VG - NYSE

Greetings. Welcome to Vonage Third Quarter 2021 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Monica Gould, Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning, and welcome to our third quarter 2021 earnings conference call. Speaking on our call this morning is Rory Read, Chief Executive Officer; and Steve Lasher, Chief Financial Officer. Rory will discuss our strategy and third quarter results, and Steve will provide a more detailed view on our third quarter results, fourth quarter guidance and updated full year 2021 guidance. Slides that accompany today's discussion are available on the IR website. At the conclusion of our prepared remarks, we'll be happy to take your questions. As referenced on Slide 2, I would like to remind everyone that statements made during this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's expectations, depend on assumptions that may be incorrect or imprecise, and are subject to risks and uncertainties that could cause actual results to differ materially. More information about these risks and uncertainties is highlighted on the second page of the slides and contained in our SEC filings. We caution listeners not to rely unduly on these statements and disclaim any intent or obligation to update. During this call, we will be referring to non-GAAP financial measures. A reconciliation to GAAP is available in the third quarter earnings press release or the third quarter earnings slides posted on the IR website. So with that, I'd like to turn the call over to Rory.

Thanks, Monica, and hello, everyone. Thank you for joining us today. Next-generation technology happens in waves that build upon each other. What is happening now is the convergence of the Internet, mobility, the cloud and powerful 5G network that is forming the digital transformation and intelligent communications wave, driving a secular change in the way businesses operate. Customers expect to digitally engage with companies to get the information they want and the channel they choose when they want it from anywhere. Similarly, employees expect seamless collaboration, engagement and access to technology no matter where, when or how they choose to work. To achieve this level of engagement, we believe all communication modes will be embedded in applications, workflows and customer experiences through composable API-based programming technique, that enable businesses to move from transactional interactions to true ongoing engagement. We provide all of these capabilities through the Vonage Communications Platform, our single global cloud communications platform. Last month, we acquired Jumper.ai, a leader in conversational commerce. With Jumper, we have added significant technology, talent and expertise to capitalize on this growing convergence of seamless shopping and conversations on services such as Messenger, WhatsApp and Instagram. Jumper AI will accelerate our ability to enable our customers to differentiate themselves as social messaging becomes increasingly important to consumers as a frontline way of connecting with their favorite brands, leading brands such as L'Oreal, Kiehl's, Disney, Axe, Dove, Ben & Jerry's and Burger King use Jumper's technology to create personalized, unique digital engagement experiences for their customers and this is just the beginning. We're truly delighted to welcome the Jumper team. Now let's review our third quarter Vonage Communication Platform results, where I'll focus my comments on our continued strong execution and the progress we are making on our strategic investment. VCP service revenues were $274 million, representing 25% year-over-year growth, up from 19% in 3Q a year ago. Third quarter VCP adjusted EBITDA was $5 million, a $19 million year-over-year improvement. VCP Rule of 40 this quarter was 27 more than doubled the 13 in the third quarter a year ago. We are ahead of the plan we laid out in our March Investor Day, and we are confident in our ability to continue to deliver on our commitments. API revenues increased 43% year-over-year to $155 million in the quarter. Our continued strong performance was driven by robust demand of our composable APIs from new and existing customers across all key industries, geographies and customer sizes. While messaging growth was particularly strong in the quarter, we also saw a strong adoption of our other API, particularly VoIP, verified for authentication, and our messages API for customer engagement. I'll highlight just a few of the new customers for the quarter. A UK-based real estate and technology company is leveraging multiple Vonage APIs to build and differentiate their business. They are using our messages API to facilitate connections between buyers and real estate agents, and they are using our video API to power virtual property viewings between agents and their customers. In the United States, Ping Identity, a Gartner Magic Quadrant leader in the access management software space, selected Vonage to provide two-factor authentication services for its customers, which now include 60% of the Fortune 100. In addition to our strong new customer growth, existing customers continued to expand on our platform. Third quarter dollar-based net expansion was 129%, driven by strength in e-commerce, travel, hospitality, logistics and the social industry. We also saw increased momentum in several areas across fintech, including crypto trading platforms, digital lending and payments. A great example is FinAccel, a digital lending pioneer in Southeast Asia, already a Vonage Voice API customer. FinAccel selected our SMS API and two factor authentication capabilities to provide customers with account updates and password assistance. FinAccel also added our messages API to power engagement with its customers over WhatsApp. Now moving to Unified Communications and Contact Center product, service revenue grew 8% ahead of expectations. Combined BBC and BCC cloud product growth was 13%, driven by improving micro and SMB growth along with strong mid-market and enterprise growth. We continue to make progress on our go-to-market initiatives. Total bookings were up year-over-year and sequentially. Within the channel our momentum is building highlighted by significant year-over-year bookings growth with five out of our top ten deals, including three of our largest deals in the quarter coming from the channel. Given our improving trajectory, we're well positioned to accelerate revenue, to double digit growth in early 2022 as we shared during our investor day in March. Key to our bookings growth is our integrated Unified Communications and Contact Center solution, which continues to be a key differentiator. 10 of our top 15 wins this quarter included both UC and CC solutions. I'll highlight two examples. An innovative financial services firm chose Vonage to replace its legacy UC and CC infrastructure. The full scope of the Vonage Communications Platform including the depth of our salesforce integration and the ability to leverage our APIs for custom integrations where key differentiators in this seven-figure TTB deal. One of the largest roofing manufacturers in North America, turned to Vonage and Salesforce to transform their customer service organization and leverage customer data to provide more proactive and intelligent customer support. Originally only a contact center deal that became apparent to the customer that they needed to move to a full cloud offering to replace their legacy on-prem UC and CC solution. Last quarter, we discussed the importance that the Salesforce Service Cloud Voice Partner Telephony Program represents for Vonage. I'm pleased to share that we are seeing early success here with several new wins and a strengthening pipeline. We had an exciting win with Stratton Finance, one of Australia's largest car and asset finance brokers. And existing Salesforce customer, the company selected Vonage for our Contact Center solution integrated with Service Cloud Voice and our Unified Communications solution. With Vonage and Salesforce Stratton Finance will accelerate its digital transformation by creating an improved agent experience, better operational efficiency and stronger customer engagement. Now moving on to product, our innovation engine continues to accelerate. During the quarter, we introduced an impressive number of new capabilities across our entire platform. I'll highlight just three. Our new AI virtual assistant for BBC is one of the first AI-driven conversational solutions to delivered enhance self-service interaction for Unified Communications. This AI solution creates intelligent conversational experiences using natural language understanding and machine learning to engage every caller with applications using voice and text. We also launched Vonage Video Express to make it easier and faster for developers to access Vonage’s video API for multiparty calls. Vonage Video Express democratizes video, making every web developer a video developer. Instead of taking days, weeks, or even months to integrate video into applications, developers can now integrate video within hours using just a few lines of code. Additionally, Vonage Contact Center solution was one of the first to be selected by Google in its new Chrome Enterprise Recommended Contact Center category, integrating the Vonage contact center with Chrome OS devices and powers IT and contact center administrators to leverage a full suite of contact center capabilities remotely and enable agents to work from anywhere, enhancing the agent experience for better efficiency and productivity. In summary, we had another strong quarter and expect to finish 2021 well ahead of our original revenue projection due to improving execution, go-to-market focus and product innovation. Vonage is in the right place at the right time and a large and rapidly growing market. As the world begins to ride this next technology wave around digital transformation and intelligent communication. The way we work, shop, learn, see a doctor, even exercise has fundamentally changed. Businesses need to move beyond transaction and notification to digitally transform, to deliver personalized conversations on the customers’ terms as the demand for virtual engagement continues to grow. Whether it's getting medical attention through tele-health, tracking a package or a food delivery, booking a ride sharing service, providing fraud protection, connecting the right customer to the right support agent, or enabling video and voice communications across thousands of office locations, Vonage does that. I would like to thank our talented team members around the world for their continued hard work and dedication. We're delivering on our commitment, executing our transformation plan and investing for future growth. And every day we're actively looking at all options to create value for our customers, our team members, and our shareholders. I look forward to updating you on our continued progress. And with that, I'll turn it over to Steve.

