Q2 2019 Earnings Call
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Please note. This event is being recorded I would now like to turn the conference over to Hunter Blankenbaker, Vice President Investor Relations. Please go ahead.
Great. Thank you Kate.
Good morning, and welcome to our second quarter.
2019 earnings conference call.
Speaking on our call. This morning is Alan Mad <unk>, Chief Executive Officer.
Dave Pearson CFO .
Also joining us is omar.
President.
<unk> platform.
Alan will discuss our strategy second quarter results.
And Dave will provide a more detailed.
But our second quarter results and third quarter guidance.
Slides that accompany todays discussion are available on the IR web site.
At the conclusion of our prepared remarks.
We'll be happy to take your questions.
As referenced on slide two I would like to remind everyone.
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 maybe incorrect.
Ram precise.
And are subject to risks and uncertainties.
Could cause actual results to differ materially.
More information about those risks 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 second quarter earnings release or second quarter earnings slides posted to the IR web site.
Additionally.
During the prepared remarks today, all comparisons to prior periods on a year over year basis, unless otherwise noted as sequential.
So with that I'd like to turn the call over.
Thank you Hunter.
Good morning.
I'm pleased to report solid second quarter results as our one vonage programmable platform strategy gained momentum with customers.
Business revenues reached $200 million and business service revenue growth accelerated to 25%.
On an adjusted constant currency basis.
Consolidated revenue was $298 million.
Adjusted OIBDA was $38 million.
During the second quarter, we continued to execute.
Three strategic initiatives, we outlined to start the year.
First we have in the applications group.
Driving revenue growth, among midmarket and enterprise customers.
Second within the API platform group.
Accelerating overall revenue growth yet with specific emphasis on growing higher value npis even faster.
And third the continued development and enhancement of the one vonage platform the integration of Ucas and Sicad along with programmable.
Let me dive deeper <unk> each of these three initiatives.
We then applications, we continue to focus on product sales and marketing efforts targeting midmarket and enterprise customers.
There are two key priorities driving our progress.
The first key priority is the one vonage platform itself.
Because we own the entire communication stack across Ucas, Sicad and programmable.
Yes.
We provide integrated programmable solutions demanded my Midmarket and enterprise customers.
Highlighting this point we sold.
31, combined ucas and Sicad deals in the second quarter versus 14 deals in the first quarter.
Of these 31 combined deals.
10 were from CX Cloud Express our new voice media based contact Center solution launched just this April that's embedded within Vonage business cloud.
Our success selling integrated solutions highlights three essential points.
First.
Midmarket and enterprise customers are buying ucas, and Sicad solutions together.
Second.
You can see Cas solutions must be famously integrated.
And increasingly the programmable.
And finally to deliver truly seamless solutions.
It is critical to own the full technology stack and thereby control the product roadmap across a commonly architected platform.
Our success selling integrated solutions reinforces our one vonage platform strategy.
Yes highlights the strategic priority businesses are placing on integrating employee and customer based communications.
One example of an integrated Ucas and Sicad sale was the leader in self publishing solutions.
For book authors worldwide.
Key to winning this seven figure TCV deal was our ability to improve customer and agent experience via tight salesforce integration.
Now moving onto the second key priority driving our progress among mid market and enterprise accounts.
We continue improving marketing demands and go to market capabilities across each of our routes to market.
Within the Master agent channel.
We continue to see excellent bookings growth and significant increases in deal size.
Also our channel partners are embracing new voice media contact center as well as CX cloud express embedded within Vonage business cloud and as a result, we're seeing strong growth of channel sourced sales pipeline.
A notable channel when was the leading platform company for home renovation and design.
Which selected Vonage for its contact center needs.
We won this seven figure TCV deal due to our deep integration into Salesforce, coupled with our omni channel solution across the voice chat email SMS visual IDR and performance dashboards.
Within our direct sales teams worldwide.
Our investments in product sales and marketing are taking hold.
Our strategic shift targeting mid market and enterprise is still early but competitive win rates are improving and sales productivity is increasing.
In addition, each route to market is supported by our strategic relationship with Salesforce Dot com.
More specifically new waste media is contact center is embedded within Salesforce service cloud, enabling direct access our contact center functionality from within Salesforce.
As a salesforce premier partner.
Our alliances team works closely with Salesforce account executives and ecosystem partners.
And because we have embedded the new voice media product and the sales force and focused our go to market with sales force our sales pipeline converts at high win rates.
Our Midmarket and enterprise cohort grew 17% in the second quarter and now represents 53%.
Of application groups service MSR.
While we clearly have more product sales and marketing improvements to make we expect in year acceleration of the Midmarket and enterprise service revenue growth rate.
Now moving to the Apiay platform group.
Second quarter revenue growth accelerated to 49%.
Reflecting increased market momentum as communication npis mature beyond SMS and other forms of strategic communication.
