Hunter Blankenbaker - VP, IR Alan Masarek - CEO David Pearson - CFO Kenny Wyatt - Chief Revenue Officer Omar Javaid - Chief Product Officer Dennis Fois - CEO, NewVoiceMedia.

George Sutton - Craig-Hallum Capital Group Richard Valera - Needham & Company Michael Rollins - Citigroup Jonathan Kees - Summit Insight Group Mike Latimore - Northland Capital Markets Catharine Trebnick - Dougherty & Company.

Good day everyone and welcome to the Vonage Holdings Corporation Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] And please note that today’s event is being recorded.

I would now like to turn the conference over to Hunter Blankenbaker, Vice President of Investor Relations. Please go ahead..

Okay, great. Thanks, William, and good morning and welcome to our third quarter 2018 earnings conference call. Speaking on our call this morning is Alan Masarek, Chief Executive Officer, and Dave Pearson, CFO. Also joining us is Kenny Wyatt, our Chief Revenue Officer; Omar Javaid, our Chief Product Officer and Dennis Fois, our CEO of NewVoiceMedia.

Alan will discuss our strategy and third quarter results and Dave will provide a more detailed view on our third quarter results and updated guidance. Slides that accompany today's discussion are available on the IR Web site. 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 those 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 them. 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 which are posted on the IR Web site. And with that, I'll turn the call over to Alan..

Thanks, Hunter. Good morning and thank you for joining us. Vonage delivered another quarter of strong business growth. Total business revenues were $154 million and comprised 59% of total revenues. Of this business, service revenues grew 23%.

Consolidated revenues were $262 million and adjusted OIBDA was $50 million and adjusted OIBDA minus CapEx was $45 million. I will start my comments this morning by reiterating our strategic vision. Simply stated, we believe that by creating fully programmable communications solutions, we can drive better business outcomes for our customers.

We are executing this strategy via acquisitions of technology rich cloud communications companies, including Nexmo, TokBox and now NewVoiceMedia, coupled with fast follow-on organic development.

As a result of our efforts, we believe we've created the world's most differentiated cloud communications company that can provide solutions for all other companies communications needs and addresses the entirety of the cloud communications TAM. And in doing so, we're helping define programmable communications as a new communications category.

Central to our strategy, we are creating a single micro services architected software platform or OneVonage. The OneVonage platform combines Vonage business cloud, our proprietary UCaaS platform, with the technology stacks of Nexmo and TokBox. And in the future OneVonage will also include NewVoiceMedia's contact center functionality.

With OneVonage, we will provide integrated communications solutions, all fully programmable that range from established use case applications like contact center, hosted PBX, collaboration and team messaging, all the way through programmable communication APIs.

From the OneVonage platform, our solutions will seamlessly integrate customer communications with a company's employee communications and workflow tools. The need for an integrated communications experience is critical as businesses undergo digital transformation.

That is deep integration between business applications and enterprise communication tools is necessary to improve the customers experience and therefore deliver those better business outcomes. Vonage is building these integrated solutions and our solution set is the essence of programmable communications.

In fact, we believe programmable communications are rooted in every businesses need to improve how they communicate with their customers. Each interaction a customer has with the business shapes that customers experience. Businesses are under intense pressure to improve customer engagement.

And customers want to interact with brands through their preferred mode of communication. And they want those interactions to be integrated, whether it's voice, SMS messaging, through a brands mobile app, over the web, through an IVR or even through the major chat apps like Facebook Messenger, WeChat and WhatsApp.

So this need for an integrated communications experience is the reason why acquiring NewVoiceMedia is so important. NewVoiceMedia is a cloud-based contact center solution that's distinguished by its CRM focused go-to-market approach. NewVoiceMedia is integrated with leading CRMs with a particularly deep integration with sales force.

By integrating tightly with CRMs, NewVoiceMedia delivers better omni-channel interactions and robust analytics and data capture. We plan to integrate NewVoiceMedia's cloud contact center solutions with our Vonage business cloud platform as well as to capitalize on the improved functionality that CPaaS naturally brings to contact center solutions.

