Greetings. Welcome to Vonage Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. I will now turn the conference over to your host, Hunter Blankenbaker, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning and welcome to our second quarter 2020 earnings conference call. Speaking on our call this morning is Rory Read, Chief Executive Officer; and Dave Pearson, CFO. Also joining us is Omar Javaid, President of the API platform; and Rodolpho Cardenuto, Head of the Applications Group. Rory will discuss our strategy and second quarter results, and Dave will provide a more detailed view on our second quarter results and third quarter and full year guidance. Slides that accompany today's discussion are available on the IR website. At the conclusion of our prepared remarks, we'll be happy to take your questions. As referenced on Slide 2, I would like to remind everyone that statements made during this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's expectations, depend on assumptions that may be incorrect or imprecise and are subject to risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties is highlighted on the second page of the slides and contained in our SEC filings. We caution listeners not to rely unduly on these statements and disclaim any intent or obligation to update them. During this call, we will be referring to non-GAAP financial measures. A reconciliation to GAAP is available in the second quarter earnings press release or the second quarter earnings slides posted on the IR website. Additionally, during prepared remarks today, all comparisons to prior periods are year-over-year unless otherwise noted as sequential. So with that, I'll turn the call over to Rory.

Thanks, Hunter. Good morning, everyone, and thank you for joining us today. I'm pleased to be speaking with you on my first conference call as Chief Executive Officer of Vonage. I hope you and your families are safe and healthy, and I look forward to meeting many of you over the coming months. Having been in the role for the past 30 days, I would like to cover the following key areas in my opening remarks. First, based on early learnings, my initial thoughts on how we can take Vonage to a new level of execution and further growth. Second, the process we have embarked upon to ensure we are efficiently and effectively allocating our skills and resources towards driving the best trajectory for our business moving forward; and finally, our strong second quarter results. The opportunity to join a company like Vonage is rare. Vonage was born out of innovation, and through that innovative spirit has reinvented itself into a global leader in cloud communications, helping businesses across the planet accelerate their digital transformation journeys. Vonage is in the right place at the right time in a very large and growing market. I'm excited to leverage my experience driving large global transformations and operational execution to help lead the company forward into its next chapter. I've been in the technology and software space for the past 38 years. I understand the power and value of cloud solutions and what they offer to global businesses. And I am passionate about innovation, execution, fact-based decision-making and accountability. Since joining on July 1, I have immersed myself in our business, conducting, operating and strategic business reviews with team members across the company. I've also been meeting with partners and customers to understand where we're strong and where we can improve. I have…

Thanks, Rory, and good morning, everyone. Let's begin with a review of the second quarter on Slide 8. Second quarter Vonage business total revenue was $226 million, ahead of guidance and representing 75% of consolidated revenue, ex USF. Over the past year, business revenue grew from 2/3 to 3/4 of the Vonage total. From Slide 9, business service revenue increased 18%. Service revenue growth is our focus, as we deemphasize access circuits and desk phones. Service revenue also excludes USF, which was $5 million in Q2, down $3 million. As we discussed last quarter, we are now charging our customers lower USF fees, which are a pass-through, based on a study that concluded that our offering is mostly software rather than telco-related services. Within business, API platform revenue was $103 million, up 32% and well ahead of our expectations. Revenue from high-value APIs, primarily video, doubled sequentially versus Q1. API revenue now represents 47% of business revenue, ex USF. Revenue from applications was $123 million, also ahead of our expectations. Of this, $109 million was service revenue, which increased 7% GAAP, led by 14% growth in MME. Moving to Slide 10. Vonage business segment revenue churn was 0.9%, down versus 1% in the year ago quarter, and monthly service revenue per customer was up 16% to $509. Both KPIs demonstrate our continued move up market. On Slide 11, business service margin was 53%, up 1% year-over-year and the fifth straight quarter of flat or better business service margin. This reflects the move to our own higher-margin products, including Vonage Business Cloud and video APIs. Moving to Slide 12. Consumer revenue was $84 million. Churn of 1.5% was down from 1.7% in the prior year. In the quarter, we took a lighter touch on terminating the service of customers who are…

Okay. Thank you, Dave. Operator, let's go ahead and turn it over to Q&A, please.

