Venture Global Inc (VG) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vonage Holdings fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Okay, great. Thanks, Karen. Good morning, and welcome to our fourth-quarter and year-end 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, our Chief Operating Officer, and Tony Jamous, President of Nexmo.

Alan will discuss our strategy, full-year and fourth-quarter results, and Dave will provide a more detailed view on our full-year and fourth-quarter financial results, as well as our 2017 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 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 fourth-quarter earnings press release or the fourth-quarter earnings slides posted to the IR website. With that, I'll turn the call over to Alan.

Thanks, Hunter. Good morning, everyone, and thanks for joining us. 2016 was a pivotal year for Vonage. We established the foundation for long-term growth, and leadership in cloud communications.

Three key strengths have driven our success: first, our ability to leverage corporate assets from our consumer segment, including our highly aware brand, strong cash flows, and the scale of the Vonage voice network. These assets have propelled our transformation; second, our ability to acquire great companies at attractive prices, and grow them organically; and third, our ability to create a unique value proposition to drive better outcomes for our business customers.

We're going to use slides today to accompany our remarks. So please let's move to slide 3 to discuss 2016 highlights. Our team continued to deliver strong operational and financial results. We grew consolidated revenues to $956 million, a 7% increase, and our third consecutive year of top-line growth. For Vonage Business, revenues increased 72% year over year. Adjusted OIBDA was $160 million, an 11% increase.

We completed the acquisition of Nexmo, which continues to grow rapidly, achieving 46% pro forma year-over-year annual revenue growth. Even more important than its strong revenue growth, Nexmo expands our capabilities by combining UCaaS and CPaaS into an integrated solution which gives Vonage the right set of assets necessary to win in cloud communications.

In addition to our product investments, we also used our strong cash flows to invest further in our growth, including significant investments in our sales infrastructure. We also strengthened our Board with the addition of two new Directors with substantial B2B experience, Gary Steele, CEO of Proofpoint, and Hamid Akhavan, the former CEO of Unify and former CEO of T-Mobile.

Lastly, as was press-released this morning, we are partnering with Amazon Web Services to combine our UCaaS products with Amazon's new collaboration suite, named Amazon Chime, to provide unmatched productivity to business users. I'll provide more on the Amazon deal in a moment, but let's first move to slide 4 to discuss our most important strategic initiative, which is the continued buildout of our product offerings to enhance our customer value proposition and to drive growth.

With the acquisition of Nexmo, now known as the Vonage API platform, customers can choose between two service delivery options for their communication needs. They can buy Vonage as a UCaaS subscription, or they can access our Vonage API platform and consume our cloud communication services as programmable modules delivered via software APIs. When combined with our ability to tie into other cloud-based workplace tools like CRM and productivity, Vonage integrates the entire business communications value chain, from employee communications that maximize productivity, to the direct engagement with customers that CPaaS provides. When combined with our MPLS network, as well as voice services over customers' own broadband networks via our SmartWAN solution, we create a truly differentiated offering that strengthens relationships with our customers.

As I reflect back on the year, I'm proud of our team's accomplishments. We've assembled the most comprehensive product offering in the cloud communications market, and we continue to build a team capable of executing on our enormous opportunity.

Now let's move to slide 5 to discuss Vonage Business. This year, we significantly built out sales infrastructure and distribution channels. We ended 2016 with field sales offices in 12 markets. We expect to open nine more cities in 2017, bringing our total to 21 markets.

We recently hired Kenny Wyatt, formerly President of Business Solutions at CenturyLink, as our Chief Revenue Officer. Kenny brings a wealth of experience in enterprise communications, sales and operations, and we'll benefit from Kenny's deep omnichannel sales experience for customer segments ranging from SMB to larger enterprise.

Vonage Business had a strong quarter of revenue growth. We delivered Q4 revenues of $111 million, a 56% year-over-year increase. Vonage Business accounted for 45% of consolidated revenues in the quarter, and we expect Business revenues to overtake Consumer revenues this year.

Now let's move to slide 6, and let me highlight several fourth-quarter accomplishments within our UCaaS family of products. First, as I mentioned, we entered into a strategic partnership with Amazon Web Services that was announced via AWS press release this morning. AWS launched Amazon Chime, their web conferencing and collaboration suite that provides audio conferencing video and collaboration services. Vonage is AWS's UCaaS launch partner for Amazon Chime. Our partnership with AWS is industry-shaping, because the integration of our UCaaS solutions with Amazon's collaboration tools brings unmatched productivity to business users.

We believe AWS chose us as its UCaaS partner because our leadership in cloud voice communications matches well with Amazon leadership in cloud services. The bundled Vonage plus Amazon Chime product offering will be available late in Q2. Vonage will sell the bundled offering through our sales channels, and Amazon will sell the bundle through its Web assets.