Now with NewVoiceMedia, Vonage is the only cloud communications company that can combine deep CRM integrations with the full range of programmable communications used by a business for its employees and its customers. This will be a powerful combination because it creates an integrated customer experience across multiple communication channels.

It can increase sales conversion on the front-end and improve customer satisfaction on the back-end. So with that as a strategic review, as a backdrop, I'll highlight the progress we're making in two critical areas. The first is the development of our OneVonage technology platform.

And the second is our sales and marketing execution, which continues to improve. Regarding the first initiative, we're making strong progress developing the OneVonage platform.

Our development efforts are focused on the continued integration of Nexmo, TokBox, and Vonage business cloud, with NewVoiceMedia to come, while concurrently improving their individual functionality. Let me highlight two important development efforts. First, we're integrating Nexmo functionality more tightly with Vonage business cloud.

We're using our messages API to significantly improve Vonage business cloud's business inbox functionality. With business inbox, phone numbers are programmable and as such developers can use our APIs to program innovative solutions for that phone number.

So, for example, with business inbox, employees will soon only need a single phone number and customers can contact an employee in the communication mode of their choice, in the customer's choice. This means that customers can call that number, text that number, fax that number or even reach that number from within a social media platform.

By making phone numbers programmable, we improved customer engagement and drive better business outcomes. Second, we're converting Vonage business cloud video conferencing solution from Amazon Chime to TokBox's video API. This will provide an improved video experience and also enhance gross margins by leveraging our own technology.

Our development efforts are being recognized for technology leadership by top industry analysts. We recently earned Frost & Sullivan's 2018 Competitive Strategy Innovation and Leadership Award for our ability to deliver UCaaS, CPaaS and CCaaS via our programmable communication platform.

And our Vonage business cloud platform, won gold at the Golden Bridge Awards for most innovative product. The second major initiative relates to improvements in our sales and marketing execution. During the quarter, we continued investing in sales, marketing and indirect channel initiatives.

And as a result, we're seeing good increases in sales productivity across our routes to market as well as solid progress selling up-market businesses. For example, within the enterprise category, we closed on four new seven-figure deals with total contract values, again greater than a $1 million.

All four of those deals included advanced contact center. This is significant because contact center drives higher MRR and therefore greater revenues. In these four enterprise deals, contact center increased contract value by one-third.

And it also highlights the contact center and UC are increasingly being purchased together, further validating our acquisition of NewVoiceMedia. During the quarter, we closed 18 deals with greater than $10,000 in MRR. And within the smaller business segment, we increased bookings by 65% from customers with greater than $1,000 MRR.

And across all routes to market, bookings for advanced contact center increased fivefold in the third quarter over the year-ago quarter. Within indirect channels, our momentum is very strong. Bookings from the master agent channel increased more than 40%. Our pipeline is at record levels. Even more significant, average deal size more than triple.

Also more than 100 partners have joined Nexmo Connect. These include Microsoft, Facebook, MuleSoft, Built.io, and Aspect Software. These partners are creating compelling solutions for their enterprise customers.

As one example, UniTalk, a cloud solutions company that helps enterprises embed programmable communications into their apps is leveraging our SMS, voice and video APIs to provide real-time conversational business solutions for their clients. The acquisition of NewVoiceMedia also provides opportunity to accelerate revenue growth.

We will leverage our combined distribution channels and combined customers to pursue cross-sell opportunities. We will also work closely with NewVoiceMedia to expand its already highly strategic go-to-market relationship with salesforce.com. Our Land and Expand sales model continues to drive results.

Revenues from new CPaaS customers added in the year-ago quarter, increased eightfold this quarter. Also our developer community continues to grow quickly and it remains a critical part of our go-to-market strategy. We ended the quarter with 696,000 developers registered on our platform.

And finally we bolstered our leadership team by adding three highly accomplished executives. Rishi Dave, joined us as Chief Marketing Officer. And Rishi will drive Vonage's repositioning as a cloud communications platform company.