[Operator Instructions]. Our first question is from Rich Valera with Needham & Company.

Welcome, Rory, and best of luck in the new role. Question on the API business. I guess a couple of questions, first. Rory, you mentioned in your prepared remarks, you think that, that business -- the CPaaS market, is bigger than sort of industry analysts think. I was wondering if you could expand on that thought. And then, if you could just give any comments on your thoughts on the sustainability of the trends you are seeing in that business in the near term, over the longer term. And then margin implications of that for the API business, as a whole, as your mix shifts towards that higher-margin business. So a few part question there, but I'm hoping you could shed some light on those.

Sure, Rich. Thank you for welcoming me, that's great. I think from a perspective of the industry, CPaaS is definitely part of a major communications trend that we're seeing across every industry. I've been in the industry for the past 38 years, Rich. And there's no question, the way that companies are interacting with individuals through communication and digital relationships is only accelerating, and COVID-19 has, in fact, accelerated that activity. I don't believe that's a temporary event. I think that's only going to accelerate. And I think, Rich, over the next 5 to 7 years, we're going to see communications, APIs and solutions embedded in pretty much every workflow, every industry, every application across the planet. I don't -- that's one of the key drivers for the reason I chose to join the team here at Vonage. I think it's uniquely positioned to participate in this. I love the product portfolio in terms of the diversity and the strength. I think API services and the way that applications are created and workflows are created, this is not a minor trend. I think this is a technological tipping point that we see occurring here with video, with voice, verification. And the way that customers want to be interacted with for support services, sales, it's really a fundamental shift. So I think that people are underestimating that this is just an event that's occurring because of the pandemic or tampered by that. I think it's a secular change in the way that customers and businesses will interact over the next 5 to 7 years. And I think that it's accelerating, and I think we'll see a bit more of that. I think our product set is really well positioned in this space, Rich. And I think that from the standpoint of opportunity, you're going to see us using our business optimization and alignment project to really drive additional focus here to capture that opportunity, sure. Will we see some moderation as the pandemic moderates itself? And when that happens, was that in the next 2, 3 quarters or the next 6 or 7 quarters? It's really hard to say. I do think you will see some moderation, but the overall trend is up into the right, for sure, in terms of this segment and this space. I don't have any question about that. And as we look at our mix and as we mix up now over 20% of our CPaaS revenues are now in that high-value segment, led by our leadership in video, I think that's only going to help us on the margin side over the next 2 or 3 years. I think that's an ongoing trend. I think it will continue. 163% year-over-year growth, sure, that's very sporty. But I think that trend of growth is going to continue, as I mentioned earlier. Does that help?

Yes, very helpful. And again, best of luck.

Thank you, sir. Omar, did you want to add any color on that one before we move on?

Thank you, Rory, and thanks, great question, Rich. I think Rory covered a lot of it. The only thing I would add is -- and we've talked about this in previous calls before, part of what is underpinning our belief, and this is even pre-COVID, that the opportunity is bigger than what a lot of analysts project is the -- this market, historically, has been driven by digital natives, and we see that continuing, that's going to be strong. But what we saw coming online were enterprises, right? I think Gartner Research showed that, that was going from 5% of enterprises to 30%, and I think that alone is a big opportunity. But with COVID, that has accelerated it massively. And to Rory's point, I think the opportunity here is everybody is rethinking their digital strategies, going through digital transformation, investing heavily. So really what's at play is every single app out there, including ones that companies are considering. And that's where that conviction comes from me.

Our next question is from Alex Kurtz with KeyBanc Capital Markets.

Yes. Welcome, Rory. So back to your earlier comments about the UCaaS and CCaaS platforms and the need for optimization. Can you just expand on that? And how you see that playing out over the next 12 months? I think a lot of investors that we talk about -- talk to about the stock and the company see these kind of independent platforms that have been brought into Vonage and aren't quite sure how you guys extract value having all 3 in-house. So you're obviously executing with CPaaS very well. The market is very strong here. But how do you get the UCaaS and CCaaS business growing kind of where the peers are growing right now that the independent peers that we see in the marketplace?

