UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2017March 31, 2019
or
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From __________ to __________
Commission File Number 001-32887
VONAGE HOLDINGS 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) | | (IRS Employer Identification No.) |
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23 Main Street, Holmdel, NJ | | 07733 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (732) 528-2600
(Former name, former address and former fiscal year, if changed since last report): Not Applicable
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
| | VG | | New York Stock Exchange |
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonacceleratednon-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x | | Accelerated filer | o |
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Non-accelerated filer | o | | (Do not check if a smaller reporting company) | |
Smaller reporting company | o | | Emerging growth company | o |
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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class | Outstanding at | October 31, 2017April 30, 2019 |
Common Stock, par value $0.001 | | 228,671,311242,443,075 | | shares |
VONAGE HOLDINGS CORP.
INDEX
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Part 1 - Financial Information | |
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Item 1. | Condensed Consolidated Financial Statements and Notes | |
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Item 2. | | |
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Item 3. | | |
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Item 4 | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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Financial Information Presentation
For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
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| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 18,254 |
| | $ | 5,057 |
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Accounts receivable, net of allowance of $3,446 and $3,542, respectively | 73,375 |
| | 75,342 |
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Inventory, net of allowance of $114 and $152, respectively | 1,322 |
| | 1,470 |
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Deferred customer acquisition costs, current portion | 10,585 |
| | 11,755 |
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Prepaid expenses | 27,113 |
| | 26,496 |
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Other current assets | 6,897 |
| | 7,634 |
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Total current assets | 137,546 |
| | 127,754 |
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Property and equipment, net of accumulated depreciation of $106,526 and $104,999, respectively | 48,776 |
| | 49,262 |
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Operating lease right-of-use assets | 53,042 |
| | — |
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Goodwill | 602,301 |
| | 598,499 |
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Software, net of accumulated amortization of $97,189 and $100,870, respectively | 21,001 |
| | 17,430 |
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Deferred customer acquisition costs | 43,980 |
| | 37,881 |
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Restricted cash | 1,872 |
| | 2,047 |
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Intangible assets, net of accumulated amortization of $176,941 and $162,788, respectively | 287,800 |
| | 299,911 |
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Deferred tax assets | 113,642 |
| | 102,560 |
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Other assets | 25,759 |
| | 24,144 |
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Total assets | $ | 1,335,719 |
| | $ | 1,259,488 |
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Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 43,690 |
| | $ | 53,262 |
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Accrued expenses | 86,057 |
| | 87,370 |
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Deferred revenue, current portion | 53,628 |
| | 53,447 |
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Operating lease liabilities, current portion | 13,909 |
| | — |
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Current portion of notes payable | 10,000 |
| | 10,000 |
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Total current liabilities | 207,284 |
| | 204,079 |
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Indebtedness under revolving credit facility | 466,500 |
| | 425,000 |
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Notes payable, net of debt related costs and current portion | 81,765 |
| | 84,228 |
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Operating lease liabilities | 46,982 |
| | — |
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Other liabilities | 3,046 |
| | 10,413 |
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Total liabilities | 805,577 |
| | 723,720 |
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Commitments and Contingencies (Note 10) |
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Stockholders’ Equity: | | | |
Common stock, par value $0.001 per share; 596,950 shares authorized at March 31, 2019, and December 31, 2018 | 314 |
| | 310 |
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Additional paid-in capital | 1,424,173 |
| | 1,415,682 |
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Accumulated deficit | (612,061 | ) | | (611,985 | ) |
Treasury stock, at cost | (293,575 | ) | | (275,009 | ) |
Accumulated other comprehensive income | 11,291 |
| | 6,770 |
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Total stockholders’ equity | 530,142 |
| | 535,768 |
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Total liabilities and stockholders’ equity | $ | 1,335,719 |
| | $ | 1,259,488 |
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| September 30, 2017 | | December 31, 2016 |
Assets | | | (revised) (1) |
Current assets: | | | |
Cash and cash equivalents | $ | 29,869 |
| | $ | 29,078 |
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Marketable securities | — |
| | 601 |
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Accounts receivable, net of allowance of $2,897 and $2,093, respectively | 42,435 |
| | 36,688 |
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Inventory, net of allowance of $124 and $117, respectively | 2,683 |
| | 4,116 |
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Deferred customer acquisition costs, current | 1,466 |
| | 2,610 |
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Prepaid expenses | 23,324 |
| | 26,041 |
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Other current assets | 2,686 |
| | 3,147 |
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Total current assets | 102,463 |
| | 102,281 |
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Property and equipment, net of accumulated depreciation of $143,265 and $129,166, respectively | 45,760 |
| | 48,415 |
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Goodwill | 371,535 |
| | 360,363 |
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Software, net of accumulated amortization of $94,917 and $87,626, respectively | 23,574 |
| | 21,971 |
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Restricted cash | 1,827 |
| | 1,851 |
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Intangible assets, net of accumulated amortization of $117,905 and $88,419, respectively | 181,522 |
| | 199,256 |
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Deferred tax assets | 192,879 |
| | 184,210 |
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Other assets | 15,059 |
| | 17,319 |
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Total assets | $ | 934,619 |
| | $ | 935,666 |
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Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 33,070 |
| | $ | 30,751 |
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Accrued expenses | 76,163 |
| | 109,195 |
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Deferred revenue, current portion | 31,332 |
| | 32,442 |
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Current maturities of capital lease obligations | 206 |
| | 3,288 |
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Current portion of notes payable | 18,750 |
| | 18,750 |
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Total current liabilities | 159,521 |
| | 194,426 |
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Indebtedness under revolving credit facility | 182,000 |
| | 209,000 |
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Notes payable, net of debt related costs and current portion | 77,361 |
| | 91,124 |
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Other liabilities | 6,123 |
| | 4,575 |
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Total liabilities | 425,005 |
| | 499,125 |
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Commitments and Contingencies (Note 7) |
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Stockholders’ Equity | | | |
Common stock, par value $0.001 per share; 596,950 shares authorized at September 30, 2017 and December 31, 2016; 295,633 and 282,319 shares issued at September 30, 2017 and December 31, 2016, respectively; 228,478 and 219,001 shares outstanding at September 30, 2017 and December 31, 2016, respectively | 295 |
| | 282 |
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Additional paid-in capital | 1,359,975 |
| | 1,310,847 |
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Accumulated deficit | (617,288 | ) | | (641,869 | ) |
Treasury stock, at cost, 67,155 shares at September 30, 2017 and 63,318 shares at December 31, 2016 | (243,594 | ) | | (219,125 | ) |
Accumulated other comprehensive loss | 10,226 |
| | (13,594 | ) |
Total stockholders’ equity | 509,614 |
| | 436,541 |
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Total liabilities and stockholders’ equity | $ | 934,619 |
| | $ | 935,666 |
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(1) see Note 3. Correction of Prior Period Financial Statements
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, | | September 30, | March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| | | (revised) (1) | | | | (revised) (1) | | | |
Total revenues | $ | 253,083 |
| | $ | 248,359 |
| | $ | 748,266 |
| | $ | 708,858 |
| $ | 279,541 |
| | $ | 253,573 |
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Operating Expenses: | | | | | | | | | | |
Cost of service (exclusive of depreciation and amortization) | 96,632 |
| | 87,377 |
| | 281,902 |
| | 232,605 |
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Cost of goods sold | 6,306 |
| | 8,591 |
| | 19,786 |
| | 26,009 |
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Cost of revenues (exclusive of depreciation and amortization) | | 113,411 |
| | 103,567 |
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Sales and marketing | 73,576 |
| | 83,731 |
| | 235,245 |
| | 246,676 |
| 95,523 |
| | 77,136 |
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Engineering and development | 6,956 |
| | 8,075 |
| | 21,996 |
| | 22,152 |
| 16,526 |
| | 10,820 |
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General and administrative | 26,811 |
| | 27,538 |
| | 98,411 |
| | 89,261 |
| 35,459 |
| | 27,582 |
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Depreciation and amortization | 18,179 |
| | 18,018 |
| | 54,520 |
| | 53,215 |
| 21,214 |
| | 16,800 |
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Total operating expenses | 228,460 |
| | 233,330 |
| | 711,860 |
| | 669,918 |
| 282,133 |
| | 235,905 |
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Income from operations | 24,623 |
| | 15,029 |
| | 36,406 |
| | 38,940 |
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(Loss)/Income from operations | | (2,592 | ) | | 17,668 |
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Other Income (Expense): | | | | | | | | | | |
Interest income | 3 |
| | 19 |
| | 12 |
| | 65 |
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Interest expense | (3,821 | ) | | (3,974 | ) | | (11,385 | ) | | (9,477 | ) | (7,576 | ) | | (3,161 | ) |
Other income (expense), net | 465 |
| | (495 | ) | | 931 |
| | (237 | ) | (416 | ) | | (253 | ) |
Total other income (expense), net | (3,353 | ) | | (4,450 | ) | | (10,442 | ) | | (9,649 | ) | (7,992 | ) | | (3,414 | ) |
Income before income taxes | 21,270 |
| | 10,579 |
| | 25,964 |
| | 29,291 |
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Income tax expense | (10,668 | ) | | (3,539 | ) | | (4,624 | ) | | (14,102 | ) | |
Net income | $ | 10,602 |
| | $ | 7,040 |
| | $ | 21,340 |
| | $ | 15,189 |
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Earnings per common share: | | | | | | | | |
(Loss)/Income before income taxes benefit | | (10,584 | ) | | 14,254 |
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Income tax benefit | | 10,050 |
| | 10,270 |
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Net (loss)/income | | $ | (534 | ) | | $ | 24,524 |
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(Loss)/Earnings per common share: | | | | |
Basic | $ | 0.05 |
| | $ | 0.03 |
| | $ | 0.10 |
| | $ | 0.07 |
| $ | — |
| | $ | 0.11 |
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Diluted | $ | 0.04 |
| | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.07 |
| $ | — |
| | $ | 0.10 |
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Weighted-average common shares outstanding: | | | | | | | | | | |
Basic | 227,943 |
| | 217,000 |
| | 223,956 |
| | 214,872 |
| 240,527 |
| | 233,034 |
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Diluted | 242,720 |
| | 234,868 |
| | 242,552 |
| | 227,499 |
| 240,527 |
| | 248,481 |
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(1) see Note 3. Correction of Prior Period Financial Statements
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) / INCOME
(In thousands)
(Unaudited)
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| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | (revised) (1) | | | | (revised) (1) |
Net income | $ | 10,602 |
| | $ | 7,040 |
| | $ | 21,340 |
| | $ | 15,189 |
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Other comprehensive income: | | | | | | | |
Foreign currency translation adjustment | 6,390 |
| | 3,372 |
| | 23,622 |
| | 1,659 |
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Unrealized (loss)/gain on available-for-sale securities | — |
| | (3 | ) | | 1 |
| | 23 |
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Unrealized gain on derivatives | 197 |
| | — |
| | 197 |
| | — |
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Total other comprehensive income | 6,587 |
| | 3,369 |
| | 23,820 |
| | 1,682 |
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Comprehensive income | $ | 17,189 |
| | $ | 10,409 |
| | $ | 45,160 |
| | $ | 16,871 |
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| Three Months Ended |
| March 31, |
| 2019 | | 2018 |
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Net (loss)/income | $ | (534 | ) | | $ | 24,524 |
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Other comprehensive income: | | | |
Foreign currency translation adjustment, net of tax expense/(benefit) of $433 and ($2), respectively | 5,208 |
| | 6,333 |
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Unrealized (loss)/gain on derivatives, net of tax expense/(benefit) of $28 and ($302), respectively | (687 | ) | | 780 |
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Total other comprehensive income | 4,521 |
| | 7,113 |
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Comprehensive income | $ | 3,987 |
| | $ | 31,637 |
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(1) see Note 3. Correction of Prior Period Financial Statements
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| | | | | | | |
| Three Months Ended |
| March 31, |
| 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net (loss)/income | $ | (534 | ) | | $ | 24,524 |
|
Adjustments to reconcile net (loss)/income to net cash provided by operating activities: | | | |
Depreciation and amortization | 6,656 |
| | 7,419 |
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Amortization of intangibles | 14,558 |
| | 9,207 |
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Deferred income taxes | (10,283 | ) | | (10,655 | ) |
Amortization of deferred customer acquisition costs | 2,530 |
| | 2,159 |
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Allowance for doubtful accounts and obsolete inventory | 80 |
| | 800 |
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Amortization of debt issuance costs | 270 |
| | 258 |
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Loss on disposal of property and equipment | 514 |
| | 174 |
|
Share-based expense | 8,015 |
| | 7,164 |
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Changes in derivatives | (133 | ) | | — |
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Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | 1,083 |
| | 271 |
|
Inventory | 179 |
| | (179 | ) |
Prepaid expenses and other current assets | 170 |
| | (2,627 | ) |
Deferred customer acquisition costs | (7,459 | ) | | (5,813 | ) |
Accounts payable | (9,824 | ) | | 1,622 |
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Accrued expenses | (969 | ) | | (10,190 | ) |
Deferred revenue | (312 | ) | | (1,434 | ) |
Other assets - deferred cloud computing implementation costs | (3,022 | ) | | (1,204 | ) |
Other assets and liabilities | 1,231 |
| | 1,972 |
|
Net cash provided by operating activities | 2,750 |
| | 23,468 |
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Cash flows used in investing activities: | | | |
Capital expenditures | (5,277 | ) | | (3,250 | ) |
Acquisition and development of software assets | (5,497 | ) | | (3,147 | ) |
Net cash used in investing activities | (10,774 | ) | | (6,397 | ) |
Cash flows provided by/(used in) financing activities: | | | |
Principal payments on capital lease obligations and other financing obligations | — |
| | (59 | ) |
Payments on notes and revolving credit facility | (2,500 | ) | | (9,687 | ) |
Proceeds received from issuance of revolving credit facility and term note | 41,500 |
| | 10,000 |
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Payment of debt issuance costs | (128 | ) | | — |
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Employee taxes paid on withholding shares | (18,566 | ) | | (27,487 | ) |
Proceeds from exercise of stock options | 480 |
| | 2,171 |
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Net cash provided by/(used in) financing activities | 20,786 |
| | (25,062 | ) |
Effect of exchange rate changes on cash | 260 |
| | 35 |
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Net increase/(decrease) in cash, cash equivalents, and restricted cash | 13,022 |
| | (7,956 | ) |
Cash, cash equivalents, and restricted cash, beginning of period | 7,104 |
| | 33,327 |
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Cash, cash equivalents, and restricted cash, end of period | $ | 20,126 |
| | $ | 25,371 |
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Supplemental disclosures of cash flow information: | | | |
Cash paid during the periods for: | | | |
Interest | $ | 6,929 |
| | $ | 2,781 |
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Income taxes | $ | 148 |
| | $ | 2,333 |
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Non-cash investing activities: | | | |
Capital expenditures included in accounts payable and accrued liabilities | $ | 334 |
| | $ | 1,315 |
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| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2017 | | 2016 (1) |
Cash flows from operating activities: | | | |
Net income | $ | 21,340 |
| | $ | 15,189 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation, amortization and impairment charges | 25,930 |
| | 27,841 |
|
Amortization of intangibles | 28,458 |
| | 25,374 |
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Deferred income taxes | 2,475 |
| | 11,647 |
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Change in contingent consideration | — |
| | (7,362 | ) |
Allowance for doubtful accounts | 562 |
| | 720 |
|
Allowance for obsolete inventory | 339 |
| | 514 |
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Amortization of debt issuance costs | 300 |
| | 800 |
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Gain on sale of business | (1,377 | ) | | — |
|
Loss on disposal of fixed assets | 132 |
| | — |
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Share-based expense | 28,997 |
| | 27,128 |
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Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | (3,970 | ) | | (5,244 | ) |
Inventory | 1,156 |
| | 582 |
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Prepaid expenses and other current assets | 3,369 |
| | (2,161 | ) |
Deferred customer acquisition costs | 1,284 |
| | 1,906 |
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Accounts payable | 1,388 |
| | (17,252 | ) |
Accrued expenses | (32,390 | ) | | (7,509 | ) |
Deferred revenue | (1,477 | ) | | (2,785 | ) |
Other assets and liabilities | 4,084 |
| | 226 |
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Net cash provided by operating activities | 80,600 |
| | 69,614 |
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Cash flows from investing activities: | | | |
Capital expenditures | (15,790 | ) | | (19,980 | ) |
Purchase of marketable securities | — |
| | (5,664 | ) |
Maturities and sales of marketable securities | 602 |
| | 9,036 |
|
Acquisition and development of software assets | (9,438 | ) | | (8,987 | ) |
Acquisition of businesses, net of cash acquired | — |
| | (163,042 | ) |
Proceeds from sale of business | 1,000 |
| | — |
|
Net cash used in investing activities | (23,626 | ) | | (188,637 | ) |
Cash flows from financing activities: | | | |
Principal payments on capital lease obligations and other financing obligations | (5,701 | ) | | (7,453 | ) |
Principal payments on notes and revolving credit facility | (56,063 | ) | | (48,125 | ) |
Proceeds received from draw down of revolving credit facility and issuance of notes payable | 15,000 |
| | 181,250 |
|
Debt related costs | — |
| | (1,316 | ) |
Common stock repurchases | (9,542 | ) | | (32,902 | ) |
Employee taxes paid on withholding shares | (14,927 | ) | | (4,359 | ) |
Proceeds from exercise of stock options | 14,476 |
| | 6,169 |
|
Net cash (used)/provided by financing activities | (56,757 | ) | | 93,264 |
|
Effect of exchange rate changes on cash | 550 |
| | 518 |
|
Net decrease in cash, cash equivalents, and restricted cash | 767 |
| | (25,241 | ) |
Cash, cash equivalents, and restricted cash, beginning of period | 30,929 |
| | 60,313 |
|
Cash, cash equivalents, and restricted cash, end of period | $ | 31,696 |
| | $ | 35,072 |
|
Supplemental disclosures of cash flow information: | | | |
Cash paid during the periods for: | | | |
Interest | $ | 10,147 |
| | $ | 8,216 |
|
Income taxes | $ | 5,395 |
| | $ | 5,165 |
|
Non-cash investing and financing activities: | | | |
Capital expenditures included in accounts payable and accrued liabilities | $ | 2,231 |
| | $ | 2,962 |
|
Issuance of common stock in connection with acquisition of business | $ | — |
| | $ | 31,591 |
|
Contingent consideration in connection with acquisition of business | $ | — |
| | $ | 16,472 |
|
Assumption of options in connection with acquisition of business | $ | — |
| | $ | 4,779 |
|
(1) See Note 2. Summary of Significant Accounting Policies for reclassification due to the adoptions of new Accounting Standard Updates and Note 3. Correction of Prior Period Financial Statements
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total |
Balance at December 31, 2016 (Revised) (1) | 219,001 |
| | $ | 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 | 13,314 |
| | 13 |
| | 14,463 |
| | | | | | | | 14,476 |
|
Share-based expense | | | | | 28,997 |
| | | | | | | | 28,997 |
|
Employee taxes paid on withholding shares | (2,238 | ) | | | | | | | | (14,927 | ) | | | | (14,927 | ) |
Common stock repurchases | (1,599 | ) | | | | | | | | (9,542 | ) | | | | (9,542 | ) |
Foreign currency translation adjustment | | | | | | | | | | | 23,622 |
| | 23,622 |
|
Unrealized gain on available-for-sale securities | | | | | | | | | | | 1 |
| | 1 |
|
Unrealized gain on derivatives | | | | | | | | | | | 197 |
| | 197 |
|
Net income | | | | | | | 21,340 |
| | | | | | 21,340 |
|
Balance at September 30, 2017 | 228,478 |
| | $ | 295 |
| | $ | 1,359,975 |
| | $ | (617,288 | ) | | $ | (243,594 | ) | | $ | 10,226 |
| | $ | 509,614 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | 8 |
| | 2,163 |
| | | | | | | | 2,171 |
|
Share-based expense | | | | 7,164 |
| | | | | | | | 7,164 |
|
Employee taxes paid on withholding shares | | | | | | | | (26,520 | ) | | | | (26,520 | ) |
Foreign currency translation adjustment | | | | | | | | | | 6,333 |
| | 6,333 |
|
Unrealized gain on derivatives | | | | | | | | | | 780 |
| | 780 |
|
Net income | | | | | | 24,524 |
| | | | | | 24,524 |
|
Balance at March 31, 2018 | | $ | 306 |
| | $ | 1,384,718 |
| | $ | (623,189 | ) | | $ | (270,759 | ) | | $ | 21,122 |
| | $ | 512,198 |
|
(1) see Note 3. Correction of Prior Period Financial Statements |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Treasury Stock | | Accumulated Other Comprehensive Income | | Total |
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 | | 4 |
| | 476 |
| | | | | | | | 480 |
|
Share-based expense | | | | 8,015 |
| | | | | | | | 8,015 |
|
Employee taxes paid on withholding shares | | | | | | | | (18,566 | ) | | | | (18,566 | ) |
Foreign currency translation adjustment | | | | | | | | | | 5,208 |
| | 5,208 |
|
Unrealized loss on derivatives | | | | | | | | | | (687 | ) | | (687 | ) |
Net loss | | | | | | (534 | ) | | | | | | (534 | ) |
Balance at March 31, 2019 | | $ | 314 |
| | $ | 1,424,173 |
| | $ | (612,061 | ) | | $ | (293,575 | ) | | $ | 11,291 |
| | $ | 530,142 |
|
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 1. BasisNature of PresentationBusiness
Nature of Operations
Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. At Vonage, we are redefining business communications. We are a leading provider ofembracing technology to transform how businesses communicate to create better business outcomes. Our cloud communications services for business. We transform the way people workplatform enables businesses of all sizes to collaborate more productively and businesses operate through a portfolioengage their customers more efficiently across any device. All of cloud-basedour cloud communications solutions that enable internal collaboration among employees, while also keeping companies closely connectedare designed to allow businesses to be more productive by integrating communications with all their existing business productivity tools and our programmable solutions allow customers to engage with their customers across any mode of communication, on any device.