Moving to slide 7, our enterprise sales team won Party City, the world's largest supplier of decorated party goods. Party City selected us for their 3,500 users across 900 locations, replacing their incumbent cloud provider because of our ability to unify all their stores on one hosted cloud platform, guaranteeing QOS with Vonage's SmartWAN solution over broadband, as well as our MPLS network.

Our channel sales team has secured a new contract with Telarus, one of the largest master agents in the US, in which Vonage was selected as the supplier of UCaaS services to one of the largest public property casualty insurance companies in the US. And finally, we continue to see good growth from existing customers. One of the best examples is WeWork, which added more than 1,000 seats in Q4, bringing the total to 9,000 seats across the US, Canada, Germany and the UK.

Now let's turn to Nexmo, the Vonage API platform, on slide 8, where the team also delivered strong results. In Q4, Vonage API platform revenues were $27 million, a 43% year-over-year increase.

We continue to build on the momentum of our merger with Nexmo, and our combined teams are delivering across three key initiatives. First, we expanded our portfolio of voice APIs with substantial increases in functionality. Second, we significantly increased our distribution footprint by aggressively entering the US market, leveraging the strength of the Vonage sales force and voice network advantages. Revenue from US-based customers increased 24% sequentially in the quarter. Third, we meaningfully increased the brand awareness of the Vonage API platform. In fact, by increasing investments in digital marketing and developer relations, and by leveraging the strength of the Vonage brand, we significantly increased our number of registered developers to 207,000.

We've also seen excellent growth from existing Nexmo customers. Notable among these, Nexmo has had a relationship with Amazon Web Services that predates our Amazon Chime deal. For AWS, Nexmo enables the delivery of SMS messages as part of AWS's simple notification service. In Q4, messages delivered on behalf of AWS increased 73% sequentially.

Regarding VAPI, which is our voice API, we're seeing strong traction, and the sales pipeline in the US is much higher than in any of our other markets because of our marketing efforts and lead sharing between sales forces. We also delivered more VAPI functionality during the quarter by adding direct support for Web sockets. In Q4, IBM Watson used Web socket support in our voice API, and delivered voice-enabled experiences through their Watson artificial intelligence applications.

Finally, on slide 9, you can see how our strategy comes together by integrating the entire business communications value chain. We integrate customer-facing communications via CPaaS, into employee communications via UCaaS, into the other cloud-based workplace tools such as CRM and productivity.

We are seeing early success from customers who are choosing Vonage because we offer both CPaaS and UCaaS solutions. For example, Electronic Restoration Services selected Vonage for their 250 seat UCaaS deployment. And they're also using our SMS APIs to enable contextual communications with their customers to improve customer engagement. We've also added CPaaS solutions to an existing 1,000 seat UCaaS customer, which has resulted in improved workforce management. I cite these examples because combining our UCaaS and CPaaS solutions has meaningfully improved our customer conversations in ways our competitors will struggle to match.

Lastly, let me review our results in our Consumer segment, where we continue to execute well. Revenue was $136 million, a 14% decline, and in line with our expectations. We ended the quarter with 1.7 million subscribers, 78% of which are tenured, meaning they've been with us for more than two years. For the full year of 2016, churn was 2.2%, which is an historic low.

These results continue to highlight the Consumer segment's cash flow-generating ability, while the segment concurrently delivers us massive voice scale, which enables direct peering with major carriers. These peering relationships give us quality and cost advantages over the competition that translate into our UCaaS and CPaaS product lines, particularly for our rollout of our voice API in the US.

To summarize, we had a very strong 2016, and we're well positioned for 2017. The sales infrastructure, solution set, and brand building we accomplished last year serve as the base of a multi-year growth opportunity. And we expect 2017 financial performance to reflect our focus on strong service revenue growth in Vonage Business, and continued harvesting of cash flow from Consumer.

I'm truly excited about our vision and the assets we've assembled to fulfill it. In just three years, we built the largest revenue base in cloud communications, as compared to our pure play competitors, and I believe the most strategic product offering by integrating our UCaaS and CPaaS solutions. While we've accomplished much, there is more to do to realize our full potential, and it's incredibly energizing to think about all of the opportunity that remains in front of us. Thanks again for your support, and I'll now turn the call to Dave for more details on our financial results and 2017 guidance.

Thanks, Alan, and good morning, everyone. 2016 was a year in which we achieved our financial goals by producing record revenue and strong cash flow, while funding organic growth and strategic acquisitions.

Before we review the results for the fourth-quarter and full-year 2016, I'd like to discuss the additional information we will be reporting starting today, both for the year 2016 and going forward. As noted on page 10, consistent with Vonage's continued transformation into a leader in business cloud communications, we're providing more visibility into financial trends in the Business and Consumer segments. For each of Consumer and Business, which represents our UCaaS and CPaaS product offerings, we will report both revenue and cost of service, each broken down by type. We believe this additional information in conjunction with our other KPIs will provide greater transparency into our progress, and insights into our execution in each segment. As in the past, I would also 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.