This quarter, we also added email to strengthen our position as an all in one platform for programmable business communications.
Our higher value Apiay like voice video verify and chat apps performed very well in the second quarter.
With revenues growing even faster than the overall growth rate of 49%.
In particular messages Apiay is seeing strong traction as brand seek to communicate with customers and their customers preferred channel.
Using a single wafer API that integrates with SMS MMS as well as the popular social chat apps.
For example might dance the AI powered content platform well known for the tick Tock album.
Selected our messages apiay for what's out.
Their intent is to expand with us across 150 global markets and 75 languages.
Our go to market investments, including our partner program and developer relations.
Our driving good results.
In the quarter, we grew our Apiay partner program to 280 partners and increased registered developers to 845000.
Now moving on to product and engineering.
We believe ownership of the one vonage platform provides competitive advantage.
By building functionality at the platform level as programmable.
Yes.
We innovate faster.
Leverage and engineering spend more efficiently and future proof customers communications needs.
We sell Apiay based functionality two ways.
First we sell functionality to developers as programmable API.
And second we sell the same functionality embedded within our applications.
Said differently, we build once sell twice.
During the quarter, we introduced new Vonage business cloud Enterprise Pager features built from the one vonage platform, including additional SAS integrations and enhanced reliability and scalability.
Later this year, we expect to release monetize meetings.
Our video meeting solution built from talk boxes programmable video technology.
Managed meetings will be fully integrated into bonds flow our proprietary team messaging solution released last year.
As well as with CX Cloud Express our embedded contact center solution.
Finally.
We know AI artificial intelligence based services will play an increasingly important role in business communications as enterprises focused on their digital transformations.
As such our Tel Aviv, Israel based engineering team has been focused on AI initiatives aimed at helping businesses deliver great customer experiences delivered both as programmable AC eyes as well as embedded into our core applications.
In that context. This morning, we announced the purchase of the assets of over AI, a Tel Aviv based provider of conversational AI.
We are acquiring over AI his entire 23 person technical team as well as their AI intellectual property.
We will deploy their engineers and technology to power conversational AI across the one bond as platform.
We welcome overheads team into our existing Engineering Center intelligence.
To summarize.
I am pleased with our team's performance and confident about our strategic potential.
Within our one vantage technology platform across Ucas see Kaz and program will.
We are uniquely positioned to deliver differentiated communication solutions and in doing so to capitalize on a vast opportunity in cloud communications.
And finally, I am delighted to announce Vonages campus, our inaugural worldwide user partner and developer conference to be held October 29th and Thirtyth in San Francisco.
We look forward to seeing many of you there.
I'll now turn the call over to Dave to give more detail on our second quarter financial performance. Thank you.
Thanks, Alan and good morning, everyone.
We had a solid second quarter featuring strong growth in Vonage business.
Results above our guidance and continued up market momentum.
Let's begin with a review of the quarter on slide eight.
Bondage business total revenue was $200 million, representing 67% of total revenues and a 35% GAAP increase.
Business service revenue growth is our focus as we deemphasize access circuits, so fewer desk phones and pass through USGIF revenues to the federal government.
Business service revenue increased 23% on an adjusted basis in the second quarter.
On an adjusted constant currency basis, the service revenue growth rate was 25%.
As with the prior quarter. This revenue growth rate is adjusted in two ways.
The pro Formas for the acquisitions of top box and new voice media as if we owned both assets for the full year 2018.
And it adds back the write down of approximately $2 million of new voice Media's deferred revenue balance under GAAP purchase accounting rules.
We have included tables on slides 20 through 23 of today's presentation and in the press release and provide additional detail on the adjustments I just noted.
And the disaggregation of our business revenue by product category.
Revenue from applications was $122 million for the quarter of which $102 million was service.
Application service revenue was up 35% on a GAAP basis and 11% adjusted.
Apiay platform revenue all of which is service was $78 million up 49% gap.
42% adjusted and 49% adjusted constant currency.
Business service margin for the second quarter was 52% down 60 basis points versus the year ago quarter as projected.
We saw margin improvement across many of our products.
Offset by product mix or the faster growth of lower margin products.
Moving to slide nine.
Second quarter business service revenue per customer was $440, a 26% increase from 348, a year ago, reflecting our successful move up market and the acquisitions of new voice media and Tokbox.
Both of which further improved our up market position.
Business revenue churn decline to 1% from 1.2% sequentially and in the prior year quarter again, the result of the move up market.
Moving to slide 10, consumer revenue for the second quarter was $98 million down 13%.
This was slightly better than our expectations.
Partially due to sequentially lower and flat year over year churn of 1.7%.
Our average revenue per line increased 52 cents from the prior year to $26.89 due to selective pricing actions and the maturity of the base.
We ended the quarter with 1.2 million consumer subscriber lines.
Tenured customers, we define as being with us for two or more years now represent 89% of our consumer customer base.