Thank you, Rory. And good morning, everyone. I'll start with a review of the third quarter results and then discuss the fourth quarter and updated full year 2021 guidance. Beginning on Slide 8, we had another quarter of solid execution, accelerating revenue and improving profitability. Each of our product areas, including API, UC and CC delivered on our commitments while we continue to improve on the rule of 40. Turning to Slide 9. Consolidated revenue increased 13% to $358 million, driven by a 23% increase in Vonage Communications Platform revenue to $288 million. VCP revenue now represents 80% of consolidated revenue, up from 74% in the third quarter of the prior year. Consolidated third quarter adjusted EBITDA of $51 million was up $9 million or 22% year-over-year due to higher revenue and improving operating structure within VCP. Moving to the Vonage Communication Platform on Slide 10. VCP service revenue increased 25% to $274 million ahead of our expectations driven by broad-based demand across our entire portfolio. VCP revenue churn was 0.6% in the third quarter and improvement of 60 basis points from a year ago, driven by improvements across all products. Monthly service revenue per customer increased 25% to $657 from $527 over the prior year quarter. VCP gross margin in the third quarter was 45%, down year-over-year due to the higher growth in our API products, particularly messaging. As we continue to strategically pursue new customer opportunities to drive product adoption across the VCP platform. VCP adjusted EBITDA was $5 million representing a $19 million year-over-year improvement. Moving to Slide 11. API revenue was $155 million in the third quarter, up 43% driven by continued growth across all product areas and geographies. We saw particular strength in our e-commerce, financial and travel verticals as customers continue to adopt new products and expand usage across the portfolio. Unified Communications & Contact Center Service revenue was $119 million in the third quarter up 8% year-over-year. Let's move to Slide 12. VCP operating expenses totaled $165 million and accounted for 57% of total VCP revenue, an improvement of 18 points year-over-year. This improvement is due to the business optimization and alignment efforts we took last year to rebalance the business. VCP sales and marketing expenses were $83 million or 29% of total VCP revenue. As we continue to make investments in sales head count and targeted demand generation. VCP engineering and development expenses were $17 million or 6% of total VCP revenue. VCP E&D expenses plus capitalized software totaled $28 million or 10% of VCP service revenue. VCP general and administrative expenses were $42 million or 15% of total VCP revenue, down approximately $11 million due to restructuring charges in the prior year quarter. Turning to Slide 13. Consumer segment revenue was $70 million in the third quarter, a 15% decrease from the prior year. Consumer adjusted EBITDA was $46 million in the third quarter, down from $56 million in the prior year. Moving to Slide 14, we ended the third quarter with $447 million of net debt, down $28 million from last quarter and $90 million from the prior year. As of September 30, net debt was less than 2.3 times last 12 months adjusted EBITDA. Moving to guidance on Slide 15. For the fourth quarter, we expect VCP revenue in the range of $293 million to $301 million. We expect VCP service revenue growth in that 22% to 25% range. Embedded in this guidance are the following assumptions. In API, we expect fourth quarter year-over-year revenue growth to be in the 34% to 40% range. With regard to Unified Communications and Contact Center, we expect service revenue growth in the high single-digits. We expect fourth quarter VCP adjusted EBITDA to be in the range of $4 million to $8 million. Within Consumer, we expect revenue in the $65 million range and adjusted EBITDA of approximately $42 million. On a consolidated basis, we expect total revenue of $358 million to $366 million and adjusted EBITDA in the $46 million to $50 million range. For the full year 2021, we are raising our revenue and adjusted EBITDA guidance to reflect our strong third quarter performance and higher fourth quarter expectations. We expect VCP revenue to be in the range of $1.113 billion to $1.121 billion. VCP service revenue is expected to be in the range of $1.55 billion to $1.63 billion, representing growth in the 23% to 24% range. We expect API revenue growth for the full year to be in the 40% range. And we expect full year UC, CC service revenue growth in the mid to high single-digit. We expect VCP adjusted EBITDA to be in the $8 million to $12 million range. For the full year, we expect our VCP rule of 40 results to be in the mid-20s, up from our original guidance of low 20s, driven by stronger than expected growth across our API and UC, CC product portfolio. For consumer, we expect full year revenue of approximately $288 million and adjusted EBITDA in the $186 million range. We expect total consolidated revenue to be in the range of $1.400 billion to $1.409 billion and adjusted EBITDA in the $194 million to $198 million range. With that, I’ll turn the call over to the operator to start the Q&A.

