Venture Global Inc (VG) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vonage third-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Hunter Blankenbaker, Vice President of Investor Relations. Hunter, please begin.

Okay, great. Thank you, David. Good morning and welcome to our third-quarter 2016 earnings conference call. Speaking on our call this morning will be Alan Masarek, Chief Executive Officer, and Dave Pearson, CFO. Also joining us are Joe Redling, Chief Operating Officer, and Tony Jamous, President of Nexmo.

Alan will discuss our strategy and third-quarter results and Dave will provide a more detailed view of our third-quarter financial results and guidance. Slides that accompany today's discussion are available on the IR website. At the conclusion of our prepared remarks, we will 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 posted on the IR website.

Now with that, would love to turn the call over to Alan.

Thanks, Hunter. Good morning, everyone. Thanks for joining us. I am pleased to share the results of a strong Q3 with you.

We generated consolidated revenues of $248 million, an 11% year-over-year increase, and we delivered adjusted OIBDA of $41 million, a 21% year-over-year increase. Given these results, I'm pleased with our team's performance, but perhaps more important than these results is the progress we have made executing on our strategy to be the clear leader in business cloud communications. So before I dig deeper into results, let's review our strategy on how we are creating long-term differentiation in business cloud communications.

First, we are starting to integrate Vonage business and our UCaaS solution and the Vonage API platform, our Nexmo CPaaS solution. Our ultimate goal is to use our solutions to seamlessly integrate the entire business communications value chain to create the most vertically-integrated communications company in our industry with scale and capabilities that deliver better outcomes to our business customers.

This is only the beginning. We have just begun scratching the surface of the opportunities we can create from integrating these solutions.

Second, we target the full range of prospective business customers from small SMBs up through very large enterprises. This approach gives us the largest total addressable market in our industry.

Our customer strategy is to deliver a unique value proposition where our customers can choose, first, their desired Cloud PBX features. And, second, their choice of quality of service guarantee, ranging from an unmanaged solution running over the top of the public internet through a fully-managed solution using our private NPLS network and/or smart WAN tools.

And, third, our customers could choose their level of integration into other cloud-based productivity and CRM tools, like Office 365, Google for Work, Salesforce, Zendesk, NetSuite, and many other cloud tools our business customers depend on every day.

In addition, our customers can choose two separate service delivery options to suit their specific cloud communication needs. They can buy Vonage business as a UCaaS subscription or they can now by our Vonage API platform and consume our cloud communication service as programmable modules delivered via software APIs.

And third, is our ability to leverage our highly-aware brand, highly-scaled voice network, and strong balance sheet and cash flows. Let me highlight these points further.

The Vonage brand has 10 times the awareness of our public UCaaS peers. The Vonage voice network terminates almost 15 billion minutes of calls annually and Vonage has direct peering relationships with major carriers, giving us quality and cost advantages versus competitors. Our annual cash flows are greater than our top five public pure-play UCaaS and CPaaS competitors combined.

Now with that as a backdrop, let's review third-quarter financial results, which reflect continued progress transforming Vonage into leadership in business cloud communications.

Total Vonage business Q3 revenue was $106 million, an 86% year-over-year increase. Vonage business accounted for 43% of total company revenues, up from 26% a year ago and just 11% two years ago. We expect business revenues to account for the majority of our consolidated revenues next year.

We continue to have a very balanced revenue mix with nearly 40% of Vonage business revenue in customers with at least 50 seats, more than 20% of revenue from customers with at least 250 seats, and more than 10% of revenue from customers with at least 1,000 seats. Within this 1,000-seat customer category, our Q3 year-on-year MRR growth was 26%.

From the perspective of customer additions, Vonage business added more than 9,000 new UCaaS business customers during Q3. We also saw particular booking strength in the midmarket and enterprise, highlighted by some key wins, including a technology company that provides call-center services to 40% of colleges in North America.

They selected Vonage business for an initial deployment of 850 UCaaS seats, growing to more than 1,000 next year. Our ability to integrate into their custom call-center software was key to winning this deal.

Next, a large healthcare company selected Vonage business to replace their on-prem solution and host their more than 700 UCaaS seats. Our ability to provide quality of service over our private MPLS network was key to this deal.

