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| UNITED STATES SECURITIES AND EXCHANGE COMMISSION • WASHINGTON, D.C. 20549 |
FORM 10-K
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| ☒ | Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 | | or | | ☐ | Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 |
| For the fiscal year ended | 12/31/20192020 | | | | | | For the transition period from to |
Commission file number 001-32887
VONAGE HOLDINGS CORP.CORP.
(Exact name of registrant as specified in its charter)
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| Delaware | | 11-3547680 |
(State or other jurisdiction of
incorporation or organization)
| | | | | (I.R.S. Employer Identification No.) |
| 23 Main Street | Holmdel | , | New Jersey | , | 07733 |
| (Address of principal executive offices) | | | | | (Zip Code) |
Registrant’s telephone number, including area code: (732) (732) 528-2600
Securities registered pursuant to Section 12(b) of the Act: |
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Stock, Par Value $0.001 Per Share | | VG | | Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.) ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at June 30, 20192020 was $2,588,190,451$2,334,361,986 based on the closing price of $11.33$10.06 per share.
The number of shares outstanding of the registrant’s common stock as of January 31, 20202021 was 242,918,708.249,132,070.
Documents Incorporated By Reference
Selected portions of the Vonage Holdings Corp. definitive Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2019,2020, are incorporated by reference in Part III of this Form 10-K.
VONAGE HOLDINGS CORP.
FORM 10-K
FOR THE FISCAL YEAR ENDED December 31, 2019
TABLE OF CONTENTS
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| PART I |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| PART II |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| PART III |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| PART IV |
| Item 15. | | |
| Item 16. | | |
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FORWARD-LOOKING STATEMENTS
VONAGE ANNUAL REPORT 20192020
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements and other information which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995, or the Litigation Reform Act. These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.
The words "plan," “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events, are subject to certain risks, uncertainties, and assumptions, and are not a guarantee of future performance. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in such forward-looking statements or information. In light of the significant uncertainties in these forward-looking statements, you should not place undue reliance on these forward-looking statements. The forward-looking statements and information contained in this Annual Report on Form 10-K relate to events and state our beliefs and the assumptions made by us only as to the date of this Annual Report on Form 10-K. We do not intend to update these forward-looking statements, except as required by law.
In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. 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; realizing the expected benefits of our business optimization or other cost-savings plans; risks related to the acquisition or integration of businesses we have acquired; our ability to adapt to rapid changes in the cloud communications market;scale our business and grow efficiently; the nascent state of the cloud communications for business market; our ability to retain customers and attract new customers cost-effectively; developing and maintaining market awareness and a strong brand; developing and maintaining effective distribution channels; security breaches and other compromises of information security; risks associated with sales of our services to medium-sized and enterprise customers; the effects of COVID-19 on our business; our reliance on third-party hardware and software; our dependence on third-party vendors; system disruptions or flaws inreliance on third parties for our technology and systems; our ability to comply with data privacy and related regulatory matters; our ability to scale our business and grow efficiently;911 services; the impact of fluctuations in economic conditions, particularly on our small and medium business customers; the effects of significant foreign currency fluctuations; developing and maintaining market awareness and a strong brand; retaining senior executives and other key employees; security breaches and other compromises of information security; system disruptions or flaws in our technology and systems; our ability to comply with data privacy and related regulatory matters; unfavorable litigation or governmental investigations; our ability to obtain or maintain relevant intellectual property licenses or to protect our trademarks and internally developed software; fraudulent use of our name or services; restrictions in our debt agreements that may limit our operating flexibility; our ability to obtain additional financing if required; retaining senior executives and other key employees; intellectual property and other litigation that have been and may be brought against us; rapid developments in global API regulation and uncertainties relating to regulation of VoIP services; risks associated with legislative, regulatory or judicial actions regarding our business products; reliance on third parties for our 911 services; liability under anti-corruption laws or from governmental export controls or economic sanctions; actions of activist shareholders; risks associated with the taxation of our business; governmental regulation and taxes in our international operations; our history of net losses and ability to achieve consistent profitability in the future; our ability to fully realize the benefits of our net operating loss carry-forwards if an ownership change occurs; actions of activist shareholders; restrictions in our debt agreements that may limit our operating flexibility; our ability to obtain additional financing if required; risks associated with the settlement and conditional conversion of our Convertible Senior Notes; potential effects the capped call transactions may have on our stock in connection with our Convertible Senior Notes; certain provisions of our charter documents; and other factors that are set forth in the “Risk Factors” section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and amendments to these reports.
FINANCIAL INFORMATION PRESENTATION
For the financial information discussed in this Annual Report on Form 10-K, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted.
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GLOSSARY OF TERMS
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:
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2016 Credit Facility | | $125 million senior secured term loan and $325 million revolving facility due 2020 |
| 2018 Credit Facility | | $100 million senior secured term loan and $500 million revolving facility due 2023 |
| Convertible Senior Notes | | $345 million aggregate principal amount of 1.75% convertible notes due 2024 |
| API | | Application Program Interfaces |
API Platform Group | | Comprised of CPaaS programmable communication solutions for business customers |
Applications Group | | Comprised of UCaaS and CCaaS communication solutions for business customers |
| ASC | | The FASB Accounting Standards Codification, which the FASB established as the source of authoritative GAAP |
| ASU | | Accounting Standards Updates - updates to the ASC |
| CCaaS or CC | | Contact Center as a Service |
| Code | | Internal Revenue Code of 1986, as amended |
| CPaaS | | Communications Platform as a Service |
| CRM | | Customer Relationship Management |
| Exchange Act | | The Securities Exchange Act of 1934, as amended |
| ECP | | Electronic Check Payments |
| EPS | | Earnings Per Share |
| FASB | | Financial Accounting Standards Board |
| FCC | | Federal Communications Commission |
| FCPA | | Foreign Corrupt Practice Act |
| GDPR | | European Union General Data Protection Regulation |
| IP | | Internet Protocol |
| IRS | | Internal Revenue Service |
| LIBOR | | London Inter-Bank Offered Rate |
| MPLS | | Multi-Protocol Label Switching |
| NOLs | | Net Operating Losses |
| NVM | | NewVoiceMedia Limited |
| QoS | | Quality of Service |
| SaaS | | Software as a Service |
| SAB | | Staff Accounting Bulletins |
| SD-WAN | | Software-Defined Wide Area Network |
| SEC | | U.S. Securities and Exchange Commission |
| SIP | | Session Initiation Protocol |
| SMB | | Small to medium-sized business |
| SMS | | Short Message Service |
TCJA | | Tax Cuts and Jobs Act enacted in 2017 |
| TokBox | | Collectively, Telefonica Digital, Inc., TokBox, Inc., and TokBox Australia Pty Limited |
| TSR | | Total Shareholder Return |
| UCaaS or UC | | Unified Communications as a Service |
| UI | | User Interface |
| USF | | Federal Universal Service Fund |
| VBC | | Vonage Business CloudCommunications |
VoIPVCC | | Vonage Contact Center |
| VCP | | Vonage Communications Platform, formerly referred to as Business |
| VoIP | | Voice over Internet Protocol |
2 VONAGE ANNUAL REPORT 20192020
PART I
ITEM 1. Business
OVERVIEW AND STRATEGY
At Vonage, our vision is to accelerate the world's ability to connect. We are observing a secular change in the way business is done, with a fundamental shift in how communications technologies are being leveraged in almost every industry. Through the Vonage Communications Platform, our strategy is to build the world’s most flexibledeliver a single leading cloud communications platform.platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. We believe that the Vonage Communications Platform's products and services are well positioned to take advantage of emerging trends with sizable, growing total addressable markets as companies look to cloud-based communications solutions and API programming architectures as part of their digital transformation.
For our Consumer customers, we enable users to access and utilize our services and features, via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices. Our missionConsumer strategy is focused on the continued penetration of our core North American markets, which provide value in international long distance and target under-served segments.
EVOLUTION OF VONAGE
Founded in 2001, Vonage was among the first companies to makeprovide Voice over Internet Protocol technology offering feature-rich, low-cost home phone services. Through a series of strategic acquisitions and organic growth, Vonage since has transformed from a VoIP-based residential service provider to a global leader in business cloud communications.
Beginning in November 2013 and continuing through September 2015, Vonage acquired four unified communications-as-a-service companies which began its transformation into a buisness-to-business cloud communications more flexible, intelligent,company. In 2016 and personal2018, Vonage expanded its offering into the API space with the completion of the acquisition of Nexmo, Inc., a global leader in communications platform as a service and TokBox Inc., an industry leader in WebRTC programmable video that enables developers and enterprises to help businesses differentiate themselves by creatingintegrate live video into existing websites, mobile apps and IoT devices with only a betterfew lines of code.
Also in 2018, Vonage completed the acquisition of NewVoiceMedia, an industry-leading cloud contact center-as-a-service provider. This acquisition enabled Vonage to combine its robust Unified Communications and API solutions with NVM's pure-play cloud contact center offerings, culminating in our ability to provide an end-to-end communication experience for their customersan organization's team members and employees. We provide UCaaS and CCaaS business solutions in our Applications Group and CPaaS business solutions in our API Platform Group, all built from a single platform. True to our roots as a technology disruptor, our flexible approach helps us to better serve the growing collaboration, communications, and customer experience needscustomers.
3 VONAGE ANNUAL REPORT 2020
We also provide a robust set of feature-rich residential communication solutions that allow consumers to connect their home phones and mobile phones to one number. We also offer competitive international long-distance rates.OPERATING SEGMENTS
Our business is organized under two reportable operating segments: BusinessVonage Communications Platform and Consumer. The Vonage Communications Platform includes our APIs, Unified Communications, Contact Center service offerings and products. The Vonage Communications Platform represents the Company’s strategic business as the source of future growth. Our Consumer segment includes our communications solutions for residential customers based on the Company's roots in providing VoIP communication services. Additional discussiondiscussions of our reportable segments is included in Note 16, Industry Segment and Geographical Information to the Consolidated Financial Statements. The following tables summarize our revenues for each of our operating segments for the years ended December 31, 2020, 2019, and 2018:
EVOLUTION OF VONAGEVonage Communications Platform
Founded in 2001,Our strategic business is the Vonage was amongCommunications Platform, which delivers a single leading cloud communications platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. The Vonage Communications Platform brings unique value to businesses by providing multiple communications channels - including video, voice, messaging, email, verification, and artificial intelligence - that integrate into the firstapplications, products and workflows that our customers are already using. We believe this delivers both the power and the flexibility to our customers to address the growing need to transform their communications, connections and experiences for customers and enables the type of business continuity, remote work, and remote delivery of services that are now essential for team members.
The following provides a more detailed description of the products and services within the Vonage Communications Platform:
APIs
Our APIs are fully programmable, embeddable and customizable, enabling software developers to build communications capabilities such as messaging and voice calling within their applications without having to build or maintain communications infrastructure.
Our APIs aim to remove the complexities of the global communications networks and deliver video, voice, chat, messaging, verification, and artificial intelligence capabilities that developers can easily embed into their applications with a low risk, pay-as-you-go business model that fosters innovation. Developers adopt our APIs via a low friction, self service model on our website where they start with a free trial account and pay for additional usage via prepaid accounts. Customers include digital native companies that are looking to disrupt an existing industry, enterprises undergoing digital transformation, and enterprise SaaS companies looking to enhance their products with embedded communications capabilities.
The need for companies to provide Voice over Internet Protocol technology offering feature-rich, low-cost voice services. Over recent years and through multiple acquisitions discussed in detail below, Vonage has transformed from solely a providerjump between these modes of VoIP communication services to predominantly a SaaS company offering a suite of communications solutions for businesses.
Beginning in November 2013 and continuing through September 2015, Vonage acquired five companies: Vocalocity, Inc., Telesphere Networks Ltd., Simple Signal Inc., gUnify LLC and iCore Networks Inc. With these acquisitions, Vonage began its execution of a pivot from a solely residential communications provider to establishing the foundation of unified communications as a service sector, addressing the needs ofis being driven by today's customer. There is an increased need among businesses to improve how theyprovide their customers with the ability to connect and communicate on their customers' own preferred channels. In an increasingly digital world, this is what customers have come to expect. Our APIs enable businesses to implement these programmable capabilities quickly, with just a few lines of code, and without the need for in-house IT support or expertise.
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Our APIs include, but are not limited to, the following:
Communications APIs
•Voice API: Voice API enables companies to deliver better and more flexible voice experiences when communicating with their customers within the context of their existing business workflow, backed by the quality, strength and their employees.
In June 2016, Vonage completed the acquisition of Nexmo, Inc., a global leader in communications platform as a service sectorreliability of the cloudVonage network in the United States and tier one carriers globally.
•SIP Trunking: Session Initiation Protocol Trunking enables companies to rapidly connect their private branch exchanges to the global telecommunications networks using a pay as you go model and without having to negotiate lengthy carrier contracts.
•SMS API: SMS API enables companies to send and receive SMS messages within the context of their existing business workflows. The direct to carrier approach and patented Adaptive Routing algorithm enables us to deliver messages reliably and with low latency, globally.
•Messages API and Dispatch API: Together they enable brands to engage with their customers wherever they prefer, elevating customer communications market. The acquisition of Nexmo accelerated Vonage's growth strategy to provide APIs for text messaging and voice communications, allowingby meeting customers on the channels they find most engaging.
•Video API: Programmable video enables developers, independent software vendors, and enterprises to embed contextual, programmable communications into mobile apps, websites,incorporate highly scalable point-to-point and business systems.
In August 2018, Vonage acquired TokBox Inc., an industry leader in WebRTC programmable video that enables developers and enterprises to integrate livemulti-party video into websites, mobile appsapplications and IoT devices with only a few lines of code. The acquisition of TokBox meaningfully broadened Vonage's
Authentication APIs
•Verify: Verify API capabilities by adding videoenables companies to its existing services in voice,deploy two-factor-authentication for their applications to help them acquire genuine customers and to protect against fraud. With a single API call, Verify delivers messages via SMS and IP messaging. Thisvoice calls if required to ensure high conversion rates. In addition, customers pay only for successful authentications.
•Number Insight: Number Insight API enables businessescompanies to benefit from simple, flexible and scalable programmable video solutions to create deeper customer relationships for businesses.
In October 2018, Vonage completed the acquisition of NewVoiceMedia, an industry-leading cloud contact center as a service provider. This acquisition enabled Vonage to combine its robust UCaaS and CPaaS solutions with NVM's pure-play cloud contact center offerings, culminatingget real time intelligence on phone numbers anywhere in the Company's abilityworld to provide an end-to-end communicationensure numbers are valid and reachable and to discover other insights such as carrier information, roaming status whether a landline or mobile, and caller name.
Use Case APIs and Programmable Numbers
•Audit API: Enables organizations to build security information and event management alerts, and access real-time information on user activities and events within accounts.
•Reports API: Reports API allows applications to access all voice and data in a single location.
•Virtual Phone Numbers: We offer phone numbers that are local all over the world enabling our customers to have a local presence globally. We also offer toll free numbers and short codes in the United States and Canada. Our numbers can be provisioned and de-provisioned programmatically to enable maximum utilization.
Our product offerings combined with the strength of our network, enables us to partner closely with customers to ensure that they are successful through a personalized account management experience, for a company's employeeshigh quality support and its customers. The addition of NewVoiceMedia helps to accelerateconsulting services. Our APIs products are supported through our growth strategy and leadership position in business communications, strengthening our presence with global mid-market and enterprise clients, and deepening our integrations and key go-to-marketclose relationships with CRM platforms like Salesforce.com. In fact, NewVoiceMedia has a longtier one carriers across the globe and strategic relationshipoffer local numbers in more countries along with Salesforce as the leading contact center providerits private MPLS network with numerous points of presence in the Salesforce ecosystem.
Recently in August 2019, we acquired intellectual property assets from Over.ai in orderUnited States allowing us to integrate conversational artificial intelligence into our Business product offerings. We also hired certain key employeesoffer high voice quality, lower costs and engineers from Over.ai in connection with this asset acquisition.
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SERVICE OFFERINGS
Business
For our Business customers, our Applications Group provides innovative, cloud-based UCaaS solutions, comprisedincreased reliability. Our extensive network of integrated voice, text, video, data, collaboration, contact center and mobile applications over our flexible, scalable Session Initiation Protocol based VoIP network. We support the full range of business customers, using the Company's two UCaaS product families: Vonage Business Cloud, based on our cloud-native, proprietary platform; and Vonage Enterprise, based on Broadsoft’s call processing platform in combination with other Vonage cloud-based solutions. Our UCaaS subscription revenue generation efforts are focused on customer acquisition and retention as well as providing additional services to existing customers as they grow and scale. Our Applications Group alsomore than one million developers provides customers with a robust CCaaS offering, driving intelligent interactions for customers through emerging technologies such as skills-based routing, real-time sentiment analysis, and chatbots.
Our API Platform Group also offers CPaaS solutions via communications APIs to developers designed to enhance the way businesses communicate with their customers by embedding contextual communications into apps, websites, and business processes. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment or onsite expertise.
Our customer base spans a wide variety of industries, including manufacturing, automotive, legal, information technology, financial services, construction, real estate, engineering, healthcare, and nonprofit organizations.
We have a robust set of product families tailored to serve the full range of the business value chain, from the SMB market through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with cloud-based business applicationsfoster rapid innovations, including extensive developer documentation, sample codes, tutorials, libraries and CRM solutions, to improve productivity and streamline communication, including Google’s G Suite, Zendesk, Salesforce, Oracle, Clio, and others.free online support.
The following provides a more detailed description of our Business services under its Applications Group and API Platform Group:
ApplicationsUnified Communications
The Company's Applications are comprised of its UCaaS and CCaaS service offerings which covers a wide range of solutions as follows:
Vonage Business CloudCommunications
Vonage Business Cloud utilizesCommunications is our cloud-native, proprietary technology platform which aims to deliver seamless,delivers integrated cloud-based unified communication services. It provides a cost-effective, highly scalable, feature-rich solution, delivered over-the-top of a customer’s broadband. Vonage SmartWAN uses SD-WAN technology to optimize QoS for unified communications across a company’s multiple locations over a private or public network to improve redundancy across locations for business customers that rely on high quantities of voice, videoAll VBC features and data communications in their day-to-day operations. All of our Vonage Business Cloudfunctionality offerings includesinclude access to oura mobile application. Additional features includeapplication, including the ability to update account profiles, manage devices, and contact call logs directly from theira mobile devices.device. We also offer virtual extensions, which connects employees to a business phone number through their mobile phones.
Vonage Business Cloud also5 VONAGE ANNUAL REPORT 2020
VBC integrates with other third-party software applications to improve workflow and enhance productivity via the Vonage App Center ecosystem. Built on a microservices architecture, Vonage App Center creates embedded, UI-level integrations with high-value applications, placing critical functionality at the fingertips of VBC users within a single, familiar interface. Our software uses a combination of open APIs and pre-built integrations to enhance functionality with data from other third-party enterprise applications including Salesforce, Microsoft Dynamics, Microsoft Teams, NetSuite, Zendesk, Oracle Sales Cloud, Hubspot, and others. The investments we have made have enabled scalability to allow Vonage Business CloudCommunications to serve a broader customer base.
The launch of Vonage Business CloudVBC was quickly followed by innovations to improve and build upon this service with new features and functionality that we believe transforms the way businesses connect, including:
•Vonage Business CloudVBC Desktop Connect App, which allows employees to start their day in the redesigned Vonage Business Cloud Mobile App and switch to the desktop when they reach the office;
•Vee, our virtual customer assistant chatbot integrated with a cloud-based unified communications solution that aids customers in managing their account services via simple natural-language text commands
•VonageFlow, oura proprietary workstream collaboration solution;
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•Business Inbox, which allows customers to reply to messages sent in messaging apps like Facebook Messenger, providing the ability to respond to customers in real-time directly within the app, organizing customer requests in one unified inbox; and
•CX Cloud, an advanced omni-channel contact center product suite allowing businesses to utilize Vonage APIs to customize their interactions with customers via real-time sentiment analysis, chatbots, and interactive voice response; and
•Vonage Meetings, a programmable video capability which is fully integrated with VBC and leverages Vonage APIs to enable voice, SMS, social, team messaging, email and video all within in a single interview for a simple, clean user experience.
Vonage Business Enterprise
Vonage Business Enterprise is a purpose-built cloud based platform for existing mid-market and enterprise customers, providing a complete set of enhanced unified communication and collaboration services, including: voice, data, video, mobile and contact center services. We focus on customers for whom guaranteed quality of service and uniformity of services across all locations is critical. We deliver services to this customer base over our private, nationwide, fully redundant, secure IP MPLS network using 21 network POPspoints of presence that allow us to deliver dedicated, secure and private bandwidth utilizing all forms of last mile technologies including EoC and Fiber and bandwidth ranging from 1.5Mbps to 1Gbps. Services we deliver include Wide Area Networking, or WAN, Internet Access, MPLS VPN, Managed Firewall, Hosted UCaaS, Hosted Video Conferencing, Web Collaboration, Secure Instant Messaging & Presence, Mobility and Fixed Mobile Convergence.
Vonage Enterprise services include features such as Single Number Reach, which provides each user one number, available over numerous devices including desk phones, tablets and smartphones, Shared Line Appearance, Busy Lamp Field, Phone Paging, Outlook Integration, IM, Presence, and Video. Vonage also delivers SIP Trunking, over the same network, to customers using premises PBXs, with the ability to overlay UCaaS features where the premises PBX is deficient or for disaster recovery and business continuity requirements. This product also supports a hybrid deployment where some locations may be fully hosted and others may continue to use the premises PBX. Vonage Enterprise customers also have the ability to utilize our gUnify middleware layer to integrate communications with the core, SaaS-based business applications that companies use as part of their every-day workflow, such as Google for Work, Salesforce, Zendesk, and others.Contact Center
Vonage Enterprise customers also receive access to a custom-built portal through which they can fully administer all services, online bill pay, manage trouble tickets, manage bandwidth and services, access detailed Call Analytics, and execute moves, adds and changes.
Vonage's Contact Center Solution
With the 2018 acquisition of NVM, Vonage also provides customers with a robust CCaaS offering, driving intelligent interactions for customers and agents through emerging technologies such as skills-based routing, real-time sentiment analysis and chatbots. With VCC, we enhance the agent and customer experience by providing a modern contact center with seamless integration into productivity tools and business applications - all on a single, flexible, and unified platform. Our cloud contact center solution combinedcan be integrated with Vonage's offering, providesthe VBC unified communications solution providing an end-to-end communications experience for enhanced customer engagement and conversation. By integrating with today’s leading business applications, productivity tools and CRMs Vonage'ssuch as Salesforce, ServiceNow, and Microsoft Dynamics, Vonage Contact Center solution delivers better omni-channel interactions and robust analytics.analytics, giving businesses the ability to customized agent, employee, and customer connections and workflows to deliver great customer experiences and enhanced productivity - from anywhere.
With Vonage'sthe Vonage Contact Center solution, we believe that Vonage is the only cloud communication company that can combine deep CRM integrations with the full range of programmable communications used by a business's employees and its customers.
Vonage APIs
The communications industry is undergoing a major transformation from dedicated communications applications and devicescapabilities to communications embedded inenhance the way agents connect with each other applications and devices where the communications happens within the context of those applications. For example, when calling or messaging a taxi driver, consumers can do this within the taxi app which has all the necessary context such as the pickup location and payment method, resulting in a better experience for both parties. Similarly, when contacting a company consumers can communicate within the context of the company’s branded mobile app or website and agents within the context of their CRM desktop application, delivering a better experience for consumers and improving productivity for contact center agents. We call this type of communications “contextual” because it is context rich and delivers a better experience. This trend is enabled by a new category of cloud communications platforms that enable software developers to build communications capabilities such as messaging and voice calling within their applications without having to build or maintain communications infrastructure. Programmable communications via APIs enable enterprises to improve the ways they engage their customers through personalized and contextual communications for deeper engagement and more meaningful relationships.
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While innovative software companies were the early adopters of cloud communication platforms, over time virtually all companies will benefit from the new approach as part of their digital transformation journey. As more startups disrupt existing industries, established enterprises will innovate with communications APIs in order to more effectively compete with the new entrants and with their traditional competitors. Over time, we believe enterprises of all sizes will adopt contextual communications to deliver better business outcomes.customers.
Vonage APIs aims to remove the complexities of the global communications networks and deliver voice, messaging, and authentication capabilities that developers can easily embed into their applications with a low risk, pay as you go business model that fosters innovation. Developers adopt our APIs via a low friction, self service model on our website where they start with a free trial account and pay for additional usage via prepaid accounts. Our customers include digital native companies that are looking to disrupt an existing industry, enterprises undergoing digital transformation, and enterprise SaaS companies looking to enhance their products with embedded communications capabilities.
We are observing an increased need among businesses to provide their customers with the ability to connect and communicate by their customers' own preferred channels (chat, voice, SMS, social messaging, etc). The need for companies to jump between modes of communication is being driven by today's customer. In a digital world, this is what customers have come to expect. These same businesses are therefore seeking the ability to implement these API tools quickly and without the need for in-house IT support or expertise.
Our platform includes the following products:
•Voice API: Our Voice API enables companies to deliver better and more flexible voice experiences when communicating with their customers within the context of their existing business workflow, backed by the quality, strength and reliability of the Vonage network in the United States and tier one carriers globally.
•SIP Trunking: Our SIP Trunking enables companies to rapidly connect their PBX to the global telecommunications networks using a pay as you go model and without having to negotiate lengthy carrier contracts.
•SMS API: Our SMS API enables companies to send and receive SMS messages within the context of their existing business workflows. Our direct to carrier approach and patented Adaptive Routing algorithm enables us to deliver messages reliably and with low latency, globally.
•Verify: Our Verify API enables companies to deploy two-factor-authentication for their applications to help them acquire genuine customers and to protect against fraud. With a single API call, Verify delivers messages via SMS and voice calls if required to ensure high conversion rates. In addition, customers pay only for successful authentications.
•Number Insight: Our Number Insight API enables companies to get real time intelligence on phone numbers anywhere in the world to ensure numbers are valid and reachable and to discover other insights such as carrier information, roaming status whether a landline or mobile, and caller name.
•Virtual Phone Numbers: We offer phone numbers that are local all over the world enabling our customers to have a local presence globally. We also offer toll free numbers and short codes in the United States and Canada. Our numbers can be provisioned and de-provisioned programmatically to enable maximum utilizations.
•Messages API and Dispatch API: Together they enable brands to engage with their customers wherever they prefer, elevating customer communications by meeting customers on the channels they find most engaging.
•Video API: Our programmable video enables developers, independent software vendors, and enterprises to incorporate highly scalable point-to-point and multi-party video into websites, mobile applications and IoT devices with only a few lines of code.
Our product offerings combined with the strength of our network enable us to partner closely with our customers to ensure that they are successful through a personalized account management experience, high quality support and consulting services. The Company's CPaaS products are supported through our close relationships with tier one carriers across the globe and offer local numbers in more countries along with our private MPLS network with 21 points of presence in the United States allowing us to offer high voice quality, lower costs and increased reliability. Additionally, Vonage has office locations all over the world, including the United States, United Kingdom, Israel, France, Germany, Hong Kong, Singapore, Japan, Korea and China. Our extensive network of developers provides customers with the ability to foster rapid innovations, including extensive developer documentation, sample codes, tutorials, libraries and free online support.
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Consumer
For our Consumer segment, we enable customers to access and utilize our services and features via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices. Our home telephone services are offered to customers through several service plans with different pricing structures. The service plans include basic features such as voicemail, call waiting, and call forwarding as well as unique features such as Simulring, Visual Voicemail, Boomerang and Extensions. We also charge for local and international calling outside of plan limits. We also charge for local and international calling outside of plan limits.
We have two primary Consumer offerings available in the United States: Vonage World and Vonage North America. Each of our Consumer calling plans provides a number of basic features including call waiting, caller ID with name, call forwarding, and voicemail. OurVonage plans also include unlimited Vonage Visual Voicemail, which is “readable voicemail” delivered via email or SMS text message, Vonage Extensions, which extends the plan, and inbound calling, to additional phone numbers and devices, and selective call block, which allows users to block unwanted calls. We also offer, in some cases for additional fees, features such as area code selection, virtual phone number,numbers, and web-enabled voicemail. Additionally, we also provideprovides similar product offerings to customers in both Canada and the United Kingdom.
In order to access our consumer services, a customer need only connect a standard telephone to a broadband Internet connection through a small Vonage-enabled device. After connecting the device, our customers can use their telephone to make and receive calls. Vonage-enabled devices allow customers to use the Internet connection for their computer and telephones at the same time while ensuring a high quality calling experience. Our plug-and-play Vonage-enabled devices permit portability as customers can take their Vonage device to different locations where broadband service is available. We generally have not charged new customers for the adapters permitting use of our service.
NETWORK OPERATIONS
The VonageOur network uses our customer’s existing or Vonage procured high-speed broadband Internet service to allow calls over the Internet either from a standard telephone through a Vonage-enabled device or through soft phone software or mobile client applications. Our UCaaSUnified Communications services are not dependent on any specific type or provider of Internet service, and our customers are free to change their Internet service provider in response to a competitive alternative, or because they have moved to a different location. For many of our VonageBusiness Enterprise customers, our UCaaSUnified Communications services are delivered over the Company's private, nationwide, fault tolerant, secure IP MPLS network under multi-year contracts to provide the high level of interconnection quality and the ability to offer service level agreements, or SLA, guaranteeing certain levels of voice service performance.
Our network is scalable and geographically distributed for robustness, high availability, and reliability across multiple call processing sites, using regional data interconnection points, where calls to non-Vonage customers are interconnected with the public switched telephone network. We periodically assess the locations of ourits regional data connection points in connection with efforts to improve the quality of and efficiency in delivering our service. Our interconnections with the public switched telephone network, or IP/SIP networks, are made pursuant to commercial agreements we have with several telecommunications providers. Under these agreements, we transfer calls originated by our customers to other carriers who connect the call to the called party or connect peer to peer. We have a varying degree of settlement arrangements with our carrier partners for indirect third party or direct termination of our calls. The calls are routed from our network to other carriers’ interconnected circuits at co-location facilities in which we leasethe Company leases space. This method of connecting to the public switched telephone or IP/SIP networks allows us to expand capacity quickly, as necessary to meet call volume, and to provide redundancy within ourthe network.
Because Vonage’s system is standards based and not constrained to use any specific broadband service provider to connect to our customers, we can centrally manage and share resources across our customer base to minimize capital investment when entering new markets.
MARKETING
In connection with our transformation from a consumer telecommunications company to a business-focused SaaS provider, beginning in 2020 we initiatedintroduced a rebranding of the Company and began implementing a new approachfocused pivot to marketing.drive relevancy in our key business markets. Our marketing objective is to help drive growth, revenue, and revenuerelevancy across our business markets. We employVonage employs an integrated multi-channel approach to marketing, whereby we evaluate and focus our efforts on efficient marketing vehicles to accomplish ourits goals with the greatest return on investment. To do this, we make use of both broad-reaching and highly-targeted media channels.
For our businessVCP customers, our primary source of lead acquisition is digital marketing in the form of search engine marketing, digital advertising, social media advertising, and affiliate programs. We also utilize database marketing and lead aggregators to source business leads. Weleads and use direct marketing and account-based marketing to help source leads and create interest in our solutions. We have a significant strategy of using third-party and proprietary events to source business leads and convert prospects. For our residentialConsumer customers, we have a highly optimized our acquisition approach and focus mainly on digital advertising channels.
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We make use of marketing research to gain consumer insights into brand, product, and service performance, and utilize those learnings to improve our messaging and media plans. Market research is also leveraged in the areas of testing, retention marketing, and product marketing to ensure we bring compelling products and services to market for our customers.
We believe ourThe Vonage brand is a meaningful factor for customers as they consider business services. We continue to invest in the equity of our brand in order to retain and expand our customer base and to position Vonage as a technology leader that delivers innovative, unified communication services and communications APIs servingto help businesses around the full rangeworld accelerate digital transformation for a fundamentally new way of businesses and enterprises. We expect these investments to continue as we further establish Vonage as a leading business services brand and pivot beyond our residential brand heritage.
SALES AND DISTRIBUTION
Enterprise Sales
In order to continue to expand in the enterprise sales channel, which we define as businesses larger than 1,000 seats, ourthe enterprise sales organization is positioned to provide high quality business services for Enterprise, through our fully managed solution, which utilizes BroadSoft’s enterprise-grade call processing platform, with a broad portfolio of products delivered over ourits own private, national MPLS network, with 21numerous Points-of-Presence, or POPs, across the country and our own team of service delivery project managers using our proprietary provisioning tool Zeus, or with SmartWan, as well as our industry leading CPaaS products. Additionally, Contact Center solutions are commonly integrated into Enterprise solutions
Developer Ecosystem
Our API platform products are principally adopted and consumed by software developers all over the world. Given the nature of the business, we invest significant time and effort to build, recruit, and maintain developers and various software ecosystems. We have a large developer ecosystem worldwide with over 940,000one million registered developers.
Field Sales and Inside Sales - SMB and Midmarket
We utilize our team of sales agents (or field sales team), primarily based in geographic territories comprising customers and prospects which we refer to as our field sales team, to market and sell our business services. These fieldfiled sales agents utilize a consistent, automated, highly-structured sales process to effectively educate prospective customers regarding our services. We have developed a scalable model applicable to both existing and new markets. Wemarkets now have a field sales presence in 20 markets within the United States and made significant expansion into new markets globally primarily supporting Vonage APIs. For customers in the SMB segment, we leverage an Inside Sales team to provide solutions across our cloud communications offerings.
Channel Sales
In addition to the inside sales and our field sales team, weVonage also havehas a dedicated team focused on channel sales who work with our channel partners to market and sell our business services, which helps to broaden our sales distribution. We continueVonage continues to develop and expand this channel program by adding new senior management,a new Channel Chief, channel managers, and additional national master agents. WeVonage now havehas a broad and deep coverage of the U.S. market through a network of over 20,000 sub agents and resellers.
Self-Service
Customers can subscribe to our consumer services at ourVonage websites, http://www.vonage.com,www.vonageforhome.com, http://www.vonage.ca,www.vonageforhome.ca, http://www.vonage.co.uk and several affiliate websites, or through multiple toll free numbers including 1-877-4VONAGE. Businesswww.vonageforhome.co.uk. U.S. VCP customers can subscribe to ourUnified Communications services at www.vonage.com, through our websites, including https://business.vonage.com/, http://www.vonagebusiness.com, https://enterprise.vonage.com, and https://www.nexmo.com,main toll-free number 1-844-365-9460, or through toll free numbers including 1-877-862-2562 and 1- 855-593-7326.campaign-driven sales lines listed on our www.vonage.com web pages. Additionally, Vonage's API enablement and developer focus lends itself to a self-service model. Our developersDevelopers can register, sign up and test, and scale their businesses easily and quickly without having to engage with anyone at Vonage.Vonage at www.vonage.com. This allows customers to self-provision their accounts with the aim of improving the customer experience while reducing customer acquisition costs.
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INTELLECTUAL PROPERTY
WeVonage currently ownowns over 235248 issued U.S. patents as well as a number of foreign patents and pending U.S. and foreign patent applications. WeThe Company routinely review ourreviews technological developments with our technology staff and business units to identify the aspects of ourVonage technology that provide us with a technological or commercial advantage and seek intellectual property and patent protection as appropriate to protect such key proprietary technology in the United States and internationally, based on our assessment in light of applicable law. Our companyThe Company's policies require our employees to assign intellectual property rights developed in the scope of or in relation to, ourcompany business to us and to treat proprietary know-how and materials as our confidential information.
We have8 VONAGE ANNUAL REPORT 2020
Vonage has acquired multiple U.S. and foreign patents, and obtained licenses to numerous other patents. We are the owner ofThe Company owns numerous United States and international trademarks and service marks and have applied for registration of our trademarks and service marks in the United States and abroad to establish and protect our brand names as part of our intellectual property strategy.
COMPETITION
In connection with ourits cloud communications products, we faceVonage faces competition from the traditional telephone and cable companies as discussed below, as well as from vendors of premises-based solutions or hosted solutions including the following:
•Independent cloud service providers;
•Premises-based business communication equipment providers;
•Hosted communication services providers;
•Traditional technology companies; and
•Emerging competitors in technology companies.
As the cloud communications market evolves, and the convergence of voice, video, messaging, mobility and data networking technologies accelerates, weVonage may face competition in the future from companies that do not currently compete in the market, including companies that currently compete in other sectors, companies that serve consumers rather than business customers, or companies which expand their market presence to include cloud communications.
We faceVonage faces strong competition from traditional telephone companies, cable companies, wireless companies, alternative communication providers, direct unified communications providers, legacy consumer VOIP businesses, large technology incumbents, and collaboration providers in the consumer, mobile, SMB and enterprise markets. Because most of ourthe Company's target customers are already purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract these customers away from their existing providers. We believe that theThe principal competitive factors affecting our ability to attract and retain customers are price, call quality, brand awareness, customer service, network and system reliability, service features and capabilities, scalability, usability, simplicity, mobile integration and the unique ability to deliver CPaaS communications toolsAPIs to business customers in addition to our UCaaSUnified Communications and CCaaSContact Center Communications offerings.
There is a continuing trend toward consolidation of competitive companies, including the acquisition of alternative communication providers by Internet product and software companies with significant resources. In addition, certain of our competitors have partnered and may in the future partner with other competitors to offer products and services, leveraging their collective competitive positions. WeVonage is also are subject to the risk of future disruptive technologies, which could give rise to significant new competition.
HUMAN CAPITAL MANAGEMENT
Successful execution of our strategy is dependent on attracting, developing and retaining key employees and members of our management team. At Vonage, we believe our culture is our human capital competitive advantage that empowers us to win in the marketplace. We believe the substantial skills, experience, and industry knowledge of our employees. These beliefs are built on a core set of values: accountability, collaboration, trust, and excellence. Vonage leaders strive to foster an environment that empowers team members to drive results, delight customers, and inspire teams.
There are several ways in which we attract, develop, and retain highly qualified talent, including:
•Strategic Approach to Work-Life Balance, Diversity, and Inclusion. As part of our strategic plan, we have implemented flexible remote working and parental leave for all employees, have mandatory unconscious bias and culture training for all employees, implement company-sponsored networking events for female employees, and have milestones in place to achieve gender pay parity. Objectives and key results for our senior executives also include metrics on diversity, pay equity, voluntary terminations, and internal mobility. We have also established a Diversity, Equity, and Inclusion Committee that is focused on promoting race, gender, and ethnic diversity throughout the organization.
•Investments in Employee Training and Development. In order to foster internal promotion and development, we continue to implement accelerated leadership development and emerging leadership programs to a diverse set of employees throughout the organization. We also continue to implement development and training programs for all employees including product and sales, Code of Conduct, conflicts of interest,information security and cybersecurity, anti-harassment and anti-bribery, and insider trading prohibitions.
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EMPLOYEES
As of December 31, 2019,2020, we had 2,264 employees. None2,198 employees, none of our employeeswhich are subject to a collective bargaining agreement.
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AVAILABLE INFORMATION
We wereVonage was incorporated in Delaware in May 2000 and changed our name to Vonage Holdings Corp. in February 2001. We maintainVonage maintains a website with the address www.vonage.com. References to our website are provided as a convenience, and the information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the U.S. Securities and Exchange Commission, or SEC. Copies are also available, without charge, by writing to Vonage’s Investor Relations Department at Vonage Holdings Corp., 23 Main Street, Holmdel, NJ 07733 or calling us at 732.365.1328 or sending an email through the Vonage Investor Relations website at http://ir.vonage.com/. Reports filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
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ITEM 1A. Risk Factors
You should carefully consider the risks below, as well as all of the other information contained in this Annual Report on Form 10-K and our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K, in evaluating our company and our business. Any of these risks could materially adversely affect our business, financial condition and results of operations and the trading price of our common stock.
Risks Relating to our Business Operations, Strategic Planning and Product Development
If we are unable to compete successfully, we could lose market share and revenue.
The business cloud communications markets and consumer services marketmarkets in which we participate are highly competitive. We face intense competition from a broad set of companies, including:
software as a service companies, contact center as a service companies, other alternative communication providers, and other providers of cloud communications services; and
traditional telephone, wireless service providers, cable companies and alternative communications providers with consumer offerings
Many of these providers are substantially larger and better capitalized than us and have the advantage of greater name and brand name recognition, and have a large existing customer base. These service providers may have the ability to devote greater resources to their communications services and may be able to respond more quickly and effectively than we can to new or changing opportunities. Our competitors' financial resources may allow them to offer services at prices below cost or even for free in order to maintain and gain market share or otherwise improve their competitive positions. Some of our competitors also could use their greater financial resources to develop and market telephony and messaging services with more attractive features and more robust customer service. In addition, because of the other services our competitors provide, some of these service providers choose to offer cloud communications services as part of a bundle that includes other products, such as high speed Internet access and wireless telephone service. These bundled offers may enable our competitors to offer cloud communications services at prices with which we may not be able to compete or to offer functionality that integrates cloud communications services with their other offerings, both of which may be more desirable. As we continue the introduction of applications that integrate different forms of voice, video, and messaging services over multiple devices, we face competition from emerging competitors focused on similar integration, as well as from established alternative communication providers. Any of these competitive factors could make it more difficult for us to attract and retain customers, reduce our market share and revenues, or cause us to lower our prices or offer additional features that may result in additional costs without commensurate price increases. In order to compete with such service providers, we may have to reduce our prices, which would impair our profitability, or offer additional features that may cause us to incur additional costs without commensurate price increases. To the extent that these or other companies strengthen their offerings, we may have to reduce our prices, increase promotions, or offer additional features, which may adversely impact our revenues and profitability.
With our offering of cloud-based contact center services, we also compete with large legacy technology vendors that offer on-premise enterprise telephony and contact center systems and legacy on-premise software companies that come from a computer-telephony integration heritage. These companies are supplementing their traditional on-premise contact center systems with cloud offerings, either through acquisition or in-house development. Additionally, we compete with vendors that historically provided other contact center services and technologies and expanded to offer cloud contact center software. We also face competition from smaller contact center service providers with specialized contact center software offerings. Our actual and potential competitors may enjoy competitive advantages over us, including greater name recognition, longer operating histories, and larger marketing budgets, as well as greater financial or technical resources. With the introduction of new technologies and market entrants, we expect competition to intensify in the future.
In connection with our emphasis on the international long distance market for consumer customers, we face competition from low-cost international calling cards, digital calling cards and VoIP providers in addition to traditional telephone companies, cable companies, and wireless companies. To the extent that these providers target marketing to the same ethnic segments that we target or strengthen their offerings to these segments, we may have to reduce our prices or increase promotions, which would impair our profitability, or offer additional features that may cause us to incur additional costs without commensurate price increase.
As a result of increasing competition, domestic and international telephony and messaging rates have generally decreased during the past few years, and we expect this trend to continue. Continued rate pressures or increasing cost to use our services could lessen or eliminate the pricing advantage that we maintain over certain competitors and cause customers or potential customers to select alternative providers or cause us to lower our prices, which would adversely impact our revenues and profitability.
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As the cloud communications services market evolves, and the convergence of voice, video, messaging, mobility, artificial intelligence and data networking technologies accelerates, we may face competition in the future from companies that do not currently compete in the cloud communications services market.
As the cloud communications services market evolves, combining voice, video, messaging, mobility, artificial intelligence and data networks, and information technology and communication applications, opportunity is created for new competitors to enter the cloud communications services market and offer competing products, including companies that currently compete in other sectors, companies that serve consumer rather than business customers, or companies which expand their market presence to include business communications. This new competition may take many forms, and may offer products and applications similar to ours. If these new competitors emerge, the cloud communications services market willmay become increasingly competitive and we may not be able to maintain or improve our market position. Our failure to do so could materially and adversely affect our business and results of operations.
If we fail to adapt to rapid changes in the market for cloud communications services, then our products and services could become obsolete.
The market for our products and services is constantly and rapidly evolving as we and our competitors introduce new and enhanced products and services and react to changes in the cloud communications services industry and customer demands. We may not be able to develop or acquire new products and plans or product and plan enhancements that compete effectively with present or emerging cloud communications services technologies or differentiate our products and plans based on functionality and performance. In addition, we may not be able to establish or maintain strategic alliances that will permit enhancement opportunities or innovative distribution methods for our products and plans.
To address these issues, we are targeting revenue growth in large, existing markets, which require us to enhance our current products and plans, and develop new products and plans on a timely basis to keep pace with market needs and satisfy the increasingly sophisticated requirements of customers. If we are unable to attract users of these services our net revenues may fail to grow as we expect.
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Cloud communications services are complex, and new products and plans and enhancements to existing products and plans can require long development and testing periods. Any delays in developing and releasing new or enhanced products and plans could cause us to lose revenue opportunities and customers. Any technical flaws in products we release could diminish the innovative impact of the products and have a negative effect on customer adoption and our reputation.
We also are subject to the risk of future disruptive technologies. New products based on new technologies or new industry standards could render our existing products obsolete and unmarketable. If new technologies develop that are able to deliver competing voice and messaging services at lower prices, better or more conveniently, it could have a material adverse effect on us.
The market for our API Platform products and platform is relatively nascent and may not experience the growth that we anticipate.
The utilization of APIs to embed contextual, programmable real time communications into mobile apps, websites and business systems workflows, remains a relatively new market, and developers and organizations may not yet recognize the need for, or benefits of, our products and platform. It is important that we are able to educate developers, organizational leaders, and other potential customers regarding our products and platform in order to help grow the market and to realize our market share. If we fail to achieve the foregoing, the market for our products and platform or our share of that market could fail to grow significantly. If the API Platform market, or our share of that market, does not experience significant growth, then our business, results of operations and financial condition could be adversely affected.
