margin API business.
Or you're seeing a lot of growth kind of in that higher value API business, but the gross margins of the segment just continue to kind of fall off. So just what are we seeing in terms of the <unk>.
Competitiveness or the margins of the rest of the API business. Thanks.
Amit This is Rory so first comment would be on the use of <unk>. We're seeing some very good cross sell activity across that portfolio and again, where we see the CEC strength, it's definitely in mid and enterprise, where we can definitely leverage the strength of our direct.
Sales force to go to market you'd see you see we have it not only there on that cross sell but then across you know the bottom of mid small and micro of where we're going to use those more efficient techniques with the channel and with E Commerce to drive that growth I think.
C. C is continues to have strength, particularly as it's related around sales force and then the expansion of the Tam with service now and Microsoft that opens up more opportunity, but that's really going to be of direct.
Vonage sales play and of leverage that continued growth and when we gave those kind of feel for the next several quarters that movement of the business is really of UC cc combination going from the trough here in low single digits into the mid and high single digits across the 2021 time period.
And then further in 'twenty, two but I'll, let Steve last or give an update on gross margin I think if you get a feel for where we're sitting on that Steve.
Great. Thank you Barry and thank you Matt for the question as we look at our VIP gross margins when we take a look at first at where we are we had strong growth in API, 33% growth from a revenue perspective, and then also from a UCC.
Perspective, 4% growth and if you look at the margins across the products they were relatively stable.
And it purely as a mix within our product offerings within there. So so again with the mix within the API oriented businesses. Our goal is obviously to improve margin, but we're really looking to drive the API scale as we go forward and I really think that as we continue to expand the business get it and.
Use the power of the global reach end of portfolio. We will also at the same time look to improve the margins as we go forward.
Thanks, Matt.
Next question.
Thank you. Our next question is come from the line of James Breen with William Blair. Please proceed with your question.
Thanks for taking the question just a couple of one of the balance sheet side. I think you said that you were looking to get below sort of two five times.
Leverage sort of implies paying off around $30 million or so of debt. This year is that is that sort of the goal of.
Operating cash flow generation in the consumer side is around $1 20 based on your estimates and sort of running BCP of breakeven.
Steve.
Yes, Sir thank you very much willing you 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 really 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 so again within that were going to evaluate what do we do and continue to pay down the debt is one of our priorities.
And again that one really the focus again is if there is 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 of Cross D. C. P. Just gives us more power firepower of more flexibility.
Thanks, and then just on the sales side.
Relative relationship with channel partners and agents et cetera.
How can you just give us some color around how that's progressed.
Maybe quarter quarter year over year in terms of getting invited into more deals and maybe the win rates.
Yeah. So from the standpoint of the channel I spent a lot of time over the past six months meeting with various channel partners across the ecosystem to really understand how to be of better partner with those channel partners and what would create that momentum both Rodolfo and J have a long track record of leveraging the expert.
Dental power of the channel to drive growth to drive our expansion, while we're sleeping across the planet right. That's the power of the channel, we targeted and looked at our products our portfolios our documentation over the last four five months, we're making changes to all of that additional case.
Abilities, and then we're working right now with kind of in concert with feedback from our channel partners on the right net that's next set of incentives and really drive that growth you'll see that launch.
For <unk> and then we will see us continue to build that out this year. It's suffice it to say that this is going to continue to be even more important driver of our growth as you see us move up that curve from a V. C. P rule of 40 exited of 'twenty 'twenty.
At 15 at 20.
'twenty 'twenty one adds so at the 20 range and then in 2022 in the mid Twenty's that is a key piece of it so you're spot on that we will look forward to giving you updates as we go forward.
Thank you next question.
Thank you. Our next question that's coming from the line of Mike Latimore with Northland Capital markets. Please proceed with your questions.
Great. Thanks, I guess just two questions here you you just throughout the notion of a strategic M&A I guess can you give a little more detail on what you're thinking.
Thinking as a potential kind of criteria there. It seems like your you know 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 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 theres 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 three or four years and strategically pivoting the business bondage communication platform I think we've got the base products as you pointed out Mike I think if there is any of them.
That activity, it's opening up market expansion and Tam or it's augmenting technical innovation and.