Consumer service margin for the quarter was 90% up from 88% due to lower termination rates and the increased allocation of certain shared network costs to the business segment as that revenue becomes a greater proportion of the whole.
Turning to slide 11 consolidated revenues for the second quarter were $298 million up $38 million or 15% on a GAAP basis and 7% adjusted.
Importantly, as our business segment is now significantly larger than consumer and continues to grow at a much higher rate than consumers declining.
We continue to expect to exit the year with double digit consolidated organic growth.
On slide 12, consolidated gross margins were down slightly a 57%, reflecting the changing mix of business versus consumer revenues and the deferred revenue write down.
Now moving to income statement cost items on slide 13.
Consolidated sales and marketing expense for the second quarter was $95 million up $18 million.
This is primarily the result of the additions of Tokbox New voice media.
Followed by small increases inorganic media developer relations and international marketing spend.
Engineering and development costs were $17 million up 7 million, reflecting primarily the acquisitions followed by continued investments in the one vonage platform.
General and administrative expense for the second quarter was $37 million up $5 million.
More than 100% or $6 million of this increase is attributable to the acquisitions and related transformation and integration costs.
GAAP net income was $5 million down $4 million and adjusted net income for the quarter was $20 million or eight cents per diluted share up $3 million.
This increase was due to an update to our expected 2019 tax benefit.
Note that the adjusted net income metric removes non cash items and transaction related costs.
Turning ahead to slide 14 second quarter, adjusted OIBDA was $38 million down 7 million year over year and up 6 million sequentially.
The decline was due to the acquisition related factors I discussed earlier, including the deferred revenue write down which directly reduced OIBDA by $2 million in the quarter.
Moving to slide 15, Capex for the quarter was $12 million up $6 million due to higher capitalized software driving adjusted OIBDA minus capex of $26 million.
From slide 16 during the second quarter, we optimized our capital structure through the issuance of convertible debt security and corresponding tapped call overlay.
The $345 million capital raise lowered fixed interest expense and extended maturities on a portion of our debt and expanded access to capital.
We used the net proceeds from this transaction, which also included a $10 million share buyback to pay down existing bank debt.
The result is we retired almost 1 million shares and achieved an effective conversion price of $23.46.
From Slide 17, we ended the quarter with $575 million of net debt up 34 million sequentially.
The increase is entirely due to the convertible issuance costs.
Absent, which debt would have been reduced.
As of June Thirtyth, we were 3.6 times net levered and have over $250 million of unused revolver capacity.
Slide 18, as Alan mentioned, the over AI assets bring in talented group of artificial intelligence engineers and important IP to bondage.
This transaction, which is expected to close this week does not significantly impact debt as we are paying $6 million for these assets half in cash half in stock.
We believe that this consideration represents an attractive value for very talented group of AI centric developers and important intellectual property.
Moving on to guidance on slide 19, our expectations for the third quarter are as follows.
Vonage business revenue of between 206 in $208 million.
Consumer revenue of between $96 million to $97 million.
And adjusted OIBDA of between 44 and $46 million.
This adjusted OIBDA range takes into account the loss of roughly $1 million of revenue and OIBDA from the required new voice media deferred revenue write down.
Operating expenses related to 23 over AI engineers, joining bondage this week.
And some currency headwind.
In conclusion, we feel very good about our financial performance for the second quarter.
And are now in an even better position to deliver on our strategic and financial objectives for the year.
I'll now turn the call over to Hunter to initiate the QNX.
Okay. Good thanks, Dave and Kate can you. Please launched the first question.
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The first question comes from Rich Valera of Needham. Please go ahead.
Thank you good morning, gentlemen.
Real strong performance on the API business in the quarter wondering if you can give us a sense of your expectations for the growth rate of that business into the second half that we think can be sustained at these growth growth rates and.
Any more granularity on what you think is driving that acceleration would be great. Thanks.
Thanks, Rich so we talked about the fact that business is somewhat seasonal so the general backdrop is that the grid business is growing very quickly and we feel very good about continuing to perform.
It well into the Fortys on a year over year basis.
It is a seasonal business. However, so are baked into our threeq guidance is a slightly lower sequential increase than what we saw.
From the first quarter to the second quarter, but when you look at that year over year because of seasonality was the same in the third quarter of last year. You are looking at a rate that's relatively similar to what we saw which is well into the mid fortys.
Got it and then just on the applications growth 11%.
Seemingly in price implies a still pretty underwhelming growth rate in the coffee you see business can you give us any any more color on whats going on under the covers in the USI business and what gives you the confidence that maybe that picks up in the back half from a year over year growth rate.
Hi, rich it's Alan so.
When we think about applications in total first it's doing precisely what we thought it would do where it's going to be flattish to down Q2 s and threes into Q2, and three relative to Q1 and then.
Begin increasing.
At the end of the year and Q4.