With that, let's begin on slide 11. Consolidated revenue for the fourth quarter was $247 million, up $17 million or 7%, due to organic business growth and the addition of Nexmo. For the full year, consolidated revenue was $956 million, also up 7%. The increase was due to substantially higher Business revenue, partially offset by planned reductions in Consumer revenue.

Moving to slide 12, let me now turn to our segment financial results for the fourth quarter, starting with Vonage Business which consists of our UCaaS and CPaaS products. Segment results can be found in table 2 of our press release. We are now providing the following Business revenue and direct cost metrics: service; product, which consists of customer premise equipment, broadband access and MPLS; professional services; and shipping and handling, and contributions to the Universal Service Fund, or USF, which are a pass-through.

Vonage Business total revenue was $111 million, a 56% increase. Of this, $84 million was UCaaS which grew 18% organically, and $27 million was CPaaS which grew 43% organically, or pro forma. UCaaS revenue in the quarter was impacted by several one-timers, including SLA credits and bad debt write-offs. 4Q is a seasonally high quarter for CPaaS, as certain corporate customers run special holiday campaigns.

Service revenue, which includes all UCaaS and CPaaS revenue, grew 69% to $92 million. Service margin during the fourth quarter was 58%, down from 73%. This decline in service margin is due entirely to the acquisition of Nexmo, as the API product currently has lower gross margins.

For the full year, Vonage Business revenue was $376 million, a 72% increase. Service revenue was $302 million, up 77%, reflecting significant organic growth in UCaaS, and the June 6 acquisition and subsequent organic growth of Nexmo.

Fourth-quarter average UCaaS revenue per seat was $44.65, flat from $44.79 a year ago. Revenue churn was 1.4%, flat sequentially, and up from 1.1% in the year ago quarter. Vonage Business grew total seats to 638,000, up 18%, reflecting strong organic growth. As Alan noted, CPaaS registered developers increased dramatically in 4Q to 207,000.

Moving to slide 13, we are now providing the following Consumer revenue and direct cost metrics: service; product, which consists primarily of VOIP routers provided to new customers; and USF. Total Consumer revenue for the fourth quarter was $136 million, down 14%. For the full year, total consumer revenue was $579 million, also down 14%, both consistent with our expectations. Consumer service margin for the fourth quarter and the year 2016 was 81%, reflecting our ability to hold margins relatively stable, despite a declining top line.

Consumer customer churn for the fourth quarter was 2.2%, consistent with the prior and year ago quarters. We expect churn to continue to fluctuate based on seasonal and competitive factors, but to stay in this general range. Consumer average revenue per line in 4Q was $26.11, down from $26.93 year over year due to lower USF, which is a pass-through.

Turning to slide 14, let me now build up to adjusted OIBDA. Consolidated sales and marketing expense for the fourth quarter was $84 million, down $6 million. This decline reflects the continued shift to more efficient media channels, and from marketing to sales. For the full year, sales and marketing was down $17 million, reflecting much more efficient media spend, partially offset by significant investments in salesforce headcount across all sales channels.

General and administrative expense for the fourth quarter were $34 million, up $4 million. Full-year G&A was $123 million, up $14 million. This increase reflects the addition of Nexmo, and in the case of the full year, Nexmo acquisition-related costs.

Fourth-quarter adjusted OIBDA was $37 million, up $3 million. Full-year adjusted OIBDA was $160 million, up 11%.

Adjusted net income for the quarter was $7 million or $0.03 per share, down $1 million. Full-year adjusted net income was $45 million or $0.21 per share, up 15% from $39 million or $0.18 per share in the prior year. The adjusted net income metric removes non-cash items such as amortization of intangibles from acquired companies and acquisition-related items. We also recorded an adjustment to income taxes related to these exclusions.

Turning ahead to slide 16, CapEx for the quarter was $9 million. For the year, CapEx was $38 million, net of reimbursable headquarters improvements, up from $34 million. This year, we advanced or completed several important capital projects, including consolidating down to four key US data centers, including our central base center at our New Jersey headquarters, and building certain field sales offices, as well as deploying success-based capital into BroadWorks licenses and CPE.

Free cash flow, which we define as net cash provided by operating activities, minus capital expenditures, and acquisition and development of software assets, was $13 million in the fourth quarter, down from $32 million due to a $15 million prepayment to acquire long-term hosting capacity at advantageous pricing and other working capital uses. Free cash flow for the year was $49 million, down from $96 million, reflecting the previously mentioned prepayment and other working capital uses. Adjusted OIBDA minus CapEx was $28 million in the fourth quarter, up $8 million or 42%, and $122 million for 2016, up $13 million or 12%.

