UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



x☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~September~~June 30, ~~2017~~2019



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.~~CORP.

(Exact name of registrant as specified in its charter)



Delaware					11-3547680
(State or other jurisdiction of incorporation or organization)					(IRS Employer Identification No.)

23 Main Street ~~Holmdel, NJ~~	Holmdel	,	NJ	,	07733
(Address of principal executive offices)					(Zip Code)

Registrant’s telephone number, including area code: ~~(732)~~ (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:



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 ~~nonaccelerated~~non-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.



Large accelerated filer	x	Accelerated filer	o

Non-accelerated filer	o	~~(Do not check if a smaller reporting company)~~
Smaller reporting company	o☐	Emerging growth company	o☐

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.



Class	Outstanding at		~~October~~July 31, ~~2017~~2019
Common Stock, par value $0.001		~~228,671,311~~242,097,852		shares

VONAGE HOLDINGS CORP.

INDEX



Part 1 - Financial Information

		Page
Item 1.	Condensed Consolidated Financial Statements and Notes
	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2019 (Unaudited) and December 31, ~~2016~~2018	3
	Unaudited Condensed Consolidated Statements of ~~Income~~Operations for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	4
	Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018	6
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2019 and 2018	7
	Notes to Unaudited Condensed Consolidated Financial Statements	89

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3032

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4346

Item 4	Controls and Procedures	4346

Part II. Other Information

Item 1.	Legal Proceedings	4547

Item 1A.	Risk Factors	4547

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4549

Item 3.	Defaults Upon Senior Securities	4549

Item 4.	Mine Safety Disclosures	4549

Item 5.	Other Information	4549

Item 6.	Exhibits	4650

	Signature	4751

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)



	June 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	17,963		$	5,057
Accounts receivable, net of allowance of $4,993 and $3,542, respectively	97,465			75,342
Inventory, net of allowance of $101 and $152, respectively	1,066			1,470
Deferred customer acquisition costs, current portion	11,789			11,755
Prepaid expenses	25,219			26,496
Other current assets	7,427			7,634
Total current assets	160,929			127,754
Property and equipment, net of accumulated depreciation of $109,594 and $104,999, respectively	47,759			49,262
Operating lease right-of-use assets	49,954			—
Goodwill	599,080			598,499
Software, net of accumulated amortization of $100,383 and $100,870, respectively	26,945			17,430
Deferred customer acquisition costs	48,222			37,881
Restricted cash	1,679			2,047
Intangible assets, net of accumulated amortization of $191,041 and $162,788, respectively	271,022			299,911
Deferred tax assets	119,410			102,560
Other assets	29,503			24,144
Total assets	$	1,354,503		$	1,259,488
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	38,249		$	53,262
Accrued expenses	120,750			87,370
Deferred revenue, current portion	59,704			53,447
Operating lease liabilities, current portion	13,136			—
Current portion of notes payable	—			10,000
Total current liabilities	231,839			204,079
Indebtedness under revolving credit facility	248,000			425,000
Notes payable, net of current portion	—			84,228
Convertible senior notes, net	269,924			—
Operating lease liabilities	43,999			—
Other liabilities	3,099			10,413
Total liabilities	796,861			723,720
Commitments and Contingencies (Note 10)
Stockholders’ Equity:
Common stock, par value $0.001 per share; 596,950 shares authorized at June 30, 2019, and December 31, 2018	314			310
Additional paid-in capital	1,464,742			1,415,682
Accumulated deficit	(607,537		)	(611,985		)
Treasury stock, at cost	(304,031		)	(275,009		)
Accumulated other comprehensive income	4,154			6,770
Total stockholders’ equity	557,642			535,768
Total liabilities and stockholders’ equity	$	1,354,503		$	1,259,488

September 30,
2017 December 31,
2016
Assets
(revised)⁽¹⁾
Current assets:
Cash and cash equivalents $ 29,869
$ 29,078
Marketable securities —
601
Accounts receivable, net of allowance of $2,897 and $2,093, respectively 42,435
36,688
Inventory, net of allowance of $124 and $117, respectively 2,683
4,116
Deferred customer acquisition costs, current 1,466
2,610
Prepaid expenses 23,324
26,041
Other current assets 2,686
3,147
Total current assets 102,463
102,281
Property and equipment, net of accumulated depreciation of $143,265 and $129,166, respectively 45,760
48,415
Goodwill 371,535
360,363
Software, net of accumulated amortization of $94,917 and $87,626, respectively 23,574
21,971
Restricted cash 1,827
1,851
Intangible assets, net of accumulated amortization of $117,905 and $88,419, respectively 181,522
199,256
Deferred tax assets 192,879
184,210
Other assets 15,059
17,319
Total assets $ 934,619
$ 935,666
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 33,070
$ 30,751
Accrued expenses 76,163
109,195
Deferred revenue, current portion 31,332
32,442
Current maturities of capital lease obligations 206
3,288
Current portion of notes payable 18,750
18,750
Total current liabilities 159,521
194,426
Indebtedness under revolving credit facility 182,000
209,000
Notes payable, net of debt related costs and current portion 77,361
91,124
Other liabilities 6,123
4,575
Total liabilities 425,005
499,125

Commitments and Contingencies (Note 7)

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
Additional paid-in capital 1,359,975
1,310,847
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
Total liabilities and stockholders’ equity $ 934,619
$ 935,666

~~(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 ~~INCOME~~OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
				(revised)⁽¹⁾						(revised)⁽¹⁾
Total revenues	$	253,083		$	248,359		$	748,266		$	708,858		$	297,584		$	259,875		$	577,125		$	513,448

Operating Expenses:
Cost of service (exclusive of depreciation and amortization)	96,632			87,377			281,902			232,605
Cost of goods sold	6,306			8,591			19,786			26,009
Cost of revenues (exclusive of depreciation and amortization)													128,221			107,204			241,632			210,771
Sales and marketing	73,576			83,731			235,245			246,676			95,362			77,685			190,885			154,821
Engineering and development	6,956			8,075			21,996			22,152			16,891			10,375			33,417			21,195
General and administrative	26,811			27,538			98,411			89,261			36,615			32,174			72,074			59,756
Depreciation and amortization	18,179			18,018			54,520			53,215			20,662			19,062			41,876			35,862
Total operating expenses	228,460			233,330			711,860			669,918			297,751			246,500			579,884			482,405
Income from operations	24,623			15,029			36,406			38,940
(Loss) Income from operations													(167		)	13,375			(2,759		)	31,043
Other Income (Expense):
Interest income	3			19			12			65
Interest expense	(3,821		)	(3,974		)	(11,385		)	(9,477		)	(8,487		)	(3,097		)	(16,063		)	(6,258		)
Other income (expense), net	465			(495		)	931			(237		)	(147		)	337			(563		)	84
Total other income (expense), net	(3,353		)	(4,450		)	(10,442		)	(9,649		)	(8,634		)	(2,760		)	(16,626		)	(6,174		)
Income before income taxes	21,270			10,579			25,964			29,291
Income tax expense	(10,668		)	(3,539		)	(4,624		)	(14,102		)
(Loss) Income before income taxes benefit													(8,801		)	10,615			(19,385		)	24,869
Income tax benefit (expense)													13,325			(2,056		)	23,375			8,214
Net income	$	10,602		$	7,040		$	21,340		$	15,189		$	4,524		$	8,559		$	3,990		$	33,083

Earnings per common share:
Basic	$	0.05		$	0.03		$	0.10		$	0.07		$	0.02		$	0.04		$	0.02		$	0.14
Diluted	$	0.04		$	0.03		$	0.09		$	0.07		$	0.02		$	0.03		$	0.02		$	0.13
Weighted-average common shares outstanding:
Basic	227,943			217,000			223,956			214,872			242,475			237,919			241,507			235,490
Diluted	242,720			234,868			242,552			227,499			249,720			248,256			249,521			248,373

~~(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)

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
Other comprehensive income:
Foreign currency translation adjustment 6,390
3,372
23,622
1,659
Unrealized (loss)/gain on available-for-sale securities —
(3 ) 1
23
Unrealized gain on derivatives 197
—
197
—
Total other comprehensive income 6,587
3,369
23,820
1,682
Comprehensive income $ 17,189
$ 10,409
$ 45,160
$ 16,871



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018

Net income	$	4,524		$	8,559		$	3,990		$	33,083
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax (benefit) expense of ($342), ($1,358), $91, and ($1,356), respectively	(6,343		)	(12,434		)	(1,135		)	(6,101		)
Unrealized (loss) gain on derivatives, net of tax expense of $264, $89, $292 and $391, respectively	(794		)	228			(1,481		)	1,008
Total other comprehensive loss	(7,137		)	(12,206		)	(2,616		)	(5,093		)
Comprehensive (loss) income	$	(2,613	)	$	(3,647	)	$	1,374		$	27,990

~~(1) see Note 3.~~ ~~Correction of Prior Period Financial Statement~~s

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended
	June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	3,990		$	33,083
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,120			17,515
Amortization of intangibles	28,756			18,181
Deferred income taxes	(24,852		)	(10,305		)
Amortization of deferred customer acquisition costs	4,921			4,423
Allowance for doubtful accounts and obsolete inventory	475			1,427
Amortization of financing costs and debt discount	1,769			511
Loss on disposal of property and equipment	444			166
Share-based expense	19,231			15,972
Changes in derivatives	(265		)	—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(23,268		)	(7,256		)
Inventory	444			623
Prepaid expenses and other current assets	1,494			3,032
Deferred customer acquisition costs	(15,372		)	(11,837		)
Accounts payable	(14,895		)	7,794
Accrued expenses	33,034			(3,535		)
Deferred revenue	6,399			(1,713		)
Other assets - deferred cloud computing implementation costs	(8,310		)	(3,392		)
Other assets and liabilities	952			1,246
Net cash provided by operating activities	28,067			65,935
Cash flows used in investing activities:
Capital expenditures	(9,456		)	(7,787		)
Acquisition and development of software assets	(12,997		)	(4,220		)
Net cash used in investing activities	(22,453		)	(12,007		)
Cash flows provided by/(used in) financing activities:
Principal payments on capital lease obligations and other financing obligations	—			(95		)
Payments for short and long-term debt	(406,000		)	(44,375		)
Proceeds from issuance of long-term debt	479,000			10,000
Payments of debt issuance costs	(8,891		)	—
Payments for capped call transactions and costs	(28,325		)	—
Common stock repurchases	(10,000		)	—
Employee taxes paid on withholding shares	(19,023		)	(28,618		)
Proceeds from exercise of stock options	1,264			5,055
Net cash provided by (used in) financing activities	8,025			(58,033		)
Effect of exchange rate changes on cash	(1,101		)	(1,205		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	12,538			(5,310		)
Cash, cash equivalents, and restricted cash, beginning of period	7,104			33,327
Cash, cash equivalents, and restricted cash, end of period	$	19,642		$	28,017
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	13,462		$	5,695
Income taxes	$	2,226		$	4,855
Non-cash investing activities:
Capital expenditures included in accounts payable and accrued liabilities	$	67		$	1,373
Debt issuance costs included in accounts payable and accrued liabilities	$	1,154		$	—