Thank you. Our first question is from Mike Latimore with Northland Capital Markets. Please proceed.

Great. Thanks. Yes, congratulations. Excellent results there. I guess just a question on the gross margin on VCP. I know messaging is growing rapidly huge demand there. How should we think about gross margin longer-term? Where does that sort of stabilize in VCP?

Thanks, Mike. Hey Mike, I’ll get started and I’ll pass it over to Steve. Hey, from my perspective, what we’re seeing is this secular change in the way communications are used across pretty much every industry and we’re seeing robust demand across our portfolio. I think the team is executing particularly well and we’re seeing that demand across all product areas. So I like that a lot. We’re not seeing a lot in terms of pricing pressure. We’re seeing really robust demand across all product areas. And as we continue to innovate, I think we’re seeing that innovation drive more demand and definitely value for the customer. So I think that’s an important factor in terms of it. You highlighted mix, we’ve definitely seen some strong robust demand across messaging, but again, we see it across every product area. So I’m pleased where we’re fit. We’re confident. We’re going to execute well in 4Q and finish the year strong. But Steve, do you want to give a little bit of a feel for how we view gross margins across the VCP platform?

Sure. Thanks, Rory. And Mike, thanks for the question. As Rory stated, from a – when we take a look at gross margin, we think it’s going to stay in that mid-40 area. And it’s really for us, it’s about the scale. As you know, we are always looking to improve on gross margin, right now, where are we seeing, where we play, the opportunity for capturing new clients and then having them scale across our platform is really key. So right now is we set our mission for – we’re happy to tradeoff a point or so of margin for 2 points on that top line. And as we continue to make progress on our rule of 40 that’s where you’re starting to see. We’ve really done a nice job and the team’s done a lot of hard work to continue to deliver on our rule of 40 and we’re making great progress. And as we continue to look towards the future, that mid-40s range, that mid-40 area, we’re comfortable with it, especially as we think about the mission going forward.

Yes, makes sense. And then on the API business, broad based demand, it sounds like were there any regions, geographic regions that either outperformed or underperformed your expectation?

