11/4/2021

speaker
Operator

Greetings. Welcome to Vonage third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Monica Gould, Investor Relations. Thank you. You may begin.

speaker
Monica Gould

Thank you, Operator, and good morning, and welcome to our third quarter 2021 earnings conference call. Speaking on our call this morning is Rory Reed, Chief Executive Officer, and Steve Lasher, Chief Financial Officer. Rory will discuss our strategy and third quarter results, and Steve will provide a more detailed view on our third quarter results, fourth quarter guidance, and updated full year 2021 guidance. Slides that accompany today's discussion are available on the IR website. At the conclusion of our prepared remarks, we'll be happy to take your questions. As referenced on slide two, I would like to remind everyone that statements made during this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's expectations, depend on assumptions that may be incorrect or imprecise, and are subject to risks and uncertainties that could cause actual results to differ materially. More information about these risks and uncertainties is highlighted on the second page of the slide and contained in our SEC filings. We caution listeners not to rely unduly on these statements and disclaim any intent or obligation to update. During this call, we will be referring to non-GAAP financial measures. A reconciliation to GAAP is available in the third quarter earnings press release or the third quarter earnings slides posted on the IR website. So with that, I'd like to turn the call over to Rory.

speaker
Steve Lasher

Thanks, Monica, and hello, everyone. Thank you for joining us today. Next-generation technology happens in ways that build upon each other. What is happening now is the convergence of the Internet, mobility, the cloud, and powerful 5G networks that is forming the digital transformation and intelligent communications wave, driving a secular change in the way businesses operate. customers expect to digitally engage with companies to get the information they want in the channel they choose when they want it from anywhere similarly employees expect seamless collaboration engagement and access to technology no matter where when or how they choose to work to achieve this level of engagement We believe all communication modes will be embedded in applications, workflows, and customer experiences through composable API-based programming techniques that enable businesses to move from transactional interactions to true ongoing engagement. We provide all of these capabilities through the Vonage Communications Platform, our single global cloud communications platform. Last month, we acquired Jumper.ai, a leader in conversational commerce. With Jumper, we have added significant technology, talent, and expertise to capitalize on this growing convergence of seamless shopping and conversations on services such as Messenger, WhatsApp, and Instagram. Jumper AI will accelerate our ability to enable our customers to differentiate themselves as social messaging becomes increasingly important to consumers as a frontline way of connecting with their favorite brands. Leading brands such as L'Oreal, Kiehl's, Disney, Axe, Dove, Ben & Jerry's, and Burger King use Jumper's technology to create personalized, unique digital engagement experiences for their customers. And this is just the beginning. We're truly delighted to welcome the Jumper team. Now let's review our third quarter Vonage communication platform results, where I'll focus my comments on our continued strong execution and the progress we are making on our strategic investment. BCP service revenues for $274 million, representing 25% year-over-year growth, up from 19% in 3Q a year ago. Third quarter, VCP adjusted EBITDA was $5 million, a $19 million year-over-year improvement. VCP rule of 40 this quarter was 27, more than double the 13 in the third quarter a year ago. We are ahead of the plan we laid out in our March investor day, and we are confident in our ability to continue to deliver on our commitment. API revenues increased 43% year-over-year to $155 million in the quarter. Our continued strong performance was driven by robust demand of our composable APIs from new and existing customers across all key industries, geographies, and customer sizes. While messaging growth was particularly strong in the quarter, we also saw a strong adoption of our other APIs, particularly Voice, Verify for authentication, and our Messages API for customer engagement. I'll highlight just a few of the new customers for the quarter. A UK-based real estate and technology company is leveraging multiple Vonage APIs to build and differentiate their business. They are using our messages API to facilitate connections between buyers and real estate agents. And they are using our video API to power virtual property viewings between agents and their customers. In the United States, Ping Identity, a Gardner Magic Quadrant leader in the access management software space, Selected Vonage to provide two-factor authentication services for its customers, which now include 60% of the Fortune 100. In addition to our strong new customer growth, existing customers continued to expand on our platform. Third quarter, dollar-based net expansion was 129%, driven by strength in e-commerce, travel, hospitality, logistics, and the social industries. We also saw increased momentum in several areas across fintech, including crypto trading platforms, digital lending, and payments. A great