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
Deferred income taxes 2,475
11,647
Change in contingent consideration —
(7,362 )
Allowance for doubtful accounts 562
720
Allowance for obsolete inventory 339
514
Amortization of debt issuance costs 300
800
Gain on sale of business (1,377 ) —
Loss on disposal of fixed assets 132
—
Share-based expense 28,997
27,128
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (3,970 ) (5,244 )
Inventory 1,156
582
Prepaid expenses and other current assets 3,369
(2,161 )
Deferred customer acquisition costs 1,284
1,906
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
Net cash provided by operating activities 80,600
69,614
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 March 31, 2018	$	306	$	1,384,718	$	(623,189	)	$	(270,759	)	$	21,122		$	512,198
Stock option exercises	3		2,881											2,884
Share-based expense			8,808											8,808
Employee taxes paid on withholding shares								(1,131		)				(1,131		)
Foreign currency translation adjustment											(12,434		)	(12,434		)
Unrealized gain on derivatives											228			228
Net income					8,559									8,559
Balance at June 30, 2018	$	309	$	1,396,407	$	(614,630	)	$	(271,890	)	$	8,916		$	519,112

~~(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 March 31, 2019	$	314		$	1,424,173		$	(612,061	)	$	(293,575	)	$	11,291		$	530,142
Stock option exercises	1			783												784
Share-based expense				11,216												11,216
Employee taxes paid on withholding shares										(457		)				(457		)
Common stock repurchases	(1		)							(9,999		)				(10,000		)
Equity component of convertible notes, net of issuance costs and tax				50,123												50,123
Purchase of capped calls, net of tax				(21,553		)										(21,553		)
Foreign currency translation adjustment													(6,343		)	(6,343		)
Unrealized loss on derivatives													(794		)	(794		)
Net income							4,524									4,524
Balance at June 30, 2019	$	314		$	1,464,742		$	(607,537	)	$	(304,031	)	$	4,154		$	557,642

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	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	11		5,044											5,055
Share-based expense			15,972											15,972
Employee taxes paid on withholding shares								(27,651		)				(27,651		)
Foreign currency translation adjustment											(6,101		)	(6,101		)
Unrealized gain on derivatives											1,008			1,008
Net income					33,083									33,083
Balance at June 30, 2018	$	309	$	1,396,407	$	(614,630	)	$	(271,890	)	$	8,916		$	519,112



	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	5			1,259												1,264
Share-based expense				19,231												19,231
Employee taxes paid on withholding shares										(19,023		)				(19,023		)
Common stock repurchases	(1		)							(9,999		)				(10,000		)
Equity component of convertible notes, net of issuance costs and tax				50,123												50,123
Purchase of capped calls, net of tax				(21,553		)										(21,553		)
Foreign currency translation adjustment													(1,135		)	(1,135		)
Unrealized loss on derivatives													(1,481		)	(1,481		)
Net income							3,990									3,990
Balance at June 30, 2019	$	314		$	1,464,742		$	(607,537	)	$	(304,031	)	$	4,154		$	557,642

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. ~~Basis~~Nature of ~~Presentation~~Business

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 of~~embracing technology to transform how businesses communicate to create better business outcomes. Our cloud communications ~~services for business. We transform the way people work~~platform enables businesses of all sizes to collaborate more productively and ~~businesses operate through a portfolio~~engage their customers more efficiently across any device. All of ~~cloud-based~~our cloud communications solutions ~~that enable internal collaboration among employees, while also keeping companies closely connected~~are 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 ~~embed~~create 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 apps~~processes. 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 send~~chatbots. 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 messages~~conversation. 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 of~~services 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%~~71% and ~~89%~~79% of our consolidated revenues for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 and ~~86%~~72% and ~~92%~~81% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 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~~six months ended ~~September~~June 30, ~~2017~~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, ~~2016~~2018 filed with the Securities and Exchange Commission on February ~~28, 2017~~27, 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, ~~Basis~~2, 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 ~~Services~~Revenues

Cost of ~~services~~revenues excludes depreciation and amortization expense of ~~$6,852~~$9,144 and ~~$7,460~~$6,226 for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 and ~~$20,497~~$18,562 and ~~$21,278~~$12,660 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. In addition, costs of goods sold included in cost of revenues during the three months ended June 30, 2019 and 2018 were $5,563 and $6,171 and during the six months ended June 30, 2019 and 2018 were $11,191 and $12,468, respectively.

~~Advertising Costs~~Sales and Marketing Expenses

We incurred advertising costs which are included in sales and marketing of ~~$11,423~~$16,586 and ~~$18,765~~$14,401 for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 and ~~$43,760~~$34,336 and ~~$55,723~~$28,922 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

~~Engineering and Development Expenses~~Leases

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 developmentAt 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 ~~engineering~~operating lease right-of-use assets, operating lease liabilities - current portion and ~~development were $5,662~~operating lease liabilities on the Company's consolidated balance sheet. The Company does not have any finance leases as of June 30, 2019 and ~~$6,234~~January 1, 2019.

A right-of-use asset represents the Company's right to use the underlying asset for the ~~three months ended September 30, 2017~~lease term and ~~2016~~the lease liabilities represent our obligation to make lease payments under the leasing arrangement. We recognize an operating lease right-of-use asset and ~~$17,357 and $16,544 for~~operating lease liability at the ~~nine months ended September 30, 2017 and 2016, respectively.~~

~~Restructuring Activities~~

~~During~~arrangement's commencement date based upon 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 liabilities~~lease 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 component~~the 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 as~~will exercise that option. The Company recognizes lease expense for lease payments on a ~~cash flow hedges. At~~straight-line basis over the ~~inception~~term 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 under~~has 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 critical~~commencement 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 that~~recognizes 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. The~~basis as described below. Certain of the Company's other financial instruments, which ~~includes~~include 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~~2018 Credit Facility at ~~September~~June 30, ~~2017~~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, 2016~~obligations 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~~June 30, ~~2017~~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
$ —



	June 30, 2019		December 31, 2018
Level 2 Measurements
Interest rate swaps ⁽¹⁾	$	352	$	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.

As of June 30, 2019, the fair value of the 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) was approximately $350,023. The fair value was determined based on the quoted price for the Convertible Senior Notes in an inactive market on the last trading day of the reporting period and is classified as Level 2 in the fair value hierarchy.

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 June 30,				As of December 31
	2019		2018		2018		2017
Cash and cash equivalents	$	17,963	$	26,077	$	5,057	$	31,360
Restricted cash	1,679		1,940		2,047		1,967
Total cash, cash equivalents and restricted cash	$	19,642	$	28,017	$	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



	June 30, 2019		December 31, 2018
Customer relationships	$	171,733	$	187,887
Developed technology	93,401		104,368
Patents and patent licenses	1,755		2,514
Trade names	4,133		5,005
Non-compete agreements	—		137
Finite-lived intangible assets, net	$	271,022	$	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



	June 30, 2019		December 31, 2018
Compensation and related taxes and temporary labor	$	27,672	$	33,249
Marketing	15,635		10,238
Taxes and fees	14,871		11,189
Telecommunications	50,334		21,403
Other accruals	7,569		4,729
Customer credits	444		3,325
Professional fees	2,679		2,049
Inventory	1,546		1,188
Accrued expenses	$	120,750	$	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 ~~August~~January 2017, ~~FASB~~the 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 will~~2017-04 is not expected to have a material impact on our condensed consolidated financial statements and related disclosures.

In ~~February~~June 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 transparency~~The 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 on~~record allowances that when deducted from the balance ~~sheet~~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. In April 2019, the FASB issued ASU 2019-04 to improve certain codifications including Topic 326 where accrued interest on receivables, recoveries, variable interest rates and ~~disclosing key information about leasing arrangements.~~prepayments are addressed. This ASU is effective for fiscal years beginning after December 15, ~~2018, including~~2019, and interim periods within those fiscal years. ~~Early adoption is permitted for all entities. The adoption~~While 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 were~~standard was adopted by the Company during the current ~~year:~~period:

In ~~November~~February 2016, the FASB issued ASU ~~2016-18, "Statement~~2016-02, "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 that~~the 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 ~~statement~~significant effect on our balance sheet, mostly related to (1) the recognition of new right-of-use assets and new lease liabilities on our balance sheet for our existing operating leases (most notably leases of office space and co-location space); and (2) the derecognition of existing assets (most notably prepaid rent), and existing liabilities (most notably deferred rent) related to such leases. It will not materially affect our earnings or cash ~~flows explains~~flows. We recorded the ~~change~~following 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 tables details our revenue from customers disaggregated by primary geographical market, source of revenue, and timing of revenue recognition. The tables also includes a reconciliation of the disaggregated revenue for our Business and Consumer segments.



	Three Months Ended						Three Months Ended
	June 30, 2019						June 30, 2018
	Business		Consumer		Total		Business		Consumer		Total
Primary geographical markets
United States	$	122,898	$	89,837	$	212,735	$	103,250	$	102,727	$	205,977
Canada	1,951		4,942		6,893		725		6,106		$	6,831
United Kingdom	15,625		2,785		18,410		7,327		3,200		$	10,527
Other Countries ⁽¹⁾	59,546		—		59,546		36,540		—		$	36,540
	$	200,020	$	97,564	$	297,584	$	147,842	$	112,033	$	259,875
Major Sources of Revenue
Service revenues	$	180,014	$	87,244	$	267,258	$	127,692	$	100,467	$	228,159
Access and product revenues	11,707		60		11,767		12,716		289		13,005
USF revenues	8,299		10,260		18,559		7,434		11,277		18,711
	$	200,020	$	97,564	$	297,584	$	147,842	$	112,033	$	259,875

(1) No individual other international country represented greater than 10% of total revenue during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash 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 reconciling 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 nine 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 of 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 $2,285 related to 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 nine months ended September 30, 2016.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)



	Six Months Ended						Six Months Ended
	June 30, 2019						June 30, 2018
	Business		Consumer		Total		Business		Consumer		Total
Primary geographical markets
United States	$	235,336	$	181,703	$	417,039	$	204,116	$	209,995	$	414,111
Canada	3,358		10,110		13,468		1,374		12,494		$	13,868
United Kingdom	39,506		5,695		45,201		13,810		6,449		$	20,259
Other Countries ⁽¹⁾	101,417		—		101,417		65,210		—		$	65,210
	$	379,617	$	197,508	$	577,125	$	284,510	$	228,938	$	513,448
Major Sources of Revenue
Service revenues	$	339,359	$	176,244	$	515,603	$	243,994	$	204,861	$	448,855
Access and product revenues	23,404		128		23,532		25,247		380		25,627
USF revenues	16,854		21,136		37,990		15,269		23,697		38,966
	$	379,617	$	197,508	$	577,125	$	284,510	$	228,938	$	513,448

(1) No individual other international country represented greater than 10% of total revenue during the periods presented.

In ~~July 2015, FASB issued ASU 2015-11, "Simplifying~~addition, the ~~Measurement of Inventory". This ASU applies~~Company recognizes service revenues from its customers through subscription services provided or through usage or pay-per-use type arrangements. During the three and six months ended June 30, 2019, the Company recognized $159,220 and $321,766 related to ~~inventory that is measured using first-in, first-out ("FIFO") or average cost. Under~~subscription services, $86,668 and $154,515 related to usage, and $51,696 and $100,844 related to other revenues such as USF, other regulatory fees, and credits. During the ~~updated guidance, an entity should measure inventory that is within scope at~~three and six months ended June 30, 2018, the ~~lower of cost~~Company recognized $150,186 and ~~net realizable value, which is the estimated selling prices~~$302,639 related to subscription services, $61,249 and $112,434 related to usage, and $48,440 and $98,375 related to other revenues such as USF, other regulatory fees, and credits.

Contract Assets and Liabilities

The following table provides information about receivables and contract liabilities from contracts with customers:

(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 statements~~balance sheet.

