Fourth Quarter and Full Year 2018 Earnings Presentation February 21, 2019 1
Safe Harbor Caution Concerning Forward-Looking Statements Various remarks that the Company makes contain forward-looking statements regarding acquisitions, acquisition integration, growth, growth priorities or plans, new products and related investment, revenues, adjusted OIBDA, churn, seats, lines or accounts, average revenues per user, cost of telephony services, the Company s share repurchase plan, new products and related investment, capital expenditures, and other statements that are not historical facts or information constitute forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on information available at the time the statements are made and/or management's belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: the competition we face; the expansion of competition in the cloud communications market; 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 cost-effectively; the risk associated with developing and maintaining effective internal sales teams and effective distribution channels; security breaches and other compromises of information security; risks associated with sales of our services to medium-sized and enterprise customers; our reliance on third-party hardware and software; our dependence on third-party facilities, equipment, systems and services; system disruptions or flaws in our technology and systems; our ability to 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 obtain or maintain relevant intellectual property 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; 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 business services; risks associated with legislative, regulatory or judicial actions regarding our business products; risks associated with operating abroad; risks associated with the taxation of our business; governmental regulation and taxes in our international operations; liability under anti-corruption laws or from governmental export controls or economic sanctions; our dependence on our customers' unimpeded access to broadband connections; foreign currency exchange risk; 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 section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and amendments to these reports. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing the Company's views as of any date subsequent to today. Non-GAAP Financial Measures This presentation contains non-gaap financial measures (including adjusted operating income before depreciation and amortization ( adjusted OIBDA ), adjusted OIBDA minus capex, net debt (cash), free cash flow, adjusted business revenue and adjusted business service revenue) as defined in Regulation G adopted by the SEC. The Company provides a reconciliation of these non-gaap financial measures to the most directly comparable financial measure at the end of the presentation and in the Company's quarterly earnings releases, which can be found on the Vonage Investor Relations website at http://ir.vonage.com. 2
2018 Highlights Increased Full Year 2018 Consolidated revenues to $1.05 Billion, up 5% year-over-year 2018 Vonage Business revenues of $608 Million, up 22% year-over-year 2018 Vonage Business Service revenues of $527 Million, up 26% year-over-year On an Adjusted 1 basis, 2018 Vonage Business Service revenues grew 23% Grew Fourth Quarter Consolidated revenues to $274 Million, up 8% year-over-year Fourth Quarter Vonage Business revenues of $170 Million, up 27% year-over-year Fourth Quarter Vonage Business Service revenues of $149 Million, a 32% Year-Over-Year Increase On an Adjusted 1 basis, Fourth Quarter Vonage Business Service revenues Grew 22% Transformed Strategic Positioning and Technology Executed on the Company s Long-term Strategic Vision With the Acquisitions of TokBox and NewVoiceMedia Realized Significant Success with Vonage Business Cloud (VBC) Platform Development and Adoption Acquisitions and Success of VBC are Key Building Blocks to OneVonage Strategy Vonage Positioned as the Only Cloud Communications Company that Addresses the Entire Future $80B TAM with Owned Assets 1. Non-GAAP financial measure. See slide 23 for a reconciliation to the most comparable GAAP financial measure. 3
OneVonage Platform Strategy: Fully Integrated and Programmable Communications Software that Helps Businesses Improve Customer Experience Programmable Communications Unified Communications Contact Center Public Cloud Infrastructure Vonage Global Carrier Network 4