No, Mike, we saw strength across the board. You look at the DBNE from the standpoint of a 129%, we like to run that and that 120% to 130% range. We saw demand from our existing customers for existing API, and we saw some good expansion in terms of new and multiple API. New customer growth was strong. Again, we saw it expand. We still have pretty much in every geography, every geography almost every vertical. There’s a lot of demand out there. And whether the world is opening up from the pandemic or however it’s changing, I think what we’re seeing is the secular change in the way consumers want to interact with companies and these companies need to implement these compostable API to create these multi-modal communication interactions that create a kind of a 360 degree relationship. I think that’s pretty powerful. So we’re seeing it across all industry and customer sizes, big, medium, small across the board, nice API demand, robots, existing and new customers.

Okay. Thank you. Congratulations.

Thanks, Mike.

Our next question is from Meta Marshall with Morgan Stanley. Please proceed.

Hi, this is Dave Nwokonko on for Meta Marshall. So you touched on the rule of 40, a little better ago. Just as you progress towards that, do you think that’s driven more by additional OpEx leverage or will that primarily be driven by growth?

Yes. So Dave, I comment on that one, when we did the Investor Day in the spring this year, matter of fact, our first Investor Day in 20 years, and we won’t wait 20 years for the next one. We look forward to it in the first half of next year again. We kind of gave this a three-year view of our transformation. We expected at the beginning of the year kind of have a rule of 40 in the high teen exited the year or near the 20. As the year has progressed, we’ve seen strength, in terms of the top line, the robust demand for all products. UCC now approaching double-digit growth and we’ll see that by early 2022. We see it in terms of all API and including messaging, we see it across all of our other API. So we saw 27 in the rule of 40 up from 13-year ago, that’s a big improvement. We thought we’d see mid-20s in the rule of 40 next year. So we’re significantly ahead of schedule. It’s never exactly a straight line on that, but we’re definitely seeing momentum in terms of demand, velocity across all geographies, all customer sizes, and this demand for the product is there. So we focused on improving our execution on the financial, our financials on the bottom line are how positive, we thought we would do that in the second half, we did it a little bit earlier. That’s accelerating and we expect to continue to throw off more profitability as we move forward. But as Steve said, we’re always going to invest that profitability once we’re in that minus 1% to plus 3% kind of range. We want to invest that into future growth. So what’s going to drive and continue to drive the rule of 40 is the effective fiscal management with a focus on investing on where the customer is going. And you’re going to see the growth rate is going to be one of the key drivers of a rule of 40 as we look out over the next two years.

Great. Thanks. And just one follow-up I was wondering if you could share the FX impact to VCP growth.

Sure. Steve, you’ve got that.

Yes. So when we take a look at FX, it was relatively – from our perspective is relatively flat. We had a good quarter. So from a VCP service revenue as reported was 25 constant currency was 25.

So Dave, we saw no impact on that front.

Yes. Thank you. Thanks for the questions, and congrats on the quarter.

Thank you, Dave.

Our next question is from Will Power with Baird. Please proceed.

Okay, great. I guess, I echo my congratulations. Great to see the revenue and operating efficiency improvements. Hey, maybe a question on Jumper.ai, that seems like a pretty interesting acquisition and fit for you all. So I guess, I’d love to better understand potential impacts that to Q4 and even into 2022 revenue and maybe even on the cost side. And maybe just any other background color on, any integration process, how quickly you can get up and running with that.

Hey, Will, I love that question. From the standpoint of how we see this market evolving over the next three, five, seven years, we’re going to see this multimodal communications, transformation across every industry, every workflow, every geography, every customer size. What we’re seeing is this movement from transactional notifications, kind of flat interaction through these composable API, whether it’s videos or messaging or our voice, what’s going to fundamentally occur is it’s going to move from this concept of notification and transactional communication to 360 degree engagements, full conversations ongoing. And this is going to be one of the key engagement levers. I believe for every industry and every customer. Unfortunately, the pandemic are depending on how you’ll – I think, it’s unfortunate. But it’s only accelerated that, because you’ve seen now all age groups being accepting of this kind of activity. And because of the cloud, because of mobility and 3.8 billion powerful handsets in everyone’s hand, plus 5G networks with improved latency and unbelievable bandwidth and security, we’re seeing that. And Jumper.ai, what it does for us is it, it moves. It’s a leader, neurally mover in this conversational commerce space. Look at the customers. I mean, L’Oréal, Burger King, Kiehl's, Dove, Ben & Jerry’s, they’re setting a trend there. We believe this is only going to accelerate, is this 360 degree kind of engagement in the metaverse expands and explodes. And I think we’re way at the beginning of it, but the Jumper team brings technology innovation and customers. That’s going to enable us to be a leader in this space. And we have other things that we’re continuing to look at in this space. This is a secular change and this is why we came to Vonage is to participate in this movement from notification to true engagement. And it’s going to change the world. In terms of how we integrate, I had an opportunity to do the integration of Dell and EMC, the largest tech deal in history. Jumper is going to come in, they’re going to fit right in great culture spend time with that team. They’re energized about how we can open up the opportunity. And from the standpoint, we think this is an important capability for us in 2022 and 2023. Well, we’ve always called 2022 and 2023 the year of the product. And you’re going to see us continue to build on that.