Sanjay Macwan joined as SVP of Enterprise Engineering and Networks, and he is focusing on the continued development of our enterprise scale software and our communications infrastructure. And then Dennis Fois, who is joined us on the call today, CEO of NewVoiceMedia. He will stay as will his entire team, leading our advanced contact center efforts.

And regarding Dennis and his team, we're delighted to welcome all 430 NewVoiceMedia team members to Vonage. Their team includes a global enterprise sales force with significant understanding of CRM as well as a product and engineering team over 100 strong. We are delighted with their joining us. To summarize, these are very exciting times at Vonage.

We've made substantial progress and I’m proud of our team's performance. We have the right technologies, products, partners and people to execute on our strategy. We’ve created a new focus around programmable communications.

And in fact, we believe that the fragmented view of the communications market in which companies are categorized as UCaaS, CCaaS or CPaaS players, leads to alphabet soup lines of demarcation that are out of touch with the future of communications.

And this is why we consider our cloud communications offerings as an aggregate product line versus breaking them into separate as a service businesses. Said differently, Vonage is building solutions that address myriad use cases for the entire communications market, TAM.

We address the broad categories of buyers each present with different needs, whether it's the IT buyer seeking to modernize infrastructure and moved to cloud-based solutions, or the software developer seeking the program communications into existing solutions to make those solutions better, or the business buyer seeking to improve engagement with customers and to improve satisfaction for both customers and employees.

With our increasingly integrated solutions, Vonage is addressing all of these buying categories, and we believe our approach is the future of communications. I'll now turn the call over to Dave for a review of our financial results..

Thanks, Alan, and good morning, everyone. I’m pleased to review our financial results for the third quarter of 2018 and update guidance for the acquisition of NewVoiceMedia. As in the past, quarterly growth rates reflected in the presentation slides and during my prepared remarks are on a year-over-year basis, unless otherwise noted as sequential.

Starting on Slide 7, consolidated revenues for the third quarter were $262 million, up $8 million or 3% with business accounting for 59% of total revenues this quarter and growing significantly faster than consumers declining. We will continue to see accelerating consolidated growth rates.

Consolidated gross margins improved to 60% due to continued improvement in margins across all of our services, partially offset by the changing mix of services. This gross margin result is despite the trend I discussed on last quarter's call, turning the CapEx that used to be spent in data centers into OpEx in the form of AWS cloud expense.

Moving to Slide 8, let me now turn to our segment financial results. Vonage business total revenue was $154 million, a 19% GAAP increase. Within this, business service revenue grew 23%. I will now discuss some of the puts and takes that impacted business revenue.

In the quarter, we reduced access revenues consistent with our plan to book and migrate certain customers onto VBC and deploy SmartWAN more widely, changed an accounting estimate relating to UCaaS customer deferred revenue, lowering revenue by $400,000, added two months of TokBox revenue, dropped several CPaaS customers who did not meet our increasing margin threshold, and experienced negative currency translation impact.

Overall, business service margin for the third quarter was 55% in line with the prior year and up over two percentage points sequentially. Again, reflecting higher margin across all services and lower credits offset by mix and CapEx to OpEx substitution.

Moving to Page 9, third quarter business service revenue per customer was $362, a 12% increase from $324 a year-ago, reflecting our successful efforts to move up market. Third quarter business revenue churn declined to 1.1% driven by significantly lower churn on our cloud architected VBC platform.

This is equal to the lowest business revenue churn we have ever reported. Moving to Slide 10, consumer revenue for the third quarter was $108 million, down 13%. Consumer customer churn was 1.8%, down from 1.9. Tenured customers, who we define as being with us for two or more years, now represent 85% of the customer base.

To parse that further, customers that have been with us for more than five years now represent over 60% of the base. We ended the quarter with 1.3 million consumer subscriber lines. Average revenue per line was $26.30, up $0.01 or roughly flat to the year-ago quarter, and again representing the stability of the base.

Consumer service margin for the quarter was 89%, up from 83% largely due to lower international and domestic termination rates and the allocation of certain shared network cost to business as that revenue becomes a greater proportion of the whole.