(2) Amounts included in deferred revenues and ~~related disclosures.~~

~~Note 3. Correction of Prior Period Financial Statements~~

~~In connection with the preparation of~~other liabilities on our condensed consolidated ~~financial statements~~balance sheet.

Our deferred revenue represents the advance consideration received from customers for subscription services and is predominantly recognized over the ~~quarter~~following performance period which is generally a month as transfer of control occurs. During the three and six months ended ~~March 31, 2017,~~June 30, 2019, the Company recognized revenue of $115,164 and ~~our remediation efforts~~$233,196, respectively, related to its contract liabilities. During the ~~material weakness in our internal control~~three and six months ended June 30, 2018, the Company recognized revenue of $107,615 and $226,986, respectively, related to its contract liabilities. We expect to recognize $59,704 into revenue over ~~financial reporting~~the next twelve months related to our ~~controls over the preparation of the annual tax provision, we identified an error~~deferred revenue as of June 30, 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 capitalized $60,011 and $49,636 as contract costs, net of accumulated amortization, as of June 30, 2019 and December 31, ~~2016 in~~2018, respectively, included within deferred customer acquisitions costs, current portion and deferred customer acquisition costs on 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 thecondensed consolidated balance ~~sheets~~sheet. Capitalized commission fees are amortized to sales and ~~related tax benefits of $4,756 as of December 31, 2016. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality,~~marketing expense over estimated customer life, which is 7 years for Business customers. The amounts amortized to sales and ~~SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the error~~marketing expense were $2,391 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 for the three months ended March 31, 2017. Accordingly, we have corrected the consolidated balance sheets as of December 31, 2016 and will correct this error in all prior periods presented by revising the appropriate condensed consolidated financial statements. This error had no impact on the three months ended March 31, 2016. The impact to the consolidated balance sheet as of December 31, 2016 and the consolidated statements of income$4,921 for the three and six months ended June 30, ~~2016,~~2019, and $2,264 and $4,423 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, and~~2018, respectively. There were no impairment losses recognized in relation to the costs capitalized during the three and six months ended June 30, 2019 and 2018. In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year ~~ended December 31, 2016 is as follows:~~and for residuals and renewals.

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)

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 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 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 liabilities assumed. Under the terms of the offer, NewVoiceMedia shareholders received cash in the amount of approximately $341 million as well as transactions costs incurred by NewVoiceMedia which were paid by the Company of approximately $9 million on the date of the acquisition.

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 $179 and $328, respectively, for the three and six months ended June 30, 2019.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

~~Note 4. Earnings Per Share~~

Supplemental Pro Forma Information (unaudited)

The following ~~table sets forth~~supplemental pro forma information represents the ~~computation~~results of operations if Vonage had acquired NewVoiceMedia on January 1, 2018.



	Six Months Ended
	June 30, 2018
Revenue	$	549,937
Net income	(1,039		)
Earnings per share - basic	$	—
Earnings per share - diluted	$	—

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 ~~basic~~illustrative purposes only and ~~diluted earnings per share~~do not reflect the realization of potential cost savings or any related integration costs.

Acquisition of TokBox

On August 1, 2018, the Company acquired 100% of the issued and outstanding shares of 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 acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair value on the acquisition date. The accounting for the ~~three and nine months ended September~~business combination was completed as of June 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~~2019, at which point 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:~~fair values became final.

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~~The table below summarizes the TokBox assets acquired and ~~Revolving Credit Facility~~

~~This footnote should be read in conjunction with the complete description~~liabilities assumed as of ~~our financing arrangements under Note 6,~~ ~~Long-Term Debt and Revolving Credit Facility~~ ~~to our Annual Report 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:~~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

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

~~2016 Financing~~

~~On June 3, 2016, we entered into Amendment No. 1~~The Company recorded goodwill of $20,650 which is attributable to the ~~Amended~~Business segment and ~~Restated Credit Agreement (the “2016 Credit Facility”) consisting of a $125.0 million term note and a $325.0 million revolving credit facility.~~is deductible for tax purposes. 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~~factors that resulted in goodwill arising from ~~our 2016 Credit Facility in connection with~~ 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.

Supplemental Pro Forma Information

The following supplemental pro forma information represents the results of ~~Nexmo~~operations as if Vonage had acquired TokBox on ~~June 3, 2016. Remaining proceeds from~~January 1, 2018.



	Six Months Ended
	June 30, 2018
Revenue	$	518,604
Net income	18,995
Earnings per share - basic	$	0.08
Earnings per share - diluted	$	0.08

The pro forma information has been adjusted to include the term note 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 repaymentspro-forma impact of ~~$14.1 million under the term note and made discretionary repayments~~amortization 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 swaps 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~~intangible assets ~~and accumulated OCI~~based on the ~~face~~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 ~~our consolidated balance sheet. As~~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 September 30, 2017, the critical terms of the swap agreements have not changed and therefore, there is no ineffectiveness to be recorded and all changes in the fair value 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:potential cost savings or any related integration costs.

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 6. Common Stock~~Goodwill

As of September 30, 2017 and December 31, 2016, the Company had 596,950 shares of common stock authorized 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 refer to Note 9, ~~Employee Benefit Plans~~ ~~in our Annual Report on Form 10-K 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, 2017 and 2016:~~

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

~~As of September 30, 2017, $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.~~

~~In any period under the 2014 $100.0 million repurchase program, cash used in financing activities related to common stock repurchases may differ~~Company's goodwill is derived primarily from the ~~comparable change~~acquisitions of Vocalocity, Telesphere, iCore, Simple Signal, Nexmo, TokBox, and NewVoiceMedia which are included in ~~stockholders' equity, reflecting timing differences between~~ the ~~recognition~~Company's Business segment. The following table provides a summary of ~~share repurchase transactions and their settlement for cash.~~the changes in the carrying amounts of 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	(867		)
Balance at June 30, 2019	$	599,080

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 5. Earnings Per Share

The following table sets forth the computation for basic and diluted (loss)/earnings per share for the three and six months ended June 30, 2019 and 2018:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Numerator
Net income	$	4,524	$	8,559	$	3,990	$	33,083
Denominator
Basic weighted average common shares outstanding	242,475		237,919		241,507		235,490
Dilutive effect of stock options and restricted stock units	7,245		10,337		8,014		12,883
Diluted weighted average common shares outstanding	249,720		248,256		249,521		248,373
Basic earnings per share
Basic earnings per share	$	0.02	$	0.04	$	0.02	$	0.14
Diluted earnings per share
Diluted earnings per share	$	0.02	$	0.03	$	0.02	$	0.13

For the three and six months ended June 30, 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		Six Months Ended
	June 30,		June 30,
	2019	2018	2019	2018
Restricted stock units	6,610	3,591	5,846	1,896
Stock options	1,828	1,977	1,823	1,126
	8,438	5,568	7,669	3,022

As the Company expects to settle the principal amount of its outstanding convertible senior notes in cash and any excess in cash or shares of the Company’s common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of $16.72 per share. The Company's convertible senior notes are further described in Note 7, Long-Term Debt.

Note 6. Income Taxes

The income tax benefit consisted of the following:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
(Loss) income before income taxes	$	(8,801	)	$	10,615		$	(19,385	)	$	24,869
Income tax benefit (expense)	13,325			(2,056		)	23,375			8,214
Effective tax rate	(151.4		)%	(19.4		)%	(120.6		)%	33.0		%

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.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

For the three and six months ended June 30, 2019, our effective tax rate was different than the statutory rate primarily due to a discrete period tax benefit of $1,404 and $6,153, respectively, which were recognized related to excess tax benefits on equity compensation. In addition, the Company’s annual effective income rate is increased due to annual estimated permanent adjustments relating to limitation on executive compensation deductibility and the inclusion of income in the U.S. due to foreign disregarded entities.

For the six months ended June 30, 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 $2,009 and $17,316 during the three and six months ended June 30, 2018, respectively, which was recognized related to excess tax benefits on equity compensation.

Uncertain Tax Positions

The Company had uncertain tax benefits of $1,200 and $1,107 as of June 30, 2019 and December 31, 2018, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company incurred interest expense or penalties of $149 for both the three and six months ended June 30, 2019, respectively, and the Company did not incur any interest expense penalties during the three and six months end June 30, 2018. The following table reconciles the total amounts of uncertain tax benefits:



	June 30, 2019			December 31, 2018
Balance as of January 1	$	1,107		$	1,086
Increase due to current year positions	—			1,107
Increase (decrease) due to prior year positions	154			(1,086		)
Decrease due to settlements and payments	(86		)	—
Increase due to foreign currency fluctuation	25			—
Uncertain tax benefits as of the end of the period	$	1,200		$	1,107

Net Operating Loss Carry Forwards ("NOLs")

As of June 30, 2019, the Company has U.S. Federal and state NOL carryforwards of $578,522 and $245,403, respectively, which expire at various times through 2037. In addition, we have NOLs for United Kingdom tax purposes of $162,535 with no expiration date.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 7. Long-Term Debt

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.

The following table summarizes the Company's long-term debt as of June 30, 2019 and December 31, 2018:



	June 30, 2019		December 31, 2018
Term note payable - due 2023	$	—	95,000
Revolving credit facility - due 2023	248,000		425,000
Convertible senior notes - due 2024	345,000		—
Long-term debt including current maturities	593,000		520,000
Less current maturities	—		10,000
Less unamortized discount	67,177		—
Less debt issuance costs	7,899		772
Total long-term debt	$	517,924	$	509,228

Convertible Senior Notes

In June 2019, the Company issued $300.0 million aggregate principal amount of 1.75% convertible senior notes due 2024 in a private placement and an additional $45.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option of the initial purchasers (collectively, "Convertible Senior Notes"). The Convertible Senior Notes are the Company's senior unsecured obligations. The Convertible Senior Notes bear interest at a rate of 1.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2019. The Convertible Senior Notes will mature on June 1, 2024, unless earlier redeemed, repurchased or converted. We may not redeem the notes prior to June 5, 2022. On or after June 5, 2022, we may redeem for cash all or a portion of the notes if the last reported sale price of the Company's common stock has been at least 130% of the conversion price then in effect on (i) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date the Company provides notice of redemption and (ii) the trading day immediately preceding the date the Company provides such notice. The total net proceeds from the offering, after deducting initial purchase discounts and expenses payable by the Company, were $334.8 million.

Each $1,000 principal amount of the Convertible Senior Notes is initially convertible into 59.8256 shares of the Company's common stock, which is equivalent to an initial conversion price of approximately $16.72 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change or a redemption period, each as defined in the indenture setting forth the terms of the Convertible Senior Notes, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Convertible Senior Notes in connection with such make-whole fundamental change or during the relevant redemption period.

The Company used the net proceeds from the offering to (i) pay the cost of the capped call transactions described below, (ii) to repurchase approximately $10 million in shares of its common stock from purchasers of the Convertible Senior Notes in privately negotiated transactions effected through one of the initial purchasers or an affiliate thereof concurrently with the pricing of the Convertible Senior Notes described below and (iii) to repay the outstanding principal balance under its credit facility.

Prior to December 1, 2023, the notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. We will satisfy any conversion election by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. The Convertible Senior Notes and shares of common stock issuable upon conversion, if any, have not been registered under the Securities Act, or under any U.S. state securities laws or other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

During the three months ended June 30, 2019, the conditions allowing holders of the Convertible Senior Notes to convert were not met.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

In accounting for the issuance of the Convertible Senior Notes, the Company separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense at an effective interest rate of 6.4% over the contractual terms of the Convertible Senior Notes.