Yes. Thanks, Alex, and thank you for the question. From a standpoint of the unified communication and contact center space, one of the things that I think is really prudent to do in joining a new company is really to really get deep into the operational execution, the efficiency, what's the business strategy and business plan. Based on that, we've embarked on a business optimization and alignment project that really will set up our strategy and operating plans for the next 30, 36 months. I think what we are seeing and what I've seen is very good products. I don't think there's any question that what's been amassed in terms of assets has been very good. And I don't think there's a lot of strategic activity that needs to be done in terms of adding. Sure, if there's something out there that augments it, we'll look at it, of course. But I think we've got the right assets. It's the right time for these assets to be put together. And think about it, the Vonage Communications Platform is really this set of API -- an API platform with a set of API services hung underneath it. And what we effectively are doing is building a couple of purpose-built applications in unified communications and contact center on top of that. And what we want to do is really utilize that same kind of thought process that our customers are doing in their workflows and their applications. I think the reason that we want to target that go-to-market is I think over the past couple of years, the applications and unified communication and contact center product has kind of built to go-to-market that was more singularly focused. It was more of a direct model. It was a bit heavier in terms of…

Yes. Maybe. Rory, thank you, and thanks, Alex, for the question. [Technical Difficulty] prodigal to market and channel, other excellent product, but excellent need for that. If you look at UCaaS [Technical Difficulty] market is growing at 14% with a combination of the two products.

So Rodolpho, we're having a little technical difficulty on your line. I think you need to -- we'll have to move on to the next question. I think it would just add on a little bit of color. Let's move on to the next question. Thank you, Alex, for that question. Any follow-up questions, Alex, before we go on to Ryan?

Look, on the consumer side, there was a decision, I think, earlier this year to think about exiting that business. I don't know if you want to provide an update on that. I didn't see any content in the deck that would suggest that, maybe I missed it, but maybe just a really quick view about that process.

Sure. We did briefly cover it. I think what we would say is, we're going through that process. We continue to go through that process. We've incorporated that into the business optimization alignment, a project that we have underway, and we expect to complete that project later this year. That business is throwing off at least $600 million of cash over the foreseeable future. So it's a good business, and I've had an opportunity to look at it in terms of its execution. Mr. Walker and his team are really doing a fine job of executing there. I think they are doing it without distraction, and they are doing it efficiently. But we're going to continue that process, look at it and complete that process and give you an update in the fourth quarter. Thanks, Alex.

Our next question is from Ryan MacWilliams with Stephens.

Perfect. And Dave, congrats again on the retirement, even though this may not be how you exactly envisioned it, given COVID. Just on the API side, can you talk about any changes to the geographic revenue breakdown or the geographic additions of new developers since COVID, just given the different tailwinds and headwinds to different customer verticals and use cases as a result of COVID?

Sure. I'll pass that to Omar in just a second, but basically, we continue to see strength across all geographies and across all of the high-value APIS. If anything, that's definitely accelerated at 163% year-over-year growth. And we expect that that's, again, a fundamental shift. I don't think that as COVID, the pandemic, dissipates at some point in the future that things go back to the way they were. I think there will be some moderation, but there's no question that this has only accelerated the move to digital transformation, and that move to digital communications and relationships will only continue to go over. Okay. Omar, why don't you give a little bit of color on that for Ryan, please?

Thanks, Rory, and thank you for the question, Ryan. To go a little bit more in-depth, I mean really, when you look at the kind of growth that we've seen, we're growing across the board. So there isn't a particular geography that stands out. One thing I can share is that we have been seeing -- we saw in Q2 a recovery in Asia Pacific in terms of traffic. So it's basically back to pre-COVID levels, which was great for the quarter and certainly encouraging when we look -- assuming all of that stuff holds, assuming for the second half of the year. So we've been pretty strong across the board. I think -- so that's obviously good. The other thing that I'm seeing is, for us, particularly, is increased traction. If you just look at some of the wins that Rory mentioned in his opening remarks, we're seeing increased traction in the Americas, particularly in the U.S., some great logo wins and great usage as well.

Our next question is from Catharine Trebnick with Colliers Securities.