Through our Nexmo subsidiary which was acquired on June 3, 2016, we are a global leader in the Communications-Platform-as-a-Service ("CPaaS") segment of the cloud communications market, providing innovative communication application program interfaces ("APIs") for textvia embedded voice, chat, or messaging and voice communications, allowing developers and enterprises to embedcreate seamless and contextual communications that makes doing business easier for end customers.
For our business customers, we provide innovative, cloud-based Unified Communications as a Service, or UCaaS, solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable Session Initiation Protocol, or SIP, based Voice over Internet Protocol, or VoIP, network. We also offer Communications Platform as a Service, or CPaaS, solutions designed to enhance the way businesses communicate with their customers by embedding communications into mobile apps, websites and business workflows via text, social media, chat appsprocesses. With the acquisition of NewVoiceMedia on October 31, 2018, Vonage also provides customers with a robust Contact Center as a Service, or CCaaS, offering, driving intelligent interactions for customers through emerging technologies such as skills-based routing, real-time sentiment analysis and voice. With just few lines of code, developers can sendchatbots. NewVoiceMedia's cloud contact center solution, combined with Vonage's offering, provides an end-to-end communications experience for enhanced customer engagement and receive text messagesconversation. In combination, our products and build programmable voice applications. Nexmo, the Vonage API Platform can scale from one API call to billions. The platform makes it easy for any ofservices permit our developers to access communication services via software and APIs. Through Nexmo we have a global network of interconnected carriers delivering our API-based communications platform, enabling businessesbusiness customers to communicate with their customers reliably and employees through any cloud-connected device, in any place, at any time without the often costly investment required with ease, no matter where in the world they are located. The addition of our Nexmo products to our business offering allows our customers to address their full communications needs, from employee to employee communications through business to customer communications.on-site equipment.
We also provide a robust suite of feature-rich residential communication solutions.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.
Customers in the United States represented 84%73% and 89%82% of our consolidated revenues for the three months ended September 30, 2017March 31, 2019 and 2016 and 86% and 92% for the nine months ended September 30, 2017 and 2016,2018, respectively, with the balance in Canada, the United Kingdom, China, Singapore, Netherlands, and other countries. Nexmo Inc. ("Nexmo") has operations in the United States, United Kingdom, Hong Kong, and Singapore, and provides CPaaS solutions to our customers located in many countries around the world.
Unaudited Interim Financial Information
The accompanying unaudited interim condensed consolidated financial statements and information have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the SEC's regulations for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the Company's financial position, results of operations, comprehensive income, cash flows, and statement of stockholders’ equity for the periods presented. The results for the three and nine months ended September 30, 2017March 31, 2019 are not necessarily indicative of the results to be expected for the full year.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 20162018 filed with the Securities and Exchange Commission on February 28, 201727, 2019.
Use of Estimates
Our condensed consolidated financial statements and notes thereof 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 condensed consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.
Reclassifications
Reclassifications have been made to our condensed consolidated financial statements for the prior year period to conform to classification used in the current year period. The reclassifications did not affect results from operations or net assets.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Reclassifications
Reclassifications have been made to our condensed consolidated financial statements for the prior year periods to conform to classifications used in the current year periods. The reclassifications did not affect results of operations or net assets.
Note 2. Summary of Significant Accounting Policies
This footnote should be read in conjunction with the complete description of our significant accounting policies under Note 1, Basis2, Summary of Presentation and Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Cost of ServicesRevenues
Cost of servicesrevenues excludes depreciation and amortization expense of $6,852$9,418 and $7,460$6,434 for the three months ended September 30, 2017March 31, 2019 and 2016 and $20,497 and $21,278 for2018, respectively. In addition, costs of goods sold included in cost of revenues during the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018 were $5,628 and $6,297, respectively.
Advertising CostsSales and Marketing Expenses
We incurred advertising costs which are included in sales and marketing of $11,423$17,750 and $18,765$14,521 for the three months ended September 30, 2017March 31, 2019 and 20162018, respectively.
Leases
At inception of a contract, the Company determines whether the contract is or contains a lease. Further, the Company determines if the arrangement qualifies as an operating lease or a finance lease. Operating leases are included in operating lease right-of-use assets, operating lease liabilities - current portion and $43,760operating lease liabilities on the Company's consolidated balance sheet. The Company does not have any finance leases as of March 31, 2019 and $55,723January 1, 2019.
A right-of-use asset represents the Company's right to use the underlying asset for the nine months ended September 30, 2017lease term and 2016, respectively.
Engineeringthe lease liabilities represent our obligation to make lease payments under the leasing arrangement. We recognize an operating lease right-of-use asset and Development Expenses
Engineering and development expenses primarily include personnel and related costs for developers responsible for new products, and software engineers maintaining and enhancing existing products. Research and development costs related to new product development included in engineering and development were $5,662 and $6,234 foroperating lease liability at the three months ended September 30, 2017 and 2016 and $17,357 and $16,544 forarrangement's commencement date based upon the nine months ended September 30, 2017 and 2016, respectively.
Restructuring Activities
During the nine months ended September 30, 2017, we recognized $4 million of costs associated with restructuring activities included in general and administrative expense and is primarily comprised of costs associated with severance and other employee related costs. As of September 30, 2017, $1.2 million remained accrued related to restructuring activities and $2.8 million was paid during the third quarter of 2017.
Derivative Financial Instruments
The Company accounts for derivative financial instruments under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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 or 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 fairpresent value of the related hedged assets and liabilitieslease payments over the lease term. We utilize our incremental borrowing rate based on the information available at the commencement date in order to determine the present value of lease payments or deferred and recognized as a componentthe implicit rate when readily determinable. The Company's lease arrangements may include options to extend or terminate the lease arrangement. Such options are included in the determination of accumulated other comprehensive income ("OCI") until the hedged transactions occur and are recognized in earnings.
Beginning the quarter ended September 30, 2017,lease term when it is reasonably certain that the Company entered into three interest rate swaps used to mitigate variability in earnings due to fluctuations in interest rates. Each swap has been designated and qualifies aswill exercise that option. The Company recognizes lease expense for lease payments on a cash flow hedges. Atstraight-line basis over the inceptionterm of the forward contract, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributed to the hedged risk.lease. The Company assesses hedge effectiveness underhas made an accounting policy election for leases that at the critical terms matched method at inception and at least quarterly through the life of the hedging relationship. If the criticalcommencement date have terms of the interest rate swap match the terms of the forecasted transaction,twelve months or less to not recognize an operating lease right-of-use assets or operating lease liabilities on its balance sheet. Instead, the Company concludes thatrecognizes lease payments as an expense in accordance with the hedge is effective.lease terms.
Fair Value of Financial Instruments
The Company records certain of its financial assets at fair value on a recurring basis. Thebasis as described below. Certain of the Company's other financial instruments, which includesinclude cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of their short-term maturities. The carrying amounts of our capital leases approximate fair value of these obligations based upon management’s best estimates of interest rates that would be available for similar debt obligations at September 30, 2017 and December 31, 2016. We believe the fair value of our debt at September 30, 2017March 31, 2019 and December 31, 2018 was approximately the same as its carrying amount as 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 on June 3, 2016obligations for a similar debt instrument.instrument and are classified as Level 3 within the fair value hierarchy.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of the inputs, or assumptions, we use in the determination of fair value, and we classify financial assets and liabilities carried at fair value in one of the following three categories:
•Level 1 Measurements - 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 Measurements - observable prices that are based on inputs not quoted on active markets but corroborated by market data; and
•Level 3 Measurements - 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.
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 September 30, 2017March 31, 2019 and December 31, 2016:2018:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Level 1 Measurements | | | |
Money market fund (1) | $ | — |
| | $ | 300 |
|
Level 2 Measurements | | | |
Available-for-sale securities (2) | $ | — |
| | $ | 601 |
|
Interest rate swap (3) | $ | 197 |
| | $ | — |
|
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Level 2 Measurements | | | |
Interest rate swaps (1) | $ | 1,278 |
| | $ | 1,859 |
|
(1) Included in cash and cash equivalents on our condensed consolidated balance sheet.
(2) Included in marketable securities on our condensed consolidated balance sheet.
(3) Included in other assets on our condensed consolidated balance sheet.sheets.
Supplemental Balance Sheet Information
Cash,The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheet to amounts included in the consolidated statement of cash flows:
|
| | | | | | | | | | | | | | | |
| As of March 31, | | As of December 31 |
| 2019 | | 2018 | | 2018 | | 2017 |
Cash and cash equivalents | $ | 18,254 |
| | $ | 23,536 |
| | $ | 5,057 |
| | $ | 31,360 |
|
Restricted cash | 1,872 |
| | 1,835 |
| | 2,047 |
| | 1,967 |
|
Total cash, cash equivalents and restricted cash | $ | 20,126 |
| | $ | 25,371 |
| | $ | 7,104 |
| | $ | 33,327 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Cash and cash equivalents | $ | 29,869 |
| | $ | 29,078 |
|
| | | |
Cash collateralized letter of credit-lease deposits | $ | 1,561 |
| | $ | 1,578 |
|
Cash reserves | 266 |
| | 273 |
|
Restricted cash | $ | 1,827 |
| | $ | 1,851 |
|
| | | |
Cash, cash equivalents, and restricted cash | $ | 31,696 |
| | $ | 30,929 |
|
Intangible assets, net
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Customer relationships | $ | 180,874 |
| | $ | 187,887 |
|
Developed technology | 100,053 |
| | 104,368 |
|
Patents and patent licenses | 2,135 |
| | 2,514 |
|
Trade names | 4,684 |
| | 5,005 |
|
Non-compete agreements | 54 |
| | 137 |
|
Finite-lived intangible assets, net | $ | 287,800 |
| | $ | 299,911 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Customer relationships | 126,758 |
| | 133,774 |
|
Developed technology | 49,054 |
| | 57,245 |
|
Patents and patent licenses | 4,410 |
| | 5,547 |
|
Trade names | 521 |
| | 1,033 |
|
Non-compete agreements | 779 |
| | 1,657 |
|
Intangible assets, net | $ | 181,522 |
| | $ | 199,256 |
|
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Accrued expenses
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Compensation and related taxes and temporary labor | $ | 18,863 |
| | $ | 33,249 |
|
Marketing | 14,199 |
| | 10,238 |
|
Taxes and fees | 13,243 |
| | 11,189 |
|
Telecommunications | 28,297 |
| | 21,403 |
|
Other accruals | 3,025 |
| | 4,729 |
|
Customer credits | 2,698 |
| | 3,325 |
|
Professional fees | 4,517 |
| | 2,049 |
|
Inventory | 1,215 |
| | 1,188 |
|
Accrued expenses | $ | 86,057 |
| | $ | 87,370 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Compensation and related taxes and temporary labor | $ | 25,292 |
| | $ | 35,308 |
|
Marketing | 11,330 |
| | 12,754 |
|
Taxes and fees | 8,537 |
| | 19,234 |
|
Acquisition related consideration accounted for as compensation | 2,134 |
| | 6,608 |
|
Telecommunications | 15,974 |
| | 14,896 |
|
Settlement | — |
| | 5,000 |
|
Other accruals | 7,950 |
| | 10,473 |
|
Customer credits | 1,143 |
| | 2,074 |
|
Professional fees | 2,844 |
| | 1,680 |
|
Inventory | 959 |
| | 1,168 |
|
Accrued expenses | $ | 76,163 |
| | $ | 109,195 |
|
Recent Accounting Pronouncements
In AugustJanuary 2017, FASBthe Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, "Derivatives and Hedging". The ASU improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and simplifies the application of the hedge accounting guidance in current generally accepted accounting principles ("GAAP"). It also amends the disclosures requirements by requiring a tabular disclosure related to the effect on the incomes statement of fair value and cash flow hedges and eliminating the ineffective portion of the change in fair value of hedging instrument disclosures. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of this ASU. We do not expect a material impact of adopting ASU 2017-12 on our condensed consolidated financial statements and related disclosures.
In January 2017, FASB issued ASU 2017-04, "Intangibles"Intangibles - Goodwill and Other"Other (Topic 350): Simplifying the Test for Goodwill Impairment". The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. This ASU is effective for an annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of adopting ASU 2017-04 on our condensed consolidated financial statements and related disclosures.
In October 2016, FASB issued ASU 2016-16, "Income Taxes". This ASU improves the accounting for income tax consequences of intra-entity transfers of assets other than inventory. This ASU is effective for fiscal years beginning after December 15, 2017 on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. We are currently evaluating the impact of adopting ASU 2016-16 on our condensed consolidated financial statements and related disclosures.
In August 2016, FASB issued ASU 2016-15, "Statement of Cash Flows". This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for fiscal years beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2016-15 will2017-04 is not expected to have a material impact on our condensed consolidated financial statements and related disclosures.
In FebruaryJune 2016, the FASB issued ASU 2016-02, "Leases"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. This ASU increases transparencyThe CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and comparability among organizations by recognizing lease assets and lease liabilities onrecord allowances that when deducted from the balance sheet and disclosing key information about leasing arrangements.of the receivables, 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 consider 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. This ASU is effective for fiscal years beginning after December 15, 2018, including2019, and interim periods within those fiscal years. Early adoption is permitted for all entities. The adoptionWhile we are still evaluating the impact of this ASU will increase our assets and liabilities for real estate and equipment operating leases for which we are the lessee. We will adopt this ASU when effective. We are currently evaluating the effect of adopting ASU 2016-02guidance on our condensed consolidated financial statements, and related disclosures.we do not currently believe it will have a material impact upon adoption.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
In January 2016, FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities". This ASU provide guidance concerning certain matters involving the recognition, measurement, and disclosure of financial assets and financial liabilities. The guidance does not alter the basic framework for classifying debt instruments held as financial assets. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted, with some exceptions. The adoption of ASU 2016-01 will not have a material impact on our condensed consolidated financial statements and related disclosures.
In May 2014, FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" which was further amended through various updates issued by the FASB thereafter. The amendments of Topic 606 clarify the principles for recognizing revenue and provide a common revenue standard for U.S. GAAP to improve financial reporting. The core principle of these standards are that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also amends the current guidance for the recognition of costs to obtain and fulfill contracts with customers requiring that all incremental costs of obtaining and direct costs of fulfilling contracts with customers such as commissions be deferred and recognized over the expected customer life. In August 2015, an ASU was issued by the FASB which deferred the effective date to annual and interim periods beginning on or after December 15, 2017. We will adopt the requirements of the new standard in the first quarter of 2018 and anticipate using the modified retrospective transition method under which the standard will be applied only to the most current period presented and the cumulative effect of applying the standard will be recognized at the date of initial application.
We are in the process of evaluating the impact of the standard with respect to the terms of our revenue arrangements and will finalize our expected impact of the pronouncement along with implementation of changes to our internal controls and disclosures as necessary to support the new accounting during the fourth quarter of 2017. We expect the timing of recognition of our sales commissions will also be impacted as a substantial portion of these costs which are currently expensed will be capitalized under the revised standard and amortized over the period of benefit.
The following standards werestandard was adopted by the Company during the current year:period:
In NovemberFebruary 2016, the FASB issued ASU 2016-18, "Statement2016-02, "Leases (Topic 842)" which replaces the guidance on accounting for leases in Topic 840. The new guidance increases transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for most leases and disclose key information about leasing arrangements.
The Company adopted the new standard on January 1, 2019 using a modified retrospective transition approach, which involves applying the new standard to all leases existing at the date of Cash Flows". This ASU requires thatthe initial application with any cumulative impact of the adoption recorded to retained earnings. In addition, we elected the package of practical expedients permitted under the transition guidance which allows the Company to carry forward the historical lease classification. The adoption of Topic 842 has had a statementsignificant 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 explainsflows. We recorded the changefollowing transactions on January 1, 2019:
Recognized currently unrecognized right-of-use assets of $57.3 million net of deferred rent and lease incentives which were previously included in other liabilities.
Recognized currently unrecognized lease liabilities of $64.5 million (based on the present value of the remaining minimum rental payments for existing operating leases).
Recognized an adjustment to retained earnings of $458 thousand related to release of deferred tax assets.
Note 3. Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers which is further described in Note 2, Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2018.
Disaggregation of Revenue
The following table details 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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| March 31, 2019 | | March 31, 2018 |
| Business | | Consumer | | Total | | Business | | Consumer | | Total |
Primary geographical markets | | | | | | | | | | | |
United States | $ | 112,438 |
| | $ | 91,866 |
| | $ | 204,304 |
| | $ | 100,866 |
| | $ | 107,268 |
| | $ | 208,134 |
|
Canada | 1,407 |
| | 5,168 |
| | 6,575 |
| | 649 |
| | 6,388 |
| | $ | 7,037 |
|
United Kingdom | 23,881 |
| | 2,910 |
| | 26,791 |
| | 6,483 |
| | 3,249 |
| | $ | 9,732 |
|
Other Countries (1) | 41,871 |
| | — |
| | 41,871 |
| | 28,670 |
| | — |
| | $ | 28,670 |
|
| 179,597 |
| | 99,944 |
| | 279,541 |
| | 136,668 |
| | 116,905 |
| | 253,573 |
|
Major Sources of Revenue | | | | | | | | | | | |
Service revenues | $ | 159,345 |
| | $ | 89,000 |
| | $ | 248,345 |
| | $ | 116,302 |
| | $ | 104,394 |
| | $ | 220,696 |
|
Access and product revenues | 11,697 |
| | 68 |
| | 11,765 |
| | 12,531 |
| | 91 |
| | 12,622 |
|
USF revenues | 8,555 |
| | 10,876 |
| | 19,431 |
| | 7,835 |
| | 12,420 |
| | 20,255 |
|
| 179,597 |
| | 99,944 |
| | 279,541 |
| | 136,668 |
| | 116,905 |
| | 253,573 |
|
(1) No individual other international country represented greater than 10% of total revenue during the period inperiods presented.
In addition, the total of cash, cash equivalents, and amounts generally described as restricted cashCompany recognizes service revenues from its customers through subscription services provided or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconcilingthrough usage or pay-per-use type arrangements. During the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, and any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. We adopted this ASU in the first quarter of 2017 and applied the retrospective transition method for each period presented. For the ninethree months ended September 30, 2016, $791 and $11 were reclassified from investing activity and effect of exchange rate changes on cash, respectively, and $51, $2,587 and $1,836 were adjusted to acquisition of business, net of cash acquired, and cash, cash equivalents, and restricted cash, beginning ofMarch 31, 2019, the period and end of the period balances, respectively.
In March 2016, FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting". This ASU is issued as part of its Simplification Initiative. The areas for simplification in this ASU involve several aspects of the accounting for share- based payment transactions, including the income tax consequences, recognition of share-based expense, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted this ASU in the first quarter of 2017. We elected to account for forfeitures when they occur versus our prior practice of estimating the number of awards that are expected to vest. The election of this new ASU resulted in a one-time adjustment in 2017 to accumulated deficit and to additional paid-in-capital of $5,668 and the corresponding benefit to our accumulated deficit and deferred tax asset of $2,285Company recognized $162,546 related to subscription services, $67,847 related to usage, and $49,148 related to other revenues such as USF, other regulatory fees, and credits. During the reversal of forfeiture rate as of December 31, 2016. In addition, a benefit to our accumulated deficit and deferred tax asset of $6,624 was recorded for excess tax benefits on equity compensation as of December 31, 2016. We also classified cash paid by us when directly withholding shares for tax-withholding purposes as a financing activity. As a result, $4,359 was reclassified from operating activity to financing activity for the ninethree months ended September 30, 2016.March 31, 2018, the Company recognized $152,453 related to subscription services, $51,186 related to usage, and $49,934 related to other revenues such as USF, other regulatory fees, and credits.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
In July 2015, FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory". This ASU applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of costContract Assets and net realizable value, which is the estimated selling pricesLiabilities
The following table provides information about receivables and contract liabilities from contracts with customers:
|
| | | | | | |
| March 31, 2019 | December 31, 2018 |
Receivables (1) | $ | 73,375 |
| $ | 75,342 |
|
Contract liabilities (2) | 53,628 |
| 53,447 |
|
(1) Amounts included in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out ("LIFO") or the retail inventory. This ASU is effective for annual and interim periods beginning after December 15, 2016, and is applied prospectively. We adopted ASU 2015-11 in the first quarter of 2017 and the adoption of this ASU did not have a material impactaccounts receivables on our condensed consolidated financial statementsbalance sheet.