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If we are unsuccessful at retaining customers or attracting new consumer or business customers weWe may experience a reduction in revenue or may be required to spend more money or alter our marketing approaches to grow our customer base.
Our rate of customer terminations for our Applications Group services could increase innot fully realize the future if customers are not satisfied with the quality and reliabilityexpected benefits of our network, the value proposition of our products, and the ability of our customer service to meet the needs and expectations of our customers. For our API Platform customers, our ability to grow revenue depends, in part, on our ability to maintain and grow usage of our platform by new and existing customers. If we are not able to increase customer usage of our products, our revenuebusiness optimization plans or other cost-saving initiatives, which may decline which would adverselynegatively impact our business, results of operations and financial condition. Our API customers are charged based on their usagecondition.
Since the third quarter of our products2020, the Company has been implementing a business optimization and generallyalignment project to focus the use of Company resources and drive operational execution. The Company may pursue similar cost-saving initiatives in the future. We may not achieve the operational improvements and efficiencies that we have targeted in this project.
Implementing any restructuring, optimization, or cost-savings plan presents significant potential risks that may impair our customers do not have long-term contractual financial commitments to us, therefore, usage rates may fluctuate at any time. In addition, our agreements with business customers typically provide for service level commitments. If we are unable to meet these commitments or if we suffer extended periods of downtime for our products or platform, our business, results of operations and financial condition could be adversely affected. Our ability to attractachieve anticipated operating improvements and/or cost reductions. These risks include (but are not limited to) higher than anticipated costs in implementing these plans, management distraction from ongoing business activities, failure to maintain adequate controls and retain customers forprocedures while executing these plans, damage to our consumer services are impacted byreputation, brand image, and workforce attrition beyond our pricing, brand awareness, customer service, network and system reliability and service features and capabilities. Competition from traditional telephone companies, cable companies, wireless companies, alternative communication providers, low-cost international calling cards, disruptive technologies, general economic conditions,planned reductions, and our ability to activated and register new customersprovide optimal service to our customers. Any of these risks could have a negative impact on our network also influence churn rate. A material decline in the usage ofprofitability and on our business and consumer products could cause us to spend significantly more on sales and marketing than we currently budget in order to maintain or increase revenue from customers, which could adversely affect our business, results of operations and financial condition.
We may face difficulties related to the acquisition or integration of businesses, which could harm our growth or operating results.
In August 2018, we acquired TokBox with the intention of integrating and adding video to our BusinessVCP offerings in voice, SMS, and IP messaging. In October 2018, we completed the acquisition of NewVoiceMedia as a contact center provider, with the intention of combining our Applications GroupUC, CC and API Platform solutions to provide an end-to-end communications experience for a company's employees and customers. In August 2019, we acquired intellectual property assets from Over.ai in order to integrate conversational artificial intelligence into our Business product offerings. In addition, we have made several acquisitions over the past several years to build our business services and continue to periodically review acquisition opportunities.
Acquisition and integration activities require substantial management time and resources. Acquisitions of existing businesses involve substantial risks, including the risk that we may not be able to integrate the operations, personnel, services, or technologies, the potential disruption of our ongoing businesses, the diversion of management attention, the maximization of financial and strategic opportunities, the difficulty in developing or maintaining controls and procedures, and the dilution to our existing stockholders from the issuance of additional shares of common stock. We may elect to acquire additional businesses or assets in the future. However, we cannot predict or guarantee that we will be able to identify suitable acquisition candidates or consummate any acquisition. As a result of these and other risks, we may not produce anticipated revenue, profitability, or synergies.
Acquisitions may require us to issue debt or equity securities, use our cash resources, incur debt or contingent liabilities, amortize intangibles, or write-off acquisition-related expenses. If we are unable to successfully integrate any acquired businesses or assets we may not receive the intended benefits of such acquisition. In addition, we cannot predict market reactions to any acquisitions we may make or to any failure to announce any future acquisitions.
Further, there may be risks or liabilities that such due diligence efforts fail to discover, are not disclosed to us, or that we inadequately assess. The discovery of material liabilities associated with acquisitions or joint venture opportunities, economic risks faced by joint venture partners, or any failure of joint venture partners to perform their obligations could adversely affect our business, results of operations, and financial condition.
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GrowthAs our VCP segment expands, we will need to continue to improve our application architecture, integrate our products and applications across our technology platforms, integrate with third-party systems, and maintain infrastructure performance. We expect the number of users, the amount of data transferred and processed, the number of locations where our service is being used, and the volume of communications over our networks to continue to expand. To address this growth, we will need to scale our systems and customer services organization. Our ability to execute on these initiatives may impact system and network performance, customer satisfaction, and ultimately, sales and revenue. These efforts may also divert management resources. These factors may materially and adversely harm our business and results of operations.
Risks Relating to Customer Attraction and Sales
If we are unsuccessful at retaining customers or attracting new customers, we may experience a reduction in revenue or may be required to spend more money or alter our marketing approaches to grow our customer base.
Our rate of customer terminations for our UC and CC services could increase in the future if customers are not satisfied with the quality and reliability of our business will depend on market awarenessnetwork, the value proposition of our products, and a strong brand,the ability of our customer service to meet the needs and any failure to develop, maintain, protect and enhanceexpectations of our brand would hurtcustomers. For our API customers, our ability to retain or attract subscribers.
Beginninggrow revenue depends, in 2020, we initiated a rebranding of the Company and began implementing a new marketing campaign. Building and maintaining market awareness, brand recognition and goodwill in a cost-effective manner is important to our overall success in achieving widespread acceptance of our existing and future solutions and products and is an important element in attracting new customers. While we may choose to engage in a broader marketing campaign to further promote our brand, this effort may not be successful, or our marketing techniques or content may be challenged. The success of our business also reliespart, on our ability to attractmaintain and grow usage of our platform by new and existing customers. If we are not able to increase customer usage of our products, our revenue may decline which would adversely impact our business, results of operations and financial condition. Our API customers in a cost-effective manner by using a varietyare charged based on their usage of marketing channels. We use developer eventsour products and developer evangelism, search engine marketing and optimization, and other marketing efforts such as regional customer events, email campaigns, advertising and public relations events. These methods are prioritized depending on effectiveness and efficiency, and may be altered if costs increase dramatically or if the resultsgenerally our customers do not meet expectations. Our efforts in developinghave long-term contractual financial commitments to us, therefore, usage rates may fluctuate at any time. In addition, our brand may be hindered by the marketing efforts of our competitors and our reliance on any strategic partners to promote our brand.agreements with business customers typically provide for service level commitments. If we are unable to cost-effectively maintain and increase awarenessmeet these commitments or if we suffer extended periods of downtime for our brand,products or platform, our business, financial condition, cash flows and results of operations and financial condition could be harmed.adversely affected. Our ability to attract and retain customers for our consumer services are impacted by our pricing, brand awareness, customer service, network and system reliability and service features and capabilities. A material decline in the usage of our business and consumer products could cause us to spend significantly more on sales and marketing than we currently budget in order to maintain or increase revenue from customers, which could adversely affect our business, results of operations and financial condition.
Our success in the cloud communications market for our business services depends in part on developing and maintaining effective distribution channels. The failure to develop and maintain these channels could materially and adversely affect our business.
A portion of our business revenue is generated through our direct sales, or “field sales,” team. This channel consists of sales agents that market and sell our business services products to customers to customers through direct, commonly face-to-face interaction. Our continued success requires that we continue developing and maintaining a successful sales organization. If we fail to do so, or if our sales agents are not successful in their sales efforts, our sales may decrease and our operating results would suffer.
A portion of our business revenue is generated through indirect channel sales. These channels consist of third-party resellers and value-added distributors that market and sell our business services products to customers. These channels may generate an increasing portion of our business revenue in the future. Generally, we do not have long-term contracts with these third-party resellers and value-added distributors, and the loss of or reduction in sales through these third parties could materially reduce our revenues. We also compete for preference amongst our current or potential resellers with our competitors. Our continued success requires that we continue developing and maintaining successful relationships with these third-party resellers and value-added distributors. If we fail to do so, or if our resellers are not successful in their sales efforts, our sales may decrease and our operating results would suffer.
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Sales of our UC and CC business services to medium-sized and enterprise customers involve significant risks which, if not managed effectively, could materially and adversely affect our business and results of operations.
As we continue to expand our sales efforts to medium-sized and larger businesses, we may incur higher selling expense and longer, more complex, sales cycles. Customers in this market segment may also require bespoke features and integration services, increasing the complexity and expense related to the sales and delivery process, and requiring highly skilled sales and support personnel. As a result, we may devote greater sales and support to these customers, which may result in increased costs and a strain on our support resources. In addition, the rollout of our products with medium-sized and enterprise customers can take longer periods of time compared to smaller customers, which can result in longer lead times in realizing revenues. These factors could materially and adversely affect our results of operations and our overall ability to grow our customer base.
Risks Relating to External Factors and Third Parties
The recent coronavirus (COVID-19) pandemic and the global attempt to contain it has impacted and may continue to impact our business and results of operations.
The global spread of the novel coronavirus (COVID-19) and the various measures to contain its effects have created significant volatility, uncertainty, and economic disruption worldwide. As a result of the COVID-19 pandemic, all travel has been severely curtailed and we have temporarily closed the majority of Vonage offices worldwide (including our corporate headquarters), both of which disrupt how we typically operate our business. COVID-19 has impacted some of our customers more than others, including customers in the travel, hospitality, retail, and other industries where physical interaction is critical. We have experienced and expect that we will continue to experience slowdowns in bookings and customer payments; increased customer churn and reduced usage; and issuance of customer credits to distressed customers served by certain product lines, including SMS API, Vonage Business Cloud, and Vonage Business Enterprise. Moreover, as businesses and educational institutions have pivoted to cloud-based communications in light of social distancing, we are experiencing and expect to experience intense competition from our existing competitors, and also emerging competitors seeking to capitalize on the growing industry.
The full extent to which the COVID-19 pandemic and the various responses to it impact our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the effect on our customers and customer demand for and ability to pay for our services; disruptions or restrictions on our employees’ ability to work and travel; and any secondary and tertiary effects of the foregoing on our customers, partners, and other entities in our supply and demand chain, including long-term or permanent impairments to individual businesses and industrial segments. If we need to access the capital markets and other sources of liquidity, there can be no assurance that financing may be available on attractive terms, if at all.
In addition to COVID-19, our operations, and the operations of our vendors and customers, may also suffer interruptions caused by natural disasters, acts of terrorism or other pandemic diseases, and such operations may be further affected by government reactions due to such incidents. Such uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.
Our ability to provide our telephony service and manage related customer accounts is dependent upon third-party facilities, equipment, and systems, the failure of which could cause delays of or interruptions to our service, damage our reputation, cause us to lose customers, limit our growth, and affect our financial condition.
Our success depends on our ability to provide quality and reliable telephony service, which is in part dependent upon the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Unlike traditional wireline telephone service or wireless service, our telephony service typically requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customer's Internet service provider and electric utility company, respectively, and not by us. The quality of some broadband Internet connections may be too poor for customers to use our telephony services properly. In addition, if there is any interruption to a customer's broadband Internet service or electrical power supply, that customer will be unable to make or receive calls, including emergency calls, using our telephony service.
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We outsource several of our network functions to third-party providers. For example, we outsource the maintenance of our regional data connection points, which are the facilities at which our network interconnects with the public switched telephone network. If our third-party service providers fail to maintain these facilities properly, or fail to respond quickly to problems, our customers may experience service interruptions. Interruptions in our service caused by third-party facilities have in the past caused and may in the future cause us to lose customers or cause us to offer substantial customer credits, which could adversely affect our revenue and profitability. If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers, and our brand, reputation, and growth will be negatively impacted.
There can be no guarantee that these third party providers will be able or willing to supply services to us in the future on commercially reasonable terms, or that we will be able to engage alternative or additional providers. Our ability to provide our services may be impacted during any transition, which could have an adverse effect on our business, financial condition or results of operations.
We rely on third-party vendors that may be difficult to replace or may not perform adequately.
It is vital to our customers that there be a minimum of disruption to the performance of our API, UC and CC services. We are therefore vulnerable to service interruptions of our third-party data center providers, such as IBM Softlayer and Amazon Web Services, or AWS; and of third-party hosted services. We may experience interruptions, delays and outages in third-party service and availability due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints caused by technical failures, natural disasters, fraud or security attacks. To the extent that we do not effectively address interruptions, delays and outages in our data center providers’ and other hosted providers’ service and availability or capacity constraints, our business, results of operations and financial condition may be adversely affected.
In some cases we rely on purchased or leased hardware and software licensed from third parties in order to provide our services. For example, Broadsoft, Inc. provides us with infrastructure, call termination and origination services, and other hardware and software in connection with certain of our Enterprise offerings. We also integrate third-party licensed software components into our platform. This hardware and software may not continue to be available on commercially reasonable terms or pricing or may fail to continue to be updated to remain competitive. The loss of the right to use this third party hardware or software may increase our expenses or impact the provisioning of our services. The failure of this third party hardware or software could materially impact the performance of our services and may cause material harm to our business or results of operations.
We depend on third-party vendors to supply, configure and deliver the phones that we sell. Any delays in delivery, or failure to operate effectively with our own servers and systems, may result in delay or failure of our services, which could harm our business, financial condition and results of operations.
We rely on Yealink Inc. and Polycom, Inc. to provide, and a single fulfillment agent to configure and deliver, the phones that we offer for sale to our customers that use our UC and CC services. If these third parties are unable to deliver phones of acceptable quality or quantity, or in a timely manner, we may be forced to offer replacements at a higher cost than what is currently contracted. In addition, these phones must interoperate with our servers and systems. If either of our providers changes the operation of their phones, we may be required to engage in development efforts to ensure that the new phones interoperate with our system. The failure of our vendor-supplied phones to operate effectively with our system could impact our customers’ ability to use our services and could cause customers to cancel our services, which may cause material harm to our business or results of operations.
We rely on third parties to provide a portion of our customer service representatives, provide aspects of our E-911 service, which differs from traditional 911 service, and initiate local number portability for our customers. If these third parties do not provide our customers with reliable, high-quality service, our reputation will be harmed and we may lose customers.
We offer our customers support 24 hours a day, seven days a week through both our comprehensive online account management website and our toll free number. Our customer support is currently provided via United States based employees as well as third party partners located in various global locations. Our third-party providers generally represent us without identifying themselves as independent parties. The ability to support our customers may be disrupted by natural disasters, inclement weather conditions, civil unrest, and other adverse events in the locations where our customer support is provided.
We also contract for services required to provide E-911 services including assistance in routing emergency calls, terminating E-911 calls, operating a national call center that is available 24 hours a day, seven days a week to receive certain emergency calls, and maintaining PSAP databases for the purpose of deploying and operating E-911 services. Interruptions in service from our vendor could cause failures in our customers’ access to E-911 services and expose us to liability and damage our reputation. We also have agreements with companies that initiate our local number portability, which allow new customers to retain their existing telephone numbers when subscribing to our services.
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If any of these third parties do not provide reliable, high-quality service, our reputation and our business will be harmed. In addition, industry consolidation among providers of services to us may impact our ability to obtain these services or increase our expense for these services.
We market our products and services to small and medium-sized businesses, which may be disproportionately impacted by fluctuations in economic conditions.
We market our products to small and medium-sized businesses. Customers in this market may be affected by economic downturns to a greater extent, and may have more limited financial resources, than larger or more established businesses. If customers in our VCP markets experience financial hardship as a result of a weak economy, the demand for our services could be materially and adversely affected.
Significant foreign currency exchange rate fluctuations could adversely affect our financial results.
Because our consolidated financial statements are presented in U.S. dollars, increases or decreases in the value of the U.S. dollar relative to other currencies in which we transact business could materially adversely affect our financial results. For example, our API business collects revenues in Euros, and accordingly the strengthening of the U.S. dollar relative to the Euro adversely affects our revenue and operating results presented in U.S. dollars. In addition, Following the departure of the U.K. from the EU and the EEA on January 31, 2020 (commonly referred to as “Brexit”) and the expiration of a transition period on December 31, 2020, there continues to be uncertainty over the practical consequences of Brexit including the potential for Brexit to contribute to long-term instability in financial, stock and currency exchange markets, greater restrictions on the supply and availability of goods and services between the U.K. and EEA region, and a general deterioration in consumer sentiment and credit conditions leading to overall negative economic growth and increased risk of merchant default. Brexit has continued to cause significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the fluctuation of the U.S. dollar against foreign currencies in which we conduct business, such as the British Pound, Euro and other currencies. Such fluctuations of the U.S. dollar relative to other currencies may adversely affect our revenue and operating results. In addition, Brexit may affect our ability to negotiate future customer and vendor contracts, and changes to U.K. border and immigration policy could likewise occur as a result of Brexit, affecting our U.K. operation's ability to recruit and retain employees from outside the U.K.
Risks Relating to Marketing and Talent Management
Growth of our business will depend on market awareness and a strong brand, and any failure to develop, maintain, protect and enhance our brand would hurt our ability to retain or attract subscribers.
Beginning in 2020, we introduced a rebranding of the Company and began implementing a new marketing campaign. Building and maintaining market awareness, brand recognition and goodwill in a cost-effective manner is important to our overall success in achieving widespread acceptance of our existing and future solutions and products and is an important element in attracting new customers. While we may choose to engage in a broader marketing campaign to further promote our brand, this effort may not be successful, or our marketing techniques or content may be challenged. The success of our business also relies on our ability to attract new customers in a cost-effective manner by using a variety of marketing channels. Our efforts in developing our brand may be hindered by the marketing efforts of our competitors and our reliance on any strategic partners to promote our brand. If we are unable to cost-effectively maintain and increase awareness of our brand, our business, financial condition, cash flows and results of operations could be harmed.
We depend on the continued services of our senior management and other key employees, the loss of any of whom could adversely affect our business, results of operations and financial condition.
Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue opportunities and services innovations. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. None of our executive officers or other senior management personnel is bound by a written employment agreement and any of them may therefore terminate employment with us at any time with no advance notice. The replacement of any of these senior management personnel would likely involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives and acquisition integrations. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, financial condition, or results of operations.
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Risks Relating to Cybersecurity, IT Systems, Data Privacy and Fraud
Security breaches and other cybersecurity or technological risks could compromise our information systems and network and expose us to liability, which could cause our business and reputation to suffer and which could have a material adverse effect on our business, financial condition, and operating results.
There are several inherent risks to engaging in a technology business, including our reliance on our data centers and networks, and the use and interconnectivity of those networks. A significant portion of our operations relies heavily on our ability to provide secure processing, storage and transmission of confidential and other sensitive data, including intellectual property, proprietary business information, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, storage, and transmission of this information is critical to our operations and business strategy. As seen in our industry and others, these activities have been, and will continue to be, subject to continually evolving cybersecurity and other technological risks. Targeted attacks, such as advanced persistent threat is prevalent throughout the Internet and associated with the theft of intellectual property and state-sponsored espionage. Due to the nature of our business and reliance on the Internet, we are susceptible to this type of attack. In addition, physical security of devices located within our offices, and/or remote devices, pose cybersecurity and other technological risks that could negatively impact our business and reputation.
We also operate Internet based, worldwide data, voice, video communications, and messaging services and electronic billing, which require the transmission of confidential and at times personal or sensitive customer or employee information over public networks that may or may not support end to end security. Despite our security measures, which include the development, operation and maintenance of systems and processes that are designed to protect consumer and employee information and prevent fraudulent credit card transactions and other security breaches, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to error, malfeasance or other disruptions by a current or former employee or third-party provider and our failure to mitigate such fraud or breaches may adversely affect our operating results. Any such breach could compromise our systems and network and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations, damage to our reputation, and a loss of confidence in our products and services, as well as our ability to keep personally identifiable information confidential, which could adversely affect our business.
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We have been subject to cybersecurity incidents from external sources including “brute force” and distributed denial of service attacks, as well as attacks that introduce fraudulent VoIP traffic. Although these incidents have not had a material adverse effect financially or on our ability to provide services, this may not continue to be the case going forward. There can be no assurance that cybersecurity incidents will not occur in the future, potentially more frequently and/or on a more significant scale.
There can be no assurance that we are adequately protecting our information or that we will not experience future incidents. The expenses associated with protecting our information could reduce our operating margins. We maintain insurance intended to cover some of these risks, however, this insurance may not be sufficient to cover all of our losses from any future breaches of our systems. In addition, third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions, which results in the storage and processing of customer information by third parties. While we engage in certain actions to reduce the exposure resulting from outsourcing, unauthorized access, loss or destruction of data or other cybersecurity incidents could occur, resulting in similar costs and consequences as those discussed above.
We make available on our website our privacy policy, which describes how we collect, use, and disclose our customers' personal information. To the extent we expand our operations into new geographies, such as areas in the Asia Pacific including China, we may become subject to local data security, privacy, data retention, and disclosure laws and regulations. Due to more burdensome and country-specific requirements, it may be difficult for us to comply with these laws and regulations if they were deemed to be applicable to us. In addition, risks related to cybercrime and fraud increase when establishing a global presence.
We are subject to Payment Card Industry, or PCI, data security standards, which require periodic audits by independent third parties to assess compliance. PCI data security standards are a comprehensive set of requirements for enhancing payment account data security that was developed by the PCI Security Standards Council including American Express, Discover Financial Services, JCB International, MasterCard Worldwide, and VISA Inc., to help facilitate the broad adoption of consistent data security measures. Failure to comply with the security requirements as identified in subsequent audits or rectify a security issue may result in fines. While we believe it is unusual, restrictions on accepting payment cards, including a complete restriction, may be imposed on companies that are not compliant. Further, the law relating to the liability of providers of online payment services is currently unsettled and states may enact their own rules with which we may not comply.
We rely on third-party providers to process and guarantee payments made by Vonage and its affiliates’ subscribers, up to certain limits, and we may be unable to prevent our customers from fraudulently receiving goods and services. Our liability risk will increase if a larger fraction of our Vonage transactions involve fraudulent or disputed credit card transactions. Any costs we incur as a result of fraudulent or disputed transactions could harm our business. In addition, the functionality of our current billing system relies on certain third party vendors delivering services. If these vendors are unable or unwilling to provide services, we will not be able to charge for our services in a timely or scalable fashion, which could significantly decrease our revenue and have a material adverse effect on our business, financial condition and operating results.
Sales of our Applications business services to medium-sized and enterprise customers involve significant risks which, if not managed effectively, could materially and adversely affect our business and results of operations.
As we continue to expand our sales efforts to medium-sized and larger businesses, we may incur higher selling expense and longer, more complex, sales cycles. Customers in this market segment may also require bespoke features and integration services, increasing the complexity and expense related to the sales and delivery process, and requiring highly skilled sales and support personnel. As a result, we may devote greater sales and support to these customers, which may result in increased costs and a strain on our support resources. In addition, the rollout of our products with medium-sized and enterprise customers can take longer periods of time compared to smaller customers, which can result in longer lead times in realizing revenues. These factors could materially and adversely affect our results of operations and our overall ability to grow our customer base.
Our ability to provide our telephony service and manage related customer accounts is dependent upon third-party facilities, equipment, and systems, the failure of which could cause delays of or interruptions to our service, damage our reputation, cause us to lose customers, limit our growth, and affect our financial condition.
Our success depends on our ability to provide quality and reliable telephony service, which is in part dependent upon the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Unlike traditional wireline telephone service or wireless service, our telephony service typically requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customer's Internet service provider and electric utility company, respectively, and not by us. The quality of some broadband Internet connections may be too poor for customers to use our telephony services properly. In addition, if there is any interruption to a customer's broadband Internet service or electrical power supply, that customer will be unable to make or receive calls, including emergency calls, using our telephony service.
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We outsource several of our network functions to third-party providers. For example, we outsource the maintenance of our regional data connection points, which are the facilities at which our network interconnects with the public switched telephone network. If our third-party service providers fail to maintain these facilities properly, or fail to respond quickly to problems, our customers may experience service interruptions. Interruptions in our service caused by third-party facilities have in the past caused and may in the future cause us to lose customers or cause us to offer substantial customer credits, which could adversely affect our revenue and profitability. If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers, and our brand, reputation, and growth will be negatively impacted.
There can be no guarantee that these third party providers will be able or willing to supply services to us in the future on commercially reasonable terms, or that we will be able to engage alternative or additional providers. Our ability to provide our services may be impacted during any transition, which could have an adverse effect on our business, financial condition or results of operations.
We rely on third-party vendors that may be difficult to replace or may not perform adequately.
It is vital to our customers that there be a minimum of disruption to the performance of our API and Applications services. We are therefore vulnerable to service interruptions of our third-party data center providers, such as IBM Softlayer and Amazon Web Services, or AWS; and of third-party hosted services. We may experience interruptions, delays and outages in third-party service and availability due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints caused by technical failures, natural disasters, fraud or security attacks. To the extent that we do not effectively address interruptions, delays and outages in our data center providers’ and other hosted providers’ service and availability or capacity constraints, our business, results of operations and financial condition may be adversely affected.
In some cases we rely on purchased or leased hardware and software licensed from third parties in order to provide our services. For example, Broadsoft, Inc. provides us with infrastructure, call termination and origination services, and other hardware and software in connection with certain of our Enterprise offerings. We also integrate third-party licensed software components into our platform. This hardware and software may not continue to be available on commercially reasonable terms or pricing or may fail to continue to be updated to remain competitive. The loss of the right to use this third party hardware or software may increase our expenses or impact the provisioning of our services. The failure of this third party hardware or software could materially impact the performance of our services and may cause material harm to our business or results of operations.
We outsource some of our cloud infrastructure to AWS which hosts certain of our products and platform. Customers of our products need to be able to access our platform at any time, without interruption or degradation of performance. AWS runs its own platform that we access, and we are, therefore, vulnerable to service interruptions at AWS. To the extent that we do not effectively address capacity constraints, either through AWS or alternative providers of cloud infrastructure, our business, results of operations and financial condition may be adversely affected. In addition, any changes in service levels from AWS may adversely affect our ability to meet our customers’ requirements.
Flaws in our technology and systems or our failure to adapt our systems to any new Internet Protocol could cause delays or interruptions of service, which could damage our reputation, cause us to lose customers, and limit our growth.
Our service may be disrupted by problems with our technology and systems that we provide to customers, software or facilities and overloading of our network. As we attract new customers, we expect increased call volume that we need to manage to avoid network interruptions. Interruptions have caused and may in the future cause us to lose customers and offer substantial customer credits, which could adversely affect our revenue and profitability. Network interruptions have also impaired our ability at times to sign-up new customers and the ability of customers to manage their accounts. If service interruptions or other outages adversely affect the perceived reliability of our service or customer service, we may have difficulty attracting and retaining customers and our brand reputation and growth may suffer.
Unpredictable technological disruptions, natural disasters, pandemic diseases, or other disruptions outside of our control could cause significant business interruptions resulting in harm to our business operations and financial condition.
We utilize third-party Internet-based or “cloud” computing services in connection with some of our business operations. Any disruption to the Internet or to our third-party Web hosting or cloud computing providers, including technological or business-related disruptions, could adversely impact the experience of our customers and have adverse effects on our operations. In addition, fires, floods, earthquakes, power losses, telecommunications failures, and similar "Acts of God" could damage these systems and hardware or cause them to fail completely. While we do maintain redundant systems consistent with industry best practices, certain events could result in downtime for our operations and could adversely affect our business.
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Our operations, and the operations of our vendors and customers, may also suffer interruptions caused by natural disasters, acts of terrorism or pandemic diseases, and such operations may be further affected by government reactions due to such incidents. For example, the Company has both employees and business operations in the Asia Pacific, including China. The recent and ongoing coronavirus outbreak stemming from China (COVID-19) has resulted in increased travel restrictions and extended shutdown of certain businesses in China and the larger Asia Pacific region. These or any further political or governmental developments or health concerns in China, or other countries in which we operate, could result in social, economic or labor instability. Such uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.
The storage, processing, and use of personal information and other confidential information subjects us to evolving governmental laws and regulation, commercial standards, contractual obligations, and other legal obligations related to consumer and data privacy, which may have a material impact on our costs, use of our products and services, or expose us to increased liability.
Federal, state, local and foreign laws and regulations, commercial commitments and industry standards, each provide for obligations and restrictions with respect to data privacy and security, as well as the collection, storage, retention, use, processing, transmission, sharing, disclosure and protection of personal information and other customer data. The evolving nature of these obligations and restrictions dictates that differing interpretations, inconsistency or conflicts among countries or rules, and general uncertainty impact the application to our business. These new laws, maysuch as the European Union General Data Protection Regulation (GDPR) or California Consumer Privacy Act (CCPA), also impact our innovation and business drivers in developing new and emerging technologies (e.g., artificial intelligence and machine learning).
These obligations and restrictions may limit our ability to collect, store, retain, process, use, transmit and share data with our customers, employees, and third party providers, which in turn could limit the ability of our customers to collect, store, retain, protect, use, process, transmit, share and disclose data with others through our products and services. Compliance with, and other burdens imposed by, such obligations and restrictions could increase the cost of our operations and impact our ability to market our products and services through effective segmentation.
An example of data privacy and security obligations and restrictions include the European Union General Data Protection Regulation, GDPR. The GDPR was adopted in April 2016 and comprehensively regulates the processing of personal data of any individual residing in the EU. The GDPR effectively requires any company processing data of EU residents to develop a comprehensive privacy program. The GDPR became effective on May 25, 2018. In addition, in January 2017, the European Commission introduced a new proposed ePrivacy regulation that would restrict communications service provider’s ability to use metadata and content from communications services. In order to become effective, the proposal needs to be adopted by the European Council and European Parliament. In October 2016, the Federal Communications Commission adopted a new privacy rules for the U.S. communications industry. These rules greatly extended the scope of FCC privacy regulation. Numerous parties have filed petitions for reconsideration at the FCC on the new privacy rules.
Additionally, California enacted the California Consumer Privacy Act ("CCPA"), which is a sweeping legislation with some similarities to GDPR, which came into effect on January 1, 2020. Pursuant to the CCPA, we are required, among other things, to make certain enhanced disclosures related to California residents regarding our use and disclosure of their personal information, allow California residents to opt-out of certain uses and disclosures of their personal information without penalty, provide Californians with other choices related to personal data in our possession, and obtain opt-in consent before engaging in certain uses of personal information relating to Californians under the age of 16.
Failure to comply with obligations and restrictions related to applicable data protection laws, regulations, standards, and codes of conduct, as well as our own posted privacy policies and contractual commitments could subject us to lawsuits, fines, criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity, loss of user confidence in our services, and loss of users, which could materially harm our business. Additionally, third-party contractors may have access to customer or employee data. If these or other third-party vendors violate obligations and restrictions related to applicable data protection laws or our policies, such violations may also put our customers’ or employees’ information at risk and could in turn have a material and adverse effect on our business.
Our Business segment is growing rapidly, and any inability to scale our business and grow efficiently could materially and adversely harm our business and results of operations.
As our Business segment expands, we will need to continue to improve our application architecture, integrate our products and applications across our technology platforms, integrate with third-party systems, and maintain infrastructure performance. We expect the number of users, the amount of data transferred and processed, the number of locations where our service is being used, and the volume of communications over our networks to continue to expand. To address this growth, we will need to scale our systems and customer services organization. Our ability to execute on these initiatives may impact system and network performance, customer satisfaction, and ultimately, sales and revenue. These efforts may also divert management resources. These factors may materially and adversely harm our business and results of operations.
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We depend on third-party vendors to supply, configure and deliver the phones that we sell. Any delays in delivery, or failure to operate effectively with our own servers and systems, may result in delay or failure of our services, which could harm our business, financial condition and results of operations.
We rely on Yealink Inc. and Polycom, Inc. to provide, and a single fulfillment agent to configure and deliver, the phones that we offer for sale to our customers that use our Applications services. If these third parties are unable to deliver phones of acceptable quality or quantity, or in a timely manner, we may be forced to offer replacements at a higher cost than what is currently contracted. In addition, these phones must interoperate with our servers and systems. If either of our providers changes the operation of their phones, we may be required to engage in development efforts to ensure that the new phones interoperate with our system. The failure of our vendor-supplied phones to operate effectively with our system could impact our customers’ ability to use our services and could cause customers to cancel our services, which may cause material harm to our business or results of operations.
We market our products and services to small and medium-sized businesses, which may be disproportionately impacted by fluctuations in economic conditions.
We market our products to small and medium-sized businesses. Customers in this market may be affected by economic downturns to a greater extent, and may have more limited financial resources, than larger or more established businesses. If customers in our Business markets experience financial hardship as a result of a weak economy, the demand for our services could be materially and adversely affected.
Significant foreign currency exchange rate fluctuations could adversely affect our financial results.
Because our consolidated financial statements are presented in U.S. dollars, increases or decreases in the value of the U.S. dollar relative to other currencies in which we transact business could materially adversely affect our financial results. For example, our API business collects revenues in Euros, and accordingly the strengthening of the U.S. dollar relative to the Euro adversely affects our revenue and operating results presented in U.S. dollars. In addition, on June 23, 2016, the United Kingdom held a referendum in which a majority of voters approved an exit from the European Union, or E.U., commonly referred to as "Brexit." As a result of this referendum, the U.K. officially withdrew from the EU on January 31, 2020, subject to a transition period until the end of 2020 while the U.K. and EU negotiate additional arrangements. Brexit has continued to cause significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business, such as the British Pound, Euro and other currencies. Such strengthening of the U.S. dollar relative to other currencies may adversely affect our revenue and operating results. In addition, changes to U.K. border and immigration policy could likewise occur as a result of Brexit, affecting our U.K. operation's ability to recruit and retain employees from outside the U.K.
If we fail to protect unique aspects of our internally developed systems, technology, products, and software and our trademarks, we may become involved in costly litigation or our business or brand may be harmed.
Our ability to compete effectively is dependent in large part upon the maintenance and protection of systems and software that we have developed internally based on open standards. While we own over 235 issued U.S. patents as well as a number of foreign patents and over 45 pending U.S. patent applications along with a number of foreign patent applications, we cannot patent much of the technology that is important to our business. Our pending patent applications may not be granted. Any issued patent that we own may be challenged, narrowed, invalidated, or circumvented. To date, we have relied on patent, copyright and trade secret laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights to this technology. We typically enter into confidentiality agreements with our employees, consultants, customers, partners, and vendors in an effort to control access to and distribution of technology, software, documentation, and other information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use this technology without authorization. Policing unauthorized use of this technology is difficult. The steps we take may not prevent misappropriation of the technology we rely on. In addition, effective protection may be unavailable or limited in some jurisdictions outside the United States, Canada, and the United Kingdom. Litigation may be necessary in the future to enforce or protect our rights or to determine the validity and scope of the rights of others. That litigation could cause us to incur substantial costs and divert resources away from our daily business, which in turn could materially adversely affect our business.
The unlicensed use of our brands by third parties could harm our reputation, cause confusion among our customers, and impair our ability to market our services. To that end, we have registered numerous trademarks and service marks and have applied for registration of our trademarks and service marks in the United States and abroad to establish and protect our brand names as part of our intellectual property strategy. If our applications receive objections or are successfully opposed by third parties, it may be difficult for us to prevent third parties from using our brand without our permission. Moreover, successful opposition to our applications might encourage third parties to make additional oppositions or commence trademark infringement proceedings against us, which could be costly and time consuming to defend against. If we decide to take limited or no action to protect our trademarks, our trademark rights may be diluted and subject to challenge or invalidation, which could materially and adversely affect our brand in the marketplace.
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Third parties may be capable of fraudulently using our name to obtain access to customer accounts and other personal information, use our services to commit fraud or steal our services or equipment, which could damage our reputation, limit our growth, and cause us to incur additional expenses.
Our customers have been subject to “phishing,” which occurs when a third party calls or sends an email or pop-up message to a customer that claims to be from a business or organization that provides services to the customer. The purpose of the inquiry is typically to encourage the customer to visit a bogus website designed to look like a website operated by the legitimate business or organization or provide information to the operator. At the bogus website, the operator attempts to trick the customer into divulging customer account or other personal information such as credit card information or to introduce viruses through “Trojan horse” programs to the customers’ computers. This has resulted in identity theft from our customers and the unauthorized use of Vonage services. Third parties have also used our communications services to commit fraud. Although we have engaged a third party to assist in the shutdown of purported phishing sites, if we are unable to detect and prevent “phishing,” use of our services for fraud, and similar activities, our brand reputation and growth may suffer and we may incur additional costs, including costs to increase security, or be required to credit significant amounts to customers.
Third parties also have used our communications services and obtained delivery of our equipment without paying, including by submitting fraudulent credit card information. This has resulted in our incurring the cost of providing the services, including incurring call termination fees, or providing the equipment without any corresponding revenues. We have implemented anti-fraud procedures in order to limit the expenses resulting from theft of service or equipment. If our procedures are not effective, theft of service or equipment could significantly increase our expenses and negatively impact our profitability.
The debt agreements governing18 VONAGE ANNUAL REPORT 2020
Risks Relating to Litigation, Regulatory and Tax Matters
Unfavorable litigation or governmental investigation results could require us to pay significant amounts or lead to onerous operating procedures.
We are subject from time to time to lawsuits both in the United States and in foreign countries, including claims and investigations relating to competition, intellectual property rights (including patents), employment and labor matters, personal injury and property damage, customer privacy, regulatory requirements, advertising, marketing and selling practices, and credit and collection issues. Greater constraints on the use of arbitration to resolve certain of these disputes could adversely affect our financing contain restrictionsbusiness. We also spend substantial resources complying with various regulatory and government standards, including any related investigations and litigation. We may incur significant expenses defending any such suit or government investigation and may be required to pay amounts or otherwise change our operations in ways that could adversely impact our businesses, results of operations or financial condition.
If we fail to protect unique aspects of our internally developed systems, technology, products, and software and our trademarks, we may limit our flexibilitybecome involved in operatingcostly litigation or our business or executing on our acquisition strategy.
On July 31, 2018, we replaced our 2016 Credit Facility previously consisting of a $125 million senior secured term loan and a $325 million revolving credit facility with the 2018 Credit Facility consisting of a $100 million senior secured term loan and a $500 million revolving facility. The 2018 Credit Facility contains customary representations and warranties and affirmative covenants that limit our ability and/or the ability of certain of our subsidiaries to engage in specified types of transactions. These covenants and other restrictionsbrand may under certain circumstances limit, but not necessarily preclude, our and certain of our subsidiaries’ ability to, among other things:
consolidate or merge;
create liens;
incur additional indebtedness;
dispose of assets;
consummate acquisitions;
make investments; or
pay dividends and other distributions.
Under the 2018 Credit Facility, we are required to comply with financial covenants, including the following financial covenants:
specified maximum consolidated leverage ratio;
specified minimum consolidated fixed coverage charge ratio, minimum cash position and maximum capital expenditures.
Our ability to comply with such financialcompete effectively is dependent in large part upon the maintenance and other covenants may be affected by events beyondprotection of systems and software that we have developed internally based on open standards. While we own 248 U.S. patents as well as a number of foreign patents and pending U.S. and foreign patent applications, we cannot patent much of the technology that is important to our control, so webusiness. Our pending patent applications may not be ablegranted. Any issued patent that we own may be challenged, narrowed, invalidated, or circumvented. To date, we have relied on patent, copyright and trade secret laws, as well as confidentiality procedures and licensing arrangements, to comply with these covenants. A breach of any such covenant could result in a default under the 2018 Credit Facility. In that case, the lenders could electestablish and protect our rights to declare due and payable immediately all amounts due under the 2018 Credit Facility, including principal and accrued interest.
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If we require additional capital, we may not be able to obtain additional financing on favorable terms or at all.
this technology. We may need to pursue additional financing to respond to new competitive pressures, pay extraordinary expenses such as litigation settlements or judgments or fund growth, including through acquisitions. Because of our past significant losses and our limited tangible assets, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the capital markets. In addition, the credit documentation for our recent financing contains affirmative and negative covenants that affect, and in many respects may significantly limit or prohibit, among other things, our and certain of our subsidiaries’ ability to incur, refinance or modify indebtedness and create liens. Our credit card processors have the ability to impose significant holdbacks in certain circumstances. The reinstatement of such holdbacks likely would have a material adverse effect on our liquidity. Under our credit card processingtypically enter into confidentiality agreements with our Visa, MasterCard, American Express,employees, consultants, customers, partners, and Discover credit card processors,vendors in an effort to control access to and distribution of technology, software, documentation, and other information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use this technology without authorization. Policing unauthorized use of this technology is difficult. The steps we take may not prevent misappropriation of the credit card processor has the right, in certain circumstances, including adverse events affecting our business, to impose a holdback of our advanced payments purchased using a Visa, MasterCard, American Express, or Discover credit card, as applicable, or demand additional reserves or other security. If circumstances were to occur that would allow any of these processors to reinstate a holdback, the negative impact on our liquidity likely would be significant.technology we rely on. In addition, our Visa and MasterCard credit card processing agreementeffective protection may be terminated byunavailable or limited in some jurisdictions outside the credit card processor at its discretion if we are deemedUnited States, Canada, and the United Kingdom. Litigation may be necessary in the future to be financially insecure. As a significant portionenforce or protect our rights or to determine the validity and scope of paymentsthe rights of others. That litigation could cause us to us are made through Visaincur substantial costs and MasterCard credit cards, if the credit card processor does not assistdivert resources away from our daily business, which in transitioning our business to another credit card processor, the negative impact on our liquidity likely would be significant. There were no cash reserves and cash-collateralized letters of credit with any credit card processors as of December 31, 2018.
We depend on the continued services of our senior management and other key employees, the loss of any of whomturn could materially adversely affect our business, results of operations and financial condition.
Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue opportunities and services innovations. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. For example, Chief Financial Officer David Pearson has announced his retirement, effective May 2020. None of our executive officers or other senior management personnel is bound by a written employment agreement and any of them may therefore terminate employment with us at any time with no advance notice. The replacement of any of these senior management personnel would likely involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives and acquisition integrations. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, financial condition, or results of operations.business.
We may be subject to damaging and disruptive intellectual property disputes that could materially and adversely affect our business, results of operations, and financial condition, as well as the continued viability of our company.
There has been substantial litigation in the cloud communications, Applications, VoIP, telecommunications, hosted services, and related industries regarding intellectual property rights and, given the rapid technological change in our industry, expansion into new technological and geographical markets, and our continual development of new products and services, we and/or our commercial partners may be subject to infringement claims from time to time. For example, we may be unaware of filed patent applications and issued patents that could include claims that might be interpreted to cover our products and services. We have been subject to patent infringement claims in the past, and from time to time we receive letters from third parties offering an opportunity for us to obtain licenses to patents that may be relevant to our business or alleging that our services infringe upon third party patents or other intellectual property. We may seek to obtain rights to third party technology in the future, but may not be able to agree upon commercially reasonable terms or at all with respect to obtaining such rights. If we are unable to extend existing licenses or are unable to obtain rights to other technology that may be commercially advantageous or necessary for our product and service offerings, we may experience a decrease in the quality of our products or services or we may lose the ability to provide our products and services on a non-infringing basis until alternative technology or suitable alternative products and services can be developed, identified, obtained either through acquisition, license or other grants of rights, and integrated.
Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our services and could cause us to pay substantial royalties, licensing fees, damages or settlement fees. Our agreements with certain customers, vendors, or partners may obligate us to defend or indemnify them in connection with such claims of infringement, further increasing our costs of defense and potential liability. Although we generally limit our contractual liability regarding such obligations, we may incur significant liability with respect to them, and disputes with our customers, vendors or partners over such obligations may have an adverse relationship on our relations with those entities. The defense of any lawsuit could divert management’s efforts and attention from ordinary business operations and result in time-consuming and expensive litigation, regardless of the merits of such claims. These outcomes may:
result in the loss of a substantial number of existing customers or prohibit the acquisition of new customers;
cause us to accelerate expenditures to preserve existing revenues;
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cause existing or new vendors to require prepayments or letters of credit;
cause our credit card processors to demand reserves or letters of credit or make holdbacks;
result in substantial employee layoffs;
materially and adversely affect our brand in the marketplace and cause a substantial loss of goodwill;
cause our stock price to decline significantly;
materially and adversely affect our liquidity, including our ability to pay debts and other obligations as they become due;
cause us to change our business methods or services;
require us to cease certain business operations or offering certain products and services; and
lead to our bankruptcy or liquidation.
The regulatory framework for API services continues to develop, as many existing regulations may not fully contemplate this type of service or business model; future legislative, regulatory or judicial actions impacting API could adversely affect our business and financial results of operations, increase the cost and complexity of compliance, and expose us to liability.
In many countries where we offer API products, it is not clear how our API Platform fitsAPIs fit into the communications regulatory framework. The Company is also expanding into new regions, such as the Asia Pacific (including China), where regulations are unclear and subject to rapid change. Regulators could claim that our API products are subject to licensing and substantive communications regulatory requirements, could modify their regulations to explicitly expand the obligations to which our API products are subject, or could increase the level of scrutiny and enforcement they apply.
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Future legislative, judicial or other regulatory actions could have a negative effect on our business. If our API products become subject to additional rules and regulations applicable to technology or communications providers, we may incur significant litigation and compliance costs, or it may significantly impact our ability to compete. Moreover, the regulatory environment is constantly evolving and changes to the applicable regulations could impose additional compliance costs and require modifications to our technology operations. We may also experience interruptions or limitations on the delivery and use of our API products on our platform, or incur significant losses based on the timing of customer payments and any difficulty in collecting accounts receivable from our API Platform customers. Any decreased use of our products and services or limitation on our ability to collect payments from our customers could adversely affect our business, results of operations, and financial condition.