We have also substantially grown many existing customers. We expanded our relationship with one of the world's largest providers of cargo handling services to 2,500 seats and one of the nation's largest health club companies to 1,000 seats. And our field salesforce expansion continues on track as we continue to add new salespeople and sales territories, while making investments in training, marketing, and processes to drive better sales productivity.

Now let me review the Vonage API platform, formerly Nexmo. It's been just four months since we completed the Nexmo acquisition and our enthusiasm has only grown with the unique set of assets we've assembled. We are seeing that nearly every organization is looking to embed communications into their customer-facing applications and websites to better connect with their end-customers.

For example, consider one of our existing customers, Securities Training Corp; and I imagine many of you on this call our customers of STC because of the training they offer to financial services professionals. Vonage Business has an existing 250-seat UCaaS deal with STC. STC was using another CPaaS provider to enable SMS notification within their online training platform, but they switched to the Vonage platform to have their cloud communication needs delivered by a single vendor.

This combined approach is resonating well with existing customers and new prospects. In fact, we have many deals in the pipeline with existing Vonage Business customers to enable their CPaaS needs.

Within the Vonage platform, during Q3 we launched our new next-generation voice application interface or as we call it VAPI. VAPI effectively doubles our addressable market by opening up the broader programmable voice market. VAPI enables us to embed programmable voice in any application and provides call control functionality, like call recording, conferencing, hunt groups, IVRs, and text-to-speech.

Importantly, VAPI is now integrated into the Vonage voice network, which enables higher-quality and lower-cost voice service. The combination of VAPI's programmability with Vonage's industrial-strength voice network, coupled with Vonage's brand and our more than 350 US-based sales personnel, gives us a great opportunity to deeply penetrate the programmable US voice market.

Early feedback to VAPI's launch has been very positive. New customers and prospects come from a wide range of geographies and sectors, including CRM, IoT, retail, and healthcare. We are aggressively marketing VAPI to build developer awareness and to ensure developers understand its ease-of-use, quality, and pricing advantages.

And to ensure we are properly focusing our resources, we have accelerated the integration of our marketing teams. We have increased digital advertising, enhanced web content, incorporated Nexmo into the Vonage Business website, and grown our developer relations team. Our strategic focus is to continue to build brand awareness of the Vonage platform, innovate and expand our portfolio of APIs, expand our geographic presence, and further leverage Vonage salesforce, product, and network advantages as well as cross-sell into our existing customer base of over 80,000 businesses.

Our efforts to build awareness are showing positive results. We ended Q3 with 175,000 registered developers, up nicely from 130,000 at the time of the acquisition.

Now let's review our results in consumer services, where we continue to successfully execute our optimize and extend strategy. The core of this strategy is a disciplined focus on maximizing cash flows. And we expect consumer services to generate $600 million in aggregate after-tax free cash flow from Q4 2016 this quarter through the end of 2020, so over the next four years and one quarter.

With respect to customer churn, we remain at near historic lows, 2.2%, and our tenured customers, which we define as those with us for more than two years, now represent 77% of our consumer base, up from 76% last quarter.

In closing, I am very encouraged by our team's performance driving this transformation to business. Our results reflect good progress integrating our acquisitions and building a differentiated, winning value proposition for our customers. I am excited for the opportunities ahead and I look forward to sharing our progress with you as we transform Vonage into the clear leader in business cloud communications.

Now Dave will discuss our third-quarter results in more detail.

Thanks, Alan, and good morning, everyone. I am pleased to review our financial results for the third quarter of 2016. Before I begin I would like to note that the quarterly growth rates reflected in our presentation slides and during our prepared remarks are on a year-over-year basis unless otherwise noted as sequential.

Let's move to slide 5. Consolidated revenues for the third quarter were $248 million, up $25 million. Total Vonage business revenue was $106 million, an 86% increase. UCaaS revenue was $82 million, a 44% year-over-year increase on a GAAP basis. Nexmo revenue for the third quarter was $24 million, a 35% increase on an organic basis.

Third-quarter consumer revenue was $142 million, down 15%. The decrease is slightly higher than in the second quarter, due primarily to lower USF, which is a pass-through.

Third-quarter Vonage Business average revenue per seat, excluding the revenue contributed by Nexmo, was $45.50, up from $41.56, due to acquisitions and organic growth in the midmarket and enterprise space. Average revenue per line in consumer was $26.36, down from $27.38 in the year-ago quarter.