(2) Amounts included in deferred revenues and related disclosures.
Note 3. Correction of Prior Period Financial Statements
In connection with the preparation ofother liabilities on our condensed consolidated financial statementsbalance sheet.
Our deferred revenue represents the advance consideration received from customers for the quarter ended March 31, 2017,subscription services and our remediation efforts related to the material weakness in our internal control over financial reporting related to our controlsis predominantly recognized over the preparationfollowing performance period which is generally a month as transfer of the annual tax provision, we identified an error as of December 31, 2016 in our recognition of a deferred tax asset related to contingent consideration with vesting requirements paid in connection with the acquisition of Nexmo. Based in part upon the vesting requirements of contingent consideration, we recorded the consideration as compensation expense in general and administrative expense in our consolidated statements of operations. However, for tax purposes the contingent consideration should have been recorded as merger consideration and not deductible compensation. The correction of this error requires the reversal of the deferred tax asset on the consolidated balance sheets and related tax benefits of $4,756 as of December 31, 2016. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the error and determined that the related impact was not material to our results of operations or financial position for any prior annual or interim period, but that correcting the $4,756 cumulative impact of the error would be material to our results of operations forcontrol occurs. During the three months ended March 31, 2017. Accordingly,2019 and 2018, the Company recognized revenue of $100,434 and $119,371, respectively, related to its contract liabilities. We expect to recognize $53,628 into revenue over the next twelve months related to our deferred revenue as of March 31, 2019.
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 corrected thecapitalized $54,565 and $49,636 as contract costs, net of accumulated amortization, as of March 31, 2019 and December 31, 2018, respectively, included within deferred customer acquisitions costs, current portion and deferred customer acquisition costs on our condensed consolidated balance sheets as of December 31, 2016sheet. Capitalized commission fees are amortized to sales and will correct this error in all prior periods presented by revising the appropriate condensed consolidated financial statements. This error had no impact onmarketing expense over estimated customer life, which is 7 years for Business customers. During the three months ended March 31, 2016. The impact2019 and 2018, the amounts amortized to sales and marketing were $2,530 and $2,159, respectively, and there were no impairment losses recognized in relation to the consolidated balance sheetcosts capitalized. In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year and for residuals and renewals.
Note 4. Acquisitions and Dispositions
Acquisition of NewVoiceMedia
On October 31, 2018, the Company acquired 100% of the issued and outstanding shares of NewVoiceMedia Limited (“NewVoiceMedia”), a cloud Contact Center-as-a-Service (CCaaS) provider, for a purchase price of $350,179 paid in cash.
The acquisition was recorded as of December 31, 2016a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair value on the consolidated statements of incomeacquisition date. The initial accounting for the threebusiness combination is not complete because the evaluations necessary to assess the fair values of certain net assets acquired inclusive of deferred tax liabilities is still in process. The allocation of the purchase price may be modified up to one year from the date of the acquisition as more information is obtained about the fair value of assets acquired and six months ended June 30, 2016,liabilities assumed. Under the three and nine months ended September 30, 2016, andterms of the three months and year ended December 31, 2016 isoffer, NewVoiceMedia shareholders received cash in the amount of approximately $341 million as follows:
well as transactions costs incurred by NewVoiceMedia which were paid by the Company of approximately $9 million on the date of the acquisition.
|
| | | | | | | | | | | | |
Consolidated Balance Sheets | | | | | | |
| | As of December 31, 2016 |
| | As Reported | | Adjustment | | As Revised |
| | | | | | |
Deferred tax assets, non-current | | $ | 188,966 |
| | $ | 4,756 |
| | $ | 184,210 |
|
Total assets | | 940,422 |
| | 4,756 |
| | 935,666 |
|
Accumulated deficit | | (637,113 | ) | | 4,756 |
| | (641,869 | ) |
Total stockholders' equity | | 441,297 |
| | 4,756 |
| | 436,541 |
|
Total liabilities and stockholders' equity | | 940,422 |
| | 4,756 |
| | 935,666 |
|
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The table below summarizes the NewVoiceMedia assets acquired and liabilities assumed as of October 31, 2018:
|
| | | | | | | | | | | |
| Preliminary Acquisition Date Fair Value as of December 31, 2018 | | Measurement period adjustments | | Revised Preliminary 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 |
| | | | 3,907 |
|
Property and equipment | 3,474 |
| | | | 3,474 |
|
Intangible assets | 154,300 |
| | | | 154,300 |
|
Other assets | 378 |
| | | | 378 |
|
Total assets acquired | 177,800 |
| | (1,448 | ) | | 176,352 |
|
| | | | | |
Liabilities | | | | | |
Accounts payable | 4,712 |
| | | | 4,712 |
|
Accrued expenses | 4,145 |
| | | | 4,145 |
|
Deferred tax liabilities | 7,756 |
| | | | 7,756 |
|
Deferred revenue | 22,000 |
| | | | 22,000 |
|
Total liabilities assumed | 38,613 |
| | — |
| | 38,613 |
|
| | | | | |
Net identifiable assets acquired | 139,187 |
| | (1,448 | ) | | 137,739 |
|
Goodwill | 210,992 |
| | 1,448 |
| | 212,440 |
|
Total purchase price | $ | 350,179 |
| | $ | — |
| | $ | 350,179 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Statements of Income | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2016 | | June 30, 2016 |
| | As Reported | | Adjustment | | As Revised | | As Reported | | Adjustment | | As Revised |
| | | | | | | | | | | | |
Income tax expense | | $ | (1,562 | ) | | $ | 679 |
| | $ | (2,241 | ) | | $ | (9,884 | ) | | $ | 679 |
| | $ | (10,563 | ) |
Net income | | 897 |
| | 679 |
| | 218 |
| | 8,828 |
| | 679 |
| | 8,149 |
|
Net income per common share: | �� | | | | | | | | | | | |
Basic | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.04 |
| | $ | — |
| | $ | 0.04 |
|
Diluted | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.04 |
| | $ | — |
| | $ | 0.04 |
|
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2016 | | September 30, 2016 |
| | As Reported | | Adjustment | | As Revised | | As Reported | | Adjustment | | As Revised |
| | | | | | | | | | | | |
Income tax expense | | $ | (1,501 | ) | | $ | 2,038 |
| | $ | (3,539 | ) | | $ | (11,385 | ) | | $ | 2,717 |
| | $ | (14,102 | ) |
Net income | | 9,078 |
| | 2,038 |
| | 7,040 |
| | 17,906 |
| | 2,717 |
| | 15,189 |
|
Net income per common share: | | | | | | | | | | | | |
Basic | | $ | 0.04 |
| | $ | 0.01 |
| | $ | 0.03 |
| | $ | 0.08 |
| | $ | 0.01 |
| | $ | 0.07 |
|
Diluted | | $ | 0.04 |
| | $ | 0.01 |
| | $ | 0.03 |
| | $ | 0.08 |
| | $ | 0.01 |
| | $ | 0.07 |
|
| | | | | | | | | | | | |
| | Three Months Ended | | Year Ended |
| | December 31, 2016 | | December 31, 2016 |
| | As Reported | | Adjustment | | As Revised | | As Reported | | Adjustment | | As Revised |
| | | | | | | | | | | | |
Income tax expense | | $ | (1,553 | ) | | $ | 2,039 |
| | $ | (3,592 | ) | | $ | (12,938 | ) | | $ | 4,756 |
| | $ | (17,694 | ) |
Net income | | 1 |
| | 2,039 |
| | (2,038 | ) | | 17,907 |
| | 4,756 |
| | 13,151 |
|
Net income per common share: | | | | | | | | | | | | |
Basic | | $ | — |
| | $ | 0.01 |
| | $ | (0.01 | ) | | $ | 0.08 |
| | $ | 0.02 |
| | $ | 0.06 |
|
Diluted | | $ | — |
| | $ | 0.01 |
| | $ | (0.01 | ) | | $ | 0.08 |
| | $ | 0.02 |
| | $ | 0.06 |
|
The Company recorded goodwill of $212,440 which is attributable to the Business 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. In addition, the Company incurred and expensed acquisition related transaction costs included in general and administrative expense related to the acquisition of NewVoiceMedia of $149 for three months ended March 31, 2019.
Supplemental Pro Forma Information (unaudited)
The following supplemental pro forma information represents the results of operations if Vonage had acquired NewVoiceMedia on January 1, 2018.
|
| | | |
| Three months Ended |
| March 31, 2018 |
Revenue | $ | 270,999 |
|
Net income | 7,475 |
|
Earnings per share - basic | $ | 0.03 |
|
Earnings per share - diluted | $ | 0.03 |
|
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 NewVoiceMedia. 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.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 4. Earnings Per Share
Acquisition of TokBox
On August 1, 2018, the Company acquired 100% of the issued and outstanding shares of Telefonica Digital, Inc. (“TDI”), a subsidiary of Telefonica, S.A., and TDI’s subsidiaries, TokBox, Inc. (“TokBox”) and TokBox Australia Pty Limited, for a purchase price of $32,906 paid in cash. San Francisco-based TokBox develops and operates the OpenTok Platform and 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 followingacquisition 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 initial accounting for the business combination is not complete because the evaluation necessary to assess the fair value of certain net assets acquired is still in process. The provisional amounts are subject to revision until the evaluations are completed to the extent that additional information is obtained about the facts and circumstances that existed as of the acquisition date. The allocation of the purchase price may be modified up to one year from the date of the acquisition as more information is obtained about the fair value of assets acquired and liabilities assumed.
The table sets forthbelow summarizes the computationTokBox 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 |
|
Net assets acquired | $ | 32,906 |
|
The Company recorded goodwill of $20,650 which is attributable to the Business segment and is deductible for basictax 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. In addition, the Company incurred and diluted earnings per shareexpensed acquisition related transaction costs included in general and administrative expense related to the acquisition of TokBox of $42 for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Numerator | | | | (revised) (1) | | | | (revised) (1) |
Net income | | $ | 10,602 |
| | $ | 7,040 |
| | $ | 21,340 |
| | $ | 15,189 |
|
Denominator | | | | | | | | |
Basic weighted average common shares outstanding | | 227,943 |
| | 217,000 |
| | 223,956 |
| | 214,872 |
|
Dilutive effect of stock options and restricted stock units | | 14,777 |
| | 17,868 |
| | 18,596 |
| | 12,627 |
|
Diluted weighted average common shares outstanding | | 242,720 |
| | 234,868 |
| | 242,552 |
| | 227,499 |
|
Basic earnings per share | | | | | | | | |
Basic earnings per share | | $ | 0.05 |
| | $ | 0.03 |
| | $ | 0.10 |
| | $ | 0.07 |
|
Diluted earnings per share | | | | | | | | |
Diluted earnings per share | | $ | 0.04 |
| | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.07 |
|
(1) see Note 3. Correction of Prior Period Financial Statements
For the three and nine months ended September 30, 2017 and 2016, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:March 31, 2019.
|
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Restricted stock units | | 4,938 |
| | 8,130 |
| | 2,458 |
| | 11,120 |
|
Stock options | | 5,362 |
| | 9,766 |
| | 4,023 |
| | 12,017 |
|
| | 10,300 |
| | 17,896 |
| | 6,481 |
| | 23,137 |
|
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 5. Long-Term Note and Revolving Credit FacilitySupplemental Pro Forma Information
This footnote should be read in conjunction withThe following supplemental pro forma information represents the complete descriptionresults of our financing arrangements under Note 6, Long-Term Debt and Revolving Credit Facility to our Annual Reportoperations as if Vonage had acquired TokBox on Form 10-K for the year ended December 31, 2016.
A schedule of long-term note and revolving credit facility at September 30, 2017 and December 31, 2016 is as follows:January 1, 2018.
|
| | | |
| Three Months Ended |
| March 31, 2018 |
Revenue | $ | 256,165 |
|
Net income | 17,014 |
|
Earnings per share - basic | $ | 0.07 |
|
Earnings per share - diluted | $ | 0.07 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
2.50-3.25% Term note - due 2020, net of debt related costs | $ | 77,361 |
| | $ | 91,124 |
|
2.50-3.25% Revolving credit facility - due 2020 | 182,000 |
| | 209,000 |
|
Total Long-term note and revolving credit facility | $ | 259,361 |
| | $ | 300,124 |
|
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.
Goodwill
2016 Financing
On June 3, 2016, we entered into Amendment No. 1 to the Amended and Restated Credit Agreement (the “2016 Credit Facility”) consisting of a $125.0 million term note and a $325.0 million revolving credit facility. The co-borrowers under the 2016 Credit Facility are the Company and Vonage America Inc., the Company’s wholly owned subsidiary. Obligations under the 2016 Credit Facility are guaranteed, fully and unconditionally, by the Company’s other United States material subsidiaries and are secured by substantially all of the assets of each borrower and each guarantor.
We used $197.8 million of the net available proceeds of the 2016 Credit Facility to retire all of the debt under our prior credit facility. We used $179.0 million from our 2016 Credit Facility in connection with the acquisition of Nexmo on June 3, 2016. Remaining proceedsCompany's goodwill is derived primarily from the term noteacquisitions of Vocalocity, Telesphere, iCore, Simple Signal, Nexmo, TokBox, and the undrawn revolving credit facility under the 2016 Credit Facility will be used for general corporate purposes. During the nine months ended September 30, 2017, we made mandatory repayments of $14.1 million under the term note and made discretionary repayments of $42.0 million under the revolving credit facility, respectively, and borrowed $15.0 million under the revolving credit facility. In addition, the effective interest rate was 4.25% as of September 30, 2017.
Interest Rate Swap
On July 14, 2017, we executed on three interest rate swap agreements in order to hedge the variability of expected future cash interest payments related to the 2016 Credit Facility. The swaps have an aggregate notional amount of $150 million and were effective on July 31, 2017 through June 3, 2020 concurrent with the term of the 2016 Credit Facility. Under the swaps our interest rate is fixed at 4.7%. The interest rate swapsNewVoiceMedia which are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging.
As of September 30, 2017, the fair market value of the swaps was $197, which is included in other assets and accumulated OCI on the face of our consolidated balance sheet. As of September 30, 2017, the critical termsCompany's Business segment. The following table provides a summary of the swap agreements have not changed and therefore, there is no ineffectiveness to be recorded and all changes in the fair valuecarrying amounts of the interest rate swaps are recorded in accumulated OCI. The following table summarizes the effects of ASC 815 on the Company's accumulated OCI balance attributable to cash flow derivatives:goodwill:
|
| | | | |
Balance at December 31, 2018 | | $ | 598,499 |
|
Increase in goodwill related to measurement period adjustments to initial acquisition accounting of NewVoiceMedia | | 1,448 |
|
Foreign currency translation adjustment | | 2,354 |
|
Balance at March 31, 2019 | | $ | 602,301 |
|
|
| | | | |
| | Three and Nine Months Ended |
| | September 30, |
| | 2017 |
| | |
Accumulated OCI beginning balance | | $ | — |
|
Mark-to-market of cash flow hedge accounting contracts | | 197 |
|
Accumulated OCI ending balance | | $ | 197 |
|
Gains expected to be realized from accumulated OCI during the next 12 months | | $ | — |
|
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 5. (Loss)/Earnings Per Share
The following table sets forth the computation for basic and diluted (loss)/earnings per share for the three months ended March 31, 2019 and 2018:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Numerator | | | | |
Net (loss)/income | | $ | (534 | ) | | $ | 24,524 |
|
Denominator | | | | |
Basic weighted average common shares outstanding | | 240,527 |
| | 233,034 |
|
Dilutive effect of stock options and restricted stock units | | — |
| | 15,447 |
|
Diluted weighted average common shares outstanding | | 240,527 |
| | 248,481 |
|
Basic (loss)/earnings per share | | | | |
Basic (loss)/earnings per share | | $ | — |
| | $ | 0.11 |
|
Diluted (loss)/earnings per share | | | | |
Diluted (loss)/earnings per share | | $ | — |
| | $ | 0.10 |
|
For the three months ended March 31, 2019 and 2018, the following were excluded from the calculation of diluted (loss)/earnings per common share because of their anti-dilutive effects:
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Restricted stock units | | 10,997 |
| | 1,346 |
|
Stock options | | 5,643 |
| | 1,469 |
|
| | 16,640 |
| | 2,815 |
|
Note 6. Common StockIncome Taxes
As
The income tax benefit consisted of September 30, 2017the following:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
(Loss)/income before income taxes | | $ | (10,584 | ) | | $ | 14,254 |
|
Income tax benefit | | 10,050 |
| | 10,270 |
|
Effective tax rate | | (95.0 | )% | | 72.0 | % |
We recognize income tax 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.
For the three months ended March 31, 2019, our effective tax rate was different than the statutory rate primarily due to a discrete period tax benefit of $4,749, which were recognized related to excess tax benefits on equity compensation for the three months ended March 31, 2019.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
For the three months ended March 31, 2018, our effective tax rate was different than the statutory rate due to a permanent adjustment of $6,702 related to the new Global Intangible Low-Taxed Income ("GILTI") tax rules that were enacted as part of tax reform enacted in December 2017. In addition, the Company recorded a discrete period tax benefit of $15,307 which was recognized related to excess tax benefits on equity compensation recognized in the first quarter of 2018.
Uncertain Tax Positions
The Company had uncertain tax benefits of $1,131 and $1,107 as of March 31, 2019 and December 31, 2016, the2018, respectively. The Company had 596,950 shares of common stock authorizedrecognizes interest and had 10,318 shares available for grants under our share-based compensation programs as of September 30, 2017. For a detailed description of our share-based compensation programs referpenalties related to Note 9, Employee Benefit Plansuncertain tax benefits in our Annual Report on Form 10-Kincome tax expense. The Company did not incur any interest expense or penalties for the year ended December 31, 2016.
Common Stock Repurchases
On December 9, 2014, Vonage's Board of Directors authorized a program for the Company to repurchase up to $100.0 million of its outstanding common stock (the "2014 $100.0 million repurchase program"). Repurchases under the 2014 $100.0 million repurchase program are expected to be made over a four-year period ending on December 31, 2018.
We repurchased the following shares of common stock with cash resources under the 2014 $100.0 million repurchase program during the three and nine months ended September 30, 2017March 31, 2019 and 2016:March 31, 2018, respectively. The following table reconciles the total amounts of uncertain tax benefits:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Balance as of January 1 | $ | 1,107 |
| | $ | 1,086 |
|
Increase due to current year positions | — |
| | 1,107 |
|
Decrease due to prior year positions | — |
| | (1,086 | ) |
Increase due to foreign currency fluctuation | 24 |
| | — |
|
Uncertain tax benefits as of the end of the period | $ | 1,131 |
| | $ | 1,107 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Shares of common stock repurchased | — |
| | — |
| | 1,599 |
| | 7,400 |
|
Value of common stock repurchased | $ | — |
| | $ | — |
| | $ | 9,510 |
| | $ | 32,762 |
|
Net Operating Loss Carry Forwards ("NOLs")As of September 30, 2017, $42,533 remainedMarch 31, 2019, the Company has U.S. Federal and state NOL carryforwards of our 2014 $100.0 million repurchase program. The repurchase program expires on December 31, 2018 but may be suspended or discontinued$578,522 and $245,403, respectively, which expire at any time without notice.various times through 2037. In addition, we have NOLs for United Kingdom tax purposes of $162,535 with no expiration date.
In any period under the 2014 $100.0 million repurchase program, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 7. Long-Term Note and Revolving Credit Facility
This footnote should be read in conjunction with the complete description of our financing arrangements under Note 7, Long-Term Debt and Revolving Credit Facility to our Annual Report on Form 10-K for the year ended December 31, 2018.
A schedule of long-term note and revolving credit facility at March 31, 2019 and December 31, 2018 is as follows:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Term note - due 2023, net of debt related costs | $ | 81,765 |
| | $ | 84,228 |
|
Revolving credit facility - due 2023 | 466,500 |
| | 425,000 |
|
Total Long-term note and revolving credit facility | $ | 548,265 |
| | $ | 509,228 |
|
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.