We may also have to restructure or discontinue certain of our service offerings, exit certain markets, or raise the price of our services in response to regulatory changes or actions, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost or complexity of doing business, limit our growth, or impact our results of operations.
Our VoIP services are subject to country-specific governmental regulation and related actions and taxes that may increase our costs or impact our product offerings.
In many countries, we are not a regulated telecommunications business subject primarily to regulations surrounding provision of emergency services and payment into universal service type funds. In some countries, providing VoIP services is or may be illegal. We may need to change our service offerings to avoid regulation as a telecommunications business in a jurisdiction, or if we are treated as a fully regulated telecommunications business, we may be required to incur additional expenses. In addition, if governments believe that we are providing unauthorized service in their countries, they may pursue fines, penalties, or other governmental action, including criminal action, that may damage our brand and reputation. If we use a local partner to provide services in a country and the local partner does not comply with applicable governmental regulations, we may face additional regulation, liabilities, penalties or other governmental action, and our brand and reputation may be harmed.
In addition to the risk of being directly subjected to regulation, decisions by foreign regulators to increase the charge for terminating international calls into their countries could cause increased costs, impact margin, and impact churn. These regulatory actions may be taken without notice and cause us to react quickly to changing market conditions. These efforts could divert management’s efforts and attention from ordinary business operations which could materially and adversely affect our results of operations.
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As a United States-based company, any foreign subsidiary or joint venture that we use for international operations may be subject to a variety of governmental regulations in the countries where we market our products, including tariffs, taxes and employment regulations different from those in the U.S. For example, distributions of earnings and other payments, including interest, received from our foreign subsidiaries may be subject to withholding taxes imposed by the jurisdiction in which such entities are formed or operating, which will reduce the amount of after-tax cash we can receive. In general, as a United States corporation, we may claim a foreign tax credit against our federal income tax expense for such foreign withholding taxes and for foreign income taxes paid directly by foreign corporate entities in which we own 10% or more of the voting stock. The ability to claim such foreign tax credits and to utilize net foreign losses is, however, subject to numerous limitations, and we may incur incremental tax costs as a result of these limitations or because we are not currently in a tax-paying position in the United States. We may also be required to include in our income for United States federal income tax purposes our proportionate share of certain earnings of those foreign subsidiaries that are classified as “controlled foreign corporations” without regard to whether distributions have been actually received from such subsidiaries.
Our VoIP services are subject to regulation in the United States, United Kingdom, and Canada, and in additional countries as we expand globally. Future legislative, regulatory or judicial actions could adversely affect our business and expose us to liability and limit our growth potential.
The United States, United Kingdom, and Canada have applied some traditional telephone company regulations to VoIP and continue to evaluate how VoIP should be regulated, as are other countries as we expand globally. The effects of future regulatory developments are uncertain. At the federal level in the U.S., the Federal Communications Commission has imposed certain telecommunications regulations on VoIP services including, but not limited to:
Requirementsto; requirements to provide E-911 service;
Communications communications Assistance for Law Enforcement Act obligations;
Obligation obligation to support Universal Service;
Customer customer Proprietary Network Information, or CPNI, requirements;
Disability disability access obligations;
Local local Number Portability requirements; and
Consumer consumer protection, including protection from unwanted telemarketing and other calls.
As we expand globally, these types of regulations are likely to be similarly enacted and enforced by local regulatory authorities.
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In general, the focus of interconnected VoIP telecommunications regulation is at the federal level. On November 12, 2004, the FCC issued a declaratory ruling providing that our service is subject to federal regulation and preempted the Minnesota Public Utilities Commission from imposing certain of its regulations on us. While this ruling does not exempt us from all state oversight of our service, it effectively prevents state telecommunications regulators from imposing certain burdensome and inconsistent market entry requirements and certain other state utility rules and regulations on our service. Despite this, Vonage may be subject to state and local regulatory requirements including:
Payment payment of state and local E-911 fees; and
State Universal Service support obligations.
In Canada, the Canadian Radio-Television and Telecommunications Commission, or CRTC, regulates VOIP Service. In the UK, the Office of Communications, or OFCOM, regulates voice services. Other regulatory bodies in various jurisdictions regulate services Vonage offers its customers. These regulated services are similar to those regulated in the United States discussed above. Future legislative, judicial or other regulatory actions could have a negative effect on our business. If we become subject to the rules and regulations applicable to telecommunications providers in individual states or other foreign jurisdictions, we may incur significant litigation and compliance costs, and we may have to restructure our service offerings, exit certain markets, or raise the price of our services, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth.
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We rely on third parties to provide a portion of our customer service representatives, provide aspects of our E-911 service, which differs from traditional 911 service, and initiate local number portability for our customers. If these third parties do not provide our customers with reliable, high-quality service, our reputation will be harmed and we may lose customers.
We offer our customers support 24 hours a day, seven days a week through both our comprehensive online account management website and our toll free number. Our customer support is currently provided via United States based employees as well as third party partners located in various global locations. Our third-party providers generally represent us without identifying themselves as independent parties. The ability to support our customers may be disrupted by natural disasters, inclement weather conditions, civil unrest, and other adverse events in the locations where our customer support is provided.
We also contract for services required to provide E-911 services including assistance in routing emergency calls, terminating E-911 calls, operating a national call center that is available 24 hours a day, seven days a week to receive certain emergency calls, and maintaining PSAP databases for the purpose of deploying and operating E-911 services. Interruptions in service from our vendor could cause failures in our customers’ access to E-911 services and expose us to liability and damage our reputation.
We also have agreements with companies that initiate our local number portability, which allow new customers to retain their existing telephone numbers when subscribing to our services.
If any of these third parties do not provide reliable, high-quality service, our reputation and our business will be harmed. In addition, industry consolidation among providers of services to us may impact our ability to obtain these services or increase our expense for these services.
Customer misuse of our API products in violation of the Telephone Consumer Protection Act may cause us to face litigation risk.
The Telephone Consumer Protection Act of 1991 restricts telemarketing and the use of automatic SMS text messages without proper consent. The scope and interpretation of the laws that are or may be applicable to the delivery of text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face liability.
We may be exposed to liabilities under anti-corruption, export control and economic sanction regulations, and similar laws and regulations, and any determination that we violated any of these laws or regulations could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, the UK Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials, political parties, and/or private parties by persons and entities for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make sales internationally. In addition, we plan to expand our international operations through potential joint ventures with local partners. Our international activities create the risk of unauthorized payments or offers of payments by one of our employees, consultants, partners, sales agents or distributors, even though these parties are not always subject to our control. It is our policy to prohibit these practices by our employees, consultants, partners, sales agents or distributors, however, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, partners, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA, the UK Bribery Act or other laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results, and financial condition.
Our products and services may be subject to export control and economic sanctions regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department's Office of Foreign Assets Controls. Our products and services must be offered and sold in compliance with these laws and regulations. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face liability. In addition, changes in our products or services, changes in applicable regulations, or change in the target of such regulations, could also result in decreased use of our products and services, or in our decreased ability to sell our products or provide our services to existing or prospective customers with international operations. Any decreased use of our products and services or limitation on our ability to export our products and provide our services could adversely affect our business, results of operations and financial condition.
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Actions of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.
From time to time, we may be subject to proposals by stockholders urging us to take certain corporate actions. For example, on March 15, 2019, we entered into a cooperation agreement with an activist shareholder and certain related investors. If activist stockholder activities ensue, our business could be adversely affected because responding to proxy contests and reacting to other actions by activist stockholders can be costly and time-consuming, disrupt our operations, and divert the attention of management and our employees. For example, we may be required to retain the services of various professionals to advise us on activist stockholder matters, including legal, financial, and communications advisers, the costs of which may negatively impact our future financial results. This may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Our API Platform offerings may be subject to liability for historic and future sales, use and similar taxes, that may increase our costs or impact our product offerings.
In some United States tax jurisdictions in which we conduct operations, sales and use and telecommunications taxes could apply to our API products. Historically, we have not billed or collected these taxes from our API customers. It is possible that some tax jurisdictions may assert that such taxes are applicable to our API products, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes on our API customers in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our business, results of operations and financial condition. To the extent that we decide to collect such taxes from our API customers in the future, we may have some customers that question the incremental tax charges and some may seek to negotiate lower pricing from us, which could adversely affect our business, results of operations and financial condition.
The global scope of our operations may subject us to potentially adverse tax consequences.
We generally report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Intercompany relationships are subject to complex transfer pricing regulations in various jurisdictions. If revenue and taxing authorities disagree with positions we have taken we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. In addition, changes in tax laws of countries in which we do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our business, cash flows, results of operations and financial position.
We have incurred cumulative losses since our inception and may not achieve consistent profitability in the future.
We incurred a net loss attributable to Vonage of $19,482$36,212 for the year ended December 31, 20192020 and our accumulated deficit is $631,009$667,221 from our inception through December 31, 2019.2020. Although we have achieved profitability in prior years and believe we will achieve consistent profitability in the future, we ultimately may not be successful. We believe that our ability to achieve consistent profitability will depend, among other factors, on our ability to continue to achieve and maintain substantive operational improvements and structural cost reductions while maintaining and growing our net revenues. In addition, certain of the costs of our business are not within our control and may increase. For example, we and other telecommunications providers are subject to regulatory termination charges imposed by regulatory authorities in countries to which customers make calls.
We may be unable to fully realize the benefits of our net operating loss, or NOL, carry forwards if an ownership change occurs.
If we were to experience a “change in ownership” under Section 382 of the Internal Revenue Code, or Section 382, the NOL carryforward limitations under Section 382 would impose an annual limit on the amount of the future taxable income that may be offset by our NOL generated prior to the change in ownership. If a change in ownership were to occur, we may be unable to use a significant portion of our NOL to offset future taxable income. In general, a change in ownership occurs when, as of any testing date, there has been a cumulative change in the stock ownership of the corporation held by 5% stockholders of more than 50 percentage points over an applicable three-year period. For these purposes, a 5% stockholder is generally any person or group of persons that at any time during an applicable three-year period has owned 5% or more of our outstanding common stock. In addition, persons who own less than 5% of the outstanding common stock are grouped together as one or more “public group” 5% stockholders. Under Section 382, stock ownership would be determined under complex attribution rules and generally includes shares held directly, indirectly through intervening entities, and constructively by certain related parties and certain unrelated parties acting as a group. We have implemented a Tax Benefits Preservation Plan intended to provide a meaningful deterrent effect against acquisitions that could cause a change in ownership, however this is not a guarantee against such a change in ownership.
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Risks Relating to Stock Ownership and Indebtedness
Actions of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.
We have been and may continue to be subject to proposals by stockholders urging us to take certain corporate actions. For example, on February 26, 2020, we renewed a cooperation agreement with an activist shareholder and certain related investors. If activist stockholder activities continue, our business could be adversely affected because responding to proxy contests and reacting to other actions by activist stockholders can be costly and time-consuming, disrupt our operations, and divert the attention of management and our employees. For example, we may be required to retain the services of various professionals to advise us on activist stockholder matters, including legal, financial, and communications advisers, the costs of which may negatively impact our future financial results. This may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
The debt agreements governing our financing contain restrictions that may limit our flexibility in operating our business or executing on our acquisition strategy.
On July 31, 2018, we replaced our 2016 Credit Facility previously consisting of a $125 million senior secured term loan and a $325 million revolving credit facility with the 2018 Credit Facility consisting of a $100 million senior secured term loan and a $500 million revolving facility. The 2018 Credit Facility contains customary representations and warranties and affirmative covenants that limit our ability and/or the ability of certain of our subsidiaries to engage in specified types of transactions. These covenants and other restrictions may under certain circumstances limit, but not necessarily preclude, our and certain of our subsidiaries’ ability to, among other things: consolidate or merge; create liens; incur additional indebtedness; dispose of assets; consummate acquisitions; make investments; or pay dividends and other distributions.
Under the 2018 Credit Facility, we are required to comply with financial covenants, including the following financial covenants: specified maximum consolidated leverage ratio; specified minimum consolidated fixed coverage charge ratio, minimum cash position and maximum capital expenditures.
Our ability to comply with such financial and other covenants may be affected by events beyond our control, so we may not be able to comply with these covenants. A breach of any such covenant could result in a default under the 2018 Credit Facility. In that case, the lenders could elect to declare due and payable immediately all amounts due under the 2018 Credit Facility, including principal and accrued interest.
If we require additional capital, we may not be able to obtain additional financing on favorable terms or at all.
We may need to pursue additional financing to respond to new competitive pressures, pay extraordinary expenses such as litigation settlements or judgments or fund growth, including through acquisitions. Because of our past significant losses and our limited tangible assets, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the capital markets. In addition, the credit documentation for our recent financing contains affirmative and negative covenants that affect, and in many respects may significantly limit or prohibit, among other things, our and certain of our subsidiaries’ ability to incur, refinance or modify indebtedness and create liens. Our credit card processors have the ability to impose significant holdbacks in certain circumstances. The reinstatement of such holdbacks likely would have a material adverse effect on our liquidity. Under our credit card processing agreements with our Visa, MasterCard, American Express, and Discover credit card processors, the credit card processor has the right, in certain circumstances, including adverse events affecting our business, to impose a holdback of our advanced payments purchased using a Visa, MasterCard, American Express, or Discover credit card, as applicable, or demand additional reserves or other security. If circumstances were to occur that would allow any of these processors to reinstate a holdback, the negative impact on our liquidity likely would be significant. In addition, our Visa and MasterCard credit card processing agreement may be terminated by the credit card processor at its discretion if we are deemed to be financially insecure. As a significant portion of payments to us are made through Visa and MasterCard credit cards, if the credit card processor does not assist in transitioning our business to another credit card processor, the negative impact on our liquidity likely would be significant. There were no cash reserves and cash-collateralized letters of credit with any credit card processors as of December 31, 2020.
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We may not have the ability to raise the funds necessary to settle conversions of the convertible senior notes due 2024 in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the notes.
Holders of our 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) have the right to require us to repurchase their Convertible Senior Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Convertible Senior Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Senior Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Senior Notes surrendered therefor or Convertible Senior Notes being converted. In addition, our ability to repurchase the Convertible Senior Notes or to pay cash upon conversions of the Convertible Senior Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Convertible Senior Notes at a time when the repurchase is required by the indenture setting forth the terms of the Convertible Senior Notes or to pay any cash payable on future conversions of the Convertible Senior Notes as required by the indenture would constitute a default under the indenture. A default under the indenture setting forth the terms of the Convertible Senior Notes or the occurrence of the fundamental change itself may lead to a default under our 2018 Credit Facility or other agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Senior Notes or make cash payments upon conversions thereof. The increase in the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption may not adequately compensate holders for any lost value of such holders’ Convertible Senior Notes as a result of such transaction.
If a make-whole fundamental change occurs prior to the maturity date or if we issue a notice of redemption with respect to the Convertible Senior Notes, under certain circumstances, we will increase the conversion rate by a number of additional shares of our common stock for Convertible Senior Notes converted in connection with such make-whole fundamental change or notice of redemption, as the case may be. The increase in the conversion rate will be determined based on the date on which the specified corporate transaction becomes effective, or the date of the notice of redemption, as the case may be and the price paid (or deemed to be paid) per share of our common stock in such transaction or with respect to such redemption, as the case may be. The increase in the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption may not adequately compensate holders for any lost value of such holders’ Convertible Senior Notes as a result of such transaction or redemption. In addition, if the price per share of our common stock paid (or deemed paid) in the transaction is greater than $60.00 per share or less than $11.73 per share (in each case, subject to adjustment), no additional shares will be added to the conversion rate. Moreover, in no event will the conversion rate per $1,000 aggregate principal amount of Convertible Senior Notes as a result of this adjustment exceed 85.2514 shares of common stock, subject to adjustment in the same manner as the conversion rate.
Our obligation to increase the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption could be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness and equitable remedies.
The conditional conversion feature of the Convertible Senior Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Senior Notes is triggered, holders of Convertible Senior Notes will be entitled to convert the Convertible Senior Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Senior Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of Convertible Senior Notes do not elect to convert their Convertible Senior Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Senior Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
2524 VONAGE ANNUAL REPORT 20192020
Convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, could have a material effect on our reported financial results.
Under certain circumstances, convertible debt instruments (such as the Convertible Senior Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Convertible Senior Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Convertible Senior Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Senior Notes, then our diluted earnings per share could be adversely affected.
The capped call transactions entered into in connection with the pricing of the Convertible Senior Notes may affect the value of the Convertible Senior Notes and our common stock.
In connection with the pricing of the Convertible Senior Notes and subsequently in connection with the exercise of the initial purchasers’ exercise of their option to purchase additional Convertible Senior Notes, we entered into capped call transactions (the “Capped Calls”) with certain option counterparties. The Capped Calls are expected generally to reduce the potential dilution upon conversion of the Convertible Senior Notes and/or offset any cash payments we are required to make in excess of the aggregate principal amount of converted Convertible Senior Notes, as the case may be, with such reduction and/or offset subject to a cap.
In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of the Convertible Senior Notes and prior to the maturity of the Convertible Senior Notes (and are likely to do so during any observation period related to a conversion of the Convertible Senior Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Convertible Senior Notes, which could affect holders’ ability to convert the Convertible Senior Notes and, to the extent the activity occurs during any observation period related to a conversion of Convertible Senior Notes, it could affect the number of shares and value of the consideration that holders will receive upon conversion of the Convertible Senior Notes.
In addition, if any such Capped Call fails to become effective, the option counterparty party thereto may unwind its hedge positions with respect to our common stock, which could adversely affect the value of our common stock and, if the Convertible Senior Notes have been issued, the value of the Convertible Senior Notes.
Our certificate of incorporation and bylaws and the agreements governing our indebtedness contain provisions that could delay or discourage a takeover attempt, which could prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.
Certain provisions of our Restated Certificate of Incorporation and our Amended and Restated By-laws may make it more difficult for, or have the effect of discouraging, a third party from acquiring control of us or changing our board of directors and management. These provisions:
provisions permit our board of directors to issue additional shares of common stock and preferred stock and to establish the number of shares, series designation, voting powers if any, preferences, other special rights, qualifications, limitations or restrictions of any series of preferred stock;
limit the ability of stockholders to amend our Restated Certificate of incorporation and Amended and Restated By-laws, including supermajority requirements;
allow only our board of directors, Chairman of the board of directors or Chief Executive Officer to call special meetings of our stockholders;
eliminate the ability of stockholders to act by written consent;
require advance notice for stockholder proposals and director nominations; and
limit the removal of directors and the filling of director vacancies.
In addition, our Restated Certificate of Incorporation and Amended and Restated By-laws were amended on June 13, 2018 to declassify our Board of Directors. The declassification of the Board will be phased in commencingcommenced with the 2019 annual meeting of stockholders and will result in the Board being fully declassified (and all Board members standing for annual elections) commencing with the 2021 annual meeting of stockholders. A classified structure will therefore remain in place during the phase-in period.
26 VONAGE ANNUAL REPORT 2019
Such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices. Any delay or prevention of, or significant payments required to be made upon, a change of control transaction or changes in our board of directors or management could deter potential acquirors or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.
25 VONAGE ANNUAL REPORT 2020
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our headquarters are located in Holmdel, New Jersey. We also lease office, building space and research and development sites around the world, primarily in the United States, Europe, Israel, Australia, and Asia. We sublease portions of office space including space in our Holmdel, NJ location to a third parties. Due to the impact of COVID-19, we analyzed our real estate footprint, our ability to work primarily as a remote organization, and that a significant amount of real estate was not fully utilized. As a result, we had decided to close offices in certain locations worldwide by December 31, 2020. We believe that the remaining facilities that we occupy are in good condition and adequate for our current needs. We have established a program to lease temporary work spaces based on the office re-openings and future needs, and do not anticipate leasing any material additional space.
ITEM 3. Legal Proceedings
Refer to Note 15, Commitments and Contingencies to our Consolidated Financial Statements included in this Annual Report on Form 10-K for a discussion of recent developments regarding our legal proceedings.
ITEM 4. Mine Safety Disclosures
Not Applicable.
2726 VONAGE ANNUAL REPORT 20192020
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock was listed on the New York Stock Exchange from May 24, 2006 to December 30, 2019 and transferred to the Nasdaq Global Select Market starting December 31, 2019, both listings are under the ticker symbol “VG”.
Holders
At January 31, 2020,2021, we had approximately 477460 stockholders of record. This number does not include beneficial owners whose shares are held in street name.
Dividends
We have never paid cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock for at least the next 12 months. We intend to retain all of our earnings, if any, for general corporate purposes, and, if appropriate, to finance the expansion of our business.
2827 VONAGE ANNUAL REPORT 20192020
Stock Performance Graph
The graphs below and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, or the Exchange Act, nor shall such information be deemed incorporated by reference into any filing under the Securities Act of 1933, or the Securities Act, or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act.
The graph below compares the cumulative total return of our common stock between December 31, 20142015 and December 31, 2019,2020, with the cumulative total return of (1) NASDAQ Telecommunications, (2) Russell 2000 Index, and (3) NASDAQ Computer. This graph assumes the investment of $100 on December 31, 20142015 in our common stock, NASDAQ Telecommunications, Russell 2000 Index, and NASDAQ Computer, and assumes the reinvestment of dividends, if any.
COMPARISON OF THE CUMULATIVE TOTAL RETURN ON COMMON STOCK BET
WE
COMPARISON OF THE CUMULATIVE TOTAL RETURN ON COMMON STOCK BETWEEN DECEMBER 31, 20142015 AND DECEMBER 31, 20192020
Among Vonage Holdings Corp., the NASDAQ Telecommunications, the Russell 2000 Index, and the NASDAQ Computer.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Vonage Holdings Corp. | $ | 119.34 | | | $ | 177.18 | | | $ | 152.09 | | | $ | 129.09 | | | $ | 224.39 | |
| NASDAQ Telecommunications | $ | 114.87 | | | $ | 134.90 | | | $ | 138.98 | | | $ | 154.80 | | | $ | 188.92 | |
| Russell 2000 Index | $ | 119.48 | | | $ | 135.18 | | | $ | 118.72 | | | $ | 146.89 | | | $ | 173.86 | |
| NASDAQ Computer | $ | 112.27 | | | $ | 155.80 | | | $ | 150.06 | | | $ | 225.59 | | | $ | 338.35 | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2015 |
| | 2016 |
| | 2017 |
| | 2018 |
| | 2019 |
|
| Vonage Holdings Corp. | $ | 150.66 |
| | $ | 179.79 |
| | $ | 266.93 |
| | $ | 229.13 |
| | $ | 194.49 |
|
| NASDAQ Telecommunications | $ | 92.50 |
| | $ | 106.25 |
| | $ | 124.78 |
| | $ | 128.57 |
| | $ | 143.20 |
|
| Russell 2000 Index | $ | 94.29 |
| | $ | 112.65 |
| | $ | 127.46 |
| | $ | 111.94 |
| | $ | 138.50 |
|
| NASDAQ Computer | $ | 106.24 |
| | $ | 119.28 |
| | $ | 165.52 |
| | $ | 159.43 |
| | $ | 239.67 |
|
Common Stock Repurchases
See Note 10, Common Stock to the Company's Consolidated Financial Statements for information regarding common stock repurchases.
In connection with the issuance of the Convertible Senior Notes in June 2019, the Company repurchased an aggregate of 852,515, or $10 million, of shares of the Company’s outstanding common stock in privately negotiated transactions at a price of $11.73 per share, which was equal to the closing price per share of the Company’s common stock on June 11, 2019, the date of the pricing of the offering of the Convertible Senior Notes.
2928 VONAGE ANNUAL REPORT 20192020
ITEM 6. Selected Financial Data
The following table presents the Company's historical selected financial data. This information should be read in conjunction with the Consolidated Financial Statements and the related notes thereto listed in Item 15 and included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company has completed several acquisitions as further described in Note 4, Acquisitions and Dispositions to the Company's Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | |
| (In thousands, except per share amounts) | 2020 | | 2019 (1) | | 2018 (2) | | 2017 | | 2016 (3) | | |
| Statement of Operations Data: | | | | | | | | | | | |
| Total revenues | $ | 1,247,934 | | | $ | 1,189,346 | | | $ | 1,048,782 | | | $ | 1,002,286 | | | $ | 955,621 | | | |
| (Loss) income from operations | (149) | | | 6,763 | | | 51,911 | | | 59,391 | | | 44,154 | | | |
| | | | | | | | | | | |
| Net (loss) income | $ | (36,212) | | | $ | (19,482) | | | $ | 35,728 | | | $ | (33,933) | | | $ | 13,151 | | | |
| (Loss) Earnings per common share | | | | | | | | | | | |
| Basic | $ | (0.15) | | | $ | (0.08) | | | $ | 0.15 | | | $ | (0.15) | | | $ | 0.06 | | | |
| Diluted | $ | (0.15) | | | $ | (0.08) | | | $ | 0.14 | | | $ | (0.15) | | | $ | 0.06 | | | |
| Weighted-average common shares outstanding: | | | | | | | | | | | |
| Basic | 246,082 | | | 242,018 | | | 237,499 | | | 225,311 | | | 215,751 | | | |
| Diluted | 246,082 | | | 242,018 | | | 248,892 | | | 225,311 | | | 231,941 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Statement of Cash Flow Data: | | | | | | | | | |
| Net cash provided by operating activities | $ | 83,880 | | | $ | 92,926 | | | $ | 123,205 | | | $ | 128,058 | | | $ | 93,456 | |
| Net cash used in investing activities | (52,723) | | | (52,079) | | | (407,230) | | | (30,737) | | | (191,449) | |
| Net cash (used in) provided by financing activities | (10,850) | | | (21,921) | | | 258,212 | | | (96,242) | | | 68,054 | |
| | | | | | | | | |
| Balance Sheet Data: | | | | | | | | | |
| Total assets | 1,395,836 | | | 1,364,700 | | | 1,259,488 | | | 858,681 | | | 935,666 | |
| Total notes payable, indebtedness under revolving credit facility and convertible notes, net | 506,284 | | | 497,158 | | | 519,228 | | | 232,515 | | | 318,874 | |
| Capital lease obligations | — | | | — | | | — | | | 140 | | | 3,428 | |
| Total stockholders’ equity | 602,774 | | | 567,062 | | | 535,768 | | | 472,898 | | | 436,541 | |
|
| | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
| (In thousands, except per share amounts) | 2019 (1) | | 2018 (2) | | 2017 | | 2016 (3) | | 2015 (4) |
| Statement of Operations Data: | | | | | | | | | |
| Total revenues | $ | 1,189,346 |
| | $ | 1,048,782 |
| | $ | 1,002,286 |
| | $ | 955,621 |
| | $ | 895,072 |
|
| Income from operations | 6,763 |
| | 51,911 |
| | 59,391 |
| | 44,154 |
| | 52,992 |
|
| (Loss) Income from continuing operations | (19,482 | ) | | 35,728 |
| | (33,933 | ) | | 13,151 |
| | 25,035 |
|
| Discontinued operations | — |
| | — |
| | — |
| | — |
| | (2,439 | ) |
| Net (loss) income | (19,482 | ) | | 35,728 |
| | (33,933 | ) | | 13,151 |
| | 22,596 |
|
| Plus: Net loss from discontinued operations attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | 59 |
|
| Net (loss) income attributable to Vonage | $ | (19,482 | ) | | $ | 35,728 |
| | $ | (33,933 | ) | | $ | 13,151 |
| | $ | 22,655 |
|
| (Loss) Earnings per common share - continuing operations: | | | | | | | | | |
| Basic | $ | (0.08 | ) | | $ | 0.15 |
| | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.12 |
|
| Diluted | $ | (0.08 | ) | | $ | 0.14 |
| | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.11 |
|
| Loss per common share - discontinued operations attributable to Vonage: | | | | | | | | | |
| Basic | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.01 | ) |
| Diluted | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.01 | ) |
| (Loss) Earnings per common share - attributable to Vonage: | | | | | | | | | |
| Basic | $ | (0.08 | ) | | $ | 0.15 |
| | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.11 |
|
| Diluted | $ | (0.08 | ) | | $ | 0.14 |
| | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.10 |
|
| Weighted-average common shares outstanding: | | | | | | | | | |
| Basic | 242,018 |
| | 237,499 |
| | 225,311 |
| | 215,751 |
| | 213,147 |
|
| Diluted | 242,018 |
| | 248,892 |
| | 225,311 |
| | 231,941 |
| | 224,110 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Statement of Cash Flow Data: | | | | | | | | | |
| Net cash provided by operating activities | $ | 92,926 |
| | $ | 123,205 |
| | $ | 128,058 |
| | $ | 93,456 |
| | $ | 134,485 |
|
| Net cash used in investing activities | (52,079 | ) | | (407,230 | ) | | (30,737 | ) | | (191,449 | ) | | (153,509 | ) |
| Net cash (used in) provided by financing activities | (21,921 | ) | | 258,212 |
| | (96,242 | ) | | 68,054 |
| | 35,451 |
|
| | | | | | | | | | |
| Balance Sheet Data: | | | | | | | | | |
| Total assets | 1,364,700 |
| | 1,259,488 |
| | 858,681 |
| | 935,666 |
| | 784,566 |
|
| Total notes payable, indebtedness under revolving credit facility and convertible notes, net | 497,158 |
| | 519,228 |
| | 232,515 |
| | 318,874 |
| | 210,392 |
|
| Capital lease obligations | — |
| | — |
| | 140 |
| | 3,428 |
| | 7,761 |
|
| Total stockholders’ equity | 567,062 |
| | 535,768 |
| | 472,898 |
| | 436,541 |
| | 388,741 |
|
(1) The year ended December 31, 2019 includes the impacts of the adoption of ASC Topic 842, Leases on January 1, 2019.
(2) The year ended December 31, 2018 includes the impacts of the adoption of ASC Topic 606, Revenue from Contracts with Customers on January 1, 2018, the acquisition of NVM, which was completed in the fourth quarter, and the acquisition of TokBox, which was completed in the third quarter.
(3) The year ended December 31, 2016 includes the impacts of the acquisition of Nexmo, which was completed in the second quarter.
(4) The year ended December 31, 2015 includes the impacts of the acquisition of iCore, which was completed in the third quarter and the acquisition of Simple Signal, which was completed in the second quarter.
3029 VONAGE ANNUAL REPORT 20192020
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with “Selected Financial Data” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under “Item 1A—Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019.
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read in connection with, the consolidated financial statements and related notes thereof. Components of management's discussion and analysis of financial condition and results of operations include:
•Overview
•Results of Operations
•Non-GAAP Measures
•Liquidity and Capital Resources
•Contractual Obligations
•Summary of Critical Accounting Policies and Estimates
•Off-Balance Sheet Arrangements
OVERVIEW
At Vonage, our vision is to accelerate the world's ability to connect. We are observing a secular change in the way business is done, with a fundamental shift in how communications technologies are being leveraged in almost every industry. Through the Vonage Communications Platform, our strategy is to deliver a single leading provider of cloud communications services for businessesplatform that powers our customers' and consumers. Our business services transformpartners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. We believe that the way people work and businesses operate through a portfolio of communications solutions that enable internal collaboration among employees, while also keeping companies closely connected with their customers, across any mode of communication, on any cloud-connected device. Vonage customers can choose among or combine two separate service delivery options to suit their specific cloud communication needs. They can buy Applications Group solutions as a subscription and they can buy our API Platform Group offerings and consume our cloud communication as a service product as programmable modules, delivered via APIs. We also provide a robust suite of feature-rich residential communication solutions.
Business
For our Business customers, we provide innovative, cloud-based Applications, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable SIP based VoIP network along with contact center solutions. We also offer API solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. In combination, ourCommunications Platform's products and services permitare well positioned to take advantage of emerging trends with sizable, growing total addressable markets as companies look to cloud-based communications solutions and API programming architectures as part of their digital transformation.
Our business is organized under two reportable operating segments: Vonage Communications Platform and Consumer. The Vonage Communications Platform includes our Unified Communications, Contact Center Communications, and APIs service offerings and represents the Company’s strategic business as the source of future growth. Our Consumer segment includes our communications solutions for residential customers to communicate with their customers and employees through any cloud-connected device,based on our roots in any place, at any time without the often costly investment required with on-site equipment. We have a robust set of product families tailored to serve the full range of the business value chain, from the SMB market, through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and CRM solutions, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud, Oracle, and Clio. With our ability to integrate these cloud-based, workplace tools, Vonage integrates the entire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers that APIs provides. When combined with our MPLS network, as well as voice services over customers' broadband networks via our SmartWan solution, we create a differentiated offering.providing VoIP communication services.
Consumer
For our Consumer customers, we enable users to access30 VONAGE ANNUAL REPORT 2020
Impact of COVID-19
A novel strain of coronavirus, or COVID-19, was first identified in China in December 2019 and utilize our services and features, via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other featuressubsequently declared a pandemic on March 11, 2020, by the World Health Organization. To date, COVID-19 has impacted nearly all regions around the world and resulted in travel restrictions and business slowdowns worldwide. The full impact of the pandemic on our business, operations and financial results has and will depend on various factors that continue to evolve, which we may not accurately predict. In response to the COVID-19 pandemic, governments across the world have enacted measures aimed at containing the spread of the virus, including ordering the closure of all businesses not deemed "essential," restricting residents to their homes, and the practice of social distancing when engaging in authorized activities. While some of these restrictions have been lifted on a varietyglobal scale, many regions, including the United States where Vonage is headquartered, are experiencing a resurgence of devices. Our Consumer strategy is focused onCOVID-19. As a result of the continued penetrationCOVID-19 pandemic, all travel has been severely curtailed to protect the health of our core North American markets,employees and to comply with local guidelines, and we have temporarily closed the majority of Vonage offices worldwide (including our corporate headquarters), both of which disrupt how we typically operate our business.
COVID-19 has impacted some of our customers more than others, including customers in the travel, hospitality, retail, and other industries where physical interaction is critical. We have experienced and expect that we will continue to provide valueexperience slowdowns in international long distancebookings and target under-served segments.customer payments, customer churn and reduced usage, and issuance of customer credits to distressed customers served by certain product lines in the Vonage Communications Platform. In addition, COVID-19 may have impacts on many additional aspects of our operations, directly and indirectly, including with respect to its impacts on customer behaviors, our business and our employees, and the market generally, and the scope and nature of these impacts continue to evolve each day.
Services outside
Recent Significant Events
Coincident with the July 1st appointment of Mr. Read as President and Chief Executive Officer, the Company initiated a business-wide optimization and alignment project to focus the Company's resources and drive stronger operational execution, which also includes the previously announced Consumer evaluation for potential sale. In connection with this project, the Company initiated a reduction in workforce which resulted in a restructuring charge during the last two quarters of 2020. In addition, the Company abandoned certain of its leased facilities during the second half of 2020 and closed a few offices worldwide by December 31, 2020 as a result of COVID-19 impact. These actions are expected to result in a reduction in operating expenses of approximately $50 million annually. The Company expects to reinvest a portion of the United Statescost savings into key areas of the business. In addition, the Company may have opportunities for further cost saving initiatives as the Company continues to streamline and optimize its business processes which may result in further restructuring charges.
We currently have Applications
The Company completed a comprehensive strategic review of the Consumer segment with the assistance of financial, accounting, and legal advisors. Based on this review, which included a detailed analysis of the Consumer operationsbusiness’ financials, profitability and potential valuation, the Company has determined that it is in the United States, United Kingdom,best interests of the Company and Canadaits shareholders to terminate the sale process and believe that our low-cost Internet based communications platform enables us to cost effectively deliver voice and messaging services to other locations throughoutretain the world. We also have operations in the United States, United Kingdom, Hong Kong, and Singapore, and provide Applications solutions to our customers located in many countries around the world.Consumer business.
Trends in Our Industry
A number of trends in our industry have a significant effect on our results of operations and are important to an understanding of our financial statements.
31 VONAGE ANNUAL REPORT 2019
Competitive landscape. The business cloud communications markets and consumer services market in which we participate are highly competitive. We face competition from a boardbroad set of companies, including (i) SaaS companies, CCaaS companies, other alternative communication providers, other providers of cloud communication services and (ii) traditional telephone, wireless service providers, cable companies, and alternative communications providers with consumer offerings. As the cloud communications market evolves, and the convergence of voice, video, messaging, mobility and data networking technologies accelerates, we may face competition in the future from companies that do not currently compete in the market, including companies that currently compete in other sectors, companies that serve consumers rather than business customers, or companies which expand their market presence to include cloud communications. Moreover, as businesses and educational institutions are quickly pivoting to cloud-based communications in light the increased need for remote work and remote learning due to the COVID-19 pandemic, we are experiencing intense competition from our existing competitors, and also emerging competitors, seeking to capitalize on the growing needs for businesses and educators to transform their operations. For additional information, refer to "Competition" in Part I, Business.
Regulation. Our business has developed in a relatively lightly regulated environment. For further discussion regarding regulatory issues which impactsimpact the Company, refer to "Regulation" in Note 15, Commitments and Contingencies to our financial statements.
31 VONAGE ANNUAL REPORT 2020
Key Operating Data
The table below includes key operating data that our management uses to measure the growth and operating performance of the BusinessVCP segment:
|
| | | | | | | | | | | |
| Business | For the Years Ended December 31, | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Service revenues per customer | $ | 447 |
| | $ | 358 |
| | $ | 327 |
|
| Business revenue churn | 1.1 | % | | 1.1 | % | | 1.2 | % |
| | | | | | | | | | | | | | | | | |
| Vonage Communications Platform | For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Service revenues per customer | $ | 516 | | | $ | 447 | | | $ | 358 | |
| Vonage Communications Platform revenue churn | 1.1 | % | | 1.1 | % | | 1.1 | % |
Service revenues per customer. Service revenues per customer for a particular period is calculated by dividing the average monthly service revenues for the period by the average number of customers over the number of months in the period. The average number of customers is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Service revenues excludes revenues from trading and auction customers. Service revenues per customer increased from $358 for 2018 to $447 for 2019 to $516 for 2020 primarily driven by the Company's successful efforts to attract larger businessVCP customers and to expand services provided to our existing businessVCP customers.
BusinessVonage Communications Platform revenue churn. BusinessVonage Communication Platform revenue churn is calculated by dividing the revenue from customers or customer locations that have been confirmed to be foregone during a period by the simple average of the total revenue from all customers in that period. Revenue for purposes of determining BusinessVCP revenue churn is service revenue excluding revenue from our trading and auction customers, and usage in excess of a customer’s contracted service plan, regulatory fees charged to customers, and credits. The simple average of total revenue from all customers during the period is the total revenue as defined herein on the first day of the period, plus the total revenue as defined herein on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate business revenue churn differently, and their businessVCP revenue churn data may not be directly comparable to ours. BusinessVonage Communications Platform revenue churn was flat atdecreased from 1.1% for 20182019 and 2019.to 1.1% for 2020. Our revenue churn may fluctuate over time due to economic conditions, seasonality in certain customer's operations, loss of customers who are acquired, and competitive pressures including promotional pricing. We are continuing to invest in our overall quality of service which includes customer care headcount and systems, billing systems, on-boarding processes and self-service options to ensure we scale our processes to our growth and continue to improve the overall customer experience.
32 VONAGE ANNUAL REPORT 20192020
The table below includes key operating data that our management uses to measure the growth and operating performance of the Consumer segment:
|
| | | | | | | | | | | |
| Consumer | For the Years Ended December 31, | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Average monthly revenues per subscriber line | $ | 27.04 |
| | $ | 26.42 |
| | $ | 26.19 |
|
| Subscriber lines (at period end) | 1,087,819 |
| | 1,287,649 |
| | 1,492,067 |
|
| Customer churn | 1.8 | % | | 1.8 | % | | 2.0 | % |
| | | | | | | | | | | | | | | | | |
| Consumer | For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Average monthly revenues per subscriber line | $ | 27.77 | | | $ | 27.04 | | | $ | 26.42 | |
| Subscriber lines (at period end) | 909,965 | | | 1,087,819 | | | 1,287,649 | |
| Customer churn | 1.7 | % | | 1.8 | % | | 1.8 | % |
Average monthly revenues per subscriber line. Average monthly revenues per subscriber line for a particular period is calculated by dividing our revenues for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. The simple average number of subscriber lines for the period is the number of subscriber lines on the first day of the period, plus the number of subscriber lines on the last day of the period, divided by two. Our average monthly revenues per subscriber line increased from $26.42 for 2018 to $27.04 for 2019 to $27.77 for 2020 due primarily to the Company's ability to retain its more tenured customers.customer.
Subscriber lines. Our subscriber lines include, as of a particular date, all paid subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines, including fax lines bundled with subscriber lines in our small office home office calling plans and soft phones, but do not include our virtual phone numbers and toll free numbers, which only allow inbound telephone calls to customers. Subscriber lines decreased from 1,287,649 as of December 31, 2018 to 1,087,819 as of December 31, 2019 to 909,965 as of December 31, 2020, reflecting planned actions to enhance the profitability of the assisted sales channel by eliminating lower performing locations and restructuring the pricing offers, and to shift investment to our businessVCP market.
Customer churn. Customer churn is calculated by dividing the number of customers that have terminated during a period by the simple average of number of customers in a given period. The simple average number of customers during the period is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate customer churn differently, and their customer churn data may not be directly comparable to ours. Customer churn was flat atdecreased to 1.7% for 2020 from 1.8% for 2019 and for 2018.2019. We maximize customer value by focusing marketing spend on higher return channels and away from assisted selling channels which had higher early life churn. We monitor customer churn on a daily basis and use it as an indicator of the level of customer satisfaction. Customers who have been with us for a year or more tend to have a lower churn rate than customers who have not. In addition, our customers who are international callers generally churn at a lower rate than customers who are domestic callers. Our customer churn will fluctuate over time due to economic conditions, competitive pressures including promotional pricing targeting international long distance callers, marketplace perception of our services, and our ability to provide high quality customer care and network quality and add future innovative products and services. See the discussion above for detail regarding churn impacting our business customers.
REVENUES
Revenues consist of services revenue and customer equipment and shipping fee revenue. Substantially all of our revenues are services revenue. For Consumer customers in the United States, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. For our Business customers, we offer SMB, mid-market, and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years. In addition, we provide managed equipment to Business customers for which the customers pay a monthly fee. Customers also have the opportunity to purchase premium features for additional fees. In addition, we derive revenue from usage-based fees earned from customers using our cloud-based software products. These usage-based software products include our messaging, voice, Verify and chat APIs. Usage-based fees include number of text messages sent or received using our messaging APIs, minutes of call duration activity for our voice APIs, and number of converted authentications for our Verify API. Services revenue is offset by the cost of certain customer acquisition activities, such as rebates and promotions. In addition, in certain instances, we charge disconnect fees which are recognized as revenue at the time the disconnect fees are collected from our customer.
In the United States, we charge regulatory, compliance and intellectual property, and E-911 recovery fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers of telecommunications services. In addition, we recognize revenue on a gross basis for contributions to the USF and related fees. All other taxes are recorded on a net basis.
33 VONAGE ANNUAL REPORT 20192020
Revenues are generated from sales of customer equipment directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. In addition, customer equipment and shipping revenues include revenues from the sale of VoIP telephones in order to access our small and medium business services. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them.
OPERATING EXPENSES
Operating expenses consist of cost of revenues, sales and marketing expense, engineering and development expense, general and administrative expense, and depreciation and amortization.
RESULTS OF OPERATIONS
The following table sets forth as a percentage of consolidated operating revenues, our consolidated statement of income for the periods indicated:
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Total revenues | $ | 1,247,934 | | | $ | 1,189,346 | | | $ | 1,048,782 | |
| | | | | |
| Operating Expenses: | | | | | |
| Cost of revenues (excluding depreciation and amortization) | 553,523 | | | 511,084 | | | 426,995 | |
| Sales and marketing | 342,053 | | | 363,111 | | | 311,433 | |
| Engineering and development | 81,484 | | | 69,460 | | | 52,139 | |
| General and administrative | 182,106 | | | 152,672 | | | 135,324 | |
| Depreciation and amortization | 88,917 | | | 86,256 | | | 70,980 | |
| Total operating expenses | 1,248,083 | | | 1,182,583 | | | 996,871 | |
| (Loss) Income from operations | (149) | | | 6,763 | | | 51,911 | |
| Other Income (Expense): | | | | | |
| Interest expense | (32,160) | | | (32,821) | | | (15,068) | |
| Other income (expense), net | 314 | | | (50) | | | (318) | |
| Total other income (expense), net | (31,846) | | | (32,871) | | | (15,386) | |
| (Loss) Income before income taxes | (31,995) | | | (26,108) | | | 36,525 | |
| Income tax (expense) benefit | (4,217) | | | 6,626 | | | (797) | |
| Net (loss) income | $ | (36,212) | | | $ | (19,482) | | | $ | 35,728 | |
|
| | | | | | | | |
| | For the Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Total revenues | 100 | % | | 100 | % | | 100 | % |
| | | | | | |
| Operating Expenses: | | | | | |
| Cost of revenues (excluding depreciation and amortization) | 43 |
| | 40 |
| | 41 |
|
| Sales and marketing | 30 |
| | 30 |
| | 31 |
|
| Engineering and development | 6 |
| | 5 |
| | 3 |
|
| General and administrative | 13 |
| | 13 |
| | 12 |
|
| Depreciation and amortization | 7 |
| | 7 |
| | 7 |
|
| Total operating expenses | 99 |
| | 95 |
| | 94 |
|
| Income from operations | 1 |
| | 5 |
| | 6 |
|
| Other Income (Expense): | | | | | |
| Interest expense | (3 | ) | | (1 | ) | | (1 | ) |
| Other income (expense), net | — |
| | — |
| | — |
|
| Total other income (expense), net | (3 | ) | | (1 | ) | | (1 | ) |
| (Loss) Income before income taxes | (2 | ) | | 4 |
| | 5 |
|
| Income tax benefit (expense) | 1 |
| | — |
| | (8 | ) |
| Net (loss) income | (1 | )% | | 4 | % | | (3 | )% |
Management's discussion of the results of operations for the Years Ended December 31, 2019,2020 and 2018,2019
The Company reported loss before income taxes of $26,108$31,995 and income before income taxes of $36,525$26,108 for the years ended December 31, 20192020 and 2018,2019, respectively. The decrease in (loss)/incomehigher loss before income taxes as compared to the prior year was primarily caused by higher other operating expenses of $101,623 primarily$23,061. The increase in operating expenses was mainly driven by an increase in general and administrative expense resulting from costs associated with the employee exit costs as a result of restructuring activities, the acquisitionsabandonment of NVMa portion of the Company's office locations and TokBox in 2018 driven by increases in salary costs due to higher headcount, increases in sales and marketing expenses, and increases in depreciation and amortization expenses due to additional intangible assets acquired. In addition, there were increasesincreased reserves associated with indirect taxes. Also attributing was an increase in engineering and development expenses in connection with the Company's continued transformation focusedfocus on innovation.further enhancing the service offerings within the Vonage Communications Platform. The increase in operating expenses was slightly offset by decrease in sales and marketing expenses due to lower media marketing costs along with certain marketing events being cancelled as a result of the COVID-19 pandemic. The increase in operating expenses was offset by higher gross margin of $16,149 primarily as a result of higher usage of APIs within the VCP segment.