What you find is just this continued shift from.
The Downmarket business, where we started from where we have moved our marketing effort away from that and as a result.
That growth rate is much less is simply.
Pulling down what is a much better growth up market, but even within up market. We think the growth will continue to improve in the current quarter, you actually see things like on the Sicad side and the new voice media side. If you note on the balance sheet the deferred revenue.
Grew quite a bit that is effectively all related to new waste media and so it just speaks to the timing of when business is booked versus installed when we actually recognize the revenue.
Got it that's helpful. Thank you gentlemen.
The next question is from John Difucci of Jefferies. Please go ahead.
Thanks.
Hi, David just a follow up to that question because when I when I look at your GAAP revenue for the application side Alan.
It accelerated but the non-GAAP when you make those adjustments it actually decelerated, a little bit and the non-GAAP adjustments are really due to the new voice media, So I would assume that the.
That most of that and it only decelerates a little bit but.
And it's still growing at a nice rate I would assume that that's mostly due to to the sea Cas business.
And that you guys may have actually accelerated.
By itself and if Thats well first of all is that true and second of all if it is what's happening. There is it is it just is there something.
Specific devons bench or are you or is it more that you're benefiting from sort of this whole business.
Moving to the cloud the sort of the market.
And then I have a follow up thanks, let me have Dave take that starts right. We didn't see anything unusual or unexpected in the in the quarter, nor a change in the dynamic between you see and Cc.
What I will say is that the cc business as chunkier than you see business because you tend to have.
A much larger EMR EMR.
Sales and they take time to install so for instance, we had a huge booking.
In the quarter in the first half of the year.
And see cats, which we talked about last quarters call thats going to take a year to ramp it started ramping.
But it's going to take a year to to get to full power. So you do see some chunkiness, there, which which could fit into what you were saying, but overall.
We did not see a change.
In the dynamic.
And I think relative to sort of the broader question.
This industry.
We are seeing specific inflection moving as larger larger companies are moving to the cloud that is undeniable.
And we are benefiting by that curve.
We just are.
In a sense weighed down by the fact that we remain over indexed to the micro segment, which is growing far slower and is no longer our area of focus.
We talked about is that now from a proportionality perspective, 53% is up market across all applications.
It's up slightly from 52% last quarter, but again I'd like to characterize it as everyday is a good day as you get more and more of your revenue up market and up market. Your churn calms down your ability to up sell those customers improve.
It's just a far better place to play.
I'd like that to Alan everyday is a good day.
But my follow up question. It has to do with guidance. So see you guys beat guidance for for this quarter, you guided to third quarter above where the street was anyway, but you left to annual guidance unchanged and I'm. Just curious just domino just some commentary around that is this simply prudent given what appears to be jitters around the macro environment. You guys saw what happened in the market yesterday are you seeing something in your specific business that gives you pause regarding the fourth quarter.
There is no pause, it's really our convention is to give annual guidance at the start of the year and then update that guidance only if we are going to be outside the range. We gave or there is an extraordinary event like an acquisition that would push us out of the range are fundamentally changed the guidance and then give quarterly guidance.
Forward each quarter so.
We're sticking with that convention, because we didnt see anything extraordinary we did we did do a small acquisition and that will affect EBITDA bet, but we'll still be in the range. When you unpack that a little bit in terms of what we're seeing.
Based on the first three quarters.
Including the mid point of what we just gave we are running a bit ahead of the midpoint of the guidance that we gave in revenue.
And that and so the midpoint was 805, we're running $2 million to $3 million ahead of that after absorbing what looks like a 4 million dollar currency headwind.
In the year the currency of the dollar euro stays where it is today.
So that's a that's a GAAP number that would have been.
$4 million higher.
Based on currency adjustment, but still in the range.
Oscillates.
And then as it relates to EBITDA.
The guidance range. There was 160 to 165, we're still in that range.
When you take into account the over AI acquisition, where we have 23 people joining on one day.
As as well as currency, which is also a drag on that because we have some significant costs.
That are over there that puts us at the low end of that range spend in both in both cases in revenue and EBITDA.
We're still.
In the ranges that we gave so didnt see the need to change it.
Though we would give that color.
Great. Thank thank you very much guys and nice job.
Thanks, John .
The next question is from Nandan Amladi Guggenheim Partners. Please go ahead.
Hi, good morning, Thanks for taking my question.
We talked a little bit at the enterprise connect about your channel development efforts can you give us an update on how things are going there and how you're able to differentiate your offering relative to.
The other two major lenders in the space.
Hi, Good morning, it's Alan.
We continue to make very very good progress throughout the master agent channel.
As you and I have discussed going back now six or seven quarters, we have.
New leadership and then we have focused on our partner programs our partner portal.
As well as creating product that targets the channel.
More than sort and others and so to be specific about it.
CX Cloud express which is.
New ways media or think of it as new ways media late which is embedded inside vonage business cloud.