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, Marc Thank you for the question I think what you were asking for how big is the opportunity in cross selling Apis to apps and vice versa versus focusing on Apis.
I think as we've as we've laid out even before the opportunity within API is very strong we continue to focus on it.
Drori Jay and team.
Candidly it wouldn't have it any other way however, we see we've invested a great deal and we have a strong customer base on the App side and it would behoove us to figure out how to become stronger at selling those solutions within those customers. So I think that's an opportunity.
But we you know what.
But we are very very focused on.
Being great at the API business as well.
Okay. Thanks, Greg next question.
Thank you. Our next question is coming from the line of Catharine <unk> with Dougherty. Please proceed with your questions.
I think kind of looking like.
Yeah, No I'm, sorry, I had you on mute.
Not moving.
One of my part.
Thank you for taking my question I have two one is it seems that you have a added a lot of the senior management team recently are you moving to a more traditional management structure with C. T O engineering sales and marketing and away from more of what was happening in a year of out where you had two centers.
<unk> of our power I would say with API and then the U C. C. C group I'm, just trying to understand the new organization structure, and how that pans out four of responsibilities and roles.
Sure Catharine Hey, there's no question I I love the power of the Vonage Communications platform and API based platform with global reach leveraging this global carrier network.
Our cloud based infrastructure around the world, we can reach any customer any partner anywhere and our API is give us the buildable base and these purpose built applications built on top of it and UC and Cc. That's the power of vantage, 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.
Day, and one what we do and that's going to be our culture, one of them make sure that we augment our already strong senior leadership team with really amazing talent I mean first joy joins us in terms of the CMO then we go.
Get Jay Steve Lasher look at the scale there and then Simon you a Barry just yesterday. These are opportunities in 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 there.
We're tackling here and we want to leverage that vantage communication. That's what customers are looking for communications are going to rule. The day over the next five years 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.
Catherine Yeah, and then the follow up is on could you parse for us what.
<unk> gross margins are I know at one point in time I was thinking of video API was around 60% any possibility you can parse some of that information out for us. Thank you.
Yeah at the product level, we're not going to kind of get into that kind of level of suffice to say high value is definitely on the higher end of the portfolio in terms of the mix. There is no question and we're growing of higher and higher percentage of that as we go forward, but there's no. No question. That's the power of D. C P.
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 is come from the line of George Sutton with Craig Hallum. Please proceed with your questions.
Thank you Rory you gave of about 1500 basis points a 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 how you got to look at that.
As we kind of talked about at the beginning with Ray and growth has to be the optimal driver.
In an optimal kind of model. If we were looking three years out three years out is a ways away, but as you try to talk.
Go for that 30 or better number in that timeframe youre going to want to look for something in that mid twenties range of growth, obviously higher is better but that part and then you wanted to be in that mid single digits on the bottom there.
There's no question that the opportunity is on the growth side, we're in the high teens today on V. C. P revenue net revenue growth, we need to accelerate that over the next several years.
Bottom line, there's lots of ways to make those numbers, but we definitely want to all of the Orient ourselves towards that growth driver does that help George.
That's very helpful. Thank you.
Okay next question.
Thank you. Our next question is coming from the line of will power with Baird and company. Please proceed with your questions.
Okay, great. Thanks, Yeah, I guess, a couple of I'll try to sneak in here I guess, you know right now that you have concluded the consumer of strategic review I was wondering if you could just remind us.
You know the strategic importance of having a P I and the UC contact center businesses together.
Intertwined or of those.
And kind of make any sense of looking at strategic alternatives for the UC contact center business just to help.
Shine a brighter light on the API segment.
I you know from my standpoint, well, there's no question, we're better together the power of vantage 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 API to build those once and then build those into the UC and cc capabilities as we move forward sure Theres No question that there is.
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 and that combination and we're seeing a lot more in terms of our sales force flow in terms of.
Combined.
Cross sell opportunities, but then they loved 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 to the API segment of it in guidance I think you all are expecting an acceleration in revenue growth from what was just reported.
I'd love any further color as to you know kind of of key drivers behind the API outlook.
You know there's no question from an API standpoint, we've seen some impact in the from the pandemic around hospitality and travel, but we've also seen acceleration in video and voice verification and some of the others.
Little bit hard to predict how the moderation of the pandemic will occur across 2021, we all want it to moderate its the best there is no question that this change of way and the way business is done is going to continue but I think that that that kind of.
Momentum is just going to continue to go on what we've done is prudently looked at the full year balancing what we're seeing in the short term with the unknown of the moderation of the pin debit bill at the end of the day, we want to make sure we're delivering information that we're go.
To execute on and execute with excellence thanks will.
Next question.
Thank you. Our next question is coming from the line of Michael Rollins with Citi. Please proceed with your questions.
Thanks, and good morning, two if I could first I was curious if you could provide an update on how you see the addressable markets in terms of revenue per key product categories. If you need to look out over the next three to five years and you just take into account the evolving ways in which <unk>.
<unk> firms and their customers are.
Beijing with each other and then the second question goes back to just the management of the business.
And curious if you're going to run that.
The strategic review you illuminated more financial disclosure score consumer are you kind of run consumer is essentially a company of a smaller company with in the vantage portfolio and it will have its own balance sheet and its own specific objectives.
Separate from the way you run and manage as D. C. P. Thank you.
Yeah, So Michael I'll take the second one first and then you could remind me of the first one guys on the screen. The second one in terms of the consumer business in terms of that where we definitely run that almost as a separate business. Today. There is 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 with well 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 do use some synergy.
But for the most part that's pretty stand alone and then the market opportunity around API that debt in terms of and in terms of the vantage communication platform. There's no question from my standpoint, it's the reason I came to vantage I believe that this.
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 is unfortunate as it's been has only accelerated that and we're going to see that continue to half of them 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 question is come from the line of some odd Samana with Jefferies. Please proceed with your question.
Hi, Good morning, Thanks for taking my question I'll Squeeze one instance of we're already over that 930, Marc but if.
If I think about.
The changes in the senior management team as you mentioned you have deepened our bench of you've made a lot of changes over the last 18 months, how should we think about maybe the net turnover rate in the in the quota carrying sales Rep organization and maybe what was what was the churn or retention of them. There in 2020, and how should we think about in terms of back filling or.
Supplementing that in 'twenty 'twenty, one and then just I know you have an analyst day coming up in a few weeks and don't want to steal the thunder from that but maybe how should we think about any additional strategic changes.
As it relates to the management of the business.
I feel good about the org structure and how we built the leadership team.
And there always be small modifications we've done the major work over the past six months I think with the four additions I think we're in the right place in terms of the first question.
<unk>.
Some odd you talked about our sales team.
Team my experience in every business I've ever been part of the number one driver of sales productivity and the reason you're asking it is spot on it's time and patch we've seen strong continued.
Flow through so the longer someone is selling our products and our capabilities. The more productivity that we want to create that environment, where they want to be part of that and continue to grow with the business. We've seen you know.
At or below industry levels of attrition over the past two years and over the past 12 months, it's actually decline, but it's something that I know J believes in big time in terms of driving that.
Productivity comes from time and patch and we're going to definitely manage that so the data on that one you should think that we're having the team at industry or lower attrition rates and that we're keeping those players focus to grow that business.
Thanks next question.
Thank you. Our next question comes from the line of Sterling Auty with J P. Morgan. Please proceed with your question.
Hi, This is true Andre Sterling I'm, you've mentioned that 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.
Great question, and I really want to emphasize there's two pieces to it it's not only the capabilities that we introduced over the past.
Several quarters, it's something of the strategy that Rodolfo it's been on and building out and micro in the beginning of small segments of the other part of it is the work that joy Corso and the marketing team are doing to drive velocity marketing around that and as I mentioned in the first quarter we've implemented.
A number of new marketing philosophy of marketing tactics, and we're seeing some very good science, we're going to double down on that to drive that growth, but that's been a strategy of since were doubtful guy here at the end of.
Of 2019, and he's been driving that change will cover that a little bit more 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 Reid for any closing comments.
Hey, I wanted 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 and fourth quarter, we have a strong leadership team and a committed view.
Vonage set of team members that want to create a better vantage going forward. We're excited to tackle 'twenty 'twenty, one and beyond and we look forward to sharing more information with you at our analyst day of March that I want to thank everyone for joining and the entire team that answered questions today.
We appreciate everyone have a great day safe 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.