The Company used $232,000 of the proceeds available under our 2018 Credit Facility plus cash on hand to retire all of the debt outstanding under our 2016 Credit Facility and to cover transaction fees and expenses. Total transaction fees and expense incurred were $3,376, of which $474 was allocated to the term note and $2,813 was allocated to the revolving credit facility which will be amortized over the term of 2018 Credit Facility. The remaining $89 of transaction fees and expenses were expensed during the year ended December 31, 2018. The Company recognized a loss on extinguishment of debt of $14 which primarily consisted of the write off of previously deferred financing costs partially offset by the realization of a portion of gains associated with the interest rate swaps included in accumulated other comprehensive income during the year ended December 31, 2018. Remaining proceeds available from the undrawn revolving credit facility under our 2018 Credit Facility will be used for general corporate purposes and to fund potential additional acquisitions.
During the three months ended March 31, 2019, we made mandatory repayments of $2.5 million under the 2018 term note and borrowed $41.5 million under the revolving credit facility. In addition, the effective interest rate was 5.25% as of March 31, 2019.
As of March 31, 2019, we were in compliance with all covenants, including financial covenants, for the 2018 Credit Facility.
2016 Financing
During the three months ended March 31, 2018, we made mandatory repayments of $4.7 million under the term note and made discretionary repayments of $5.0 million under the revolving credit facility and borrowed $10.0 million under the revolving credit facility.
Interest Rate Swaps
On July 14, 2017, we executed on three interest rate swap agreements in order to hedge the variability of expected future cash interest payments related to the 2016 Credit Facility. The swaps have an aggregate notional amount of $150 million and were effective from July 31, 2017 through June 3, 2020 concurrent with the term of the 2016 Credit Facility. 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.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
As of March 31, 2019 and December 31, 2018, the fair market value of the swaps was $1,278 and $1,859, respectively, which is included in other assets on our condensed consolidated balance sheet. The following table summarizes the effects of ASC 815 on the Company's accumulated OCI balance attributable to cash flow derivatives:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
| | | | |
Accumulated OCI beginning balance | | $ | 975 |
| | $ | 965 |
|
Reclassified from accumulated OCI to income: | | | | |
Due to reclassification of previously deferred gain | | (133 | ) | | — |
|
Change in fair value of cash flow hedge accounting contracts, net of tax | | (554 | ) | | 780 |
|
Accumulated OCI ending balance, net of tax benefit of $365 and $622, respectively | | $ | 288 |
| | $ | 1,745 |
|
Gains expected to be reclassified from accumulated OCI during the next 12 months | | $ | 531 |
| | $ | — |
|
Note 8. Leases
The Company entered into various operating lease agreements 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, some of which provide the Company options to extend the leases for terms up to 5 years beyond the original term.
During the three months ended March 31, 2019, the Company incurred operating lease expense of $3,941 related to its operating leases. Additionally, the remaining weighted average lease term for our operating leases was 6.79 years and the weighted average discount rate utilized to measure the Company's operating leases was 5.22% as of March 31, 2019.
Supplemental cash flow related to the Company's operating leases is as follows:
|
| | | |
| Three Months Ended |
| March 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 4,352 |
|
| |
Right-of-use assets obtained in exchange for lease obligations: | |
Operating leases | $ | — |
|
Maturities of lease liabilities as of March 31, 2019 are as follows:
|
| | | |
2019 (excluding the three months ended March 31, 2019) | $ | 16,474 |
|
2020 | 13,245 |
|
2021 | 9,761 |
|
2022 | 5,988 |
|
2023 | 5,415 |
|
Thereafter | 21,573 |
|
Total lease payments | 72,456 |
|
Less imputed interest | (11,565 | ) |
Total | $ | 60,891 |
|
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Minimal rental commitments under non-cancelable operating leases in effect as of December 31, 2018 were as follows (as calculated under ASC 840, Leases):
|
| | | |
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 9. Common Stock
As of March 31, 2019 and December 31, 2018, the Company had 596,950 shares of common stock authorized and had 2,410 shares available for grants under our share-based compensation programs as of March 31, 2019. For a detailed description of our share-based compensation programs refer to Note 10, Employee Stock Benefit Plans in our Annual Report on Form 10-K for the year ended December 31, 2018. The following table reflects the changes in the Company's common stock issued and outstanding:
|
| | | | | | | | |
(in thousands) | Issued | | Treasury | | Outstanding |
Balance at December 31, 2017 | 298,174 |
| | (67,235 | ) | | 230,939 |
|
Shares issued under the 2015 Equity Incentive Plan | 8,366 |
| | — |
| | 8,366 |
|
Employee taxes paid on withholding shares | — |
| | (2,416 | ) | | (2,416 | ) |
Balance at March 31, 2018 | 306,540 |
| | (69,651 | ) | | 236,889 |
|
| | | | | |
Balance at December 31, 2018 | 309,736 |
| | (69,993 | ) | | 239,743 |
|
Shares issued under the 2015 Equity Incentive Plan | 4,497 |
| | — |
| | 4,497 |
|
Employee taxes paid on withholding shares | — |
| | (1,864 | ) | | (1,864 | ) |
Balance at March 31, 2019 | 314,233 |
| | (71,857 | ) | | 242,376 |
|
Note 10. Commitments and Contingencies
Litigation
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 thesuch 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.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Litigation
IP Matters
RPost Holdings, Inc.On August 24, 2012, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited (collectively, “RPost”) filed a lawsuit against StrongMail Systems, Inc. (“StrongMail”) in the United States District Court for the Eastern District of Texas alleging that StrongMail’s products and services, including its electronic mail marketing services, are covered by United States Patent Nos. 8,224,913, 8,209,389, 8,161,104, 7,966,372, and 6,182,219. On February 11, 2013, RPost filed an amended complaint, adding 27 new defendants, including Vonage America Inc. RPost’s amended complaint alleges willful infringement of the RPost patents by Vonage and each of the other new defendants because they are customers of StrongMail. StrongMail has agreed to fully defend and indemnify Vonage in this lawsuit. Vonage answered the complaint on May 7, 2013. On September 17, 2015, the Court ordered the consolidation for pre-trial purposes of this case with other cases by RPost. The lead case has been administratively closed and stayed since January 30, 2014 due to multiple pending actions by third parties regarding ownership of the patents at issue. On September 1, 2017, the parties in the consolidated actions filed a joint notice regarding status of the co-pending actions. Plaintiffs requested that the stay be lifted, while defendants maintain that the stay should remain in place.
AIP Acquisition LLC. On January 3, 2014, AIP Acquisition LLC (“AIP”), filed a lawsuit against Vonage Holdings Corp., Vonage America, Inc., and Vonage Marketing LLC in the U.S. District Court for the District of Delaware alleging that Vonage’s products and services are covered by United States Patent No. 7,269,247. Vonage filed an answer and counterclaims on February 25, 2014. AIP filed an amended complaint on March 18, 2014, which Vonage answered on April 4, 2014. On April 8, 2014, the Court stayed the case pending final resolution of non-party Level 3’s inter partes review request of United States Patent No. 7,724,879, which is a continuation of the ‘247 patent. On October 8, 2014, the Patent Office issued a Final Written Decision, finding all challenged claims of the ‘879 patent to be invalid. On November 10, 2015, the Federal Circuit rejected AIP’s appeal and affirmed the Patent Office’s rejection of the ‘879 patent.
Cisco petitioned for inter partes review of the ‘247 patent on November 25, 2014, which was granted on May 20, 2015. On May 18, 2016, the Patent Office issued a Final Written Decision, finding all challenged claims of the ‘247 patent to be invalid. AIP appealed to the Federal Circuit, filing its opening brief on December 15, 2016. On December 20, 2016, the Patent Office filed a notice of intervention in the appellate proceedings. Briefing on the appeal is complete, and oral argument was held on October 3, 2017.
Commercial Litigation
Merkin & Smith, et al. On September 27, 2013, Arthur Merkin and James Smith filed a putative class action lawsuit against Vonage America, Inc. in the Superior Court of the State of California, County of Los Angeles, alleging that Vonage violated California’s Unfair Competition Law by charging its customers fictitious 911 taxes and fees. On October 30, 2013, Vonage filed a notice removing the case to the United States District Court for the Central District of California. On November 26, 2013, Vonage filed its Answer to the Complaint. On December 4, 2013, Vonage filed a Motion to Compel Arbitration, which the Court denied on February 4, 2014. On March 5, 2014, Vonage appealed that decision to the United States Court of Appeals for the Ninth Circuit. On March 26, 2014, the district court proceedings were stayed pending the appeal. On February 29, 2016, the Ninth Circuit reversed the district court’s ruling and remanded with instructions to grant the motion to compel arbitration. On March 22, 2016, Merkin and Smith filed a petition for rehearing. On May 4, 2016, the Ninth Circuit withdrew its February 29, 2016 decision and issued a new order reversing the district court’s order and remanded with instructions to compel arbitration. The Ninth Circuit also declared as moot the petition for rehearing. On June 27, 2016, the lower court stayed the case pending arbitration. A joint status report was filed with the District Court on December 23, 2016. A second joint status report was filed with the District Court on March 23, 2017. A third joint status report was filed with the District Court on June 27, 2017. A fourth joint status report was filed with the District Court on September 26, 2017.
DSA Promotions, LLC v. Vonage America, Inc. On September 28, 2017, DSA Promotions, LLC ("DSA") filed suit in the District Court of Dallas County, Texas, seeking payment of approximately $162 for goods and materials provided by DSA to Vonage. Vonage was served with the Original Petition and Request for Disclosure on October 13, 2017. DSA makes its claim based upon the doctrine of suit on a sworn account, quantum meruit and unjust enrichment. Vonage removed the matter from Dallas County District Court to the United States Federal Court for the Northern District of Texas, Dallas Division, on Monday, November 6, 2017. Vonage's responsive pleadings are due on Monday, November 13, 2017.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Regulation
Telephony services are subject to a broad spectrum of state, federal and federalforeign regulations. Because of the uncertainty over whether Voice over Internet Protocol (“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.
Federal - Net Neutrality
Clear and enforceable The Company continues to monitor federal regulations relating to net neutrality, rules make it more difficult for broadband Internet service providers to block or discriminate against Vonage service. In addition, explicitly applying net neutrality rules to wireless broadband Internet service providers could create greater opportunities for VoIP applications that run on wireless broadband Internet service. In December 2010, the Federal Communications Commission ("FCC") adopted net neutrality rules that applied strong net neutrality rules to wired broadband Internet service providers and limited rules to wireless broadband Internet service providers. On January 14, 2014, the D.C. Circuit Court of Appeals vacated a significant portion of the 2010 rules. On May 15, 2014, the FCC issued a Notice of Proposed Rulemaking (NPRM) proposing new net neutrality rules. After public response to the NPRM, the FCC adopted new neutrality rules on February 26, 2015. These rules prohibit broadband Internet service providers from: (1) blocking or throttling lawful content applications, or services; (2) imposing paid prioritization arrangements; and (3) unreasonably interfering or unreasonably disadvantaging consumers or edge providers. In addition, broadband Internet service providers are required to make certain disclosures regarding their network management practices, network performance, and commercial terms. These net neutrality rules apply the same requirements to wired and wireless broadband Internet service providers. Several parties filed appeals which are pending at the D.C. Circuit Court of Appeals. Oral arguments at the D.C. Circuit Court of Appeals were held on December 4, 2015. On June 14, 2016, the D.C. Circuit of Appeals denied the appeals. Several parties filed a petition for rehearing en banc on July 29, 2016, which was denied on May 1, 2017. On July 2, 2017 Chief Justice John Roberts extended the time within which interested parties could file a petition for a writ of certiorari until September 28, 2017. Multiple interested parties and intervenors filed petitions. The Supreme Court has not yet ruled on the petitions.
Federal - Rural Call Completion Issues
On February 7, 2013, the FCC released a NPRM on rural call completion issues. The NPRM proposed new detailed reporting requirements to gauge rural call completion performance. Rural carriers have argued that VoIP provider call completion performance to rural areas is generally poor. On October 28, 2013, the FCC adopted an order on rural call completion imposing new reporting obligations and restricting certain call signaling practices. The call signaling rules went into effect on January 31, 2014. We filed for extensions of the rules, which the FCC granted, and as of April 17, 2014, we were compliant with the FCC call signaling rules. The effective date for the reporting requirements was April 1, 2015. We could be subject to an FCC enforcement action in the future in the event the FCC took the position that our rural call completion performance is inadequate or we were not compliant with the FCC’s order. On June 22, 2017, the FCC issued a Second Further Notice of Proposed Rulemaking. The FCC has proposed changes to the FCC's rules that allegedly would more effectively address rural call completion problems while reducing burdens on covered providers. Vonage is reviewing and evaluating the FCC's proposed changes.
Federal - NPRM - Number Slamming
On July 13, 2017, the FCC adopted a NPRM regarding ways to protect consumers fromissues, number slamming, 911 access, access to telecommunication equipment and cramming without impeding competition or impairing the abilityservices 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 consumersregulations are likely to switch providers. Vonage is monitoring this NPRM.
Federal - NPRM Toll Free Assignment Modernization
On September 26, 2017 the FCC issued a NPRM regarding the modernization of toll free number assignment. The FCC proposes amending its rules to allow for the use of an auction to assign certain toll free numbers - such as vanitybe similarly enacted and repeater numbers - in order to better promote the equitable and efficient use of numbers (especially as affordedenforced by the opening of the 833 toll free code). Vonage will continue to monitor activity with respect to this NPRM.
Federal - NOI - Enterprise Communications Systems Access to 911
On September 26, 2017, the FCC adopted a Notice of Inquiry ("NOI") with respect to 911 access, routing and location in Enterprise Communication Systems. Vonage will monitor activity related to this NOI.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Federal - Access to Telecommunication Equipment and Services by Persons with Disabilities
At its open meeting scheduled for October 24, 2017, the FCC applied its wireline hearing aid compatibility rules/standards to handsets that provide advanced communication services, which includes interconnected and non-interconnected Voice over IP. The rules include certain coupling and volume control requirements that would allow the handsets to work better for persons with hearing aids. There are also testing and certification requirements, which typically apply to the handset manufacturer. The FCC also adopted a requirement for volume control in wireless handsets. The new rules have a two-year phase in for new phones and do not require the modification to existing handsets.
Federal - Rules and Policies Regarding Caller ID Services
At its open meeting on October 24, 2017, the FCC issued a report and order regarding amendments to the Commission’s rules to exempt threatening calls from current Caller ID blocking roles so that, among other changes, law enforcement and security personnel have timely access to information they need to aid their investigations. The order exempts threatening calls from the CPN privacy rules.
Federal - Part 43 Report and Order
At its open meeting scheduled for October 24, 2017, the FCC issued a report and order based on a March 23, 2017 NPRM to eliminate the filing of annual traffic and revenue reports and streamline circuit capacity reports.
Federal - Number Portability NPRM and NOI
At its open meeting scheduled for October 24, 2017, the FCC released a NPRM that would allow carriers flexibility in conducting number portability database queries to promote nationwide number portability and eliminate the dialing party requirement as it applies to interexchange service. The NOI seeks comments on industry number portability models and how number administration might be improved for more efficient technical, operational, administrative and legal processes. Vonage is monitoring this NPRM and NOI.
State Telecommunications Regulation
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 (“MPUC”) from imposing certain of its regulations on us. The FCC's decision was based on its conclusion that our service is interstate in nature and cannot be separated into interstate and intrastate components. On March 21, 2007, the United States Court of Appeals for the 8th Circuit affirmed the FCC's declaratory ruling preempting state regulation of our service.
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. State regulators continue to probe the limits of federal preemption in their attempts to apply state telecommunications regulation to interconnected VoIP service. On July 16, 2009, the Nebraska Public Service Commission and the Kansas Corporation Commission filed a petition with the FCC seeking a declaratory ruling or, alternatively, adoption of a rule declaring that state authorities may apply universal service funding requirements to nomadic VoIP providers. We participated in the FCC proceedings on the petition. On November 5, 2010, the FCC issued a declaratory ruling that allowed states to assess state USF on nomadic VoIP providers on a going forward basis provided that the states comply with certain conditions to ensure that imposing state USF does not conflict with federal law or policy.
Minnesota - More recently on July 28, 2015, the MPUC found that it has authority to regulate Charter’s fixed, interconnected VoIP service. Charter challenged the MPUC’s order at the U.S. District Court for Minnesota. This challenge is currently pending. In September 2017 amicus briefs were filed in support of the Minnesota PUC's appeal of the Charter decision by AARP, the AARP Foundation, Professor Barbara Cherry, the National Association of Regulatory Utility Commissioners and the national Association of State Consumer Advocates and the Mid-Minnesota Legal Aid.
Arizona - on August 14, 2017, the Arizona Corporation Commission issued an opinion and order with respect to amendments to the Arizona Universal Services Fund. The rulemaking allows for, among other things, the collection of additional USF surcharges in Arizona to fund the E-rate Broadband Special Construction Project Matching Fund Program. The Commission held hearing on September 12 and 13, 2017. Vonage will continue to monitor this rulemaking to determine its effect upon its business activities within Arizona.
We expect that state public utility commissions and state legislators will continue their attempts to apply state telecommunications regulations to nomadic VoIP service.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
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. For a period of time, we did not collect or remit state or municipal taxes (such as sales, excise, utility, use, and ad valorem taxes), fees or surcharges (“Taxes”) on the charges to our customers for our services, except that we historically complied with the New Jersey sales tax. We have received inquiries or demands from a number of state and municipal taxing and 911 agencies seeking payment of Taxes that are applied to or collected from customers of providers of traditional public switched telephone network services. Although we have consistently maintained that these Taxes do not apply to our service for a variety of reasons depending on the statute or rule that establishes such obligations, we are now collecting and remitting sales taxes in certain of those states including a number of states that have changed their statutes to expressly include VoIP. In addition, many states address how VoIP providers should contribute to support public safety agencies, and in those states we remit fees to the appropriate state agencies. We could also be contacted by state or municipal taxing and 911 agencies regarding Taxes that do explicitly apply to VoIP and these agencies could seek retroactive payment of Taxes. As such, we have established reserves of $901$3,380 and $1,763$3,302 as of September 30, 2017March 31, 2019 and December 31, 2016,2018, respectively, as our best estimate of the potential tax exposure for any retroactive assessment.
Note 8. Acquisitions and Dispositions
Sale of Hosted Infrastructure Product Line
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 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 been included within our business segment. As a result of the sale, we recorded a gain of $1,377 within other income for the nine months ended September 30, 2017. This disposal did not represent a strategic shift in operations and, therefore, did not qualify for presentation as discontinued operations.
Acquisition of Nexmo
Nexmo is a global leader in the Communications-Platform-as-a-Service (“CPaaS”) segment of the cloud communications market. Nexmo provides innovative communication application program interfaces (“APIs”) for text messaging and voice communications, allowing developers and enterprises to embed contextual communications into mobile apps, websites and business workflows via text, social media, chat apps and voice.
Pursuant to the Agreement and Plan of Merger dated May 5, 2016 and further amended on June 2, 2016, by and among the Company, Neptune Acquisition Corp., a Delaware corporation and newly formed indirect, wholly owned subsidiary of Vonage (“Merger Sub”), Nexmo, a Delaware corporation, and Shareholder Representative Services LLC, a Colorado limited liability company, as representative of the security holders of Nexmo, on June 3, 2016, Merger Sub, on the terms and subject to the conditions thereof, merged with and into Nexmo, and Nexmo became a wholly owned indirect subsidiary of Vonage.
Under the agreement, Nexmo shareholders received consideration of $231,122, with an additional earn-out opportunity (the "contingent consideration") of up to $20,000 contingent upon Nexmo achieving certain performance targets. Of the consideration, $194,684 (net of cash acquired of $16,094) was paid at close, consisting of $163,093 of cash (net of $16,094 of cash acquired) and 6,823 in shares of Vonage common stock valued at $31,591. The remaining $36,438 of the $231,122 purchase price is in the form of restricted cash, restricted stock and options held by Nexmo management and employees (the "Employee Payout Amount"), subject to vesting requirements over time and to be amortized to compensation expense quarterly until vested. We financed the transaction with $179,000 from our 2016 Credit Facility.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The consideration was allocated to acquisition cost as follows:
|
| | | |
Cash paid at closing (inclusive of cash acquired of $16,094) | $ | 179,186 |
|
Stock paid at closing | 31,591 |
|
Contingent consideration (described below) | 16,472 |
|
Employee Payout Amount (described below) | 4,779 |
|
Acquisition Cost | $ | 232,028 |
|
In addition, Nexmo shareholders were eligible to earn a Variable Payout Amount of up to $20,000, subject to the achievement of certain performance targets during the 12 month period following the closing of the transaction. We estimated using probability weighting that the value of the contingent consideration was $17,840 at the acquisition date and included that amount in acquisition cost at the net present value amount of $16,472. As of December 31, 2016, Nexmo did not achieve the performance targets necessary to earn the Variable Payout Amount but the parties agreed to a $5,000 settlement that the parties were paid in the first quarter of 2017.