Now moving to notable income statement cost items on Page 11, consolidated sales and marketing expense for the third quarter was $74 million, up $1 million. This is the result of the benefits of ASC 606 deferrals being offset by increased sales spend.

Engineering and development costs were $14 million, a 106% increase, reflecting the significant investments we're making in our VBC platform and the addition of TokBox. General and administrative expense for the third quarter was $38 million, up 11.

The main difference is the addition of two months of TokBox and higher financing and acquisition costs related to both TokBox and NewVoiceMedia. GAAP net income of $10 million was down roughly $1 million and adjusted net income for the quarter was $22 million or $0.09 per diluted share, up $5 million.

The adjusted net income metric removes non-cash items and transaction related costs giving a clear picture of our strong operational performance. Turning ahead to Slide 12, third quarter adjusted OIBDA was $50 million, down $1 million.

A small decrease in adjusted OIBDA was due primarily to the higher engineering and development and G&A expenses, including from TokBox, partially offset by the higher margin. Moving to Slide 13, CapEx for the quarter was $5 million, down $4 million, driving OIBDA minus CapEx of $45 million, a $3 million improvement.

As we move away from private hosting of our solutions and data centers, where we have to buy the hardware, rent the space and often pay third-party license costs to public cloud hosting of the OneVonage platform, this calculation captures the net positive effect of this shift.

As Alan mentioned, on October 31, we completed the acquisition of NewVoiceMedia. The equity price for the acquisition was $350 million. We inherited the cash and receivables on NewVoiceMedia's balance sheet, meaning the enterprise value is a bit lower.

We estimate that the resulting enterprise value pay is attractive at 3.8x 2019 revenue, which we expect to grow in the 25% range organically. This revenue multiple compares favorably to NewVoiceMedia's publicly traded cloud contact center peers as well as recent private valuation multiples in the contact center space.

On Page 14, we ended the third quarter with $186 million of net debt, up $14 million sequentially as we acquire TokBox for $33 million, but partially offset that cost with debt pay down.

The acquisition of NewVoiceMedia was funded through the same $600 million credit facility that we completed in July, making net debt pro forma for the acquisition of $546 million or 3.4x adjusted OIBDA.

Looking forward, we expect to pay down debt quickly with target net leverage below 3x pro forma adjusted OIBDA by the first quarter of 2019, both NewVoiceMedia and TokBox are unique, and our ability to pay in cash enabled us to win these assets and manage dilution.

We continue to be strategically flexible through access to our revolver and the capital markets.

Before I discuss updated guidance for 2018, I wanted to reiterate that as an enterprise software company, NewVoiceMedia has deferred revenue on its balance sheet, stemming from its approach of billing new customers upfront for their first full-year of service.

GAAP purchase accounting rules require a write-down of a portion of this deferred revenue balance, primarily impacting the first 12 months of ownership. Therefore, a reported revenue on OIBDA will be lower than they would have been organically to the first year of ownership.

Benefit to this billing approach is that NewVoiceMedia is a positive working capital business, constantly receiving cash from new customers prior to providing service. Turning to Slide 15, consistent with our prior custom, we are updating 2018 guidance to reflect the acquisition of new voice media and other factors.

We are raising 2018 consolidated revenue to a range of $1.048 billion to $1.052 billion. Within this, we now expect Vonage business revenue to be in the range of $608 million to $612 million. We expect consumer revenue to be in the $440 million area.

Inherent in this update is that excluding M&A and including a projected currency headwind of more than $5 million, we are on track to achieve the initial consolidated revenue guidance we set forth at the beginning of the year.

We expect adjusted OIBDA to be in the $177 million to $180 million area, taking into account NewVoiceMedia's organic adjusted OIBDA profile and the loss of a portion of its revenue and OIBDA from the required write-down of a portion of its deferred revenue.

This also takes into account the continued acceleration of VBC from resulting shift of CapEx to OpEx and today's currency rates. We're also updating our CapEx guidance.