Differentiated Customer Experience Helps Businesses Win Experience must include both the customer and the employee. In 2 years time, 81% say they expect to be competing mostly or completely on the basis of CX. 2 Customer and employee experiences are directly linked and need to be considered together. EX CX Companies that excel at CX have 1.5X more engaged employees than companies with poor CX. 3 2. Gartner, Customer Experience Survey 3. Temkin Group, Experience Matters 5
Programmable Communications Enable Differentiated Experiences Customer and employee communication needs are getting more complex and demanding. Customers and employees communicate across multiple channels and devices and are increasingly mobile. They are virtual, constantly connected, and expect a personalized experience. 6
Product Highlights: Vonage Business Cloud Gaining Significant Traction ~100K Customers ON VBC PLATFORM 85% OF Q4 NEW BOOKINGS ON VBC PLATFORM 45% IN Q4 MESSAGING ON VONAGE FLOW AI & Chatbots USED TO IMPROVE CUSTOMER ONBOARDING AND EXPERIENCE 30% IN MOBILE APP USAGE 25% IN 2018 CUSTOMER CARE CALLS Vonage Business Cloud (VBC) 7
Go-to-Market Initiatives Increase Sales From MME Customers Drive Sales of Integrated UCaaS/CCaaS/CPaaS Products Grow the Long-tail Customer Base 8
Go-to-Market Highlights: Business Service Revenues from Customers with $10,000+ in Monthly Revenue Increased 40% Year-over-Year in the Fourth Quarter Applications Key New Customer Wins Signed seven deals in the fourth quarter with TCV greater than $1 million, and most included programmable solutions Channel bookings grew 60% in the fourth quarter, and six of the top ten deals originated from the Channel 1 A Fortune 500 Financial Services Firm 14,000 seat win due to: UCaaS Verify API SmartWAN API Platform Revenues from new API use case only customers added in the fourth quarter increased 82% year-over-year Revenues from long-tail customers increased 90% yearover-year in the fourth quarter, and we ended the year with 735,000 developers 2 3 A Fortune 100 Athletic Apparel Brand A World Leading Pizza Restaurant Chain 1,000 seat win due to: UCaaS Contact Center API Platform Won due to: Verify API UCaaS 9
Growth Priorities for 2019 Accelerate OneVonage Platform Development to Broaden Portfolio Focus on High Value, Long-tail and US API Penetration Strengthen Omni-Channel Sales Execution and Leverage CRM Relationships 10
Vonage Business Revenues $134 Quarterly $154 $170 Prod. & USF Service Fourth quarter Business revenues increased 27% year-over-year on a GAAP basis, and 19% on an Adjusted 1 basis Fourth quarter Business Service revenues grew 32% (GAAP) and 22% (Adjusted 1 ) 4Q'17 3Q'18 4Q'18 $376 Annual $499 $608 Full year Business revenues grew 22% on a GAAP basis, and 19% on an Adjusted 1 basis Full year Business Service revenues grew 26% (GAAP) and 23% (Adjusted 1 ) ($ in millions) 2016 2017 2018 GAAP Business Revenues reflect acquisitions of TokBox on 7/31/18 and NewVoiceMedia on 10/31/18; adjusted growth rates reflect full-year ownership of these assets, and effects of significant one-time items. 1. Non-GAAP financial measure. See slide 23 for a reconciliation to the most comparable GAAP financial measure. 11
Vonage Business KPIs $328 Service Revenue Per Customer $362 $392 Service Revenue per customer up 20% year-over-year Driven by successful move up-market and land-and-expand strategy 4Q'17 3Q'18 4Q'18 1.2% Business Revenue Churn 1.1% 1.1% Business Revenue churn down to 1.1% from 1.2% in the prior year period Driven by significantly higher customer satisfaction on the VBC platform 4Q'17 3Q'18 4Q'18 12
Consumer Segment Quarterly Revenues Prod. & USF Service Consumer ARPU Stable ARPU $120 $108 $104 $26.33 $26.30 $26.32 4Q'17 3Q'18 4Q'18 Annual Revenues 4Q'17 3Q'18 4Q'18 Consumer Customer Churn $579 $503 $441 Improved Churn 1.9% 1.8% 1.8% ($ in millions, except ARPU) 2016 2017 2018 4Q'17 3Q'18 4Q'18 13
Consolidated Revenues Quarterly $254 $262 $274 4Q'17 3Q'18 4Q'18 Annual $956 $1,002 $1,049 Consumer Business Business grew to 62% of Consolidated revenues Fourth quarter Consolidated revenues up 8% GAAP from the prior year due to: Vonage Business organic growth Partial quarter of NewVoiceMedia and full quarter of TokBox revenues Offset by continued managed decline in Consumer Full year Consolidated revenues up 5% due to: Vonage Business growth Vonage Business revenues represented 58% of total revenues, up from 50% in 2017 ($ in millions) 2016 2017 2018 14