In addition, Nexmo management and employees were eligible to earn an Employee Payout Amount of $36,438 attributable to restricted cash, restricted stock and assumed options, of which $4,779 is included in acquisition cost as service had been provided pre-acquisition and $31,659 will be recorded as post-acquisition expense assuming all amounts vest, of which $31,087 is being recognized as compensation expense and $572 related to interest expense as continued employment is a condition of receiving consideration. Pursuant to the merger agreement, $20,372 of the cash consideration and $5,081 of the stock consideration were placed in escrow for unknown liabilities that may have existed as of the acquisition date.
For the nine months ended September 30, 2017, we incurred approximately $28 and for the three and nine months ended September 30, 2016, we incurred approximately $257 and $5,316, respectively, in acquisition related transaction costs, which were recorded in general and administrative expense in the accompanying condensed consolidated statements of income. For the full year 2016, we incurred approximately $5.5 million in acquisition related transaction costs.
The acquisition was accounted for using the acquisition method of accounting under which assets and liabilities of Nexmo were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition has been recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment. The factors that contributed to goodwill include synergies that are specific to our consolidated business, the acquisition of a talented workforce that provides us with expertise in the small and medium business markets, as well as other intangible assets that do not qualify for separate recognition.
The acquisition price was allocated to the tangible and identified intangible assets acquired and liabilities assumed as of the closing date. The fair values assigned to identifiable intangible assets assumed were based on management’s current estimates and assumptions. The accounting for the Nexmo acquisition was completed during the three months ended June 30, 2017, at which point the fair values became final. The table below summarizes the provisional amounts recognized for assets acquired and liabilities assumed as of December 31, 2016 as well as adjustments made through the nine months ended September 30, 2017, when the allocation became final. Measurement period adjustments primarily reflect the tax impact of the acquisition date fair values.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The purchase price was allocated as follows: |
| | | | | | | | | | | |
| Acquisition Date Fair Value as of December 31, 2016 | | Measurement period adjustments | | Revised Acquisition Date Fair Value |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 16,094 |
| | $ | — |
| | $ | 16,094 |
|
Accounts receivable | 8,764 |
| | — |
| | 8,764 |
|
Prepaid expenses and other current assets | 3,507 |
| | — |
| | 3,507 |
|
Total current assets | 28,365 |
| | — |
| | 28,365 |
|
Property and equipment | 757 |
| | — |
| | 757 |
|
Software, net | 242 |
| | — |
| | 242 |
|
Intangible assets | 101,770 |
| | — |
| | 101,770 |
|
Restricted cash | 51 |
| | — |
| | 51 |
|
Total assets acquired | 131,185 |
| | — |
| | 131,185 |
|
| | | | | |
Liabilities | | | | | |
Current liabilities: | | | | | |
Accounts payable | 1,841 |
| | — |
| | 1,841 |
|
Accrued expenses | 9,299 |
| | — |
| | 9,299 |
|
Deferred revenue, current portion | 1,735 |
| | — |
| | 1,735 |
|
Total current liabilities | 12,875 |
| | — |
| | 12,875 |
|
Deferred tax liabilities, net, non-current | 29,355 |
| | (5,482 | ) | | 23,873 |
|
Total liabilities assumed | 42,230 |
| | (5,482 | ) | | 36,748 |
|
| | | | | |
Net identifiable assets acquired | 88,955 |
| | 5,482 |
| | 94,437 |
|
Goodwill | 143,073 |
| | (5,482 | ) | | 137,591 |
|
Total purchase price | $ | 232,028 |
| | $ | — |
| | $ | 232,028 |
|
Identifiable intangible assets recognized in connection with the acquisition included:
|
| | | |
| |
Customer relationships | $ | 85,900 |
|
Developed technologies | 13,768 |
|
Non-compete agreements | 972 |
|
Trade names | 1,130 |
|
| $ | 101,770 |
|
Goodwill
The following table provides a summary of the changes in the carrying amounts of goodwill which is attributable to our business segment:
|
| | | | |
Balance at December 31, 2016 | | $ | 360,363 |
|
Decrease in goodwill related acquisition of Nexmo | | (5,482 | ) |
Currency translation adjustments | | 16,654 |
|
Balance at September 30, 2017 | | $ | 371,535 |
|
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Pro forma financial information
The following unaudited supplemental pro forma information presents the combined historical results of operations of Vonage and Nexmo for the nine months ended September 30, 2016, as if the acquisition had been completed at the beginning of 2016.
|
| | | | |
| | Nine Months Ended |
| | September 30, |
| | 2016 |
Revenues | | $ | 743,083 |
|
Net income | | $ | 12,718 |
|
Earnings per common share - basic | | $ | 0.06 |
|
Earnings per common share - diluted | | $ | 0.05 |
|
The pro forma financial information includes certain adjustments to reflect expenses in the appropriate pro forma periods as though the companies were combined as of the beginning of 2016 and includes the pro-forma impact of amortization of identifiable intangibles assets and interest expense on borrowings under our revolving line of credit utilized to, in part, finance the acquisition. The pro forma data was also adjusted to eliminate non-recurring transaction costs incurred by us as well as the related tax impact. The pro forma results are not necessarily indicative of the results that we would have achieved had the transaction actually occurred on January 1, 2016 and does not purport to be indicative of future financial operating results nor does it reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition.
Note 9.11. 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 information for each of our reportable segments, but does not review operating expenses on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.
Business
For our Business customers, we provide innovative, cloud-based Unified Communications as a Service, or UCaaS solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable Session Initiation Protocol (SIP)SIP based Voice over Internet Protocol, or VoIP network. Through Nexmo, the Vonage API Platform, we also offer Communications Platform as a Service, or CPaaS solutions designed to enhance the way businesses communicate with their customers embedding communications into apps, websites and business processes. Together we have a robust set of product families tailored to serve the full range of the business value chain, from the small and medium business, or 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, Clio, and other CRM solutions. 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.
Consumer
For our Consumer customers, we enable users to access and utilize our UCaaS services and features, via their existing internet connections,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 communicationand messaging services and other features around the world on a variety of devices.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
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,
ProductAccess and product revenues. Product revenues include equipment sold to customers, shipping and handling, professional services, and broadband access.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 Federal Universal Service Fund (“USF”) and related fees.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.
ProductAccess 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.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 Universal Service Fund (“USF”)USF and related fees.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Information about our segment results for the three and nine months ended September 30, 2017March 31, 2019 were as follows:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, 2017 | | September 30, 2017 | March 31, 2019 |
| Business | | Consumer | | Total | | Business | | Consumer | | Total | Business | | Consumer | | Total |
Revenues | | | | | | | | | | | | | | | | |
Service revenues | $ | 109,483 |
| | $ | 111,913 |
| | $ | 221,396 |
| | $ | 305,599 |
| | $ | 346,666 |
| | $ | 652,265 |
| $ | 159,345 |
| | $ | 89,000 |
| | $ | 248,345 |
|
Product revenues (1) | 13,085 |
| | 94 |
| | 13,179 |
| | 39,837 |
| | 498 |
| | 40,335 |
| |
Service and product revenues | 122,568 |
| | 112,007 |
| | 234,575 |
| | 345,436 |
| | 347,164 |
| | 692,600 |
| |
Access and product revenues (1) | | 11,697 |
| | 68 |
| | 11,765 |
|
Service, access and product revenues | | 171,042 |
| | 89,068 |
| | 260,110 |
|
USF revenues | 6,738 |
| | 11,770 |
| | 18,508 |
| | 19,386 |
| | 36,280 |
| | 55,666 |
| 8,555 |
| | 10,876 |
| | 19,431 |
|
Total revenues | 129,306 |
| | 123,777 |
| | 253,083 |
| | 364,822 |
| | 383,444 |
| | 748,266 |
| 179,597 |
| | 99,944 |
| | 279,541 |
|
| | | | | | | | | | | | | | | | |
Cost of revenues | | | | | | | | | | | | | | | | |
Service cost of revenues (2) | 50,777 |
| | 19,434 |
| | 70,211 |
| | 139,218 |
| | 62,969 |
| | 202,187 |
| 69,854 |
| | 9,258 |
| | 79,112 |
|
Product cost of revenues (1) | 12,702 |
| | 1,517 |
| | 14,219 |
| | 38,360 |
| | 5,475 |
| | 43,835 |
| |
Service and product cost of revenues | 63,479 |
| | 20,951 |
| | 84,430 |
| | 177,578 |
| | 68,444 |
| | 246,022 |
| |
Access and product cost of revenues (1) | | 13,871 |
| | 997 |
| | 14,868 |
|
Service, access and product cost of revenues | | 83,725 |
| | 10,255 |
| | 93,980 |
|
USF cost of revenues | 6,738 |
| | 11,770 |
| | 18,508 |
| | 19,386 |
| | 36,280 |
| | 55,666 |
| 8,555 |
| | 10,876 |
| | 19,431 |
|
Total cost of revenues | 70,217 |
| | 32,721 |
| | 102,938 |
| | 196,964 |
| | 104,724 |
| | 301,688 |
| 92,280 |
| | 21,131 |
| | 113,411 |
|
| | | | | | | | | | | | | | | | |
Segment gross margin | | | | | | | | | | | | | | | | |
Service margin | 58,706 |
| | 92,479 |
| | 151,185 |
| | 166,381 |
| | 283,697 |
| | 450,078 |
| 89,491 |
| | 79,742 |
| | 169,233 |
|
Product margin | 383 |
| | (1,423 | ) | | (1,040 | ) | | 1,477 |
| | (4,977 | ) | | (3,500 | ) | |
Gross margin ex-USF (Service and product margin) | 59,089 |
| | 91,056 |
| | 150,145 |
| | 167,858 |
| | 278,720 |
| | 446,578 |
| |
Access and product margin | | (2,174 | ) | | (929 | ) | | (3,103 | ) |
Gross margin ex-USF (Service, access and product margin) | | 87,317 |
| | 78,813 |
| | 166,130 |
|
USF margin | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
Segment gross margin | $ | 59,089 |
| | $ | 91,056 |
| | $ | 150,145 |
| | $ | 167,858 |
| | $ | 278,720 |
| | $ | 446,578 |
| $ | 87,317 |
| | $ | 78,813 |
| | $ | 166,130 |
|
| | | | | | | | | | | | | | | | |
Segment gross margin % | | | | | | | | | | | | | | | | |
Service margin % | 53.6 | % | | 82.6 | % | | 68.3 | % | | 54.4 | % | | 81.8 | % | | 69.0 | % | 56.2 | % | | 89.6 | % | | 68.1 | % |
Gross margin ex-USF (Service and product margin %) | 48.2 | % | | 81.3 | % | | 64.0 | % | | 48.6 | % | | 80.3 | % | | 64.5 | % | |
Gross margin ex-USF (Service, access and product margin %) | | 51.1 | % | | 88.5 | % | | 63.9 | % |
Segment gross margin % | 45.7 | % | | 73.6 | % | | 59.3 | % | | 46.0 | % | | 72.7 | % | | 59.7 | % | 48.6 | % | | 78.9 | % | | 59.4 | % |
(1) Includes customer premise equipment, access, professional services, and shipping and handling.
(2) Excludes depreciation and amortization of $5,053$8,214 and $1,799$1,204 for the three months ended September 30, 2017 and $14,931 and $5,566 for the nine months ended September 30, 2017,March 31, 2019, respectively.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Information about our segment results for the three and ninethree months ended September 30, 2016March 31, 2018 were as follows:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, 2016 | | September 30, 2016 | March 31, 2018 |
| Business | | Consumer | | Total | | Business | | Consumer | | Total | Business | | Consumer | | Total |
Revenues | | | | | | | | | | | | | | | | |
Service revenues | $ | 86,662 |
| | $ | 128,167 |
| | $ | 214,829 |
| | $ | 210,214 |
| | $ | 399,401 |
| | $ | 609,615 |
| $ | 116,302 |
| | $ | 104,394 |
| | $ | 220,696 |
|
Product revenues (1) | 13,618 |
| | 207 |
| | 13,825 |
| | 39,795 |
| | 514 |
| | 40,309 |
| |
Service and product revenues | 100,280 |
| | 128,374 |
| | 228,654 |
| | 250,009 |
| | 399,915 |
| | 649,924 |
| |
Access and product revenues (1) | | 12,531 |
| | 91 |
| | 12,622 |
|
Service, access and product revenues | | 128,833 |
| | 104,485 |
| | 233,318 |
|
USF revenues | 6,029 |
| | 13,676 |
| | 19,705 |
| | 15,832 |
| | 43,102 |
| | 58,934 |
| 7,835 |
| | 12,420 |
| | 20,255 |
|
Total revenues | 106,309 |
| | 142,050 |
| | 248,359 |
| | 265,841 |
| | 443,017 |
| | 708,858 |
| 136,668 |
| | 116,905 |
| | 253,573 |
|
| | | | | | | | | | | | | | | | |
Cost of revenues | | | | | | | | | | | | | | | | |
Service cost of revenues (2) | 34,858 |
| | 24,973 |
| | 59,831 |
| | 72,788 |
| | 77,220 |
| | 150,008 |
| 52,982 |
| | 14,014 |
| | 66,996 |
|
Product cost of revenues (1) | 13,101 |
| | 3,331 |
| | 16,432 |
| | 38,465 |
| | 11,196 |
| | 49,661 |
| |
Service and product cost of revenues | 47,959 |
| | 28,304 |
| | 76,263 |
| | 111,253 |
| | 88,416 |
| | 199,669 |
| |
Access and product cost of revenues (1) | | 14,491 |
| | 1,794 |
| | 16,285 |
|
Service, access and product cost of revenues | | 67,473 |
| | 15,808 |
| | 83,281 |
|
USF cost of revenues | 6,029 |
| | 13,676 |
| | 19,705 |
| | 15,843 |
| | 43,102 |
| | 58,945 |
| 7,840 |
| | 12,446 |
| | 20,286 |
|
Total cost of revenues | 53,988 |
| | 41,980 |
| | 95,968 |
| | 127,096 |
| | 131,518 |
| | 258,614 |
| 75,313 |
| | 28,254 |
| | 103,567 |
|
| | | | | | | | | | | | | | | | |
Segment gross margin | | | | | | | | | | | | | | | | |
Service margin | 51,804 |
| | 103,194 |
| | 154,998 |
| | 137,426 |
| | 322,181 |
| | 459,607 |
| 63,320 |
| | 90,380 |
| | 153,700 |
|
Product margin | 517 |
| | (3,124 | ) | | (2,607 | ) | | 1,330 |
| | (10,682 | ) | | (9,352 | ) | |
Gross margin ex-USF (Service and product margin) | 52,321 |
| | 100,070 |
| | 152,391 |
| | 138,756 |
| | 311,499 |
| | 450,255 |
| |
Access and product margin | | (1,960 | ) | | (1,703 | ) | | (3,663 | ) |
Gross margin ex-USF (Service, access and product margin) | | 61,360 |
| | 88,677 |
| | 150,037 |
|
USF margin | — |
| | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) | (5 | ) | | (26 | ) | | (31 | ) |
Segment gross margin | $ | 52,321 |
| | $ | 100,070 |
| | $ | 152,391 |
| | $ | 138,745 |
| | $ | 311,499 |
| | $ | 450,244 |
| $ | 61,355 |
| | $ | 88,651 |
| | $ | 150,006 |
|
| | | | | | | | | | | | | | | | |
Segment gross margin % | | | | | | | | | | | | | | | | |
Service margin % | 59.8 | % | | 80.5 | % | | 72.1 | % | | 65.4 | % | | 80.7 | % | | 75.4 | % | 54.4 | % | | 86.6 | % | | 69.6 | % |
Gross margin ex-USF (Service and product margin %) | 52.2 | % | | 78.0 | % | | 66.6 | % | | 55.5 | % | | 77.9 | % | | 69.3 | % | |
Gross margin ex-USF (Service, access and product margin %) | | 47.6 | % | | 84.9 | % | | 64.3 | % |
Segment gross margin % | 49.2 | % | | 70.4 | % | | 61.4 | % | | 52.2 | % | | 70.3 | % | | 63.5 | % | 44.9 | % | | 75.8 | % | | 59.2 | % |
(1) Includes customer premise equipment, access, professional services, and shipping and handling.
(2) Excludes depreciation and amortization of $5,015$4,973 and $2,445$1,461 for the three months ended September 30, 2016 and $13,807 and $7,471 for nine months ended September 30, 2016, respectivelyMarch 31, 2018, respectively.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
A reconciliation of the total of the reportable segments' gross margin to consolidated income before provision for income taxes is as follows:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, | | September 30, | March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
Total reportable gross margin | $ | 150,145 |
| | $ | 152,391 |
| | $ | 446,578 |
| | $ | 450,244 |
| $ | 166,130 |
| | $ | 150,006 |
|
Sales and marketing | 73,576 |
| | 83,731 |
| | 235,245 |
| | 246,676 |
| 95,523 |
| | 77,136 |
|
Engineering and development | 6,956 |
| | 8,075 |
| | 21,996 |
| | 22,152 |
| 16,526 |
| | 10,820 |
|
General and administrative | 26,811 |
| | 27,538 |
| | 98,411 |
| | 89,261 |
| 35,459 |
| | 27,582 |
|
Depreciation and amortization | 18,179 |
| | 18,018 |
| | 54,520 |
| | 53,215 |
| 21,214 |
| | 16,800 |
|
Income from operations | 24,623 |
| | 15,029 |
| | 36,406 |
| | 38,940 |
| |
(Loss)/Income from operations | | (2,592 | ) | | 17,668 |
|
| | | | | | | | | | |
Interest income | 3 |
| | 19 |
| | 12 |
| | 65 |
| |
Interest expense | (3,821 | ) | | (3,974 | ) | | (11,385 | ) | | (9,477 | ) | (7,576 | ) | | (3,161 | ) |
Other income (expense), net | 465 |
| | (495 | ) | | 931 |
| | (237 | ) | (416 | ) | | (253 | ) |
Income before income taxes | $ | 21,270 |
| | $ | 10,579 |
| | $ | 25,964 |
| | $ | 29,291 |
| |
(Loss)/Income before income taxes benefit | | $ | (10,584 | ) | | $ | 14,254 |
|
Information about our operations by geographic location is as follows:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Long-lived assets: | | | |
United States | $ | 585,276 |
| | $ | 596,820 |
|
United Kingdom | 372,220 |
| | 366,594 |
|
Israel | 2,082 |
| | 1,688 |
|
| $ | 959,578 |
| | $ | 965,102 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Revenues: | | | | | | | |
United States | $ | 212,346 |
| | $ | 220,262 |
| | $ | 639,852 |
| | $ | 655,350 |
|
Canada | 6,877 |
| | 6,878 |
| | 23,324 |
| | 19,491 |
|
United Kingdom | 7,175 |
| | 5,021 |
| | 15,419 |
| | 12,636 |
|
Other Countries (1) | 26,685 |
| | 16,198 |
| | 69,671 |
| | 21,381 |
|
| $ | 253,083 |
| | $ | 248,359 |
| | $ | 748,266 |
| | $ | 708,858 |
|
(1) No individual other international country represented greater than 10% of total revenue during the periods presented.
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Long-lived assets: | | | |
United States | $ | 621,750 |
| | $ | 629,269 |
|
United Kingdom | 392 |
| | 450 |
|
Israel | 249 |
| | 286 |
|
| $ | 622,391 |
| | $ | 630,005 |
|
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 10. Income Taxes
Effective Tax Rate
The income tax provision consisted of the following:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended |
| | September 30, | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Income before income taxes | | $ | 21,270 |
| | $ | 10,579 |
| | $ | 25,964 |
| | $ | 29,291 |
|
Income tax expense | | (10,668 | ) | | (3,539 | ) | | (4,624 | ) | | (14,102 | ) |
Effective tax rate | | 50.2 | % | | 33.5 | % | | 17.8 | % | | 48.1 | % |
We recognize income tax expense equal to pre-tax income multiplied by our 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.
For the three and nine months ended September 30, 2017, our effective tax rate was different than the statutory rate due to discrete period tax benefits of $9,539 and $1,433 which were recognized related to excess tax benefits on equity compensation recognized primarily in the first quarter of 2017 as well as an adjustment to our deferred asset related to stock compensation.
For the three and nine months ended September 30, 2016, our effective tax rate was different than the statutory rate due to a discrete period tax expense of $1,220 recorded due to expired stock options recognized in the first quarter of 2016 which was partially offset by $389 which was recorded during the second quarter of 2016 and $661 which was recorded in the third quarter of 2016. The provision also includes the federal alternative minimum tax and state and local income taxes.