He is really targeting the channel because it targets the mid market, which is their sweet spot.
And as I talked about.
We announced or released CX cloud express only at the beginning of the quarter.
In the quarter, we did 10 deals.
On CX cloud Xpress. We also did 21, new voice media contact center deals and now the channel is embracing that as well. So it's a function of a go to market focus.
And a tools focused in terms of terms of the channel.
Portal and programs as well as a product focused all of those items seem to be taking hold and we continue to see good strength excellent strength as well as larger deal sizes.
Thank you.
The next question is from George Sutton of Craig Hallum. Please go ahead.
Alan you talked about a lot of your.
Deals that combine ucas and see cash, but you also mentioned that customers were increasingly looking for program ability that limits. The number of competitors that can really do that can you can you discuss what you were referring to there and maybe some tangible examples.
Let me start and I'll turn it over to Omar who can describe it.
Our focus is.
It is when we talk about the one advantage programmable strategy.
The focus is that.
You're only going to win over the long haul first with integrated solutions and so youre excited us. Several examples where you are seeing ucas and sicad increasingly being bought together, particularly within the mid market enterprise.
On top of that.
Because it's built from programmable apiay as those applications are they themselves programmable, meaning as example, we talked about last quarter, we released what we call smart numbers.
Which is the branded term last quarter, we talked about phone number program ability.
So now you're building built bringing extra functionality to those midmarket and enterprise customers.
It's early in the world of program ability, but as you speak to customers about future proofing their requirements.
Our solution is just.
Different and I believe better than what competitors can provide when you're just architected sort of the old way more monolithically youre not built from micro services architecture, but were seeing examples over and over and over again, we're winning based if not about them using that program really right now the promise of that program building tomorrow.
Turning to add to that yes.
Excuse me.
Yes, Justin just extend a bit on alans comments, so what we are beginning to see.
As a backdrop of all of this is customers that are buying power solutions or really solutions in general here, they're going through digital transformation right. So they are trying to change from the ground up the way that they operate and.
Some of the areas that they tackle first are really the customer experience can they found they get.
And they get tremendous value out of out of sort of rethinking that customer experience so to alan's point.
We acquired Nexmo, we have this guy platform and we've as we have rebuilt our products and rebuilt our technology, we look at our own products and the application group as leveraging those communication Npis, which third parties all over the world.
Leverage for their applications as well.
So what we are beginning to see and what we what we hope to see accelerating is that customers application customers today, either our ucas solution or a C class solution or the combined sort of the combined ucas get solutions.
We will be able to build it will be able to rapidly build.
Customized experiences using those npis. So we have seen examples of that so for example, the ability to quickly enable.
SMS or messaging alerts and.
The ability to do verify so to have a very quickly.
So these are capabilities that we bring to our Tam and bring to the table and as you pointed out.
It's a very limited competitive set of competitors that can actually match those.
Skills.
So I'm not sure if the Gartner folks listen to these calls, but they clearly haven't been paying attention to your progress.
Curious if you could just sort of address their recent magic quadrant.
The simple answer is we did not.
Apply.
Veight and again, it's frustrating to our investors, it's frustrating on every which way I understand that.
Last year in 2018.
We weren't in the quadrant because that the requirements were to have a certain scale across in ucas across the three main regions of the world and we did not have that presence in Asia Pac.
This year they change that.
And it's only two of three of the major regions of the world.
And we certainly qualify for that yet.
They said you cannot do it with a third party call product stack.
And in the UK.
Up until very recently, we used broadsoft, they're not vonage business cloud.
And so yet again, we did not qualify so we chose not to apply.
Okay makes sense. Thank you.
The next question is from Catharine Trebnick of Dougherty. Please go ahead.
Well. Thank you nice print you guys and I like the Guy. So quick question, one how does the new acquisition tying in with the work you're doing with Google AI and the second part of the question really has to do with the high value.
Apiay could you reiterate again, which were the three this quarter. Thank you.
Let me have Omar Shaker.
Hi, Catherine.
Hi, Good question your question overnight and who goal.
A short answer really is is that it enhances it so as very astute question and really the base of it is we saw and as Alan stated in his opening remarks.
That as companies are going through their digital transformations, we see AI and machine learning as.
More and more important. So this is really about bolstering our capabilities, both with the skill sets and the intellectual property. So it isn't meant to supplant what we're trying to do with AI and other.
AI technology, it's really about accelerating our own internal efforts.
And then within the top 50 on the higher value. It's his voice video and verified currently as well as things like we cited the messages a pie.
Which can default to the social apps in particular, we're seeing super strengthened in the Whatsapp connection there as well let me make one other point about over AI. This is an aqua hire. These 23 has our head count that was already.
Approved headcount.
In the budget, the only sort of drag on EBITDA is the fact that we're hiring these folks now in one day as opposed to it would have taken us half a year to bring in.