The Company reported net loss of $19,482$36,212 and net income of $35,728,$19,482, respectively, for the years ended December 31, 20192020 and 2018.2019. The decreaseincrease in net (loss)/incomeloss for the year ended December 31, 20192020 is mainly due to the aforementioned decreaseincrease in (loss)/incomeloss before income taxes andoffset by the increase in income tax benefit/(expense)expense of $7,423.$10,843 due to an adjustment related to a limitation against the deductibility of officer’s compensation stemming from the impact of CEO and CFO succession and related costs during the current year. In addition, there was an increase to the valuation allowance related to the United Kingdom.
34 VONAGE ANNUAL REPORT 20192020
Segment Adjusted EBITDA
The following graphs illustrate the composition of our Adjusted EBITDA with respect to each of our reportable segments for the years ended December 31, 2020, 2019, and 2018.
The Adjusted EBITDA for Vonage Communications Platform has improved from $(114,555) and $(103,266) for the years ended December 31, 2018 and 2019, respectively, to $(56,968) for they year ended December 31, 2020. This improvement in Vonage Communications Platform Adjusted EBITDA is primarily due to an increase in Vonage Communications Platform gross margin of $61,272 as the Company experience growth in API services as compared to the prior year along with lower sales and marketing costs as a result of less travel due to COVID-19. Adjusted EBITDA for Vonage Communications Platform was also positively impacted in the current year due to cost saving initiatives executed in the second half of 2020. The decline year over year of Adjusted EBITDA for Consumer is primarily driven by the decrease in subscriber lines year over year as further described below.
35 VONAGE ANNUAL REPORT 2020
Consolidated Gross Margin for the Years Ended December 31, 2020, 2019, and 2018
We calculate gross margin as total revenues less cost of service, which primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services and costs incurred when a customer first subscribes to our service. The following table presents total revenues, cost of revenues and the composition of gross margin for the years ended December 31, 2020, 2019, and 2018:
| | | | For the years ended December 31, | | $ Change 2018 to 2019 | % Change 2018 to 2019 | $ Change 2017 to 2018 | % Change 2017 to 2018 | | For the years ended December 31, | | $ Change 2019 to 2020 | % Change 2019 to 2020 | $ Change 2018 to 2019 | % Change 2018 to 2019 | |
| (in thousands, except percentages) | 2019 | 2018 | 2017 | | (in thousands, except percentages) | 2020 | 2019 | 2018 | | |
| Service, access and product revenues | | Service, access and product revenues | $ | 1,185,357 | | $ | 1,106,472 | | $ | 971,723 | | | $ | 78,885 | | 7 | % | $ | 134,749 | | 14 | % | |
| USF revenues | | USF revenues | $ | 62,577 | | $ | 82,874 | | $ | 77,059 | | | $ | (20,297) | | (24) | % | $ | 5,815 | | 8 | % | |
| Total revenues | $ | 1,189,346 |
| $ | 1,048,782 |
| $ | 1,002,286 |
| | $ | 140,564 |
| 13 | % | $ | 46,496 |
| 5 | % | Total revenues | $ | 1,247,934 | | $ | 1,189,346 | | $ | 1,048,782 | | | $ | 58,588 | | 5 | % | $ | 140,564 | | 13 | % | |
| Service, access and product cost of revenues | | Service, access and product cost of revenues | 490,946 | | 428,210 | | 349,905 | | | 62,736 | | 15 | % | 78,305 | | 22 | % | |
| USF cost of revenues | | USF cost of revenues | 62,577 | | 82,874 | | 77,090 | | | (20,297) | | (24) | % | 5,784 | | 8 | % | |
Cost of revenues (1) | 511,084 |
| 426,995 |
| 404,954 |
| | 84,089 |
| 20 | % | 22,041 |
| 5 | % | Cost of revenues (1) | 553,523 | | 511,084 | | 426,995 | | | 42,439 | | 8 | % | 84,089 | | 20 | % | |
| Gross margin | $ | 678,262 |
| $ | 621,787 |
| $ | 597,332 |
| | $ | 56,475 |
| 9 | % | $ | 24,455 |
| 4 | % | Gross margin | $ | 694,411 | | $ | 678,262 | | $ | 621,787 | | | $ | 16,149 | | 2 | % | $ | 56,475 | | 9 | % | |
(1) Excludes depreciation and amortization of $51,408, $38,167, $27,754, and $27,308,$27,754, respectively.
Total revenues and cost of revenues were impacted by the following trends and uncertainties:
For the year ended December 31, 20192020 compared to the year ended December 31, 20182019
Total revenues increased 13%5% for the year ended December 31, 20192020 as compared to the prior year period. The increase is primarily due to businessVCP customer growth driving an increase in revenues of $195,736,$111,177 despite a decline in USF revenues as more of the Company's VCP services are based upon software service rather than telecommunication services. This was partially offset by declining consumer revenues of $55,172$52,589 in connection with the continued decline of subscriber lines. The Company continues to expect that the Consumer portion of the Company's overall business will become less significant assignificant. As a result, the Company reallocatescontinues to allocate its resources to increase market share in its Business communications platforms.on enhancing service provided under the Vonage Communications Platform.
Cost of revenues increased 20%8% for the year ended December 31, 20192020 as compared to the prior year period driven by increased costs incurred in servicing our business customers of $99,083$49,905 due to higher usage of the Company's APIs along with an increase in customers year over year. This was partially offset by a decrease in costs in Consumer of $14,994$7,466 as subscriber lines continues to decline resulting in lower international and long-distance termination costs.
3536 VONAGE ANNUAL REPORT 20192020
BusinessVonage Communications Platform Gross Margin for the Years Ended December 31, 2020, 2019, 2018, and 20172018
| | | | For the years ended December 31, | | $ Change 2018 to 2019 | % Change 2018 to 2019 | $ Change 2017 to 2018 | % Change 2017 to 2018 | | For the years ended December 31, | | $ Change 2019 to 2020 | % Change 2019 to 2020 | $ Change 2018 to 2019 | % Change 2018 to 2019 |
| (in thousands, except percentages) | 2019 | 2018 | 2017 | | (in thousands, except percentages) | 2020 | 2019 | 2018 | |
| Revenues | | | | | | | Revenues | |
| Service revenues | $ | 719,514 |
| $ | 526,707 |
| $ | 417,118 |
| | $ | 192,807 |
| 37 | % | $ | 109,589 |
| 26 | % | Service revenues | $ | 856,492 | | $ | 719,514 | | $ | 526,707 | | | $ | 136,978 | | 19 | % | $ | 192,807 | | 37 | % |
Access and product revenues (1) | 46,232 |
| 50,068 |
| 54,971 |
| | (3,836 | ) | (8 | )% | (4,903 | ) | (9 | )% | Access and product revenues (1) | 36,584 | | 46,232 | | 50,068 | | | (9,648) | | (21) | % | (3,836) | | (8) | % |
| Service, access and product revenues | 765,746 |
| 576,775 |
| 472,089 |
| | 188,971 |
| 33 | % | 104,686 |
| 22 | % | Service, access and product revenues | 893,076 | | 765,746 | | 576,775 | | | 127,330 | | 17 | % | 188,971 | | 33 | % |
| USF revenues | 38,134 |
| 31,369 |
| 26,833 |
| | 6,765 |
| 22 | % | 4,536 |
| 17 | % | USF revenues | 21,981 | | 38,134 | | 31,369 | | | (16,153) | | (42) | % | 6,765 | | 22 | % |
| Total revenues | 803,880 |
| 608,144 |
| 498,922 |
| | 195,736 |
| 32 | % | 109,222 |
| 22 | % | Total revenues | 915,057 | | 803,880 | | 608,144 | | | 111,177 | | 14 | % | 195,736 | | 32 | % |
| | | | | | | | |
| Cost of revenues | | | | | | | Cost of revenues | |
Service cost of revenues (2) | 336,045 |
| 239,096 |
| 184,054 |
| | 96,949 |
| 41 | % | 55,042 |
| 30 | % | Service cost of revenues (2) | 413,079 | | 336,045 | | 239,096 | | | 77,034 | | 23 | % | 96,949 | | 41 | % |
Access and product cost of revenues (1) | 53,455 |
| 58,081 |
| 57,906 |
| | (4,626 | ) | (8 | )% | 175 |
| — | % | Access and product cost of revenues (1) | 42,479 | | 53,455 | | 58,081 | | | (10,976) | | (21) | % | (4,626) | | (8) | % |
| Service, access and product cost of revenues | 389,500 |
| 297,177 |
| 241,960 |
| | 92,323 |
| 31 | % | 55,217 |
| 23 | % | Service, access and product cost of revenues | 455,558 | | 389,500 | | 297,177 | | | 66,058 | | 17 | % | 92,323 | | 31 | % |
| USF cost of revenues | 38,134 |
| 31,374 |
| 26,833 |
| | 6,760 |
| 22 | % | 4,541 |
| 17 | % | USF cost of revenues | 21,981 | | 38,134 | | 31,374 | | | (16,153) | | (42) | % | 6,760 | | 22 | % |
| Total cost of revenues | 427,634 |
| 328,551 |
| 268,793 |
| | 99,083 |
| 30 | % | 59,758 |
| 22 | % | Total cost of revenues | 477,539 | | 427,634 | | 328,551 | | | 49,905 | | 12 | % | 99,083 | | 30 | % |
| | | | | | | | |
| Segment gross margin | | | | | | | Segment gross margin | |
| Service margin | 383,469 |
| 287,611 |
| 233,064 |
| | 95,858 |
| 33 | % | 54,547 |
| 23 | % | Service margin | 443,413 | | 383,469 | | 287,611 | | | 59,944 | | 16 | % | 95,858 | | 33 | % |
| Gross margin ex-USF (Service, access and product margin) | 376,246 |
| 279,598 |
| 230,129 |
| | 96,648 |
| 35 | % | 49,469 |
| 21 | % | Gross margin ex-USF (Service, access and product margin) | 437,518 | | 376,246 | | 279,598 | | | 61,272 | | 16 | % | 96,648 | | 35 | % |
| Segment gross margin | $ | 376,246 |
| $ | 279,593 |
| $ | 230,129 |
| | $ | 96,653 |
| 35 | % | $ | 49,464 |
| 21 | % | Segment gross margin | $ | 437,518 | | $ | 376,246 | | $ | 279,593 | | | $ | 61,272 | | 16 | % | $ | 96,653 | | 35 | % |
| | | | | | | | |
| Segment gross margin % | | | | | | | Segment gross margin % | |
| Service margin % | 53.3 | % | 54.6 | % | 55.9 | % | | (1.3 | )% | | (1.3 | )% |
|
| Service margin % | 51.8 | % | 53.3 | % | 54.6 | % | | (1.5) | % | | (1.3) | % | |
| Gross margin ex-USF (Service, access and product margin) % | 49.1 | % | 48.5 | % | 48.7 | % | | 0.6 | % | | (0.2 | )% | | Gross margin ex-USF (Service, access and product margin) % | 49.0 | % | 49.1 | % | 48.5 | % | | (0.1) | % | | 0.6 | % | |
| Segment gross margin % | 46.8 | % | 46.0 | % | 46.1 | % | | 0.8 | % | | (0.1 | )% | | Segment gross margin % | 47.8 | % | 46.8 | % | 46.0 | % | | 1.0 | % | | 0.8 | % | |
(1) Includes customer premise equipment, access, and shipping and handling.
(2) Excludes depreciation and amortization of $47,701, $33,484, $22,554, and $20,100,$22,554, respectively.
For the year ended December 31, 20192020 compared to the year ended December 31, 20182019
The following table describes the increase in businessVonage Communications Platform gross margin for the year ended December 31, 20192020 as compared to the year ended December 31, 2018:2019:
| | | | | |
| (in thousands) |
| Service gross margin increase is primarily due to increased usage of the Company's API services as customers expand their use of video APIs as a result of the ongoing COVID-19 pandemic along with an overall increase in the customer base further attributing to the increase in VCP Adjusted EBITDA | $ | 59,944 | |
| Access and product gross margin increased due to lower costs providing access services to VCP customers during the current year | 1,328 | |
| |
| Increase in segment gross margin | $ | 61,272 | |
|
| | | |
| | (in thousands) |
| Service gross margin excluding the impact of the acquisitions increased 11% primarily due to overall growth in our Business customer base of 6% as compared to the prior year | $ | 31,822 |
|
| Service gross margin also increased due to acquisitions of TokBox on August 1, 2018 and NVM on October 31, 2018, respectively | 64,036 |
|
| Access and product gross margin increased due to higher costs providing access services to Business customers during the current year | 790 |
|
| USF gross margin increased mainly due to payment during the first quarter of 2018 for USF fees not collected in 2017 | 5 |
|
| Increase in segment gross margin | $ | 96,653 |
|
36 VONAGE ANNUAL REPORT 2019
BusinessVonage Communications Platform service gross margin percentage decreased to 53.3%51.8% for the year December 31, 20192020 from 54.6%53.3% for the year ended December 31, 2018.2019. The decrease in businessVCP service gross margin percentage is a result of faster growthgreater proportion of certain lower-margin productslower margin services across our BusinessVCP segment forduring the year ended December 31, 20192020 as compared to the same period in the prior year.year as usage of APIs has grown. Our gross margin percentage may continue to be impacted by changes in the mix of service offerings provided to our customers across our BusinessVCP segment.
37 VONAGE ANNUAL REPORT 2020
Consumer Gross Margin for the Years Ended December 31, 2020, 2019, 2018, and 20172018
| | | | For the years ended December 31, | | $ Change 2018 to 2019 | % Change 2018 to 2019 | $ Change 2017 to 2018 | % Change 2017 to 2018 | | For the years ended December 31, | | $ Change 2019 to 2020 | % Change 2019 to 2020 | $ Change 2018 to 2019 | % Change 2018 to 2019 |
| (in thousands, except percentages) | 2019 | 2018 | 2017 | | (in thousands, except percentages) | 2020 | 2019 | 2018 | |
| Revenues | | | | | | | Revenues | |
| Service revenues | $ | 340,462 |
| $ | 394,389 |
| $ | 454,340 |
| | $ | (53,927 | ) | (14 | )% | $ | (59,951 | ) | (13 | )% | Service revenues | $ | 292,003 | | $ | 340,462 | | $ | 394,389 | | | $ | (48,459) | | (14) | % | $ | (53,927) | | (14) | % |
Access and product revenues (1) | 264 |
| 559 |
| 525 |
| | (295 | ) | (53 | )% | 34 |
| 6 | % | Access and product revenues (1) | 278 | | 264 | | 559 | | | 14 | | 5 | % | (295) | | (53) | % |
| Service, access and product revenues | 340,726 |
| 394,948 |
| 454,865 |
| | (54,222 | ) | (14 | )% | (59,917 | ) | (13 | )% | Service, access and product revenues | 292,281 | | 340,726 | | 394,948 | | | (48,445) | | (14) | % | (54,222) | | (14) | % |
| USF revenues | 44,740 |
| 45,690 |
| 48,499 |
| | (950 | ) | (2 | )% | (2,809 | ) | (6 | )% | USF revenues | 40,596 | | 44,740 | | 45,690 | | | (4,144) | | (9) | % | (950) | | (2) | % |
| Total revenues | 385,466 |
| 440,638 |
| 503,364 |
| | (55,172 | ) | (13 | )% | (62,726 | ) | (12 | )% | Total revenues | 332,877 | | 385,466 | | 440,638 | | | (52,589) | | (14) | % | (55,172) | | (13) | % |
| | | | | | | | |
| Cost of revenues | | | | | | | Cost of revenues | |
Service cost of revenues (2) | 34,677 |
| 47,439 |
| 80,454 |
| | (12,762 | ) | (27 | )% | (33,015 | ) | (41 | )% | Service cost of revenues (2) | 33,550 | | 34,677 | | 47,439 | | | (1,127) | | (3) | % | (12,762) | | (27) | % |
Access and product cost of revenues (1) | 4,033 |
| 5,289 |
| 7,208 |
| | (1,256 | ) | (24 | )% | (1,919 | ) | (27 | )% | Access and product cost of revenues (1) | 1,838 | | 4,033 | | 5,289 | | | (2,195) | | (54) | % | (1,256) | | (24) | % |
| Service, access and product cost of revenues | 38,710 |
| 52,728 |
| 87,662 |
| | (14,018 | ) | (27 | )% | (34,934 | ) | (40 | )% | Service, access and product cost of revenues | 35,388 | | 38,710 | | 52,728 | | | (3,322) | | (9) | % | (14,018) | | (27) | % |
| USF cost of revenues | 44,740 |
| 45,716 |
| 48,499 |
| | (976 | ) | (2 | )% | (2,783 | ) | (6 | )% | USF cost of revenues | 40,596 | | 44,740 | | 45,716 | | | (4,144) | | (9) | % | (976) | | (2) | % |
| Total cost of revenues | 83,450 |
| 98,444 |
| 136,161 |
| | (14,994 | ) | (15 | )% | (37,717 | ) | (28 | )% | Total cost of revenues | 75,984 | | 83,450 | | 98,444 | | | (7,466) | | (9) | % | (14,994) | | (15) | % |
| | | | | | | | |
| Segment gross margin | | | | | | | Segment gross margin | |
| Service margin | 305,785 |
| 346,950 |
| 373,886 |
| | (41,165 | ) | (12 | )% | (26,936 | ) | (7 | )% | Service margin | 258,453 | | 305,785 | | 346,950 | | | (47,332) | | (15) | % | (41,165) | | (12) | % |
| Gross margin ex-USF (Service, access and product margin) | 302,016 |
| 342,220 |
| 367,203 |
| | (40,204 | ) | (12 | )% | (24,983 | ) | (7 | )% | Gross margin ex-USF (Service, access and product margin) | 256,893 | | 302,016 | | 342,220 | | | (45,123) | | (15) | % | (40,204) | | (12) | % |
| Segment gross margin | $ | 302,016 |
| $ | 342,194 |
| $ | 367,203 |
| | $ | (40,178 | ) | (12 | )% | $ | (25,009 | ) | (7 | )% | Segment gross margin | $ | 256,893 | | $ | 302,016 | | $ | 342,194 | | | $ | (45,123) | | (15) | % | $ | (40,204) | | (12) | % |
| | | | | | | | |
| Segment gross margin % | | | | | | | Segment gross margin % | |
| Service margin % | 89.8 | % | 88.0 | % | 82.3 | % | | 1.8 | % | | 5.7 | % | | Service margin % | 88.5 | % | 89.8 | % | 88.0 | % | | (1.3) | % | | 1.8 | % | |
| Gross margin ex-USF (Service, access and product margin) % | 88.6 | % | 86.6 | % | 80.7 | % | | 2.0 | % | | 5.9 | % | | Gross margin ex-USF (Service, access and product margin) % | 87.9 | % | 88.6 | % | 86.6 | % | | (0.7) | % | | 2.0 | % | |
| Segment gross margin % | 78.4 | % | 77.7 | % | 72.9 | % | | 0.7 | % | | 4.8 | % | | Segment gross margin % | 77.2 | % | 78.4 | % | 77.7 | % | | (1.2) | % | | 0.7 | % | |
(1) Includes customer premise equipment, and shipping and handling.
(2) Excludes depreciation and amortization of $3,707, $4,683, $5,200, and $7,208,$5,200, respectively.
37 VONAGE ANNUAL REPORT 2019
For the year ended December 31, 20192020 compared to the year ended December 31, 20182019
The following table describes the decrease in consumerConsumer gross margin for the year ended December 31, 20192020 as compared to the year ended December 31, 2018:2019:
| | | | | |
| (in thousands) |
| Service gross margin decreased primarily due to a decrease in subscriber lines of 16% resulting in lower gross margin of $47,430 which has been declining over recent years as the Company has focused on the growth of the Vonage Communications Platform | $ | (47,332) | |
| Access and product gross margin increased 59% primarily due lower equipment costs associated with sales to customers during the current year | 2,209 | |
| |
| Decrease in segment gross margin | $ | (45,123) | |
|
| | | |
| | (in thousands) |
| Service gross margin decreased primarily due to a decrease in subscriber lines of 16% resulting in lower gross margin of $41,874 as the Company is not actively pursuing expansion of the Consumer customer base. This was offset by a slight increase in average revenue per customer and lower overall costs incurred by the Consumer segment resulting in increased gross margin of $709 | $ | (41,165 | ) |
| Access and product gross margin increased 20% primarily due lower equipment costs associated with sales to customers during the current year | 961 |
|
| USF gross margin increased mainly due to payment during the first quarter of 2018 for USF fees not collected in 2017 | 26 |
|
| Decrease in segment gross margin | $ | (40,178 | ) |
Consumer service gross margin percentage increaseddecreased to 88.5% for the year ended December 31, 2020 from 89.8% for the year ended December 31, 2019 from 88.0% for the year ended December 31, 2018 due to lowerslightly higher international and domestic termination rates and the allocationrates.
38 VONAGE ANNUAL REPORT 2020
Other Operating Expenses
The following table presents our other operating expenses during the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively:
| | | | For the years ended December 31, | | $ Change 2018 to 2019 | % Change 2018 to 2019 | $ Change 2017 to 2018 | % Change 2017 to 2018 | | For the years ended December 31, | | $ Change 2019 to 2020 | % Change 2019 to 2020 | $ Change 2018 to 2019 | % Change 2018 to 2019 |
| (in thousands, except percentages) | 2019 | 2018 | 2017 | | (in thousands, except percentages) | 2020 | 2019 | 2018 | |
| Sales and marketing | $ | 363,111 |
| $ | 311,433 |
| $ | 313,251 |
| | $ | 51,678 |
| 17 | % | $ | (1,818 | ) | (1 | )% | Sales and marketing | $ | 342,053 | | $ | 363,111 | | $ | 311,433 | | | $ | (21,058) | | (6) | % | $ | 51,678 | | 17 | % |
| Engineering and development | 69,460 |
| 52,139 |
| 29,630 |
| | 17,321 |
| 33 | % | 22,509 |
| 76 | % | Engineering and development | 81,484 | | 69,460 | | 52,139 | | | 12,024 | | 17 | % | 17,321 | | 33 | % |
| General and administrative | 152,672 |
| 135,324 |
| 122,537 |
| | 17,348 |
| 13 | % | 12,787 |
| 10 | % | General and administrative | 182,106 | | 152,672 | | 135,324 | | | 29,434 | | 19 | % | 17,348 | | 13 | % |
| Depreciation and amortization | 86,256 |
| 70,980 |
| 72,523 |
| | 15,276 |
| 22 | % | (1,543 | ) | (2 | )% | Depreciation and amortization | 88,917 | | 86,256 | | 70,980 | | | 2,661 | | 3 | % | 15,276 | | 22 | % |
| Total other operating expenses | $ | 671,499 |
| $ | 569,876 |
| $ | 537,941 |
| | $ | 101,623 |
| 18 | % | $ | 31,935 |
| 6 | % | Total other operating expenses | $ | 694,560 | | $ | 671,499 | | $ | 569,876 | | | $ | 23,061 | | 3 | % | $ | 101,623 | | 18 | % |
For the year ended December 31, 20192020 compared to the year ended December 31, 20182019
Total other operating expenses increased by $101,623$23,061 during the year ended December 31, 20192020 as compared to the year ended December 31, 20182019 primarily due to the following:
•Sales and marketing expense increased by $51,678, or 17%decreased 6%, primarily due to additional costs from TokBox and NVM which were acquired in August 2018 and October 2018, respectively. Additionally, sales and marketing costs were impacted by increaseddecreased spending in the current year related to media marketing initiatives, expansion ofless travel by the Company's sales force, hostingand attending fewer sales conferences this year than in the Company's first ever Vonage Campus eventyear due to the COVID-19 pandemic. These were offset by an increase in October 2019, andreserves for expected credit losses for trade receivables during the attendance at conferences such as Dreamforce.current year.
•Engineering and development expense increased $17,321 or 33%17%, in connection withdue to higher employee costs as the Company's continued transformation focusedCompany increased resources as part of its focus on innovation and developingthe development of further functionality related to its proprietary platformthe Vonage Communications Platform in order to support customers through the mid-market and enterprise sector.
•General and administrative expense increased by $17,348, or 13%, primarily due to higher personnel costs driven by the increase in headcount following the acquisition of TokBox and NVM.
Depreciation and amortization expense increased by $15,276, or 22%19%, primarily due to the amortization of acquired intangible assetsexpense related to TokBoxthe employee exit costs associated with restructuring activities along with CEO succession costs, the abandonment of certain of the Company's leased office locations, an increase in professional services related to strategic business reviews undertaken by the Company in the current year, higher personnel costs and NVM.stock compensation.
3839 VONAGE ANNUAL REPORT 20192020
Other Income (Expense)
| | | | For the years ended December 31, | | $ Change 2018 to 2019 | % Change 2018 to 2019 | $ Change 2017 to 2018 | % Change 2017 to 2018 | | For the years ended December 31, | | $ Change 2019 to 2020 | % Change 2019 to 2020 | $ Change 2018 to 2019 | % Change 2018 to 2019 |
| (in thousands, except percentages) | 2019 | 2018 | 2017 | | (in thousands, except percentages) | 2020 | 2019 | 2018 | |
| Interest expense | $ | (32,821 | ) | $ | (15,068 | ) | $ | (14,868 | ) | | $ | (17,753 | ) | (118 | )% | $ | (200 | ) | (1 | )% | Interest expense | $ | (32,160) | | $ | (32,821) | | $ | (15,068) | | | $ | 661 | | 2 | % | $ | (17,753) | | (118) | % |
| Other income (expense), net | (50 | ) | (318 | ) | 1,270 |
| | 268 |
| 84 | % | (1,588 | ) | 125 | % | Other income (expense), net | 314 | | (50) | | (318) | | | 364 | | 728 | % | 268 | | 84 | % |
| | $ | (32,871 | ) | $ | (15,386 | ) | $ | (13,598 | ) | | $ | (17,485 | ) | (114 | )% | $ | (1,788 | ) | (13 | )% | | $ | (31,846) | | $ | (32,871) | | $ | (15,386) | | | $ | 1,025 | | 3 | % | $ | (17,485) | | (114) | % |
For the year ended December 31, 2020 compared to the year ended December 31, 2019
Interest expense. The interest expense decreased 2%, was mainly due to the realization of losses associated with the unwind of the Company's interest rate swaps in June 2020 and an increase in interest expense associated with the Convertible Senior Notes issued in June 2019, offset by lower interest expense due to lower principal balances on our 2018 Credit Facility.
Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | $ Change 2019 to 2020 | % Change 2019 to 2020 | $ Change 2018 to 2019 | % Change 2018 to 2019 |
| (in thousands, except percentages) | 2020 | 2019 | 2018 | |
| Income tax (expense) benefit | $ | (4,217) | | $ | 6,626 | | $ | (797) | | | $ | (10,843) | | (164) | % | $ | 7,423 | | 931 | % |
| Effective tax rate | (13) | % | 25 | % | 2 | % | | | | | |
For the year ended December 31, 20192020 compared to the year ended December 31, 2018
Interest expense. The increase in interest expense of $17,753, or 118%, was mainly due to interest expense associated with the Convertible Senior Note issued in June 2019 which includes the amortization of the discount on the notes, along with higher interest costs on the Company's 2018 Credit Facility during the first half of the year due to higher outstanding debt balance during that time.
Income Taxes
|
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | $ Change 2018 to 2019 | % Change 2018 to 2019 | $ Change 2017 to 2018 | % Change 2017 to 2018 |
| (in thousands, except percentages) | 2019 | 2018 | 2017 | |
| Income tax benefit (expense) | $ | 6,626 |
| $ | (797 | ) | $ | (79,726 | ) | | $ | 7,423 |
| 931 | % | $ | 78,929 |
| 99 | % |
| Effective tax rate | 25 | % | 2 | % | 174 | % | | | | | |
For the year ended December 31, 2019 compared to the year ended December 31, 2018
We recognize income taxes equal to pre-tax income multiplied by our annual effective income tax rate. In addition, adjustments are recorded for discrete period items and changes to our state effective tax rate which can cause the rate to fluctuate from quarter to quarter.
During the year ended December 31, 2020, we recognized tax expense of $4,217 related to U.S., state and foreign income tax expense. The Company recorded a permanent adjustment related to a limitation against the deductibility of officer’s compensation stemming from the impact of CEO and CFO succession and related costs during the current year. In addition, there was an increase to the valuation allowance related to the United Kingdom.
During the year ended December 31, 2019, we recognized tax benefit of $6,626 related to U.S., state and foreign income tax expense. The Company recorded a permanent benefit related to the equity based stock compensation and an interested related adjustment in the United Kingdom.
During the year ended December 31, 2018, we recognized tax expense of $797 related to U.S., state and foreign income tax expense. The Company has recorded a permanent benefit related to excess share-based stock compensation. In addition, certain acquisition related expenses incurred during 2018 are treated as a permanent difference as the expenses are not deductible for tax purposes but are a reduction of pre-tax income. The Company also recorded a permanent difference related to the impact of the TCJA related to the excess compensation deduction pertaining to covered employees who received compensation in excess of $1 million dollars.
3940 VONAGE ANNUAL REPORT 20192020
NON-GAAP METRICS
Adjusted EBITDA is a non-GAAP financial measure and is the primary basis used as the measure of profit or loss for our businesses. Adjusted EBITDA is defined as net income or net loss attributable to Vonage before income tax expense or benefit, interest expense, depreciation and amortization, stock-based expense, amortization of costs to implement cloud computing arrangements, acquisition related transaction and integration costs, organizational transformation costs, restructuring activities, and other non-recurring items. Organizational transformation includes employee related exits including CEO succession, system change management, facility exit costs, and rebranding. Restructuring activities relate to the Company's business-wide optimization and alignment project initiated in 2020 which included employee related exits and further facility exit costs executed upon as part of the overall project. Other non-recurring items principally include certain litigation charges and other non-recurring project costs such as the review of the Consumer business and the business optimization project, both of which were initiated in 2020. This is also consistent with the measure used under our bank credit assessment. Our management and our Board of Directors utilize Adjusted EBITDA to evaluate our consolidated operating performance and the performance of our operating segments and to allocate resources and capital to our segments. It is also a significant performance measure in our annual incentive compensation programs. We believe that Adjusted EBITDA is useful to our investors as a basis for comparing our operating performance with that of other companies in our industries, although our measure of Adjusted EBITDA may not be directly comparable to that of other companies.
Our reconciliation of the aggregate amount of Adjusted EBITDA to consolidated income before taxes is presented below:
| | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Net (Loss) Income | | $ | (36,212) | | | $ | (19,482) | | | $ | 35,728 | |
| Income tax | | 4,217 | | | (6,626) | | | 797 | |
| Interest expense | | 32,160 | | | 32,821 | | | 15,068 | |
| Depreciation and amortization | | 88,917 | | | 86,256 | | | 70,980 | |
| Amortization of costs to implement cloud computing arrangements | | 2,885 | | | 1,362 | | | — | |
| Share-based expense | | 45,667 | | | 45,242 | | | 33,020 | |
| Acquisition related transactions and integration costs | | — | | | 701 | | | 14,645 | |
| Acquisition related consideration accounted for as compensation | | — | | | — | | | 1,425 | |
| Organizational transformation | | 5,119 | | | 14,533 | | | 4,331 | |
| Restructuring activities | | 18,913 | | | — | | | — | |
| Other non-recurring items | | 8,518 | | | 3,289 | | | 1,742 | |
| Adjusted EBITDA | | $ | 170,184 | | | $ | 158,096 | | | $ | 177,736 | |
41 VONAGE ANNUAL REPORT 2020
LIQUIDITY AND CAPITAL RESOURCES
Overview
For the year ended December 31, 2019,2020, we had lower net cash from operations compared to the years ended December 31, 2019 and 2018 and 2017primarily due to lower net income. We expect to continue to balance efforts to grow our revenue while consistently achieving operating profitability. To grow our revenue, we continue to make investments in growth initiatives, marketing, application development, network quality and expansion, and customer care. Although we believe we will achieve consistent profitability in the future, we ultimately may not be successful and we may not achieve consistent profitability. We believe that cash flow from operations and cash on hand will fund our operations for at least the next twelve months.
The following table sets forth a summary of our cash flows for the periods indicated:
| | | | For the years ended December 31, | | $ Change 2018 to 2019 | $ Change 2017 to 2018 | | For the years ended December 31, | | $ Change 2019 to 2020 | $ Change 2018 to 2019 |
| (dollars in thousands) | 2019 | 2018 | 2017 | | (dollars in thousands) | 2020 | 2019 | 2018 | |
| Net cash provided by operating activities | $ | 92,926 |
| $ | 123,205 |
| $ | 128,058 |
| | $ | (30,279 | ) | $ | (4,853 | ) | Net cash provided by operating activities | $ | 83,880 | | $ | 92,926 | | $ | 123,205 | | | $ | (9,046) | | $ | (30,279) | |
| Net cash used in investing activities | (52,079 | ) | (407,230 | ) | (30,737 | ) | | 355,151 |
| (376,493 | ) | Net cash used in investing activities | (52,723) | | (52,079) | | (407,230) | | | (644) | | 355,151 | |
| Net cash (used in) provided by financing activities | (21,921 | ) | 258,212 |
| (96,242 | ) | | (280,133 | ) | 354,454 |
| Net cash (used in) provided by financing activities | (10,850) | | (21,921) | | 258,212 | | | 11,071 | | (280,133) | |
|
Operating Activities
The following table describes the changes in cash provided by operating activities for the year ended December 31, 20192020 as compared to the year ended December 31, 2018:2019:
|
| | | |
| | (in thousands) |
| Decrease in operating income adjusted for non-cash items due to the decline of the Consumer segment and higher operating expenses in 2019 | $ | (27,475 | ) |
| Decrease in working capital driven primarily by timing of accounts receivable collections, payments to acquire customers, and vendor payments | (2,804 | ) |
| Decrease in cash provided by operating activities | $ | (30,279 | ) |
| | | | | |
| (in thousands) |
| Increase in operating income adjusted for non-cash items primarily due to increased gross margin driven by growth within VCP during the year | $ | 15,469 | |
| Decrease in working capital driven primarily by prepayments for annual licenses, CEO succession payments and vendor payments which was slightly offset by improvement in operating cash flows as a result of benefits under the CARES Act and timing of accounts receivable collections | (24,515) | |
| Decrease in cash provided by operating activities | $ | (9,046) | |
Investing Activities
The following table describes the changes in cash used in/provided by investing activities for the year ended December 31, 20192020 as compared to the year ended December 31, 2018:2019:
| | | | | |
| (in thousands) |
| Increase in payments to acquire and develop software assets | (13,352) | |
| Decrease in payments related to capital expenditures | 9,702 | |
| Decrease in cash paid related to prior year acquisitions of business | $ | 3,000 | |
| Decrease in current year payments to acquire new patents | 6 | |
| Increase in cash used in investing activities | $ | (644) | |
|
| | | |
| | (in thousands) |
| Decrease in cash paid related to prior year acquisitions of NewVoiceMedia and TokBox | $ | 377,484 |
|
| Increase in payments to acquire and develop software assets | (20,774 | ) |
| Increase in payments related to capital expenditures | (1,241 | ) |
| Current year payments to acquire new patents | (318 | ) |
| Increase in cash used in investing activities | $ | 355,151 |
|
4042 VONAGE ANNUAL REPORT 20192020
Financing Activities
The following table describes the changes in cash used financing activities for the year ended December 31, 20192020 as compared to the year ended December 31, 2018:2019:
|
| | | |
| | (in thousands) |
| Increase in repayments under the 2018 Credit Facility and capital lease obligations during the current year | $ | (123,172 | ) |
| Decrease in borrowings under the 2018 Credit Facility and Convertible Senior Notes as compared to the prior year | (118,000 | ) |
| Payment for the capped call transaction in connection with the June 2019 issuance of the Convertible Senior Notes | (28,325 | ) |
| Share repurchases in connection with the June 2019 issuance of the Convertible Senior Notes | (10,000 | ) |
| Increase in debt issuance costs largely associated with the June 2019 issuance of the Convertible Senior Notes | (6,663 | ) |
| Decrease in proceeds received from exercise of stock options due to fewer exercises in 2019 | (4,523 | ) |
| Decrease in payments associated with taxes on share based compensation due to lower vesting in 2019 | 10,550 |
|
| Decrease in cash (used in) provided by financing activities | $ | (280,133 | ) |
| | | | | |
| (in thousands) |
| Decreased borrowings net of repayments during the current year | $ | (50,500) | |
| Prior year amount represents payment for the capped call transaction in connection with the June 2019 issuance of the Convertible Senior Notes | $ | 28,325 | |
| Prior year amount represents payments for share repurchases in connection with the June 2019 issuance of the Convertible Senior Notes | 10,000 | |
| Prior year amount represents payments for financing costs in connection with the June 2019 issuance of the Convertible Senior Notes | 10,043 | |
| Increase in proceeds received from exercise of stock options due to fewer exercises in 2020 | 8,329 | |
| Decrease in payments associated with taxes on share based compensation due to lower vesting in 2020 | 4,874 | |
| Decrease in cash provided by financing activities | $ | 11,071 | |
| |
Sources of Liquidity
The principal sources of liquidity are derived from available borrowings under our existing financing arrangements, existing cash on hand, and cash flows from operations. As described in Note 8, Long-Term Debt, to the Consolidated Financial Statements, the Company's financing arrangements consist of its Convertible Senior Notes and the 2018 Credit Facility comprised of a $100,000 term note and a $500,000 revolving credit facility. The COVID-19 pandemic has caused disruption in global capital markets. This could result in future financing becoming more difficult or expensive to obtain or the Company may not be able to obtain financing on acceptable terms or at all.
Uses of Liquidity
The Company's requirements for liquidity and capital resources are generally for the purposes of operating activities, debt service obligations, and capital expenditures. For the year ended December 31, 2019,2020, capital expenditures were primarily for the implementation of software solutions and purchase of network equipment as we continue to expand our network. Our capital expenditures for the year ended December 31, 20192020 were $49,079,$52,723, of which $28,488$41,840 was for software acquisition and development. The majority of these expenditures are comprised of investments in information technology and systems infrastructure, including an electronic data warehouse, online customer service, and customer management platforms.platforms for the Vonage Communications Platform. For 2020,2021, we believe our capital and software expenditures will be approximately $60$65 million.
Available Borrowings Under the 2018 Credit Facility
We maintain significant availability under our line of credit to meet our short-term liquidity requirements. As of December 31, 2019,2020, amounts available under the 2018 Credit Facility totaled $279.5$284.5 million.
4143 VONAGE ANNUAL REPORT 20192020
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The table below summarizes our contractual obligations at December 31, 2019,2020, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (dollars in thousands) | Total | | 1 year or less | | 2-3 years | | 4-5 years | | After 5 years |
| | (unaudited) |
| Contractual Obligations: | | | | | | | | | |
| Convertible senior notes | $ | 345,000 |
| | $ | — |
| | $ | — |
| | $ | 345,000 |
| | $ | — |
|
| 2018 revolving credit facility | 220,500 |
| | — |
| | — |
| | 220,500 |
| | — |
|
| Interest associated with outstanding debt | 67,468 |
| | 17,402 |
| | 34,743 |
| | 15,323 |
| | — |
|
| Operating lease obligations | 69,246 |
| | 15,017 |
| | 19,262 |
| | 13,789 |
| | 21,178 |
|
| Purchase obligations | 94,196 |
| | 41,807 |
| | 48,844 |
| | 3,545 |
| | — |
|
| Total contractual obligations | 796,410 |
| | 74,226 |
|
| 102,849 |
| | 598,157 |
| | 21,178 |
|
| Other Commercial Commitments: | | | | | | | | | |
| Standby letters of credit | 1,528 |
| | 1,528 |
| | — |
| | — |
| | — |
|
| Total contractual obligations and other commercial commitments | $ | 797,938 |
| | $ | 75,754 |
| | $ | 102,849 |
| | $ | 598,157 |
| | $ | 21,178 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (dollars in thousands) | Total | | 1 year or less | | 2-3
years | | 4-5
years | | After 5
years |
| | (unaudited) |
| Contractual Obligations: | | | | | | | | | |
| Convertible senior notes | $ | 345,000 | | | $ | — | | | $ | — | | | $ | 345,000 | | | $ | — | |
| 2018 revolving credit facility | 212,500 | | | — | | | 212,500 | | | — | | | — | |
| Interest associated with outstanding debt | 40,382 | | | 13,615 | | | 24,033 | | | 2,734 | | | — | |
| Operating lease obligations | 47,098 | | | 13,134 | | | 18,046 | | | 8,396 | | | 7,522 | |
| Purchase obligations | 59,525 | | | 32,539 | | | 26,986 | | | — | | | — | |
| Total contractual obligations | 704,505 | | | 59,288 | | | 281,565 | | | 356,130 | | | 7,522 | |
| Other Commercial Commitments: | | | | | | | | | |
| Standby letters of credit | 1,502 | | | 1,502 | | | — | | | — | | | — | |
| Total contractual obligations and other commercial commitments | $ | 706,007 | | | $ | 60,790 | | | $ | 281,565 | | | $ | 356,130 | | | $ | 7,522 | |
Convertible Senior Notes. The company issued $345 million aggregate principal amount of 1.75% convertible senior notes due 2024. As of December 31, 2020, interest associated with the convertible senior note dueis approximately $6,038 for 2021 through 2023 annually and $2,734 in 2024. See Note 8, Long-Term Debt in the notes to the Consolidated Financial Statements.
2018 Credit Facility. The 2018 Credit Facility was entered in July 2018 consisting of a $100,000 term note and a $500,000 revolving credit facility. As of December 31, 2020, the 2018 revolving credit facility balance was $215,500, matures on July 31, 2023 and interest associated with the outstanding debt is approximately $7,577 in 2021 and in 2022, and $4,380 in 2023, respectively. See Note 8, Long-Term Debt in the notes to the Consolidated Financial Statements.
Operating Lease Obligations. At December 31, 2019,2020, we had future commitments for office spaces leased in Holmdel, New Jersey for our headquarters, various other locations for field sales and administration offices in the United States and other countries, in Tel Aviv, Israel for application development, in London, United Kingdom for our UK offices, and for operating leases for co-location facilities mainly in the United States that accommodate a portion of our network equipmentequipment. As part of the Company's business optimization evaluation, the Company decided to close certain office locations worldwide by December 31, 2020 and will lease agile workspaces when needed after the COVID-19 occupancy restrictions are lifted. As of December 31, 2020, operating lease obligations are approximately $13,134 in 2021, $9,645 in 2022, $8,401 in 2023, $4,148 in 2024, $4,248 in 2025, and $7,522 thereafter.
Purchase obligations. The purchase obligations are primarily commitments to vendors who will provide license patents to us, provide web hosting service, provide carrier operation, provide networks and telephone related services, provide electricity to our office, license patents to us, andprovide cloud-based data warehousing, provide software maintenance as well as hardware purchasesservice, and software supports.provide insurance to us. In certain cases, we may terminate these arrangements early upon payment of specified fees. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented do not provide a reliable indicator of our expected future cash outflows or changes in our expected cash position. As of December 31, 2020, purchase obligations are approximately $32,539 in 2021, $23,441 in 2022, and $3,545 in 2023, respectively. See also Note 15, Commitments and Contingencies to our Consolidated Financial Statements.
44 VONAGE ANNUAL REPORT 2020
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses, and the related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. The SEC has defined critical accounting policies as those policies management believes are most important to the portrayal of the Company's financial condition and results of operations and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the following critical accounting policies and estimates addressed below. Our significant accounting policies are summarized in Note 2, Summary of Significant Accounting Policies to our Consolidated Financial Statements. The following describes our critical accounting policies and estimates:
Use of Estimates
Our consolidated financial statements and notes thereto are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.
42 VONAGE ANNUAL REPORT 2019
We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates are used for such items as depreciable lives for long-lived assets including intangible assets, tax provisions, uncollectible accounts, convertible notes, and assets and liabilities assumed in business combinations, among others. In addition, estimates are used to test long-lived assets and goodwill for impairment.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers which is further described in Note 3, Revenue Recognition to the Consolidated Financial Statements
We measure revenue based upon consideration specified by contracts with our customers. Revenue is recognized when our performance obligation under the contract is satisfied by transferring control over the product or service to the customer. We derive our revenues for our Consumer and BusinessVonage Communications Platform segments primarily from the sale of our communication services and customer equipment as further described below. The majority of the Company's contracts with customers have a single performance obligation for service revenues. We recognize revenue with customers when control transfers, which occurs upon delivery of a service or product. For our BusinessVCP segment, the typical life of a service customer is seven years.
Service Revenues
Substantially all of our revenues are service revenues, which are derived from monthly subscription fees under usage based or pay-per-use type billing arrangements, and contract-based services plans. For consumer customers in the United States, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. For business customers, we offer small and medium business, mid-market, and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years. In addition, we provide managed equipment to business customers for a monthly fee. Customers also have the opportunity to purchase premium features for additional fees. We also derive service revenues from per minute fees for international calls if not covered under a plan, including calls made via applications for mobile devices and other stand-alone products, and for any calling minutes in excess of a customer's monthly plan limits. For a portion of our customers, monthly subscription fees are automatically charged to customers' credit cards, debit cards or ECP in advance and are recognized over the following month as service is provided.
Service revenue also includes supplying messaging (SMS and Voice) services to customers as part of our API offerings. Revenue is recognized in the period when messages are sent by the customer. We also transact with providers or bulk SMS aggregators and sell services to these customers who then onsell to their customers. Since the aggregator is our customer, revenue is recognized on a gross basis with related costs included in cost of revenues.
In the United States, we charge regulatory, compliance, E-911 and intellectual property-related recovery fees on a monthly basis to defray costs and to cover taxes that we are charged by the suppliers of telecommunications services. These charges, along with the remittance to the relevant government entity, are recorded on a gross basis. In addition, we charge customers USF fees from customers to recover our obligation to contribute to the fund, as allowed by the FCC. We recognize USF revenue on a gross basis and record the related fees in cost of revenues.
45 VONAGE ANNUAL REPORT 2020
Customer Equipment and Shipping Revenues
Revenues are generated from sales of customer equipment directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. In addition, customer equipment and shipping revenues include revenues from the sale of VoIP telephones in order to access our small and medium business services. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them.
Valuation of Goodwill and Intangible Assets
As of December 31, 2019,2020, the Company had goodwill of $602,970$624,328 consisting of $159,966$173,784 associated with the API Platform GroupAPIs through the acquisitions of Nexmo and TokBox and $443,004$450,544 associated with the Applications GroupUnified Communications and Contact Center Communications as a result of acquisitions of NVM, iCore, Simple Signal, Telesphere, gUnify and Vocalocity. The Company does not have any goodwill allocated to its Consumer segment as of December 31, 2019.2020. In addition, the Company recognized intangible assets measured primarily based upon significant inputs that are not observable in the market and represent Level 3 measurements as defined by ASC 820, Fair Value Measurements. .
43 VONAGE ANNUAL REPORT 2019
The Company applies ASC 805, Business Combinations and ASC 350, Intangibles - Goodwill and Other to account for goodwill and intangible assets. The Company amortizes all finite-lived intangible assets over their respective estimated useful lives while goodwill has an indefinite life and is not amortized. Goodwill and intangible assets not subject to amortization are tested for impairment on an annual basis on October 1st and, when specific circumstances dictate, between annual tests. The Company tests for goodwill at the reporting unit level, which is identified by assessing whether the components of the Company's operating segments constitute businesses for which discrete financial information is available. With respect to the annual goodwill impairment test on October 1st, the Company identified the Applications GroupUC/CC and API Platform Group reporting units which collectively represent the BusinessVCP segment as of that date.
On January 26, 2017, the FASB issued ASC No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The new guidance eliminates Step 2 of the goodwill impairment test. A goodwill impairment loss will now beis measured as the amount by which a reporting unit's carrying amount, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance is effective for public business entities that are SEC fillers for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption was permitted for any impairment test performed on testing dates after January 1, 2017. The Company early adopted this guidance effective September 30, 2019. The guidance allows an entity to assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any).
The Company performed a qualitative assessment of macroeconomic, industry and market events and circumstances, and the overall financial performance of its quantitative impairment test forAPIs reporting unit and its Applications GroupUnified Communications and API Platform GroupContact Center Communications reporting unitsunit as of October 1, 2019 utilizing1st with respect to the income approach. Under the income approach, theannual goodwill impairment test. The Company estimateddetermined it was not more likely than not that the fair value of the reporting units exceeded its carrying value and, as such, the Company concluded that goodwill associated withattributed each of the reporting units inwas less than its carrying amount and accordingly, no impairment needed to be recognized for the following table is not impaired:year ended December 31, 2020. There were also no impairments recorded during the years ended December 31, 2019 and 2018, respectively.
|
| | |
Reporting Unit (Segment) | % Fair Value Over Carrying Value |
Applications Group (Business) | 152 | % |
API Platform Group (Business) | 435 | % |
We also perform a review of our purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life of the asset is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There was no impairment of purchased-intangible assets identified for the years ended December 31, 2020, 2019, 2018, or 2017.2018.
46 VONAGE ANNUAL REPORT 2020
Valuation of Income Taxes
We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred taxes primarily consist of net operating loss carry forwards, or NOLs, intangibles and prepaids. We are required to record a valuation allowance against our net deferred tax assets if we conclude that it is more likely than not that taxable income generated in the future will be insufficient to utilize the future income tax benefit from our net deferred tax assets (namely, the NOLs) prior to expiration. We periodically review this conclusion, which requires significant management judgment. If we are able to conclude in a future period that a future income tax benefit from our net deferred tax assets has a greater than 50% likelihood of being realized, we are required in that period to reduce the related valuation allowance with a corresponding decrease in income tax expense. This would result in a non-cash benefit to our net income in the period of the determination. In subsequent periods, we would expect to recognize income tax expense equal to our pre-tax income multiplied by our effective income tax rate, an expense that was not recognized prior to the reduction of the valuation allowance.
As of December 31, 2019,2020, we had NOLs for United States federal and state tax purposes, including those NOLs acquired as part of past business combinations, of $509,313$410,731 and $237,667,$207,769, respectively, expiring at various times through 2037. In addition, we had Non-US NOLs of $165,104$159,152 primarily related to the United Kingdom which has no expiration date.
44 VONAGE ANNUAL REPORT 2019
Under Section 382 of the Internal Revenue Code, if we undergo an “ownership change” which is generally defined as a greater than 50% change by value in our equity ownership over a three-year period, our ability to use our pre-change of control NOLs and other pre-change tax attributes against our post-change income may be limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. At December 31, 2019,2020, there were no limitations on the use of our NOLs except for the NOLs of Vocalocity as of the date of acquisition for which the Company has reflected in the deferred tax asset.
Capitalized Software
The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage. Capitalization is dependent on whether management with the relevant authority has authorized and committed to funding the project, it is probable the project will be completed, and the software will be used to perform the function intended. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized software is stated at cost less accumulated amortization and amortized on a straight-line basis over their estimated useful lives. During the yearyears ended December 31, 2020, 2019, and 2018 the Company incurred $28,488$41,840, 28,488, and 7,714, respectively, related to the acquisition of software assets which was largely comprised of labor directly associated with internal-use projects.
Business Combinations
We account for acquired businesses treated as a business combination using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related costs are expensed as incurred in the consolidated financial statements. Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets acquired. Estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions believed to be reasonable, and when appropriate, include assistance from independent third-party appraisal firms.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
4547 VONAGE ANNUAL REPORT 20192020
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in currency exchange rates and interest rates.
Foreign Exchange Risk
We sell our products and services primarily in the United States, Canada, the European Union, and Asia. A portion of our sales denominated in Euros, the Canadian Dollar, and the British Pound Sterling, which are affected by changes in currency exchange rates. Our financial results could be affected by changes in foreign currency exchange rates, although foreign exchange risks have not been material to our financial position or results of operations to date.
We prepared a sensitivity analysis to determine the impact of hypothetical changes foreign currency exchange rates have on our results of operations. The foreign currency rate analysis assumed a uniform movement in currencies by 10% relative to the U.S. Dollar on our results. Based upon the results of this analysis, a 10% change in currency rates would have resulted in an increase or decrease in our earnings for the year ended December 31, 20192020 of approximately $1.6$8 million.
On January 31, 2020, the United Kingdom officially withdrew from the European Union or , "EU". WhileThe 11-month transition period ended on December 31, 2020. As of January 1, 2021, the UK willis no longer be a member ofinside the EU, it will still be subject to EU rulesEU's Single Market and remain a member of the Customs Union for a period of time as it negotiates the rulesand is free to be applied to future trading, taxes, and other relationships.implement trade deals struck with third countries. Uncertainty and currency volatility in the British Pound Sterling exchange rate is expected to continue in the short term. In the longer term, any impact from the Brexit on the Company's operations and financial statements will depend on the outcome of future negotiations.continue.
Interest Rate and Debt Risk
Our exposure to market risk for changes in interest rates primarily relates to our long-term debt. In order to hedge the variability of expected future cash interest payments related to our credit facilities we have entered into three interest rate swap agreements which were executed on July 14, 2017. The swaps have an aggregate notional amount of $150 million and are effective on July 31, 2017 through June, 3, 2020. Under the swaps our interest rate is fixed at 4.7%. The interest rate swaps are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging.
As of December 31, 2019,2020, if the interest rate on our variable rate debt changed by 1% on our 2018 revolving credit facility, our annual debt service payment would change by approximately $700.$2,155.
ITEM 8. Financial Statements and Supplementary Data
The financial statements and schedules required by this Item are listed in Part IV, Item 15 in this Annual Report on Form 10-K.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
4648 VONAGE ANNUAL REPORT 20192020
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, as amended, as of the end of the period covered by this Annual Report on Form 10-K. Based on the evaluation of our disclosure controls and procedures as of December 31, 2019,2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
We have implemented significant phases of reporting and transaction system upgrades and are in initial stages of consolidating and upgrading additional transaction systems. Controls over installed and upgraded applications have not changed significantly but may in planned future phases of system and application implementations. We are continually monitoring and assessing the COVID-19 situation in order to assess the impact on the design, implementation, and operating effectiveness of our internal controls. There were no other changes to controls during the quarter ended December 31, 20192020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Inherent Limitations over Internal Controls
The Company's controls and other procedures are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
4749 VONAGE ANNUAL REPORT 20192020
Management’s Report on Internal Control Over Financial Reporting
February 20, 202019, 2021
To the Stockholders of Vonage Holdings Corp.:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2020. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019,2020, our internal control over financial reporting was effective.
Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting. This report appears on page F-4.
|
| | | | | | | |
/s/ ALAN MASAREKRory Read | | /s/ DAVID T. PEARSONTim Shaughnessy |
Alan Masarek
Director, Rory Read
Chief Executive
Officer
Office | | David T. PearsonTim Shaughnessy
Chief Financial Officer(Officer
(Principal Financial Officer and Duly Authorized Officer) |
| | /s/ Stephen Lasher |
| | Stephen Lasher
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer) |
Report of the Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
See Report of Independent Registered Public Accounting Firm on page F-4.56.
ITEM 9B. Other Information
None.
4850 VONAGE ANNUAL REPORT 20192020
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The discussion under the headings “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Director Nomination Process”, “Corporate Governance – Board Committees – Audit Committee”, and “Executive Officers of Vonage” in our Proxy Statement for the 20202021 Annual Meeting of Stockholders is hereby incorporated by reference.
We have adopted a Vonage Code of Conduct applicable to all of our directors, officers, and employees and a Vonage Finance Code of Ethics applicable to our chief financial officer and other employees in our finance organization. The Vonage Code of Conduct and Vonage Finance Code of Ethics are posted in the Investor Relations section of our website, www.vonage.com. We will provide you with print copies of our codes free of charge on written request to Vonage Investor Relations, 23 Main Street, Holmdel NJ, 07733. We intend to disclose any amendments to, or waivers from, provisions of our codes that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, or any person performing in similar functions, on our website promptly following the date of such amendment or waiver.
ITEM 11. Executive Compensation
The discussion under the headings “Compensation”, “Director Compensation”, “Corporate Governance – Compensation Committee Interlocks and Insider Participation”, and “Corporate Governance – Compensation Committee Report” in our Proxy Statement for the 20202021 Annual Meeting of Stockholders is hereby incorporated by reference.
The “Compensation Committee Report” contained in our Proxy Statement shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, or the Securities Act, or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act.
ITEM 12. Delinquent Section 16(a) Reports
The discussion under the headings “Stock Ownership Information” and “Equity Compensation Plan Information” in our Proxy Statement for the 20202021 Annual Meeting of Stockholders is hereby incorporated by reference.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The discussion under the headings “Election of Directors – Transactions with Related Persons”, and “Corporate Governance – Board Determination of Independence” in our Proxy Statement for the 20202021 Annual Meeting of Stockholders is hereby incorporated by reference.
ITEM 14. Principal Accountant Fees and Services
The discussion under the heading “Ratification of Independent Registered Public Accounting Firm” in our Proxy Statement for the 20202021 Annual Meeting of Stockholders is hereby incorporated by reference.
4951 VONAGE ANNUAL REPORT 20192020
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
Exhibits,(a)(1) Financial Statements
The following financial statements are included are included herein:
•Report of Independent Registered Public Accounting Firm
•Consolidated Balance Sheets - As of December 31, 2020 and 2019
•Consolidated Statements of Operations - Years Ended December 31, 2020, 2019, and 2018
•Consolidated Statements of Comprehensive (Loss) Income - Years Ended December 31, 2020, 2019, and 2018
•Consolidated Statements of Cash Flows - Years Ended December 31, 2020, 2019, and 2018
•Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2020, 2019, and 2018
•Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule
(a)
(1) Financial Statements.The index to our financial statementsfollowing schedule is found on page F-1filed as part of Item 15 of this Form 10-K.report and should be read in connection with the Consolidated Financial Statements:
(2) •Financial Statement Schedule.Schedule II—II - Valuation and Qualifying Accounts is
All other schedules are omitted because they are not required or are not applicable.
(a)(3) Exhibits
See Exhibit Index submitted as follows:a separate section of this report.
52 VONAGE ANNUAL REPORT 2020
|
| | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Period |
| Additions | | Less Deductions |
| Other | | Balance at End of Period |
|
| Revenue |
| Expense |
| |
| Allowance for Doubtful Accounts: | | | | | | | | |
| Year ended December 31, 2019 | $ | 3,542 |
| $ | (325 | ) | $ | 2,277 |
| | $ | — |
| $ | — |
| | $ | 5,494 |
|
| Year ended December 31, 2018 | 2,258 |
| (489 | ) | 1,773 |
| | — |
| — |
| | 3,542 |
|
| Year ended December 31, 2017 | 2,093 |
| (1,822 | ) | 1,987 |
| | — |
| — |
| | 2,258 |
|
| Inventory Obsolescence: | | | | | | | | |
| Year ended December 31, 2019 | $ | 152 |
| $ | — |
| $ | (30 | ) | | $ | (46 | ) | $ | — |
| | $ | 76 |
|
| Year ended December 31, 2018 | 108 |
| — |
| 237 |
| | (193 | ) | — |
| | 152 |
|
| Year ended December 31, 2017 | 117 |
| — |
| 412 |
| | (421 | ) | — |
| | 108 |
|
| Valuation Allowance for Deferred Taxes: | | | | | | | | |
| Year ended December 31, 2019 | $ | 23,815 |
| $ | — |
| $ | (3,837 | ) | (1) | $ | — |
| $ | — |
| | $ | 19,978 |
|
| Year ended December 31, 2018 | 22,390 |
| — |
| 1,425 |
| (1) | — |
| — |
| | 23,815 |
|
| Year ended December 31, 2017 | 18,546 |
| — |
| 3,844 |
| (1) | — |
| — |
| | 22,390 |
|
(1)Amounts charged (credited) to expense represent change in valuation allowance.
|
| | |
Exhibit
Number
| | Description of Exhibit |
2.1 | | |
2.2 | | |
3.1 | | |
3.2 | | |
4.1 | | |
4.2 | | |
4.3 | | |
4.4 | | |
4.5 | | |
10.1 | | Nexmo Inc. 2011 Stock Plan (Incorporated by reference to Vonage Holding Corp.’s Registration Statement on Form S-8 (File No. 001-32887) filed on June 29, 2016).* |
10.2 | | |
10.3 | | |
10.4 | | |
10.5 | | |
50 VONAGE ANNUAL REPORT 2019
|
| | |
10.6 | | |
10.7 | | |
10.8 | | |
10.9 | | |
10.10 | | |
10.11 | | |
10.12 | | |
10.13 | | |
10.14 | | |
10.15 | | |
10.16 | | |
10.17 | | |
10.18 | | |
10.19 | | |
10.20 | | |
10.21 | | |
10.22 | | Second Amended and Restated Credit Agreement, dated July 31, 2018, by and among Vonage America Inc., Vonage Holdings Corp., JPMorgan Chase Bank, N.A., as Administrative Agent, Citizens Bank, N.A. and Bank of America, N.A. as Syndication Agent, and the Lenders party thereto (Incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-32887) filed on August 2, 2018). |
10.23 | | |
10.24 | | |
10.25 | | |
10.26 | | |
10.27 | | |
10.28 | | |
10.29 | | |
10.30 | | |
10.31 | | |
10.32 | | |
10.33 | | |
51 VONAGE ANNUAL REPORT 2019
|
| | |
21.1 | | |
23.1 | | |
31.1 | | |
31.2 | | |
32.1 | | |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| |
* | Management contract or compensatory plan or arrangement. |
(b) Exhibits Filed Herewith
Refer to (a)(3) above.
(c) Financial Statement Schedule
Schedule II – Valuation and Qualifying Accounts.
ITEM 16. Form 10-K Summary
None.
52 VONAGE ANNUAL REPORT 2019
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Holmdel, State of New Jersey, on February 20, 2020.
|
| | | | |
| | VONAGE HOLDINGS CORP. |
| | | | |
Dated: | February 20, 2020 | By: | | /S/ DAVID T. PEARSON |
| | | | David T. Pearson |
| | | | Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the dates indicated.
|
| | | | |
Signature | | Title | | Date |
| | |
/S/ ALAN MASAREK | | Director, Chief Executive Officer | | February 20, 2020 |
Alan Masarek | | (principal executive officer) | | |
| | |
/S/ DAVID T. PEARSON | | Chief Financial Officer | | February 20, 2020 |
David T. Pearson | | (principal financial officer) | | |
| | |
/S/ DAVID LEVI | | Senior Vice President and Controller | | February 20, 2020 |
David Levi | | (principal accounting officer) | | |
| | | | |
/S/ JEFFREY A. CITRON | | Director, Chairman | | February 20, 2020 |
Jeffrey A. Citron | | | | |
| | | | |
/S/ HAMID AKHAVAN | | Director | | February 20, 2020 |
Hamid Akhavan | | | | |
| | | | |
/S/ NAVEEN CHOPRA | | Director | | February 20, 2020 |
Naveen Chopra | | | | |
| | | | |
/S/ STEPHEN FISHER | | Director | | February 20, 2020 |
Stephen Fisher | | | | |
| | |
/S/ JAN HAUSER | | Director | | February 20, 2020 |
Jan Hauser | | | | |
| | |
/S/ PRISCILLA HUNG | | Director | | February 20, 2020 |
Priscilla Hung | | | | |
| | |
/S/ CAROLYN KATZ | | Director | | February 20, 2020 |
Carolyn Katz | | | | |
| | | | |
/S/ MICHAEL MCCONNELL | | Director | | February 20, 2020 |
Michael McConnell | | | | |
| | | | |
/S/ JOHN J. ROBERTS | | Director | | February 20, 2020 |
John J. Roberts | | | | |
| | |
/S/ GARY STEELE | | Director | | February 20, 2020 |
Gary Steele | | | | |
53 VONAGE ANNUAL REPORT 2019
INDEX TO FINANCIAL STATEMENTS
53 VONAGE ANNUAL REPORT 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Vonage Holdings Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Vonage Holdings Corp. (the "Company") as of December 31, 20192020 and 2018,2019, the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholders’ equity, for each of the three years in the period ended December 31, 2019,2020, and the related notes and the scheduleschedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2020,19, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Changes in Accounting Principles
As discussed in Note 2 to the financial statements, on January 1, 2018, the Company changed its method of accounting for the recognition of costs to obtain and fulfill contracts with customers in accordance with the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606); and effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (Topic 842), using the using a modified retrospective transition approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and thatthat: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit mattersmatter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
54 VONAGE ANNUAL REPORT 2020
Convertible Senior Notes -Revenue Recognition – Refer to Note 83 to the financial statements
Critical Audit Matter Description
In June 2019,
The Company’s service revenues are comprised of monthly subscription fees under usage based or pay-per-use type billing arrangements, and contract-based service plans.Service revenues consist of a high volume of subscription and usage-based transactions, sourced from customary and proprietary information technology (IT) systems, databases, and other tools.The processing and recording of service revenues is substantially automated and based on contractual terms with customers.
We identified the Company issued $300 million aggregate principal amounttesting of 1.75% convertible senior notes due 2024 inservice revenue recognition as a private placement and an additional $45 million aggregate principal amount of such notes pursuant to the exercise in fullcritical audit matter.This matter required subjective auditor judgment because of the over-allotment optionnumber of IT applications involved in the initial purchasers (collectively, "Convertible Senior Notes"). The total net proceeds fromrevenue recognition process.Involvement of IT professionals with specialized skills and knowledge was required to assist with the offering, after deducting initial purchase discountsperformance of certain procedures and expenses payable by the Company, were $334.8 million. In accounting for the issuance of the Convertible Senior Notes, the Company separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The fair value was determined utilizing a discounted cash flow model that includes assumptions such as implied credit spread, expected volatility, and the risk-free rate for notes with a similar term. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
Given (a) the complexity of applying the accounting framework for the Convertible Senior Notes, and (b) the determination of IT applications subject to testing.Auditor judgment was required in determining the fair value of the liability component requires the Company to make significant estimatesnature and assumptions relating to the implied credit spread, expected volatility, and the risk-free rate, performing audit procedures to (a) evaluate the appropriateness of the accounting framework and (b) the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.audit evidence obtained over service revenue.
How the Critical Audit Matter Waswas Addressed in the Audit
Our audit procedures related to the accounting for the Convertible Senior Notes, including the Company’s judgments and calculations related to the fair value of the liability component,service revenue, included the following, procedures, among others:
•With the assistance of our IT specialists, we:
◦Identified the systems used to process service revenue transactions and tested the effectiveness of general IT controls over each of these systems, including the user access controls, change management controls, and IT operations controls
◦Performed testing of the effectiveness of system interface controls and automated controls within the relevant revenue streams, as well as the controls designed to ensure the accuracy and completeness of revenue.
•We tested the effectiveness of controls over the Company’s accounting forrelevant revenue business processes, including those in place to reconcile the Convertible Senior Notes, and over the determination of the fair value of the liability component.
With the assistance of professionals in our firm having expertise in debt issuance accounting, we evaluatedvarious systems to the Company’s conclusions regarding the accounting treatment applied to the Convertible Senior Notes.general ledger.
•With the assistance of our fair valuedata specialists, we created visualizations to evaluate recorded revenue and evaluate trends in the transactional revenue data.
•We evaluated the reasonablenessrecorded activity for certain revenue streams based on analytical procedures, including using regression and trend analyses to develop an expectation of the valuation methodologyrecorded revenue balance.
•For certain revenue streams, we performed detail transaction testing by agreeing the amounts recognized to source documents, including contracts with customers and testing the significant assumptions used to determine the fair valuemathematical accuracy of the liability component, by:recorded revenue.
| |
– | Testing the source information underlying the fair value of the liability component and the mathematical accuracy of the calculation. |
| |
– | Developing an independent expectation of the certain of the significant assumptions, including the implied credit spread and expected volatility, and comparing our estimate to the Company’s estimate. |
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 20,19, 2021
55 VONAGE ANNUAL REPORT 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Vonage Holdings Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Vonage Holdings Corp. (the "Company") as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019,2020, of the Company and our report dated February 20, 2020,19, 2021, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of new accounting standards.statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 20, 2020
F-456 VONAGE ANNUAL REPORT 20192020
|
| |
| VONAGE HOLDINGS CORP. CONSOLIDATED BALANCE SHEETS |
VONAGE HOLDINGS CORP. CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| (In thousands, except par value) | December 31, 2020 | | December 31, 2019 |
| | | |
| Assets |
| Current assets: | | | |
| Cash and cash equivalents | $ | 43,078 | | | $ | 23,620 | |
| Accounts receivable, net of allowance $8,878 of and $5,494, respectively | 116,304 | | | 101,813 | |
| | | |
| Deferred customer acquisition costs, current portion | 18,161 | | | 13,834 | |
| Prepaid expenses | 32,131 | | | 22,338 | |
| Other current assets | 6,230 | | | 11,463 | |
| Total current assets | 215,904 | | | 173,068 | |
| Property and equipment, net of accumulated depreciation of $117,761 and $109,646, respectively | 31,621 | | | 48,371 | |
| Operating lease right-of-use assets | 29,330 | | | 50,847 | |
| Goodwill | 624,328 | | | 602,970 | |
| Software, net of accumulated amortization of $111,642 and $102,133, respectively | 80,638 | | | 40,300 | |
| Deferred customer acquisition costs | 67,529 | | | 55,148 | |
| Restricted cash | 1,919 | | | 2,015 | |
| Intangible assets, net of accumulated amortization of $275,346 and $221,182, respectively | 204,267 | | | 249,905 | |
| Deferred tax assets | 106,374 | | | 108,347 | |
| Other assets | 33,926 | | | 33,729 | |
| Total assets | $ | 1,395,836 | | | $ | 1,364,700 | |
| | | |
| Liabilities and Stockholders’ Equity |
| Current liabilities: | | | |
| Accounts payable | $ | 17,464 | | | $ | 42,366 | |
| Accrued expenses | 158,080 | | | 137,589 | |
| Deferred revenue, current portion | 65,506 | | | 59,464 | |
| Operating lease liabilities, current portion | 11,554 | | | 12,477 | |
| | | |
| | | |
| Total current liabilities | 252,604 | | | 251,896 | |
| Indebtedness under revolving credit facility | 215,500 | | | 220,500 | |
| | | |
| Convertible senior notes, net | 290,784 | | | 276,658 | |
| Operating lease liabilities | 31,019 | | | 45,722 | |
| Other liabilities | 3,155 | | | 2,862 | |
| Total liabilities | 793,062 | | | 797,638 | |
| | | |
| Commitments and Contingencies (Note 15) | 0 | | | 0 | |
| | | |
| Stockholders’ Equity | | | |
| Common stock, par value $0.001 per share; 596,950 shares authorized at December 31, 2020 and 2019; 323,815 and 315,808 shares issued at December 31, 2020 and 2019, respectively; 248,974 and 242,849 shares outstanding at December 31, 2020 and 2019, respectively | 324 | | | 316 | |
| Additional paid-in capital | 1,554,574 | | | 1,494,469 | |
| Accumulated deficit | (667,221) | | | (631,009) | |
| Treasury stock, at cost, 74,841 shares at December 31, 2020 and 72,959 shares at December 31, 2019 | (320,891) | | | (306,043) | |
| Accumulated other comprehensive income | 35,988 | | | 9,329 | |
| Total stockholders’ equity | 602,774 | | | 567,062 | |
| Total liabilities and stockholders’ equity | $ | 1,395,836 | | | $ | 1,364,700 | |
|
| | | | | | | |
| (In thousands, except par value) | December 31, 2019 | | December 31, 2018 |
| | | | |
| Assets |
| Current assets: | | | |
| Cash and cash equivalents | $ | 23,620 |
| | $ | 5,057 |
|
| Accounts receivable, net of allowance of $5,494 and $3,542, respectively | 101,813 |
| | 75,342 |
|
| Inventory, net of allowance of $76 and $152, respectively | 1,475 |
| | 1,470 |
|
| Deferred customer acquisition costs, current portion | 13,834 |
| | 11,755 |
|
| Prepaid expenses | 22,338 |
| | 26,496 |
|
| Other current assets | 9,988 |
| | 7,634 |
|
| Total current assets | 173,068 |
| | 127,754 |
|
| Property and equipment, net of accumulated depreciation of $109,646 and $104,999, respectively | 48,371 |
| | 49,262 |
|
| Operating lease right-of-use assets | 50,847 |
| | — |
|
| Goodwill | 602,970 |
| | 598,499 |
|
| Software, net of accumulated amortization of $102,133 and $100,870, respectively | 40,300 |
| | 17,430 |
|
| Deferred customer acquisition costs | 55,148 |
| | 37,881 |
|
| Restricted cash | 2,015 |
| | 2,047 |
|
| Intangible assets, net of accumulated amortization of $221,182 and $162,788, respectively | 249,905 |
| | 299,911 |
|
| Deferred tax assets | 108,347 |
| | 102,560 |
|
| Other assets | 33,729 |
| | 24,144 |
|
| Total assets | $ | 1,364,700 |
| | $ | 1,259,488 |
|
| | | | |
| Liabilities and Stockholders’ Equity |
| Current liabilities: | | | |
| Accounts payable | $ | 42,366 |
| | $ | 53,262 |
|
| Accrued expenses | 137,589 |
| | 87,370 |
|
| Deferred revenue, current portion | 59,464 |
| | 53,447 |
|
| Operating lease liabilities, current portion | 12,477 |
| | — |
|
| Current portion of notes payable | — |
| | 10,000 |
|
| Total current liabilities | 251,896 |
| | 204,079 |
|
| Indebtedness under revolving credit facility | 220,500 |
| | 425,000 |
|
| Notes payable, net of current portion | — |
| | 84,228 |
|
| Convertible senior notes, net | 276,658 |
| | — |
|
| Operating lease liabilities | 45,722 |
| | — |
|
| Other liabilities | 2,862 |
| | 10,413 |
|
| Total liabilities | 797,638 |
| | 723,720 |
|
| | | | |
| Commitments and Contingencies (Note 15) | — |
| | — |
|
| | | | |
| Stockholders’ Equity | | | |
| Common stock, par value $0.001 per share; 596,950 shares authorized at December 31, 2019 and 2018; 315,808 and 309,736 shares issued at December 31, 2019 and 2018, respectively; 242,849 and 239,743 shares outstanding at December 31, 2019 and 2018, respectively | 316 |
| | 310 |
|
| Additional paid-in capital | 1,494,469 |
| | 1,415,682 |
|
| Accumulated deficit | (631,009 | ) | | (611,985 | ) |
| Treasury stock, at cost, 72,959 shares at December 31, 2019 and 69,993 shares at December 31, 2018 | (306,043 | ) | | (275,009 | ) |
| Accumulated other comprehensive income | 9,329 |
| | 6,770 |
|
| Total stockholders’ equity | 567,062 |
| | 535,768 |
|
| Total liabilities and stockholders’ equity | $ | 1,364,700 |
| | $ | 1,259,488 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-557 VONAGE ANNUAL REPORT 20192020
|
| |
| VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS |
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands, except per share amounts) | 2020 | | 2019 | | 2018 |
| | | | | |
| Service, access and product revenues | $ | 1,185,357 | | | $ | 1,106,472 | | | $ | 971,723 | |
| USF revenues | 62,577 | | | 82,874 | | | 77,059 | |
| Total revenues | 1,247,934 | | | 1,189,346 | | | 1,048,782 | |
| | | | | |
| Operating Expenses: | | | | | |
| Service, access and product cost of revenues (excluding depreciation and amortization) | 490,946 | | | 428,210 | | | 349,905 | |
| USF cost of revenues | 62,577 | | | 82,874 | | | 77,090 | |
| Sales and marketing | 342,053 | | | 363,111 | | | 311,433 | |
| Engineering and development | 81,484 | | | 69,460 | | | 52,139 | |
| General and administrative | 182,106 | | | 152,672 | | | 135,324 | |
| Depreciation and amortization | 88,917 | | | 86,256 | | | 70,980 | |
| Total operating expenses | 1,248,083 | | | 1,182,583 | | | 996,871 | |
| (Loss) Income from operations | (149) | | | 6,763 | | | 51,911 | |
| Other Income (Expense): | | | | | |
| | | | | |
| Interest expense | (32,160) | | | (32,821) | | | (15,068) | |
| Other income (expense), net | 314 | | | (50) | | | (318) | |
| Total other income (expense), net | (31,846) | | | (32,871) | | | (15,386) | |
| (Loss) Income before income taxes | (31,995) | | | (26,108) | | | 36,525 | |
| Income tax (expense) benefit | (4,217) | | | 6,626 | | | (797) | |
| Net (loss) income | $ | (36,212) | | | $ | (19,482) | | | $ | 35,728 | |
| | | | | |
| (Loss) Earnings per common share: | | | | | |
| Basic | $ | (0.15) | | | $ | (0.08) | | | $ | 0.15 | |
| Diluted | $ | (0.15) | | | $ | (0.08) | | | $ | 0.14 | |
| | | | | |
| Weighted-average common shares outstanding: | | | | | |
| Basic | 246,082 | | | 242,018 | | | 237,499 | |
| Diluted | 246,082 | | | 242,018 | | | 248,892 | |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands, except per share amounts) | 2019 | | 2018 | | 2017 |
| | | | | | |
| Total revenues | $ | 1,189,346 |
| | $ | 1,048,782 |
| | $ | 1,002,286 |
|
| | | | | | |
| Operating Expenses: | | | | | |
| Cost of revenues (excluding depreciation and amortization) | 511,084 |
| | 426,995 |
| | 404,954 |
|
| Sales and marketing | 363,111 |
| | 311,433 |
| | 313,251 |
|
| Engineering and development | 69,460 |
| | 52,139 |
| | 29,630 |
|
| General and administrative | 152,672 |
| | 135,324 |
| | 122,537 |
|
| Depreciation and amortization | 86,256 |
| | 70,980 |
| | 72,523 |
|
| Total operating expenses | 1,182,583 |
| | 996,871 |
| | 942,895 |
|
| Income from operations | 6,763 |
| | 51,911 |
| | 59,391 |
|
| Other Income (Expense): | | | | | |
| Interest expense | (32,821 | ) | | (15,068 | ) | | (14,868 | ) |
| Other income (expense), net | (50 | ) | | (318 | ) | | 1,270 |
|
| Total other income (expense), net | (32,871 | ) | | (15,386 | ) | | (13,598 | ) |
| (Loss) Income before income taxes | (26,108 | ) | | 36,525 |
| | 45,793 |
|
| Income tax benefit (expense) | 6,626 |
| | (797 | ) | | (79,726 | ) |
| Net (loss) income | $ | (19,482 | ) | | $ | 35,728 |
| | $ | (33,933 | ) |
| | | | | | |
| (Loss) Earnings per common share: | | | | | |
| Basic | $ | (0.08 | ) | | $ | 0.15 |
| | $ | (0.15 | ) |
| Diluted | $ | (0.08 | ) | | $ | 0.14 |
| | $ | (0.15 | ) |
| | | | | | |
| Weighted-average common shares outstanding: | | | | | |
| Basic | 242,018 |
| | 237,499 |
| | 225,311 |
|
| Diluted | 242,018 |
| | 248,892 |
| | 225,311 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-658 VONAGE ANNUAL REPORT 20192020
|
| |
| VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| | | | | |
| Net (loss) income: | $ | (36,212) | | | $ | (19,482) | | | $ | 35,728 | |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustment, net of tax expense (benefit) of $(2,517), $393, and $(4,433), respectively | 25,658 | | | 4,535 | | | (7,249) | |
| Unrealized gain on derivatives, net of tax expense (benefit) of $(4), $397, and $(73), respectively | 1,001 | | | (1,976) | | | 10 | |
| Total other comprehensive income (loss) | 26,659 | | | 2,559 | | | (7,239) | |
| Comprehensive (loss) income | $ | (9,553) | | | $ | (16,923) | | | $ | 28,489 | |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| | | | | | |
| Net (loss) income: | $ | (19,482 | ) | | $ | 35,728 |
| | $ | (33,933 | ) |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustment, net of tax expense (benefit) of $393, ($4,433), and $4,616, respectively | 4,535 |
| | (7,249 | ) | | 26,637 |
|
| Unrealized gain on available-for-sale securities, net of tax expense of $0, $0, and $0, respectively | — |
| | — |
| | 1 |
|
| Unrealized gain on derivatives, net of tax expense (benefit) of $397, ($73), and ($320), respectively | (1,976 | ) | | 10 |
| | 965 |
|
| Total other comprehensive income (loss) | 2,559 |
| | (7,239 | ) | | 27,603 |
|
| Comprehensive (loss) income | $ | (16,923 | ) | | $ | 28,489 |
| | $ | (6,330 | ) |
The accompanying notes are an integral part of these consolidated financial statements
F-759 VONAGE ANNUAL REPORT 20192020
|
| |
| VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | |
| Net (loss) income | $ | (19,482 | ) | | $ | 35,728 |
| | $ | (33,933 | ) |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 27,815 |
| | 31,444 |
| | 34,255 |
|
| Amortization of intangibles | 58,441 |
| | 39,457 |
| | 38,056 |
|
| Deferred income taxes | (13,411 | ) | | (4,809 | ) | | 74,577 |
|
| Amortization of deferred customer acquisition costs | 11,359 |
| | 10,287 |
| | — |
|
| Allowance for doubtful accounts and obsolete inventory | 2,247 |
| | 2,010 |
| | 2,399 |
|
| Amortization of financing costs and debt discount | 8,907 |
| | 1,022 |
| | 1,074 |
|
| Loss on disposal of property and equipment | 771 |
| | 79 |
| | 212 |
|
| Loss on extinguishment of debt | — |
| | 14 |
| | — |
|
| Share-based expense | 45,242 |
| | 33,799 |
| | 37,482 |
|
| Gain on sale of business | — |
| | — |
| | (1,879 | ) |
| Change in derivatives | (531 | ) | | (198 | ) | | — |
|
| Changes in operating assets and liabilities, net of acquisitions: | | | | | |
| Accounts receivable | (29,139 | ) | | (20,485 | ) | | (7,253 | ) |
| Inventory | 27 |
| | 1,233 |
| | 789 |
|
| Prepaid expenses and other current assets | 1,956 |
| | 2,787 |
| | 3,339 |
|
| Deferred customer acquisition costs | (30,546 | ) | | (25,439 | ) | | 1,729 |
|
| Accounts payable and accrued expenses | 38,027 |
| | 13,502 |
| | (24,025 | ) |
| Deferred revenue | 3,947 |
| | 1,416 |
| | (2,584 | ) |
| Other assets - cloud computing implementation costs | (15,480 | ) | | (6,255 | ) | | — |
|
| Other assets and liabilities | 2,776 |
| | 7,613 |
| | 3,820 |
|
| Net cash provided by operating activities | 92,926 |
| | 123,205 |
| | 128,058 |
|
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (20,273 | ) | | (19,032 | ) | | (21,915 | ) |
| Purchase of intangible assets | (318 | ) | | — |
| | — |
|
| Maturities and sales of marketable securities | — |
| | — |
| | 602 |
|
| Acquisition and development of software assets | (28,488 | ) | | (7,714 | ) | | (11,374 | ) |
| Acquisitions, net of cash acquired | (3,000 | ) | | (380,484 | ) | | — |
|
| Proceeds from sale of business | — |
| | — |
| | 1,950 |
|
| Net cash used in investing activities | (52,079 | ) | | (407,230 | ) | | (30,737 | ) |
| Cash flows from financing activities: | | | | | |
| Principal payments on capital lease obligations and other financing obligations | — |
| | (140 | ) | | (5,788 | ) |
| Payments on short and long-term debt | (443,500 | ) | | (320,188 | ) | | (101,750 | ) |
| Proceeds from issuance of short and long-term debt | 489,000 |
| | 607,000 |
| | 15,000 |
|
| Payment of debt issuance costs | (10,043 | ) | | (3,380 | ) | | — |
|
| Payment for capped call transactions and costs | (28,325 | ) | | — |
| | — |
|
| Common stock repurchases | (10,000 | ) | | — |
| | (9,542 | ) |
| Employee taxes paid on withholding shares | (21,034 | ) | | (31,584 | ) | | (15,572 | ) |
| Proceeds from exercise of stock options | 1,981 |
| | 6,504 |
| | 21,410 |
|
| Net cash (used in) provided by financing activities | (21,921 | ) | | 258,212 |
| | (96,242 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (395 | ) | | (410 | ) | | 1,319 |
|
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 18,531 |
| | (26,223 | ) | | 2,398 |
|
| Cash, cash equivalents, and restricted cash, beginning of period | 7,104 |
| | 33,327 |
| | 30,929 |
|
| Cash, cash equivalents, and restricted cash, end of period | $ | 25,635 |
| | $ | 7,104 |
| | $ | 33,327 |
|
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | |
| Net (loss) income | $ | (36,212) | | | $ | (19,482) | | | $ | 35,728 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 34,378 | | | 27,815 | | | 31,444 | |
| Amortization of intangibles | 54,539 | | | 58,441 | | | 39,457 | |
| Deferred income taxes | (352) | | | (13,411) | | | (4,809) | |
| Amortization of deferred customer acquisition costs | 16,241 | | | 11,359 | | | 10,287 | |
| Allowance for doubtful accounts | 5,684 | | | 2,247 | | | 2,010 | |
| Amortization of financing costs and debt discount | 14,938 | | | 8,907 | | | 1,022 | |
| Loss on disposal of property and equipment | 889 | | | 771 | | | 79 | |
| Loss on extinguishment of debt | 0 | | | 0 | | | 14 | |
| Share-based expense | 45,667 | | | 45,242 | | | 33,799 | |
| Change in derivatives | 1,055 | | | (531) | | | (198) | |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | |
| Accounts receivable | (14,018) | | | (29,139) | | | (20,485) | |
| | | | | |
| Prepaid expenses and other current assets | (4,629) | | | 1,983 | | | 4,020 | |
| Deferred customer acquisition costs | (32,335) | | | (30,546) | | | (25,439) | |
| Accounts payable and accrued expenses | (11,126) | | | 38,027 | | | 13,502 | |
| Deferred revenue | 4,043 | | | 3,947 | | | 1,416 | |
| Other assets - cloud computing implementation costs | (6,909) | | | (15,480) | | | (6,255) | |
| Other assets and liabilities | 12,027 | | | 2,776 | | | 7,613 | |
| Net cash provided by operating activities | 83,880 | | | 92,926 | | | 123,205 | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (10,571) | | | (20,273) | | | (19,032) | |
| Purchase of intangible assets | (312) | | | (318) | | | 0 | |
| Acquisition and development of software assets | (41,840) | | | (28,488) | | | (7,714) | |
| Acquisitions, net of cash acquired | 0 | | | (3,000) | | | (380,484) | |
| Net cash used in investing activities | (52,723) | | | (52,079) | | | (407,230) | |
| Cash flows from financing activities: | | | | | |
| Principal payments on capital lease obligations and other financing obligations | 0 | | | 0 | | | (140) | |
| Payments on short and long-term debt | (80,000) | | | (443,500) | | | (320,188) | |
| Proceeds from issuance of short and long-term debt | 75,000 | | | 489,000 | | | 607,000 | |
| Payment of debt issuance costs | 0 | | | (10,043) | | | (3,380) | |
| Payment for capped call transactions and costs | 0 | | | (28,325) | | | 0 | |
| Common stock repurchases | 0 | | | (10,000) | | | 0 | |
| Employee taxes paid on withholding shares | (16,160) | | | (21,034) | | | (31,584) | |
| Proceeds from exercise of stock options | 10,310 | | | 1,981 | | | 6,504 | |
| Net cash (used in) provided by financing activities | (10,850) | | | (21,921) | | | 258,212 | |
| Effect of exchange rate changes on cash and cash equivalents | (945) | | | (395) | | | (410) | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 19,362 | | | 18,531 | | | (26,223) | |
| Cash, cash equivalents, and restricted cash, beginning of period | 25,635 | | | 7,104 | | | 33,327 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 44,997 | | | $ | 25,635 | | | $ | 7,104 | |
The accompanying notes are an integral part of these consolidated financial statements
F-860 VONAGE ANNUAL REPORT 20192020
|
| |
| VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Common
Stock | Additional
Paid-in
Capital | Accumulated
Deficit | Treasury
Stock | Accumulated
Other
Comprehensive
Income | Total |
| | | | | | |
| Balance at December 31, 2017 | $ | 298 | | $ | 1,375,391 | | $ | (672,561) | | $ | (244,239) | | $ | 14,009 | | $ | 472,898 | |
| Cumulative effect adjustment upon the adoption of Topic 606 | | | 24,848 | | | | 24,848 | |
| Stock option exercises | 12 | | 6,492 | | | | | 6,504 | |
| Share-based expense | | 33,799 | | | | | 33,799 | |
| Employee taxes paid on withholding shares | | | | (30,770) | | | (30,770) | |
| | | | | | |
| Foreign currency translation adjustment | | | | | (7,249) | | (7,249) | |
| Unrealized gain on derivatives | | | | | 10 | | 10 | |
| Net loss | | | 35,728 | | | | 35,728 | |
| Balance at December 31, 2018 | 310 | | 1,415,682 | | (611,985) | | (275,009) | | 6,770 | | 535,768 | |
| Cumulative effect adjustment upon the adoption of Topic 842 | | | 458 | | | | 458 | |
| Stock option exercises | 6 | | 1,975 | | | | | 1,981 | |
| Share-based expense | | 45,242 | | | | | 45,242 | |
| Employee taxes paid on withholding shares | | | | (21,034) | | | (21,034) | |
| Common stock repurchases | | | | (10,000) | | | (10,000) | |
| Equity component of convertible notes, net of issuance costs and tax | | 50,123 | | | | | 50,123 | |
| Purchase of capped calls, net of tax | | (21,553) | | | | | (21,553) | |
| Common stock issued for acquisition of assets | | 3,000 | | | | | 3,000 | |
| Foreign currency translation adjustment | | | | | 4,535 | | 4,535 | |
| Unrealized gain on derivatives | | | | | (1,976) | | (1,976) | |
| Net income | | | (19,482) | | | | (19,482) | |
| Balance at December 31, 2019 | 316 | | 1,494,469 | | (631,009) | | (306,043) | | 9,329 | | 567,062 | |
| | | | | | |
| Stock option exercises | 8 | | 10,302 | | | | | 10,310 | |
| Share-based expense | | 49,803 | | | | | 49,803 | |
| Employee taxes paid on withholding shares | | | | (14,848) | | | (14,848) | |
| | | | | | |
| | | | | | |
| Foreign currency translation adjustment | | | | | 25,658 | | 25,658 | |
| Unrealized gain on derivatives | | | | | 1,001 | | 1,001 | |
| Net loss | | | (36,212) | | | | (36,212) | |
| Balance at December 31, 2020 | $ | 324 | | $ | 1,554,574 | | $ | (667,221) | | $ | (320,891) | | $ | 35,988 | | $ | 602,774 | |
|
| | | | | | | | | | | | | | | | | | |
| (In thousands) | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Treasury Stock | Accumulated Other Comprehensive Income | Total |
| | | | | | | |
| Balance at December 31, 2016 | $ | 282 |
| $ | 1,310,847 |
| $ | (641,869 | ) | $ | (219,125 | ) | $ | (13,594 | ) | $ | 436,541 |
|
| Cumulative effect adjustment upon the adoption of ASU 2016-09 | | 5,668 |
| 3,241 |
| | | 8,909 |
|
| Stock option exercises | 16 |
| 21,394 |
| | | | 21,410 |
|
| Share-based expense | | 37,482 |
| | | | 37,482 |
|
| Employee taxes paid on withholding shares | |
| | (15,572 | ) | | (15,572 | ) |
| Common stock repurchases | | | | (9,542 | ) | | (9,542 | ) |
| Foreign currency translation adjustment |
|
| |
| 26,637 |
| 26,637 |
|
| Unrealized loss on available-for-sale securities |
|
| | | 1 |
| 1 |
|
| Unrealized gain on derivatives | | | | | 965 |
| 965 |
|
| Net loss | | | (33,933 | ) | | | (33,933 | ) |
| Balance at December 31, 2017 | 298 |
| 1,375,391 |
| (672,561 | ) | (244,239 | ) | 14,009 |
| 472,898 |
|
| Cumulative effect adjustment upon the adoption of Topic 606 | |
|
| 24,848 |
| | | 24,848 |
|
| Stock option exercises | 12 |
| 6,492 |
| | | | 6,504 |
|
| Share-based expense | | 33,799 |
| | | | 33,799 |
|
| Employee taxes paid on withholding shares | | | | (30,770 | ) | | (30,770 | ) |
| Foreign currency translation adjustment | | | | | (7,249 | ) | (7,249 | ) |
| Unrealized gain on derivatives | | | | | 10 |
| 10 |
|
| Net income | | | 35,728 |
| | | 35,728 |
|
| Balance at December 31, 2018 | 310 |
| 1,415,682 |
| (611,985 | ) | (275,009 | ) | 6,770 |
| 535,768 |
|
| Cumulative effect adjustment upon the adoption of Topic 842 | | | 458 |
| | | 458 |
|
| Stock option exercises | 6 |
| 1,975 |
| | | | 1,981 |
|
| Share-based expense | | 45,242 |
| | | | 45,242 |
|
| Employee taxes paid on withholding shares | | | | (21,034 | ) | | (21,034 | ) |
| Common stock repurchases | | | | (10,000 | ) | | (10,000 | ) |
| Equity component of convertible notes, net of issuance costs and tax | | 50,123 |
| | | | 50,123 |
|
| Purchase of capped calls, net of tax | | (21,553 | ) | | | | (21,553 | ) |
| Common stock issued for acquisition of assets | | 3,000 |
| | | | 3,000 |
|
| Foreign currency translation adjustment | | | | | 4,535 |
| 4,535 |
|
| Unrealized gain on derivatives | | | | | (1,976 | ) | (1,976 | ) |
| Net loss | | | (19,482 | ) | | | (19,482 | ) |
| Balance at December 31, 2019 | $ | 316 |
| $ | 1,494,469 |
| $ | (631,009 | ) | $ | (306,043 | ) | $ | 9,329 |
| $ | 567,062 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-961 VONAGE ANNUAL REPORT 20192020
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 1. Nature of Business
Nature of Operations
Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. At Vonage, our vision is to accelerate the world's ability to connect. We are observing a secular change in the way business is done, with a fundamental shift in how communications technologies are being leveraged in almost every industry. Through the Vonage Communications Platform, our strategy is to continually redefine business communications. We are making communications more flexible, intelligent and personal to help enterprises the world over stay ahead. We provide unified communications, contact centers and programmable communications APIs, built on what we believe to be the world's most flexibledeliver a single leading cloud communications platform. Trueplatform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. We believe that the Vonage Communications Platform's products and services are well positioned to take advantage of emerging trends with sizable, growing total addressable markets as companies look to cloud-based communications solutions and API programming architectures as part of their digital transformation.