We do not have any uncertain tax positions as of September 30, 2017 and December 31, 2016.
Net Operating Loss Carry Forwards ("NOLs")
As of December 31, 2016, we had cumulative domestic Federal NOLs of $575,476 and cumulative state NOLs of $158,848, expiring at various times from years ending 2017 through 2036. In addition, we had NOLs for United Kingdom tax purposes of $43,006 with no expiration date. In connection with the completion of our accounting of the acquisition of Nexmo, we adjusted our cumulative domestic Federal NOLs to $585,622 as of September 30, 2017 and did not impact our cumulative state NOLs or the United Kingdom.
On June 8, 2017, at the Vonage 2017 annual meeting of stockholders, stockholders ratified the extension of the Tax Benefits Preservation Plan ("Preservation Plan") through June 30, 2019. Refer to Note 8, Common Stock to our Annual Report on Form 10-K for the year ended December 31, 2016 for a complete description of the Preservation Plan.
|
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K. This discussion contains forward-looking statements. These forward-looking statements are based on information available at the time the statements are made and/or management’s belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: the competition we face; the expansion of competition in the cloud communications market; risks related to the acquisition or integration of businesses we have acquired; our ability to adapt to rapid changes in the cloud communications market; the nascent state of the cloud communications for business market; our ability to retain customers and attract new customers;customers cost-effectively; the risk associated with developing and maintaining effective internal sales teams and effective distribution channels; risks related to the acquisition or integration of businesses we have acquired; security breaches and other compromises of information security; risks associated with sales of our services to medium-sized and enterprise customers; our reliance on third partythird-party hardware and software; our dependence on third partythird-party facilities, equipment, systems and services; system disruptions or flaws in our technology and systems; our ability to comply with data privacy and related regulatory matters; our ability to scale our business and grow efficiently; our dependence on third party vendors; the impact of fluctuations in economic conditions, particularly on our small and medium business customers; our ability to comply with data privacy and related regulatory matters; our ability to obtain or maintain relevant intellectual property licenses; failurelicenses or to protect our trademarks and internally developed software; restrictions in our debt agreements that may limit our operating flexibility; our ability to obtain additional financing if required; fraudulent use of our name or services; intellectual property and other litigation that have been and may be brought against us; reliance on third parties for our 911 services; uncertainties relating to regulation of VoIPbusiness services; risks associated with legislative, regulatory or judicial actions regarding our CPaaSbusiness products; the impact of governmental export controls or sanctions on our CPaaS products; our ability to establish and expand strategic alliances; risks associated with operating abroad; risks associated with the taxation of our business; risks associated with a material weakness in our internal controls; our dependence upon key personnel; governmental regulation and taxes in our international operations; liability under anti-corruption laws;laws or from governmental export controls or economic sanctions; our dependence on our customers' existingunimpeded access to broadband connections; differences between our services and traditional telephone service; restrictions in our debt agreements that may limit our operating flexibility; foreign currency exchange risk; the market for our stock; our ability to obtain additional financing if required; any reinstatement of holdbacks by our credit card processors; our history of net losses and ability to achieve consistent profitability in the future; our ability to fully realize the benefits of our net operating loss carry-forwards if an ownership change occurs; certain provisions of our charter documents and other factors that are set forth in the “Risk Factors” in our Annual Report on Form 10-K and in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K.10-Q. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to the date this Form 10-Q is filed with the Securities and Exchange Commission.
Financial Information Presentation
For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share per line and per seatline amounts, dollar amounts are presented in thousands, except where noted. All trademarks are the property of their owners.
Overview and Strategy
At Vonage, our strategy is to redefine business communications. True to our roots as a technology disruptor, we are embracing technology to transform how businesses communicate to create better business outcomes. Our cloud communications platform enables businesses of all sizes to collaborate more productively and engage their customers more efficiently across any device.
We believe we have a unique set of capabilities and solutions to deliver on the full business communications value chain to help enterprises use cloud communications to improve how business gets done. Vonage offers a unique combination of unified communications, programmable communications and contact center to transform the way businesses communicate all on one platform. We build integrated solutions through programmable communications, complementing and adding more value and customizations to unified communications as a service and cloud contact center solutions.
The OneVonage microservices platform creates specific tools customers need to address the unique communication challenges their businesses face. All of our cloud communications solutions are designed to provide employees with the tools they need to connect, collaborate and be more productive internally while enabling them to engage with customers externally for a better customer experience and more meaningful relationships.
We also provide a robust set 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.
Our business is organized under two reportable segments, Business and Consumer. Additional discussion of our reportable segments is included in Note 11, Industry Segment and Geographical Information to the Consolidated Financial Statements.
Segment Overview
We are a leading provider of cloud communications services for businesses and consumers. Our business services transform 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 Vonage Business as a subscription through our Applications Group offering our UCaaS and CCaaS and they can buy our Vonage API Platform and consume our cloudwhich consists of a broad set of programmable communication as a service product as programmable modules, delivered via application program interfaces.APIs. We also provide a robust suite of feature-rich residential communication solutions.
Business
For our Business customers, we provide innovative, cloud-based Unified Communications as a Service, or UCaaS, solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable Session Initiation Protocol (SIP) based Voice over Internet Protocol, or VoIP, network. Through our acquisition of Nexmo in 2016, weWe also offer CPaaS solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. In August 2018, the Company completed the acquisition of TokBox which added video functionality to the CPaaS suite of services available to its customers. 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. We have a robust set of product families tailored to serve the full range of the business value chain, from the small and medium business, or 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.
Our Business strategy is With our ability to supportintegrate these cloud-based, workplace tools, Vonage integrates the full range ofentire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers using two product families: Vonage Essentials, based onthat CPaaS provides. When combined with our proprietary call processing platform that is purpose-built for SMB and mid-market customers; and Vonage Premier, based on Broadsoft’s call processing platform in combination with other Vonage cloud based solutions, which serves larger customers, from mid-market businesses through large enterprises. We also organized our salesforce to address the full business market. We believe operating two platforms at scale enables us to deliver the right products and solutions to address the needs of diverse customers while maximizing our subscriber economics, regardless of segment served. Revenues are generated primarily through the sale of subscriptions for our UCaaS services. Our revenue generation efforts are focused on customer acquisition and retentionMPLS network, as well as providing additionalvoice services over customers' broadband networks via our SmartWan solution, we create a differentiated offering. On October 31, 2018, the Company completed the acquisition of NewVoiceMedia, a leading provider of Contact Center as a Service, or CCaaS, solutions allowing the Company to compliment its existing customers as they grow and scale.
Our diverse customer base spans a wide varietysuite of industries, including manufacturing, automotive, legal, information technology, financial services, construction, real estate, engineering, healthcare, and non-profit.
Vonage Essentials. Vonage Essentials customers subscribe to our cloud-based communication services, delivered through our proprietary platform that is purpose-built for SMB and mid-market customers. Essentials provides a cost-effective, scalable, feature-rich solution, delivered over-the-top of a customer’s broadband, typically month-to-month without a commitment. Vonage Essentials is sold primarily through our direct telesales and online channels, and is increasingly sold through our channel partners and field sales teams. We believe the strength of the Vonage brand directly contributes to a lower-cost customer acquisition model and provides attractive subscriber economics.
Vonage Premier. Our Vonage Premier offerings are tailor-made for the large mid-market and enterprise segments. Vonage Premier is a feature-rich/fully managed solution that utilizes Broadsoft Inc.’s ("Broadsoft") enterprise-grade call processing platform, in combination with other cloud services like advanced contact center, video conferencing and speak2dial, and can be provided with high-level quality of service ("QoS"), which is generally delivered over our national MPLS network, with 21 network Points of Presence (POPs) across the country. Vonage can also provide QoS-level quality over-the-top of the customer’s broadband through our Smart-WAN router solution. Customers value our proprietary provisioning and feature-management tool, named Zeus, which enables the rapid deployment of solutions directly by Vonage while giving full visibility to our channel partners and our customers. Further differentiating Vonage is our robust service delivery team comprised of team members specializing in project management, voice and data provisioning, and line number porting. This team is intensely focused on providing an outstanding customer experience, and is rapidly becoming a competitive differentiator.
Our Vonage Premier offering is sold primarily through our channel partners, and our field and enterprise sales teams, and generally requires a three-year contract. We are a preferred provider for many of the largest master agents in the country, harnessing a network of over 20,000 sub agents selling both Vonage Premier and Vonage Essentials. We believe we have one of the largest multi-channel distribution sales platforms in our industry to serve the full range of business customers. We plan to capitalize on the growing adoption of cloud-based communications and collaboration solutions by continuing to expand our salesforce, expand into new markets, and enhance our relationships with existing customers to provide additional functionality and overall business value that can be achieved with our UCaaS platform.
Nexmo, the Vonage API Platform. We are a global leader in the CPaaS segment of the cloud communications market, providing innovative communication APIs for text messaging and voice communications, allowing developers and enterprisesservices available to embed contextual communications into mobile apps, websites and business workflows via text, social media, chat apps and voice. With just few lines of code, developers can send and receive text messages and build programmable voice applications. Nexmo, the Vonage API Platform can scale from one API call to billions. The platform makes it easy for any of our over 200,000 developers to access communication services via software and APIs. Through Nexmo we have a global network of interconnected carriers delivering our API-based communications platform, enabling businesses to communicate with their customers reliably and with ease, no matter where in the world they are located. The addition of our Nexmo products to our Business offering allows our customers to address their full communications needs, from employee to employee communications through business to customer communications.its customers.
Consumer
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 communicationand 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, where we will continue to provide value in domestic and international long distance and target under-served segments.
We generate revenue through the acquisition and retention of Consumer customers. We are focused on optimizing the Consumer business for profitability to improve the strong cash flows of the business. During 2017, we continued our disciplined focus on marketing efficiency by shifting customer acquisition spend to our higher performing channels, improving the quality of customers we acquire and driving lower churn, all of which drive higher customer life-time value. This focus has led to a reallocation of marketing spend to our Business segment.
The result of these initiatives has been to create a strong cash flow business which provides financial stability, as well as cost synergies and structural advantages to our Business segment.
Services outsideOutside of the United States. States
We currently have UCaaS and consumer operations delivering our suite of communication solutions in the United States, United Kingdom, Hong Kong, Singapore, and Canada and believe that our low-cost Internet based communications platformplatforms enables us to cost effectively deliver voice and messaging services to other locations throughout the world. Through Nexmo, we have operations in the United States, United Kingdom, Hong Kong, and Singapore, and provide CPaaS solutions to our customers located in many countries around the world.
We had approximately 2.3 million combined consumer subscriber lines and business seats as of September 30, 2017. Customers in the United States represented 84% of our consolidated revenues at September 30, 2017, with the balance in Canada, the United Kingdom, and other countries. Nexmo has operations in the United States, United Kingdom, Hong Kong, and Singapore, and provides CPaaS solutions to our customers located in many countries around the world.
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.
Competitive landscape. We face intense competition from traditional telephone companies, wireless companies, cable companies, and alternative communication providers. Most traditional wireline and wireless telephone service providers and cable companies are substantially larger and better capitalized than we are and have the advantage of a large existing customer base. In addition, because our competitors provide other services, they often choose to offer VoIP services or other voice services as part of a bundle that includes other products, such as video, high speed Internet access, and wireless telephone service, which we do not offer. In addition, such competitors may in the future require new customers or existing customers making changes to their service to purchase voice services when purchasing high speed Internet access. Further, as wireless providers offer more minutes at lower prices, better coverage, and companion landline alternative services, their services have become more attractive to households as a replacement for wireline service. We also compete against alternative communication providers, such as Twilio, Ooma, magicJack, Skype, WhatsApp, and Google Voice.providers. Some of these service providers have chosen to sacrifice telephony revenue in order to gain market share and have offered their services at low prices or for free. As we continue to introduce applications that integrate different forms of voice and messaging services over multiple devices, we are facing competition from emerging competitors focused on similar integration, as well as from alternative voice communication providers. In addition, our competitors have partnered and may in the future partner with other competitors to offer products and services, leveraging their collective competitive positions. We also are subject to the risk of future disruptive technologies. In connection with our emphasis on the international long distance market in the United States, we face competition from low-cost international calling cards and VoIP providers in addition to traditional telephone companies, cable companies, and wireless companies, each of which may implement promotional pricing targeting international long distance callers.
Regulation. Our business has developed in a relatively lightly regulated environment. The United States and other countries, however, are examining how VoIP services should be regulated. In particular, state telecommunications regulators continue to try to regulate VoIP service despite the FCC’s 2004 Vonage Preemption Order that preempted state regulation. For example, on July 28, 2015, the Minnesota Public Utility Commission found that it has authority to regulate Charter’s ‘fixed' interconnected VoIP service. In addition to regulatory matters that directly address VoIP, a number of other regulatory initiatives could impact our business. One such regulatory initiative is net neutrality. On February 26, 2015, the FCC adopted strong net neutrality rules. Several parties filed appeals which are pending at the D.C. Circuit Court of Appeals. Oral arguments at the D.C. Circuit Court of Appeals were held on December 4, 2015. On June 14, 2016, the D.C. Circuit of Appeals denied the appeals. Several parties filed a petition for rehearing en banc on July 29, 2016, which was denied on May 1, 2017. See also the discussion under "Regulation" in Note 710 to our financial statements for a discussion of regulatory issues that impact us. On July 2, 2017, Chief Justice John Roberts extended the time within which interested parties could file a petition for a writ of certiorari until September 28, 2017. Multiple interest parties and intervenors filed petitions. The Supreme Court has not yet ruled on the petitions.
Key Operating Data
The table below includes key operating data that our management uses to measure the growth and operating performance of the Business segment:
|
| | | | | | | | | | | | | | | | |
Business | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Revenues (1) | | $ | 129,306 |
| | $ | 106,309 |
| | $ | 364,822 |
| | $ | 265,841 |
|
Average monthly revenues per seat (2) | | $ | 43.53 |
| | $ | 45.50 |
| | $ | 43.70 |
| | $ | 44.96 |
|
Seats (at period end) (2) | | 709,736 |
| | 615,728 |
| | 709,736 |
| | 615,728 |
|
Revenue churn (2) | | 1.2 | % | | 1.4 | % | | 1.3 | % | | 1.4 | % |
|
| | | | | | | | |
Business | | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Service revenue per customer | | $ | 408 |
| | $ | 328 |
|
Business revenue churn | | 1.2 | % | | 1.2 | % |
(1) Includes revenue from CPaaS of $38,364 and $99,780 for the three and nine months ended September 30, 2017, respectively, and $23,909 and$31,607 for the three and nine months ended September 30, 2016, respectively.
(2) UCaaS only.
Revenues. Includes revenues from our business customers from acquired entities and excludes revenues from our legacy business customers.
Average monthlyService Revenue per Customer. Service revenues per seat. Average monthly revenues per seatcustomer for a particular period is calculated by dividing the average monthly service revenues for thatthe period by the simple average number of seats for the period, and dividing the result bycustomers over the number of months in the period. The simple average number of seats for the periodcustomers is the number of seatscustomers on the first day of the period, plus the number of seatscustomers on the last day of the period, divided by two. Our average monthlyService revenues excludes revenues from trading and auction customers. Service revenue per seat decreasedcustomer increased from $45.50 and $44.96$328 for the three and nine months ended September 30, 2016, respectively,March 31, 2018 to $43.53 and $43.70$408 for the three and nine months ended September 30, 2017 dueMarch 31, 2019 primarily driven by the Company's successful efforts to attract larger business customers and to expand services provided to our plan to sell access more selectively and the removal of revenues associated with our Hosted Infrastructure product line which was sold at the end of May 2017.
Seats. Seats include, as of a particular date, all paid seats from which a customer can make an outbound telephone call on that date and virtual seats. Seats exclude electronic fax lines and toll free numbers, which do not allow outbound telephone calls by customers. Seats increased from 615,728 as of September 30, 2016 to 709,736 as of September 30, 2017. This increase is due to continued growth in ourexisting business customers as we have increased marketing investment to attract these more profitable customers.along with the acquisition of NewVoiceMedia and TokBox during the second half of 2018.
Business Revenue Churn. RevenueChurn. Business revenue churn is calculated by dividing the monthly recurring revenue from customers or customer locations that have terminatedbeen confirmed to be foregone during a period by the simple average of the total monthly recurring revenue from all customers in that period. Revenue for purposes of determining Business revenue churn is service revenue excluding revenue from our trading and auction customers, and usage in excess of a given period.customer’s contracted service plan, regulatory fees charged to customers, and credits. The simple average of total monthly recurring revenue from all customers during the period is the total monthly recurring revenue as defined herein on the first day of the period, plus the total monthly recurring 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 business revenue churn data may not be directly comparable to ours. RevenueBusiness revenue churn was 1.4%flat at 1.2% for the three and nine months ended September 30, 2016, respectively,March 31, 2018 and 1.2% and 1.3% for the three and nine months ended months ended September 30, 2017, respectively.2019. Our revenue churn willmay 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.
The table below includes key operating data that our management uses to measure the growth and operating performance of the Consumer segment:
| | Consumer | | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | September 30, | | September 30, | | March 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 |
Revenues | | $ | 123,777 |
| | $ | 142,050 |
| | $ | 383,444 |
| | $ | 443,017 |
| |
Average monthly revenues per subscriber line | | $ | 26.29 |
| | $ | 26.36 |
| | $ | 26.18 |
| | $ | 26.55 |
| | $ | 26.43 |
| | $ | 26.58 |
|
Subscriber lines (at period end) | | 1,543,760 |
| | 1,767,212 |
| | 1,543,760 |
| | 1,767,212 |
| | 1,232,857 |
| | 1,439,669 |
|
Customer churn | | 1.9 | % | | 2.2 | % | | 2.0 | % | | 2.2 | % | | 1.9 | % | | 1.9 | % |
Revenues. Represents revenue from our Consumer customers including revenues from our legacy business customers using Vonage VoIP products.
Average monthly revenuesMonthly Revenues per subscriber line. 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 decreased from $26.36 and $26.55$26.58 for the three and nine months ended September 30, 2016, respectivelyMarch 31, 2018 to $26.29 and $26.18$26.43 for the three and nine months ended September 30, 2017, respectively,March 31, 2019 due primarily to lower international long distance pay-per-use revenue.the Company's ability to retain its more tenured customers.
Subscriber lines. 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 1,767,2121,439,669 as of September 30, 2016March 31, 2018 to 1,543,7601,232,857 as of September 30, 2017,March 31, 2019, 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 business market.
Customer churn. 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 decreased from 2.2% for both the three and nine months ended September 30, 2016, toremained at 1.9% and 2.0% for the three and nine months ended September 30, 2017, respectively.March 31, 2018 and 2019. 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 below for detail regarding churn impacting our business customers.
REVENUE
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, 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. In addition, we recognize revenue on a gross basis for contributions to the Federal Universal Service Fund, or USF, and related fees. All other taxes are recorded on a net basis.
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 total revenues, our condensed consolidated statementstatements of operations for the periods indicated:
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
| | | | |
Total revenues | | 100 | % | | 100 | % |
| | | | |
Operating Expenses: | | | | |
Cost of revenues (exclusive of depreciation and amortization) | | 41 |
| | 41 |
|
Sales and marketing | | 34 |
| | 30 |
|
Engineering and development | | 6 |
| | 4 |
|
General and administrative | | 12 |
| | 11 |
|
Depreciation and amortization | | 8 |
| | 7 |
|
Total operating expenses | | 101 |
| | 93 |
|
(Loss)/income from operations | | (1 | ) | | 7 |
|
Other Income (Expense): | | | | |
Interest expense | | (3 | ) | | (1 | ) |
Other income (expense), net | | — |
| | — |
|
Total other income (expense), net | | (3 | ) | | (1 | ) |
(Loss)/income before income taxes | | (4 | ) | | 6 |
|
Income tax benefit | | 3 |
| | 4 |
|
Net (loss)/income | | (1 | )% | | 10 | % |
|
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | |
Total revenues | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | | |
Operating Expenses: | | | | | | | | |
Cost of service (exclusive of depreciation and amortization) | | 38 |
| | 35 |
| | 38 |
| | 33 |
|
Cost of goods sold | | 3 |
| | 4 |
| | 3 |
| | 4 |
|
Sales and marketing | | 29 |
| | 34 |
| | 31 |
| | 35 |
|
Engineering and development | | 3 |
| | 3 |
| | 3 |
| | 3 |
|
General and administrative | | 11 |
| | 11 |
| | 13 |
| | 13 |
|
Depreciation and amortization | | 7 |
| | 7 |
| | 7 |
| | 7 |
|
Total operating expenses | | 91 |
| | 94 |
| | 95 |
| | 95 |
|
Income from operations | | 9 |
| | 6 |
| | 5 |
| | 5 |
|
Other Income (Expense): | | | | | | | | |
Interest income | | — |
| | — |
| | — |
| | — |
|
Interest expense | | (1 | ) | | (2 | ) | | (1 | ) | | (1 | ) |
Other income (expense), net | | — |
| | — |
| | — |
| | — |
|
Total other income (expense), net | | (1 | ) | | (2 | ) | | (1 | ) | | (1 | ) |
Income before income taxes | | 8 |
| | 4 |
| | 4 |
| | 4 |
|
Income tax benefit (expense) | | (4 | ) | | (1 | ) | | (1 | ) | | (2 | ) |
Net income | | 4 | % | | 3 | % | | 3 | % | | 2 | % |
Management's discussionDiscussion of the resultsResults of operationsOperations for the Three and Nine Months Ended September 30, 2017March 31, 2019 and 20162018
The Company reported loss before income taxes of $10,584 for the three months ended March 31, 2019 and income before income taxes of $14,254 for the three months ended March 31, 2018, respectively. The decrease was primarily driven by higher other operating expenses of $36,384 as a result of the acquisitions of NewVoiceMedia in October 2018 and TokBox in August 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 assets acquired. In addition, there were increases in engineering and development expenses in connection with the Company's continued transformation focused on innovation.