Those people in the ordinary course, so the key thing about this is that we had an issue we have an existing AI group within that engineering team, who already had a relationship in working with over AI. We've now really as a talent at IP acquisition, just folded that group directly into the existing engineering hub and the existing efforts within Tel Aviv.
Okay. Thanks, and then any timeframe on when you expect some new proof of concepts to come out from the combined group.
Yes, Thats a great question.
In fact, we've been we have been working with his group for quite some time and so as just to refer to Alan's opening remarks, we look we look at them. This benefiting both the applications of business and the inkjet business I think that what what you will where you will see.
Our initial focus in terms of proof of concepts will beat on.
On the application side, and we will then sort of shift to the npis side, but that this is this is all pretty new and we are looking to move pretty aggressively here in general.
All right. Thank you very much.
The next question is from Michael Rollins of Citi Investment Research. Please go ahead.
Thanks.
Couple of questions.
First as you described the focus to move up market.
For the size of deals and customers that you're going after.
Does the balance sheet play a role in your customers purchasing decision and if so how do you look at the balance sheet strategy going forward and then secondly can you just give us an update on how you see the competitive landscape and who are the toughest competitors in each of the key product verticals.
That you're offering into the business market price. Thanks.
Sure, Let me ask Dave take the balance sheet question on the balance sheet side right now we're at our back some of them.
Leverage point that we project right now we're able to go up to four and a half times debt.
Based on the facilities that we have now and having putting the convert in place actually unlocked.
A turn of leverage.
Relative to the bank loan that we had it also fixed at four and a half times capacity across the five years of the security. So we feel very good about our liquidity and our ability to use our balance sheet.
Offensively that being said, we don't have any plans to be any more highly levered than we are today.
I think that and in fact, we're paying down debt every quarter. This quarter went up and more than 100% of that increase is from the fees on the convertible issuance, which was a very positive thing from a cost of capital.
And financial engineering perspective, but.
We do believe that over time.
Financial Heft and financial flexibility will be an important differentiator for customers as you move our move up market people want to do business with companies that are going to be around for a while and I think it feeds into what we're talking about on George's question relative to future proofing.
If you're if you're.
Sizable companies can be around for a while and your future proved on the technology.
Those those two things fit together.
And then Mike your other question on the top competitors.
Pretty straightforward within the API side.
It's really ourselves and Twilio, we're really the only two players with a full all in one platform across the major modes of communication.
We are the largest by a lot.
We are growing.
Looks to be the fastest relative to anyone else, it's sort of a kind of a two horse race at this point and we continue to make a great deal of progress in a market, which is just growing.
In very attractive ways in the application side.
Really the best performing competitor today is ringcentral.
Obviously as evidenced in their growth rate.
We continue to make moves to.
Overtake them, we've got still work to do as I cited across the product work, we're doing around bonded business cloud and creating a differentiated offering our sales and marketing and demand Gen efforts. What we are doing across our routes to market. All those efforts are in place. We're seeing good results. We're seeing good bookings, it's heading in the right direction clearly, we still work to do.
To overtake.
So it is growing as fast as ringcentral.
Thanks very much.
Again, if you have a question. Please press Star then one the next question comes from will power of Baird. Please go ahead.
Great. Thanks, Yeah, I guess, a kind of a.
Kind of a two part question tied to contact center side I Wonder if you could.
Kind of dig into what's driving the increased interest in the integrated you see contact center product how much of that's the market driving that versus you all pushing a combined product.
More aggressive later and I guess.
Kind of tied to that as you look at the mid market enterprise EMR growth, 17% was down slightly from last quarter. This quarter is that a number that we could expect actually.
Accelerate.
Some of those recent ones the contact center start to flow through how do we think about that going forward.
Well, let me start and I'll turn it over to Omar So simple answer is a 17% versus the 20% last quarter is really a timing issue and it should accelerate.
Based on all the factors that I spoke to and we do see any year acceleration.
And on your first point.
On the you see you see Cc combo.
You were simply following buyer demand.
When we bought new ways medium.
We created the applications group, which is ucas and Sicad combined.
Simply because.
Following the buyer demand.
That applications motion.
Is very similar whether you're going to buy ucas or sicad has.
And increasingly on a combined basis, and you're seeing more and more of that within Midmarket and enterprise.
And quite frankly, while we do it now with a fully owned solution our competitors do it with a third party solution like in contact.
But they're doing it the same way.
We also have done third party research, which validates about how it professionals and others of the decision makers really are increasingly insisting on the you see NCC solution being.
From a common technology stack much of this goes to how.
The world is evolving in terms of contact centers are getting ever more virtual rather than having a big center with 300 agents in one building.
Increasingly or virtual work know somebody takes a three hour shift from home.
And.
You have to bear will be virtual because the biggest problem of the contact center world is turnover.