Okay. No, that’s great. Is there anything from a granular standpoint to call out with respect to initial revenue or cost impacts?

Well, Steve you can comment if you like. But I’d say, I’m not seeing anything significant. On the OpEx side, we’re very financially well structured. We’ve been managing well. You could see the $19 million improvement year-to-year on the bottom line. We’ve structured that all into our outlooks in our forecast. And I think it’s going to help us in terms of the velocity of the business, because I think it’s a differentiated capability. I don’t think with a differentiate capability, it’s also going to help us get into even higher margin, messaging, higher margin APIs. But Steve any comment for Will.

Yes. Will, thanks for the question. When we look at it, look over time, we’ll see some synergies from Jumper.ai that’s going to allow us to move on – improve on our operating margin and that that’s going to come over time. And it goes back to as Roy mentioned, as transactions move to conversations, that’s going to allow us to improve. But as far as where we are right now, you’re not going to see any significant change to where we are. It’s really about us embedding Jumper into the platform and moving forward and the evolution of transactions to conversations.

Okay. Great. Thank you.

Our next question is from Samad Samana with Jefferies. Please proceed.

Hi. This is Mason Marion on for Samad. Thanks for taking our questions. So I want to go back to API. So you cut out messaging is particularly strong. Going forward, how are you thinking about growth between messaging voice and video and what the main drivers will be?

Sure. Thanks, Mason. I think from a standpoint of API messaging and this continued trend toward moving notifications to conversation and adding value added capabilities, like the Jumper.ai offering in this conversational commerce is going to continue to drive robust demand in messaging. We see that in the pipelines, we see that in the trend. And we’re going to continue to participate in that. You’re going to see Barry and his team are doing outstanding job working across our go-to-market to really understand where the opportunities are to open up TAM and improve even our margin participation with higher value offerings. And we’ve got that innovation engine moving more rapidly. So we like the robust demand. That’s a good thing. We see it out into the future based on the pipeline. And then from a standpoint of the other APIs, like the intelligent messaging APIs, like in over the top areas, video voice, we think that area will ultimately grow faster in terms of percentage base. Some of those working off some relatively smaller numbers, but there we’ve gotten that again, focus on what functionality do we need to introduce that would open it up. And you’re going to see us really trying to focus on vertical differentiation in our go-to-market team, so that we can see the use cases where they’re applied and we’re going to bring expertise. I think it’s a very interesting time. You’ve got this convergence of the cloud, the mobility and 5G networks. This is opening up – and the secular change in terms of a societal acceptance. This is opening up the demand. We’re seeing robust demand across the board.

Okay. Great. Thank you. And then going over to the UCC business, growth is accelerating right on track. Can you guys talk about your channel partner efforts, how the channel partners are responding to the changes you’ve made. And then on the other hand, can you talk about your direct sales efforts, down market and how your new go-to-market motion is resonating there?

Yes. I’ll make a couple of comments here. The UCC base I’ve been so impressed with our team. We kind of laid out with Rodolpho, Reggie and others, this kind of concept of really pivoting and turning that business around. We began that work in 2020. We could see it in terms of the pipeline, in terms of bookings, install, it’s a waterfall. So you can really see it. We’ve seen year-to-year improvements, sequential improvements and that business is right on track. We’ve called it earlier on these call that we would return to double digit growth. The cloud components, you Vonage VBC and BCC are already in that mid double digit growth. And we’re optimistic. We’re going to continue to build. Remember Mason, there’s 0.5 billion, let me say that again, 0.5 billion seats that need to move to the cloud less than 10% of it, maybe right around 10% have moved. This is a huge opportunity. And it’s across all customer segments. We’re doing a really nice job in re-energizing micro and small with the work that Joy’s marketing team working with. The go-to-market has improved in that space. I think – and then the strength that we continue to see in mid enterprise. You asked about the channel. I spent the past four weeks meeting with every major channel partner one-on-one, I’ve spoken at many of their events over the past two months. I believe in the channel. I believe in the channel multiple applying capability of reach and customer impact. And we’ve definitely got feedback that we’re on the right track. They like the portal, they like the tool. They like our ability to work with them, to create a great outcome for the customer. So, we’ve seen the pipeline and the key deals and the channel continue to accelerate. I think, where they are is, we’re building real trust with them. They have seen some start and stops with Vonage in the past in the channel, we’re committed. We believe in the channel. We believe in our partners. And we’re going to continue to accelerate our investment to build that capability out. And we see it in the results. So the feedback was good. The trust is building, and we’re going to continue to follow through on that over the next three, four, eight, 12 quarters to continue to create that great relationship. I think they want us to win. I really do. And I think they are helping us. So, good feedback so far. But more work to do, and we’re going to do it.

Thank you.

Our next question is from Tim Horan with Oppenheimer. Please proceed.