Sales & Marketing Quarterly $78 $74 $82 4Q'17 3Q'18 4Q'18 Sales & Marketing expense increased in the fourth quarter, primarily due to Addition of TokBox and NewVoiceMedia expenses Partially offset by the year-over-year benefit from ASC 606 commission accounting, and the shift of certain sales operations into product development $331 Annual $313 $311 Sales & Marketing expense decreased for the full year 2018 due to: Benefit from ASC 606 Partially offset by addition of TokBox and NewVoiceMedia Sales & Marketing spend ($ in millions) 2016 2017 2018 15
Engineering & Development Quarterly $17 $14 $8 4Q'17 3Q'18 4Q'18 Annual $52 Engineering & Development expense increased sequentially and year over year due to: The ongoing transition to owned software solutions (OneVonage platform) The shift of certain sales operations into product development The full quarter run-rate of Engineering & Development expenses associated with TokBox and NewVoiceMedia $30 $30 ($ in millions) 2016 2017 2018 16
General & Administrative $24 Quarterly $38 $38 Fourth quarter and full year General & Administrative expense increased from the prior year due to: The impact of the run-rate expenses associated with TokBox and NewVoiceMedia One-time acquisition-related items 4Q'17 3Q'18 4Q'18 Annual $123 $123 $135 ($ in millions) 2016 2017 2018 17
Quarterly Operating Income & Adjusted OIBDA 4 $23 Quarterly Operating Income $15 $6 Fourth quarter Operating Income and Adjusted OIBDA 4 decreased due to: The impact of TokBox and NewVoiceMedia deal and operating expenses The write-down of NewVoiceMedia s deferred revenues 4Q'17 3Q'18 4Q'18 Quarterly Adjusted OIBDA 4 $51 $50 $41 ($ in millions) 4Q'17 3Q'18 4Q'18 4. Non-GAAP financial measure. See slide 24 for a reconciliation to the most comparable GAAP financial measure. 18
Annual Operating Income & Adjusted OIBDA 4 $44 Annual Operating Income $59 $52 Full year Operating Income and Adjusted OIBDA 4 decreased due to: The impact of TokBox and NewVoiceMedia deal and operating expenses The write-down of NewVoiceMedia s deferred revenues 2016 2017 2018 Annual Adjusted OIBDA 4 $160 $180 $178 ($ in millions) 2016 2017 2018 4. Non-GAAP financial measure. See slide 24 for a reconciliation to the most comparable GAAP financial measure. 19
Cash Flow and Balance Sheet Cash: $5 million Cash Flow ($ in millions) 4Q 18 Cash from operations $29 Capital expenditures and software ($10) Free cash flow 5 $19 Debt Repayment $24 million in debt repayment in 4Q 18 $313 million increase in net debt for the full year 2018 Total debt: $520 million Net debt 5 : $515 million (Gross Debt less Unrestricted Cash and Marketable Securities) Net debt/adjusted OIBDA = 2.9x 5. Non-GAAP financial measure. See slide 25 for a reconciliation to the most comparable GAAP financial measure. 20
2019 Guidance Full Year 2019 First Quarter 2019 Consolidated Revenues $1,170 to $1,195 Vonage Business Revenues $795 to $815 $177 to $179 Consumer Revenues $375 to $380 $99 to $100 Adjusted OIBDA 4 $160 to $165 Low $30 Area Capital Expenditures $40 Area ($ in millions) 4. Non-GAAP financial measure. 21
Vonage Business KPI Summary KPIs 4Q 17 1Q 18 2Q 18 3Q 18 4Q 18 Service Revenue Per Customer $328 $328 $348 $362 $392 Business Revenue Churn 1.2% 1.2% 1.2% 1.1% 1.1% 22
Adjusted Revenue Reconciliation 4Q 17 1Q 18 2Q 18 3Q 18 4Q 18 FY 18 Vonage Business Revenue (GAAP) $134.1 $136.7 $147.8 $153.6 $170.0 $608.1 Y/Y Growth Rate 22% 20% 19% 27% 22% Deferred Revenue Adjustment from Acquired Companies $ - $ - $ - $ - $ 2.2 $ 2.2 Revenue from Acquired Companies (Prior to Acquisition) Less Revenue from Divested Businesses 6 $ 18.2 $ 18.8 $ 19.3 $ 19.1 $ 6.1 $ 63.2 Outage Credits and Significant One-time Items $ (1.1) $ - $ 0.9 $ - $ 1.5 $ 2.4 Vonage Business Revenue Adjusted for Acquisitions and Significant One-time Items $ 151.2 $ 155.4 $ 168.0 $ 172.7 $ 179.8 $ 675.9 Y/Y Growth Rate 20% 21% 18% 19% 19% Vonage Business Service Revenues (GAAP) $113.3 $116.3 $127.7 $133.7 $149.0 $526.7 Y/Y Growth Rate 27% 24% 23% 32% 26% Deferred Revenue Adjustment from Acquired Companies $ - $ - $ - $ - $ 2.2 $ 2.2 Service Revenue from Acquired Companies (Prior to Acquisition) Less Revenue from Divested Businesses 6 $ 18.0 $ 18.6 $ 19.2 $ 19.0 $ 6.1 $ 62.9 Outage Credits and Significant One-time Items $ (1.1) $ - $ 0.9 $ - $ 1.5 $ 2.4 Vonage Business Service Revenues Adjusted for Acquisitions and Significant Onetime Items $ 130.2 $ 134.9 $ 147.8 $ 152.7 $ 158.8 $ 594.2 Y/Y Growth Rate 23% 25% 21% 22% 23% ($ in millions) 6. Includes unaudited combined financial information. 23
Non-GAAP Reconciliation 24
Non-GAAP Reconciliation 25