Brands are trying to drive a better customer experience. If they are folks who are front facing the customer.
Turn over all the time, they just can't do that so you have to be able to accommodate distributed workers from contact center and distributed increasingly mobilize workers on the site. It becomes really all in the same.
That said, we believe why you're seeing more integration omori, one handed that no I think that was that was perfectly answered I, we have done third party.
We've seen customer demand driving this way so it's not really vendor driven or it's not really pushed by us per se.
And that that's that's kind of what fueled.
The acquisition in the first place and then what we've done Roadmaps are we seeing customer to customer demand.
And as Weve, just like any other from we do a lot of research and to Alan's point and third Party research has has consistently shown and we do this quarterly.
Consistently shown.
A lot of interest and desire by economic buyers sort of processes across medium sized companies and larger in fact, what you see as the largest companies get the stronger that preferences.
So we think that it's a pretty strong combination.
Okay. That's helpful. Thanks.
The next question is from Mike rather more of Northland capital markets. Please go ahead.
Yes, thanks, great quarter guys.
On the AD business.
How much of that growth is coming from his current customers for an application and just seeing more volume versus this kind of cross sell up sell dynamic.
Omar.
I'm, sorry, I didn't catch that last part of that question.
Cross selling dynamic.
Just how much of that if the growth is coming from just current customer to the volume growth versus cross sell up sell.
That's a great question. So I think a couple of things so we see a lot of.
Existing customer growth, particularly in the messages a pie and I think a lot of what you're seeing in terms of the numbers.
Visiting customers growing and growing and growing.
So that I'll, just point, you that and daves remarks announcements there now in terms of product mix, what we see especially with newer products or what we've termed as high value.
That would be voice that would be video.
Enhancements to the messaging pie, where we do when we connect to.
Org, absolutely what tap for example.
That is a combination of both existing customers existing customers that say started in messaging apiay SMS have enhance those offerings with our additional products say voice or video, but what we were seeing a lot of activity is probably skewing more towards newer customers that start with those higher value.
So I think that's that's kind of the mix I don't know if that answers your question.
Yes, and then on the.
How about in terms of just industry verticals are you seeing some kind of new verticals open up to this kind of FDIC pad model that maybe wasn't there a year ago, maybe Omar.
Traditional economy kind of verticals.
Thats a great question. So we have we have done I think a lot of like like a lot of the companies in the space and probably where C pass was born.
Was adopt was adoption by digital natives, that's still a very very strong area for us.
But what we have seen and I think we've talked about this in previous earnings calls as well what we have seen is.
Did that traditional customers that traditional large enterprises.
Begin to adopt.
LPI technologies more and more and I think this is a this is a big trend. It's early we started seeing it.
We began investing in fact in our go to market mid last year.
Pretty heavily in terms of both.
Buildout in sales the sales capabilities as well as partnerships and then where we saw this happening and we continue to see it grow so so just to recap we.
The traditional digital natives are are a big part of that business and they are growing and we love that.
We're seeing a lot of the traditional enterprise in particular large enterprises.
At being interested in this adopting adopting this and we're seeing a lot of we see a lot of potential growth there as well Mike there was a really good study the Gartner did that in 2017. It was 5% of industry was 5% of businesses. We're using these programmable tools expected to be 30% by 2020 and what's so interesting is everybody, whether you're a digital native or an old brick and mortar enterprise everyone's focus and trying to improve customer experience and so these program will tools are doing precisely that or how do I create something within some other digital environment, My mobile app or on existing.
The existing enterprise application proprietary otherwise, where I can now embedded communications to make it better and you're seeing that everywhere, yet yet and just that data.
What we're also seeing is number one its global and what we're seeing in parts like pay outside of the United States.
Are those companies there is almost a leap frog.
To give you. An example, like a lot of companies like a lot of parts of the world kind of skipped landline and went directly to mobile so theres a similar kind of effect there. So it's really interesting and.
No the beneficiary of that of course.
Hey, great long later on there thanks.
The next question is from Jonathan Keith.
Summit insights group. Please go ahead.
Great. Thanks for taking my questions and I'll add my kudos to the strong numbers.
I just wanted to follow up on Alan your commentary about the integration of them.
Sicad with Ucas Youve done that organizationally.
And it sounds like you are leading with the new voice media not so much with your Incontact partnership and Youre doing that in your sales approach.
In terms of the integration there Im just curious in terms of the software stack something Youve talked out before frankly at all on the same stack where are you there not just with new voice media, but also with.
Nexmo and the other acquisitions too thank you.
Jonathan Okay. The the strategy is to be a single stack that we own vessel one bonds is all about.
And.
So we.
The effective the beginning of the second quarter.
Stop selling new customers.
On Broadsoft on Ucas side and in contact with the contact center side, because we're focused on our own stack because we have a fundamental belief that you have to control the roadmap.
In order to be able to provide these seamlessly integrated solutions.
Our view of what volume is what we're doing is.
Your characterization of Nexmo, let me sort of try to clarify that.
Our staff is a programmable apiay stack, that's what one vonage is comprised of those micro services video audio SMS IP messaging et cetera.
Those elements.
Can be sold individually or in small bundles as apia highs.
Thats, what we refer to as the AI platform go to market.
Or and or built into the applications around known use cases, the ucas UK use case, the sicad has used case or increasingly combined.
That's what we're driving to uniquely no one else.
Combined owning all of those elements.
So that we can.
Server, though these big Tandems around these known application used cases.
Or.
Selling it on bundle because its architected that microservices wet.
Okay. So it sounds like down whether it's sold unbundled or bundled in terms of integration technology side. You are on the same stack on the same platform.
That work is.
Like its mostly completed.
That's the strategy there is more work to be done new ways media, we just acquired nine months ago and so.
Pulling that apart back into that Microservices architecture, that's work underway, but that is precisely what we're driving to.
Yes.
And just to add a little bit.
Those towns point on new Vice media that is that theres multiple stages of that effort. So we began some integrations very shortly after acquiring.
Vice media and Thats, an ongoing effort.
So.
Okay, and just putting my product had on for a second and that those are things that you're you're always effectively working on the on the product side of it.
Great.
That makes sense all right. Thank you.
The next question is from James Breen of William Blair. Please go ahead.
Thanks, just a couple of questions first just a follow up but because my guess round apiay side are there any use cases that you've seen that sort of surprise you that are non traditional that.
Yes in the future sort of increase the traditional.
Tam for that market and then secondly on the consumer side, you talked about a pretty high percentage aligns now being two years plus customers.
When do we get to the point, where that just basically stays flat it generates cash flow and doesn't weigh on the overall growth rate. Thanks.
Let me ask Omar and taking the giant and Dave will take on the consumer side.
Yes, that's a great question. So we see a couple of them in effect.
And some of those use cases are what drove.
Talent acquisition of over AI, So what we've seen.
I think one of the use cases that we've talked about in the past we have a really interesting customer that uses.
Augmented reality and virtual reality.
And this is a company that power is that.
Maybe SaaS company and they use our video npis to power unique.
Customer care customers or use cases, so I think.
You call Youre a.
Our business you have an issue with some of your equipment you call. These people you call. This company, who provides effectively selling service plan think of this IP service plans.
And using using a camera that can be a camera on their smartphone it could be on your last comment on your tablet whatever the case might be.
Using the video Apiay, they can actually do see.
See what see what the customer sees they can actually imposed.
Schematic.
They can put drawings on it right to say okay. These are this is the way to cable leann should be looks like there is a mistake there.
So we think thats pretty powerful and we think there is a much broader we think there's a pretty broad set of use cases, we think once people see the power of something like that.
We'll see.
A lot more of that so thats, one I think the other one has been.
The power of artificial lift in artificial intelligence and machine learning.
Theres been a lot of.
There have been a lot of use cases there.
All across the board just to give you. One example.
There is a there is a lot of it when we talk about voice.
Most of the industry has been focused on basically making voice.
Sort of voice minute or the unit of voice as as inexpensive as possible and that's great.
But there is now a growing trend and growing interest in voice quality. So you see the importance of.
Artificial intelligence post both to analyze existing voice calls and even enhance.
The quality of the voice.
Voice experience real time, so thats, one and then there is a lot of Ada that's generated.
On the backend where machine learning, where you can sort of constantly improve that experience based on.
Very very large customer base.
Across the network. So those are those are kind of two use cases, I think that surprised me.
David will take the consumer question, yes, absolutely. So the question is when do we think consumer or could we get it to flat. So it's not a drag on consolidated growth.
We're very happy with how the business.
Is performing the consumer business, it's exceeding our expectations. This year and every day that the base becomes more tenured it becomes more predictable.
That being said, we're not projecting that it will get to a two zero.
Revenue decline at any point in the future. What we are projecting is that eventually the tenured base will go from roughly 90% of that base today to 100% of that base.
Because we I think we will be adding over time, the number of customers that we add relative that base relative to that base will be de minimis.
So the churn of the base will become the churn of the tenured cohort.
That churn today is in the 1415 context, so I think the upside in that business overtime is lowering churn.
And then being able to manage ARPU as well as possible and we did that in the quarter, we took some pricing actions.
In areas that we thought.
We could and where it was warranted and will continue to to look for those opportunities, where we're adding value.
Got to customers, but it really is it's it's about managing the rate of decline.
Not getting it to not getting into zero.
This concludes our question and answer session I would like to turn the conference back over to Hunter Blankenbaker for closing remarks.
Okay. Thanks, Kate net does wrap up today's call. We look forward to seeing many of you in the coming months, including tomorrow at various investor conferences.
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Please contact us if you need any additional details thanks everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.