Thanks guys. Your largest API competitor, you kind of grew faster than for, I think the first time I can remember. And I’ve always been curious why you haven’t been kind of growing faster than them for the last couple years, because you have such small market share versus them. And I guess my question is, if you look at your top 20, 30, API users globally, are you starting to gain share there with those customers? Do you have the product quality now? Because you’re pretty points seem to be quite a bit below them. And do you think you’re basically set up at this point to really gain a lot more share from them with the larger customers out there? Thanks.

Yes. Thanks Tim. I think one of the things we wanted to do is, we wanted during the first phase of the transformation is to really get the house in order. We did that in the second half of 2020. And sort of like restoring a sports car. I mean, we’ve taken it out of the garage now and we took it out on the track to see what it could do. The feedback is good. The product quality is improved. Knock on wood will continue to focus on that. We’re adding new features and functions. And I highlighted a few like video express in this most recent quarter, last quarter, the HIPAA compliance and the SOX compliance. These are opening up new TAM for us. We’re getting to the point where we’ve getting this business in a good balance. We have fiscal responsibility, we have very good operational discipline and structure, and there’s demand out there. And that demand is robust. And for us, I think we can improve the value that we’re getting for our products by adding these new features and functions like Jumper.ai and the Conversational Commerce or adding, the HIPAA compliance messaging. So that medical and privacy are really covered. There’s competitors out there sure. But our focus is, we understand them. But we’re really spending our time with our customers, and our customers are telling us you’re on the right track. You’re definitely increase our footprint with them. We’re expanding across other APIs, but we have more work to do and we’re going to do it. So, we like the progress we’re on our three year transformation. We are ahead of schedule. But the demand is there and people are reacting to the improvements we’re making. So Tim, we’re going to continue to do what we’re doing. Listen to our customer, put that customer first, deliver the innovation that creates value. And we’re going to go after this market.

But I guess specifically the larger API customers out there globally, are they looking at dual source at this point, or are you starting to gain some traction with them? And you think there’s a lot more potential only because it just seems to be such low hanging fruit. I mean, it’s almost like no SG&A and R&D costs with those customers. And I would think they want a dual source.

Yes, Tim, I think you’re spot on. I think that we’re definitely scaling on our OpEx now. I think we’re getting the business in balance so that we can add in particular areas, like you suggested in some of the larger relationships, and we’re winning new routes. We’re expanding our footprint with them. They definitely are reacting. We’re going to go across the entire planet and go after the competition. Customers reacting. So, you’re spot on that. I definitely think there’s an opportunity and we’re going to be the aggressor.

Thank you.

Our next question is from Drew Glaeser with JPMorgan. Please proceed.

Hey guys can grab on a great quarter. You mentioned this briefly in the prepared remarks, but how are the COVID impacted industries like travel and hospitality performing at this point? And are there any specific verticals that are leading the way in the API business or the UC, CC side?

Hey, Drew, how are you good to speak with you? I’d say in terms of our portfolio, and we’ve commented a couple times in the past, I think it’s a competitive advantage. The diversity of it, both geographically and vertically wise. We’re definitely seeing improvement in travel and hospitality as COVID kind of moderate. And we’re also seeing activity in logistics. We're seeing it in crypto platforms. We're seeing it in social. We're seeing it in the payment sector. There is no question that there is demand out there. And we see it in terms of e-commerce, financial, logistics. The hospitality area and travel have absolutely picked up. But there's still more room for them to go. I think they're going to add a lot more in terms of capacity, and we'll continue to participate on that. So I feel that we have a nice combination. So we're not just tied to pre-COVID kind of industry. We're participating across the board. And Drew, I think it really is less to do about COVID and more do about this change in the way customers want to interact. And that's why we went after Jumper AI. That's why we're building that technology. This is really going to move in the direction of engagement in the metaverse. And I think it's the next five, seven, 10 years. You had a second question, Drew. What was the second part?

So I think that, that covered the first one, but I do have another quick question. So you talked about building trust with the channel. I was wondering if you could kind of expand upon what exactly you're doing to incentivize those channel partners?

Sure, Drew. One of the things that we did when I first got here, has reached out to the channel partners, their leadership, communicated our commitment and our focus. Then when we launched the whole Vonage Accelerate and the whole concept of getting that to move faster in the channel, we then backed that up with actions, so better tooling, better documentation, better incentives. And then our teams – and now we're investing to expand our footprint with feet on the street to allow us to deliver that. So it's a series of steps. And then the most recent six, eight weeks, I went and followed up with all of them with the team to understand what the feedback was. And I spoke at a lot of their kickoffs and their events. The feedback is positive. They like the investment of the portal. They like the tooling, the ability to do faster pricing. We need to do it even faster, but the feedback was good and spent time. So I'm trying to reinforce that we say that we're going to do it. We do it, and we follow up. We get feedback and we continue to improve. Their feedback was good. As I said, we're on track and we're seeing it. We're seeing it in terms of the pipeline, and we're seeing it in terms of the velocity. We're not at the knee of the curve yet. I think there's more to do here. And you can hear it in their voice because they're looking and they're believing that we're executing, we're committed, which we are, and then we're going to build on that activity. Why the channel? The channel has such reach, and they have – they are trusted advisers to so many players in the space, particularly in UC/CC, and we will create that combination of Vonage plus that channel partner plus that end customer, that's expertise. That's trusted adviser. That's better together. So the feedback has been good, and we're going to continue to build on the track record and action will build trust.