The Company reported net loss of $534 and net income of $24,524 for the three months ended March 31, 2019 and 2018, respectively. The decrease in net (loss)/income for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 is mainly due to the aforementioned decrease in (loss)/income before income taxes offset by the decrease in income tax benefit of $220.
We calculate gross margin in order to evaluate operating revenues as total revenues less cost of service,revenues, which primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services and cost of goods sold which primarily includes costs incurred when a customer first subscribes to our service. The following table presents consolidated revenues, cost of revenues and the composition of gross margin for the three months ended March 31, 2019 and nine month periods ending September 30, 2017 and 2016:2018:
| | (in thousands, except percentages) | | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | September 30, | | September 30, | | March 31, |
| | 2017 | | 2016 | | Dollar Change | | Percent Change | | 2017 | | 2016 | | Dollar Change | | Percent Change | | 2019 | | 2018 | | Dollar Change | | Percent Change |
Total revenues | | $ | 253,083 |
| | $ | 248,359 |
| | $ | 4,724 |
| | 2 | % | | $ | 748,266 |
| | $ | 708,858 |
| | $ | 39,408 |
| | 6 | % | | $ | 279,541 |
| | $ | 253,573 |
| | $ | 25,968 |
| | 10 | % |
Cost of service | | 96,632 |
| | 87,377 |
| | 9,255 |
| | 11 | % | | 281,902 |
| | 232,605 |
| | 49,297 |
| | 21 | % | |
Cost of goods sold | | 6,306 |
| | 8,591 |
| | (2,285 | ) | | (27 | )% | | 19,786 |
| | 26,009 |
| | (6,223 | ) | | (24 | )% | |
Cost of revenues (1) | | | 113,411 |
| | 103,567 |
| | 9,844 |
| | 10 | % |
Gross margin | | $ | 150,145 |
| | $ | 152,391 |
| | $ | (2,246 | ) | | (1 | )% | | $ | 446,578 |
| | $ | 450,244 |
| | $ | (3,666 | ) | | (1 | )% | | $ | 166,130 |
| | $ | 150,006 |
| | $ | 16,124 |
| | 11 | % |
(1) Excludes depreciation and amortization of $6,852$9,418 and $7,460$6,434 for the three months ended September 30, 2017March 31, 2019 and 2016, respectively2018, respectively.
Total revenues and $20,497cost of revenues were impacted by the following trends and $21,278uncertainties:
Three Months Ended March 31, 2019 compared to Three Months Ended March 31, 2018
Total revenues increased 10% for the ninethree months ended September 30, 2017March 31, 2019 as compared to the prior year period. The increase is primarily due to the acquisition of NewVoiceMedia and 2016, respectively.TokBox in the second half of 2018 along with business customer growth driving an increase in revenues of $42,929, offset by declining consumer revenues of $16,961 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 as the Company reallocates resources to increase market share in its Business communications platforms.
Cost of revenues increased 10% for the three months ended March 31, 2019 as compared to the prior year period driven by increased costs incurred in servicing our Business customers of $16,967 due to the increase in customers and prior year acquisitions. This was partially offset by a decrease in costs in Consumer of $7,123 as subscriber lines continues to decline resulting in lower international and long-distance termination costs.
Business Gross Margin for the Three Months Ended March 31, 2019 and 2018
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | September 30, | | September 30, | | March 31, |
(in thousands, except percentages) | | 2017 | | 2016 | | Dollar Change | | Percent Change | | 2017 | | 2016 | | Dollar Change | | Percent Change | | 2019 | | 2018 | | Dollar Change | | Percent Change |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Service revenues | | $ | 109,483 |
| | $ | 86,662 |
| | $ | 22,821 |
| | 26 | % | | $ | 305,599 |
| | $ | 210,214 |
| | $ | 95,385 |
| | 45 | % | | $ | 159,345 |
| | $ | 116,302 |
| | $ | 43,043 |
| | 37 | % |
Product revenues (1) | | 13,085 |
| | 13,618 |
| | (533 | ) | | (4 | )% | | 39,837 |
| | 39,795 |
| | 42 |
| | — | % | |
Service and product revenues | | 122,568 |
| | 100,280 |
| | 22,288 |
| | 22 | % | | 345,436 |
| | 250,009 |
| | 95,427 |
| | 38 | % | |
Access and product revenues(1) | | | 11,697 |
| | 12,531 |
| | (834 | ) | | (7 | )% |
Service, access and product revenues | | | 171,042 |
| | 128,833 |
| | 42,209 |
| | 33 | % |
USF revenues | | 6,738 |
| | 6,029 |
| | 709 |
| | 12 | % | | 19,386 |
| | 15,832 |
| | 3,554 |
| | 22 | % | | 8,555 |
| | 7,835 |
| | 720 |
| | 9 | % |
Total revenues | | 129,306 |
| | 106,309 |
| | 22,997 |
| | 22 | % | | 364,822 |
| | 265,841 |
| | 98,981 |
| | 37 | % | | 179,597 |
| | 136,668 |
| | 42,929 |
| | 31 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost of revenues (2) | | 50,777 |
| | 34,858 |
| | 15,919 |
| | 46 | % | | 139,218 |
| | 72,788 |
| | 66,430 |
| | 91 | % | | 69,854 |
| | 52,982 |
| | 16,872 |
| | 32 | % |
Product cost of revenues (1) | | 12,702 |
| | 13,101 |
| | (399 | ) | | (3 | )% | | 38,360 |
| | 38,465 |
| | (105 | ) | | — | % | |
Service and product cost of revenues | | 63,479 |
| | 47,959 |
| | 15,520 |
| | 32 | % | | 177,578 |
| | 111,253 |
| | 66,325 |
| | 60 | % | |
Access and product cost of revenues (1) | | | 13,871 |
| | 14,491 |
| | (620 | ) | | (4 | )% |
Service, access and product cost of revenues | | | 83,725 |
| | 67,473 |
| | 16,252 |
| | 24 | % |
USF cost of revenues | | 6,738 |
| | 6,029 |
| | 709 |
| | 12 | % | | 19,386 |
| | 15,843 |
| | 3,543 |
| | 22 | % | | 8,555 |
| | 7,840 |
| | 715 |
| | 9 | % |
Total cost of revenues | | 70,217 |
| | 53,988 |
| | 16,229 |
| | 30 | % | | 196,964 |
| | 127,096 |
| | 69,868 |
| | 55 | % | | 92,280 |
| | 75,313 |
| | 16,967 |
| | 23 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Segment gross margin | | | | | | | | | | | | | | | | | | | | | | | | |
Service margin | | 58,706 |
| | 51,804 |
| | 6,902 |
| | 13 | % | | 166,381 |
| | 137,426 |
| | 28,955 |
| | 21 | % | | 89,491 |
| | 63,320 |
| | 26,171 |
| | 41 | % |
Gross margin ex-USF (Service and product margin) | | 59,089 |
| | 52,321 |
| | 6,768 |
| | 13 | % | | 167,858 |
| | 138,756 |
| | 29,102 |
| | 21 | % | |
Gross margin ex-USF (Service, access and product margin) | | | 87,317 |
| | 61,360 |
| | 25,957 |
| | 42 | % |
Segment gross margin | | $ | 59,089 |
| | $ | 52,321 |
| | $ | 6,768 |
| | 13 | % | | $ | 167,858 |
| | $ | 138,745 |
| | $ | 29,113 |
| | 21 | % | | $ | 87,317 |
| | $ | 61,355 |
| | $ | 25,962 |
| | 42 | % |
| | Segment gross Margin % | | | | | | | | | | | | | | |
Service margin % | | 53.6 | % | | 59.8 | % | | 54.4 | % | | 65.4 | % | | | 56.2 | % | | 54.4 | % | |
Gross margin ex-USF (Service and product margin) % | | 48.2 | % | | 52.2 | % | | 48.6 | % | | 55.5 | % | | |
Gross margin ex-USF (Service, access and product margin) % | | | 51.1 | % | | 47.6 | % | |
Segment gross margin % | | 45.7 | % | | 49.2 | % | | 46.0 | % | | 52.2 | % | | | 48.6 | % | | 44.9 | % | |
| |
(1) | Includes customer premise equipment, access, professional services, and shipping and handling. |
| |
(2) | Excludes depreciation and amortization of $8,214 and $4,973 for the three and nine months ended September 30, 2017 of $5,053 March 31, 2019 and $14,931, respectively and for the three and nine months ended September 30, 2016 of $5,015, and $13,807,2018, respectively. |
Three Months Ended September 30, 2017March 31, 2019 compared to Three Months Ended September 30, 2016March 31, 2018
Service revenues. Service revenues increased by $22,821, or 26%, due primarily to Nexmo which represents 17% ofThe following table describes the total increase in business gross margin for the three months ended March 31, 2019 as compared to the prior year quarter asthree months ended March 31, 2018:
|
| | | |
| (in thousands) |
Service gross margin excluding the impact of the acquisitions increased 19% primarily due to overall growth in our Business customer base of 11% as compared to the prior year quarter | $ | 11,767 |
|
Service gross margin also increased due to acquisitions of TokBox on August 1, 2018 and NewVoiceMedia on October 31, 2018, respectively | 14,404 |
|
Access and product gross margin decreased due to higher costs providing access services to Business customers during the current quarter | (214 | ) |
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 | $ | 25,962 |
|
Business service gross margin percentage increased to 56.2% for the Company has continued to focus on growththree months ended March 31, 2019 from 54.4% for the three months ended March 31, 2018. The increase in CPaaS sincebusiness service gross margin percentage is a result of the acquisition of Nexmo in June 2016. In addition, the prior year results excludes a current year correction in reporting a portion of revenues on a gross basis rather than net which also has resulted in an increase in revenue. This correction did not have a material impact. Service revenues were also favorably impacted by an increase in the number of UCaaS seats as we have shifted marketing investments from Consumer to attract more profitable Business customers. During 2017, our CPaaS revenue growth has predominately come from lower margin business for which our strategy of increasing higher margin CPaaS integrated voice business is currently underway. This increase is slightly offset by decrease in service revenues attributed toNewVoiceMedia along with the sale of a greater proportion of higher margin services across our Hosted Infrastructure product line completed on MayBusiness segment during the quarter ended March 31, 2017.
Service cost of revenues. Service cost of revenues increased by $15,919, or 46%, primarily driven by an increase in costs associated with Nexmo due to higher usage volumes2019 as compared to the prior year.
USF revenues and USF cost of revenues. USF revenues increased by $709, or 12% and USF cost of revenues increased by $709, or 12%, due to synchronization of methodologies across Business segment and increasesame period in the number of UCaaS seats.
Nine Months EndedSeptember 30, 2017 comparedprior quarter. Our gross margin percentage may continue toNine Months EndedSeptember 30, 2016
Service revenues. Service revenues increased be impacted by $95,385, or 45%, due primarily to the acquisition of Nexmo on June 3, 2016 which attributed to approximately 32% of the increase as compared to the nine months ended September 30, 2016. Also attributing to the increasechanges in the current year was an increase in the numbermix of UCaaS seats as we have shifted marketing investments from Consumerservice offerings provided to attract more profitableour customers across our Business customers.segment.
Service cost of revenues. Service cost of revenues increased by $66,430, or 91%, due primarily to the acquisition of Nexmo along with the prospective presentation beginning the quarter ended June 30, 2017 of costs associated with Nexmo's trading activities on a gross basis as discussed above. Costs during the current year period are also slightly higher due to increased technical care costs and network operations cost in support of growth in the segment.
USF revenues and USF cost of revenues. USF revenues increased by $3,554, or 22% and USF cost of revenues increased by $3,543, or 22%, due to synchronization of methodologies across Business segment and increase in the number of UCaaS seats.
Consumer Gross Margin for the Three Months Ended March 31, 2019 and 2018
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | September 30, | | September 30, | | March 31, |
(in thousands, except percentages) | | 2017 | | 2016 | | Dollar Change | | Percent Change | | 2017 | | 2016 | | Dollar Change | | Percent Change | | 2019 | | 2018 | | Dollar Change | | Percent Change |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Service revenues | | $ | 111,913 |
| | $ | 128,167 |
| | $ | (16,254 | ) | | (13 | )% | | $ | 346,666 |
| | $ | 399,401 |
| | $ | (52,735 | ) | | (13 | )% | | $ | 89,000 |
| | $ | 104,394 |
| | $ | (15,394 | ) | | (15 | )% |
Product revenues (1) | | 94 |
| | 207 |
| | (113 | ) | | (55 | )% | | 498 |
| | 514 |
| | (16 | ) | | (3 | )% | |
Service and product revenues | | 112,007 |
| | 128,374 |
| | (16,367 | ) | | (13 | )% | | 347,164 |
| | 399,915 |
| | (52,751 | ) | | (13 | )% | |
Access and product revenues(1) | | | 68 |
| | 91 |
| | (23 | ) | | (25 | )% |
Service, access and product revenues | | | 89,068 |
| | 104,485 |
| | (15,417 | ) | | (15 | )% |
USF revenues | | 11,770 |
| | 13,676 |
| | (1,906 | ) | | (14 | )% | | 36,280 |
| | 43,102 |
| | (6,822 | ) | | (16 | )% | | 10,876 |
| | 12,420 |
| | (1,544 | ) | | (12 | )% |
Total revenues | | 123,777 |
| | 142,050 |
| | (18,273 | ) | | (13 | )% | | 383,444 |
| | 443,017 |
| | (59,573 | ) | | (13 | )% | | 99,944 |
| | 116,905 |
| | (16,961 | ) | | (15 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost of revenues (2) | | 19,434 |
| | 24,973 |
| | (5,539 | ) | | (22 | )% | | 62,969 |
| | 77,220 |
| | (14,251 | ) | | (18 | )% | | 9,258 |
| | 14,014 |
| | (4,756 | ) | | (34 | )% |
Product cost of revenues (1) | | 1,517 |
| | 3,331 |
| | (1,814 | ) | | (54 | )% | | 5,475 |
| | 11,196 |
| | (5,721 | ) | | (51 | )% | |
Service and product cost of revenues | | 20,951 |
| | 28,304 |
| | (7,353 | ) | | (26 | )% | | 68,444 |
| | 88,416 |
| | (19,972 | ) | | (23 | )% | |
Access and product cost of revenues (1) | | | 997 |
| | 1,794 |
| | (797 | ) | | (44 | )% |
Service, access and product cost of revenues | | | 10,255 |
| | 15,808 |
| | (5,553 | ) | | (35 | )% |
USF cost of revenues | | 11,770 |
| | 13,676 |
| | (1,906 | ) | | (14 | )% | | 36,280 |
| | 43,102 |
| | (6,822 | ) | | (16 | )% | | 10,876 |
| | 12,446 |
| | (1,570 | ) | | (13 | )% |
Total cost of revenues | | 32,721 |
| | 41,980 |
| | (9,259 | ) | | (22 | )% | | 104,724 |
| | 131,518 |
| | (26,794 | ) | | (20 | )% | | 21,131 |
| | 28,254 |
| | (7,123 | ) | | (25 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Segment gross margin | | | | | | | | | | | | | | | | | | | | | | | | |
Service margin | | 92,479 |
| | 103,194 |
| | (10,715 | ) | | (10 | )% | | 283,697 |
| | 322,181 |
| | (38,484 | ) | | (12 | )% | | 79,742 |
| | 90,380 |
| | (10,638 | ) | | (12 | )% |
Gross margin ex-USF (Service and product margin) | | 91,056 |
| | 100,070 |
| | (9,014 | ) | | (9 | )% | | 278,720 |
| | 311,499 |
| | (32,779 | ) | | (11 | )% | |
Gross margin ex-USF (Service, access and product margin) | | | 78,813 |
| | 88,677 |
| | (9,864 | ) | | (11 | )% |
Segment gross margin | | $ | 91,056 |
| | $ | 100,070 |
| | $ | (9,014 | ) | | (9 | )% | | $ | 278,720 |
| | $ | 311,499 |
| | $ | (32,779 | ) | | (11 | )% | | $ | 78,813 |
| | $ | 88,651 |
| | $ | (9,838 | ) | | (11 | )% |
| | Segment gross Margin % | | | | | | | | | | | | |
Service margin % | 82.6 | % | | 80.5 | % | | 81.8 | % | | 80.7 | % | | 89.6 | % | | 86.6 | % | |
Gross margin ex-USF (Service and product margin) % | 81.3 | % | | 78.0 | % | | 80.3 | % | | 77.9 | % | | |
Gross margin ex-USF (Service, access and product margin) % | | 88.5 | % | | 84.9 | % | |
Segment gross margin % | 73.6 | % | | 70.4 | % | | 72.7 | % | | 70.3 | % | | 78.9 | % | | 75.8 | % | |
| |
(1) | Includes customer premise equipment professional services, and shipping and handling. |
| |
(2) | Excludes depreciation and amortization of $1,204 and $1,461 for the three and nine months ended September 30, 2017 of $1,799 March 31, 2019 and $5,566, respectively and for the three and nine months ended September 30, 2016 of $2,445, and $7,471,2018, respectively. |
Three Months Ended September 30, 2017March 31, 2019 compared to Three Months Ended September 30, 2016March 31, 2018
Service revenues. Service revenues decreased by $16,254, or 13%, due to a decline in subscriber lines reflecting planned actions to enhance profitability by modulating marketing spend, restructuring pricing offers, and targeting consumers with lower subscriber acquisition cost and churn profiles.
Service cost of revenues. Service cost of revenues decreased by $5,539, or 22% due to the corresponding decrease in service revenues of 13% in line with planned actions to enhance profitability.
Product cost of revenues. Product cost of revenues decreased by $1,814, or 54%, due toThe following table describes the decrease in customers' equipment costsconsumer gross margin for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018:
|
| | | |
| (in thousands) |
Service gross margin decreased primarily due to a decrease in subscriber lines of 14% resulting in lower gross margin of $11,303 as we have reallocated resources focused on attracting Business customers. 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 $665 | $ | (10,638 | ) |
Access and product gross margin increased 45% primarily due lower equipment costs associated with sales to customers during the current quarter | 774 |
|
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 | $ | (9,838 | ) |
Consumer service gross margin percentage increased to 89.6% for the three months ended March 31, 2019 from 86.6% for the three months ended March 31, 2018 due to lower new customer additions.international and domestic termination rates and the allocation of certain shared network costs to Business as that revenue becomes a greater proportion of the whole. The increase in Consumer service margin percentage is also driven by overall lower costs attributed to consumer services as the Company shifts resources towards attracting more profitable Business customers.
USF revenues. USF revenues decreased by $1,906, or 14%, and USF cost of revenues decreased by $1,906, or 14% due to lower subscriber lines.
Nine Months EndedSeptember 30, 2017 compared toNine Months EndedSeptember 30, 2016
Service revenues. Service revenues decreased by $52,735, or 13%, due to a decline in subscriber lines of 10% from December 31, 2016 reflecting planned actions to enhance profitability by modulating marketing spend, restructuring pricing offers, and targeting consumers with lower subscriber acquisition cost and churn profiles.
Service cost of revenues. Service cost of revenues decreased by $14,251, or 18% due to fewer subscriber lines reflecting planned actions to enhance profitability by modulating marketing spend, restructuring pricing offers, and targeting consumers with lower subscriber acquisition cost and churn profiles.
Product cost of revenues. Product cost of revenues decreased by $5,721, or 51%, due to the decrease in customers' equipment costs due to lower new customer additions and a decrease in reserve related to inventory.
USF revenues and USF cost of revenues. USF revenues decreased by $6,822, or 16%, and USF cost of revenues decreased by $6,822, or 16% due to lower subscriber lines.
Other Operating Expenses
The following table presents our other operating costs during the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, respectively:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | September 30, | | September 30, | | March 31, |
| | 2017 | | 2016 | | Dollar Change | | Percent Change | | 2017 | | 2016 | | Dollar Change | | Percent Change | |
(in thousands, except percentages) | | | 2019 | | 2018 | | Dollar Change | | Percent Change |
Sales and marketing | | $ | 73,576 |
| | $ | 83,731 |
| | $ | (10,155 | ) | | (12 | )% | | $ | 235,245 |
| | $ | 246,676 |
| | $ | (11,431 | ) | | (5 | )% | | $ | 95,523 |
| | $ | 77,136 |
| | $ | 18,387 |
| | 24 | % |
Engineering and development | | 6,956 |
| | 8,075 |
| | (1,119 | ) | | (14 | )% | | 21,996 |
| | 22,152 |
| | (156 | ) | | (1 | )% | | 16,526 |
| | 10,820 |
| | 5,706 |
| | 53 | % |
General and administrative | | 26,811 |
| | 27,538 |
| | (727 | ) | | (3 | )% | | 98,411 |
| | 89,261 |
| | 9,150 |
| | 10 | % | | 35,459 |
| | 27,582 |
| | 7,877 |
| | 29 | % |
Depreciation and amortization | | 18,179 |
| | 18,018 |
| | 161 |
| | 1 | % | | 54,520 |
| | 53,215 |
| | 1,305 |
| | 2 | % | | 21,214 |
| | 16,800 |
| | 4,414 |
| | 26 | % |
Total other operating expenses | | $ | 125,522 |
| | $ | 137,362 |
| | $ | (11,840 | ) | | (9 | )% | | $ | 410,172 |
| | $ | 411,304 |
| | $ | (1,132 | ) | | — | % | | $ | 168,722 |
| | $ | 132,338 |
| | $ | 36,384 |
| | 27 | % |
Three Months Ended September 30, 2017March 31, 2019 compared to Three Months Ended September 30, 2016March 31, 2018
Total other operating expenses decreasedincreased by $11,840$36,384 as compared to the three months ended September 30, 2016March 31, 2018 due to the following:
Sales and marketing expense decreasedincreased by $10,155$18,387, primarily due to a reductionadditional costs from TokBox and NewVoiceMedia which were acquired in ConsumerAugust 2018 and October 2018, respectively. Additionally, sales and marketing through traditionalcosts were impacted by increased spending in the current year related to media outlets reflecting planned actions to enhance profitability by targeting consumers with lower subscriber acquisition costmarketing initiatives and churn profilesthe attendance at certain conferences which was largely offset by an increasewere not attended in Business marketing as we have shifted marketing investment to attract these more profitable customers.the previous year.
Engineering and development expense decreasedincreased by $1,119 due$5,706, in connection with the Company's continued transformation focus on innovation especially in regards to decreased employee costs associated with engineering costsdeveloping further functionality related to Consumer as comparedits proprietary platform in order to support customers through the prior year as the Company has focused on the ongoing growth of the Business segment.
Nine Months Ended September 30, 2017 compared to Nine Months Ended September 30, 2016
Total other operating expenses decreased by $1,132 as compared to the nine months ended September 30, 2016 due to the following:
Salesmid-market and marketing expense decreased by $11,431 primarily due to a shift in traditional media marketing investments from Consumer to Business customers as part of an effort to attract these more profitable customers during the current year.enterprise sector.
| |
• | General and administrative expense increased by $7,877, primarily due to higher personnel costs driven by the increase in headcount following the acquisition of TokBox and NewVoiceMedia. |
| |
• | Depreciation and amortization expense increased by $4,414 primarily due to the amortization of acquired intangible assets related to TokBox and NewVoiceMedia. |
General and administrative expense increased by $9,150 primarily due the acquisition of Nexmo during the prior year along with costs associated with restructuring activities during the current year period.
Other Income (Expense)
| | (in thousands, except percentages) | | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | September 30, | | September 30, | | March 31, |
| | 2017 | | 2016 | | Dollar Change | | Percent Change | | 2017 | | 2016 | | Dollar Change | | Percent Change | | 2019 | | 2018 | | Dollar Change | | Percent Change |
Interest income | | $ | 3 |
| | $ | 19 |
| | $ | (16 | ) | | (84 | )% | | $ | 12 |
| | $ | 65 |
| | $ | (53 | ) | | (82 | )% | |
Interest expense | | (3,821 | ) | | (3,974 | ) | | 153 |
| | 4 | % | | (11,385 | ) | | (9,477 | ) | | (1,908 | ) | | (20 | )% | | $ | (7,576 | ) | | $ | (3,161 | ) | | $ | (4,415 | ) | | (140 | )% |
Other income (expense), net | | 465 |
| | (495 | ) | | 960 |
| | (194 | )% | | 931 |
| | (237 | ) | | 1,168 |
| | (493 | )% | | (416 | ) | | (253 | ) | | (163 | ) | | (64 | )% |
| | $ | (3,353 | ) | | $ | (4,450 | ) | | $ | 1,097 |
| | | | $ | (10,442 | ) | | $ | (9,649 | ) | | $ | (793 | ) | | | | $ | (7,992 | ) | | $ | (3,414 | ) | | $ | (4,578 | ) | | |
Three Months Ended September 30, 2017March 31, 2019 compared to Three Months Ended September 30, 2016March 31, 2018
Interest expense. The decrease in interest expense of $153, or 4%, was driven by lower interest associated with the Company's capital lease as compared to the prior year.
Other income (expense), net. The increase in other income (expense), net of $960, or 194%, was attributable to losses associated with foreign currency in the prior year along with additional gain recognized during the quarter associated with contingent consideration from the sale of the Hosted Infrastructure product line.
Nine Months Ended September 30, 2017 compared to Nine Months Ended September 30, 2016
Interest expense. The increase in interest expense of $1,908,$4,415, or 20%140%, was mainly due mainly to the funds we borrowed from the 2016higher principal balances on our 2018 Credit Facility that we entered into in June 2016 in connectionJuly 2018 along with the acquisition of Nexmo and the additional funds we borrowed in the first quarter of 2017 to fund operations.rising rates during three months ended March 31, 2019.
Other income (expense), net. The increased in other income (expense), net of $1,168, or 493%, was due the sale of the Hosted Infrastructure product line during the second quarter of 2017.
Provision for Income Taxes
|
| | | | | | | | | | | | | | |
(in thousands, except percentages) | Three Months Ended |
| March 31, |
| 2019 | | 2018 | | Dollar Change | | Percent Change |
Income tax benefit | $ | 10,050 |
| | $ | 10,270 |
| | $ | (220 | ) | | (2 | )% |
Effective tax rate | (95 | )% | | 72 | % | | | | |
Three Months Ended March 31, 2019 compared to Three Months Ended March 31, 2018
We recognize income tax equal to pre-tax income multiplied by our 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 ninethree months ended September 30, 2017,March 31, 2019, the Company has recorded a benefit related to excess share-based stock compensation driving the majority of the income tax benefit recognized.
During the three months ended March 31, 2018 , we recognized discrete period tax benefits of $9,539 and $1,433$15,307 which werewas recognized related to excess tax benefits on equity compensation recognized primarily in the first quarter of 2017 as well as an2018 offset by a permanent adjustment to our deferred assetof $6,702 related to stock compensation.
InGILTI tax rules under the first quarter of 2016 a discrete period tax expense of $1,220 was recorded related to expired stock optionsTCJA which was partially offset by $389 which was recorded during the second quarter of 2016 and $661 which was recordedenacted in the third quarter of 2016. The provision also includes the federal alternative minimum tax and state and local income taxes.December 2017.
Liquidity and Capital Resources
Overview
For the ninethree months ended September 30, 2017,March 31, 2019, we generatedhad lower net cash from operations.operations compared to the prior year quarter mainly 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:
| | | Nine Months Ended | | | Three Months Ended |
| September 30, | | | March 31, |
| 2017 | | 2016 | | Dollar Change | |
| (in thousands) | | | |
(in thousands) | | 2019 | | 2018 | | Dollar Change |
Net cash provided by operating activities | $ | 80,600 |
| | $ | 69,614 |
| | 10,986 |
| $ | 2,750 |
| | $ | 23,468 |
| | $ | (20,718 | ) |
Net cash used in investing activities | (23,626 | ) | | (188,637 | ) | | 165,011 |
| (10,774 | ) | | (6,397 | ) | | (4,377 | ) |
Net cash (used)/provided by financing activities | (56,757 | ) | | 93,264 |
| | (150,021 | ) | |
Net cash provided by (used in) financing activities | | 20,786 |
| | (25,062 | ) | | 45,848 |
|
Effect of exchange rate changes on cash and cash equivalents | | 260 |
| | 35 |
| | 225 |
|
Operating Activities
Cash provided by operating activities increaseddecreased to $80,600$2,750 for the ninethree months ended September 30, 2017 compared to $69,614March 31, 2019 from $23,468 for the ninethree months ended September 30, 2016,March 31, 2018, primarily due to an increasea decrease in earnings as compared to the prior period attributed toas a result of acquisitions and a decrease in deferred taxesaccounts payable of $9,172 and contingent consideration$11,446 due to the timing of $7,362 during the prior year period,payments, offset by an increase in stock compensation expense during the nine months ended September 30, 2017amortization of intangible assets of $5,351 driven by acquired intangible assets associated with NewVoiceMedia in the acquisitionsecond half of Nexmo of $1,869.2018.
Changes in working capital requirements include changes in accounts receivable, inventory, prepaid and other assets, accounts payable, accrued and other liabilities, and deferred revenue and costs. Cash used for working capital requirements decreasedincreased by $5,681$1,341 during the ninethree months ended September 30, 2017March 31, 2019 compared to the prior year period.period primarily due to the timing of payments.
Investing Activities
Cash used in investing activities for the ninethree months ended September 30, 2017March 31, 2019 of $23,626$10,774 was mainly attributable to the purchase of capital expenditures of $15,790$5,277 and development of software assets of $9,438, offset by the sales of marketable securities of $602 and cash proceeds of $1,000 associated with the sale of the Hosted Infrastructure product line in the second quarter of 2017.$5,497.
Cash used in investing activities for the ninethree months ended September 30, 2016March 31, 2018 of $188,637$6,397 was mainly attributable to the acquisition of Nexmo for cash proceeds of $163,042, purchase of capital expenditures of $19,980$3,250 and development of software assets of $8,987,$3,147.
Financing Activities
Cash provided by financing activities for the three months ended March 31, 2019 of $20,786 was primarily attributable to $41,500 in proceeds received from draws on the 2018 credit facility and $480 in proceeds received from the exercise of stock options, offset by $2,500 of repayments under the sales2018 credit facility in the first quarter of marketable securities, net of purchase of $3,372.
Financing Activities2019 and $18,566 in employee taxes paid on withholding shares.
Cash used in financing activities for the ninethree months ended September 30, 2017March 31, 2018 of $56,757$25,062 was primarily attributable to $14,063$4,687 in 2016 term note principal payments, $42,000$5,000 in 2016 revolving credit facility principal payments, $2,500 in patent license payments, $3,201$59 in capital lease payments, $9,542 in common stock repurchases, and $14,927$27,487 in employee taxes paid on withholding shares, offset by $14,476$2,171 in proceeds received from the exercise of stock options and $15,000$10,000 in proceeds received from issuance of notes payable.
Cash provided by
Sources of Liquidity
The principal sources of liquidity are derived from available borrowings under our existing financing activities for the nine months ended September 30, 2016 of $93,264 was primarily attributable to $181,250arrangements, existing cash on hand, and cash flows from operations. As described in net proceeds received from our 2016Note 7, Long-Term Debt and Revolving Credit Facility, and $6,169 in proceeds received fromto the exerciseConsolidated Financial Statements, the Company's financing arrangements consist of stock option, offset by $9,375 in 2016the 2018 Credit Facility comprised of a $100,000 term note principal payments, $25 million in 2016and a $500,000 revolving credit facility principal payments, $3,750 in 2015 term note principal payments, $10 million in 2015 revolving credit facility principal payments, $4,250 in patent license payments, $3,203 in capital lease payments, $32,902 in common stock repurchases, $1,316 in debt related costs payments, and $4,359 in employee taxes paid on withholding shares.
facility.
Available Borrowings Under the 20162018 Credit Facility
We maintain significant availability under our lines of credit to meet our short-term liquidity requirements. As of September 30, 2017,March 31, 2019, amounts available under the 20162018 Credit Facility totaled $143$33.3 million.
State and Local Sales Taxes
We also have contingent liabilities for state and local sales taxes. As of September 30, 2017,March 31, 2019, we had a reserve of $901.$3,380. If our ultimate liability exceeds this amount, it could affect our liquidity unfavorably. However, we do not believe it will significantly impair our liquidity.
Capital Expenditures
For the nine months ended September 30, 2017, 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 ninethree months ended September 30, 2017March 31, 2019 were $25,228,$10,774, of which $9,438$5,497 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. For 2017,2019, we believe our capital and software expenditures will be approximately $35,000. This amount is net of Tenant Improvement capital dollars we are investing in our Holmdel, New Jersey headquarters which are being refunded by the building owner in connection with the long-term lease renewal we executed in the fourth quarter of 2015.$40,000.
Common Stock Repurchases
On December 9, 2014, Vonage's Board of Directors authorized a new program for the Company to repurchase up to $100.0 million of its outstanding common stock. Repurchases under the new program are expected to be made over a four-year period ending on December 31, 2018.
Under the current program, the timing and amount of repurchases will be determined by management based on its evaluation of market conditions, the trading price of the stock and will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. Repurchases may be made in the open market or through private transactions from time to time. The repurchases will be made using available cash balances. In any period, under each repurchase program, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.
As of September 30, 2017, approximately $42,533 remained of our 2014 $100.0 million repurchase program. The repurchase program expires on December 31, 2018 but may be suspended or discontinued at any time without notice.
Off-Balance Sheet Arrangements
Obligations under Certain Guarantee Contracts
We enter guarantee arrangements in the normal course of business to facilitate transactions with third parties. These arrangements include financial and performance guarantees, stand-by letters of credit, debt guarantees and indemnifications. As of September 30, 2017March 31, 2019 and December 31, 20162018 we had stand-by letters of credit totaling $1,561$1,520 and $1,578,$1,516, respectively.
Contractual Obligations and Commitments
Except as set forth below and in Note 7. 10. Commitments and Contingencies included in Part 1, Item 1 of this Form 10-Q, there were no significant changes in our commitments under contractual obligations as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Contingencies
There has been and may be in the future substantial litigation in the areas in which we operate regarding alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. We record 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. Such legal proceedings are inherently unpredictable and subject to further uncertainties. Should any of these estimates and assumptions change it is possible that the resolution of the matters described in Note 7. 10, Commitments and Contingencies included in Part 1, Item 1 of this Form 10-Q could have a material adverse effect on our consolidated financial position, cash flows or results of operations.
Critical Accounting Policies
Our consolidated statements and accompanying notes are prepared in accordance with U.S. GAAP. Our significant accounting policies are described in Note 1, Basis2, Summary of Presentation and Significant Accounting Policies to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.2018. The preparation of financial statements and related disclosures in compliance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. The application of these policies involves judgment regarding future events and these judgments could materially affect the financial statements and disclosures based on varying assumptions, which may be appropriate to use.
We identify our most critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and results of operations, and those that require the most difficult, subjective or complex judgments by management regarding estimates. Our critical accounting policies include revenue recognition, impairmentvaluation of goodwill and long livedintangible assets, income taxes and valuation allowancecapitalized software. Effective January 1, 2019, the Company adopted ASC Topic 842. Refer to Note 2, Summary of Significant Accounting Policies for deferred taxes, share-based compensation, inventory andchanges to our critical accounting for business combinations.
policy with respect to recognition of leasing arrangements as a result of the adoption. As of September 30, 2017,March 31, 2019, our goodwill is attributable to our Business operating segment. We perform our annual test of goodwill on October 1st. Additionally, we will assess our goodwill for impairment between annual tests when specific circumstances dictate.
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Item 3. | 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, and the European Union. Changes in currency exchange rates affect the valuation in our financial statements of the assetsUnion, and liabilities of these operations. We also have aAsia. A portion of our sales denominated in Euros, the Canadian Dollar, and the British Pound Sterling, which are also 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. Volatility in the British Pound Sterling exchange rate is expected to continue in the short term as the United Kingdom negotiates its exit from the European Union which has been extended through October 31, 2019. If the United Kingdom and the European Union are unable to reach an agreement and the United Kingdom exits the European Union without an agreement in place, it will likely create further short-term uncertainty and currency volatility. In the longer term, any impact from the United Kingdom exiting the European Union on the Company's operations will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations.
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 the 2016 Credit Facilityour 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 concurrent with the term of the 2016 Credit Facility.2020. Under the swaps our interest rate is fixed at 4.7%. The interest rate swaps will be accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging.
As of September 30, 2017,March 31, 2019, if the interest rate on our variable rate debt changed by 1% on our 20162018 term note, our annual debt service payment would change by approximately $1 million.$700. As of September 30, 2017,March 31, 2019, if the interest rate on our variable rate debt changed by 1% on our 20162018 revolving credit facility, our annual debt service payment would change by approximately $1.8 million.$3,400.
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Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective as of such date due to the material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 related to our controls over the preparation of the annual tax provision.effective.
Material Weakness. As disclosed in Part II. Item 9A. Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, in connection with the preparation of our condensed consolidated financial statements as of and for the year ended December 31, 2016, we identified a material weakness in our internal control over financial reporting related to our controls over the preparation of the annual tax provision.
Changes in Internal Controls. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for changes in connection with the implementation of the remediation plan described below.reporting.
Remediation Plan. Management has begun implementing a remediation plan to address the control deficiency that led to the material weakness. The remediation plan includes (i) the implementation of additional review procedures designed to enhance our tax provision controls and (ii) strengthening our tax provision controls with improved documentation standards, oversight, and training. In the course of this remediation, we identified an additional error caused by the control deficiency identified at year-end, as described in more detail in Note 3 Correction of Prior Period Financial Statements. We are implementing enhanced review procedures and documentation standards and our plan is to remediate this material weakness by the end of 2017, subject to there being sufficient opportunities to conclude, through testing, that the enhanced control is operating effectively.
Part II—Other Information
We are subject to a number of lawsuits, government investigations and claims arising out of the conduct of our business. See a discussion of our litigation matters in Note 710 of Notes to our Condensed Consolidated Financial Statements, which is incorporated herein by reference.
There have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2018.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2(a) and (b) are notNot applicable.
(c) Common stock repurchases (in thousands, except per share value):
During the three months ended September 30, 2017, we did not repurchase Vonage Holdings Corp. common stock pursuant to the 2014 $100.0 million repurchase program. When executed, repurchases occur in the open market and pursuant to a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934. As of September 30, 2017, approximately $42,533 remained of our 2014 $100.0 million repurchase program.
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Item 3. | Defaults Upon Senior Securities |
None.
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Item 4. | Mine Safety Disclosures |
Not applicable.
None.
See accompanying Exhibit Index for a list of the exhibits filed or furnished with this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
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31.1 | 10.1 | | |
10.2 | | |
10.3 | | |
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31.1 | | |
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31.2 |
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32.1 |
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101 | 101.INS | | The following financial statements from Vonage Holdings Corp.’s Quarterly Report on Form 10-Q forXBRL Instance Document - the three and nine months ended September 30, 2017, filed withinstance document does not appear in the Securities and Exchange Commission on November 7, 2017, formatted inInteractive Data File because its XBRL (eXtensible Business Reporting Language): (i)tags are embedded within the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Cash Flows; (v) the Condensed Consolidated Statements of Stockholders’ Deficit; and (vi) the Notes to Condensed Consolidated Financial Statements.Inline XBRL document. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
(1) Filed herewith.
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*(1) | Management contract or compensatory plan or arrangement.Incorporated by reference to Vonage Holdings Corp.'s Current Report on form 8-K (File No. 001-32887) filed on March 15, 2019. |
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(2) | Incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-3287) filed on March 15, 2019. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | VONAGE HOLDINGS CORP. |
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Dated: | November 7, 2017May 8, 2019 | | By: | | /s/ David T. Pearson |
| | | | | David T. Pearson Chief Financial Officer and Treasurer (Principal Financial Officer and Duly Authorized Officer) |
EXHIBIT INDEX
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31.1 |
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31.2 |
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32.1 |
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101 |
| | The following financial statements from Vonage Holdings Corp.’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, filed with the Securities and Exchange Commission on November 7, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Cash Flows; (v) the Condensed Consolidated Statements of Stockholders’ Deficit; and (vi) the Notes to Condensed Consolidated Financial Statements.
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(1) Filed herewith.
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* | Management contract or compensatory plan or arrangement. |