We now expect CapEx to improve to the $25 million area, $10 million lower than our initial guidance and lower than we anticipated last quarter, primarily because of the accelerated adoption of VBC with its corresponding lower third-party equipment co-location and license cost.

This results in adjusted OIBDA minus CapEx in the $152 million to $155 million range. The upper end being the number we guided to last quarter, which did not include drag from NewVoiceMedia. To be clear, this means that excluding M&A, we are delivering more cash flow in 2018 than projected above the beginning of the year and last quarter.

In conclusion, we feel very good about our financial performance for the quarter and the long-term strategic value of NewVoiceMedia. I will now turn the call over to Hunter to initiate the Q&A..

Okay, great. Thanks, Dave. And William, could you open-up the queue for questions please..

[Operator Instructions] And the first questioner today will be George Sutton with Craig-Hallum. Please go ahead..

Thank you. Alan, I appreciated your discussion around the programmable concept in moving and pushing out the services actually to customers -- of your customers.

Have you been able to turn that into any sort of an ROI type sale where you can argue that using this creates ROI for your customers? And/or does that ultimately work its way into how you price your services?..

Thanks, George, and good, morning. I doubt we will -- let me just take those reverse. I doubt we will price our services, if you're referring to sort of a benefit basis, I think it's very difficult to capture, but what we're seeing is that using a tremendous -- a very, very robust demand for these programmable services.

And the use case is -- this I put in my prepared remarks, the use cases that they're addressing are as varied as any businesses -- every business is a bit different in terms of their particular flow with their customers and sort of how they serve their customer, what their go-to-market, what their support models are and the like.

The whole notion is they’re bringing these tools in because the macro goal is to improve customer engagement.

And so if you think about every interaction with that customer, I want to be able to pull that customer in, in the -- in the channel of communication of their choice, with the mode of their choice to the right expert within my company and back again. So just by virtue of the growth, the ROI is embedded. Now they wouldn’t be doing it otherwise..

Understand. Okay. One other question really for Dave, I guess, the lowered OIBDA number, there are really three things I'm hearing. I don't believe any of them are fundamental. But number one, your engineering costs are higher because of lot of the work you're doing as we talked about.

Number two, NewVoiceMedia had some deferred revenues that that aren't flowing through, and then some FX impact.

Is there a way to break that down at all?.

Absolutely. So in the last quarter we updated guidance to the $185 million area. Now we are $177 million to $180 million.

The bridge there to the extent you were to go all the way to $177 million and we very much are within the range would be $5 million for NewVoice, now having seen a bit more detail on what their deferred revenue looks like and how we would account for that $1 million further CapEx to OpEx in addition to what we projected last quarter, and then $2 million of currency impact.

And currency impact is fairly unique in the sense that it's attributable from a cost perspective on the disconnection between the British pound and the euro, due to Brexit. We have a significant cost base in British pounds. We take in most of our revenue in dollars and then some in euros.

And that disconnection between the euro and the pound specifically is driving that. We don't view that as something that’s going to be an ongoing issue, and it hasn't -- really hadn't been an issue before this quarter..

Okay. Thanks for the detail. I appreciate it..

Sure..

And the next questioner today will be Rich Valera with Needham & Company. Please go ahead..

Thank you. Good morning. Alan, you mentioned you signed four large deals of $8 million plus deals that included advanced contact center.

I was wondering if any of those included NewVoiceMedia? And if not, if you think -- if you had already closed NewVoice and had it for a couple of quarters, if that would be different, if you think you will be able to sell New Voice in cases where you wouldn't have in the past? Thanks..

Well none -- they were all -- the advanced contact center was in contact because we -- that’s the third-party product we’ve been representing. Had we owned it for a couple quarters and have the integration done? Of course, we would push those to NewVoiceMedia, because that scale, that’s for NewVoiceMedia plays best.

And so, the whole idea is we're going to be integrating NewVoiceMedia in the Vonage business cloud, and as we progress forward we will be selling that as our default.