In accounting for the transaction costs related to the Convertible Senior Notes, the Company allocated the total amount incurred to the liability and equity components of the Convertible Senior Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were $7,973 were recorded as additional debt discount and will be amortized to interest expense using the effective interest method over the contractual terms of the Convertible Senior Notes. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.

The net carrying amount of the liability component of the Convertible Senior Notes was as follows:



	June 30, 2019
Principal	$	345,000
Unamortized discount	(67,177		)
Unamortized issuance cost	(7,899		)
Net carrying amount	$	269,924

The net carrying amount of the equity component of the Convertible Senior Notes was as follows:



	June 30, 2019
Proceeds allocated to the conversion option (debt discount)	$	67,664
Issuance cost	(1,944		)
Income tax expense	(15,597		)
Net carrying amount	$	50,123

The following table sets forth the interest expense recognized related to the Convertible Senior Notes:



	June 30, 2019
Contractual interest expense	$	276
Amortization of debt discount	487
Amortization of debt issuance costs	74
Total interest expense related to the Convertible Senior Notes	$	837

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

In connection with the pricing of the Convertible Senior Notes and subsequently in connection with the exercise of the initial purchasers option to purchase additional notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the "Capped Calls"). The Capped Calls each have a strike price of $16.72 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Convertible Senior Notes. The Capped Calls have initial cap prices of $23.46 per share, subject to certain adjustments. The Capped Calls are expected generally to reduce potential dilution to the Company's common stock upon any conversion of notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap. The initial cap price of the Capped Call transactions was $23.46. The net cost of $28,325 incurred to purchase the Capped Calls and related income tax benefit of $6,772 was recorded as a reduction to additional paid-in capital on the Company's consolidated balance sheet and are not accounted for as derivatives.

Concurrently with the issuance of the Convertible Senior Notes, the Company’s board of directors approved the repurchase of an aggregate of 852,515, or $10,000 of, shares of the Company’s outstanding common stock in privately negotiated transactions at a price of $11.73 per share, which was equal to the closing price per share of the Company’s common stock on June 11, 2019, the date of the pricing of the offering of the Convertible Senior Notes. The share repurchase was recorded to treasury stock on the Company's consolidated balance sheet.

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 six months ended June 30, 2019, we repaid $311 million under the revolving credit facility, $95 million under the 2018 term note, and borrowed $134 million under the revolving credit facility. In addition, the effective interest rate was 5.19% as of June 30, 2019.

As of June 30, 2019, we were in compliance with all covenants, including financial covenants, for the 2018 Credit Facility.

2016 Financing

During the six months ended June 30, 2018, we made mandatory repayments of $9.4 million under the term note and made discretionary repayments of $35.0 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 June 30, 2019 and December 31, 2018, the fair market value of the swaps was $352 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					Six Months Ended
	June 30,					June 30,
	2019			2018		2019			2018

Accumulated OCI beginning balance	$	288		$	1,745	$	975		$	965
Reclassified from accumulated OCI to income:
Due to reclassification of previously deferred gain	(132		)	—		(265		)	—
Change in fair value of cash flow hedge accounting contracts, net of tax	(662		)	228		(1,216		)	1,008
Accumulated OCI ending balance, net of tax benefit of $100 and $711, respectively	$	(506	)	$	1,973	$	(506	)	$	1,973
Gains expected to be reclassified from accumulated OCI during the next 12 months	$	531		$	—	$	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 and six months ended June 30, 2019, the Company incurred operating lease expense of $3,726 and $7,667, respectively, related to its operating leases. Additionally, the remaining weighted average lease term for our operating leases was 6.76 years and the weighted average discount rate utilized to measure the Company's operating leases was 5.23% as of June 30, 2019.

Supplemental cash flow related to the Company's operating leases is as follows:



	Six Months Ended
	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	8,681

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	—

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Maturities of lease liabilities as of June 30, 2019 are as follows:



2019 (excluding the six months ended June 30, 2019)	$	8,099
2020	14,295
2021	10,921
2022	6,084
2023	5,643
Thereafter	22,821
Total lease payments	67,863
Less imputed interest	(10,728		)
Total	$	57,135

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

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 9. Common Stock

As of June 30, 2019 and December 31, 2018, the Company had 596,950 shares of common stock authorized and had 23,934 shares available for grants under our share-based compensation programs as of June 30, 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:



For the Three Month Ended
(in thousands)	Issued	Treasury		Outstanding
Balance at March 31, 2018	306,540	(69,651	)	236,889
Shares issued under the 2015 Equity Incentive Plan	2,029	—		2,029
Employee taxes paid on withholding shares	—	(100	)	(100	)
Balance at June 30, 2018	308,569	(69,751	)	238,818

Balance at March 31, 2019	314,233	(71,857	)	242,376
Shares issued under the 2015 Equity Incentive Plan	492	—		492
Employee taxes paid on withholding shares	—	(47	)	(47	)
Common stock repurchases (Note 7)	—	(853	)	(853	)
Balance at June 30, 2019	314,725	(72,757	)	241,968


For the Six Month Ended
(in thousands)	Issued	Treasury		Outstanding
Balance at December 31, 2017	298,174	(67,235	)	230,939
Shares issued under the 2015 Equity Incentive Plan	10,395	—		10,395
Employee taxes paid on withholding shares	—	(2,516	)	(2,516	)
Balance at June 30, 2018	308,569	(69,751	)	238,818

Balance at December 31, 2018	309,736	(69,993	)	239,743
Shares issued under the 2015 Equity Incentive Plan	4,989	—		4,989
Employee taxes paid on withholding shares	—	(1,911	)	(1,911	)
Common stock repurchases (Note 7)	—	(853	)	(853	)
Balance at June 30, 2019	314,725	(72,757	)	241,968

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

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 ~~the~~such 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 ~~federal~~foreign 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 from~~issues, number slamming, 911 access, access to telecommunication equipment and ~~cramming without impeding competition or impairing the ability~~services by persons with disabilities, caller ID services, number portability, unwanted calls to reassigned numbers, and robocalling. As we continue to expand globally, these types of ~~consumers~~regulations 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 afforded~~enforced 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~~$3,747 and ~~$1,763~~$3,302 as of ~~September~~June 30, ~~2017~~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 ~~communication~~and 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,

~~Product~~Access 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.

~~Product~~Access and product cost of revenues. Product cost of revenues includes equipment sold to customers, shipping and handling, professional services, cost of certain products including equipment or services that we give customers as promotions, and broadband ~~access.~~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~~six months ended ~~September~~June 30, ~~2017~~2019 were as follows:


	Three Months Ended									Nine Months Ended									Three Months Ended									Six Months Ended
	September 30, 2017									September 30, 2017									June 30, 2019									June 30, 2019
	Business			Consumer			Total			Business			Consumer			Total			Business			Consumer			Total			Business			Consumer			Total
Revenues
Service revenues	$	109,483		$	111,913		$	221,396		$	305,599		$	346,666		$	652,265		$	180,014		$	87,244		$	267,258		$	339,359		$	176,244		$	515,603
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⁾																			11,707			60			11,767			23,404			128			23,532
Service, access and product revenues																			191,721			87,304			279,025			362,763			176,372			539,135
USF revenues	6,738			11,770			18,508			19,386			36,280			55,666			8,299			10,260			18,559			16,854			21,136			37,990
Total revenues	129,306			123,777			253,083			364,822			383,444			748,266			200,020			97,564			297,584			379,617			197,508			577,125

Cost of revenues
Service cost of revenues⁽²⁾	50,777			19,434			70,211			139,218			62,969			202,187			86,290			8,861			95,151			156,144			18,119			174,263
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⁾																			13,594			917			14,511			27,465			1,914			29,379
Service, access and product cost of revenues																			99,884			9,778			109,662			183,609			20,033			203,642
USF cost of revenues	6,738			11,770			18,508			19,386			36,280			55,666			8,299			10,260			18,559			16,854			21,136			37,990
Total cost of revenues	70,217			32,721			102,938			196,964			104,724			301,688			108,183			20,038			128,221			200,463			41,169			241,632

Segment gross margin
Service margin	58,706			92,479			151,185			166,381			283,697			450,078			93,724			78,383			172,107			183,215			158,125			341,340
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
USF margin	—			—			—			—			—			—
Access and product margin																			(1,887		)	(857		)	(2,744		)	(4,061		)	(1,786		)	(5,847		)
Gross margin ex-USF (Service, access and product margin)																			91,837			77,526			169,363			179,154			156,339			335,493
Segment gross margin	$	59,089		$	91,056		$	150,145		$	167,858		$	278,720		$	446,578		$	91,837		$	77,526		$	169,363		$	179,154		$	156,339		$	335,493

Segment gross margin %
Service margin %	53.6		%	82.6		%	68.3		%	54.4		%	81.8		%	69.0		%	52.1		%	89.8		%	64.4		%	54.0		%	89.7		%	66.2		%
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 %)																			47.9		%	88.8		%	60.7		%	49.4		%	88.6		%	62.2		%
Segment gross margin %	45.7		%	73.6		%	59.3		%	46.0		%	72.7		%	59.7		%	45.9		%	79.5		%	56.9		%	47.2		%	79.2		%	58.1		%

(1) Includes customer premise equipment, access, ~~professional services,~~ and shipping and handling.

(2) Excludes depreciation and amortization of ~~$5,053~~$7,978 and ~~$1,799~~$1,166 for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~$14,931~~$16,192 and ~~$5,566~~$2,370 for ~~the nine~~six months ended ~~September~~June 30, ~~2017,~~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 ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 were as follows:


	Three Months Ended									Nine Months Ended									Three Months Ended									Six Months Ended
	September 30, 2016									September 30, 2016									June 30, 2018									June 30, 2018
	Business			Consumer			Total			Business			Consumer			Total			Business			Consumer			Total			Business			Consumer			Total
Revenues
Service revenues	$	86,662		$	128,167		$	214,829		$	210,214		$	399,401		$	609,615		$	127,692		$	100,467		$	228,159		$	243,994		$	204,861		$	448,855
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⁾																			12,716			289			13,005			25,247			380			25,627
Service, access and product revenues																			140,408			100,756			241,164			269,241			205,241			474,482
USF revenues	6,029			13,676			19,705			15,832			43,102			58,934			7,434			11,277			18,711			15,269			23,697			38,966
Total revenues	106,309			142,050			248,359			265,841			443,017			708,858			147,842			112,033			259,875			284,510			228,938			513,448

Cost of revenues
Service cost of revenues⁽²⁾	34,858			24,973			59,831			72,788			77,220			150,008			60,335			12,375			72,710			113,317			26,389			139,706
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⁾																			13,913			1,870			15,783			28,404			3,664			32,068
Service, access and product cost of revenues																			74,248			14,245			88,493			141,721			30,053			171,774
USF cost of revenues	6,029			13,676			19,705			15,843			43,102			58,945			7,434			11,277			18,711			15,274			23,723			38,997
Total cost of revenues	53,988			41,980			95,968			127,096			131,518			258,614			81,682			25,522			107,204			156,995			53,776			210,771

Segment gross margin
Service margin	51,804			103,194			154,998			137,426			322,181			459,607			67,357			88,092			155,449			130,677			178,472			309,149
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																			(1,197		)	(1,581		)	(2,778		)	(3,157		)	(3,284		)	(6,441		)
Gross margin ex-USF (Service, access and product margin)																			66,160			86,511			152,671			127,520			175,188			302,708
USF margin	—			—			—			(11		)	—			(11		)	—			—			—			(5		)	(26		)	(31		)
Segment gross margin	$	52,321		$	100,070		$	152,391		$	138,745		$	311,499		$	450,244		$	66,160		$	86,511		$	152,671		$	127,515		$	175,162		$	302,677

Segment gross margin %
Service margin %	59.8		%	80.5		%	72.1		%	65.4		%	80.7		%	75.4		%	52.7		%	87.7		%	68.1		%	53.6		%	87.1		%	68.9		%
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 %)																			47.1		%	85.9		%	63.3		%	47.4		%	85.4		%	63.8		%
Segment gross margin %	49.2		%	70.4		%	61.4		%	52.2		%	70.3		%	63.5		%	44.8		%	77.2		%	58.7		%	44.8		%	76.5		%	58.9		%

(1) Includes customer premise equipment, access, ~~professional services,~~ and shipping and handling.