example is Finicel, a digital lending pioneer in Southeast Asia, already a Vonage Voice API customer. Finicel selected our SMS API and two-factor authentication capabilities to provide customers with account updates and password assistance. Finicel also added our messages API to power engagement with its customers over WhatsApp. Now moving to unified communications and contact center products, service revenue grew 8% ahead of expectations. Combined VBC and VCC cloud product growth was 13%, driven by improving micro and SMB growth, along with strong mid-market and enterprise growth. We continue to make progress on our go-to-market initiatives. Total bookings were up year over year and sequentially. Within the channel, our momentum is building, highlighted by significant year over year bookings growth, with five out of our top 10 deals, including three of our largest deals in the quarter, coming from the channel. Given our improving trajectory, We're well positioned to accelerate revenue to double-digit growth in early 2022, as we shared during our investor day in March. Key to our bookings growth is our integrated unified communications and contact center solution, which continues to be a key differentiator. Ten of our top 15 wins this quarter included both UC and CC solutions. I'll highlight two examples. An innovative financial services firm chose Vonage to replace its legacy UC and CC infrastructure. The full scope of the Vonage communication platform, including the depth of our Salesforce integration and the ability to leverage our APIs for custom integrations, were key differentiators in this seven-figure TCV deal. One of the largest roofing manufacturers in North America turned to Vonage and Salesforce to transform their customer service organization and leverage customer data to provide more proactive and intelligent customer support. Originally, only a contact center deal, it became apparent to the customer that they needed to move to a full cloud offering to replace their legacy on-prem UC and CC solution. Last quarter, we discussed the importance that the Salesforce Service Cloud Voice Partner Telephony Program represents for Vonage. I'm pleased to share that we are seeing early success here with several new wins and a strengthening pipeline. We had an exciting win with Stratton Finance, one of Australia's largest car and asset finance brokers. An existing Salesforce customer, The company selected Vonage for our contact center solution integrated with Service Cloud Voice and our unified communication solution. With Vonage and Salesforce, Stratton Finance will accelerate its digital transformation by creating an improved agent experience, better operational efficiency, and stronger customer engagement. Now moving on to product, our innovation engine continues to accelerate. During the quarter, we introduced an impressive number of new capabilities across our entire platform. I'll highlight just three. Our new AI Virtual Assistant for VVC is one of the first AI-driven conversational solutions to deliver enhanced self-service interactions for unified communication. This AI solution creates intelligent conversational experiences using natural language understanding and machine learning to engage every caller with applications using voice and text. We also launched Vonage Video Express to make it easier and faster for developers to access Vonage's video API for multi-party calls. Vonage Video Express democratizes video, making every web developer a video developer. Instead of taking days, weeks, or even months to integrate video into applications, Developers can now integrate video within hours using just a few lines of code. Additionally, Vonage Contact Center solution was one of the first to be selected by Google in its new Chrome Enterprise Recommended Contact Center category. Integrating the Vonage Contact Center with Chrome OS devices empowers IT and contact center administrators to leverage a full suite of contact center capabilities remotely and enable agents to work from anywhere, enhancing the agent experience for better efficiency and productivity. In summary, we had another strong quarter and expect to finish 2021 well ahead of our original revenue projection due to improving execution, go-to-market focus, and product innovation. Vonage is in the right place at the right time in a large and rapidly growing market as the world begins to ride this next technology wave around digital transformation and intelligent communication. The way we work, shop, learn, see a doctor, even exercise has fundamentally changed. Businesses need to move beyond transactions and notifications to digitally transform to deliver personalized conversations on the customer's terms as the demand for virtual engagement continues to grow. Whether it's getting medical attention through telehealth, tracking a package or a food delivery, booking a ride-sharing service, providing fraud protection, connecting the right customer to the right support agent, or enabling video and voice communications across thousands of office locations, Vonage does that. I would like to thank our talented team members around the world for their continued hard work and dedication. We're delivering on our commitment, executing our transformation plan and investing for future growth. And every day we're actively looking at all options to create value for our customers, our team members and our shareholders. I look forward to updating you on our continued progress. And with that, I'll turn it over to Steve.