Our strategic business is the Vonage Communications Platform formerly referred to as "Business," which delivers a single leading cloud communications platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. The Vonage Communications Platform brings unique value to businesses by providing multiple communications channels - including video, voice, messaging, email, verification, and artificial intelligence - that integrate into the applications, products and workflows that our customers are already using. We believe this delivers both the power and the flexibility to our roots as a technology disruptor, our flexible approach helps us better servecustomers to address the growing collaboration,need to transform their communications, connections and customer experience needsexperiences for customers and enables the type of companies, across all communications channels.business continuity, remote work, and remote delivery of services that are now essential for team members.
For our BusinessConsumer customers, we enable users to access and utilize our services and features, via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices. Our Consumer strategy is focused on the continued penetration of our core North American markets, which provide innovative, cloud-based Applications, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable SIP based VoIP network. We also offer API solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device,value in any place, at any time without the often costly investment required with on-site equipment. We have a robust set of product families tailored to serve the full range of the business value chain, from the SMB market, through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and CRM solutions, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud, Oracle, and Clio. With our ability to integrate these cloud-based, workplace tools, Vonage integrates the entire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers that APIs provides. When combined with our MPLS network, as well as voice services over customers' broadband networks via our SmartWan solution, we create a differentiated offering.
We also provide a robust suite of feature-rich residential communication solutions that allow consumers to connect their home phones and mobile phones on one number and we offer attractive international long distance rates that help create a loyal base of satisfied customers.and target under-served segments.
Customers in the United States represented 72%68%, 79%72%, and 85%79% of our consolidated revenues for the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively, with the balance in Canada, the United Kingdom, China, Singapore, Netherlands, and other countries around the world.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with U.S. GAAP. The ASC established by the FASB is the source of authoritative GAAP to be applied to nongovernmental entities. In addition, the rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.
The consolidated financial statements include the accounts and operations of Vonage and its wholly-owned subsidiaries for which we have a controlling interest. All intercompany balances and transactions have been eliminated in consolidation. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity; however, a controlling financial interest may also exist through arrangements that do not involve controlling voting interests. As such, Vonage applies the guidance of ASC 810, Consolidations, or ASC 810, to determine when an entity that is insufficiently capitalized or not controlled through its voting interests, referred to as a VIE, should be consolidated. In addition, the results of companies acquired or disposed of are included in the consolidated financial statements from the effective date of the acquisition or up to the date of disposal.
F-1062 VONAGE ANNUAL REPORT 20192020
Revenue Recognition
Beginning January 1, 2018, ourOur results are presented in accordance with the guidance of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), or Topic 606. We measure revenue based upon consideration specified by contracts with our customers. Revenue is recognized when our performance obligation under the contract is satisfied by transferring control over the product or service to the customer. We derive our revenues for our Consumer and BusinessVCP segments primarily from the sale of our communication services, access, and customer equipmentproducts along with USF as further described in Note 3, Revenue Recognition. The majority of the Company's contracts with customers have a single performance obligation for service revenues. We recognize revenue with customers when control transfers, which occurs upon delivery of a service or product. For our BusinessVCP segment, the typical life of a customer for service is 7 years.
Contract Acquisition Costs
We have various commission programs for which eligible employees and third parties may earn commission on sales of services and products to customers. We expect that these commission fees are recoverable and, therefore, we have capitalized these commissions as contract costs included within deferred customer acquisitions cost on our consolidated balance sheet. Capitalized commission fees are amortized to sales and marketing expense over estimated customer life, which is 7 years for BusinessVCP customers. In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year and for residuals and renewals.
Cost of Revenues
Cost of revenues is primarily comprised of cost of services consisting of costs that we pay to third parties such as access and interconnection charges that we pay to other companies to terminate domestic and international phone calls on the public switched telephone network. In addition, costs to lease phone numbers, to co-locate in other companies’ facilities, to provide enhanced emergency dialing capabilities to transmit 911 calls, and to provide local number portability are also included in cost of service. These costs also include taxes that we pay on telecommunications services from our suppliers or are imposed by government agencies such as USF contributions and royalties for use of third parties’ intellectual property. In addition, these costs include certain personnel and related costs for network operations and technical support that are attributable to revenue generating activities. Cost of services excludes depreciation and amortization expense of $51,408, $38,167, $27,754, and $27,308$27,754 for the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively.
Also included in cost of revenues is costs of goods sold consisting primarily of costs incurred on customer equipment for customers who subscribe through the direct sales channel in excess of activation fees. The amortization of deferred customer equipment, the cost of shipping and handling for customer equipment, and the cost of certain promotions are also included in cost of goods sold.
We categorize cost of revenues as follows:
Services, access and product cost of revenues. Services cost of revenues consists of costs associated with network operations and technical support personnel, communication origination, and termination services provided by third party carriers and excludes depreciation and amortization.
Access and product cost of revenues. Product cost of revenues includes equipment sold to customers, shipping and handling, professional services, cost of certain products including equipment or services that we give customers as promotions, and broadband access.
USF cost of revenues. USF cost of revenues represents contributions to the Federal USF and related fees.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel and related costs for employees and contractors directly associated with our sales and marketing activities, internet advertising fees, radio and billboard advertising, public relations, commissions paid to employees, resellers and other third parties, trade shows, marketing and promotional activities, customer support, credit card fees, collections, and systems and information technology support. We expense advertising costs during the period in which they are incurred. Advertising costs included in sales and marketing were $40,862, $46,606, $54,735, and $57,703$54,735 for the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively.
F-1163 VONAGE ANNUAL REPORT 20192020
Engineering and Development Expenses
Engineering and development expenses predominantly include personnel and related costs for developers responsible for research and development of new products.
Costs for research, including predevelopment efforts priorrelated to establishing technological feasibility of software expected to be marketed,preliminary project activities and post implementation activities are expensed as incurred.
Cash, Cash Equivalents and Marketable SecuritiesRestricted Cash
We maintain cash with several investment grade financial institutions. Highly liquid investments, which are readily convertible into cash, with original maturities of three months or less, are recorded as cash equivalents. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheet to same such amounts show in the consolidated statement of cash flows:
| | | | As of December 31, | | As of December 31, |
| | 2019 | 2018 | 2017 | 2016 | | 2020 | 2019 | 2018 | 2017 | |
| Cash and cash equivalents | $ | 23,620 |
| $ | 5,057 |
| $ | 31,360 |
| $ | 29,078 |
| Cash and cash equivalents | $ | 43,078 | | $ | 23,620 | | $ | 5,057 | | $ | 31,360 | | |
| Restricted cash | 2,015 |
| 2,047 |
| 1,967 |
| 1,851 |
| Restricted cash | 1,919 | | 2,015 | | 2,047 | | 1,967 | | |
| | $ | 25,635 |
| $ | 7,104 |
| $ | 33,327 |
| $ | 30,929 |
| | $ | 44,997 | | $ | 25,635 | | $ | 7,104 | | $ | 33,327 | | |
Certain Risks and Concentrations
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, marketable securities, and accounts receivable. They are subject to fluctuations in both market value and yield based upon changes in market conditions, including interest rates, liquidity, general economic conditions, and conditions specific to the issuers. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States. A portion of our accounts receivable represents the timing difference between when a customer’s credit card is billed and the subsequent settlement of that transaction with our credit card processors. This timing difference is generally three days for substantially all of our credit card receivables. We have never experienced any accounts receivable write-offs due to this timing difference. In addition, we collect subscription fees in advance, minimizing our accounts receivable and bad debt exposure. If a customer’s credit card, debit card or ECP is declined, we generally suspend international calling capabilities as well as their ability to incur domestic usage charges in excess of their plan minutes. Generally, if the customer’s credit card, debit card or ECP could not be successfully processed during 3 billing cycles, we terminate the account. In addition, we automatically charge any per minute fees to our customers’ credit card, debit card or ECP monthly in arrears. To further mitigate our bad debt exposure, a customer’s credit card, debit card or ECP will be charged in advance of their monthly billing if their international calling or overage charges exceed a certain dollar threshold.
Inventory
Inventory consists of the cost of customer equipment and is valued at the lower of cost or market, with cost determined using the average cost method. We provide an inventory allowance for customer equipment that has been returned by customers but may not be able to be reissued to new customers or returned to the manufacturer for credit.
Property and Equipment
Property and equipment includes acquired assets and consist principally of network equipment and computer hardware, software, furniture, and leasehold improvements. Company-owned equipment in use at customer premises is also included in property and equipment. Network equipment, computer hardware and furniture are stated at cost with depreciation provided using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over their estimated useful life of the related assets or the life of the lease, whichever is shorter. The cost of substantial improvements is capitalized while the cost of maintenance and repairs is charged to operating expenses as incurred. Company-owned customer premises equipment is depreciated on a straight-line basis over 3 years.
Our network equipment and computer hardware, which consists of routers, gateways, and servers that enable our services, is subject to technological risks and rapid market changes due to new products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives or the carrying value of these assets, or both.
F-1264 VONAGE ANNUAL REPORT 20192020
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, operating lease obligations, current portion and operating lease obligations on the Company's consolidated balance sheets. A right-of-use asset represents the Company's right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. A right-of-use asset and related liability is recognized at the commencement date of the arrangement based upon the present value of lease payments over the lease term. As most of our lease arrangements do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.
When the Company has the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that the Company will exercise the option, the Company will consider these options in determining the classification and measurement of the lease. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease arrangement. From time to time, the Company may abandon one of its leased locations. Upon abandonment, the Company will accelerate the amortization of the related right-of-use asset through the abandonment date within rent expense.
The Company has lease arrangements with lease and non-lease components, which are generally accounted for separately. For certain leases, the Company accounts for the lease and non-lease components as a single lease component.
As of December 31, 2019, the Company did not have any finance lease arrangements.
Software
The Company capitalizes software which primarily consists of qualifying internal-use software development costs that are incurred during the application development stage. Capitalization is dependent on whether management with the relevant authority has authorized and committed to funding the project, it is probable the project will be completed, and the software will be used to perform the function intended. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized software is stated at cost less accumulated amortization and amortized on a straight-line basis over their estimated useful lives.
Cloud Computing Arrangements
The Company incurs costs to implement cloud computing arrangements that are hosted by a third party vendor. Generally, these arrangements are service contracts that do not provide the Company with the right to take possession of the software or the ability to run the software on its own hardware or contract with another party, other than the vendor, to host the software. As such, the costs incurred to implement these arrangements are capitalized into other assets on the Company's balance sheet and amortized on a straight-line basis over their estimated useful lives.lives expensed along with respective hosting fees.
Goodwill
In accordance with ASC 350, Intangibles - Goodwill and Other, we recognize goodwill for the excess cost of an acquired business over the fair value assigned to assets acquired and liabilities assumed. Goodwill is tested for impairment on an annual basis on October 1st and, when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down based on the quantitative test result. The Company early adopted ASCASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment onSeptember 30, 2019. The new guidance eliminates Step 2 of the old goodwill impairment test. A goodwill impairment loss will instead beis measured at the amount by which a reporting unit's carrying amount, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance allows an entity to assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any).
The Company performed its quantitativequalitative assessment of the Applications GroupUnified Communications and Contact Center Communications reporting unit and API Platform Group reporting unitsunit as of October 1, 20192020 and estimateddetermined that it was not more likely than not that the fair value of the reporting units' invested capital exceededwas less than its carrying value and accordingly, no impairment needed to be recognized for the year ended December 31, 2019.2020. There were also no impairments recorded during the years ended December 31, 20182019 and 2017, respectively.
F-1365 VONAGE ANNUAL REPORT 20192020
Intangible Assets
Intangible assets acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received.
Purchased-intangible assets are accounted for based upon the fair value of assets received and are amortized on a straight-line or accelerated basis over the periods of economic benefit, ranging from two to twelve years. We perform a review of purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life of the asset is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There was no impairment of purchased-intangible assets identified for the years ended December 31, 2020, 2019, 2018, and 2017.2018.
Asset Impairments
We evaluate impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the assets might be impaired. If our review indicates that the carrying value of an asset or asset group will not be recoverable, based on a comparison of the carrying value of the asset to the undiscounted future cash flows, the impairment will be measured by comparing the carrying value of the asset to its fair value. Fair value will be determined based on quoted market values, discounted cash flows or appraisals. Impairments of long-lived assets are recorded in the statement of operations as part of depreciation and amortization expense. There was no impairment of property and equipment identified for the years ended December 31, 2020, 2019, 2018, and 2017.2018.
Debt Related Costs
Costs incurred in raising debt are deferred and amortized as interest expense using the effective interest method over the life of the debt. Costs associated with term loans are netted against the underlying notes payable in accordance with ASU 2015-15, Interest-Imputation of Interest, while costs deferred associated with revolving facilities are included in other assets. Upon refinancing, costs associated with the new debt are either expensed or deferred and unamortized costs associated with the old debt are either written off or deferred and to be amortized as interest expense if deferred using the effective interest method over the life of the new debt per the guidance in ASC 470-50. Total costs related to the Convertible Senior Notes were allocated to the liability and equity components of the Convertible Senior Notes based on the proportion of the proceeds allocated to the debt and equity components. Costs attributable to the liability component were recorded as additional debt discount and amortized to interest expense using the effective interest method over the contractual terms of the Convertible Senior Notes. Costs attributable to the equity component were netted with the equity component in stockholders’ equity.
Restricted Cash and Letters of Credit
We had a cash collateralized letter of credit for $1,528$1,502 and $1,516$1,528 as of December 31, 20192020 and 2018,2019, respectively, mainly related to lease deposits for our Holmdel office. In the aggregate, cash reserves and collateralized letters of credit of $2,015$1,919 and $2,047$2,015 were recorded as long-term restricted cash at December 31, 20192020 and 2018,2019, respectively.
Derivative Financial Instruments
The Company accounts for derivative financial instruments under ASC 815, Derivatives and Hedging, which requires the Company to record all derivatives on the balance sheet at fair value unless they qualify for a normal purchase normal sale exception. Changes in the fair value of non-hedge derivatives are immediately recognized into earnings. Changes in the fair value of derivatives accounted for as hedges, if elected for hedge accounting, are either recognized in earnings as an offset to the changes in the fair value of the related hedged assets and liabilities or deferred and recognized as a component of accumulated other comprehensive income, or OCI, until the hedged transactions occur and are recognized in earnings.
During 2017, the Company entered into three interest rate swap agreements to mitigate variability in our 2016 Credit Facility earnings due to fluctuations in interest rates and has been designated and qualified as a cash flow hedge. Upon the refinancing in 2018, the Company de-designated the swaps of our 2016 Credit Facility and re-designated the swaps as a cash flow hedge of the 2018 Credit Facility. As such, the balances in Accumulated Other Comprehensive Income related to de-designated 2016 Credit Facility cash flow hedge were either released into earnings or continue to be deferred and amortized over the remaining life of the 2018 Credit Facility. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly through the life of the hedging relationship. If the critical terms of the interest rate swap match the terms of the forecasted transaction, the Company concludes that the hedge is effective.
F-1466 VONAGE ANNUAL REPORT 20192020
Income Taxes
We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards, or NOLs. We are required to record a valuation allowance against our net deferred tax assets if we conclude that it is more likely than not that taxable income generated in the future will be insufficient to utilize the future income tax benefit from our net deferred tax assets prior to expiration. We periodically review this conclusion, which requires significant management judgment. If we are able to conclude in a future period that a future income tax benefit from our net deferred tax assets has a greater than 50% likelihood of being realized, we are required in that period to reduce the related valuation allowance with a corresponding decrease in income tax expense. This would result in a non-cash benefit to our net income in the period of the determination. In the future, if available evidence changes our conclusion that it is more likely than not that we will utilize our net deferred tax assets prior to their expiration, we will make an adjustment to the related valuation allowance and income tax expense at that time. In subsequent periods, we would expect to recognize income tax expense equal to our pre-tax income multiplied by our effective income tax rate, an expense that was not recognized prior to the reduction of the valuation allowance. Our effective rate may differ from the federal statutory rate due, in part, to our foreign operations and certain discrete period items.
On December 22, 2017, the TCJA was signed into law by the President of the United States. The TCJA most notably reduced the corporate tax rate from 35% to 21% along with eliminating the alternative minimum tax, or AMT, and imposing a mandatory one-time tax on foreign earnings. Under ASC 740, Income Taxes, an entity was required to recognize the effect of tax law changes during the period of enactment. As such, the Company reflected the impact of this law within its December 31, 2017 financial statements. The Company recorded a charge to income tax expense of $69,378 related to the re-measurement of the Company’s deferred tax balances at the 21% income tax rate in its December 31, 2017 statement of operations.
We file income tax returns in the U.S. for federal and state purposes and in various foreign jurisdictions. Our federal tax return remains subject to examination by the Internal Revenue Service from 2015 to present, our New Jersey tax returns remain open from 2014 to present, our Canada tax return remains open from 2015 to present, and other domestic and foreign tax returns remain open for all periods to which those filings relate. The Company received notice that the State of New Jersey will commence an income tax audit for the tax years ended December 31, 2014 through December 31, 2017. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
Business Combinations
We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. We include the results of all acquisitions in our consolidated financial statements from the date of acquisition.
Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in general and administrative expense.
Acquisition related integration costs include costs associated with exit or disposal activities, which do not meet the criteria of discontinued operations, including costs for employee, lease, and contract terminations, facility closing or other exit activities. Additionally, these costs include expenses directly related to integrating and reorganizing acquired businesses and include items such as employee retention costs, recruiting costs, certain moving costs, certain duplicative costs during integration and asset impairments. These costs are expensed as incurred in general and administrative expense.
Acquisition related consideration accounted for as compensation expense, such as restricted cash, restricted stock and option related costs incurred in connection with an acquisition are included in general and administrative expense.
F-1567 VONAGE ANNUAL REPORT 20192020
Foreign Currency
Generally, the functional currency of our non-United States subsidiaries is the local currency. However, the functional currency of API's United States's subsidiary is the Euro. The financial statements of these subsidiaries are translated to their respective functional currency using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs, and expenses. Translation gains and losses from the Company's net investments in subsidiaries are deferred and recorded in accumulated other comprehensive income as a component of stockholders’ equity until sale or complete or substantially complete liquidation of the net investment in the foreign entity takes place. Foreign currency transaction gains or losses are reported within other income (expense), net in the Company's consolidated statements of operations. For the year ended December 31, 2020, the amount recognized as foreign currency transaction gain was $368, for the years ended December 31, 2019, the amount recognized as foreign currency transaction loss was $727, and for the yearsyear ended December 31, 2018, the amount recognized as foreign currency transaction gain was $145, and for the year ended December 31, 2017, the amount recognized as foreign currency transaction loss was $620, respectively.$145.
Share-Based Compensation
We account for share-based compensation in accordance with FASB ASC 718, Compensation-Stock Compensation. Under the fair value recognition provisions of this pronouncement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award on a straight-line basis. On January 1, 2017, theThe Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. Previously, excess tax benefits were recognized in additional paid-in capital on the consolidated balance sheet to the extent they reduced income taxes payable. Any excess tax benefits or shortfalls are recorded in income taxes upon vest or exercise. During the years ended December 31, 2020, 2019, 2018, and 2017,2018, the Company recorded a net benefit of $0.3 million, $5 million, $16 million, and $11$16 million, respectively, related to excess tax benefits.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive items. Other comprehensive items include unrealized gains (losses) on derivatives, foreign currency translation adjustments, and unrealized gains (losses) on available-for-sale securities.
Use of Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.estimates, including uncertainty in the current economic environment due to the recent outbreak of the novel coronavirus COVID-19.
We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates are used for such items as depreciable lives for long-lived assets including intangible assets, tax provisions, uncollectible accounts, and assets and liabilities assumed in business combinations, among others. In addition, estimates are used to test long-lived assets and goodwill for impairment.
COVID-19 has created and may continue to create uncertainty in customer payments, reduced usage, and issuance of customer credits to distressed customers served by certain product lines. As of the date of our consolidated financial statements, we are not aware of any specific event or circumstance that would require us to materially update our estimates or judgments. However, these estimates may change as new events occur and additional information is obtained, which may result in changes being recognized in our condensed consolidated financial statements in future periods. In particular and in light of the COVID-19 pandemic, the assumptions and estimates associated with collectability assessment of revenue and credit losses of accounts receivable may have a material impact our consolidated financial statements in future periods, depending on the continued duration or degree of the impact of the COVID-19 pandemic on the global economy.
Reclassifications
Reclassifications have been made to our consolidated financial statements for the prior year periods to conform to classification used in the current year period.period including presentation of the Company's segments as further described in Note 16, Industry Segment and Geographical Information. The reclassifications did not affect results from operations or net assets.
68 VONAGE ANNUAL REPORT 2020
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)". This ASU provides an easier and more cost efficient way for companies to modify contracts that reference the London Interbank Offered Rate ("LIBOR") and other rates that are being phased out. The ASU (1) allows eligible contracts that are modified to be accounted for as a continuation of those contracts - a simplification that eliminates the need for companies to reassess or remeasure the contracts for accounting purposes; (2) permits companies to preserve their hedge accounting during the transition period; and (3) enables companies to make a one-time election to transfer or sell held-to-maturity debt securities that are affected by rate reform. It is effective as of March 12, 2020 through December 31, 2022. The Company adopted the ASU when effective. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes(Topic (Topic 740): Simplifying the Accounting for Income Taxes by removing certain exceptions currently permissible under ASC Topic 740 along with requiring740. This ASU also requires entities toto: (1) recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amounts incurred as non-income based tax,tax; (2) evaluate when a step upstep-up in the tax basis of goodwill should be considered as part of the business combination and when it should be considered a separate transaction,transaction;(3) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements,statements; and (4) reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation and other minor improvements. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company is currently evaluatingadopted the impactnew standard on January 1, 2020. The adoption of adoptingthe ASU 2019-12did not have a material impact on our consolidated financial statements and related disclosures.
F-16 VONAGE ANNUAL REPORT 2019
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the use of a new current expected credit loss ("CECL") model in estimating allowances for doubtful accounts with respect to accounts receivable, straight-line receivable and notes receivable. Receivables from revenue transactions, or trade receivables, are recognized when the corresponding revenue is recognized under ASC Topic 606, Revenue from Contracts with Customers. The CECL model requires that the Company estimatesestimate its lifetime expected credit loss with respect to these receivables and recordsrecord allowances that when deducted from the balance of the receivables, which represent the estimated net amounts expected to be collected. Given the generally short term nature of trade receivables, we do not expect to apply a discounted cash flow methodology. However, the Company will considerconsiders whether historical loss rates are consistent with expectations of forward-looking estimates for our trade receivables. In November 2018, the FASB issued ASU 2018-19 to clarify that operating lease receivables recorded by lessors are explicitly excluded from the scope of Topic 326. In April 2019, the FASB issued ASU 2019-04 to improve certain codifications including Topic 326 where accrued interest on receivables, recoveries, variable interest rates and prepayments are addressed. In November 2019, the FASB issued ASU 2019-11 to require entities to include expected recoveries of the amortized cost basis previously written off or expected to be written off in the valuation account for purchased financial assets with credit deterioration and clarifies and improves various aspects of the guidance for ASU 2016-13. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of this ASU will not have a material impactCompany adopted the new standard on our consolidated financial statements and related disclosures.
The following standards were adopted by the Company during the current year:
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other. The guidance eliminates Step 2 of the goodwill impairment test. A goodwill impairment loss will now be measured as the amount by which a reporting unit's carrying amount, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption was permitted for any impairment test performed on testing dates after January 1, 2017. The Company early adopted this guidance effective September 30, 2019.2020. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures. Due to the COVID-19 pandemic and impact on economic conditions, the Company included in its estimate of expected credit losses additional reserves related to trade receivables for those customers in industries most significantly impacted by these events. The Company will continue to actively monitor the impact of the COVID-19 pandemic on its estimate of expected credit losses.
In February 2016,August 2020, the FASB issued ASU 2016-02, 2020-06, "LeasesDebt - Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging - Contracts (Topic 842) which replacesin Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity". This ASU simplifies the guidance on accounting for leasescertain convertible instruments such that the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASC 815, or that do not result in Topic 840.substantial premiums accounted for as paid-in-capital. As a result, more convertible debt instruments will be accounted for as a single liability measured at its amortized cost. In addition, the ASU requires the use of the if-converted method to be applied to convertible instruments when calculating earnings per share. The new guidance increases transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheetASU is effective for most leases and disclose key information about leasing arrangements.
The Company adopted the new standard on January 1, 2019fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, using either a modified retrospective transition approach, which involves applyingor a full retrospective approach. Early adoption is permitted for fiscal years beginning after December 15, 2020. The Company is currently evaluating the new standard to all leases existing at the date of the initial application with any cumulative impact of the adoption recorded to retained earnings. The Company elected the practical expedient which permits the Company the use of hindsight along with package of practical expedients permitted under the transition guidance which excludes lease arrangements with an initial term of twelve month or less. Additionally, the Company carried over its assessment under ASC 840 regarding whether our contracts contained a lease arrangement, the classification of those lease, and the remaining lease terms. The Company also elected the optional transition method that allows adoption of the newthis standard prospectively, as of the effective date, without adjusting comparative periods presented.
The adoption of Topic 842 has had a significant effect on our balance sheet, mostly related to (1) the recognition of new right-of-use assets and new lease liabilities on our balance sheet for our existing operating leases (most notably leases of office space and co-location space); and (2) the derecognition of existing assets (most notably prepaid rent), and existing liabilities (most notably deferred rent) related to such leases. It will not materially affect our earnings or cash flows. We recorded the following transactions on January 1, 2019:consolidated financial statements.
Recognize currently unrecognized right-of-use assets of approximately $57.3 million net of deferred rent and lease incentives which were previously included in other liabilities.
Recognize currently unrecognized lease liabilities of approximately $64.5 million (based on the present value of the remaining rental payments for existing operating leases).
Recognize an adjustment to retained earnings of $458 thousand related to release of deferred tax assets.
F-1769 VONAGE ANNUAL REPORT 20192020
Note 3. Revenue Recognition
On January 1, 2018, theThe Company adoptedrecognizes revenues in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Our results for reporting periods beginning after January 1, 2018 are presented in accordance with the provisions under Topic 606 but any prior period amounts have not been adjusted and continue to be reported in accordance with our revenue recognition policy.
Service Revenues
Substantially all of our revenues are service revenues, which are derived from monthly subscription fees under usage based or pay-per-use type billing arrangements, and contract-based services plans. For consumer customers in the United States, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. For businessVCP customers, we offer small and medium business, mid-market, and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years. In addition, we provide managed equipment to businessVCP customers for a monthly fee. Customers also have the opportunity to purchase premium features for additional fees. We also derive service revenues from per minute fees for international calls if not covered under a plan, including calls made via applications for mobile devices and other stand-alone products, and for any calling minutes in excess of a customer's monthly plan limits. For a portion of our customers, monthly subscription fees are automatically charged to customers' credit cards, debit cards or ECP in advance and are recognized over the following month as service is provided.
Service revenue also includes supplying messaging (SMS and Voice) services to customers as part of our CPaaS offerings. Revenue is recognized in the period when messages are sent by the customer. We also transact with providers or bulk SMS aggregators and sell services to these customers who then onsell to their customers. Since the aggregator is our customer, revenue is recognized on a gross basis with related costs included in cost of revenues.
In the United States, we charge regulatory, compliance and intellectual property, and E-911 recovery fees on a monthly basis to defray costs and to cover taxes that we are charged by the suppliers of telecommunications services. These charges, along with the remittance to the relevant government entity, are recorded on a gross basis. In addition, we charge customers USF fees from customers to recover our obligation to contribute to the fund, as allowed by the FCC. We recognize USF revenue on a gross basis and record the related fees in cost of revenues.
Customer Equipment and Shipping Revenues
Revenues are generated from sales of customer equipment directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. In addition, customer equipment and shipping revenues include revenues from the sale of VoIP telephones in order to access our small and medium business services. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them.
F-18 VONAGE ANNUAL REPORT 2019
Disaggregation of Revenue
The following tables detail our revenue from customers disaggregated by primary geographical market, source of revenue, and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue for our Business and Consumer segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | For the years ended December 31, | | For the years ended December 31, |
| 2020 | | 2019 | | 2018 |
| VCP | Consumer | Total | | VCP | Consumer | Total | | VCP | Consumer | Total |
| Primary geographical markets | | | | | | | | | | | |
| United States | $ | 542,741 | | $ | 306,211 | | $ | 848,952 | | | $ | 500,545 | | $ | 354,710 | | $ | 855,255 | | | $ | 421,239 | | $ | 404,482 | | $ | 825,721 | |
| | | | | | | | | | | |
| United Kingdom | 70,090 | | 10,066 | | 80,156 | | | 55,721 | | 11,002 | | 66,723 | | | 36,992 | | $ | 12,438 | | 49,430 | |
| Other Countries | 302,226 | | 16,600 | | 318,826 | | | 247,614 | | 19,754 | | 267,368 | | | 149,913 | | $ | 23,718 | | 173,631 | |
| 915,057 | | 332,877 | | 1,247,934 | | | 803,880 | | 385,466 | | 1,189,346 | | | 608,144 | | 440,638 | | 1,048,782 | |
| Major Sources of Revenue | | | | | | | | | | | |
| Service revenues | $ | 856,492 | | $ | 292,003 | | $ | 1,148,495 | | | $ | 719,514 | | $ | 340,462 | | $ | 1,059,976 | | | $ | 526,707 | | $ | 394,389 | | $ | 921,096 | |
| Access and product revenues | 36,584 | | 278 | | 36,862 | | | 46,232 | | 264 | | 46,496 | | | 50,068 | | 559 | | 50,627 | |
| USF revenues | 21,981 | | 40,596 | | 62,577 | | | 38,134 | | 44,740 | | 82,874 | | | 31,369 | | 45,690 | | 77,059 | |
| 915,057 | | 332,877 | | 1,247,934 | | | 803,880 | | 385,466 | | 1,189,346 | | | 608,144 | | 440,638 | | 1,048,782 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | For the years ended December 31, |
| | 2019 | | 2018 |
| | Business | | Consumer | | Total | | Business | | Consumer | | Total |
| Primary geographical markets | | | | | | | | | | | |
| United States | $ | 500,545 |
| | $ | 354,710 |
| | $ | 855,255 |
| | $ | 421,239 |
| | $ | 404,482 |
| | $ | 825,721 |
|
| Canada | 6,942 |
| | 19,754 |
| | 26,696 |
| | 3,549 |
| | 23,718 |
| | 27,267 |
|
| United Kingdom | 55,721 |
| | 11,002 |
| | 66,723 |
| | 36,992 |
| | 12,438 |
| | 49,430 |
|
| Other Countries | 240,672 |
| | — |
| | 240,672 |
| | 146,364 |
| | — |
| | 146,364 |
|
| | 803,880 |
| | 385,466 |
| | 1,189,346 |
| | 608,144 |
| | 440,638 |
| | 1,048,782 |
|
| Major Sources of Revenue | | | | | | | | | | | |
| Service revenues | $ | 719,514 |
| | $ | 340,462 |
| | $ | 1,059,976 |
| | $ | 526,707 |
| | $ | 394,389 |
| | $ | 921,096 |
|
| Access and product revenues | 46,232 |
| | 264 |
| | 46,496 |
| | 50,068 |
| | 559 |
| | 50,627 |
|
| USF revenues | 38,134 |
| | 44,740 |
| | 82,874 |
| | 31,369 |
| | 45,690 |
| | 77,059 |
|
| | 803,880 |
| | 385,466 |
| | 1,189,346 |
| | 608,144 |
| | 440,638 |
| | 1,048,782 |
|
70 VONAGE ANNUAL REPORT 2020
In addition, the Company recognizes service revenues from its customers through subscription services provided or through usage or pay-per-use type arrangements. During the year ended December 31, 2020, the Company recognized $612,551 related to subscription services, $447,012 related to usage, and $188,371 related to other revenues such as USF, other regulatory fees, and credits. During the year ended December 31, 2019, the Company recognized $637,980 related to subscription services, $338,697 related to usage, and $212,669 related to other revenues such as USF, other regulatory fees, and credits. During the year ended December 31, 2018, the Company recognized $607,823 related to subscription services, $247,256 related to usage, and $193,703 related to other revenues such as USF, other regulatory fees, and credits.
Contract Assets and Liabilities
The following table provides information about receivables and contract liabilities from contracts with customers:
| | | | December 31, 2019 | | December 31, 2018 | | December 31, 2020 | | December 31, 2019 |
Receivables (1) | $ | 101,813 |
| | 75,342 |
| Receivables (1) | $ | 116,304 | | | 101,813 | |
Contract liabilities (2) | 59,464 |
| | 53,447 |
| Contract liabilities (2) | 65,506 | | | 59,464 | |
(1) Amounts included in accounts receivables on our consolidated balance sheet.
(2) Amounts included in deferred revenues on our consolidated balance sheet.
Our deferred revenue represents the advance consideration received from customers for subscription services and is predominantly recognized over the following month as transfer of control occurs. During the yearyears ended December 31, 2020, 2019 and 2018, the Company recognized revenue of $431,220, $456,855, and $445,547, respectively, related to its contract liabilities. We expect to recognize $59,464$65,506 into revenue over the next twelve months related to our deferred revenue as of December 31, 2019.2020.
Remaining Performance Obligation
Transaction price allocated to the remaining performance obligation represents contracted revenue that has not yet been recognized. The typical subscription term may range from 1 month to 3 years. Contracted revenue as of December 31, 20192020 that has not yet been recognized was approximately $0.4 billion.$0.4 billion. This excludes contracts with an original expected length of less than one year. The Company expects to recognize the majority of its remaining performance obligation over the next 18 months.
F-19 VONAGE ANNUAL REPORT 2019
Contract Acquisition Costs
We have various commission programs for internal sales personnel and channel partners that are incremental to the acquisition of customer contracts. These costs are recorded as deferred contract acquisition costs on the consolidated balance sheets which eligible employees and third parties may earn commission on sales of services and products to customers. We expect that these commission fees are recoverable and, therefore, we have capitalized $68,982$85,690 and $49,636$68,982 as contract costs, net of accumulated amortization, as of December 31, 20192020 and December 31, 2018,2019, respectively, included within deferred customer acquisitions costs, current portion and deferred customer acquisition costs on our consolidated balance sheet. In addition, we established a deferred tax liability associated with the transition asset of $9,636 upon the adoption of Topic 606 on January 1,2018. Capitalized commission fees are amortized to sales and marketing expense over the estimated customer life, which is seven years for BusinessVonage Communications Platform customers. During the year ended December 31, 20192020 and 2018,2019, the amounts amortized to sales and marketing were $11,359$16,241 and $10,287,$11,359, respectively. There were no impairment losses recognized in relation to the costs capitalized for the years ended December 31, 20192020 and December 31, 2018.2019. In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year and for residuals and renewals.
F-2071 VONAGE ANNUAL REPORT 20192020
Note 4. Acquisitions and Dispositions
Acquisition of NewVoiceMedia
On October 31, 2018, the Company acquired 100% of the issued and outstanding shares of NVM, a cloud CCaaS provider, for a purchase price of $350,179 paid in cash. NVM is a private limited company organized under the laws of England & Wales. Adding NVM's contact center solutions to its existing suite of products will enable the Company to offer a full array of cloud business communications solutions delivered through owned technology.
The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair value on the acquisition date. The accounting for the business combination was completed as of October 31, 2019, at which point the fair values became final.
Under the terms of the offer, NVM shareholders received cash in the amount of approximately $341 million (approximately £260 million based on a 1.31335 GBP to USD exchange rate as of September 18, 2018) shortly after completion of the offer and the Company paid transactions costs incurred by NVM of approximately $9 million on the date of the acquisition.
The table below summarizes the NVM assets acquired and liabilities assumed as of October 31, 2018:
| | | | | | | | | | | |
| Preliminary Acquisition Date Fair Value as of December 31, 2018 | Measurement Period Adjustments | Final Acquisition Date Fair Value |
| Assets | | | |
| Cash and cash equivalents | $ | 1,994 | | | $ | 1,994 | |
| Accounts receivable | 13,747 | | (1,448) | | 12,299 | |
| Other current assets | 3,907 | | (565) | | 3,342 | |
| Property and equipment | 3,474 | | | 3,474 | |
| Intangible assets | 154,300 | | | 154,300 | |
| Other assets | 378 | | | 378 | |
| Total assets acquired | 177,800 | | (2,013) | | 175,787 | |
| | | |
| Liabilities | | | |
| Accounts payable | 4,712 | | | 4,712 | |
| Accrued expenses | 4,145 | | 333 | | 4,478 | |
| Deferred tax liabilities | 7,756 | | (598) | | 7,158 | |
| Deferred revenue | 22,000 | | 800 | | 22,800 | |
| Total liabilities assumed | 38,613 | | 535 | | 39,148 | |
| | | |
| Net identifiable assets acquired | 139,187 | | (2,548) | | 136,639 | |
| Goodwill | 210,992 | | 2,548 | | 213,540 | |
| Total purchase price | $ | 350,179 | | $ | — | | $ | 350,179 | |
|
| | | | | | | | | |
| | Preliminary Acquisition Date Fair Value as of December 31, 2018 | Measurement Period Adjustments | Final Acquisition Date Fair Value |
| Assets | | | |
| Cash and cash equivalents | $ | 1,994 |
| | $ | 1,994 |
|
| Accounts receivable | 13,747 |
| (1,448 | ) | $ | 12,299 |
|
| Other current assets | 3,907 |
| (565 | ) | $ | 3,342 |
|
| Property and equipment | 3,474 |
| | $ | 3,474 |
|
| Intangible assets | 154,300 |
| | $ | 154,300 |
|
| Other assets | 378 |
| | $ | 378 |
|
| Total assets acquired | 177,800 |
| (2,013 | ) | 175,787 |
|
| | | | |
| Liabilities |
| | |
| Accounts payable | 4,712 |
| | 4,712 |
|
| Accrued expenses | 4,145 |
| 333 |
| 4,478 |
|
| Deferred tax liabilities | 7,756 |
| (598 | ) | 7,158 |
|
| Deferred revenue | 22,000 |
| 800 |
| 22,800 |
|
| Total liabilities assumed | 38,613 |
| 535 |
| 39,148 |
|
| | | | |
| Net identifiable assets acquired | 139,187 |
| (2,548 | ) | 136,639 |
|
| Goodwill | 210,992 |
| 2,548 |
| 213,540 |
|
| Total purchase price | $ | 350,179 |
| $ | — |
| $ | 350,179 |
|
The fair values of intangible assets at the acquisition date were measured primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The fair values of the trade name, customer relationships and developed technology were determined utilizing variations of the income approach where the expected future cash flows resulting from the acquired identifiable intangible assets were reduced by operating costs and charges for contributory assets and then discounted to present value at the weighted average cost of capital.
F-2172 VONAGE ANNUAL REPORT 20192020
The Company recorded goodwill of $213,540 which is attributable to the BusinessVCP segment and is not deductible for tax purposes. The factors that resulted in goodwill arising from the acquisition include the revenues and synergies anticipated with the ability to provide a contact center solution to our existing suite of cloud communication services along with a skilled workforce proficient in API development. The Company also recorded intangible assets of $154.3 million comprised of trade name of $5.3 million, customer relationships of $87 million, and developed technology of $62 million. In addition, the Company incurred and expensed acquisition related transaction costs included in general and administrative expense related to the acquisition of NVM of $253 and $9,627 for the years ended December 31, 2019 and 2018, respectively.
Supplemental Pro Forma Information (unaudited)
The following supplemental pro forma information represents the results of operations if Vonage had acquired NVM on January 1, 2018.
|
| | | | |
| | �� | For the year ended |
| | | December 31, 2018 |
| Revenue | | $ | 1,105,674 |
|
| Net loss | | (17,475 | ) |
| Loss per share - basic | | (0.07 | ) |
| Loss per share - diluted | | (0.07 | ) |
| | | | | | | | |
| | For the year ended |
| | December 31, 2018 |
| Revenue | | $ | 1,105,674 | |
| Net loss | | (17,475) | |
| Loss per share - basic | | (0.07) | |
| Loss per share - diluted | | (0.07) | |
The pro forma information has been adjusted to include the pro-forma impact of amortization of intangible assets based on the purchase price allocations. The pro forma data has also been adjusted to eliminate non-recurring transaction costs as well as the related tax impact of pro forma adjustments. There were no transactions between Vonage and NVM. The pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings or any related integration costs.