(2) Excludes depreciation and amortization of ~~$5,015~~$4,978 and ~~$2,445~~$1,248 for the three months ended ~~September~~June 30, ~~2016~~2018 and ~~$13,807~~$9,951 and ~~$7,471~~$2,709 for ~~nine~~the six months ended ~~September~~June 30, ~~2016, respectively~~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						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Total reportable gross margin	$	150,145		$	152,391		$	446,578		$	450,244		$	169,363		$	152,671		$	335,493		$	302,677
Sales and marketing	73,576			83,731			235,245			246,676			95,362			77,685			190,885			154,821
Engineering and development	6,956			8,075			21,996			22,152			16,891			10,375			33,417			21,195
General and administrative	26,811			27,538			98,411			89,261			36,615			32,174			72,074			59,756
Depreciation and amortization	18,179			18,018			54,520			53,215			20,662			19,062			41,876			35,862
Income from operations	24,623			15,029			36,406			38,940
(Loss) Income from operations													(167		)	13,375			(2,759		)	31,043

Interest income	3			19			12			65
Interest expense	(3,821		)	(3,974		)	(11,385		)	(9,477		)	(8,487		)	(3,097		)	(16,063		)	(6,258		)
Other income (expense), net	465			(495		)	931			(237		)
Income before income taxes	$	21,270		$	10,579		$	25,964		$	29,291
Other (expense) income, net													(147		)	337			(563		)	84
(Loss) Income before income taxes benefit													$	(8,801	)	$	10,615		$	(19,385	)	$	24,869

Information about our operations by geographic location is as follows:



	June 30, 2019		December 31, 2018
Long-lived assets:
United States	$	582,735	$	596,820
United Kingdom	358,831		366,594
Israel	3,240		1,688
	$	944,806	$	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 party~~third-party hardware and software; our dependence on ~~third party~~third-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; failure~~licenses 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; our ability to raise funds necessary to settle conversion of the 2024 convertible senior notes; conditional conversion features of the convertible senior notes; the cash settlement of the convertible senior notes; the effects of the capped call transactions in connection with the convertible senior notes; fraudulent use of our name or services; intellectual property and other litigation that have been and may be brought against us; reliance on third parties for our 911 services; uncertainties relating to regulation of ~~VoIP~~business services; risks associated with legislative, regulatory or judicial actions regarding our ~~CPaaS~~business 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' ~~existing~~unimpeded 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 ~~seat~~line 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 cloud~~which 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, we~~We 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 ~~support~~integrate these cloud-based, workplace tools, Vonage integrates the ~~full range of~~entire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers ~~using two product families: Vonage Essentials, based on~~that 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 additional~~voice 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 variety~~suite 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 enterprises~~services 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 ~~communication~~and messaging services and other features around the world on a variety of devices.

Our Consumer strategy is focused on the continued penetration of our core North American markets, 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 ~~outside~~Outside 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 platform~~platforms 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						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Service revenue per customer	$	440		$	348		$	416		$	338
Business revenue churn	1.0		%	1.2		%	1.0		%	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 monthly~~Service Revenue per Customer. Service revenues per ~~seat.~~ ~~Average monthly revenues per seat~~customer for a particular period is calculated by dividing the average monthly service revenues for ~~that~~the period by the ~~simple~~ average number of ~~seats for the period, and dividing the result by~~customers over the number of months in the period. The ~~simple~~ average number of ~~seats for the period~~customers is the number of ~~seats~~customers on the first day of the period, plus the number of ~~seats~~customers on the last day of the period, divided by two. ~~Our average monthly~~Service revenues excludes revenues from trading and auction customers. Service revenue per ~~seat decreased~~customer increased from ~~$45.50 and $44.96~~$348 for the three ~~and nine~~ months ended ~~September~~June 30, ~~2016, respectively,~~2018 to ~~$43.53 and $43.70~~$440 for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017 due~~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~~existing business customers along with the acquisition of NewVoiceMedia and TokBox during the ~~removal~~second half 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~~2018. Service revenue per 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~~$338 for the six months ended June 30, ~~2016~~2018 to ~~709,736 as of September~~$416 for the six months ended June 30, ~~2017. This increase is due~~2019 primarily driven by the Company's successful efforts to ~~continued growth in our~~attract larger business customers ~~as we have increased marketing investment~~and to ~~attract these more profitable customers.~~expand services provided to our existing business customers along with the acquisition of NewVoiceMedia and TokBox during the second half of 2018.

Business Revenue ~~Churn.~~ ~~Revenue~~Churn. Business revenue churn is calculated by dividing the ~~monthly recurring~~ revenue from customers or customer locations that have ~~terminated~~been 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. ~~Revenue~~Business revenue churn ~~was 1.4%~~decreased from 1.2% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, respectively, and 1.2% and 1.3%~~2018 to 1.0% for the three and ~~nine~~six months ended ~~months ended September~~June 30, ~~2017,~~2019, respectively. Our revenue churn ~~will~~may fluctuate over time due to economic conditions, seasonality in certain customer's operations, loss of customers who are acquired, and competitive pressures including promotional pricing. We are continuing to invest in our overall quality of service which includes customer care headcount and systems, billing systems, on-boarding processes and self-service options to ensure we scale our processes to our growth and continue to improve the overall customer experience.

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						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2017			2016			2017			2016			2019			2018			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		$	26.89		$	26.37		$	26.62		$	26.45
Subscriber lines (at period end)	1,543,760			1,767,212			1,543,760			1,767,212			1,185,835			1,393,131			1,185,835			1,393,131
Customer churn	1.9		%	2.2		%	2.0		%	2.2		%	1.7		%	1.7		%	1.8		%	1.8		%

~~Revenues.~~ ~~Represents revenue from our Consumer customers including revenues from our legacy business customers using Vonage VoIP products.~~

Average ~~monthly revenues~~Monthly 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~~increased from ~~$26.36 and $26.55~~$26.37 for the three ~~and nine~~ months ended ~~September~~June 30, ~~2016, respectively~~2018 to ~~$26.29 and $26.18~~$26.89 for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017, respectively,~~2019 due primarily to ~~lower international long distance pay-per-use revenue.~~the Company's ability to retain its more tenured customers. Our average monthly revenues per subscriber line increased from $26.45 for the six months ended June 30, 2018 to $26.62 for the six months ended June 30, 2019 due primarily to 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 ~~1,767,212~~1,393,131 as of ~~September~~June 30, ~~2016~~2018 to ~~1,543,760~~1,185,835 as of ~~September~~June 30, ~~2017,~~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, to 1.9% and 2.0%~~remained at 1.7% for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017, respectively.~~2018 and 2019. Customer churn remained at 1.8% for the six months ended June 30, 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 ~~statement~~statements of operations for the periods indicated:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018

Total revenues	100	%	100	%	100	%	100	%

Operating Expenses:
Cost of revenues (exclusive of depreciation and amortization)	43		41		42		41
Sales and marketing	32		30		33		30
Engineering and development	6		4		6		4
General and administrative	12		13		12		12
Depreciation and amortization	7		7		7		7
Total operating expenses	100		95		100		94
(Loss) income from operations	—		5		—		6
Other Income (Expense):
Interest expense	(3	)	(1	)	(3	)	(1	)
Other income (expense), net	—		—		—		—
Total other income (expense), net	(3	)	(1	)	(3	)	(1	)
(Loss) income before income taxes	(3	)	4		(3	)	5
Income tax benefit (expense)	5		(1	)	4		1
Net income	2	%	3	%	1	%	6	%

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 ~~discussion~~Discussion of the ~~results~~Results of ~~operations~~Operations for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018

The Company reported loss before income taxes of $8,801 for the three months ended June 30, 2019 and income before income taxes of $10,615 for the three months ended June 30, 2018, and loss before income taxes of $19,385 for the six months ended June 30, 2019 and income before income taxes of $24,869 for the six months ended June 30, 2018, respectively. The decrease was primarily driven by higher other operating expenses of $30,234 and $66.618 for the three and six months ended June 30, 2019, respectively, 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 income of $4,524 and $8,559 for the three months ended June 30, 2019 and 2018, and net income of $3,990 and $33,083 for the six months ended June 30, 2019 and 2018, respectively. The decrease in net income for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 is mainly due to the aforementioned decrease in (loss)/income before income taxes offset by the increase in income tax benefit/(expense) of $15.381. The decrease in net income for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 is mainly due to the aforementioned decrease in income before income taxes offset by the increase in income tax expense of $15,161.

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 and ~~nine month periods ending September~~six months ended June 30, ~~2017~~2019 and ~~2016:~~2018:


(in thousands, except percentages)	Three Months Ended									Nine Months Ended									Three Months Ended								Six Months Ended
	September 30,									September 30,									June 30,								June 30,
	2017		2016		Dollar Change			Percent Change		2017		2016		Dollar Change			Percent Change		2019		2018		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	%	$	297,584	$	259,875	$	37,709	15	%	$	577,125	$	513,448	$	63,677	12	%
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⁾																			128,221		107,204		21,017		20	%	241,632		210,771		30,861		15	%
Gross margin	$	150,145	$	152,391	$	(2,246	)	(1	)%	$	446,578	$	450,244	$	(3,666	)	(1	)%	$	169,363	$	152,671	$	16,692	11	%	$	335,493	$	302,677	$	32,816	11	%

(1) Excludes depreciation and amortization of ~~$6,852~~$9,144 and ~~$7,460~~$6,226 for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively and ~~$20,497~~$18,562 and ~~$21,278~~$12,660 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

Total revenues and cost of revenues were impacted by the following trends and uncertainties:

Three Months Ended June 30, 2019 compared to Three Months Ended June 30, 2018

Total revenues increased 15% for the three months ended June 30, 2019 as compared to the prior year period. The increase is primarily due to the acquisition of NewVoiceMedia and TokBox in the second half of 2018 along with business customer growth driving an increase in revenues of $52,178, offset by declining consumer revenues of $14,469 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 20% for the three months ended June 30, 2019 as compared to the prior year period driven by increased costs incurred in servicing our Business customers of $26,501 due to the increase in customers and prior year acquisitions. This was partially offset by a decrease in costs in Consumer of $5,484 as subscriber lines continues to decline resulting in lower international and long-distance termination costs.

Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018

Total revenues increased 12% for the six months ended June 30, 2019 as compared to the prior year period. The increase is primarily due to the acquisition of NewVoiceMedia and TokBox in the second half of 2018 along with business customer growth driving an increase in revenues of $95,107, offset by declining consumer revenues of $31,430 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 15% for the six months ended June 30, 2019 as compared to the prior year period driven by increased costs incurred in servicing our Business customers of $43,468 due to the increase in customers and prior year acquisitions. This was partially offset by a decrease in costs in Consumer of $12,607 as subscriber lines continues to decline resulting in lower international and long-distance termination costs.

Business Gross Margin for the Three and Six Months Ended June 30, 2019 and 2018


	Three Months Ended									Nine Months Ended									Three Months Ended									Six Months Ended
	September 30,									September 30,									June 30,									June 30,
(in thousands, except percentages)	2017		2016		Dollar Change			Percent Change		2017		2016		Dollar Change			Percent Change		2019		2018		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	%	$	180,014	$	127,692	$	52,322		41	%	$	339,359	$	243,994	$	95,365		39	%
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⁾																			11,707		12,716		(1,009		)	(8	)%	23,404		25,247		(1,843		)	(7	)%
Service, access and product revenues																			191,721		140,408		51,313			37	%	362,763		269,241		93,522			35	%
USF revenues	6,738		6,029		709			12	%	19,386		15,832		3,554			22	%	8,299		7,434		865			12	%	16,854		15,269		1,585			10	%
Total revenues	129,306		106,309		22,997			22	%	364,822		265,841		98,981			37	%	200,020		147,842		52,178			35	%	379,617		284,510		95,107			33	%

Cost of revenues
Service cost of revenues⁽²⁾	50,777		34,858		15,919			46	%	139,218		72,788		66,430			91	%	86,290		60,335		25,955			43	%	156,144		113,317		42,827			38	%
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⁾																			13,594		13,913		(319		)	(2	)%	27,465		28,404		(939		)	(3	)%
Service, access and product cost of revenues																			99,884		74,248		25,636			35	%	183,609		141,721		41,888			30	%
USF cost of revenues	6,738		6,029		709			12	%	19,386		15,843		3,543			22	%	8,299		7,434		865			12	%	16,854		15,274		1,580			10	%
Total cost of revenues	70,217		53,988		16,229			30	%	196,964		127,096		69,868			55	%	108,183		81,682		26,501			32	%	200,463		156,995		43,468			28	%

Segment gross margin
Service margin	58,706		51,804		6,902			13	%	166,381		137,426		28,955			21	%	93,724		67,357		26,367			39	%	183,215		130,677		52,538			40	%
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)																			91,837		66,160		25,677			39	%	179,154		127,520		51,634			40	%
Segment gross margin	$	59,089	$	52,321	$	6,768		13	%	$	167,858	$	138,745	$	29,113		21	%	$	91,837	$	66,160	$	25,677		39	%	$	179,154	$	127,515	$	51,639		40	%


Segment gross Margin %
Service margin %	53.6	%	59.8	%	54.4	%	65.4	%	52.1	%	52.7	%	54.0	%	53.6	%
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) %									47.9	%	47.1	%	49.4	%	47.4	%
Segment gross margin %	45.7	%	49.2	%	46.0	%	52.2	%	45.9	%	44.8	%	47.2	%	44.8	%


(1)	Includes customer premise equipment, access, ~~professional services,~~ and shipping and handling.


(2)	Excludes depreciation and amortization of $7,978 and $4,978 for the three ~~and~~ ~~nine~~ months ended ~~September~~ June 30, ~~2017 of $5,053~~2019 and ~~$14,931,~~2018, respectively and $16,192 and $9,951 for the ~~three~~six months ended June 30, 2019 and ~~nine months ended~~ ~~September 30, 2016 of $5,015, and $13,807, respectively.~~ 2018.

Three Months Ended ~~September~~June 30, ~~2017~~2019 compared to Three Months Ended ~~September~~June 30, ~~2016~~2018

~~Service revenues.~~ ~~Service revenues increased by $22,821, or 26%, due primarily to Nexmo which represents 17% of~~The following table describes the ~~total~~ increase in business gross margin for the three months ended June 30, 2019 as compared to the ~~prior year quarter as~~three months ended June 30, 2018:



	(in thousands)
Service gross margin excluding the impact of the acquisitions increased 16% primarily due to overall growth in our Business customer base of 10% as compared to the prior year quarter	$	10,813
Service gross margin also increased due to acquisitions of TokBox on August 1, 2018 and NewVoiceMedia on October 31, 2018, respectively	15,554
Access and product gross margin decreased due to higher costs providing access services to Business customers during the current quarter	(690		)
Increase in segment gross margin	$	25,677

Business service gross margin percentage decreased to 52.1% for the ~~Company has continued to focus on growth~~three months ended June 30, 2019 from 52.7% for the three months ended June 30, 2018. The decrease in ~~CPaaS since the acquisition~~business service gross margin percentage is a result of ~~Nexmo in June 2016. In addition, the prior year results excludes~~ a ~~current year correction in reporting a portion~~greater proportion 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~~services across our strategy of increasing higher margin CPaaS integrated voice business is currently underway. This increase is slightly offset by decrease in service revenues attributed to the sale of our Hosted Infrastructure product line completed on May 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 volumes 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 increase in the number of UCaaS seats.~~

~~Nine Months EndedSeptember 30, 2017 compared toNine Months EndedSeptember 30, 2016~~

~~Service revenues.~~ Service revenues increased 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 increase in the current year was an increase in the number of UCaaS seats as we have shifted marketing investments from Consumer to attract more profitable Business customers.

~~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~~during the quarter ended June 30, ~~2017 of costs associated with Nexmo's trading activities on a gross basis~~2019 as ~~discussed above. Costs during~~compared to the ~~current year~~same period ~~are also slightly higher due to increased technical care costs and network operations cost in support of growth~~ in the prior quarter. Our gross margin percentage may continue to be impacted by changes in the mix of service offerings provided to our customers across our Business segment.

~~USF revenues and USF cost~~Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018

The following table describes the increase in business gross margin for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018:



	(in thousands)
Service gross margin excluding the impact of the acquisitions increased 17% primarily due to overall growth in our Business customer base of 10% as compared to the prior year quarter	$	22,580
Service gross margin also increased due to acquisitions of TokBox on August 1, 2018 and NewVoiceMedia on October 31, 2018, respectively	29,958
Access and product gross margin decreased due to higher costs providing access services to Business customers during the current quarter	(904		)
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	$	51,639

Business service gross margin percentage increased to 54.0% for the six months ended June 30, 2019 from 53.6% for the six months ended June 30, 2018. The increase in business service gross margin percentage is a result of ~~revenues.~~ ~~USF revenues increased by $3,554, or 22% and USF cost~~the acquisition of ~~revenues increased by $3,543, or 22%, due to synchronization~~NewVoiceMedia along with the sale of ~~methodologies~~a greater proportion of higher margin services across our Business segment ~~and increase~~for the six months ended June 30, 2019 as compared to the same period in the ~~number~~prior quarter. Our gross margin percentage may continue to be impacted by changes in the mix of ~~UCaaS seats.~~service offerings provided to our customers across our Business segment.

Consumer Gross Margin for the Three and Six Months Ended June 30, 2019 and 2018


	Three Months Ended									Nine Months Ended									Three Months Ended									Six Months Ended
	September 30,									September 30,									June 30,									June 30,
(in thousands, except percentages)	2017		2016		Dollar Change			Percent Change		2017		2016		Dollar Change			Percent Change		2019		2018		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	)%	$	87,244	$	100,467	$	(13,223	)	(13	)%	$	176,244	$	204,861	$	(28,617	)	(14	)%
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⁾																			60		289		(229		)	(79	)%	128		380		(252		)	(66	)%
Service, access and product revenues																			87,304		100,756		(13,452		)	(13	)%	176,372		205,241		(28,869		)	(14	)%
USF revenues	11,770		13,676		(1,906		)	(14	)%	36,280		43,102		(6,822		)	(16	)%	10,260		11,277		(1,017		)	(9	)%	21,136		23,697		(2,561		)	(11	)%
Total revenues	123,777		142,050		(18,273		)	(13	)%	383,444		443,017		(59,573		)	(13	)%	97,564		112,033		(14,469		)	(13	)%	197,508		228,938		(31,430		)	(14	)%

Cost of revenues
Service cost of revenues⁽²⁾	19,434		24,973		(5,539		)	(22	)%	62,969		77,220		(14,251		)	(18	)%	8,861		12,375		(3,514		)	(28	)%	18,119		26,389		(8,270		)	(31	)%
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⁾																			917		1,870		(953		)	(51	)%	1,914		3,664		(1,750		)	(48	)%
Service, access and product cost of revenues																			9,778		14,245		(4,467		)	(31	)%	20,033		30,053		(10,020		)	(33	)%
USF cost of revenues	11,770		13,676		(1,906		)	(14	)%	36,280		43,102		(6,822		)	(16	)%	10,260		11,277		(1,017		)	(9	)%	21,136		23,723		(2,587		)	(11	)%
Total cost of revenues	32,721		41,980		(9,259		)	(22	)%	104,724		131,518		(26,794		)	(20	)%	20,038		25,522		(5,484		)	(21	)%	41,169		53,776		(12,607		)	(23	)%

Segment gross margin
Service margin	92,479		103,194		(10,715		)	(10	)%	283,697		322,181		(38,484		)	(12	)%	78,383		88,092		(9,709		)	(11	)%	158,125		178,472		(20,347		)	(11	)%
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)																			77,526		86,511		(8,985		)	(10	)%	156,339		175,188		(18,849		)	(11	)%
Segment gross margin	$	91,056	$	100,070	$	(9,014	)	(9	)%	$	278,720	$	311,499	$	(32,779	)	(11	)%	$	77,526	$	86,511	$	(8,985	)	(10	)%	$	156,339	$	175,162	$	(18,823	)	(11	)%


Segment gross Margin %
Service margin %	82.6	%	80.5	%	81.8	%	80.7	%	89.8	%	87.7	%	89.7	%	87.1	%
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) %									88.8	%	85.9	%	88.6	%	85.4	%
Segment gross margin %	73.6	%	70.4	%	72.7	%	70.3	%	79.5	%	77.2	%	79.2	%	76.5	%


(1)	Includes customer premise equipment ~~professional services,~~ and shipping and handling.


(2)	Excludes depreciation and amortization of $1,166 and $1,248 for the three ~~and~~ ~~nine~~ months ended ~~September~~ June 30, ~~2017 of $1,799~~2019 and ~~$5,566,~~2018, respectively and $2,370 and $2,709 for the ~~three~~six months ended June 30, 2019 and ~~nine months ended~~ ~~September 30, 2016 of $2,445, and $7,471, respectively.~~ 2018.

Three Months Ended ~~September~~June 30, ~~2017~~2019 compared to Three Months Ended ~~September~~June 30, ~~2016~~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 to~~The following table describes the decrease in ~~customers' equipment costs~~consumer gross margin for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018:



	(in thousands)
Service gross margin decreased primarily due to a decrease in subscriber lines of 15% resulting in lower gross margin of $10,745 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 $1,036	$	(9,709	)
Access and product gross margin increased 46% primarily due lower equipment costs associated with sales to customers during the current quarter	724
Decrease in segment gross margin	$	(8,985	)

Consumer service gross margin percentage increased to 89.8% for the three months ended June 30, 2019 from 87.7% for the three months ended June 30, 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%~~Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018

The following table describes the decrease in consumer gross margin for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018:



	(in thousands)
Service gross margin decreased primarily due to a decrease in subscriber lines of 15% resulting in lower gross margin of $21,165 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 $818	$	(20,347	)
Access and product gross margin increased 46% primarily due lower equipment costs associated with sales to customers during the current quarter	1,498
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	$	(18,823	)

Consumer service gross margin percentage increased to 89.7% for the six months ended June 30, 2019 from 87.1% for the six months ended June 30, 2018 due to lower ~~subscriber lines.~~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.

~~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~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively:


	Three Months Ended									Nine Months Ended									Three Months Ended								Six Months Ended
	September 30,									September 30,									June 30,								June 30,
	2017		2016		Dollar Change			Percent Change		2017		2016		Dollar Change			Percent Change
(in thousands, except percentages)																			2019		2018		Dollar Change		Percent Change		2019		2018		Dollar Change		Percent Change
Sales and marketing	$	73,576	$	83,731	$	(10,155	)	(12	)%	$	235,245	$	246,676	$	(11,431	)	(5	)%	$	95,362	$	77,685	$	17,677	23	%	$	190,885	$	154,821	$	36,064	23	%
Engineering and development	6,956		8,075		(1,119		)	(14	)%	21,996		22,152		(156		)	(1	)%	16,891		10,375		6,516		63	%	33,417		21,195		12,222		58	%
General and administrative	26,811		27,538		(727		)	(3	)%	98,411		89,261		9,150			10	%	36,615		32,174		4,441		14	%	72,074		59,756		12,318		21	%
Depreciation and amortization	18,179		18,018		161			1	%	54,520		53,215		1,305			2	%	20,662		19,062		1,600		8	%	41,876		35,862		6,014		17	%
Total other operating expenses	$	125,522	$	137,362	$	(11,840	)	(9	)%	$	410,172	$	411,304	$	(1,132	)	—	%	$	169,530	$	139,296	$	30,234	22	%	$	338,252	$	271,634	$	66,618	25	%

Three Months Ended ~~September~~June 30, ~~2017~~2019 compared to Three Months Ended ~~September~~June 30, ~~2016~~2018

Total other operating expenses ~~decreased~~increased by ~~$11,840~~$30,234 as compared to the three months ended ~~September~~June 30, ~~2016~~2018 due to the following:

Sales and marketing expense ~~decreased~~increased by ~~$10,155~~$17,677, primarily due to ~~a reduction~~additional costs from TokBox and NewVoiceMedia which were acquired in ~~Consumer~~August 2018 and October 2018, respectively. Additionally, sales and marketing ~~through traditional~~costs 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 cost~~marketing initiatives and ~~churn profiles~~the attendance at certain conferences which ~~was largely offset by an increase~~were not attended in ~~Business marketing as we have shifted marketing investment to attract these more profitable customers.~~the previous year.

Engineering and development expense ~~decreased~~increased by ~~$1,119 due~~$6,516, in connection with the Company's continued transformation focus on innovation especially in regards to ~~decreased employee costs associated with engineering costs~~developing further functionality related to ~~Consumer as~~its proprietary platform in order to support customers through the mid-market and enterprise sector.


•	General and administrative expense increased by $4,441, 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 $1,600 primarily due to the amortization of acquired intangible assets related to TokBox and NewVoiceMedia.

Six Months Ended June 30, 2019 compared to ~~the prior year as the Company has focused on the ongoing growth of the Business segment.~~

~~Nine~~Six Months Ended ~~September~~June 30, ~~2017 compared to Nine Months Ended September 30, 2016~~2018

Total other operating expenses ~~decreased~~increased by ~~$1,132~~$66,618 as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 due to the following:

Sales and marketing expense ~~decreased~~increased by ~~$11,431~~$36,064, primarily due to ~~a shift~~additional costs from TokBox and NewVoiceMedia which were acquired in ~~traditional~~August 2018 and October 2018, respectively. Additionally, sales and marketing costs were impacted by increased spending in the current year related to media marketing ~~investments from Consumer~~initiatives and the attendance at certain conferences which were not attended in the previous year.

Engineering and development expense increased by $12,222, in connection with the Company's continued transformation focus on innovation especially in regards to ~~Business~~developing further functionality related to its proprietary platform in order to support customers ~~as part of an effort to attract these more profitable customers during~~through the ~~current year.~~mid-market and enterprise sector.

General and administrative expense increased by ~~$9,150~~$12,318, primarily due to higher personnel costs driven by the increase in headcount following the acquisition of ~~Nexmo during~~TokBox and NewVoiceMedia.

Depreciation and amortization expense increased by $6,014 primarily due to the ~~prior year along with costs associated with restructuring activities during the current year period.~~amortization of acquired intangible assets related to TokBox and NewVoiceMedia.

Other Income (Expense)


(in thousands, except percentages)	Three Months Ended											Nine Months Ended											Three Months Ended											Six Months Ended
	September 30,											September 30,											June 30,											June 30,
	2017			2016			Dollar Change			Percent Change		2017			2016			Dollar Change			Percent Change		2019			2018			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	)%	$	(8,487	)	$	(3,097	)	$	5,390		174	%	$	(16,063	)	$	(6,258	)	$	9,805		157	%
Other income (expense), net	465			(495		)	960			(194	)%	931			(237		)	1,168			(493	)%	(147		)	337			(484		)	(144	)%	(563		)	84			(647		)	(770	)%
	$	(3,353	)	$	(4,450	)	$	1,097				$	(10,442	)	$	(9,649	)	$	(793	)			$	(8,634	)	$	(2,760	)	$	(5,874	)			$	(16,626	)	$	(6,174	)	$	(10,452	)

Three Months Ended ~~September~~June 30, ~~2017~~2019 compared to Three Months Ended ~~September~~June 30, ~~2016~~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,~~$5,390, or ~~20%~~174%, was mainly due ~~mainly~~ to ~~the funds we borrowed from the 2016~~higher principal balances on our 2018 Credit Facility that we entered into in July 2018 along with rising rates during three months ended June 30, 2019, as well as interest expense associated with the convertible senior note issued in June ~~2016~~2019.

Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018

Interest expense. The increase in ~~connection~~interest expense of $9,805, or 157%, was mainly due to higher principal balances on our 2018 Credit Facility that we entered into in July 2018 along with rising rates during six months ended June 30, 2019., as well as interest expense associated with the ~~acquisition of Nexmo~~convertible senior note issue in June 2019.

Income Taxes



(in thousands, except percentages)	Three Months Ended										Six Months Ended
	June 30,										June 30,
	2019			2018			Dollar Change		Percent Change		2019			2018			Dollar Change		Percent Change
Income tax benefit (expense)	$	13,325		$	(2,056	)	$	15,381	748	%	$	23,375		$	8,214		$	15,161	185	%
Effective tax rate	(151		)%	(19		)%					(121		)%	33		%

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 ~~additional funds we borrowed in the first~~rate to fluctuate from quarter ~~of 2017~~ to ~~fund operations.~~quarter.

~~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~~Three Months Ended June 30, 2019 compared to Three Months Ended June 30, 2018

During the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2019, the income tax benefit includes a discrete tax benefit related to excess tax benefits on equity compensation along with permanent adjustments related to executive compensation deductibility and inclusion of income related to foreign disregarded entities.

During the three months ended June 30, 2018, we recognized an additional discrete period tax ~~benefits of $9,539 and $1,433 which were recognized~~benefit related to excess tax benefits on equity compensation recognized ~~primarily in~~during the ~~first quarter~~quarter.

Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018

During the six months ended June 30, 2019, the income tax benefit includes a discrete tax benefit of ~~2017 as well as an adjustment to our deferred asset~~$6,153 related to ~~stock compensation.~~excess tax benefits on equity compensation along with permanent adjustments related to executive compensation deductibility and the inclusion of income related to foreign disregarded entities.

InDuring the ~~first quarter of 2016~~six months ended June 30, 2018, we recognized a discrete period tax ~~expense~~benefit of ~~$1,220 was recorded~~$17,316 related to ~~expired stock options which was partially offset by $389 which was recorded during the second quarter of 2016 and $661 which was recorded~~excess tax benefits on equity compensation recognized in the ~~third quarter~~first half of ~~2016. The provision also includes the federal alternative minimum tax and state and local income taxes.~~2018.

Liquidity and Capital Resources

Overview

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, we ~~generated~~had 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								Six Months Ended
	September 30,								June 30,
	2017			2016			Dollar Change
	(in thousands)
(in thousands)									2019			2018			Dollar Change
Net cash provided by operating activities	$	80,600		$	69,614		10,986		$	28,067		$	65,935		$	(37,868	)
Net cash used in investing activities	(23,626		)	(188,637		)	165,011		(22,453		)	(12,007		)	(10,446		)
Net cash (used)/provided by financing activities	(56,757		)	93,264			(150,021	)
Net cash provided by (used in) financing activities									8,025			(58,033		)	66,058
Effect of exchange rate changes on cash and cash equivalents									(1,101		)	(1,205		)	104

Operating Activities

Cash provided by operating activities ~~increased~~decreased to ~~$80,600~~$28,067 for the ~~nine~~six months ended ~~September~~June 30, ~~2017 compared to $69,614~~2019 from $65,935 for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, primarily due to ~~an increase~~a decrease in earnings as compared to the prior period ~~attributed to~~as a result of acquisitions and a decrease in ~~deferred taxes~~accounts payable of ~~$9,172 and contingent consideration~~$22,689 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, 2017~~amortization of intangible assets of $10,575 driven by acquired intangible assets associated with NewVoiceMedia in the ~~acquisition~~second 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 ~~decreased~~increased by ~~$5,681~~$4,484 during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the prior year ~~period.~~period primarily due to the timing of payments.

Investing Activities

Cash used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 of ~~$23,626~~$22,453 was mainly attributable to the purchase of capital expenditures of ~~$15,790~~$9,456 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.~~$12,997.

Cash used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 of ~~$188,637~~$12,007 was mainly attributable to the ~~acquisition of Nexmo for cash proceeds of $163,042,~~ purchase of capital expenditures of ~~$19,980~~$7,787 and development of software assets of ~~$8,987,~~$4,220.

Financing Activities

Cash provided by financing activities for the six months ended June 30, 2019 of $8,025 was primarily attributable to $345,000 in proceeds received from the issuance of convertible senior notes, $134,000 in proceeds received from draws on the 2018 credit facility and $1,264 in proceeds received from the exercise of stock options, offset by $406,000 of repayments under the ~~sales~~2018 credit facility, $10,000 common stock repurchase as well as $28,325 payment for capped call transactions and costs in connection of ~~marketable securities, net~~the issuance of ~~purchase of $3,372.~~

~~Financing Activities~~convertible senior notes, $19,023 in employee taxes paid on withholding shares and $8,891 related to payments for financing costs.

Cash used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 of ~~$56,757~~$58,033 was primarily attributable to ~~$14,063~~$9,375 in 2016 term note principal payments, ~~$42,000~~$35,000 in 2016 revolving credit facility principal payments, ~~$2,500 in patent license payments, $3,201~~$95 in capital lease payments, ~~$9,542 in common stock repurchases,~~ and ~~$14,927~~$28,618 in employee taxes paid on withholding shares, offset by ~~$14,476~~$5,055 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 financing activities for the nine months ended September 30, 2016 of $93,264 was primarily attributable to $181,250 in net proceeds received from our 2016 Credit Facility and $6,169 in proceeds received from the exercise of stock option, offset by $9,375 in 2016 term note principal payments, $25 million in 2016 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.

Sources of Liquidity

The principal sources of liquidity are derived from available borrowings under our existing financing arrangements, existing cash on hand, and cash flows from operations. As described in Note 7, Long-Term Debt and Revolving Credit Facility, to the Consolidated Financial Statements, the Company's financing arrangements consist of its Convertible Senior Notes and the 2018 Credit Facility which is comprised of a $100,000 term note and a $500,000 revolving credit facility.

Available Borrowings Under the ~~2016~~2018 Credit Facility

We maintain significant availability under our lines of credit to meet our short-term liquidity requirements. As of ~~September~~June 30, ~~2017,~~2019, amounts available under the ~~2016~~2018 Credit Facility totaled ~~$143~~$252 million.