Now that said, in contact we will remain in our product catalog because there are certain instances where you may not have particular involvement of CRM, particularly no involvement of sales force, added customer prospect and in contact may just fit well. So we’ve done as we’ve expanded our opportunity. We haven't shrunk at it any sort of way..

That’s great.

And then I see you’re not -- it looks like you’re not going to be formally splitting out the UCaaS from the CPaaS, but can you give any color on how those two businesses performed individually during the quarter?.

Let me let Dave take that..

Sure. Thanks..

Yes. Absolutely. I will give you the numbers. So UCaaS revenue was $98.5 million and the accounting policy change took $400,000 out of that. So the clean number would be $98.9 million, basically $99 million total UCaaS. That represents service revenue growth of 13%. On the CPaaS side, the number was $55.1 million of CPaaS.

Again, I talked about in my script there were that's a -- we’re happy with that number. That being said, there were two impacts negatively to that number. One was $2 million of currency and again you saw a very large move in the euro that we had not seen before.

And secondly, about $2 million from the customers that I talked about that we dropped, that simply not only weren't meeting our margin target, but they weren't going to meet our margin target through product mix or any other kind of growth.

And that was just -- those are just one of those trade-offs that we make every day, but happen to be material in this quarter..

Got it. And just one follow-up, if I could, on the 13% UCaaS service growth. I guess, that -- I think it was maybe 14% the prior quarter. And I know you’ve been working pretty hard on the sales and channel aspect of that business.

Any thoughts about how that business trend from a growth perspective as we head into '19?.

Sure. Let me ask Kenny to take that..

expanding distribution, field sales, continuing to invest heavily in the channel and making sure that we've got access to all the deals in the market through the channel as well as adding contact center in the bag of this -- as the sales professionals continues to improve bookings and I think we will see that come through in revenue as a result..

Got it. That’s all for me. Thanks, gentlemen..

And Rich, it's Alan again. You may recall, as a reminder, I said -- in the current quarter, across all our routes to market, contact center bookings were up fivefold. So what Kenny is referring to is that focus there is really beginning to bear fruit..

Got it. Thanks, gentlemen..

And the next questioner today will be Michael Rollins with Citi. Please go ahead..

Hi. Thanks for taking the questions.

So -- and maybe just at a high level, if you think about all the additional services that you’re putting on your menu for customers to bundle together, how do you think about totality of growth versus your cloud communications competitors? Should you be able to grow in total for business revenue faster than them, because you have all these capabilities.

And over what time frame do you expect to kind of effectuate that the aspiration? Thanks..

Hey, Mike. It's Alan. Simple answer is, I believe that we will be able to -- because of the totality of the offerings that we have, that we will be able to overtake our competitors in terms of our revenue growth.

And so that the 23% -- and I’m adjusting service revenue growth of 23% this quarter, it's roughly been 24%, 23% through the first three quarters of the year. My expectation is that’s going to move up. And I think we will overtake all competitors.

Those who are focused -- those who are -- other than perhaps those who are focused specifically on CPaaS, CPaaS as its own piece is growing the fastest. But I think the other names that we can get compared to all the time, I have every confidence that we're going to exceed their growth rate..

And as you look to accomplish that, what’s the biggest hurdle that the organization needs to overcome?.

Well, I think I -- Kenny, address that in part and I did as well. We have within -- if you parse it back and I prefer not to, but if you parse it back to, you -- in just sort of the as a service component, the efforts that we're doing on you UCaaS are to grow up market because again we have been over indexed in the SMB market.

We are seeing great success within the channel, growing over 40% where the average deal size has more than tripled and we're seeing contact center, which has a very high tickets to growing as well and we are adding distribution in terms of numbers of salespeople, seniority of salespeople and we are seeing better productivity.

So it's those levers which are just happening.

Concurrent with that again if you parse it back to the CPaaS side, we have been executing on really a mix and geography strategy, supplementing the -- where our Nexmo was strongest when we bought it, which was international termination of SMS to add voice and other higher margin and fast-growing products like VAPI as well as geography in the United States.