speaker
Monica

Thank you, Rory, and good morning, everyone. I'll start with a review of the third quarter results and then discuss the fourth quarter and updated full-year 2021 guidance. Beginning on slide eight, we had another quarter of solid execution, accelerating revenue and improving profitability. Each of our product areas, including API, UC, and CC, delivered on our commitments while we continued to improve on the Rule of 40. Turning to slide nine, Consolidated revenue increased 13% to $358 million, driven by a 23% increase in Vonage communication platform revenue to $288 million. VCP revenue now represents 80% of consolidated revenue, up from 74% in the third quarter of the prior year. Consolidated third quarter adjusted EBITDA of $51 million was up 9 million, or 22%, year over year due to higher revenue and improving operating structure within VCP. Moving to the Vonage Communication Platform on slide 10, VCP service revenue increased 25% to $274 million, ahead of our expectations, driven by broad-based demand across our entire portfolio. VCP revenue churn was 0.6% in the third quarter, an improvement of 60 basis points from a year ago, driven by improvements across all products. Monthly service revenue per customer increased 25% to $657 from $527 over the prior year quarter. VCP gross margin in the third quarter was 45%, down year over year due to the higher growth in our API products, particularly messaging, as we continue to strategically pursue new customer opportunities to drive product adoption across the VCP platform. VCP adjusted EBITDA was $5 million, representing a $19 million year-over-year improvement. Moving to slide 11, API revenue was $155 million in the third quarter, up 43%, driven by continued growth across all product areas and geographies. We saw particular strength in our e-commerce, financial, and travel verticals as customers continued to adopt new products and expand usage across the portfolio. Unified communications and contact center service revenue was $119 million in the third quarter, up 8% year-over-year. Let's move to slide 12. VCP operating expenses totaled $165 million and accounted for 57% of total VCP revenue, an improvement of 18 points year-over-year. This improvement is due to the business optimization and alignment efforts we took last year to rebalance the business. VCP sales and marketing expenses were $83 million, or 29% of total VCP revenue, as we continue to make investments in sales headcount and targeted demand generation. VCP engineering and development expenses were $17 million, or 6% of total VCP revenue. VCP E&D expenses plus capitalized software totaled $28 million, or 10% of VCP service revenue. VCP general and administrative expenses were $42 million, or 15% of total VCP revenue, down approximately $11 million due to restructuring charges in the prior year quarter. Turning to slide 13, consumer segment revenue was $70 million in the third quarter, a 15% decrease from the prior year. Consumer adjusted EBITDA was $46 million in the third quarter, down from $56 million in the prior year. Moving to slide 14, we ended the third quarter with $447 million of net debt, down $28 million from last quarter and $90 million from the prior year. As of September 30th, net debt was less than 2.3 times last 12 months adjusted EBITDA. Moving to guidance on slide 15, for the fourth quarter, we expect VCP revenue in the range of $293 to $301 million. We expect VCP service revenue growth in the 22 to 25% range. Embedded in this guidance are the following assumptions. In API, we expect fourth quarter year-over-year revenue growth to be in the 34 to 40% range. With regard to unified communications and contact center, we expect service revenue growth in the high single digits. We expect fourth quarter VCP adjusted EBITDA to be in the range of $4 to $8 million. Within consumer, we expect revenue in the $65 million range and adjusted EBITDA of approximately $42 million. On a consolidated basis, we expect total revenue of $358 to $366 million and adjusted EBITDA in the $46 to $50 million range. For the full year 2021, we are raising our revenue and adjusted EBITDA guidance to reflect our strong third quarter performance and higher fourth quarter expectations. We expect VCP revenue to be in the range of $1,113,000,000 to $1,121,000,000. VCP service revenue is expected to be in the range of $1,055,000,000 to $1,063,000,000, representing growth in the 23% to 24% range. We expect API revenue growth for the full year to be in the 40% range and we expect full-year UCCC service revenue growth in the mid to high single digits. We expect VCP adjusted EBITDA to be in the $8 million to $12 million range. For the full year, we expect our VCP Rule of 40 results to be in the mid-20s, up from our original guidance of low 20s, driven by stronger-than-expected growth across our API and UCCC product portfolios. For consumer, we expect full-year revenue of approximately $288 million and adjusted EBITDA in the $186 million range. We expect total consolidated revenue to be in the range of $1,400,000,000 to $1,409,000,000 and adjusted EBITDA in the $194,000,000 to $198,000,000 range. With that, I'll turn the call over to the operator to start the Q&A.

speaker
Operator

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Mike Lattimore with Northland Capital Markets. Please proceed.

speaker
Mike Lattimore

Great, thanks. Yeah, congratulations. Excellent results there. I guess just a question on the gross margin on VCP. I know messaging is growing rapidly, you know, huge demand there. How should we think about gross margin, you know, longer term? Where does that sort of stabilize in VCP?

speaker
Steve Lasher

Thanks, Mike. Hey, Mike, I'll get started and I'll pass it over to Steve. Hey, from my perspective, what we're seeing is this secular change in the way communications are used across pretty much every industry. And we're seeing robust demand across our portfolio. I think the team is executing particularly well, and we're seeing that demand across all product areas. So I like that a lot. We're not seeing a lot in terms of pricing pressure. We're seeing really robust demand across all product areas. And as we continue to innovate, I think we're seeing That innovation drives more demand and definitely value for the customers. So I think that's an important factor in terms of it. You highlighted mix. We've definitely seen some strong, robust demand across messaging, but again, we see it across every product area. So I'm pleased with where we're sitting. We're confident we're going to execute well in 4Q and finish the year strong. But Steve, do you want to give a little bit of a, feel for how we view gross margins across the VCP platform?

speaker
Monica

Sure. Thanks, Rory, and Mike, thanks for the question. As Rory stated, when we take a look at gross margin, we think it's going to stay in that mid-40 area. And it's really, for us, it's about the scale. As you know, we are always looking to improve on gross margin. But right now, where we see, where we play, the opportunity for capturing new clients and then having them scale across our platform is really key. So right now, as we set our mission forward, we're happy to trade off a point or so of margin for two points on that top line. And as we continue to make progress on our rule of 40, That's where you're starting to see. We've really done a nice job, and the team's done a lot of hard work to continue to deliver on our Rule of 40, and we're making great progress. And as we continue to look towards the future, that mid-40s range, that mid-40 area, we're comfortable with it, especially as we think about the mission going forward.

speaker
Mike Lattimore

Yeah, makes sense. And then on the API business, broad-based demand, it sounds like, were there any regions, geographic regions, that you know, either outperformed or underperformed your expectations?

speaker
Steve Lasher

No, Mike. We saw strength across the board. You know, you look at the DB&E from the standpoint of a 129. We like to run that in that 120 to 130 range. We saw demand from our existing customers for existing APIs, and we saw some good expansion in terms of new and multiple APIs. New customer growth was strong again. We saw it expand. We saw it pretty much in every geography, almost every vertical. There's a lot of demand out there. And whether the world is opening up from the pandemic or however it's changing, I think what we're seeing is the secular change in the way consumers want to interact with companies. And these companies need to implement these composable APIs to create these multimodal communication interactions that create kind of a 360-degree relationship. I think that's pretty powerful. So we're seeing it across all industry and customer sizes, big, medium, small, across the board. Nice API demand, robots, existing and new customers.