State and Local Sales Taxes

We ~~also~~ have contingent liabilities for state and local sales taxes. As of ~~September~~June 30, ~~2017,~~2019, we had a reserve of ~~$901.~~$3,747. 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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 were ~~$25,228,~~$22,453, of which ~~$9,438~~$12,997 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.$45,000.

~~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~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 we had stand-by letters of credit totaling ~~$1,561~~$1,523 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, ~~Basis~~2, 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, ~~impairment~~valuation of goodwill and ~~long lived~~intangible assets, income taxes and ~~valuation allowance~~capitalized 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 and~~changes to our critical accounting ~~for business combinations.~~

policy with respect to recognition of leasing arrangements as a result of the adoption. As of ~~September~~June 30, ~~2017,~~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.



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 assets~~Union, and ~~liabilities of these operations. We also have a~~Asia. 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 Facility~~our credit facilities we have entered into three interest rate swap agreements which were executed on July 14, 2017. The swaps have an aggregate notional amount of $150 million and are effective on July 31, 2017 through June 3, ~~2020 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~~June 30, ~~2017,~~2019, if the interest rate on our variable rate debt changed by 1% on our ~~2016 term note, our annual debt service payment would change by approximately $1 million. As of September 30, 2017, if the interest rate on our variable rate debt changed by 1% on our 2016~~2018 revolving credit facility, our annual debt service payment would change by approximately ~~$1.8 million.~~$1,000.

As of June 30, 2019, we had $345.0 million outstanding on our 1.75% convertible senior notes due 2024. The Notes have 1.75% percent fixed annual interest rates and, therefore, our economic interest rate exposure on our Notes is fixed. However, the values of the Notes are exposed to interest rate risk. Generally, the fair market value of our fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair values of the Notes are affected by our stock price. The fair value of the Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines in value. Additionally, we carry the Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only.



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



Item 1.	Legal Proceedings

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.



Item 1A.	Risk Factors

~~There~~

Other than the risk factors set forth below, 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.

We may not have the ability to raise the funds necessary to settle conversions of the convertible senior notes due 2024 in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the notes.

Holders of our 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) have the right to require us to repurchase their Convertible Senior Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Convertible Senior Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Senior Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Senior Notes surrendered therefor or Convertible Senior Notes being converted. In addition, our ability to repurchase the Convertible Senior Notes or to pay cash upon conversions of the Convertible Senior Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Convertible Senior Notes at a time when the repurchase is required by the indenture setting forth the terms of the Convertible Senior Notes or to pay any cash payable on future conversions of the Convertible Senior Notes as required by the indenture would constitute a default under the indenture. A default under the indenture setting forth the terms of the Convertible Senior Notes or the occurrence of the fundamental change itself may lead to a default under our 2018 Credit Facility or other agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Senior Notes or make cash payments upon conversions thereof. The increase in the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption may not adequately compensate holders for any lost value of such holders’ Convertible Senior Notes as a result of such transaction.

If a make-whole fundamental change occurs prior to the maturity date or if we issue a notice of redemption with respect to the Convertible Senior Notes, under certain circumstances, we will increase the conversion rate by a number of additional shares of our common stock for Convertible Senior Notes converted in connection with such make-whole fundamental change or notice of redemption, as the case may be. The increase in the conversion rate will be determined based on the date on which the specified corporate transaction becomes effective, or the date of the notice of redemption, as the case may be and the price paid (or deemed to be paid) per share of our common stock in such transaction or with respect to such redemption, as the case may be. The increase in the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption may not adequately compensate holders for any lost value of such holders’ Convertible Senior Notes as a result of such transaction or redemption. In addition, if the price per share of our common stock paid (or deemed paid) in the transaction is greater than $60.00 per share or less than $11.73 per share (in each case, subject to adjustment), no additional shares will be added to the conversion rate. Moreover, in no event will the conversion rate per $1,000 aggregate principal amount of Convertible Senior Notes as a result of this adjustment exceed 85.2514 shares of common stock, subject to adjustment in the same manner as the conversion rate.

Our obligation to increase the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption could be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness and equitable remedies.

The conditional conversion feature of the Convertible Senior Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the Convertible Senior Notes is triggered, holders of Convertible Senior Notes will be entitled to convert the Convertible Senior Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Senior Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of Convertible Senior Notes do not elect to convert their Convertible Senior Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Senior Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

Convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, could have a material effect on our reported financial results.

Under certain circumstances, convertible debt instruments (such as the Convertible Senior Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Convertible Senior Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Convertible Senior Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Senior Notes, then our diluted earnings per share could be adversely affected.

The capped call transactions entered into in connection with the pricing of the Convertible Senior Notes may affect the value of the Convertible Senior Notes and our common stock.

In connection with the pricing of the Convertible Senior Notes and subsequently in connection with the exercise of the initial purchasers’ exercise of their option to purchase additional Convertible Senior Notes, we entered into capped call transactions (the “Capped Calls”) with certain optioncounterparties. The Capped Calls are expected generally to reduce the potential dilution uponconversion of the Convertible Senior Notes and/or offset any cash payments we are required to make in excess of the aggregateprincipal amount of converted Convertible Senior Notes, as the case may be, with such reduction and/or offset subject to a cap.

In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of the Convertible Senior Notes and prior to the maturity of the Convertible Senior Notes (and are likely to do so during any observation period related to a conversion of the Convertible Senior Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Convertible Senior Notes, which could affect holders’ ability to convert the Convertible Senior Notes and, to the extent the activity occurs during any observation period related to a conversion of Convertible Senior Notes, it could affect the number of shares and value of the consideration that holders will receive upon conversion of the Convertible Senior Notes.

In addition, if any such Capped Call fails to become effective, the option counterparty party thereto may unwind its hedge positions with respect to our common stock, which could adversely affect the value of our common stock and, if the Convertible Senior Notes have been issued, the value of the Convertible Senior Notes.



Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

~~Item 2(a) and (b) are not applicable.~~

~~(c) Common~~The table below provides information with respect to repurchase of our common stock ~~repurchases (in thousands, except per share value):~~

~~During~~made during the three months ended ~~September~~June 30, ~~2017, we did not repurchase Vonage Holdings Corp.~~2019:



Issuer Purchases of Equity Securities
Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1 - April 30, 2019	—	—	—	—
May 1 - May 31, 2019	—	—	—	-
June 1 - June 30, 2019⁽¹⁾	852,515	11.73⁽²⁾	—	—
	852,515		—

(1) In connection with the offering of the Convertible Senior Notes, the Company purchased 852,515 shares of our common stock ~~pursuant~~in a privately negotiated transaction.

(2) The price paid per share of $11.73 was equal to the ~~2014 $100.0 million repurchase program. When executed, repurchases occur in~~closing price per share of our common stock on June 11, 2019, the ~~open market and pursuant to a trading plan under Rule 10b5-1~~date of the ~~Securities Exchange Act~~pricing and offering of ~~1934. As of September 30, 2017, approximately $42,533 remained of our 2014 $100.0 million repurchase program.~~the Convertible Senior Notes.



Item 3.	Defaults Upon Senior Securities

None.



Item 4.	Mine Safety Disclosures

Not applicable.



Item 5.	Other Information

None.



Item 6.	Exhibits

See accompanying Exhibit Index for a list of the exhibits filed or furnished with this Quarterly Report on Form 10-Q.

EXHIBIT INDEX




~~31.1~~	4.1		Indenture, dated as of June 14, 2019, between Vonage Holdings Corp. and Wilmington Trust, National Association, as trustee (incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-32887) filed as Exhibit 4.1 on June 14, 2019)
4.2		Form of 1.75% Convertible Senior Notes due 2024 (included in Exhibit 4.1 and incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-32887) filed as Exhibit 4.2 on June 14, 2019)
10.1		Amended and restated 2015 Equity Incentive Plan*
10.2		Amended and restated 2015 Equity Incentive Plan - Restricted Stock Unit Agreement*
10.3		Capped Call Confirmation, dated as of June 11, 2019, by and between the Company and Bank of America, N.A. (incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-32887) filed as Exhibit 10.1 on June 14, 2019)
10.4		Capped Call Confirmation, dated as of June 11, 2019, by and between the Company and Morgan Stanley & Co. LLC (incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-32887) filed as Exhibit 10.2 on June 14, 2019)
10.5		Capped Call Confirmation, dated as of June 11, 2019, by and between the Company and Deutsche Bank AG, London Branch (incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-32887) filed as Exhibit 10.3 on June 14, 2019)

31.1		Certification of the Company’s Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002(1)~~2002*

31.2			Certification of the Company’s Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002(1)~~2002*

32.1			Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002(1)~~2002*

~~101~~	101.INS		~~The following financial statements from Vonage Holdings Corp.’s Quarterly Report on Form 10-Q for~~XBRL Instance Document - the ~~three and nine months ended September 30, 2017, filed with~~instance document does not appear in the ~~Securities and Exchange Commission on November 7, 2017, formatted in~~Interactive 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

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

~~(1)~~* Filed herewith.


*	~~Management contract or compensatory plan or arrangement.~~

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.



		VONAGE HOLDINGS CORP.

Dated:	~~November 7, 2017~~August 6, 2019	By:	/s/ David T. Pearson
			David T. Pearson Chief Financial Officer ~~and Treasurer~~ (Principal Financial Officer and Duly Authorized Officer)

~~EXHIBIT INDEX~~




~~31.1~~			~~Certification of the Company’s Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)~~

~~31.2~~			~~Certification of the Company’s Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)~~

~~32.1~~			~~Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)~~

~~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.

~~(1) Filed herewith.~~


*	~~Management contract or compensatory plan or arrangement.~~



	September 30, 2017			December 31, 2016
Assets				(revised)⁽¹⁾
Current assets:
Cash and cash equivalents	$	29,869		$	29,078
Marketable securities	—			601
Accounts receivable, net of allowance of $2,897 and $2,093, respectively	42,435			36,688
Inventory, net of allowance of $124 and $117, respectively	2,683			4,116
Deferred customer acquisition costs, current	1,466			2,610
Prepaid expenses	23,324			26,041
Other current assets	2,686			3,147
Total current assets	102,463			102,281
Property and equipment, net of accumulated depreciation of $143,265 and $129,166, respectively	45,760			48,415
Goodwill	371,535			360,363
Software, net of accumulated amortization of $94,917 and $87,626, respectively	23,574			21,971
Restricted cash	1,827			1,851
Intangible assets, net of accumulated amortization of $117,905 and $88,419, respectively	181,522			199,256
Deferred tax assets	192,879			184,210
Other assets	15,059			17,319
Total assets	$	934,619		$	935,666
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	33,070		$	30,751
Accrued expenses	76,163			109,195
Deferred revenue, current portion	31,332			32,442
Current maturities of capital lease obligations	206			3,288
Current portion of notes payable	18,750			18,750
Total current liabilities	159,521			194,426
Indebtedness under revolving credit facility	182,000			209,000
Notes payable, net of debt related costs and current portion	77,361			91,124
Other liabilities	6,123			4,575
Total liabilities	425,005			499,125

Commitments and Contingencies (Note 7)

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
Additional paid-in capital	1,359,975			1,310,847
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
Total liabilities and stockholders’ equity	$	934,619		$	935,666



	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	$	—



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



	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



	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	$	—



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



	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




Customer relationships	$	85,900
Developed technologies	13,768
Non-compete agreements	972
Trade names	1,130
	$	101,770



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

June 30, 2019

December 31, 2018

Receivables⁽¹⁾

Contract liabilities ⁽²⁾