We are just executing on all those pieces and what we can uniquely do is serve the whole TAM and others can't. As we execute and you're seeing the greenshoots -- each quarter we’re seeing more and more of that, the greenshoots of that execution that growth rate is going to count..

Thanks very much..

And the next questioner today will be Jonathan Kees with Summit Insight Group. Please go ahead..

Hi. Thanks. I appreciate taking -- you taking my questions. I wanted to ask about, I guess, maybe this is a question more for Alan here. In regards to his discussion about -- your discussion about fully programmable solutions, you’ve gone to good lengths here detailing about the cross-sell with contact center.

Just curious how the cross-sell has been with customers in regards to Nexmo? How many of your UCaaS customers have been buying Nexmo? How much of that was included in like the large deals?.

The way to think about it is not from a go-to-market point of view. It's from a product point of view. And what I mean by that is you clearly -- as I mentioned in the remarks, you're absolutely seeing UC and CC, so that sort of the hosted PBX and the contact center been bought together.

We are seeing that everywhere and we highlighted that specifically, for instance, all four enterprise deals reflected both UC seats and contact center seats. And the contact center seat added a third to the total contract value of those deals.

On the CPaaS side, what you're seeing is not a specific go-to-market connection, you’re seeing a product connection.

So as I talked about the -- you'll sell more UC because all the phone numbers are programmable, which is functionality that comes from the Nexmo side or in contact center you'll sell more of that because of functionality that’s delivered because of the programmable pieces.

For instance, last quarter we announced -- again, this was built on in contact -- Vonage CX Cloud, which took Nexmo's sentiment analysis and paired that within contact. Now that we have new voice media where we obviously control the roadmap, we will be able to make those integrations ever tighter..

Okay. That was helpful. So if I can dig a bit deeper there, in regards to those -- I can understand you sell more because it's more robust, you can program it.

How many of the -- are you getting a greater rate interest of customers who have purchased UC and the CC solutions? And now they're like saying we wanted to be able to utilize that programmable aspect it?.

Yes. You are seeing that in the examples that I gave you. And you are also seeing it where we're winning deals because of the Nexmo capability, even before it's even implemented. We are winning deals because of that. So, a couple quarters ago, we announced, just to give you an example, MedXM 5000 seat disease management company.

And that was contact center and UC. We won that deal because of the Nexmo functionality because they were very interested in the ability to program the communications out to their patients, because that's how that business works. It's all about compliance with the patients.

And so, it's very intensive as to communications back and forth with the patients. That functionality, which was not present in the deal day one is the reason that we won relative to competitors. That has played out over and over and over again.

Our salespeople, very interestingly, even within, I will call it sort of a fairly vanilla UC deal will start by selling the Nexmo differentiator -- the ability to differentiate with Nexmo first, because that's what future-proofs that customer. It's not -- you want to avoid in a sales call getting into a feature sale.

As I often say, you don't want to go to a customer and say, buy me versus a competitor because my auto attendant is better than the competitors, because it's basically very -- it's a baseline utility. It's hard to differentiate that way.

But when you pair it with the programmability and now with NewVoiceMedia, pair it often with the contact center, now you’ve a differentiated offering..

Okay, great. That helps. Thanks a lot. Good luck..

Thank you..

[Operator Instructions] And the next questioner today will be Mike Latimore with Northland Capital Markets. Please go ahead..

Yes, great. Thanks a lot.

On NewVoiceMedia, how quickly will you be able to sell that through the Vonage U.S channel, like the master agents? How long will it take to onboard them if you are going to do that?.

Well let me have Dennis take that..

Hey, good morning. Thanks for the question. Well, the answer is we are starting immediately. Kenny, I, and the teams are working together on that. So, we are actually looking forward to make some progress on that in this quarter..

Okay, great.

And then what is the OIBDA profile of NewVoiceMedia?.

Yes, it will be so -- as it relates to 2019, organically, there's a slight drag and then you have the deferred revenues. So from a GAAP perspective, it's going to end up dragging OIBDA next year in the $10 million type area, almost all of which is from deferred revenue.