Dave, I'll be sad to see you go. Good luck in your retirement and Rory, welcome. So can we put a finer point on sales and marketing and G&A? You're down in sales and marketing, but up significant year-over-year in G&A? And how should we think about that going forward?

Sure. And I'll have Dave touch on that a bit in terms of the drivers in that, in the quarter, but I want to kind of set the expectation moving forward. I think there is definitely an opportunity to streamline and to provide efficiency in both of those spaces and to really focus our capabilities and resources on those areas of most growth. And I tried to share those areas, particularly around API services, and then definitely, that contact center work and UCaaS space by targeting and tailoring the go-to-market. But I would expect that we could drive efficiency and streamline on the longer term in both of those segments -- I mean, in both of those OpEx areas, but I'll pass it to Dave to give you a little bit of clarity within the quarter.

Yes. Absolutely. And thank you very much for your comments, Catharine. Regarding sales and marketing, you have to take into account that customer care, a lot of customer care is in there. So as you see sales and marketing in certain quarters step down, some of that is consumer-related customer care coming down and other efficiencies. As a general matter, you saw the sequential increase in sales and marketing, and that's because we launched our new brand campaign. The heavy piece of that was in 2Q, and we would expect to stay at this type of level for the rest of the year, given we're going to continue to advertise on the brand side. Clearly, we've had a bit less commission payments in there as well and a bit less T&E. But I would expect it to stay in this general level to slightly up if we get more activity on the commission and T&E side. Regarding G&A, you saw 2 factors in the quarter. One was consulting fees, and those will continue. Those are not in adjusted EBITDA, but they are in the G&A caption on the income statement, and that was first the consumer view and now that's been folded into the project that Rory talked about and so we'll have that in Q3. And in addition, in Q2, you had the -- we were very heavy on the CEO transition costs, which again hit the income statement but did not hit EBITDA. As a general matter, G&A, organic G&A, is not going up, ought to be relatively flat for the rest of the year. And then with the project that Rory discussed, eventually, that will start to come down as we execute that.

Our next question is from Tim Horan with Oppenheimer.

Good luck, Rory, and thanks, Dave, for your help. Domino's, can you give a little bit more color what was differentiated about your product? And I guess maybe the same thing for your 5-value API services. How differentiated are you? Do you think you're taking share in that high-value side?

Sure. I'll take the second one and then touch on the -- have Omar touch on it. Having come in here and spent the past 4 or 5, 6 weeks really learning the business, getting deep into API, I was familiar with the API services before I decided to join Vonage. So there's no question there's real strength in our API services. I think we have a leadership capability from the standpoint of video. I also think the way that we've utilized the service to create integration points is differentiated. I think -- and there was another question at the beginning, Tim. Was it around Domino's? Is that what you were asking? I couldn't hear you clearly, I apologize. Tim, do I -- what was the first part of the question? I apologize.

Yes. Sorry, can you hear me okay, Rory?

Yes. I can now. Thank you.

Yes, sorry. So the question is Domino's, I think you said you want it because you had differentiated services. Just trying to understand what that differentiation was.

Yes. This one is kind of interesting, right? So there's a couple of things that really made us strong in that space. And in an enterprise solution, particularly because of the multi-location capability, we've built that into the unified communications space. I think that's really an important driver in our wins in that enterprise. And remember, when I talked about the go-to-market around those unified communication and contact center app that we had to tailor it and the product was particularly strong and small and mid. This is just the idea that, that same kind of multi-location implementation with the control points that we put over top of it gave it strength. And then the voice API and the API work on top of that, really, I thought, gave us differentiation. But why don't we go to Omar first on the high value, and then we will continue? Omar, want to add a little bit of color on high value and our differentiation? I touched on it at the beginning.

Sure. So with respect to high-value differentiation -- let's talk about a couple of different products. We highlighted video. You may recall, we acquired a company, TokBox in late 2018. And what we got through that was not only a number of high-profile customers but a great deal of history in that space. So we effectively have been doing pioneering work in the underlying technology, which is called WebRTC. So we have a ton of intellectual property there, great customers that we can reference. Also, we've been investing in sort of security and certification. So those are important in a number of markets like health care, financial services, certain other social networking type of use cases. So we have a number of those kinds of strengths. So I would say that's one point. The second point is, since this is -- the API products are really appealing to technical, let's say, engineers or technically savvy customers. We have -- and we've won awards to this effect as well is we've invested a lot in making our software very easy to use, very easy to implement; that is a differentiator as well. And then onto your point about Domino's, just to add a bit to what Rory was saying, the multi-location capabilities, remember, now the way Domino's is structured, there's corporate and there's -- there are franchisees, and there's a lot of franchisees. And so for them, just having something -- they needed something more than just a phone system in the store, and we can provide that. There's a number of companies that can provide that, but what really differentiated us is that we -- that given the way that we approach the market, as Rory talked about, this platform approach with the apps built on top of it, it allowed us to give them the flexibility that they needed that was unique to them and implement that very easily and really support the digital transformation that they were going through. And the other, really, key point is, as big as Domino's is in the U.S., they are huge and growing all over the world. And so our global footprint, and this is something that we've been very strong yet in the beginning in the API business is our global footprint and the ability to operate globally and support our customers globally.

Our next question is from Meta Marshall with Morgan Stanley.

This is Eric [ph] on for Meta. Maybe just one for us on your Salesforce relationship. I understand pipelines are a bit less full on the application side overall, but how has that relationship continued to develop? And are you seeing pull-through if you see when making a contact center sale, anything kind of that you've seen there?

Sure, Eric. I think two good points on your question. From the standpoint, of Salesforce, there's definitely continued activity and that's a really good strategy in terms of contact center focusing on that kind of build-out on that CRM contact center with our capability and having that deep integration. We're also doing 2 additional areas in that space, and you'll see more on that over the coming weeks and months, in terms of additional capabilities in CRM and service areas, where we will drive that same deep integration. I think that will definitely drive a disproportional share. And I think that there's no question that that's the right space. And again, very good product in the right space. Any follow-up, Eric, there?

No.

Oh, the pull-through, right?

Right. Yes. It just kind of -- anything that you can add on that side?

Absolutely. Yes, no question. So if you think about it, if we target those contact centers that are around Salesforce or service applications or other CRMs, and just a handful because we want to be great at it and we want to drive really strong integration, and they tend to be these midsized kinds of contact centers that are built off of that. Then what you get is then you can -- what we're seeing is pull-through on unified communication. Rodolpho has shown me several really good examples. And that integration across contact center and unified communication, that's a real differentiator because of the focus that goes after the right level, we don't want to be spreads thin across all areas. Let's target the subset, like Salesforce, in the service space, et cetera, in order to get that targeted focus, and then build on top of that, the integration, into those application as well as the integration into our UC, and we're definitely seeing pull-through both in pipeline and closing that drives that integration. And that's been a driver of net expansion in those accounts and driving the win. So it's a great question. Thanks, Eric.

Our next question is from Sterling Auty with JPMorgan.

This is Drew on for Sterling. Congrats, Rory, on your first call; and Dave, on your last. So in the past, you've mentioned the 20% exposure to industries like travel and hospitality on the API side of the business specifically. I was wondering if you could provide some more color on how those verticals are performing and like how many customers are requesting concessions and what type of concessions you're offering them?

Sure. I'll just give you a quick update, and then I'll pass it over to Omar. We saw that kind of impact appear to peak in the May time frame. And as he mentioned in his earlier remarks, you've seen Asia Pacific return to more pre-COVID activities in terms of that velocity. There's still pressure there. There's no question, particularly in the U.S. and travel and even in Europe. But we have seen them come off of the lows, and they've definitely been improving. Why don't I pass it to Omar to give you a little bit of detail on that, Drew, and thank you for the welcome. Omar?

Thank you, Rory. Really, not much more to add. I think we have seen -- we have seen so we have that exposure to travel and hospitality. And I think just globally, they are going to struggle to recover to pre-COVID levels. But what we have seen in Asia Pacific is activity and usage back to pre-COVID levels. So we saw that, particularly in Mainland China, and we have seen pick up in travel and hospitality. And there's also a lot of -- there's a lot of traffic, for example, that is meant to drive actions in retail, so we've seen that. We've also seen that pick up in Asia Pacific. So all of that looks pretty positive. We are monitoring that situation pretty closely, of course, as is everyone, I'm sure. Now to the other part of your question in terms of whether we are getting -- whether we are being asked for concessions due to COVID, we really haven't seen that. We haven't seen, let's say, struggling customers that have come back to us and asked us for price breaks and things like that. I anticipated that early on. We just haven't seen much of that activity.

Our next question is from Will Power with Robert Baird.

Great. Yes, so I guess I want to follow up a bit and try to peel back on you a little bit more, if we could, on the app services segment. I'm trying to understand a couple of the different underlying trends there. As we look at digital transformation over the course of this quarter, one of the biggest beneficiaries, I think, for many of your peers has been in contact center. And so I just -- I guess, I'd love to kind of better understand holistically beyond Salesforce, in total, kind of what you're seeing in contact center? Is that facing the same pipeline challenges, go-to-market issues that you are facing more broadly? Or is that more related to UCaas? I'm really just trying to understand the broader contact center trends. And Rory, as you look at that and talk to customers of the pieces there you need to add, I guess, to further improve that product.

Yes. I think, from a perspective of contact center, that area had the strongest trajectory. I think the focus in terms of the product and the way we're targeting it at Salesforce and then in the service space and then additional maybe one more CRM, I think it's the right strategy. Keep it focused. Put the energy of the organization there, get the pull-through through the ISV ecosystem. We've already seen higher growth rates compared to the unified communication space in contact center. I expect that to continue. Contact center grew in the mid-teens. I suspect that we can continue to build on that by keeping that focus and expanding that base. I think that that's the right strategy in terms of the capability. I think there's more pressure on unified communications, in general, but I think that's more about how we've gone to market versus the product. I think the power, though, of the combination in contact center, when we win those contact centers around Salesforce or service activities, and then we combine it with unified communication, it's really a differentiated capability. Then you get that full integration across call, activities, routing, all of the data and information shared, I think it's a powerful offering, and I think we will build on that. The main purpose of the business optimization and alignment project is to put in additional operating discipline and drive execution excellence. I think we're on the right space and right focus on contact center. I think we can lift that growth rate. But what we have to do is continue to build on that focus and augment it with the unified communications. All right? Thanks, Will.

Our next question is from George Sutton with Craig-Hallum.

Welcome to Rory. And Dave, I hope to never have you come when I dial 911. So Rory -- and actually, this is for Omar as well, the -- it was several months ago, you changed the branding, kind of the logo change was really meant to move Vonage more into a business environment. I'm curious how you feel that has gone? And are we moving the Vonage brand into that business-centric area in your view?

Sure. I'll take the first pass at it, George. Well, one of the things is that I'm very excited about continuing to add talent of the team. You may have noticed that we added a new senior leader, Joy Corso, who joined us as CMO of the business. Joy brings a real deep knowledge across all marketing activities. She knows how to deliver messaging and communication across the portfolio. And she's got an operations and an operator's-type background. What we want to do here is -- there's no doubt, Vonage is a business software-as-a-service company. That's where we are, that's where we're going, and that's why we're properly positioned to take advantage of this fundamental shift in communications and digital transformation. You're going to see us continue to build on that and to continue to drive that messaging because that's what we are. The capabilities that we're bringing to market across our API services, our API platform and communications platform and then the targeted purpose-built applications around unified communications and contact center are all built on that idea of serving businesses and their digital transformation. I'm pretty excited about that that's why I wanted to be part of this team. And you'll see us continue to build on that messaging and that trust as part of our overall operating discipline and our business planning for the next 2.5 years. Thanks, George.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Well, I wanted to say thank you to everyone joining the call. It's very exciting to be part of the Vonage team. And as we talked about through the earnings call, I think we have made real tangible progress over the past several years to position the company well for the future. I think we're at the beginning of a industry-wide communications revolution in this digital transformation space. And I think our products and capabilities are well positioned to take advantage of that. We're going to apply operating discipline and drive execution excellence across every part of our business to change and to fully realize our full potential of our business trajectory. So with that, I'll pass it to Hunter. Any final comments, Hunter?

No, Rory. Thank you for that closing. We look forward to seeing many of you at some virtual conferences over the coming months, and we will talk then. Bye-bye.

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