Acquisition of TokBox
On August 1, 2018, the Company acquired 100% of the issued and outstanding shares of TokBox for a purchase price of $32,906 paid in cash. San Francisco-based TokBox develops and operates the OpenTok Platform and is a provider in the WebRTC programmable video segment of the cloud communications market which will compliment the Company's existing portfolio of programmable communications.
The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair value on the acquisition date. The accounting for the business combination was completed as of June 30, 2019, at which point the fair values became final.
F-2273 VONAGE ANNUAL REPORT 20192020
The table below summarizes the TokBox assets acquired and liabilities assumed as of August 1, 2018:
| | | | | |
| Acquisition Date Fair Value |
| Assets | |
| Cash and cash equivalents | $ | 557 | |
| Current assets | 2,205 | |
| Property and equipment | 124 | |
| Intangible assets | 15,602 | |
| Deferred tax asset | 92 | |
| Restricted cash | 50 | |
| Total assets acquired | 18,630 | |
| |
| Liabilities | |
| Accounts payable | 371 | |
| Accrued expenses | 6,003 | |
| Total liabilities assumed | 6,374 | |
| |
| Net identifiable assets acquired | 12,256 | |
| Goodwill | 20,650 | |
| Total purchase price | $ | 32,906 | |
|
| | | |
| | Acquisition Date Fair Value |
| Assets | |
| Cash and cash equivalents | $ | 557 |
|
| Current assets | 2,205 |
|
| Property and equipment | 124 |
|
| Intangible assets | 15,602 |
|
| Deferred tax asset | 92 |
|
| Restricted cash | 50 |
|
| Total assets acquired | 18,630 |
|
| | |
| Liabilities | |
| Accounts payable | 371 |
|
| Accrued expenses | 6,003 |
|
| Total liabilities assumed | 6,374 |
|
| | |
| Net identifiable assets acquired | 12,256 |
|
| Goodwill | 20,650 |
|
| Total purchase price | $ | 32,906 |
|
The Company recorded goodwill of $20,650 which is attributable to the BusinessVCP segment and is deductible for tax purposes. The factors that resulted in goodwill arising from the acquisition include the revenues expected to be achieved by incorporating a video feature in the Company's API platform along with a skilled workforce proficient in API development. The Company also recorded intangible assets of $15,602 comprised of customer relationships of $5,020 and developed technology of $10,582.
Supplemental Pro Forma Information (unaudited)
The following supplemental pro forma information represents the results of operations if Vonage had acquired TokBox on January 1, 2018.
|
| | | | |
| | | For the year ended |
| | | December 31, 2018 |
| Revenue | | $ | 1,054,649 |
|
| Net income | | 19,459 |
|
| Earnings per share - basic | | 0.08 |
|
| Earnings per share - diluted | | 0.08 |
|
| | | | | | | | | |
| | For the year ended |
| | December 31, 2018 | |
| Revenue | | $ | 1,054,649 | | |
| Net income | | 19,459 | | |
| Earnings per share - basic | | 0.08 | | |
| Earnings per share - diluted | | 0.08 | | |
The pro forma information has been adjusted to include the pro-forma impact of amortization of intangible assets based on the preliminary purchase price allocations. The pro forma data has also been adjusted to eliminate non-recurring transaction costs as well as the related tax impact of pro forma adjustments. There were no transactions between Vonage and TokBox. The pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings or any related integration costs.
F-2374 VONAGE ANNUAL REPORT 20192020
On May 31, 2017, we completed the sale of our Hosted Infrastructure product line for up to $4.0 million consideration comprised of $1.0 million received upon closing, an additional $0.5 million of contingent consideration received during the third quarter of 2017 and the potential for up to $2.5 million further consideration based on the achievement of financial objectives for net sales during the 18 months following closing. The results of our Hosted Infrastructure product line have historically been included within the Business segment. As a result of the sale, we recorded a gain $1,879 for the year ended December 31, 2017, within other income. This disposal did not represent a strategic shift in operations and, therefore, did not qualify for presentation as discontinued operations.
Note 5. Earnings Per Share
Earnings (loss) per share has been computed according to FASB ASC 260, “Earnings per Share”, which requires a dual presentation of basic and diluted EPS. Basic EPS represents net income or loss divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units under our 2001 Stock Incentive Plan and 2006 Incentive Plan were exercised or converted into common stock. The dilutive effect of outstanding, stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation cost attributed to future services.
The following table sets forth the computation for basic and diluted earnings (loss) per share:
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
| 2020 | | 2019 | | 2018 |
| | | | | |
| Numerator | | | | | |
| Net (loss) income | $ | (36,212) | | | $ | (19,482) | | | $ | 35,728 | |
| | | | | |
| Denominator | | | | | |
| Basic weighted average common shares outstanding | 246,082 | | | 242,018 | | | 237,499 | |
| Dilutive effect of stock options and restricted stock units | 0 | | | 0 | | | 11,393 | |
| Diluted weighted average common shares outstanding | 246,082 | | | 242,018 | | | 248,892 | |
| Basic (loss) earnings per share | | | | | |
| Basic (loss) earnings per share | $ | (0.15) | | | $ | (0.08) | | | $ | 0.15 | |
| Diluted (loss) earnings per share | | | | | |
| Diluted (loss) earnings (loss) per share | $ | (0.15) | | | $ | (0.08) | | | $ | 0.14 | |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
| Numerator | | | | | |
| Net (loss) income | $ | (19,482 | ) | | $ | 35,728 |
| | $ | (33,933 | ) |
| | | | | | |
| Denominator | | | | | |
| Basic weighted average common shares outstanding | 242,018 |
| | 237,499 |
| | 225,311 |
|
| Dilutive effect of stock options and restricted stock units | — |
| | 11,393 |
| | — |
|
| Diluted weighted average common shares outstanding | 242,018 |
| | 248,892 |
| | 225,311 |
|
| Basic (loss) earnings per share | | | | | |
| Basic (loss) earnings per share | $ | (0.08 | ) | | $ | 0.15 |
| | $ | (0.15 | ) |
| Diluted (loss) earnings per share | | | | | |
| Diluted (loss) earnings (loss) per share | $ | (0.08 | ) | | $ | 0.14 |
| | $ | (0.15 | ) |
The following shares were excluded from the calculation of diluted earnings (loss) per share because of their anti-dilutive effects:
|
| | | | | | | | |
| | For the years ended December 31, | |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Restricted stock units | 10,389 |
| | 3,285 |
| | 11,928 |
|
| Employee stock options | 4,946 |
| | 1,163 |
| | 10,448 |
|
| | 15,335 |
| | 4,448 |
| | 22,376 |
|
F-24 VONAGE ANNUAL REPORT 2019
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Restricted stock units | 14,623 | | | 10,389 | | | 3,285 | |
| Employee stock options | 1,501 | | | 4,946 | | | 1,163 | |
| 16,124 | | | 15,335 | | | 4,448 | |
As the Company expects to settle the principal amount of its outstanding convertible senior notes in cash and any excess in cash or shares of the Company’s common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of $16.72 per share. The Company's convertible senior notes are further described in Note 8, Long-Term Debt .
75 VONAGE ANNUAL REPORT 2020
Note 6. Goodwill and Intangible Assets
Goodwill
The Company's goodwill is derived primarily from the acquisitions of Vocalocity, Telesphere, iCore, Simple Signal, Nexmo, TokBox and NVM which are included in the Company's BusinessVCP segment. The following table provides a summary of the changes in the carrying amounts of goodwill:
|
| | | |
| Balance at January 1, 2018 | $ | 373,764 |
|
| Increase in goodwill related to acquisition of TokBox | 20,650 |
|
| Increase in goodwill related to acquisition of NVM | 210,992 |
|
| Foreign currency translation adjustment | (6,907 | ) |
| Balance at December 31, 2018 | 598,499 |
|
| Increase in goodwill related to measurement period adjustments to initial acquisition accounting of NVM | 2,548 |
|
| Foreign currency translation adjustment | 1,923 |
|
| Balance at December 31, 2019 | $ | 602,970 |
|
| | | | | |
| Balance at January 1, 2019 | $ | 598,499 | |
| Increase in goodwill related to acquisition of NVM | 2,548 | |
| Foreign currency translation adjustment | 1,923 | |
| Balance at December 31, 2019 | 602,970 | |
| Foreign currency translation adjustment | 21,358 | |
| Balance at December 31, 2020 | $ | 624,328 | |
Intangible assets, net
The Company's intangible assets as of December 31, 20192020 and 20182019 primarily reflect intangible assets established with the acquisitions of various companies such as customer relationships, trade names and developed technology. In addition, the Company's intangible assets include patents we have purchased and licensed, including in connection with the settlement of litigation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2020 | | December 31, 2019 |
| Useful Lives
(years) | | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | | Gross Carrying Value | Accumulated Amortization | Net Carrying Value |
| Customer relationships | 7 | to | 12 | | $ | 284,692 | | $ | (150,094) | | $ | 134,598 | | | $ | 272,767 | | $ | (115,583) | | $ | 157,184 | |
| Developed technology | 3 | to | 10 | | 173,572 | | (104,468) | | 69,104 | | | 169,722 | | (80,523) | | 89,199 | |
| Patents and patent licenses | 3 | to | 5 | | 20,849 | | (20,284) | | 565 | | | 20,554 | | (19,228) | | 1,326 | |
| Trade names | 2 | to | 5 | | 500 | | (500) | | 0 | | | 7,074 | | (4,878) | | 2,196 | |
| Non-compete agreements | | 3 | | | 0 | | 0 | | 0 | | | 970 | | (970) | | 0 | |
| Total finite-lived intangible assets | | | | | $ | 479,613 | | $ | (275,346) | | $ | 204,267 | | | $ | 471,087 | | $ | (221,182) | | $ | 249,905 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2019 | | December 31, 2018 |
| | Useful Lives (years) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | | Gross Carrying Value | Accumulated Amortization | Net Carrying Value |
| Customer relationships | 7 | to | 12 | $ | 272,767 |
| $ | (115,583 | ) | $ | 157,184 |
| | $ | 272,226 |
| $ | (84,339 | ) | $ | 187,887 |
|
| Developed technology | 3 | to | 10 | 169,722 |
| (80,523 | ) | 89,199 |
| | 162,316 |
| (57,948 | ) | 104,368 |
|
| Patents and patent licenses | 3 | to | 5 | 20,554 |
| (19,228 | ) | 1,326 |
| | 20,214 |
| (17,700 | ) | 2,514 |
|
| Trade names | 2 | to | 5 | 7,074 |
| (4,878 | ) | 2,196 |
| | 6,952 |
| (1,947 | ) | 5,005 |
|
| Non-compete agreements | | 3 | | 970 |
| (970 | ) | — |
| | 991 |
| (854 | ) | 137 |
|
| Total finite-lived intangible assets | | | | $ | 471,087 |
| $ | (221,182 | ) | $ | 249,905 |
| | $ | 462,699 |
| $ | (162,788 | ) | $ | 299,911 |
|
F-25 VONAGE ANNUAL REPORT 2019
During the years ended December 31, 2020, 2019, 2018, and 2017,2018, the Company recorded amortization expense of $54,539, $58,441 $39,457 and $38,056,$39,457, respectively. Amortization expense may vary in the future as acquisitions, dispositions and impairments, if any, occur. The total expected future annual amortization for the succeeding five years ended December 31 is as follows:
| | | | | |
| Estimated Amortization Expense |
| 2021 | $ | 44,614 | |
| 2022 | 40,889 | |
| 2023 | 34,330 | |
| 2024 | 28,617 | |
| 2025 | 14,455 | |
76 VONAGE ANNUAL REPORT 2020
|
| | | |
| | Estimated Amortization Expense |
| 2020 | $ | 51,219 |
|
| 2021 | 43,390 |
|
| 2022 | 39,942 |
|
| 2023 | 33,523 |
|
| 2024 | 27,927 |
|
Note 7. Income Taxes
The components of loss or(loss) income before income taxes are as follows:
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| United States | $ | 11,994 |
| | $ | 31,205 |
| | $ | 39,370 |
|
| Foreign | (38,102 | ) | | 5,320 |
| | 6,423 |
|
| | $ | (26,108 | ) | | $ | 36,525 |
| | $ | 45,793 |
|
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| United States | $ | (9,440) | | | $ | 11,994 | | | $ | 31,205 | |
| Foreign | (22,555) | | | (38,102) | | | 5,320 | |
| $ | (31,995) | | | $ | (26,108) | | | $ | 36,525 | |
The income tax (expense) benefit or expense consisted of the following amounts:
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Current: | | | | | |
| Federal | $ | 1,303 | | | $ | 0 | | | $ | 0 | |
| Foreign | (2,637) | | | (3,599) | | | (3,023) | |
| State and local taxes | (3,235) | | | (3,186) | | | (2,583) | |
| $ | (4,569) | | | $ | (6,785) | | | $ | (5,606) | |
| Deferred: | | | | | |
| Federal | $ | (739) | | | $ | (1,495) | | | $ | 6,249 | |
| Foreign | 1,290 | | | 7,321 | | | 1,290 | |
| State and local taxes | (199) | | | 7,585 | | | (2,730) | |
| | 352 | | | 13,411 | | | 4,809 | |
| $ | (4,217) | | | $ | 6,626 | | | $ | (797) | |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Current: | | | | | |
| Federal | $ | — |
| | $ | — |
| | $ | (1,101 | ) |
| Foreign | (3,599 | ) | | (3,023 | ) | | (1,731 | ) |
| State and local taxes | (3,186 | ) | | (2,583 | ) | | (2,317 | ) |
| | $ | (6,785 | ) | | $ | (5,606 | ) | | $ | (5,149 | ) |
| Deferred: | | | | | |
| Federal | $ | (1,495 | ) | | $ | 6,249 |
| | $ | (75,928 | ) |
| Foreign | 7,321 |
| | 1,290 |
| | 1,631 |
|
| State and local taxes | 7,585 |
| | (2,730 | ) | | (280 | ) |
| | 13,411 |
| | 4,809 |
| | (74,577 | ) |
| | $ | 6,626 |
| | $ | (797 | ) | | $ | (79,726 | ) |
F-2677 VONAGE ANNUAL REPORT 20192020
The reconciliation between the United States federal statutory rate of 21% for the year ended December 31, 2020, 2019 and 2018, and 35% for the years ended December 31, 2017, respectively, to the Company's effective rates are as follows:
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| U.S. Federal statutory tax rate | 21 | % | | 21 | % | | 21 | % |
| Statutory permanent items | 0 | % | | (3) | % | | 3 | % |
| | | | | |
| Equity-based compensation | 1 | % | | 19 | % | | (43) | % |
| Acquisition costs | 0 | % | | 0 | % | | 4 | % |
| Officers' compensation | (9) | % | | (7) | % | | 3 | % |
| Interest | (5) | % | | (10) | % | | 1 | % |
| State and local taxes, net of federal benefit | (8) | % | | 13 | % | | 12 | % |
| International tax (reflects effect of losses for which tax benefit not realized) | (7) | % | | (9) | % | | 4 | % |
| Uncertain tax positions | 1 | % | | 2 | % | | 2 | % |
| Tax credits | 7 | % | | 1 | % | | (2) | % |
| Valuation reserve for income taxes and other | (16) | % | | 0 | % | | 0 | % |
| Tax rate change | 3 | % | | 0 | % | | 0 | % |
| Other | (1) | % | | (2) | % | | (3) | % |
| Effective tax rate | (13) | % | | 25 | % | | 2 | % |
|
| | | | | | | | |
| | For the years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| U.S. Federal statutory tax rate | 21 | % | | 21 | % | | 35 | % |
| Statutory permanent items | (3 | )% | | 3 | % | | 9 | % |
| Effect of the Tax Cuts and Jobs Act | — | % | | — | % | | 152 | % |
| Equity-based compensation | 19 | % | | (43 | )% | | (24 | )% |
| Acquisition costs | — | % | | 4 | % | | — | % |
| Officers' compensation | (7 | )% | | 3 | % | | 1 | % |
| Interest | (10 | )% | | 1 | % | | — | % |
| State and local taxes, net of federal benefit | 13 | % | | 12 | % | | 5 | % |
| International tax (reflects effect of losses for which tax benefit not realized) | (9 | )% | | 4 | % | | (4 | )% |
| Uncertain tax positions | 2 | % | | 2 | % | | — | % |
| Tax credits | 1 | % | | (2 | )% | | (2 | )% |
| Valuation reserve for income taxes and other | — | % | | — | % | | (3 | )% |
| Tax rate change | — | % | | — | % | | 3 | % |
| Other | (2 | )% | | (3 | )% | | 2 | % |
| Effective tax rate | 25 | % | | 2 | % | | 174 | % |
For the year ended December 31, 2020, the Company's overall effective tax rate was different from the statutory rate of 21% primarily as a result of a permanent adjustment related to a limitation against the deductibility of officer’s compensation stemming from the impact of CEO and CFO succession and related costs during the current year. In addition, there was an increase to the valuation allowance related to the United Kingdom.
For the year ended December 31, 2019, the Company's overall effective tax rate was different from the statutory rate of 21% primarily as a result of a permanent benefit related to the equity based stock compensation and an interested related adjustment in the United Kingdom.
For the year ended December 31, 2018, the Company's overall effective tax rate was different from the statutory rate of 21% primarily as a result of the increase in the state provision along with the permanent benefit related to the equity-based stock compensation and its related state impact.
For the year ended December 31, 2017, the Company's overall effective tax rate was different from the statutory rate of 35% primarily due to the impact of tax reform enacted in the United States on December 22, 2017 reducing the corporate tax rate from 35% to 21% beginning January 1, 2018. This resulted in an expense of $69,378 attributable to the re-measurement of the Company's deferred tax assets as of December 31, 2017.
F-2778 VONAGE ANNUAL REPORT 20192020
The temporary differences which gave rise to the Company's net deferred tax assets consisted of the following:
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Assets and liabilities: | | | |
| Accounts receivable and inventory allowances | $ | 1,044 |
| | $ | 839 |
|
| Deferred rent | 1,833 |
| | 1,212 |
|
| Acquired intangible assets and property and equipment | (35,524 | ) | | (56,801 | ) |
| Accrued expenses | 7,964 |
| | 7,344 |
|
| Research and development | 1,170 |
| | 991 |
|
| Stock option compensation | 17,979 |
| | 14,741 |
|
| Capital leases | — |
| | (38 | ) |
| Cumulative translation adjustments | 40 |
| | 170 |
|
| Deferred revenue | 7,471 |
| | 5,355 |
|
| Derivatives | 3 |
| | 142 |
|
| Prepaid expense | (15,569 | ) | | (13,312 | ) |
| Convertible debt and capped call | (7,934 | ) | | — |
|
| Net operating loss carryforwards | 149,848 |
| | 165,732 |
|
| | 128,325 |
| | 126,375 |
|
| Valuation allowance | (19,978 | ) | | (23,815 | ) |
| Deferred tax assets, net, non-current | $ | 108,347 |
| | $ | 102,560 |
|
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Assets and liabilities: | | | |
| Accounts receivable and inventory allowances | $ | 1,588 | | | $ | 1,044 | |
| Deferred rent | 3,149 | | | 1,833 | |
| Acquired intangible assets and property and equipment | (23,360) | | | (35,524) | |
| Accrued expenses | 9,537 | | | 7,964 | |
| Research and development | 11,288 | | | 1,170 | |
| Stock option compensation | 18,326 | | | 17,979 | |
| | | |
| Cumulative translation adjustments | 39 | | | 40 | |
| Deferred revenue | 8,201 | | | 7,471 | |
| Derivatives | 0 | | | 3 | |
| Prepaid expense | (18,892) | | | (15,569) | |
| Convertible debt and capped call | (9,345) | | | (7,934) | |
| Net operating loss carryforwards | 130,681 | | | 149,848 | |
| 131,212 | | | 128,325 | |
| Valuation allowance | (24,838) | | | (19,978) | |
| Deferred tax assets, net, non-current | $ | 106,374 | | | $ | 108,347 | |
Deferred tax assets and valuation allowance
Net deferred tax balance. As of December 31, 20192020 and 2018,2019, we recorded a net deferred tax asset, net of valuation allowance of $108,347$106,374 and $102,560,$108,347, respectively. The Company believes that the net operating losses related to one of its United Kingdom subsidiaries, Vonage Limited, and certain U.S. states may not be realizable under a "more likely than not" measurement and as such, a valuation allowance has been established to reduce the asset accordingly.
NOL carryforwards. As of December 31, 2019,2020, the Company has U.S. Federalfederal and state NOL carryforwards of $509,313$410,731 and $237,667,$207,769, respectively, which expire at various times through 2037. We have Non-US NOLs of $165,104$159,152 primarily related to the United Kingdom which has no expiration date. Under Section 382 of the Internal Revenue Code, if we undergo an “ownership change” which is generally defined as a greater than 50% change by value in our equity ownership over a three-year period, our ability to use our pre-change of control NOLs and other pre-change tax attributes against our post-change income may be limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. At December 31, 2019,2020, there were no limitations on the use of our NOLs except for a certain portion of the NOLs ofacquired with Vocalocity, which the Company has reflected in the deferred tax asset.
Valuation allowance. As of December 31, 20192020 and 2018,2019, the Company's valuation allowance was $19,978$24,838 and $23,815,$19,978, respectively, primarily consisting of NOLs associated with Vonage Limited, NVM and state NOLs for certain legal entities.
Uncertain tax benefits
The Company had uncertain tax benefits of $914$632 and $1,107$914 as of December 31, 20192020 and 2018,2019, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company incurred interest expense or penalties of $20, $60, $68, and $61$68 for the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively.
The following table reconciles the total amounts of uncertain tax benefits:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Balance as of January 1 | $ | 1,107 |
| | 1,086 |
|
| Increase due to current year positions | 155 |
| | 1,107 |
|
| Decrease due to prior year positions | (243 | ) | | (1,086 | ) |
| Decrease due to settlements and payments | (86 | ) | | — |
|
| Decrease due to lapse of applicable statute of limitations | (71 | ) | | — |
|
| Increase due to foreign currency fluctuation | 52 |
| | — |
|
| Uncertain tax benefits as of December 31 | $ | 914 |
| | $ | 1,107 |
|
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| Balance as of January 1 | $ | 914 | | | 1,107 | |
| Increase due to current year positions | 114 | | | 155 | |
| Decrease due to prior year positions | 0 | | | (243) | |
| Decrease due to settlements and payments | (173) | | | (86) | |
| Decrease due to lapse of applicable statute of limitations | (238) | | | (71) | |
| Increase due to foreign currency fluctuation | 15 | | | 52 | |
| Uncertain tax benefits as of December 31 | $ | 632 | | | $ | 914 | |
F-2879 VONAGE ANNUAL REPORT 20192020
Tax jurisdictions
Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns that are filed are subject to audit by various Federal,federal, state and local tax authorities. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2015.2016. With few exceptions, state and local income tax examinations are no longer open for years before 2014.2015.
Note 8. Long-Term Debt
A schedule of long-term debt, excluding current portion, at December 31, 20192020 and 20182019 is as follows:
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Term note - due 2023 | $ | — |
| | $ | 95,000 |
|
| Revolving credit facility - due 2023 | 220,500 |
| | 425,000 |
|
| Convertible senior notes - due 2024 | 345,000 |
| | — |
|
| Long-term debt including current maturities | $ | 565,500 |
| | $ | 520,000 |
|
| Less current maturities | — |
| | 10,000 |
|
| Less unamortized discount | 61,234 |
| | — |
|
| Less debt issuance cost | 7,108 |
| | 772 |
|
| Total long-term debt | $ | 497,158 |
| | $ | 509,228 |
|
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| | | |
| Revolving credit facility - due 2023 | 215,500 | | | 220,500 | |
| Convertible senior notes - due 2024 | 345,000 | | | 345,000 | |
| Long-term debt including current maturities | $ | 560,500 | | | $ | 565,500 | |
| | | |
| Less unamortized discount | 48,702 | | | 61,234 | |
| Less debt issuance cost | 5,514 | | | 7,108 | |
| Total long-term debt | $ | 506,284 | | | $ | 497,158 | |
As of December 31, 2019,2020, future payments under long-term debt obligations over each of the next five years are as follows:
|
| | | |
| | Long-term debt |
| 2020 | $ | — |
|
| 2021 | — |
|
| 2022 | — |
|
| 2023 | 220,500 |
|
| 2024 | 345,000 |
|
| Minimum future payments of principal | $ | 565,500 |
|
| | | | | |
| | Long-term debt |
| 2021 | $ | 0 | |
| 2022 | 0 | |
| 2023 | 215,500 | |
| 2024 | 345,000 | |
| |
| Minimum future payments of principal | $ | 560,500 | |
| |
| |
| |
Convertible Senior Notes
In June 2019, the Company issued $300.0 million aggregate principal amount of 1.75% convertible senior notes due 2024 in a private placement and an additional $45.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option of the initial purchasers. The Convertible Senior Notes are the Company's senior unsecured obligations. The Convertible Senior Notes bear interest at a rate of 1.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2019. The Convertible Senior Notes will mature on June 1, 2024, unless earlier redeemed, repurchased or converted. We may not redeem the notes prior to June 5, 2022. On or after June 5, 2022, we may redeem for cash all or a portion of the notes if the last reported sale price of the Company's common stock has been at least 130% of the conversion price then in effect on (i) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date the Company provides notice of redemption and (ii) the trading day immediately preceding the date the Company provides such notice. The total net proceeds from the offering, after deducting initial purchase discounts and expenses payable by the Company, were $334.8 million.
F-29 VONAGE ANNUAL REPORT 2019
Each $1,000 principal amount of the Convertible Senior Notes is initially convertible into 59.8256 shares of the Company's common stock, which is equivalent to an initial conversion price of approximately $16.72 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change or a redemption period, each as defined in the indenture setting forth the terms of the Convertible Senior Notes, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Convertible Senior Notes in connection with such make-whole fundamental change or during the relevant redemption period.
The Company used the net proceeds from the offering to (i) pay the cost of the capped call transactions described below, (ii) to repurchase approximately $10 million in shares of its common stock from purchasers of the Convertible Senior Notes in privately negotiated transactions effected through one of the initial purchasers or an affiliate thereof concurrently with the pricing of the Convertible Senior Notes described below, and (iii) to repay the outstanding principal balance under its credit facility.
Prior to December 1, 2023, the notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. We will satisfy any conversion election by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. The Convertible Senior Notes and shares of common stock issuable upon conversion, if any, have not been registered under the Securities Act, or under any U.S. state securities laws or other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
During the year ended December 31, 2019,2020, the conditions allowing holders of the Convertible Senior Notes to convert were not met.
In accounting for the issuance80 VONAGE ANNUAL REPORT 2020
In accounting for the transaction costs related to the Convertible Senior Notes, the Company allocated the total amount incurred to the liability and equity components of the Convertible Senior Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component of $7,973 were recorded as additional debt discount and will be amortized to interest expense using the effective interest method over the contractual terms of the Convertible Senior Notes. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.
The net carrying amount of the liability component of the Convertible Senior Notes was as follows:
|
| | | |
| | December 31, 2019 |
|
| Principal | $ | 345,000 |
|
| Unamortized discount | (61,234 | ) |
| Unamortized issuance cost | (7,108 | ) |
| Net carrying amount | $ | 276,658 |
|
| | | | | |
| December 31, 2020 |
| Principal | $ | 345,000 | |
| Unamortized discount | (48,702) | |
| Unamortized issuance cost | (5,514) | |
| Net carrying amount | $ | 290,784 | |
F-30 VONAGE ANNUAL REPORT 2019
The net carrying amount of the equity component of the Convertible Senior Notes was as follows: |
| | | |
| | December 31, 2019 |
|
| Proceeds allocated to the conversion option (debt discount) | $ | 67,664 |
|
| Issuance cost | (1,944 | ) |
| Income tax expense | (15,597 | ) |
| Net carrying amount | $ | 50,123 |
|
| | | | | |
| December 31, 2020 |
| Proceeds allocated to the conversion option (debt discount) | $ | 67,664 | |
| Issuance cost | (1,944) | |
| Income tax expense | (15,597) | |
| Net carrying amount | $ | 50,123 | |
The following table sets forth the interest expense recognized related to the Convertible Senior Notes:
| | | | | | | | | | | | | | | |
| For the years ended December 31, |
| 2020 | | 2019 | | | | |
| Contractual interest expense | $ | 6,038 | | | $ | 3,304 | | | | | |
| Amortization of debt discount | 12,532 | | | 6,430 | | | | | |
| Amortization of debt issuance costs | 1,594 | | | 865 | | | | | |
| Total interest expense related to the Convertible Senior Notes | $ | 20,164 | | | $ | 10,599 | | | | | |
|
| | | |
| | For the years ended December 31, |
| | 2019 |
| Contractual interest expense | $ | 3,304 |
|
| Amortization of debt discount | 6,430 |
|
| Amortization of debt issuance costs | 865 |
|
| Total interest expense related to the Convertible Senior Notes | $ | 10,599 |
|
In connection with the pricing of the Convertible Senior Notes and subsequently in connection with the exercise of the initial purchasers option to purchase additional notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the "Capped Calls"). The Capped Calls each have a strike price of $16.72 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Convertible Senior Notes. The Capped Calls have initial cap prices of $23.46 per share, subject to certain adjustments. The Capped Calls are expected generally to reduce potential dilution to the Company's common stock upon any conversion of notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap. The initial cap price of the Capped Call transactions was $23.46. The net cost of $28,325 incurred to purchase the Capped Calls and related income tax benefit of $6,772 was recorded as a reduction to additional paid-in capital on the Company's consolidated balance sheet during the quarter ended June 30, 2019 and are not accounted for as derivatives.
Concurrently with the issuance of the Convertible Senior Notes, the Company’s board of directors approved the repurchase of an aggregate of 852,515, or $10,000 of, shares of the Company’s outstanding common stock in privately negotiated transactions at a price of $11.73 per share, which was equal to the closing price per share of the Company’s common stock on June 11, 2019, the date of the pricing of the offering of the Convertible Senior Notes. The share repurchase was recorded to treasury stock on the Company's consolidated balance sheet.sheet and stockholder's equity during the year ended December 31, 2019.
2018 Term Note and Revolving Credit Facility
On July 31, 2018, the Company replaced its 2016 Credit Facility previously consisting of a $125 million term loan and a $325 million revolving credit facility with the 2018 Credit Facility consisting of a $100 million senior secured term loan and a $500 million revolving credit facility. The co-borrowers under the 2018 Credit Facility are the Company and Vonage America Inc., the Company’s wholly owned subsidiary. Obligations under the 2018 Credit Facility are guaranteed, fully and unconditionally, by the Company’s other United States subsidiaries and are secured by substantially all of the assets of each borrower and each guarantor.
F-3181 VONAGE ANNUAL REPORT 20192020
2018 Credit Facility Terms
The following description summarizes the material terms of the 2018 Credit Facility:
The loans under the 2018 Credit Facility mature on July 31, 2023. The unused portion of the Company's revolving credit facility incurs a 0.30% per annum commitment fee.
Outstanding amounts under the 2018 Credit Facility, at the Company's option, will bear interest at:
•LIBOR (applicable to one-, two-, three-, six-, or twelve-month periods) plus an applicable margin equal to 2.00% up to 2.75% per annum payable on the last day of each relevant interest period or, if the interest period is longer than three months, each day that is three months after the first day of the interest period, or
•the base rate determined by reference to the highest of (a) the rate of interest last quoted by the Wall Street Journal as the “Prime Rate” in the U.S., (b) the federal funds effective rate from time to time plus 0.50%, and (c) the adjusted LIBO rate applicable to one month interest periods plus 1.00%, plus an applicable margin equal to 1.00% up to 1.75% per annum payable on the last business day of each March, June, September, and December and the maturity date of the 2018 Credit Facility.
In 2020, we made discretionary repayments of $80 million under the 2018 revolving credit facility and borrowed $75 million under the revolving credit facility. In addition, the effective interest rate was 2.94% as of December 31, 2020.
In 2019, we made repayments of $95 million under the 2018 term loan and made discretionary repayments of $348.5 million under the 2018 revolving credit facility, and borrowed $144 million under the revolving credit facility. In addition, the effective interest rate was 4.56% as of December 31, 2019.
In 2018, we made mandatory repayments of $5 million under the 2018 term loan and made discretionary repayments of $42 million under the 2018 revolving credit facility.
As of December 31, 2019,2020, we were in compliance with all covenants, including financial covenants, for the 2018 Credit Facility.
2016 Financing
In 2018, we made mandatory repayments of $9.4 million under the term note and made discretionary repayments of $35 million under the revolving credit facility and borrowed $40 million under the revolving credit facility.
Interest Rate Swap
On July 14, 2017, we executed on 3 interest rate swap agreements in order to hedge the variability of expected future cash interest payments related to the 2016 Credit Facility.payments. The swaps havehad an aggregate notional amount of $150 million and were effective fromon July 31, 2017 through June 3, 2020 concurrent with the term of the 2016 Credit Facility.2017. Under the swaps our interest rate iswas fixed at 4.7%. The swaps expired on June 3, 2020 at which time the Company recognized previously deferred amounts within interest expense. The interest rate swaps are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging.
F-32 VONAGE ANNUAL REPORT 2019
As of December 31, 2019, and 2018, the fair market value of the swaps was $18, and $1,859, respectively, which is included in other assets on our consolidated balance sheet. The following table summarizes the effects of ASC 815 on the Company's accumulated OCI balance attributable to cash flow derivatives:
| | | | | | | | | | | |
| | Years Ended December 31 |
| | 2020 | | 2019 |
| Accumulated OCI beginning balance | $ | (1,001) | | | $ | 975 | |
| Reclassified from accumulated OCI to income: | | | |
| Due to reclassification of previously deferred gain | 1,051 | | | (531) | |
| Change in fair value of cash flow hedge accounting contracts, net of tax | (50) | | | (1,445) | |
| Accumulated OCI ending balance, net of tax expense of $— and $4, respectively | $ | 0 | | | $ | (1,001) | |
| Gains expected to be realized from accumulated OCI during the next 12 months | $ | 0 | | | $ | 531 | |
|
| | | | | | | |
| | Years Ended December 31 |
| | 2019 | | 2018 |
| Accumulated OCI beginning balance | $ | 975 |
| | $ | 965 |
|
| Reclassified from accumulated OCI to income: | | | |
| Due to reclassification of previously deferred gain | (531 | ) | | (469 | ) |
| Change in fair value of cash flow hedge accounting contracts, net of tax | (1,445 | ) | | 479 |
|
| Accumulated OCI ending balance, net of tax (expense) benefit of ($4) and $393, respectively | $ | (1,001 | ) | | $ | 975 |
|
| Gains expected to be realized from accumulated OCI during the next 12 months | $ | 531 |
| | $ | — |
|
82 VONAGE ANNUAL REPORT 2020
NOTE 9. Fair Value of Financial Instruments
ASC 820-10 defines fair value as the amount that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820-10 describes the following three levels of inputs that may be used:
•Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
•Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
•Level 3: Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Although management believed its valuation methods were appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could have resulted in a different fair value measurement at the reporting date.
The following table presents the assets and liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2019 and December 31, 2018:
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Level 2 Measurements | | | |
Interest rate swaps (1) | $ | 18 |
| | $ | 1,859 |
|
(1) Included in other assets on our consolidated balance sheets.
As of December 31, 2019,2020, the fair value of the 1.75% Convertible Senior Notes was approximately $309,641.$373,373. The fair value was determined based on the quoted price for the Convertible Senior Notes in an inactive market on the last trading day of the reporting period and is classified as Level 2 in the fair value hierarchy.
F-33 VONAGE ANNUAL REPORT 2019
Fair Value of Other Financial Instruments
The carrying amounts of our other financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value and are classified as Level 1 because of their short maturities. We believe the fair value of our 2018 Credit Facility at December 31, 20192020 and December 31, 20182019 was approximately the same as its carrying amount as as the facility bears interest at a variable rate indexed to current market conditions including available interest rates, credit spread relative to our credit rating, and illiquidity, remain relatively unchanged from the issuance date of our debt obligations for a similar debt instrument and areis classified as Level 32 within the fair value hierarchy.
As of December 31, 2019,2020, we did not have any other assets or liabilities that are measured and recognized at fair value on a recurring basis.
83 VONAGE ANNUAL REPORT 2020
Note 10. Common Stock
As of December 31, 20192020 and December 31, 2018,2019, the Company had 596,950 shares of common stock authorized. For a detailed description of our share-based compensation programs refer to Note 11, Employee Stock Benefit Plans.
The following table reflects the changes in the Company's common stock issued and outstanding:
| | | | | | | | | | | | | | | | | |
| For the Year Ended | | | | | |
| (in thousands) | Issued | | Treasury | | Outstanding |
| Balance at December 31, 2017 | 298,174 | | | (67,235) | | | 230,939 | |
| Shares issued under the 2015 Equity Incentive Plan | 11,562 | | | 0 | | | 11,562 | |
| Employee taxes paid on withholding shares | 0 | | | (2,758) | | | (2,758) | |
| | | | | |
| Balance at December 31, 2018 | 309,736 | | | (69,993) | | | 239,743 | |
| Shares issued under the 2015 Equity Incentive Plan | 5,832 | | | 0 | | | 5,832 | |
| Employee taxes paid on withholding shares | 0 | | | (2,113) | | | (2,113) | |
| Assets acquisition | 240 | | | 0 | | | 240 | |
| Common stock repurchases | 0 | | | (853) | | | (853) | |
| Balance at December 31, 2019 | 315,808 | | | (72,959) | | | 242,849 | |
| Shares issued under the 2015 Equity Incentive Plan | 8,007 | | | 0 | | 8,007 | |
| Employee taxes paid on withholding shares | 0 | | (1,882) | | | (1,882) | |
| | | | | |
| | | | | |
| Balance at December 31, 2020 | 323,815 | | | (74,841) | | | 248,974 | |
|
| | | | | | | | |
| For the Year Ended | | | | | |
| (in thousands) | Issued | | Treasury | | Outstanding |
| Balance at December 31, 2016 | 282,318 |
| | (63,317 | ) | | 219,001 |
|
| Shares issued under the 2015 Equity Incentive Plan | 15,856 |
| | — |
| | 15,856 |
|
| Employee taxes paid on withholding shares | — |
| | (2,319 | ) | | (2,319 | ) |
| Common stock repurchases | — |
| | (1,599 | ) | | (1,599 | ) |
| Balance at December 31, 2017 | 298,174 |
| | (67,235 | ) | | 230,939 |
|
| Shares issued under the 2015 Equity Incentive Plan | 11,562 |
| | — |
| | 11,562 |
|
| Employee taxes paid on withholding shares | — |
| | (2,758 | ) | | (2,758 | ) |
| Balance at December 31, 2018 | 309,736 |
| | (69,993 | ) | | 239,743 |
|
| Shares issued under the 2015 Equity Incentive Plan | 5,832 |
| | — |
| | 5,832 |
|
| Employee taxes paid on withholding shares | — |
| | (2,113 | ) | | (2,113 | ) |
| Assets acquisition | 240 |
| | — |
| | 240 |
|
| Common stock repurchases (Note 8) | — |
| | (853 | ) | | (853 | ) |
| Balance at December 31, 2019 | 315,808 |
| | (72,959 | ) | | 242,849 |
|
Common Stock Repurchases
On June 11, 2019, concurrently with the issuance of the Convertible Senior Notes, the Company repurchased the Company’s outstanding common stock in privately negotiated transactions. For additional information, refer to Note 8. Long-Term Debt.
We repurchased the following shares of common stock during the year ended December 31, 2019:
| | | | | | | |
| December 31, 2019 | | |
| Shares of common stock repurchased | 852,515 | | | |
| Value of common stock repurchased | $ | 10,000 | | | |
|
| | | |
| | December 31, 2019 |
| Shares of common stock repurchased | 852,515 |
|
| Value of common stock repurchased | $ | 10,000 |
|
F-34 VONAGE ANNUAL REPORT 2019
Net Operating Loss Rights Agreement
On June 7, 2012, we entered into a Tax Benefits Preservation Plan, or Preservation Plan, designed to preserve stockholder value and tax assets. Our ability to use our tax attributes to offset tax on U.S. taxable income would be substantially limited if there were an "ownership change" as defined under Section 382 of the U.S. Internal Revenue Code. In general, an ownership change would occur if one or more "5-percent shareholders," as defined under Section 382, collectively increase their ownership in us by more than 50 percent over a rolling three-year period.
In connection with the adoption of the Preservation Plan, our board of directors declared a dividend of one preferred share purchase right for each outstanding share of the Company’s common stock. The preferred share purchase rights were distributed to stockholders of record as of June 18, 2012, as well as to holders of the Company's common stock issued after that date, but will only be activated if certain triggering events under the Preservation Plan occur.
Under the Preservation Plan, preferred share purchase rights will work to impose significant dilution upon any person or group which acquires beneficial ownership of 4.9% or more of the outstanding common stock, without the approval of our board of directors, from and after June 7, 2012. Stockholders that own 4.9% or more of the outstanding common stock as of the opening of business on June 7, 2012, will not trigger the preferred share purchase rights so long as they do not (i) acquire additional shares of common stock or (ii) fall under 4.9% ownership of common stock and then re-acquire shares that in the aggregate equal 4.9% or more of the common stock.
84 VONAGE ANNUAL REPORT 2020
The Preservation Plan was set to expire on June 30, 2019, unless extended by our board of directors. On June 6, 2019, at the Vonage 2019 annual meeting of stockholders, stockholders ratified the continued extension of the Preservation Plan through June 30, 2021.
Note 11. Employee Stock Benefit Plans
Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, we grant options from our 2015 Equity Incentive Plan. Our 2006 Incentive Plan was terminated by our board of directors in 2015 and our 2001 Stock Incentive Plan was terminated by our board of directors in 2008. As such, share-based awards are no longer granted under either the 2006 Incentive Plan and the 2001 Stock Incentive Plan. Under the 2015 Equity Incentive Plan, share-based awards can be granted to all employees, including executive officers, outside consultants, and non-employee directors. Vesting periods for share-based awards are generally three or four years for both plans. Awards granted under each plan expire in five or ten years from the effective date of grant. As of April 2010, the Company began routinely granting awards with ten years expiration period.
The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. The company did not grant options in 2019 and 2018. The assumptions used to value options in 2017 is as follows:
|
| | |
| 2017 |
Risk-free interest rate | 1.95-2.18% |
|
Expected stock price volatility | 46.19-47.59% |
|
Dividend yield | 0.00 | % |
Expected life (in years) | 6.25 |
|
We estimated the volatility of our stock using historical volatility of our common stock in accordance with guidance in FASB ASC 718, “Compensation-Stock Compensation”. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding, which we derive based on our historical settlement experience. As we historically have not paid dividends, we utilize a dividend yield of 0%.
We also issue restricted performance stock units with vesting that is contingent on both TSR compared to members of our peer group and continued service. For the market-based restricted performance stock units issued during the year ended December 31, 20192020 and 2018,2019, the payouts at vesting which are linearly interpolated between the percentiles specified below are as follows:
F-35 VONAGE ANNUAL REPORT 2019
|
| | | | | | | | |
| Payout Schedule |
| Percentile Ranking | | % of Target Earned |
| Greater than |
| | 80% | | | | 200% |
| 50 | % | — | 80% | | 100 | % | — | 200% |
| 30 | % | — | 50% | | 50 | % | — | 100% |
| Less than |
| | 30% | | — | % | | —% |
| | | | | | | | |
| Payout Schedule |
| Percentile Rank | | Payout Percentage |
| Greater than 80% | | 200 | % |
| 50% | | 100 | % |
| 30% | | 50 | % |
| Less than 30% | | 0 | % |
Notwithstanding the foregoing, if our TSR is negative for the performance period, then the vesting percentage shall not exceed 100%. In addition, we reduce the shares available for grant to cover the potential payout of 200%.
To value these market-based restricted performance stock units, we used a Monte Carlo simulation model on the date of grant. Compensation expense for restricted stock units with performance and market conditions is recognized over the requisite service period using the straight-line method.
The assumptions used to value these market based restricted performance stock units are as follows:
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Risk-free interest rate | 0.56 | % | | 2.40 | % | | 2.38 | % |
| Expected stock price volatility | 42.21 | % | | 39.95 | % | | 36.72 | % |
| Dividend yield | 0.00 | % | | 0.00 | % | | 0.00 | % |
| Expected term (in years) | 2.80 | | 2.79 | | 2.79 |
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Risk-free interest rate | 2.40 | % | | 2.38 | % | | 1.54 | % |
| Expected stock price volatility | 39.95 | % | | 36.72 | % | | 35.99 | % |
| Dividend yield | 0.00 | % | | 0.00 | % | | 0.00 | % |
| Expected term (in years) | 2.79 |
| | 2.79 |
| | 2.79 |
|
Our stock incentive plans as of December 31, 20192020 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares
Authorized | | Shares
Available
for Grant | | Stock
Options
Outstanding | | Non-vested Restricted Stock and Restricted Stock Units |
| Options assumed from acquisition | 2,227 | | | 300 | | | 108 | | | 0 | |
| 2006 Incentive Plan | 71,669 | | | 0 | | | 593 | | | 0 | |
| 2015 Incentive Plan | 42,731 | | | 14,094 | | | 800 | | | 14,623 | |
| Total as of December 31, 2020 | 116,627 | | | 14,394 | | | 1,501 | | | 14,623 | |
|
| | | | | | | | | | | |
| | Shares Authorized | | Shares Available for Grant | | Stock Options Outstanding | | Non-vested Restricted Stock and Restricted Stock Units |
| Options assumed from acquisition | 2,227 |
| | 296 |
| | 219 |
| |
|
|
| 2006 Incentive Plan | 71,669 |
| |
| | 3,650 |
| | 34 |
|
| 2015 Incentive Plan | 42,731 |
| | 23,145 |
| | 1,077 |
| | 10,355 |
|
| Total as of December 31, 2019 | 116,627 |
| | 23,441 |
| | 4,946 |
| | 10,389 |
|
85 VONAGE ANNUAL REPORT 2020
2015 Equity Incentive Plan
On June 3, 2015, we adopted our 2015 Equity Incentive Plan which replaced the 2006 Incentive Plan. Shares issued under the plan may be authorized and unissued shares or may be issued shares that we have reacquired. Shares covered by awards that are forfeited, canceled or otherwise expire without having been exercised or settled, or that are settled by cash or other non-share consideration, will become available for issuance pursuant to a new award. Shares that are tendered or withheld to pay the exercise price of an award or to satisfy tax withholding obligations will not be available for issuance pursuant to new awards. Our 2015 Equity Incentive Plan will terminate on June 3, 2025. At December 31, 2019,2020, there are 23,14514,094 shares available for future grant under the 2015 Equity Incentive Plan.