So, there's a small organic OIBDA drag and then a fairly material deferred revenue which is noncash drag from it..

Okay, got it.

And then in terms of your UCaaS deployment timeframe, sort of the time to install deals, particularly midsize and enterprise, has that been stable, shrinking, growing? How is that been working out?.

Hey, Mike. It's Kenny. I will take it. We are actually seeing our quote to cash, if you will, the install time from contract signature to when we start billing and post install coming down, decreasing. And a lot of that is due to the shift towards VBC.

VBC, as -- just the way we've built it, the way Omar and team have built it is much easier to provision and easier to install, even with things like SmartWAN, as we've integrated those features into that product set. Our install days are much, much shorter than the VBE platform.

So as we shift more bookings, in fact, 70% -- just a little bit above 70% of the bookings in third quarter were on VBC. As we continue to shift even more bookings towards that platform, we expect those install times to continue to come down..

Okay, great. Thank you..

And the next questioner today will be Catherine Trebnick with Dougherty. Please go ahead..

Thanks for taking my question. Sorry, if I'm repeating. I got bounced off the line. One is just to give an idea, how much of the revenue was through the channel this year or this quarter versus a year-ago? To get a good sense of -- you've invested in the channel, I am just looking for some progress, some more data on progress? Thanks, Kenny..

Yes, you bet. Good morning, Catherine. So, from a -- let me start just with bookings. As Alan mentioned on his prepared script, we’re seeing inbound deals -- so, deals that we’re booking through the channel -- up just over 40% year-on-year. So -- in fact, the number was 43% year-on-year from third quarter of 2017.

So that's one indicator of the investment that we’ve talked about in the last several quarters that we’re making back into the channel by offering the new portal, the new programs, and just making kind of deeper inroads with the masters and their subs. So bookings are up 43%. We are also seeing the size of those deals improve pretty dramatically.

So the size -- the average size of a deal that a channel partner brings us is roughly 3x what it was in the first quarter. And so that -- we are seeing very, very good progress from both deal inflow as well as size deals.

The last stat I would share with you is, that the -- of all the large deals we sold, all the way down to $10,000 in MRR, three quarters of those came from the channel. As we’ve mentioned, some of those obviously were CCaaS, some of those were both CCaaS and UCaaS, but three quarters of that volume came from the channel.

So seeing nice progress based on the investment we’ve made with partners..

How long does it take you to ramp up your new partners?.

It depends on the partner. We are recruiting daily to bring partners into the fold. Some of those partners are ready to ramp immediately. They’ve the background to sell UC, they’ve the background to sell contact center solution.

Others take a little bit longer because they may have been on on-prem partner that, for instance, AVAR, that’s looking to move towards cloud and takes a little bit more enablement and education. So, we are seeing deals pop from the partner inside of 30 days all the way to as long as kind of six months to get them ramped..

Okay. And then another -- Alan, this is for you. On Nexmo, how much of the -- what percentage would you say are you getting traction in North America with the Voice API? I know that’s a real key piece of driving the gross margins for that product up. Can you give us some more color around that? Thank you..

Yes, Catherine. I will start and I will turn it to Kenny. I think we are seeing continued progress and high growth rates on VAPI, but still off of a small base. So the largest proportion of the business is still international, where it was two years ago.

So, again, we feel we’ve the right product, and we've developed the distribution and the training and the sales enablement, etcetera, pushing hard into the United States, not just for voice but also for SMS as well because even SMS terminated in the U.S is much, much better margin than it is overseas.

Kenny, you want to augment that?.

No, I think you covered it, Alan. I think that’s it..

All right. Thanks..

Thanks, Catharine..

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Hunter Blankenbaker for any closing remarks. Hunter Blankenbaker Okay, great. Thanks, William. And that does wrap up the Q&A portion. We look forward to seeing many of you in the coming months at various investor conferences.

And for those unable to attend in person, these events will be webcast. And you can follow our comments on the Vonage IR Web site. Please contact us for any additional details, and thank you again for joining..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines..