Investor Presentation Second Quarter 2017
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Investor Presentation
Second Quarter 2017
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Caution Concerning Forward-Looking Statements
Various remarks that the Company makes contain forward-looking statements regarding acquisitions, acquisition integration, growth, growth priorities or plans, new products and related investment, revenues, adjusted OIBDA, churn, seats, lines or accounts, average revenue per user, cost of telephony services, the Company’s share repurchase plan, new products and related investment, capital expenditures, and other statements that are not historical facts or information constitute forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on information available at the time the statements are made and/or management's belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: the competition we face; the expansion of competition in the cloud communications market; our ability to adapt to rapid changes in the cloud communications market; the nascent state of the cloud communications for business market; our ability to retain customers and attract new customers; the risk associated with developing and maintaining effective internal sales teams and effective distribution channels; risks related to the acquisition or integration of businesses we have acquired; security breaches and other compromises of information security; risks associated with sales of our services to medium-sized and enterprise customers; our reliance on third party hardware and software; our dependence on third party facilities, equipment, systems and services; system disruptions or flaws in our technology and systems; our ability to scale our business and grow efficiently; our dependence on third party vendors; the impact of fluctuations in economic conditions, particularly on our small and medium business customers; our ability to comply with data privacy and related regulatory matters; our ability to obtain or maintain relevant intellectual property licenses; failure to protect our trademarks and internally developed software; fraudulent use of our name or services; intellectual property and other litigation that have been and may be brought against us; reliance on third parties for our 911 services; uncertainties relating to regulation of VoIP services; risks associated with legislative, regulatory or judicial actions regarding our CPaaS products; the impact of governmental export controls or sanctions on our CPaaS products; our ability to establish and expand strategic alliances; risks associated with operating abroad; risks associated with the taxation of our business; risks associated with a material weakness in our internal controls; our dependence upon key personnel; governmental regulation and taxes in our international operations; liability under anti-corruption laws; our dependence on our customers' existing broadband connections; differences between our services and traditional telephone service; restrictions in our debt agreements that may limit our operating flexibility; foreign currency exchange risk; the market for our stock; our ability to obtain additional financing if required; any reinstatement of holdbacks by our credit card processors; our history of net losses and ability to achieve consistent profitability in the future; and other factors that are set forth in the “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, in the Company’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing the Company's views as of any date subsequent to today.
Non-GAAP Financial Measures
This presentation contains non-GAAP financial measures (including adjusted operating income before depreciation and amortization (“adjusted OIBDA”), adjusted OIBDA less capex, adjusted net income, net debt (cash),free cash flow and adjusted revenue), as defined in Regulation G adopted by the SEC. The Company provides a reconciliation of these non-GAAP financial measures to the most directly comparable financial measure at the end of the presentation and in the Company's quarterly earnings releases, which can be found on the Vonage Investor Relations website at http://ir.vonage.com.
Safe Harbor
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Proven growth strategy via organic growth and M&A
Industry Leader in Business Cloud Communications
Broad portfolio of Cloud Communications solutions
Powerful, iconic brand provides competitive advantage
Large scale network terminating billions of minutes and messages
Strong cash flows and balance sheet driven by Consumer
BUILT ON:
$8
$94
$219
$376
$486
2013 2014 2015 2016 2017E
~ Vonage Business Revenues ($MM)
Guidance
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UCaaS and CPaaS are a Powerful Combination, Giving Vonage the Right Set of Assets to Win in Cloud Communications
UCaaS
SMB to Enterprise SaaS Delivery
Underlying Communications Platform
Voice
Conferencing
SMS / Chat
Recording
Video
Call Controls
Analytics
Other
MPLS QoS Bring-your-own-broadband (OTT) SmartWAN QoS
• Prebuilt Cloud PBX solution • Can be integrated with business apps
• Self-accessible components • Programmable into apps and software
CPaaS PaaS Delivery
Common Network
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Vonage is a Leader Across the Large and Rapidly Growing Cloud Communications Market, which is Comprised of Both UCaaS and CPaaS Delivery Models
2021
CPaaS
UCaaS
CPaaS Nascent
$41B $21B $1B+
2017 2012
CPaaS today is much like UCaaS in 2012; by 2021 the Cloud Communications TAM is expected to almost double
Source: IDC (2017)
UCaaS UCaaS
CPaaS $1B
$20B $33B
$8B
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UCaaS Growth Driven by Two Purpose-Built Solutions
ENTERPRISE
SMB
SmartWAN QoS MPLS QoS
Bring-Your-Own-Broadband
The Vonage Difference
Quality of Service
Innovation
Support
Ease of Use
Unified Communications
Video Analytics Administration SIP Trunking
Contact Center Collaboration Mobility
Business Phone Systems
Mobile App integration Presence
Portal Click – to - Dial Voicemail to Email
Call screening
Prem
ier
Esse
ntia
ls
SmartWAN QoS
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Vonage’s Investments in the Enterprise Segment are Paying Off
Recent enterprise activity
50+ 250+ 1000+
Representative Customers
Seats
50%
25%
MRR as % of Total MRR
Strong mid-market and enterprise presence
Large Radio Broadcast Company • Owns 500 stations across the U.S • Won customer due to:
- Integration into productivity tools - carrier-grade voice QoS via SmartWAN and MPLS
• Leading Practice Management software provider • Won customer due to:
- Ability to serve all locations on one cloud platform - Integration into productivity tools
• > 3,500 users across 900 locations in the United States • Won competitive bid due to:
- ability to serve all stores on one cloud platform - carrier-grade voice QoS via SmartWAN and MPLS
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Signed One of the Largest Deals in UCaaS
§ Global leader in residential real estate franchising and brokerage with many of the best-known industry brands
§ Delivering 20,000+ corporate seats across 550
locations in the U.S.
§ Partnership to sell into additional 4,000+ Franchise locations in the U.S.
§ Won competitive process due to:
- Enterprise grade voice QoS via SmartWAN and MPLS - Real-time reporting and analytics - Mobility, video conferencing and collaboration - Integration of communications into Productivity and CRM
tools
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Nexmo, the Vonage API Platform, Producing Strong Results
Cus
tom
ers
& P
artn
ers
Reg
iste
red
Dev
elop
ers
CPa
aS R
even
ues
31% YoY
Under Vonage Ownership
$20
$26
1Q'16 1Q'17
143 155
176
207
249
100
125
150
175
200
225
250
1Q'16 2Q'16 3Q'16 4Q'16 1Q'17
(1) Excludes developer signups expected to be bots
(1)
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Nexmo Enables Developers to Easily Embed Communications to Drive Better Business Outcomes
On-Premise PBX & Contact Center
Cloud PBX & Contact Center
Embedded Contextual Customer Communications
CAPEX to OPEX Better Business Outcomes
Legacy
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Integrating the Business Communications Value Chain Enhances Vonage’s Value Proposition
Case 1: MedXM
• 5,000 employee Healthcare technology company
• UCaaS for Contact Center and Google integration
• Opportunity to embed CPaaS for Increased patient communication
Case 2: Publicly Traded Restaurant Chain
• Operates more than 550 stores in the United States
• UCaaS for carrier-grade QoS over SmartWAN
• Opportunity to embed CPaaS for enhanced customer experiences
Q1 wins with UCaaS and CPaaS
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• The iconic Vonage brand stands for innovation, disruption and value
• More than $2 billion invested to build brand
• Extending the Vonage brand to business services has meaningfully accelerated growth
Vonage Brand Awareness is Significantly Higher Than Other Pure-Play UCaaS Market Participants
56%
Source: Vonage small business brand tracking study, Fourth Quarter 2016
RingCentral
8% 8x8
5%
Aided Brand Awareness Among Non-Customers
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Vonage has the Most Robust Omni-channel Distribution Platform in Cloud Communications
Inside Sales Field Sales Channel Sales Enterprise Sales Developers
• Executing on NFL cities strategy in Field Sales
- Opened 4 new markets year-to-date in Detroit, San Diego, San Francisco and Los Angeles - Expect to have field sales presence in 21 cities by end of 2017
• Amazon partnership provides distribution and Chime product integration
• Consolidated UCaaS and CPaaS sales channels under CRO Kenny Wyatt to promote lead sharing across sales organization
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The AWS Partnership is Strategic and the Integration of Amazon Chime Offers Vonage Customers a Differentiated Collaboration and Productivity Suite
Amazon’s collaboration suite enhances Vonage’s communication offerings
• Vonage is the UCaaS launch partner for Amazon Chime, a web-conferencing and collaboration suite
• Combines Vonage’s leadership in Cloud Communications with Amazon’s leadership in cloud services
• Bundled product to be sold by Vonage salesforce and on the AWS web properties
• Offering will be available late Q2’17
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20 Billion Minutes and Messages Per Year
Vonage Cloud Communications Products Utilize the Same Network and Termination Relationships
Products
Business Consumer CPaaS UCaaS
249K Developers1
659K Seats1
VoIP
1.6M Subscriber lines1
Common Network Infrastructure
Global Carrier Presence
• Data Centers • Points of Presence • Diverse Redundant Backbone
• Termination Network • Peering Connections • Volume Pricing • Owned Phone Numbers
Quality
Cost
1) As of March 31, 2017
VONAGE, PROPRIETARY & CONFIDENTIAL
Financial Overview and Analysis
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Cloud Communications Growth Strategy
Q1 Year-Over-Year Business Revenues Growth1
$19
$42
$74
$112
A1'14 Q1'15 Q1'16 Q1'17
• Organic:
– Increase salesforce and geographic markets – Expand Mid-market and Enterprise presence – Upsell additional services
• Inorganic: – Disciplined Acquirer – Cost of capital advantage – Scaled platform to integrate future acquisitions
1) GAAP Vonage Business Revenues
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• First quarter consolidated Adjusted OIBDA of $37 million
• Currently expect Consumer to generate over $600 million of after-tax free cash flow through 2021
Optimization of Consumer is Driving Strong Cash Flows
Vonage Annual Adjusted OIBDA
$110M
2013
$124M
$144M $160M
2014 2015 2016
2.5% 2.6%
2.3% 2.2% FY’16
~$165M
2017E Guidance
Customer Churn
19
$972M
LTM Adjusted OIBDA - CAPEX
NOLs
U.S. Patents
LTM Adjusted OIBDA
Financial Strength and Complementary Assets are a Strategic and Competitive Advantage
LTM Consolidated Revenues
$155M $122M $575M
155
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Capital Allocation Strategy
Invest to grow Vonage Business organically
• Invest in new market, salesforce and product expansion
Acquire selectively to grow Vonage Business
• Accretively acquire customers, salesforce, technologies, geographic footprint and / or product
Maintain strategic and financial flexibility
• Operate Consumer for cash flow and profitable subscriber base
• Manage leverage
Return capital to shareholders • Opportunistically execute share repurchase
through $100 million authorization
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Proven and Experienced Leadership
Joseph Redling Chief Operating Officer Since 2013
David Pearson Chief Financial Officer Since 2013
Omar Javaid Chief Product Officer Since 2015
Clark Peterson Chief Evangelist Since 2014
Ted Gilvar Chief Marketing Officer Since 2015
Graham McGonigal SVP of Networks Since 2012
Sue Quackenbush Chief Human Resources Officer Since 2015
Vinod Lala Chief Strategy Officer Since 2014
Alan Masarek Chief Executive Officer Since 2014
Randy Rutherford Chief Legal Officer Since 2016
Tony Jamous President, Nexmo Since 2016
Johan Hybinette Chief Information Security Officer Since 2017
Kenny Wyatt Chief Revenue Officer Since 2017
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THANK YOU
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VONAGE, PROPRIETARY & CONFIDENTIAL
First Quarter 2017 Earnings
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• Grew total revenues to $243 million, a 7% GAAP year-over-year increase – Grew Business revenues 51% year-over-year – Grew Nexmo proforma revenues 31% year-over-year
• Gained traction in enterprise segment – Signed largest UCaaS deal in Company history at more than 20,000 seats across 550 locations – Closed four deals with total contract value greater than seven figures in UCaaS
• Invested in Omni-channel Distribution Platform to Drive Growth
– Expanded field sales presence to 4 new markets year-to-date – Expect to have field sales coverage in 21 markets by end of 2017
• Continued to Integrate the Business Communications Value Chain to Enhance Value
Proposition – Multiple customer wins based on the integration of UCaaS and CPaaS
Recent Highlights
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• Consolidated revenues up 7% GAAP from the prior year due to: – UCaaS growth
– Addition of Nexmo and subsequent organic growth
• Business revenues represented 46% of total revenues
Consolidated Revenues
$227
$247 $243
1Q'16 4Q'16 1Q'17
($ in millions)
7% GAAP YoY
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• Vonage Business revenues up 51% GAAP from the prior year – UCaaS organic revenues growth
– Addition of Nexmo and subsequent organic growth
Segment Revenues
1Q'16 4Q'16 1Q'17
Service Product & USF
Business
Consumer
• Consumer revenues down 14% year-over-year – Consistent with expectations
– Lowest sequential revenues decline since 2014
$112 $111
$74
($ in millions)
51% GAAP YoY
1Q'16 4Q'16 1Q'17
Service Product & USF
$132 $136 $153
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• Consolidated Sales and Marketing up from the prior year due to: – Significant investments in business
salesforce headcount across all sales channels
– Offset by continued optimization of Consumer Sales and Marketing
Operating Expenses
Sales & Marketing
General & Administrative
($ in millions)
• General and Administrative up from the prior year due to: – Addition of Nexmo G&A expenses
– Nexmo acquisition-related expenses, including vesting deal consideration
$27 $34 $35
1Q'16 4Q'16 1Q'17
$80 $84 $82
1Q'16 4Q'16 1Q'17
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Adjusted OIBDA1
($ in millions)
$42 $37 $37
1Q'16 4Q'16 1Q'17
Income From Operations
Adjusted OIBDA1
• Consolidated Adjusted OIBDA down from the prior year primarily due to: – Accelerated Nexmo growth investment in
1Q
– Expect continued investment to exploit enhanced market opportunity
(1) This is a non-GAAP financial measure. Please refer to the end of the presentation for a reconciliation to GAAP income from operations.
• Operating Income down from the prior year due to: – Acquisition of Nexmo and Nexmo
acquisition-related expenses
$19
$5 $5
1Q'16 4Q'16 1Q'17
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Cash Flow, Stock Buyback and Balance Sheet
• Cash1: $28 million • Total debt: $333 million • Net debt2: $306 million (Gross Debt less Unrestricted Cash and Marketable Securities)
Net debt/Adjusted OIBDA = 2.0x
Cash Flow ($ in millions) Q1 2017 Cash from operations $17
Capital expenditures and software ($7)
Free cash flow2 $10
Significant strategic and financial flexibility
Stock Repurchase Program • In Q1, repurchased 1.6 million shares for $10 million at an average price of $5.95 • Repurchased 57 million shares for $191 million since August 2012
(1) Includes $2 million of restricted cash (2) This is a non-GAAP measure. Please refer to the end of the presentation for a reconciliation to GAAP.
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2017 Guidance Adjusted for Sale of Hosted Infrastructure Business
$ in Millions
Prior Guidance Adjusted for Sale(1)
Consolidated Revenues $970 - $985 $966 - $981
Vonage Business Revenues $487 - $493 $483 - $489
(1) Represents $4M of foregone revenues from sale of hosted infrastructure business (May 31, 2017 close)
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UCaaS Revenues Reconciliation to Adjust for Sale of Hosted Infrastructure Business and One-time Items
Q1'16 Q2'16 Q3'16 Q4'16 Q1'17
GAAP Total UCaaS Revenues $73.8 $78.0 $82.4 $84.0 $85.6
Accounting change - (0.4) - - -
Early termination fee - (0.5) - - -
Accounts receivable write-off - - (0.3) 0.3 0.3
Total UCaaS revenues incl. one-time items (Non-GAAP) $73.8 $77.1 $82.1 $84.3 $85.9
Hosted infrastructure business (1.4) (1.6) (1.6) (1.7) (1.6)
Adjusted Total UCaaS Revenues (Non-GAAP) $72.4 $75.5 $80.5 $82.6 $84.3
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Non-GAAP Reconciliation
VONAGE HOLDINGS CORP. TABLE 3. RECONCILIATION OF GAAP INCOME FROM OPERATIONS
TO ADJUSTED OIBDA AND TO ADJUSTED OIBDA MINUS CAPEX (Dollars in thousands)
(unaudited)
Three Months Ended
March 31, December 31, March 31,
2017 2016 2016
Income from operations $ 5,124 $ 5,214 $ 18,524 Depreciation and amortization 17,947 19,070 16,979 Share-based expense 7,064 9,462 6,303 Acquisition related transaction and integration costs 139 (219 ) 93 Change in contingent consideration — (4,110 ) — Acquisition related consideration accounted for as compensation 6,763 6,813 — Loss on sublease — 744 —
Adjusted OIBDA 37,037 36,974 41,899 Less:
Capital expenditures (3,701 ) (6,166 ) (8,895 ) Intangible assets $ — $ (50 ) $ — Acquisition and development of software assets (3,380 ) (2,551 ) (2,312 )
Adjusted OIBDA Minus Capex $ 29,956 $ 28,207 $ 30,692
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Non-GAAP Reconciliation
VONAGE HOLDINGS CORP. TABLE 4. RECONCILIATION OF GAAP NET INCOME ATTRIBUTABLE TO VONAGE TO
NET INCOME ATTRIBUTABLE TO VONAGE EXCLUDING ADJUSTMENTS (Dollars in thousands, except per share amounts)
(unaudited) Three Months Ended
March 31, December 31, March 31,
2017 2016 2016
(revised) (1) Net income $ 5,913 $ (2,038 ) $ 7,931
Amortization of acquisition - related intangibles 8,999 8,706 6,962 Acquisition related transaction and integration costs 139 (219 ) 93 Acquisition related consideration accounted for as compensation 6,763 6,813 — Change in contingent consideration — (4,110 ) — Loss on sublease — 744 — Tax effect on adjusting items (6,569 ) (4,932 ) (2,915 )
Adjusted net income $ 15,245 $ 4,964 $ 12,071 Net income per common share:
Basic $ 0.03 $ (0.01 ) $ 0.04 Diluted $ 0.02 $ (0.01 ) $ 0.04
Weighted-average common shares outstanding: Basic 220,371 218,375 214,039 Diluted 239,486 218,375 224,225
Net income per common share, excluding adjustments: Basic $ 0.07 $ 0.02 $ 0.06 Diluted $ 0.06 $ 0.02 $ 0.05
Weighted-average common shares outstanding: Basic 220,371 218,375 214,039 Diluted 239,486 237,670 224,225
(1) Revised due to the correction of prior period financial statements.
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Non-GAAP Reconciliation
VONAGE HOLDINGS CORP. TABLE 5. FREE CASH FLOW
(Dollars in thousands) (unaudited)
Three Months Ended
March 31, December 31, March 31,
2017 2016 2016
(Revised) (1) (Revised) (1) Net cash provided by operating activities $ 17,261 $ 23,842 $ 17,468 Less:
Capital expenditures (3,701 ) (6,166 ) (8,895 ) Purchase of intangible assets — (50 ) — Acquisition and development of software assets (3,380 ) (2,551 ) (2,312 )
Free cash flow $ 10,180 $ 15,075 $ 6,261 (1) Revised due to the adoption of new Accounting Standard Updates.
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Non-GAAP Reconciliation
VONAGE HOLDINGS CORP. TABLE 6. RECONCILIATION OF NOTES PAYABLE, INDEBTEDNESS UNDER REVOLVING CREDIT
FACILITY, AND CAPITAL LEASES TO NET DEBT (Dollars in thousands)
(unaudited)
March 31, December 31,
2017 2016
Current maturities of capital lease obligations $ 2,184 $ 3,288 Current portion of notes payable 18,750 18,750 Notes payable and indebtedness under revolving credit facility, net of current maturities and debt related costs 310,541 300,124 Unamortized debt related cost 959 1,064 Capital lease obligations, net of current maturities 81 140 Gross debt 332,515 323,366 Less:
Unrestricted cash and marketable securities 26,520 29,679 Net debt $ 305,995 $ 293,687
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