The 2015 Equity Incentive Plan permits the grant of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance units, annual awards, and other awards based on, or related to, shares of our common stock. Options awarded under our 2015 Equity Incentive Plan may be non-qualified stock options or may qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. For purposes of complying with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended, the maximum number of shares of common stock that may be subject to stock options, stock appreciation rights, performance-based restricted stock awards, performance-based restricted stock units and performance-based stock awards granted to any participant other than a non-employee director during any calendar year will be limited to 10,000 shares of common stock for each such award type individually. The maximum number of shares of common stock that may be subject to stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock awards granted to any non-employee director during any calendar year will be limited to 10,000 shares of common stock for all such award types in the aggregate. Further, the maximum amount that may become payable to any one Participant during any one calendar year under all Cash Performance Awards intended to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code of 1986, as amended, is limited to $5,000.
F-36 VONAGE ANNUAL REPORT 2019
Stock Options
The following table summarizes the activity and changes related to stock options during the year:
|
| | | | | | |
| | Stock Options Outstanding |
| | Units | | Weighted Average Exercise Price Per Unit |
| | (in thousands) | | |
| Outstanding at December 31, 2018 | 5,935 |
| | $ | 3.79 |
|
| Stock options granted | — |
| | — |
|
| Stock options exercised | (948 | ) | | 2.62 |
|
| Stock options canceled | (41 | ) | | 4.04 |
|
| Outstanding at December 31, 2019 | 4,946 |
| | $ | 4.01 |
|
| Exercisable at December 31, 2019 | 4,425 |
| | $ | 3.73 |
|
| | | | | | | | | | | |
| | Stock Options Outstanding |
| | Shares | | Weighted Average Exercise Price Per Share |
| | (in thousands) | | |
| Outstanding at December 31, 2019 | 4,946 | | | $ | 4.01 | |
| | | |
| Stock options exercised | (3,190) | | | 3.41 | |
| Stock options canceled | (255) | | | 6.38 | |
| Outstanding at December 31, 2020 | 1,501 | | | $ | 4.90 | |
| Vested and expected to vest at December 31, 2020 | 1,501 | | | $ | 4.90 | |
| Exercisable at December 31, 2020 | 1,498 | | | $ | 4.90 | |
There were no options granted in 2020, 2019, and 2018. The weighted average exercise price of options granted was $6.46 for the years ended December 31, 2017. The aggregate intrinsic value of exercised stock options for the years ended December 31, 2020, 2019, and 2018 was $26,133, $7,616, and 2017 was $7,616, $38,248, and $38,958, respectively.
The weighted average grant date fair market value of stock options granted was $3.04 for the years ended December 31, 2017.
Restricted Stock and Restricted Stock Units
The following table summarizes the activity and changes related to restricted stock and restricted stock units during the year:
| | | | | | | | | | | |
| | Restricted Stock and Restricted Stock Units Outstanding |
| | Units | | Weighted Average Grant Date Fair Value Per Unit |
| | (in thousands) | | |
| Non-vested at December 31, 2019 | 10,389 | | | $ | 10.58 | |
| Restricted stock and restricted stock units granted | 12,415 | | | 8.49 | |
| Restricted stock and restricted stock units vested | (4,838) | | | 8.87 | |
| Restricted stock and restricted stock units canceled | (3,343) | | | 9.39 | |
| Non-vested at December 31, 2020 | 14,623 | | | $ | 9.65 | |
|
| | | | | | |
| | Restricted Stock and Restricted Stock Units Outstanding |
| | Units | | Weighted Average Grant Date Fair Market Value Per Unit |
| | (in thousands) | | |
| Non-vested at December 31, 2018 | 9,906 |
| | $ | 8.81 |
|
| Restricted stock and restricted stock units granted | 7,696 |
| | 11.29 |
|
| Restricted stock and restricted stock units vested | (4,917 | ) | | 6.69 |
|
| Restricted stock and restricted stock units canceled | (2,296 | ) | | 10.31 |
|
| Non-vested at December 31, 2019 | 10,389 |
| | $ | 10.58 |
|
86 VONAGE ANNUAL REPORT 2020
The weighted average grant date fair market value of restricted stock and restricted stock units granted was $8.49, $11.29, $10.55, and $6.79$10.55 per unit during the year ended December 31, 2020, 2019, 2018, and 2017,2018, respectively. The fair value of restricted stock and restricted stock units that vested during the years ended December 31, 2020, 2019, and 2018 was $42,886, $32,872, and 2017 was $32,872, $44,812, and $41,057, respectively. The aggregate intrinsic value of restricted stock units outstanding was $76,986$188,277 as of December 31, 2019.2020.
Supplemental Information
Total share-based compensation expense recognized for the years ended December 31, 2020, 2019, and 2018 was $45,667, $45,242, and 2017 was $45,242, $33,799, and $37,482, respectively, which were recorded to cost of services and general and administrative expense in the consolidated statement of income. As of December 31, 2019,2020, total unamortized share-based compensation was $51,602,$71,966, accounting for forfeitures when they occur, which is expected to be amortized over the remaining weighted average recognition period of 2.1 years. Compensation costs for all share-based awards are amortized on a straight-line basis over the requisite service period. Our current policy is to issue new shares to settle the exercise of stock options and prospectively, the vesting of restricted stock units.
F-37 VONAGE ANNUAL REPORT 2019
Information regarding the options outstanding as of December 31, 20192020 is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stock Options Outstanding | | Stock Options Exercisable |
Range of
Exercise Prices | Stock
Options
Outstanding | Weighted
Average
Remaining
Contractual
Life | Weighted Average Exercise Price | Aggregate
Intrinsic
Value | | Stock Options Vested and Exercisable | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Aggregate
Intrinsic
Value |
| | (in thousands) | (in years) | | (in thousands) | | (in thousands) | (in years) | | (in thousands) |
| $0.69 to $1.99 | 125 | | | 1.16 | | | | 125 | | | 1.16 | | |
| | | | | | | | | |
| $2.00 to $4.00 | 377 | | | 3.05 | | | | 377 | | | 3.05 | | |
| $4.01 to $7.25 | 999 | | | 6.07 | | | | 996 | | | 6.06 | | |
| | | | | | | | | |
| 1,501 | | 2.12 | 4.90 | | $ | 11,974 | | | 1,498 | | 2.12 | 4.90 | | $ | 11,960 | |
|
| | | | | | | | | | | | | | | | | |
| | Stock Options Outstanding | | Stock Options Exercisable |
Range of Exercise Prices | Stock Options Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Aggregate Intrinsic Value | | Stock Options Vested and Exercisable | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Aggregate Intrinsic Value |
| | (in thousands) | (in years) | | (in thousands) | | (in thousands) | (in years) | | (in thousands) |
| $0.69 to $1.99 | 268 |
| | 1.22 |
| | | 264 |
| | 1.22 |
| |
| $2.00 to $4.00 | 3,337 |
| | 3.41 |
| | | 3,337 |
| | 3.41 |
| |
| $4.01 to $7.25 | 1,341 |
| | 6.06 |
| | | 824 |
| | 5.83 |
| |
| | 4,946 |
| 5.13 | 4.01 |
| $ | 16,804 |
| | 4,425 |
| 4.87 | 3.73 |
| $ | 16,281 |
|
Retirement Plan
In March 2001, we established a 401(k) Retirement Plan, or the Retirement Plan, available to employees who meet the plan’s eligibility requirements. Participants may elect to contribute a percentage of their compensation to the Retirement Plan up to a statutory limit. We may make a contribution to the Retirement Plan in the form of a matching contribution. The employer matching contribution is 50% of each employee’s contributions not to exceed $6 in 2017, 2018,2020, 2019, and 2019.2018. Our expense related to the Retirement Plan was $9,625, $8,750, and $6,756 in 2020, 2019, and $5,411 in 2019, 2018, and 2017, respectively.
Note 12. Leases
The Company entered into various non-cancelable operating lease arrangements for certain of our existing office and telecommunications co-location space as well as operating leases for certain equipment. The operating leases expire at various times through 2026,2028, some of which provide the Company options to extend the leases for terms up to 5 years beyond the original term. We are committed to pay a portion of the buildings’ operating expenses as required under the arrangements which we will separate as a non-lease component when readily determinable. The Company did not have any finance leases as of December 31, 2020 and 2019.
During the year ended December 31, 2020 and 2019, the Company incurred operating lease expense, excluding lease abandonment, of $10,976 and $14,390, respectively, related to its operating leasesleases. In addition, the Company received sub-lease income of $1,196 and $1,272, of sub-lease income.respectively, during the year ended December 31, 2020 and 2019. Under ASC 840, the Company had rent expense net of sub-lease income of $22,706 and $11,429 for the years ended December 31, 2018 and 2017, respectively.2018. Additionally, the remaining weighted average lease term for our operating leases was 6.885.44 years and the weighted average discount rate utilized to measure the Company's operating leases was 5.18%4.10% as of December 31, 2019.2020.
87 VONAGE ANNUAL REPORT 2020
Supplemental cash flow related to the Company's operating leases is as follows:
| | | | | | | | | | | |
| For the years ended |
| December 31, 2020 | | December 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | $ | 15,380 | | | $ | 16,972 | |
| Right-of-use assets obtained in exchange for lease obligations | 13,023 | | | 7,718 | |
|
| | | |
| | The Year Ended |
| | December 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | $ | 16,972 |
|
| Right-of-use assets obtained in exchange for lease obligations | 7,718 |
|
F-38 VONAGE ANNUAL REPORT 2019
Maturities of lease liabilities as of December 31, 20192020 were as follows:
|
| | | |
| 2020 | $ | 15,017 |
|
| 2021 | 11,663 |
|
| 2022 | 7,599 |
|
| 2023 | 7,197 |
|
| 2024 | 6,592 |
|
| Thereafter | 21,178 |
|
| Total lease payments | $ | 69,246 |
|
| Less imputed interest | (11,047 | ) |
| Total | $ | 58,199 |
|
| | | | | | | |
| For the year ended | | |
| December 31, 2020 | | |
| | | |
| 2021 | $ | 13,134 | | | |
| 2022 | 9,645 | | | |
| 2023 | 8,401 | | | |
| 2024 | 4,148 | | | |
| 2025 | 4,248 | | | |
| Thereafter | 7,522 | | | |
| Total lease payments | 47,098 | | | |
| Less imputed interest | (4,525) | | | |
| Total | $ | 42,573 | | | |
Rental commitments under non-cancelable
During the first quarter of 2020, the Company amended one of its office leases to remove a renewal period of 5 years beyond the initial lease term. In the Company's adoption of ASC 842, the Company had included the available renewal term within the transition asset and liability as the renewal was highly probable at the time of adoption. As a result, the Company's operating lease liability was reduced by $15,825 with a corresponding reduction in the Company's operating lease right-of-use assets as of March 31, 2020. During the third and fourth quarters of 2020, the Company abandoned a few of its office leases in effectand as such, the Company reduced its operating lease right-of-use asset by $9,503 as of December 31, 2018 were as follows (as calculated under ASC 840, Leases):2020 by accelerating the amortization of the right-of-use asset through the cease use date which is included in general and administrative expense.
|
| | | |
| 2019 | $ | 17,204 |
|
| 2020 | 14,209 |
|
| 2021 | 10,378 |
|
| 2022 | 8,206 |
|
| 2023 | 8,154 |
|
| Thereafter | 9,908 |
|
| Total minimum payments required | $ | 68,059 |
|
Note 13. Property and Equipment
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Network equipment and computer hardware | $ | 74,149 | | | $ | 88,360 | |
| Leasehold improvements | 37,752 | | | 37,522 | |
| Customer premise equipment | 34,009 | | | 28,022 | |
| Furniture | 3,472 | | | 4,113 | |
| 149,382 | | | 158,017 | |
| Less accumulated depreciation | (117,761) | | | (109,646) | |
| Property and equipment | $ | 31,621 | | | $ | 48,371 | |
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Network equipment and computer hardware | $ | 88,360 |
| | $ | 91,901 |
|
| Leasehold improvements | 37,522 |
| | 36,464 |
|
| Customer premise equipment | 28,022 |
| | 18,280 |
|
| Furniture | 4,113 |
| | 7,616 |
|
| | 158,017 |
| | 154,261 |
|
| Less accumulated depreciation | (109,646 | ) | | (104,999 | ) |
| Property, plant and equipment | $ | 48,371 |
| | $ | 49,262 |
|
F-3988 VONAGE ANNUAL REPORT 20192020
Note 14. Accrued Liabilities
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Compensation and benefits, related taxes and temporary labor | $ | 43,580 | | | $ | 40,101 | |
| Marketing | 15,319 | | | 15,294 | |
| Taxes and fees | 25,977 | | | 22,922 | |
| Telecommunications | 52,975 | | | 40,498 | |
| Severance | 3,594 | | | 0 | |
| Interest | 847 | | | 873 | |
| Customer credits | 4,738 | | | 2,772 | |
| Professional fees | 1,953 | | | 4,482 | |
| Inventory | 659 | | | 871 | |
| Other accruals | 8,438 | | | 9,776 | |
| $ | 158,080 | | | $ | 137,589 | |
During the third quarter of September 30, 2020, the Company initiated a business-wide optimization and alignment project to focus the Company's resources and drive stronger operational execution, which includes the previously announced Consumer evaluation. In connection with this project, the Company initiated a reduction in workforce incurring accrued severance costs of $9,410 related to employee exits as well as abandoning a portion of its office leases as further described in Note 12, Leases which together resulted in total restructuring expense included in general and administrative expense during the year ended December 31, 2020 of $18,913.
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Compensation and benefits, related taxes and temporary labor | $ | 40,101 |
| | $ | 33,249 |
|
| Marketing | 15,294 |
| | 10,238 |
|
| Taxes and fees | 22,922 |
| | 11,189 |
|
| Telecommunications | 40,498 |
| | 21,403 |
|
| Interest | 873 |
| | 65 |
|
| Customer credits | 2,772 |
| | 3,325 |
|
| Professional fees | 4,482 |
| | 2,049 |
|
| Inventory | 871 |
| | 1,188 |
|
| Other accruals | 9,776 |
| | 4,664 |
|
| | $ | 137,589 |
| | $ | 87,370 |
|
Note 15. Commitments and Contingencies
Commitments
Stand-by Letters of Credit
We have stand-by letters of credit totaling $1,528$1,502 and $1,516,$1,528, as of December 31, 20192020 and 2018,2019, respectively.
End-User Commitments
We are obligated to provide telephone services to our registered end-users. The costs related to the potential utilization of minutes sold are expensed as incurred. Our obligation to provide this service is dependent on the proper functioning of systems controlled by third-party service providers. We do not have a contractual service relationship with some of these providers.
Vendor Commitments
We have several commitments primarily commitments to vendors who will provide local inbound services, provide carrier operation, provide data center with technical supports, provide networks and telephone related services, provide marketing infrastructure and services, provide customer caller ID, provide hardware and software supports,license patents to us, provide web hosting service, provide electricity to our office, provide cloud-based data warehousing, provide software maintenance service, and license patentsprovide insurance to us. In certain cases, we may terminate these arrangements early upon payment of specified fees. These commitments total $94,196$59,525 as of December 31, 2019.2020. Of this total amount, we expect to purchase $41,807 in 2020, $26,952$32,539 in 2021, $21,892$23,441 in 2022, and $3,545 in 2023, respectively. During the fourth quarter of 2019, the Company executed a contract with a vendor related to co-location and infrastructure services over the next three years which comprises a large portion of the Company's purchase commitments as of December 31, 2019. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented do not provide a reliable indicator of our expected future cash outflows or changes in our expected cash position.
F-4089 VONAGE ANNUAL REPORT 20192020
Contingencies
From time to time, in addition to those identified below, we are subject to legal proceedings, claims, investigations, and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. From time to time, we receive letters or other communications from third parties inviting us to obtain patent licenses that might be relevant to our business or alleging that our services infringe upon third party patents or other intellectual property. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. We believe that we have valid defenses with respect to the legal matters pending against us and are vigorously defending these matters. Given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome in the matters noted below and our inability to reasonably estimate the amount of loss or range of loss, it is possible that the resolution of one or more of these matters could have a material adverse effect on our condensed consolidated financial position, cash flows or results of operations.
Regulation
Telephony services are subject to a broad spectrum of state, federal and foreign regulations. Because of the uncertainty over whether VoIP should be treated as a telecommunications or information service, we have been involved in a substantial amount of state and federal regulatory activity. Implementation and interpretation of the existing laws and regulations is ongoing and is subject to litigation by various federal and state agencies and courts. Due to the uncertainty over the regulatory classification of VoIP service, there can be no assurance that we will not be subject to new regulations or existing regulations under new interpretations, and that such change would not introduce material additional costs to our business. The Company continues to monitor federal regulations relating to net neutrality, rural call completion issues, number slamming, 911 access, access to telecommunication equipment and services by persons with disabilities, caller ID services, number portability, unwanted calls to reassigned numbers, and robocalling. As we continue to expand globally, these types of regulations are likely to be similarly enacted and enforced by the local regulatory authorities.
State and Municipal Taxes
In accordance with generally accepted accounting principles, we make a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability or range of liability can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. From time to time, we have received inquiries from a number of states and local taxing agencies with respect to the remittance of sales, use, telecommunications, and excise taxes. Several jurisdictions are currently conducting tax audits of the Company's records. While the Company collects or has accrued for taxes that it believes are required to be remitted, it has reviewed its positions in those various jurisdictions as well as other regulatory fees and has established appropriate reserves. As such, we have a reserve of $3,175$8,560 as of December 31, 20192020 as our best estimate of the potential tax exposure for any retroactive assessment.
F-4190 VONAGE ANNUAL REPORT 20192020
Note 16. Industry Segment and Geographic Information
ASC 280, Segment Reporting, establishes reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. Our chief operating decision-maker reviews revenue and gross margin informationAdjusted EBITDA for each of our reportable segments. Beginning as of December 31, 2020, the Company now includes Adjusted EBITDA as this is the measure management uses to evaluate the profitability of our operating segments. The items excluded from Adjusted EBITDA are not separately evaluated for each reportable segment. The Company has recast data from prior years to reflect the change how the Company evaluates the profitability of its reportable segments but does not review operating expenses on ato conform to the current year presentation.
Beginning the quarter ended September 30, 2020, the Company began referring to the VCP segment by segment basis.which had previously been referred to as the Business segment. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.segments as this information is not utilized by management to allocate resources or capital.
BusinessVonage Communications Platform
ForThe Vonage Communications Platform is our Businesssingle enterprise cloud communications platform, offering our wide range of enterprise communications services and solutions including APIs, Unified Communications, and Contact Center Communications The Vonage Communications Platform brings unique value to businesses by providing multiple communications channels - video, voice, messaging, email and verification - that integrate into applications, products and workflows. This delivers both the power and the flexibility our customers need to disrupt their industries, and enables the type of business continuity, remote work, and remote delivery of services that are now essential for companies to work and serve customers from anywhere. Vonage products and services enable our Applications Group provides innovative, cloud-based UCaaS and CCaaS solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable SIP based VoIP network. The API Platform Group also offers CPaaS solutions designedbusiness customers to enhance the way businesses communicatefundamentally change how they engage with their customers embedding communications into apps, websites and business processes. Together weteam members. We have a robust set of product families tailoredsolutions and services that meet the needs of businesses of all sizes, from micro, to serve the full range of the business value chain, from the SMB market, through mid-market and enterprise markets.enterprise. We provide customers with multiple deployment options designed to provide the reliability and quality of service they demand. We provide customers the ability toVonage solutions also integrate our cloud communications platform with many cloud-basedtoday's leading business applications, CRM and productivity and CRM solutions,tools,, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud,and Service Clouds, Microsoft Dynamics, ServiceNow, Oracle, and Clio among others, to drive internal communications and other CRM solutions. In combination, our productscollaboration among team members and services permit our businessexternal engagement with customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment.
Consumer
For our Consumer customers, we enable users to access and utilize our UCaaS services and features, via a single “identity,” either a number or user name, regardless of how they are connected to the Internet, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices.
For our segments we categorize revenues as follows:
Services revenues. Services revenues consists primarily of revenue attributable to our communication services for Consumer and Software Defined Wide Area Network, or SD-WAN, UCaaS and CPaaS services for Business,
Access and product revenues. Product revenues include equipment sold to customers, shipping and handling, professional services, and broadband access, as well as revenues associated with providing access services to Business customers.
USF revenues. USF revenues represent fees passed on to customers to offset required contributions to the USF.
For our segments we categorize cost of revenues as follows:
Services cost of revenues. Services cost of revenues consists of costs associated with network operations and technical support personnel, communication origination, and termination services provided by third party carriers and excludes depreciation and amortization.
Access and product cost of revenues. Product cost of revenues includes equipment sold to customers, shipping and handling, professional services, cost of certain products including equipment or services that we give customers as promotions, and broadband access, as well as costs associated with providing access services to Business customers.
USF cost of revenues. USF cost of revenues represents contributions to the Federal USF and related fees.
F-4291 VONAGE ANNUAL REPORT 20192020
Information about our segment results for the years ended December 31,
2020, 2019,
2018, and
20172018 were as follows:
|
| | | | | | | | | | | |
| Year ended December 31, 2019 | | | | | |
| | Business | | Consumer | | Total |
| Revenues | | | | | |
| Service revenues | $ | 719,514 |
| | $ | 340,462 |
| | $ | 1,059,976 |
|
| Access and product revenues (1) | 46,232 |
| | 264 |
| | 46,496 |
|
| Service, access and product revenues | 765,746 |
| | 340,726 |
| | 1,106,472 |
|
| USF revenues | 38,134 |
| | 44,740 |
| | 82,874 |
|
| Total revenues | 803,880 |
| | 385,466 |
| | 1,189,346 |
|
| | | | | | |
| Cost of revenues | | | | | |
| Service cost of revenues (2) | 336,045 |
| | 34,677 |
| | 370,722 |
|
| Access and product cost of revenues (1) | 53,455 |
| | 4,033 |
| | 57,488 |
|
| Service, access and product cost of revenues | 389,500 |
| | 38,710 |
| | 428,210 |
|
| USF cost of revenues | 38,134 |
| | 44,740 |
| | 82,874 |
|
| Total cost of revenues | 427,634 |
| | 83,450 |
| | 511,084 |
|
| | | | | | |
| Segment gross margin | | | | | |
| Service margin | 383,469 |
| | 305,785 |
| | 689,254 |
|
| Access and product margin | (7,223 | ) | | (3,769 | ) | | (10,992 | ) |
| Gross margin ex-USF (Service, access and product margin) | 376,246 |
| | 302,016 |
| | 678,262 |
|
| USF margin | — |
| | — |
| | — |
|
| Segment gross margin | $ | 376,246 |
| | $ | 302,016 |
| | $ | 678,262 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Service Revenue | | Revenue | | | | Adjusted EBITDA | | Depreciation and Amortization | | |
| Year ended December 31, 2020 | | | | | | | | | | | | |
| Vonage Communications Platform | | $ | 856,492 | | | $ | 915,057 | | | | | $ | (56,968) | | | $ | 85,210 | | | |
| Consumer | | 292,003 | | | 332,877 | | | | | 227,152 | | | 3,707 | | | |
| Total Vonage | | $ | 1,148,495 | | | $ | 1,247,934 | | | | | $ | 170,184 | | | $ | 88,917 | | | |
| | | — | | | | | | | | | |
| Year ended December 31, 2019 | | | | | | | | | | | | |
| Vonage Communications Platform | | $ | 719,514 | | | $ | 803,880 | | | | | $ | (103,266) | | | $ | 80,197 | | | |
| Consumer | | 340,462 | | | 385,466 | | | | | 261,362 | | | 6,059 | | | |
| Total Vonage | | $ | 1,059,976 | | | $ | 1,189,346 | | | | | $ | 158,096 | | | $ | 86,256 | | | |
| | | | | | | | | | | | |
| Year ended December 31, 2018 | | | | | | | | | | | | |
| Vonage Communications Platform | | $ | 526,707 | | | $ | 608,144 | | | | | $ | (114,555) | | | $ | 62,330 | | | |
| Consumer | | 394,389 | | | 440,638 | | | | | 292,291 | | | 8,650 | | | |
| Total Vonage | | $ | 921,096 | | | $ | 1,048,782 | | | | | $ | 177,736 | | | $ | 70,980 | | | |
|
| | | | | | | | |
| Segment gross margin % | | | | | |
| Service margin % | 53.3 | % | | 89.8 | % | | 65.0 | % |
| Gross margin ex-USF (Service, access and product margin) % | 49.1 | % | | 88.6 | % | | 61.3 | % |
| Segment gross margin % | 46.8 | % | | 78.4 | % | | 57.0 | % |
(1) Includes customer premise equipment, access, professional services,The Company uses Adjusted EBITDA as the measure of profit or loss for the evaluation of performance and shipping and handling.
(2) Excludesallocation of resources of our operating segments. Adjusted EBITDA is defined as net income or net loss attributable to Vonage before income tax expense or benefit, interest expense, depreciation and amortization, of $33,484, $4,683, and $38,167, respectively.
F-43 VONAGE ANNUAL REPORT 2019
|
| | | | | | | | | | | |
| Year ended December 31, 2018 | | | | | |
| | Business | | Consumer | | Total |
| Revenues | | | | | |
| Service revenues | $ | 526,707 |
| | $ | 394,389 |
| | $ | 921,096 |
|
| Access and product revenues (1) | 50,068 |
| | 559 |
| | 50,627 |
|
| Service, access and product revenues | 576,775 |
| | 394,948 |
| | 971,723 |
|
| USF revenues | 31,369 |
| | 45,690 |
| | 77,059 |
|
| Total revenues | 608,144 |
| | 440,638 |
| | 1,048,782 |
|
| | | | | | |
| Cost of revenues | | | | | |
| Service cost of revenues (2) | 239,096 |
| | 47,439 |
| | 286,535 |
|
| Access and product cost of revenues (1) | 58,081 |
| | 5,289 |
| | 63,370 |
|
| Service, access and product cost of revenues | 297,177 |
| | 52,728 |
| | 349,905 |
|
| USF cost of revenues | 31,374 |
| | 45,716 |
| | 77,090 |
|
| Total cost of revenues | 328,551 |
| | 98,444 |
| | 426,995 |
|
| | | | | | |
| Segment gross margin | | | | | |
| Service margin | 287,611 |
| | 346,950 |
| | 634,561 |
|
| Access and product margin | (8,013 | ) | | (4,730 | ) | | (12,743 | ) |
| Gross margin ex-USF (Service, access and product margin) | 279,598 |
| | 342,220 |
| | 621,818 |
|
| USF margin | (5 | ) | | (26 | ) | | (31 | ) |
| Segment gross margin | $ | 279,593 |
| | $ | 342,194 |
| | $ | 621,787 |
|
|
| | | | | | | | |
| Segment gross margin % | | | | | |
| Service margin % | 54.6 | % | | 88.0 | % | | 68.9 | % |
| Gross margin ex-USF (Service, access and product margin) % | 48.5 | % | | 86.6 | % | | 64.0 | % |
| Segment gross margin % | 46.0 | % | | 77.7 | % | | 59.3 | % |
(1) Includes customer premise equipment, access, and shipping and handling.
(2) Excludes depreciation andstock-based expense, amortization of $22,554, $5,200,costs to implement cloud computing arrangements, acquisition related transaction and $27,754, respectively.
F-44 VONAGE ANNUAL REPORT 2019
|
| | | | | | | | | | | |
| Year ended December 31, 2017 | | | | | |
| | Business | | Consumer | | Total |
| Revenues | | | | | |
| Service revenues | $ | 417,118 |
| | $ | 454,340 |
| | $ | 871,458 |
|
| Access and product revenues (1) | 54,971 |
| | 525 |
| | 55,496 |
|
| Service, access and product revenues | 472,089 |
| | 454,865 |
| | 926,954 |
|
| USF revenues | 26,833 |
| | 48,499 |
| | 75,332 |
|
| Total revenues | 498,922 |
| | 503,364 |
| | 1,002,286 |
|
| | | | | | |
| Cost of revenues | | | | | |
| Service cost of revenues (2) | 184,054 |
| | 80,454 |
| | 264,508 |
|
| Access and product cost of revenues (1) | 57,906 |
| | 7,208 |
| | 65,114 |
|
| Service and product cost of revenues | 241,960 |
| | 87,662 |
| | 329,622 |
|
| USF cost of revenues | 26,833 |
| | 48,499 |
| | 75,332 |
|
| Total cost of revenues | 268,793 |
| | 136,161 |
| | 404,954 |
|
| | | | | | |
| Segment gross margin | | | | | |
| Service margin | 233,064 |
| | 373,886 |
| | 606,950 |
|
| Access and product margin | (2,935 | ) | | (6,683 | ) | | (9,618 | ) |
| Gross margin ex-USF (Service, access and product margin) | 230,129 |
| | 367,203 |
| | 597,332 |
|
| USF margin | — |
| | — |
| | — |
|
| Segment gross margin | $ | 230,129 |
| | $ | 367,203 |
| | $ | 597,332 |
|
|
| | | | | | | | |
| Segment gross margin % | | | | | |
| Service margin % | 55.9 | % | | 82.3 | % | | 69.6 | % |
| Gross margin ex-USF (Service, access and product margin) % | 48.7 | % | | 80.7 | % | | 64.4 | % |
| Segment gross margin % | 46.1 | % | | 72.9 | % | | 59.6 | % |
(1) Includes customer premise equipment, access,integration costs, organizational transformation costs, restructuring activities, and shippingother non-recurring items. Organizational transformation includes employee related exits including CEO succession, system change management, facility exit costs, and handling.
(2) Excludes depreciationrebranding. Restructuring activities relate to the Company's business-wide optimization and amortizationalignment project initiated in 2020 which included employee related exits and further facility exit costs executed upon as part of $20,100, $7,208,the overall project. Other non-recurring items principally include certain litigation charges and $27,308, respectively.
F-45 VONAGE ANNUAL REPORT 2019
Aother non-recurring project costs. This is also consistent with the measure used under our bank credit assessment. Our reconciliation of the totalaggregate amount of theAdjusted EBITDA for our reportable segments' gross marginsegments to consolidated income before provision for income taxes is as follows:presented below:
| | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Adjusted EBITDA | | $ | 170,184 | | | $ | 158,096 | | | $ | 177,736 | |
| Interest expense | | (32,160) | | | (32,821) | | | (15,068) | |
| Depreciation and amortization | | (88,917) | | | (86,256) | | | (70,980) | |
| Amortization of costs to implement cloud computing arrangements | | (2,885) | | | (1,362) | | | 0 | |
| Share-based expense | | (45,667) | | | (45,242) | | | (33,020) | |
| Acquisition related transactions and integration costs | | 0 | | | (701) | | | (14,645) | |
| Acquisition related consideration accounted for as compensation | | 0 | | | 0 | | | (1,425) | |
| Organizational transformation | | (5,119) | | | (14,533) | | | (4,331) | |
| Restructuring activities | | (18,913) | | | 0 | | | 0 | |
| Other non-recurring items | | (8,518) | | | (3,289) | | | (1,742) | |
| (Loss) Income before taxes | | $ | (31,995) | | | $ | (26,108) | | | $ | 36,525 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2019 | | 2018 | | 2017 |
| Total reportable gross margin | $ | 678,262 |
| | $ | 621,787 |
| | $ | 597,332 |
|
| Sales and marketing | 363,111 |
| | 311,433 |
| | 313,251 |
|
| Engineering and development | 69,460 |
| | 52,139 |
| | 29,630 |
|
| General and administrative | 152,672 |
| | 135,324 |
| | 122,537 |
|
| Depreciation and amortization | 86,256 |
| | 70,980 |
| | 72,523 |
|
| Income from operations | $ | 6,763 |
| | $ | 51,911 |
| | $ | 59,391 |
|
| | | | | | |
| Interest expense | $ | (32,821 | ) | | $ | (15,068 | ) | | $ | (14,868 | ) |
| Other income (expense), net | (50 | ) | | (318 | ) | | 1,270 |
|
| Income before income taxes | $ | (26,108 | ) | | $ | 36,525 |
| | $ | 45,793 |
|
92 VONAGE ANNUAL REPORT 2020
Information about our operations by geographic location is as follows:
|
| | | | | | | | | | | |
| | For the years ended December 31, | |
| | 2019 | | 2018 | | 2017 |
| Revenues: | | | | | |
| United States | $ | 855,255 |
| | $ | 825,721 |
| | $ | 851,413 |
|
| Canada | 26,696 |
| | 27,267 |
| | 30,252 |
|
| United Kingdom | 66,723 |
| | 49,430 |
| | 28,309 |
|
Other Countries (1) | 240,672 |
| | 146,364 |
| | 92,312 |
|
| | $ | 1,189,346 |
| | $ | 1,048,782 |
| | $ | 1,002,286 |
|
(1) No individual other international country represented greater than 10% of total revenue during the periods presented. | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| Long-lived assets: | | | |
| United States | $ | 646,072 | | | $ | 640,277 | |
| United Kingdom | 293,457 | | | 299,660 | |
| Israel | 1,325 | | | 1,609 | |
| $ | 940,854 | | | $ | 941,546 | |
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Long-lived assets: | | | |
| United States | $ | 640,277 |
| | $ | 596,820 |
|
| United Kingdom | 299,660 |
| | 366,594 |
|
| Israel | 1,609 |
| | 1,688 |
|
| | $ | 941,546 |
| | $ | 965,102 |
|
F-46 VONAGE ANNUAL REPORT 2019
Note 17. Cash Flow Information
Detail of supplemental disclosures for cash flow and non-cash investing and financing information was as follows:
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| 2020 | | 2019 | | 2018 |
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid during the periods for: | | | | | |
| Interest | $ | 15,928 | | | $ | 23,006 | | | $ | 14,278 | |
| Income taxes | 2,298 | | | 4,365 | | | 6,644 | |
| Non-cash investing and financing activities: | | | | | |
| Acquisition of long-term assets included in accounts payable and accrued expenses | $ | 3,082 | | | $ | 1,326 | | | $ | 1,036 | |
| Stock-based compensation expense capitalized in internally developed software costs | 4,136 | | | 0 | | | 0 | |
| | | | | |
| Issuance of shares for asset acquisition | 0 | | | 3,000 | | | 0 | |
| | | | | |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid during the periods for: | | | | | |
| Interest | $ | 23,006 |
| | $ | 14,278 |
| | $ | 13,323 |
|
| Income taxes | 4,365 |
| | 6,644 |
| | 6,760 |
|
| Non-cash investing and financing activities: | | | | | |
| Capital expenditures included in accounts payable and accrued liabilities | $ | 1,326 |
| | $ | 1,036 |
| | $ | 2,345 |
|
| Issuance of shares for asset acquisition | 3,000 |
| | — |
| | — |
|
93 VONAGE ANNUAL REPORT 2020
Note 18. Quarterly Financial Information (Unaudited)
Refer to Note 12,4, Acquisition and Dispositions for a description of the effect of unusual or infrequently occurring events during the quarterly periods. Summarized unaudited quarterly financial data is as follows:
| | | | | | | | | | | | | | | |
| | | |
| | March 31, | June 30, | September 30, | December 31, | |
| Year Ended 2020 | | | | | |
| Revenue | $ | 297,457 | | $ | 310,533 | | $ | 316,649 | | $ | 323,295 | | |
| Income (Loss) from operations | 3,848 | | 2,422 | | (10,589) | | 4,170 | | |
| Net loss | (3,755) | | (8,430) | | (10,062) | | (13,965) | | |
| Loss per common share: | | | | | |
| Basic loss per share | | | | | |
| Basic loss per share | $ | (0.02) | | $ | (0.03) | | $ | (0.04) | | $ | (0.06) | | |
| Diluted loss per share | | | | | |
| Diluted loss per share | $ | (0.02) | | $ | (0.03) | | $ | (0.04) | | $ | (0.06) | | |
| | | | | |
| Year Ended 2019 | | | | | |
| Revenue | $ | 279,541 | | $ | 297,584 | | $ | 302,534 | | $ | 309,687 | | |
| (Loss) Income from operations | (2,592) | | (167) | | 5,547 | | 3,975 | | |
| Net (loss) income | (534) | | 4,524 | | (21,097) | | (2,375) | | |
| Earnings (loss) per common share: | | | | | |
| Basic earnings (loss) per share | | | | | |
| Basic earnings (loss) per share | $ | 0 | | $ | 0.02 | | $ | (0.09) | | $ | (0.01) | | |
| Diluted earnings (loss) per share | | | | | |
| Diluted earnings (loss) per share | $ | 0 | | $ | 0.02 | | $ | (0.09) | | $ | (0.01) | | |
|
| | | | | | | | | | | | |
| | |
| | March 31, | June 30, | September 30, | December 31, |
| Year Ended 2019 | | | | |
| Revenue | $ | 279,541 |
| $ | 297,584 |
| $ | 302,534 |
| $ | 309,687 |
|
| (Loss) income from operations | (2,592 | ) | (167 | ) | 5,547 |
| 3,975 |
|
| Net (loss) income | (534 | ) | 4,524 |
| (21,097 | ) | (2,375 | ) |
| (Loss) earnings per common share: | | | | |
| Basic earnings per share | | | | |
| Basic earnings per share | $ | — |
| $ | 0.02 |
| $ | (0.09 | ) | $ | (0.01 | ) |
| Diluted earnings per share | | | | |
| Diluted earnings per share | $ | — |
| $ | 0.02 |
| $ | (0.09 | ) | $ | (0.01 | ) |
| | | | | |
| Year Ended 2018 | | | | |
| Revenue | $ | 253,573 |
| $ | 259,875 |
| $ | 261,531 |
| $ | 273,803 |
|
| Income from operations | 17,668 |
| 13,375 |
| 14,847 |
| 6,021 |
|
| Net income (loss) | 24,524 |
| 8,559 |
| 9,588 |
| (6,943 | ) |
| Earnings (loss) per common share: | | | | |
| Basic earnings (loss) per share | | | | |
| Basic earnings (loss) per share | $ | 0.11 |
| $ | 0.04 |
| $ | 0.04 |
| $ | (0.03 | ) |
| Diluted earnings (loss) per share | | | | |
| Diluted earnings (loss) per share | $ | 0.10 |
| $ | 0.03 |
| $ | 0.04 |
| $ | (0.03 | ) |
94 VONAGE ANNUAL REPORT 2020
Schedule II. Valuation and Qualifying Accounts
| | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Period | | Charged to Costs and Expenses | | | | | Balance at End of Period |
Deductions(1) | |
| Allowance for Doubtful Accounts: | | | | | | | | |
| Year ended December 31, 2020 | $ | 5,494 | | $ | (2,300) | | $ | 5,684 | | | | | | $ | 8,878 | |
| Year ended December 31, 2019 | 3,542 | | (325) | | 2,277 | | | | | | 5,494 | |
| Year ended December 31, 2018 | 2,258 | | (489) | | 1,773 | | | | | | 3,542 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Valuation Allowance for Deferred Taxes: | | | | | | | | |
| Year ended December 31, 2020 | $ | 19,978 | | $ | — | | $ | 4,860 | | (2) | | | | $ | 24,838 | |
| Year ended December 31, 2019 | 23,815 | | — | | (3,837) | | (2) | | | | 19,978 | |
| Year ended December 31, 2018 | 22,390 | | — | | 1,425 | | (2) | | | | 23,815 | |
(1)Represents principally net amounts charged as uncollectible.
(2)Amounts charged (credited) to expense represent change in valuation allowance.
95 VONAGE ANNUAL REPORT 2020
| | | | | | | | | | | |
Exhibit
Number | | Description of Exhibit [To be updated] | |
| 2.1 | | | |
| 2.2 | | | |
| 3.1 | | | |
| 3.2 | | | |
| 4.1 | | | |
| 4.2 | | | |
| 4.3 | | | |
| 4.4 | | | |
| 4.5 | | | |
| 10.1 | | Nexmo Inc. 2011 Stock Plan (Incorporated by reference to Vonage Holding Corp.’s Registration Statement on Form S-8 (File No. 001-32887) filed on June 29, 2016).* | |
| 10.2 | | | |
| 10.3 | | | |
| 10.4 | | | |
| 10.5 | | | |
| 10.6 | | | |
| 10.7 | | | |
| 10.8 | | | |
| 10.9 | | | |
| 10.10 | | | |
| 10.11 | | | |
| 10.12 | | | |
| 10.13 | | | |
| 10.14 | | | |
| 10.15 | | | |
| 10.16 | | | |
| 10.17 | | | |
| 10.18 | | | |
96 VONAGE ANNUAL REPORT 2020
| | | | | | | | | | | |
| 10.19 | | | |
| 10.20 | | | |
| 10.21 | | | |
| 10.22 | | | |
| 10.23 | | Second Amended and Restated Credit Agreement, dated July 31, 2018, by and among Vonage America Inc., Vonage Holdings Corp., JPMorgan Chase Bank, N.A., as Administrative Agent, Citizens Bank, N.A. and Bank of America, N.A. as Syndication Agent, and the Lenders party thereto (Incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-32887) filed on August 2, 2018). | |
| 10.24 | | | |
| 10.25 | | | |
| 10.26 | | | |
| 10.27 | | | |
| 10.28 | | | |
| 10.29 | | | |
| 10.30 | | | |
| 10.31 | | | |
| 10.32 | | | |
| 10.33 | | | |
| 10.34 | | | |
| 10.35 | | | |
| 10.36 | | | |
| 10.37 | | | |
| 10.38 | | | |
| 10.39 | | | |
| 21.1 | | | |
| 23.1 | | | |
| 31.1 | | | |
| 31.2 | | | |
| 31.3 | | | |
| 32.1 | | | |
97 VONAGE ANNUAL REPORT 2020
| | | | | | | | | | | |
| 101 | | The following financial information from Vonage Holdings Corp.'s Annual Report on Form 10-K for the year ended December 31, 2020 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive income (Loss), (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders Equity, and (vi) Notes to the Consolidated Financial Statements. | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
* Management contract or compensatory plan or arrangement.
ITEM 16. Form 10-K Summary
None.
F-4798 VONAGE ANNUAL REPORT 20192020
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Holmdel, State of New Jersey, on February 19, 2021.
| | | | | | | | | | | | | | |
| | VONAGE HOLDINGS CORP. |
| | | | |
| Dated: | February 19, 2021 | By: | | /s/ TIM SHAUGHNESSY |
| | | | Tim Shaughnessy
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer) |
| Dated: | February 19, 2021 | By: | | /s/ STEPHEN LASHER |
| | | | Stephen Lasher
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | |
| /s/ RORY READ | | Director, Chief Executive Officer | | February 19, 2021 |
| Rory Read | | (principal executive officer) | | |
| | |
| /s/ TIM SHAUGHNESSY | | Chief Financial Officer | | February 19, 2021 |
| Tim Shaughnessy | | (principal financial officer) | | |
| | | | |
| /s/ STEPHEN LASHER | | Chief Financial Officer | | February 19, 2021 |
| Stephen Lasher | | (principal financial officer) | | |
| | |
| /S/ DAVID LEVI | | Senior Vice President and Controller | | February 19, 2021 |
| David Levi | | (principal accounting officer) | | |
| | | | |
| /S/ JEFFREY A. CITRON | | Director, Chairman | | February 19, 2021 |
| Jeffrey A. Citron | | | | |
| | | | |
| /S/ HAMID AKHAVAN | | Director | | February 19, 2021 |
| Hamid Akhavan | | | | |
| | | | |
| /S/ STEPHEN FISHER | | Director | | February 19, 2021 |
| Stephen Fisher | | | | |
| | |
| /S/ JAN HAUSER | | Director | | February 19, 2021 |
| Jan Hauser | | | | |
| | |
| /S/ PRISCILLA HUNG | | Director | | February 19, 2021 |
| Priscilla Hung | | | | |
| | |
| /S/ CAROLYN KATZ | | Director | | February 19, 2021 |
| Carolyn Katz | | | | |
| | | | |
| /S/ MICHAEL MCCONNELL | | Director | | February 19, 2021 |
| Michael McConnell | | | | |
| | | | |
| /S/ JOHN J. ROBERTS | | Director | | February 19, 2021 |
| John J. Roberts | | | | |
| | |
| /S/ GARY STEELE | | Director | | February 19, 2021 |
| Gary Steele | | | | |
| | | | |
| /S/ TIEN TZUO | | Director | | February 19, 2021 |
| Tien Tzuo | | | | |
99 VONAGE ANNUAL REPORT 2020