speaker
Mike Lattimore

Okay, thank you. Congratulations.

speaker
Steve Lasher

Thanks, Mike. Thanks.

speaker
Operator

Our next question is from Mita Marshall with Morgan Stanley. Please proceed.

speaker
Mita Marshall

Hi. This is Dave Wilconco on for Mita Marshall. So you touched on the Rule of 40 a little bit ago. Just as you progress towards that, do you think that's driven more by additional OpEx leverage, or will that primarily be driven by growth?

speaker
Steve Lasher

Yeah, so, Dave, I comment on that one. When we did the investor day in the spring this year, matter of fact, our first investor day in 20 years, and we won't wait 20 years for the next one. We look forward to it in the first half of next year again. You know, we kind of gave this three-year view of our transformation. We expected at the beginning of the year kind of have a rule of 40 in, you know, the high teens. Exited the year or you know near the 20 as the year has progressed. We've seen strength In terms of the top line the robust demand for all products UCCC now approaching double-digit growth and we'll see that by early 22 We see it in terms of all api Including messaging we see it across all of our other api so We saw 27 in the rule of 40 up from 13 a year ago. That's a big improvement. We thought we'd see mid-20s in the rule of 40 next year. So we're significantly ahead of schedule. And it's never exactly a straight line on that, but we're definitely seeing momentum in terms of demand, velocity across all geographies, all customer sizes, and this demand for the product is there. So, you know, we focused on improving our execution on the financials. Our financials on the bottom line are now positive. We thought we would do that in the second half. We did it a little bit earlier. That's accelerating, and we expect to continue to throw off more profitability as we move forward. But as Steve said, we're always going to invest that profitability once we're in that you know, minus one to plus three kind of percent range, we want to invest that into future growth. So what's going to drive and continue to drive the Rule of 40 is effective fiscal management with a focus on investing on where the customer is going. And you're going to see that the growth rate is going to be one of the key drivers of a Rule of 40 as we look out over the next, you know, two years.

speaker
Mita Marshall

Great. Thanks. And just one follow-up. I was wondering if you could share the FX impact to VCP growth.

speaker
Monica

Sure. Steve, you've got that. Yeah. So when we take a look at FX, it was relatively, you know, from our perspective, it was relatively flat. We had a good quarter. So from a VCP service revenue, as reported, was 25. Constant currency was 25.

speaker
Steve Lasher

Got it. So Dave, we saw no impact on that front.

speaker
Mita Marshall

Yep. Thank you. Thanks for the questions and congrats on the quarter.

speaker
Steve Enders

Thank you, Dave.

speaker
Operator

Our next question is from Will Power with Baird. Please proceed.

speaker
Will Power

Okay, great. Yeah, I guess I'd echo my congratulations. Great to see the revenue and operating efficiency improvements Hey, maybe a question on Jumper AI. That seems like a pretty interesting acquisition and fit for you all. So I guess I'd love to better understand potential impacts to Q4 and even into 2022 revenue, maybe even on the cost side and maybe just any other background color on any integration process, how quickly you can get up and running with that.

speaker
Steve Lasher

Hey, Will, I love that question. From the standpoint of how we see this market evolving over the next three, five, seven years, we're going to see this multimodal communications transformation across every industry, every workflow, every geography, every customer side. What we're seeing is this movement from transactional notifications, kind of flat interactions, through these composable APIs, whether it's videos or messaging or voice. What's going to fundamentally occur is it's going to move from this concept of notification and transactional communication to 360-degree engagements, full conversations, ongoing. And this is going to be one of the key engagement levers, I believe, for every industry and every customer. Unfortunately, the pandemic, or depending on how you look, I think it's unfortunate, but it's only accelerated that because you've seen now all age groups being accepting of this kind of activity. And because of the cloud, because of mobility and 3.8 billion powerful handsets in everyone's hand, plus 5G networks with improved latency and unbelievable bandwidth and security, we're seeing that. And Jumper AI, what it does for us is it moves. It's a leader, an early mover in this conversational commerce space. Look at the customers. I mean, L'Oreal, Burger King, Kiehl's, Dove, Ben & Jerry's. They're setting a trend there. We believe this is only going to accelerate this 360-degree kind of engagement in the metaverse expands and explodes. And I think we're way at the beginning of it, but the Jumper team brings technology, innovation, and customers that's going to enable us to be a leader in this space. And we have other things that we're continuing to look at in this space. This is a secular change, and this is why we came to Vonage, is to participate in this movement from notification to true engagement. And this is going to change the world. In terms of how we integrate I had an opportunity to do the integration of Dell and EMC, the largest tech deal in history. Jumper is going to come in. They're going to fit right in. Great culture. Spend time with that team. They're energized about how we can open up the opportunity. And from the standpoint, we think this is an important capability for us in 22 and 23. Will, we've always called 22 and 23 the year of the product, and you're going to see us continue to build on that.

speaker
Will Power

Okay, no, that's great. I mean, is there anything from a granular standpoint to call out with respect to initial revenue or cost impacts?

speaker
Steve Lasher

Well, Steve, you can comment if you like, but I'd say I'm not seeing anything significant on the OPEX side. We're very financially well-structured. We've been managing well. You could see the $19 million improvement year-to-year on the bottom line. we've structured that all into our outlooks and our forecast. And I think it's going to help us in terms of, you know, the velocity of the business because I think it's a differentiated capability. And I think with a differentiated capability, it's also going to help us get into even higher margin messaging, higher margin APIs. But Steve, any comment for Will?

speaker
Monica

Yeah, no, well, thanks for the question. When we look at it, look, over time, we'll see some synergies from Jumper AI that's going to allow us to move on, improve on our operating margin. And that's going to come over time. And it goes back to, as Rory mentioned, as transactions move to conversation, that's going to allow us to improve. But as far as where we are right now, you're not going to see any significant change to where we are. It's really about us embedding Jumper into the platform and moving forward and the evolution of transactions to conversations. Okay, great.

speaker
spk06

Thank you.

speaker
Operator

Our next question is from Samad Sahana with Jefferies. Please proceed.

speaker
Samad Sahana

Hi, this is Mason Marion. I'm for SMOD. Thanks for taking our questions. So I want to go back to API. So you cut off messaging is particularly strong going forward. How are you thinking about growth between messaging voice and video and what the main drivers will be?

speaker
Steve Lasher

Sure. Thanks, Mason. I think from a standpoint of API messaging and this, you know, continued trend toward moving notifications to conversation, and adding value-added capabilities like the Jumper AI offering in this conversational commerce is going to continue to drive robust demand and messaging. We see that in the pipeline. We see that in the trend. And we're going to continue to participate in that. You're going to see Sabine Berry and his team are doing an outstanding job working across our go-to-market, to really understand where the opportunities are to open up TAM and improve even our margin participation with higher value offerings. And we've got that innovation engine moving more rapidly. So we like the robust demand. That's a good thing. We see it out into the future based on the pipeline. And then from a standpoint of the other API's like the mess, the, the intelligent messaging API's like in the over the top areas, you know, video voice. We think that area will ultimately grow faster in terms of percentage space. Some of those working on some relatively smaller numbers. But we've gotten that, again, that focus on what functionality do we need to introduce that would open it up. And you're going to see us really trying to focus on vertical differentiation in our go-to-market teams so that we can see the use cases where they're applied, and we're going to bring expertise. You know, I think it's a very interesting time. You've got this convergence of the cloud, the mobility, and 5G networks. This is opening up this – and the secular change in terms of the societal acceptance. This is opening up the demand. We're seeing robust demand across the board.

speaker
Samad Sahana

Okay, great. Thank you. And then going over to the UCCC business, growth is accelerating right on track. Can you guys talk about your channel partner efforts, how the channel partners are responding to the changes you've made? And then on the other hand, can you talk about your direct sales efforts down market and how your new go-to-market motion is resonating there? Yeah, I'll make a couple of comments here.

speaker
Steve Lasher

In the UCCC space, I've been so impressed with our team. We kind of laid out with Rodolfo, Reggie, and others this kind of concept of really pivoting and turning that business around. We began that work in 2020. We could see it in terms of the pipeline, in terms of bookings installed. It's a waterfall, so you can really see it. We've seen year-to-year improvements, sequential improvements, and that business is right on track. We called it earlier on these calls that we would return to double-digit growth. The cloud components, VBC and VCC are already in that mid-double-digit growth. And we're optimistic we're going to continue to build. Remember, Mason, there's a half a billion, let me say that again, a half a billion seats that need to move to the cloud. You know, less than 10% of it, maybe right around 10% have moved. This is a huge opportunity and it's across all customer segments. We're doing a really nice job in re-energizing micro and small with the work that Joy's marketing team working with the go-to-market have improved in that space. I think, you know, and then the strength that we continue to see in mid and enterprise. You asked about the channel. I spent the past four weeks meeting with every major channel partner one-on-one. I've spoken at many of their events over the past two months. I believe in the channel. I believe in the channel's multiple applying capability of reach and customer impact. And we've definitely gotten feedback that we're on the right track. They like the portal. They like the tool. They like our ability to work with them to create a great outcome for the customer. So we've seen the pipeline and the key deals in the channel continue to accelerate. I think where they are is we're building real trust with them. They have seen some starts and stops with Vonage in the past in the channel. We're committed. We believe in the channel. We believe in our partners. And we're going to continue to accelerate our investment to build that capability out. And we see it in the results. So the feedback was good. The trust is building. And we're going to continue to follow through on that over the next three, four, eight, 12 quarters to continue to create that great relationship. I think they want us to win. I really do. And I think they're helping us. So good feedback so far. But more work to do and we're going to do it. Thanks, Macy. Thank you.

speaker
Operator

Our next question is from Tim Horan with Oppenheimer. Please proceed.

speaker
Tim Horan

Thanks, guys. Your largest API competitor, you kind of grew faster than for, I think, the first time I can remember. And I've always been curious why you haven't been kind of growing faster than them for the last couple of years because you have such small market share versus them. And I guess my question is, if you look at your top 20, 30 API users globally, are you starting to gain share there with those customers? Do you have the product quality now? Because your price points seem to be quite a bit below them. And do you think you're basically set up at this point to really gain a lot more share from them with the larger customers out there? Thanks.

speaker
Steve Lasher

Yeah, thanks, Tim. I think one of the things we wanted to do is we wanted, during the first phase of the transformation, is to really get the house in order. We did that in the second half of 2020, and sort of like restoring a sports car. I mean, we've taken it out of the garage now, and we took it out on the track to see what it could do. You know, the feedback's good. The product quality is improved. Knock on wood, we'll continue to focus on that. We're adding new features and functions. And I highlighted a few, like Video Express in this most recent quarter. Last quarter, the HIPAA compliance and the SOX compliance. These are opening up new TAM for us. You know, we're getting to the point where we're getting this business in a good balance. We have fiscal responsibility issues. We have very good operational discipline in the structure. And there's demand out there. That demand is robust. And for us, I think we can improve the value that we're getting for our products by adding these new features and functions like Jumper AI and the conversational commerce, or adding the HIPAA compliance and messaging so that medical and privacy are really covered. There's competitors out there, sure, but our focus is we understand them, but we're really spending our time with our customers, and our customers are telling us, you're on the right track. You're definitely increasing our footprint with them. We're expanding across other APIs, but we have more work to do, and we're going to do it. So we like the progress we're on on our three-year transformation. We are ahead of schedule. But the demand is there, and people are reacting to the improvements we're making. So, Tim, we're going to continue to do what we're doing, listen to our customer, put that customer first, deliver the innovation that creates value, and we're going to go after this market.

speaker
Tim Horan

But I guess specifically the larger API customers out there globally, are they looking at dual source at this point, or are you starting to gain some traction with them and you think there's a lot more potential? Only because it just seems to be such a hanging fruit. I mean, there's almost like no SG&A. and R&D costs with those customers. And I would think they want a dual source.

speaker
Steve Lasher

Yeah, Tim, I think you're spot on. I think that we're definitely scaling on our OpEx now. I think we're getting the business in balance so that we can add in particular areas like you suggested in some of the larger relationships. And we're winning new routes. We're expanding our footprint with them. They definitely are reacting. We're going to go across the entire planet and go after the competition. customers reacting. So you're spot on. I definitely think there's an opportunity and we're going to be the aggressor. Thank you.

speaker
Operator

Our next question is from Drew Glashier with JP Morgan. Please proceed.

speaker
Drew Glashier

Hey guys, congrats on a great quarter. You mentioned this briefly in the prepared remarks, but how are the COVID-impacting industries like travel and hospitality performing at this point, and are there any specific verticals that are leading the way in the API business or the UCCC side?

speaker
Steve Lasher

Hey, Drew. How are you? Good to speak with you. I'd say in terms of our portfolio, and we've commented a couple times in the past, I think it's a competitive advantage, the diversity of it, both geographically and vertically-wise. We're definitely seeing improvement in travel and hospitality as COVID kind of moderates. We're also seeing activity in logistics. We're seeing it in crypto platforms. We're seeing it in social. We're seeing it in the payment sector. There is no question that there's demand out there. And we see it in terms of e-commerce, financial, logistics. The hospitality area and travel have absolutely picked up. But there's still more room for them to go. I think they're going to add a lot more in terms of capacity and and we'll continue to participate on that. So I feel that we have a nice combination. So we're not just tied to pre-COVID kind of industry. We're participating across the board. And, Drew, I think it really is less to do about COVID and more to do about this change in the way customers want to interact. And that's why we went after Jumper AI. That's why we're building that technology. This is really going to move in the direction of engagement in the metaverse. And I think it's the next 5, 7, 10 years. You had a second question, Drew. What was the second part?

speaker
Drew Glashier

So I think that that covered the first one, but I do have another quick question. So You talked about building trust with the channel. I was wondering if you could kind of expand upon what exactly you're doing to incentivize those channel partners.

speaker
Steve Lasher

Sure. Drew, one of the things that we did when I first got here is reached out to the channel partners, their leadership, you know, communicated our commitment and our focus. Um, then when we launched, uh, you know, the whole, um, Vonage Accelerate and the whole concept of getting that to move faster in the channel, we then back that up with action. So better tooling, better documentation, better incentives. And then our teams. And now we're investing to expand our footprint with Feet on the Street to allow us to deliver that. So it's a series of steps. And then the most recent six, eight weeks, I went and followed up with all of them with – you know, the team to understand what the feedback was. And I spoke at a lot of their kickoffs and their events. The feedback is positive. They like the investment of the portal. They like the tooling, the ability to do faster pricing. We need to do it even faster, but the feedback was good and spent time. So I'm trying to reinforce that we say that we're going to do it. We do it. Then we follow up, we get feedback and we continue to improve. Their feedback was good. They said, we're on track and we're seeing it. We're seeing it in terms of the pipeline and we're seeing it in terms of the velocity. We're not at the knee of the curve yet. I think there's more to do here. And you can hear it in their voice, you know, because they're looking and they're believing that we're executing, we're committed, which we are, and that we're going to build on that activity. Why the channels? The channel has such reach, and they're trusted advisors to so many players in the space, particularly in UCCC. And when we create that combination of Vonage plus that channel partner plus that end customer, that's expertise. That's trusted advisor. You know, that's, you know, better together. So the feedback's been good, and we're going to continue to build on the track record, and action will build trust.

speaker
Drew Glashier

Yes, got it. Thank you. That's really helpful.

speaker
Operator

Our next question is from George Sutton with Craig Callum. Please proceed.

speaker
George Sutton

Thank you. Rory is a long-term follower. I would tell you this turnaround has been fun to watch, and I think your use of data to create some predictability is really creating renewed confidence in the story, so I think it's great. I had a quick question on Salesforce.com and your ability to go to market with them on the CCAST side. I know that's been an increased effort for you and certainly an area of enthusiasm for us. And then secondarily, just the issue of the day, Microsoft Voice being added to their CCAST platform. Any thoughts around that relative to your opportunity going through the Microsoft channel? Thank you. Thanks, George.

speaker
Steve Lasher

Hey, I'll pitch it to Steve for a quick comment on the data, because one of the things that we've really focused on over the past 18 months is to give us instrumentation. We've invested into our BI structure and our analytics capability. I mean, Steve, just maybe a couple of sentences on the focus, and that all reports up into you. So how are you feeling about our instrumentation and the analytics in terms of giving us that data to kind of really target in where the opportunities are.

speaker
Monica

Sure. Thanks, Rory. And George, thanks for the question. When we take a look at how we're trying to really get underneath the diagnostics to where do we compete best and where gives us the best opportunity to win. And since the business analytics teams, business insights, data, all rolls up to me. So we have one source of the truth and we're really able to leverage that information to especially when we go take a look at the opportunities of the pipeline, how they're flowing through and really getting into the details around what allows us to win. And quite frankly, the relationship with Salesforce, we continue to see strong opportunities in the pipeline and the win rates continue to be really strong. And as we continue to win, they pull us into more integration opportunities. And that's really what it's about. More opportunities, swings that we get as we're at the plate and we're connecting with the ball right now. And we see that continuing. But as Rory mentioned earlier on, it's really also about continuing to add new feature function in our product and E&D. And we'll continue to invest in that area to make sure we're building out that relationship.

speaker
Steve Lasher

Yeah, and I'll just add a little bit. From a sales force, the top-to-top communications are strong. The service cloud voice really represents an interesting opportunity. We're clearly a leadership partner in this. I believe we have significantly more wins than anyone else in this space, and that pipeline is trending well. So there's a lot of interest in that top-to-top conversation, and we're building it through the teams. Jay and Bree, Bree who runs our partner activity, we're committed to this, and we're going to build that out. So good traction so far. We'll add more feature and function. I do think the Jumper AI capability, again, will help us in the UCCC space as well. So that's an interesting combination, but I'll let Sabine expand. On the MS conversation, it's It's a half a billion seats out there. I've competed and worked with Microsoft for 38 years of my career. I heard so many times that they were going to do this or take over that. There's a huge opportunity out there. They're just starting. We have some really great products, great channel relationships, and there's a half a billion seats. I mean, we have a really good opportunity to participate in a significant way. We take every competitor serious, but our focus is on our customer and the opportunity. That's a big opportunity, and we're going to go get it. Thanks, George. Thank you.

speaker
Operator

Our next question is from Ryan McWilliams with Barclays. Please proceed.

speaker
Ryan McWilliams

Thanks for taking the question. And Rory, good to hear about your hands-on and consistent approach to the channel. I know they love that. With net debt now at like 2.3 times and down almost a full turn from last year, how should we think about M&A here? I know you probably feel pretty good about your hand, but like how should we think about anything transformational on the horizon? Thanks. Sure.

speaker
Steve Lasher

Thanks, Ryan. Great to have you back in the fold, so always enjoy it. Hey, Steve, do you want to give your thoughts on how we improved the net debt? It's been a very impressive fiscal management. including the way we're managing, you know, accounts receivable, everything. But what's your thoughts? Do you want to add on that? And then I'll talk about the M&A.

speaker
Monica

Sure. And, Ryan, thanks for the question. We've seen strong progress as far as collections. And again, it's really just been the team continuing to go after. And we've done a really nice job of A, collections, B, being able to pay down the debt. And it shows the operations are running smoothly. There's always work to do. We'll continue to continue to drive and expand on that. But we feel pretty good about where we are. And from a terms perspective, we're not extending any, changing any new terms. So we feel pretty good about where we are. And then as they look forward, we'll continue to continue to pay down the debt as we move forward. And then when we think about what that allows us to do, it allows us to think about M&A. And as you kind of asked the question, Rory runs a very robust process around acquisitions, looking for strategic plays within the marketplace. and we feel we're in a pretty good place as far as the VCP business getting to profitability, the continuing to utilize the cash from consumer. And, uh, so when we're looking through the marketplace, we, we are focused on key areas that will allow us to continue to build on that top line, but advance the strategy and the mission that we're on. And again, I think, uh, Jumper AI is just one of the first that you'll see coming through the pipeline that we feel will really embed in the technology and help advance the platform.

speaker
Steve Lasher

Thanks, Steve. The thing I'd add here is the board and management are looking every day actively of how we can create value for our team members, our customers, and our shareholders. We're always looking at how we can improve that and that's consistent and we're actively looking at that. We have a process that looks at tens and tens, 70 plus, 75 target potential interesting assets. You want to have a wide net, but we're looking you don't have to spend a billion dollars to get really interesting capabilities. Jumper ABI is a really good asset. And you're going to see us continue to look at that across the board where there's definite technologies and skills that make a difference, that open up new margin, open up new value that we can create with it. And everything is focused around this communications engagement platform, where the market is going. Sure. You know, we always look at transformational pivots as well. And this company has a long history working with the board to really do those kind of things. So rest assured, we're actively looking every single day at the ways to increase value for our shareholders, for our team members, and our customers. Thanks, Ryan.

speaker
Ryan McWilliams

Thanks. And just one more on the API side. You mentioned you prepared remarks, and we picked up in our checks that some of your larger UCCC deals included API revenues or API use cases alongside that. Do you think channel partners are becoming more comfortable selling API solutions on top of traditional contact center solutions, and are you seeing more cross-sell there?

speaker
Steve Lasher

It's a great question, Ryan. By the way, the amount of discussion about API and my channel checks that I did over the past eight weeks was definitely increased from the previous two cycles that I've done. I do it about every quarter and a half to make sure that I got a feel for where that is. The channel is definitely interested in adding it. They see it as the customer sees it, that a future proves the opportunity. Again, I think that's why this platform concept is a good one, and I think whether it's the channel or our UC customers, we're at the beginning of that kind of integration, but I can tell you in every Orals, every customer call we make in that UCCC space, the API section where we share our capabilities there is probably one of the most well-attended and the best interactions in terms of where they're interested in talking about because APIs and composable APIs are going to dominate the planet for the next three, five, seven, ten years. And so we're going to see more of it. It's still early, but you're right to feel that and we're seeing it. Thanks, Ryan. Thanks, guys.

speaker
Operator

Our next question is from Andrew King with Colliers. Please proceed.

speaker
Andrew King

Hey, thanks for taking my question. Really nice to see the UCCC group accelerating line plans laid out at the analyst day. Can you give us an idea how much of that acceleration is being driven by bundled versus standalone contact center?

speaker
Steve Lasher

Sure. Thanks, Andrew. Yeah, the momentum in the space we've laid out, I think the team's done a very nice job of understanding where the products fit. We still see the dominant volume in the pipeline and the closed deals being one or the other, UC or CC, but we're clearly seeing more and more each quarter, and particularly in the larger size deals. We've been seeing our biggest deals have a combined structure. I think that's only going to continue to accelerate I think that combination is just a natural capability. And often what we see is a customer engages us on one tower, one product tower, and then once they get into it, they're like, oh, this makes a lot of sense. Let's do both. And I kind of highlighted a couple of that phenomena in the prepared remarks. We like that. And 10 of the top 15 deals were in that combined space in the third quarter. Again, up from a few quarters ago where it was three out of 15. And it's been on a kind of a nice steady trajectory there. So we like it. And that business is on track to get to double digits. The cloud component's already there. Thanks, Andrew.

speaker
Andrew King

Great. If I could just sneak one more quick one in here. There's a pretty meaningful step down engineering development project this quarter. Could you just talk about what caused that and where you see that going forward, especially with the acquisition of Jumper AI?

speaker
Steve Lasher

Yeah, I like Steve's comment, but it's basically a one-time kind of item on some of the accounting. We're definitely investing and growing that. You'll see 22 and 20, well, 22 for sure the plan's done, but for sure 23 as well. We're going to increase and have been increasing our development footprint This is a software communications cloud business. The future is around product and innovation. So that's just a one-time kind of blip based on some one-time items, but it's really up and to the right. Steve, any further thoughts?

speaker
Monica

No, I think you hit on it right, Rory. We'll continue as we move forward to invest in our engineering and development, and it is a focus for us, and we'll continue to make investments as we move forward.

speaker
Andrew King

Great, thank you.

speaker
Operator

Our final question is from Steve Enders with KeyBank Capital Markets. Please proceed.

speaker
Steve Enders

Hi, this is George on for Steve. Congrats on the quarter. Just one quick one for me. Anything to call out from A2P carrier fees on the messaging side? That's it, and congrats again.

speaker
Steve Lasher

Steve, do you want to add any comment there? I have some quick thoughts on it, but

speaker
Monica

Yeah, no, again, so George, thanks for the question. From a carrier fees perspective, no change as we continue to move through the quarter. Obviously, we'll stay close as it goes. But as far as impacting any of our guide, we feel confident in kind of what the team's been able to deliver. And then going forward, when we take a look at As we look at the growth from a VCP on a go-forward basis, continuing to see API at that midpoint of about a 37% growth, we're seeing that continue in UCCC in that high single digits. So all of that's baked in as we continue to expand on the rule of 40. As we talk about looking forward and baking in some of these fees, it's really all about our progression. And I think they go forward for us. We feel confident about where we're going to end and we're looking forward to just closing out the year. Yeah. Thanks.

speaker
Steve Lasher

Thanks, George. Hey, appreciate everyone's time. We, we definitely look forward to updating you on our progress in 4Q. We've got work to do, so we're going to get to it. Pass it back to you, Sherry.

speaker
Operator

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

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q3VG 2021

-

-