Moving to slide 6, revenue churn for Vonage business was 1.4%, up from 1.3% year over year and flat sequentially. Vonage Business grew total seats to 616,000, up 20% from the year-ago quarter. This represents a sequential increase of 24,000 seats versus the 21,000 added in 2Q.

Let me note that our ending Business seat KPI was previously understated by an immaterial amount for the previous three quarters. The earnings press release contains the ending seat count corresponding reconciliation.

Customer churn in Consumer was 2.2%, down from 2.3% in the year-ago quarter and up from 2.1% in 2Q. We ended the quarter with 1.8 million consumer subscriber lines, consistent with our plans to increase investments in Business as we continue to optimize profitability of Consumer.

Now moving to income statement cost items. Cost of service was $87 million, up from $67 million, due to higher cost of telephony services from the increase in Business seats and the addition of Nexmo termination costs.

Turning to slide 7, sales and marketing expense for the third quarter was $84 million, down $4 million, consistent with the lower consumer sales and marketing spend and the shift to more efficient media channels. In the quarter, we continued to shift our sales and marketing resources towards Business and increasingly toward sales, where we are investing to build a larger omnichannel salesforce.

General and administrative expense for the third quarter was $28 million. This is down $1 million, reflecting the addition of G&A of acquired businesses and Nexmo acquisition-related items, including professional fees and amortization of stock and cash-based deal consideration to employees, offset by the quarterly adjustment of the earn-out carrying costs.

G&A also includes approximately $2 million of severance charges related to our operational transformation project. Through this project, we continue to reshape the organization and align resources to execute on our transformation to Business. Partially offsetting these expenditures was the unwind of unvested stock awards for employees receiving severance. We will see a small amount of expense in 4Q related to this project.

Moving to slide 8, adjusted OIBDA for the third quarter was $41 million, a 21% increase. This reflects higher revenues and corresponding higher gross profit and a reduction in sales and marketing. Consumer had another quarter of strong cash flow, accounting for more than 100% of adjusted OIBDA on an allocated basis.

Adjusted net income was $19 million, or $0.09 per share, up from $11 million. Adjusted net income [mentored from moves] additional non-cash items, such as amortization of intangibles from acquired companies and acquisition-related costs. Both GAAP net income, which was $9 million, and adjusted net income were impacted by the G&A factors I referenced.

Moving to slide 9, CapEx for the quarter, including the acquisition of developed software assets, was $7 million, down from $10 million in the prior year and sequentially. Looking ahead, in the fourth quarter we plan to make a prepayment to acquire long-term hosting capacity at very attractive rates. While not CapEx, this will be a cash expenditure of approximately $15 million in the form of a prepaid expense that will amortize over three years.

Adjusted OIBDA minus capital expenditures was $34 million, up $9 million and representing the strong cash flow generation of our business. Free cash flow, which we define as net cash provided by operating activities minus CapEx and acquisition and development of software assets, was $19 million. This was down $9 million year over year due to higher working capital and interest costs and up $6 million sequentially due to the higher OIBDA and lower CapEx and acquisition costs.

After repurchasing $25 million of stock in 2Q at the accretive average price of $4.31 per share, we did not repurchase additional stock in the third quarter. As noted on prior earnings calls, the execution of our buyback program was subject to change as market conditions, M&A opportunities, and capital allocation priorities warrant. Our second-quarter repurchases represented one quarter of our entire four-year $100 million authorization, which runs through 2018.

Since beginning the repurchase of stock in August 2012, we've bought back 56 million shares of Vonage stock, or 20% of shares outstanding, for $181 million at a highly-accretive average price of $3.26. Our buyback has provided strong returns for shareholders and continues to be one of the key components of our capital allocation plan.

Cash, cash equivalents, and marketable securities as of September 30, $42 million including $2 million in restricted cash and $7 million in marketable securities. Net debt was $309 million and we ended the quarter with net debt to trailing adjusted OIBDA of 2.1 times.

Our strong cash flow and revolving debt facility give Vonage significant financial capacity and strategic flexibility, which we believe are competitive advantages. Today, Consumer is producing all of this cash flow, making it a strategic asset that fuels our business growth initiatives and enables us to borrow at attractive rates. This borrowing capacity has provided the capability to execute on highly-strategic M&A targets such as Nexmo.

Importantly, cash flow produced by Consumer drops sufficiently to the bottom line, given our $642 million NOL. We believe that Consumer will produce approximately $600 million of after-tax free cash flow from now through 2020 and still have material value at that point.

Moreover, the combination of consumer and business delivers substantial synergies today, enabling us to operate our network infrastructure, carrier termination partnerships, brand activities, and care group at significant scale. This includes elements such as pairing connections, ownership of phone numbers, and volume pricing that yield quality and cost advantages.

Now that we are three quarters through the year and have owned Nexmo for a full quarter, we are in a position to update guidance for 2016. There is no change to our consolidated revenue guidance of $950 million to $960 million; however, we are increasing both full-year Business revenue and consolidated adjusted OIBDA guidance.

The Business revenue, which includes UCaaS and CPaaS combined on a GAAP basis, we are increasing the expected range to $374 million to $377 million, up from $365 million to $370 million. And we now expect to deliver adjusted OIBDA in the $158 million to $160 million range, up from original guidance of at least $150 million.

That concludes my prepared remarks. I will now turn the call over to Hunter to initiate the Q&A.

Great. Thank you, Dave. David, let's go ahead and turn it over to Q&A please.

(Operator Instructions) Dimitry Netis, William Blair.

Great. Thank you very much, guys. Nice quarter there and guidance.

A couple of questions. So just looking at the guidance for VB, it was a nice raise there, $7 million to $8 million or so from what you have originally. It seems like the Nexmo piece came in right in line at $24 million this quarter. So can you elaborate, is it just --?

If I look at business revenue, it actually beat my estimate and consensus by about $1.5 million. So it seems like the UCaaS, the organic UCaaS business was up over expectations or was above expectations. Nexmo came in line, raising the full-year Vonage Business revenue.

So just comment I guess on Vonage Business, organic UCaaS side of Business, whether that indeed came in better than expected. And then what we will see in December, whether the upside of $7 million, $8 million there is really coming from the Vonage Business UCaaS side or is it a combination of both Nexmo and UCaaS? Or maybe it's tilted toward Nexmo? Thank you.

Thanks, Dimitry; it's Dave. Within our guidance, obviously as CPaaS and UCaaS -- to answer your question: in the third quarter, UCaaS grew 20% on an organic basis and CPaaS we talked about grew 35%. CPaaS or Nexmo put on more revenue on a dollar basis in the third quarter than did in the second quarter. And in that business, which is very dynamic, these sequential differences are probably more important than the year over year.

Embedded in our guidance is continued success in CPaaS, but also potential volatility in CPaaS, which we and our competitors see just given some of the larger customers are very, very sophisticated and very dynamic.

And then continued success in UCaaS. UCaaS did see in the third quarter some benefit from USF. We adjusted our USF approach across the entire complex. That was a bit of -- led to a bit lower revenue on consumer because the USF rate went down and USF rate went up a little bit on our UCaaS customers.

So there's some of that in there that was of a one-time nature, but the guidance reflects the trajectory we are on.

Okay, great. Just to clarify, 20% was the organic growth of the UCaaS side and then you did fill out the 1,000-seat customers which grew 26% year over year; is that correct?

Correct.

Great. One other question; on the gross adds in consumer, can you tell us what that number was this quarter?

Gross adds in consumer were 57,000.

Okay, so up from 55,000?

Exactly.

Okay. And then the last question on the churn, VB it was about flat with last quarter but it's up from the quarter before.

Anything to read into that as far as maybe focusing more on the midmarket enterprise which potentially could drive up the churn on the low end of the business? Anything you can comment on kind of where that churn will be or should we expect it to go down from here?

This is Joe. It's been in the same 1.3%, 1.4% range for several quarters, so we are focused on the midmarket, which as you know is predominantly contracted business. So we feel really good about that trajectory. The 1.4% obviously incorporates our SMB side of the business as well, which is typically a higher churn rate because they're smaller companies without contracts. So we feel the range is -- right range as we look ahead today and as we continue to change our mix up market we should start seeing some improvements.

Excellent. Thank you very much. I'll cede the floor and keep up the good work, guys.

George Sutton, Craig-Hallum.

Thank you. Joe, just to keep you on the churn concept relative to the Consumer business, how low do you envision that can go over the next couple of years? What would be the best bar that we could expect?

If you look at our tenured customers, obviously the churn rate is well below our total churn of 2.2%. It's typically in the high 1.7%s, 1.8% range, so I think as that base continues to mature you will start seeing continued improvements there.

We are still bringing in, as Dave mentioned, 57,000 new lines this quarter at very effective investment rates for us. So as that continues you will see that continue to stabilize in the low 2%s, but as the base ages over time I think you'll see that churn rate continue to go down.

Perfect. Alan, relative to the former Nexmo, as you attack the US market more aggressively you are obviously learning quite a bit. I'm curious; when you first started to look into this, there was a pricing umbrella that you were looking at: the obvious advantage of the Vonage brand and some of the things that you can bring.

Can you just give us an updated sense of what are you finding as you attack that market? How available is that market to you relative to your original expectations? And how much importance do we derive from the 175,000 developers versus 130,000, for example? Thanks.

Sure, George. We remain very bullish in the opportunity in the programmable US voice market. You cited in your question many of the elements of how we are attacking the market, whether it is, as we push the brand and market more aggressively, the product itself, which has a higher quality, ability to deliver voice at lower cost, the way we are pricing it on a per-second basis versus our competitor on a per-minute basis our customers are finding to be a fairer solution.

But the market is vast and we really haven't been in it very substantially, so we think there is a great deal of upside there and we're just attacking it very methodically. I think you should read into something about the growth in developer registrations. It's a very positive sign because for that -- for us that is the top of the funnel; that is what begins the long-tail Business customers for us. They have to start initially registering as a developer.

Okay, perfect. If I could just sneak one more in relative to iCore, you obviously have some challenges initially with the sales team there. You've made a number of changes. Is that now fully behind us, in your view?

Yes, it is behind us. There isn't anything any longer named iCore. It's simply they had a direct salesforce; now we have built a core direct salesforce. That direct salesforce is selling today our UCaaS products across Vonage Essentials and Vonage Premier.

We have expanded the number of salespeople, the number of sales territories, and then we are continuing to press, as I put it in my prepared remarks, forward on improving processes, integrating systems, training, etc., etc. So I think you begin to see some of the early sort of green shoots of that this quarter that we just announced; what we are seeing sort of in terms of numbers and logos added across the board, the strength that we are seeing in bookings among midmarket and enterprise, etc.

Thank you.

Rich Valera, Needham & Company.

Thank you. Alan, you just referenced a growth in developer registrations for Nexmo. Could you put a little more color around that? How those numbers are shaping up and how you think about those as a leading indicator for the overall business for Nexmo?

Let me start and then I will turn it over to Tony. Nexmo pursues a hybrid distribution model. So we have a direct sales effort, which is comprised of salespeople in-market and inside sales and sales engineers and account managers; sort of a classically-organized direct sales model.

We also work or generate business as a pull, so it's not being pushed by salespeople. It's a pull so that developers out there in companies large and small everywhere will come to our website, pull down the API, and then begin to play with it. Embed it in their application, into their website, what have you, because we have this desire to embed communications into their solution.

As I mentioned on the earlier question, that's the top of the funnel for us for that long tail with Business customers. They have to initially register as a developer. They have to, therefore, be aware of us as a solution.

Nexmo's footprint was much more of a global footprint much more oriented towards SMS and now we're pushing things to balance it out into voice and domestically. So we have to build that awareness and that's some of the value of the Vonage brand. Again, getting greater numbers of developers is an important element to us because that's the top of the funnel.

Tony, you want to add to that?

Yes, sure. I would like to add that we doubled the rate of inbound leads since the acquisition, so that's actually the sign-up plus the contact sales on our website. And that's as a result of the increasing awareness and marketing investment we are making around the developer community.

The developer persona is important in our business because what we offer is programmable objects that require to be built by a developer, whether that developer is in a start-up company where there are more influential in making decisions or they are in an enterprise setting where they are being asked to develop distribution. So overall we continue to invest in increasing and developing our awareness within developer community and we already see early result of that since the acquisition.

Tony, I just wanted to clarify, is an inbound lead equivalent to a download?

So the inbound leads that sign-up on our website and start using our platform, meaning it has the APIs and you can consider that a download, but essentially, they don't download anything. This is not a piece of software you view; you install on your computer. It's really an API, which means that you are connecting to the platform and interacting with the platform to build the communication application you want to build.

Appreciate that clarification. One more if I could.

Dave, could you talk about what drives the increase in OIBDA guidance on the flat revenue? Are your investment levels you've talked about previously, particularly with respect to Nexmo and Vonage Business intact? Where is that increased profitability coming from?

They are intact. In fact, we talked last quarter about accelerating investment into Nexmo and we continue to do that, whereby Nexmo -- if you think about our EBITDA guidance for the year, within that Nexmo is going to be negative in the $5 million to $7 million range as we talked about on the last call. So our OIBDA is actually up more than what's implied in the guidance that we updated.

That delta is coming from Consumer and it's really two areas. It's slightly less spend in consumer than we earmarked, because we were able to put that into Business and then the spend in Consumer being much more efficient than we had planned. And so we are just getting more bang for the buck.

So in Consumer there's a little bit less revenue in there and a lot more cash flow. And part of that revenue was also USF, as I talked about. So there's no change to our capital allocation plan.

Great, I appreciate that color, Dave. Thank you.

Greg Burns, Sidoti & Company.

Good afternoon. Within the growth of Nexmo, could you give us any maybe additional color on whether that growth is primarily coming from new accounts or growth within existing accounts?

Yes, it was. Tony can provide any color, but, yes, it was --. We talked about our strategy is to diversify the customer base and diversify the product and geographic mix, and that strategy is going to take time to execute but we are trying every quarter to lengthen the tail.

Our competitor, Twilio, has talked about this base versus variable revenue concept and we clearly see that. Once a customer gets to be very large, they are sophisticated and they tend to look at this as a dynamic business. So what we saw consistent with that is continued volatility amongst those very large sophisticated customers, although they did grow in the quarter on a sequential basis, and much higher growth than the average in the everybody else category.

Could you maybe quantify that customer concentration? Like what percent of revenue is coming from those very large accounts that might provide some volatility to the numbers?

If you think about Twilio, which is a pure-play, which I think has done a very good job of kind of defining this, they talk I believe about variable revenue sub 20%. Using the same definition, on a dollar size basis, we have the same dynamic: sub 20%, very large accounts that again approach the business differently with our strategy to make the other part, the tail, longer and more stable.

Okay, thanks. Then looking at your gross margins versus like a Twilio, is that gap strictly a function of messaging versus voice? And are you going to close that gap as you grow your voice business?

Yes, it is a mix difference, so it's SMS where we are 90% SMS and it's outside the US where we are about 70% outside the US. We have no intention of pulling back at all on SMS or outside the US. It's really about creating that counterweight and that diversity in voice globally and a presence in the US across the products that we think will lead to gross margin increase over time as we execute the strategy.

We also feel like our advantages on the peering side and termination side, they play to the US market. They don't really play to the international SMS market.

Thanks.

Catharine Trebnick, Dougherty.

Nice print and thanks for taking my question. What percentage of the 175,000 developers are paying customers? And then the follow-on question is what is the gestation from once you dial-in to the online platform to revenue generation? Thank you.

I think I will turn it over to Tony. You said what's the gestation period between --?

Yes. How long does it take, once you start working on it, before you actually start getting remuneration from the platform, generating revenue for you?

We've disclosed in the past that we have roughly 5,000 business customers, so we don't break it down specifically between a developer who registers and -- if we had 100 developers registered today, who's paying and who is not. It's more think of it as the top of the funnel that are going to convert an element of those over time into paying customers.

So when we bought the company it was 130,000 roughly registered developers and about 5,000 business customers. We are certainly working on improving those ratios, but that's an over time phenomenon.

Tony, you want to add to that?

I'd like to add that we are going to start measuring the time to first payment. Typically it's -- you can sign up online and start testing today and we give you free credits and then when you [redeem these free] credits you could go and pay online to replenish your quota essentially. And that time could be as short as a day, but depending on how the customer is testing and how long they need to test, it could take over months from sign up to first production paid transaction.

All right, thanks much. I will circle around and thank you.

(Operator Instructions) Will Power, Baird.

-- and UCaaS offers. And I guess as part of that I think you referenced one of the cross-sell wins.

Will, excuse me, you clipped at the beginning. Why don't you start your question again?

Okay, sorry. I guess what I really want to understand is where we are in the UCaaS CPaaS integration process, effectively what inning. Have you started cross-selling those platforms across the existing base of customers on the UCaaS and CPaaS side, respectively?

I guess I'm just also curious, as you go to new customers and look at RFPs out there, how effective has it been thus far to have both of these offers? Have you seen that start to bear fruit as a differentiator?

This is Alan; let me take that. I think we are still singing the national anthem. We have even started the game yet.

Clearly, on the VAPI release we have integrated it in with our industrial-strength network and that's proving to be very, very effective. But the opportunity of an integrated solution, that is still being planned and won't begin being executed probably in meaningful pieces until the next year. That is sort of in the physical integrations of the platforms.

From a lead-gen point of view, however, it is becoming very, very important. One, we are viewed evermore as a thought leader. Our customers we find very, very frequently use CPaaS tools in addition to a UCaaS-based solution. We cited one example on the call of an initial -- an existing UCaaS company who now has switched from our competitor to us because they wanted to buy it from a single vendor.

So very early days. But we are seeing all the right indications that we have done is the exact right thing from an acquisition perspective and how we are going about executing this are the right things as well. So very, very hopeful about it.

Okay. Then maybe just as a follow-up to that, as you think about the VAPI product, I guess I would be interested in any other reactions you have gotten from customers around it, although I recognize that's early. And I do know if this is, Alan, for you or maybe for Tony, but just trying to better understand the differentiators of your voice API product versus what the competitors are offering.

Let me have Tony answer that.

Sure. Thanks, Alan; I will. First, when you look at the combined Vonage and the Nexmo platform with the voice API provides a unique offering to the US market specifically. Because in the past customers needed to make a trade-off: either they go with easy-to-program platform or they go with a carrier-grade, heavy, old telco.

Now, together with Vonage, we offer the best of both. We offer the easy-to-program voice and backed by the underlying carrier-grade network, which has five-nines uptime, 16 billion minutes of voice terminated a year, so customers don't need to make a trade-off anymore. That's one of the key advantages the combination of the asset provides.

But specifically, even without the combination, the new voice API provides higher level of programmability and a much easier way. It's built on more modern web framework -- we call it JSON -- and it has a number of full-control objects that provide this higher functionality for the developer and enable any developer -- you don't need to be a telco developer to be able to build the next-generation of voice application.

And, thirdly, would be the international reach. The new voice API has two times more inbound reach, so you can provision a phone number in two times more countries than any other close competitor in the market.

Okay, great. Thank you.

Mike Latimore, Northland Capital.

Thank a lot; great quarter, guys. The 20% UCaaS growth I think you mentioned, was that an improvement from the growth rate in the second quarter?

Yes, it was close. Second quarter was high teens.

All right. And then on the voice API, is it -- in terms of bookings over the next 12 months, let's say, is it clear that more bookings will come from developers or the direct sales? Or it's still too early to say which will be the bigger bookings generator?

Dave, why don't you take that?

I think it's still too early to say. Clearly, we are seeing anecdotal evidence of the ability to cross-sell quickly by putting the product into the -- the suite of Nexmo products into the sales bag of the salesperson. But we are going through our planning process now so it's -- we are not a position to comment how much will come from that.

I would also just note; we talked about bookings and I think that is a good shorthand for it, but it does -- it's not as subscription business. It does tend to be more volatile than a booking, both up and down and usage based.

Then I know the voice API opens a big new opportunity, but on the text messaging side of things, can you talk a little bit more about where you are seeing growth? Is it sort of new customers coming online? Is it an increase in use of current customers or is it new regions? A little bit more color around where the text messaging growth is coming from would be helpful, thanks.

Tony, why don't you handle that?

Yes, sure. So the text messaging market is as big as the programmable voice market and we see similar growth rate in both markets when you look at it from a CPaaS point of view.

There's really three levels of growth, if you think about it. There is the existing business, the expansion in the existing business and that there is twofold, which is the natural growth of these companies and also the competitive win as well, when you specifically own the top accounts that have multiple vendors. And then you have the new business, the new accounts.

Today we see growth across the board. There is the volatility that Dave mentioned on the top accounts and that volatility is being replenished by the natural growth of the other accounts and also the addition of our new business. Overall, we continue to see growth in the business on SMS and the new business is an important driver to manage the volatility in the existing business on the top accounts.

All right, thank you.

Michael Rollins, Citi.

Good morning and thanks for taking the questions. Two if I could please.

The first is I was wondering if you take -- for the UCaaS products that you are offering for the medium and larger size businesses and you look at the salesforce you've invested in and the acquisitions that you've done, what proportion of the country can you now effectively go after to sell into?

And as you look at the future growth for this business, how do you think about the growth coming from getting more depth of share where you have the sales capability built out versus expanding the breadth of your salesforce and getting more growth that way? Thanks.

Thanks for your question, Mike; this is Alan. We have a completely national footprint right now. It is an omnichannel approach, so clearly our inside sales group sells nationally. Our channel sales group sells nationally. Our enterprise group sells nationally.

Within our field sales teams, which has grown dramatically both in terms of numbers of salespeople and numbers of sales territories, we often speak about it as we want to be in all the NFL cities, which is roughly 30. I was get in trouble with people from St. Louis when I say that, but the -- roughly 30 cities. And we're in about half that today and growing.

Our focus, in terms of cities, has been more East Coast and Southwest, but we are pushing West so you will see more of that in the coming quarters.

Is this still in your mind a land grab for a much larger opportunity or are you starting to run into competitors more often as companies are evaluating which solutions to choose?

Well, it is a land grab in the sense that we are -- it is a land grab and we are competing against the other cloud players. Let me break that down.

The land grab is that we are stealing share from the on-prem solutions that are out there. In the midmarket in the enterprise, you are almost always seeing the names you would expect that you would compete against because those mid-market enterprise customers are certainly not going to go with the first vendor who knocks on the door.

Down market, though, is very different. Down market, where the lead gen generally starts from a buyer doing a Google search, it's the person who -- so, therefore, the buyer is generating demand intent. It's the vendor who gets there first who generally wins, because they don't usually do a competitive process.

And we have found, given the strength of the Vonage brand, that has given us the ability to source those leads less expensively than others because we have so much domain authority in our space. And that's why the down-market side of our business, the small company start of our business continues to grow so well.

If you look at the total numbers, the percentage of business above 50 seats, 250 seats, and 1,000 seats, the percentage of total revenues is comparable, but the total base is growing. And that's because we're growing at both ends.

Thanks for the help.

Tim Horan, Oppenheimer.

Thanks, guys. I have about 10 of them, but I will wait till later.

Maybe just focused on the UCaaS market; obviously you grew 20%. One of your peers grew 30% and you had a bunch of improvements for the business. Do you think this business can accelerate back to the 25% you were doing or are the improvements basically behind you at this point?

I also noted you had a lot of seat adds in that business. Is that sustainable? Maybe a little bit more color around the growth would be great.

We have made a lot of improvements and I think we talked back in the first quarter about integration. We talked about rationalizing the salesforce and all that stuff is behind us, so we are seeing the benefits of that.

I would say, though, that I don't see the model that we are pursuing today growing at 30%, just given again in the midmarket and up market it is a longer sales cycle, it is a more sophisticated sale, and it's a longer install cycle. And that market continues to tip to the cloud, whereas in the SMB market it already has. So it's going to take time for the average to go up, given the factors that I talked about in the up market. I think the growth that we are seeing is where we are right now.

Just a clarification on Nexmo. When you acquired the company you were thinking maybe $120 million of revenues for 2017, if I remember that correctly. I know there's a lot of puts and takes and a lot of moving parts, but are we still thinking we're in that range for 2017?

Yes, there's no change to the way we're looking at 2017. As I mentioned, we are in the budgeting process and there is capital to grow that business as fast as possible. We talked about the long-term strategy, but there's no change to the view right now for 2017.

Great. Alan, happy two-year anniversary and great job. Congratulations.

Thank you very much.

At this time I'm showing no further questions in queue. I would now like to turn the call back over to Hunter for closing remarks.

Great. Thanks, David, and thank you, everyone, for joining us this morning. We appreciate your support. We look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.