Yes. Got it. Thank you. That's very helpful.

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

Thank you. Rory is a long-term follower. I would tell you this turnaround has been fun to watch, and I think your use of data to create some predictability as really creating renewed confidence in the story. So I think it's great. I had a quick question on salesforce.com and your ability to go to market with them on the CCaaS side; I know that's been an increased effort for you and certainly an area of enthusiasm for us? And then secondarily, just the issue of the day, Microsoft voice being added to their CCaaS platform. Any thoughts around that relative to your opportunity going through the Microsoft channel? Thank you.

Thanks, George. Hey, I'll pitch it to Steve for a quick comment on the data because one of the things that we've really focused on over the past 18 months is to give us instrumentation. We invested into our BI structure and our analytics capability. I mean, Steve, just maybe a couple of sentences on the focus, and that all reports up into you. So how are you feeling about our instrumentation in the analytics in terms of giving us that data to kind of really target in where the opportunities are?

Sure. Thanks, Rory. And George thanks for the question. When we take a look at how we're trying to really get underneath the diagnostics to where do we compete best and where it gives us the best opportunity to win. Since the business analytics teams, business insights, data, all rolls up to me to have one source of the truth, and we're really able to leverage that information especially when we go take a look at the opportunities of the pipeline, how they're flowing through and really getting into the details around what allows us to win. And quite frankly, the relationship with Salesforce, we continue to see strong opportunities in the pipeline, and the win rates continue to be really strong. And as we continue to win, they pull us into more integration opportunities. And that's really what it's about, more opportunities swings that we get as we're at the plate. And we're connecting with the ball right now. And we see that continuing is – but as Rory mentioned earlier on, it's really also about continuum to add new feature function in our product and E&D and we'll continue to invest in that area to make sure we're building out that relationship.

Yes. And I'll just add a little bit from a sales force, the top-to-top communications are strong. The service cloud voice really represents an interesting opportunity. We're clearly a leadership partner in this. I believe we have significantly more wins than anyone else in this space and that that pipeline is trending well. So there's a lot of interest in that top-to-top conversation and we're building it through the team, Jay and Brie who runs our engage partner activity. We're committed to this and we're going to build that out. So good traction so far. We will add more feature and function. I do think the Jumper.ai capability, again, will help us in the UCC space as well. So that's an interesting combination, but I'll let Simone expand. On the MS conversation, it's a 0.5 billion seats out there. I've dealt competed and worked with Microsoft for 38 years of my career. I heard so many times that they were going to do this or take over that. There's a huge opportunity out there. They're just starting. We have some really great products. We great channel relationships, and there's a 0.5 billion seats. I mean, we have a really good opportunity to participate in a significant way. We take every competitor serious, but our focus is on our customer and the opportunity, that's a big opportunity and we're going to go get it. Thanks, George.

Thank you.

Our next question is from Ryan MacWilliams with Barclays. Please proceed.

Thanks for taking the question. And Rory, good to hear about your hands on and consistent approach to the channel. I know they love that. So with net debt now at like 2.3 times and down almost the full turn from last year, how should we think about M&A here? I know you probably feel pretty good about your hand, but like how should we think about anything transformational on the horizon? Thanks.

Thanks, Ryan. Great to have you back in fold, so always enjoy it. Hey, Steve, do you want to give your thoughts on how we improve the net debt? It's been a very impressive fiscal management including the way we're managing, accounts receivable, everything, but what's your thoughts you want to add on that? And I'll talk about the M&A.

Sure. And Ryan, thanks for the question. We've seen strong progress of as far as collections and again, it's really just been the team continuing to go after, and we've done a really nice job of a, collections, b, being able to pay down the debt and it shows the operations are running smoothly. There's always work to do. We'll continue to drive and expand on that. But we feel pretty good about where we are. And from a terms perspective, we're not extending any changing, any new terms. So we feel pretty good about where we are. And then as they look forward, we'll continue to continue to pay down the debt as we move forward. And then when we think about what that allows us to do. It allows us to think about M&A and as you kind of asked the question. Rory runs a very robust process around acquisitions, looking for strategic plays within the marketplace. And we feel we're in a pretty good place as far as the VCP business, getting to profitability, continuing to utilize the cash from consumer. And so when we're looking through the marketplace, we are focused on key areas that will allow us to continue to build on that top-line, but advance the strategy and the mission that we're on. And again, I think Jumper.ai is just one of the first that you'll see coming through the pipeline that we feel will really embed in the technology and help advance the platform.

Thanks, Steve. The thing I'd add here is the Board and management are looking every day actively of how we can create value for our team members, our customers, and our shareholders. And we're always looking at how we can improve that and that's consistent. And we're actively looking at that. We have – and we have a process that looks at tens and tens, 70 plus, 75 target potential interesting assets. You want to have a wide net, but we're looking, you don't have to spend a $1 billion to get really interesting capability. Jumper.ai is a really good asset. And you're going to see us continue to look at that across the board where there's definite technologies and skills that make a difference that open up new margin, open up new value that we can create with and everything is focused around this communication engagement platform where the market is going. Sure. We always look at transformational pivots as well. And this company has a long history working with the Board to really do those kind of things. So rest assured we're actively looking every single day at the ways to increase value for our shareholders for our team members and our customers. Thanks, Ryan.

Thanks. And just one more on the API side, you mentioned you prepared remarks and we picked up in our checks that some of your larger UC CC deals included API revenues or API use cases alongside that. Do you think channel partners are becoming more comfortable, selling API solutions on top of traditional Contact Center solutions? And are you seeing more cross-sell there? Thanks.

Yes, it’s a great question, Ryan, by the way, I – the amount of discussion about API and my channel checks that I did over the past eight weeks was definitely increased from the previous two cycles that I've done. I do it about every quarter and a half to make sure that I got a feel for where that is, the channel is definitely interested in adding it. They see it as the customer sees it that a future proofs, the opportunity again, I think that's why this platform concept is a good one. And I think whether it's the channel or our UC customer, we're at the beginning of that kind of integration, but I can tell you in every orals, every customer call we make in the UC CC space, the API section where we share our capabilities, there is probably one of the most well attended and the best interactions in terms of where, their interested in talking about because APIs in compostable APIs are going to dominate the planet for the next, three, five, seven, 10 years. And so we're going to see more of it. It's still early, but you're right to feel that, and we are seeing it. Thanks, Ryan.

Thanks guys.

Our next question is from Andrew King with Colliers. Please proceed.

Hey, thanks for taking my question. Really nice to see the UC CC group accelerating lines of plant laid out at the Analyst Day. Give us an idea how much of that acceleration is being driven by bundled versus standalone contact center.

Sure. Thanks Andrew. Yes, the momentum in the space we've laid out. I think the team's done a very nice job of understanding where the products fit. We still see the dominant volume in the pipeline and the closed deals being one or the other UC or CC, but we're clearly seeing more and more each quarter and particularly in the larger size deals we've been seeing our biggest deals have a combined structure. I think that's only going to continue to accelerate. I think that combination is just a natural capability. And often what we see is a customer engages us on one tower, one product tower, and then once they get into it, they're like, oh, this makes a lot of sense. Let's do both and I kind of highlighted a couple of that phenomena in that, in the prepared remarks. So we like that. And 10 of the top 15 deals were in the combined space in the third quarter, again, up from a few quarters ago where it was three out of 15, and it's been on a, kind of a nice steady trajectory there. So we like it. And that business is on track to get to double digits, the cloud components already there. Thanks Andrew.

Great. If I could just sneak one more quick one in here. There's a pretty meaningful stepped up engineering development this quarter. Could you just talk about what caused that and where you see that going forward, especially with the acquisition of Jumper.ai?

Yes, I like Steve comment, but it's basically a onetime kind of item on some of the accounting we're definitely investing and growing that you'll see 2022 and, well 2022 for sure the plan's done, but for sure, 2023 as well. We're going to increase and have been increasing our development footprint. This is a software communications cloud business. The future is around product and innovation. So that's just a onetime kind of blip based on some onetime items, but it's really up to the right. Steve, any further thoughts?

No, I think you hit on it, right, Rory, we will continue as we move forward to invest in, our engineering and development and it is a focus for us and we'll continue to make investments as we move forward.

Great. Thank you.

Our final question is from Steve Enders with KeyBanc Capital Markets. Please proceed.

Hi, this is George on for Steve. Congrats on the quarter. Just one quick one for me. Anything to call out from VCP carrier fees on the messaging side. That's it and congrats again.

And Steve, do you want to add any comment there? I have some quick thoughts on that.

Yes, no again so George thanks for the question from a carrier fees perspective. No change as we continue to move through the quarter, obviously we'll stay, closer as it goes, but as far as impacting any of our guide, we feel confident and kind of what the team's been able to deliver and then going forward, when we take a look at, as we look at the growth from a VCP on a go forward basis, continuing to see API at that, midpoint of about a 37% growth, we're seeing that continue in UC, CC in that high single digits. So all of that's baked in as we continue to, expand on the Rule of 40 as we talk about, looking forward and baking in some of these fees, it's really all about our progression. And I think the go forward for us, we feel confident about where we're going to end and we're looking forward to just closing out the year.

Yes. Thanks George. Hey, appreciate everyone's time. We definitely look forward to updating you on our progress in 4Q. We've got work to do, so we're going to get to it. Pass it back to you, Sherry.