In 2016, we returned $33 million to shareholders through our buyback program, repurchasing 7.4 million shares at the highly accretive average price of $4.43 per share. This represents one-third of our four-year $100 million authorization, which we are halfway through after two years of execution. Since beginning the repurchase of stock in August 2012, we have bought back 56 million shares of Vonage stock for $181 million, the highly accretive average price of $3.26. Our buyback has provided strong returns for shareholders, and it continues to be one of the components of our capital allocation plan to be deployed at Management's discretion.

Cash, cash equivalents, and marketable securities as of December 31 were $32 million. The data center capacity and other cash prepayments totalling over $17 million sit on the balance sheet as prepaid expenses until the service is utilized. In addition, we made a $1 million phone sale associated with a pending enterprise customer contract which sits in deferred revenue and will be recognized as revenue in the future.

Taking all of these items into account, net debt was $294 million, and we ended the quarter with net debt to trailing adjusted OIBDA of 1.8 times. The $450 million credit facility we put in place in the middle of 2016 continues to provide significant committed borrowing capacity.

Moving on to guidance on slide 17, our expectations for the full-year 2017 are as follows. Consolidated revenue is expected to be in the range of $970 million to $985 million. As we discussed throughout 2016 as an objective, we expect that Business revenue will exceed Consumer revenue in 2017.

Within this, we expect total Vonage Business revenue, which includes both UCaaS and CPaaS, to be in the range of $487 million to $493 million for GAAP revenue growth in the 30% area. This takes into account our plan to deploy access more selectively in 2017, meaning that service revenue will grow a bit faster than total revenues.

To give some commentary on timing of Business revenue development, revenue will ramp throughout the year, with Q1 representing the smallest sequential dollar increase of the year, in part due to the seasonally high fourth quarter in CPaaS. We expect the sequential dollar growth to ramp throughout the year. CPaaS, this is driven by our awareness efforts, cross-selling, and VAPI adoption, and in UCaaS by the opening of new markets and increasing sales force productivity.

Consumer revenue is expected to contribute between $483 million and $492 million, as we continue to focus on optimizing this segment profitability and cash flow. The actual dollar decline in Consumer will be less than in 2016. Using some simplified cost allocation assumptions, we currently expect Consumer to print over $600 million of after-tax free cash flow, that's cash flow minus CapEx minus taxes, through 2021.

Regarding cash flow, we expect to deliver at least $165 million of adjusted OIBDA in 2017. As with revenue, adjusted OIBDA will scale through the year. This is due to investments we expect to make in the first half to build out our Business sales force and CPaaS awareness. We expect CapEx to be in line with 2016 at approximately $40 million.

Combining the components of guidance I just discussed, we expect to generate at least $125 million of operating free cash flow, or adjusted OIBDA minus CapEx, in 2017. This cash flow generation is a strategic and financial differentiator for Vonage. With strong free cash flow, low leverage, and our low-cost revolving credit facility, we continue to have meaningful financial flexibility. This was evidenced by our ability to strike quickly to acquire Nexmo, with a compelling deal structure that was 80% cash.

Thank you for your continued support of Vonage. I will now turn the call back over to Hunter to initiate the Q&A session.

Great. Thank you, Dave. Karen, let's please turn it over to the Q&A session.

Certainly.

(Operator Instructions)

Our first question for today comes from the line of George Sutton from Craig-Hallum.

Thank you. And Dave, I appreciate the additional disclosures. So Alan, you -- for the first time, at least that I've heard you say this, you're starting to talk about UCaaS and CPaaS as an either/or model, and some of the discussions you're having with customers are driven by that. Can you go into a little more detail on that? In other words, are you literally coming, and saying we've got this or this, and we can be very flexible in terms of how we set you up? Is that effectively what you're saying?

George, no, it's not. It's actually not an either/or. What I was trying to say, that they are very complementary. And so, when you go into a customer, they generally require both.

All customers are communicating to their customers, of course, and also looking to bring their employee-based communications to the cloud, their PBX system to the cloud. So what we're finding is, it's just changing the customer conversation, so there is an opportunity to sell both.

That was really the rationale for when we bought Nexmo, was that you saw this convergence between the need to link external customer-facing communications with the internal employee-based communications. So it's really not an either/or. It's a both. But you can get the lead from one or the other, of course.

Got you. Okay. I just wanted to make sure I understood that. And then, as my follow-up, I will migrate over to Amazon, just give us a better sense in terms of being a Vonage partner.

What resource dedication do you have to them? What resource dedication do they have to you? My assumption is that you will be reselling their services. I don't believe they will be reselling your services, but I just want to be clear about that?

No, it's a shared deal. They'll be reselling the bundle -- or they'll be, excuse me, selling the bundle through their web assets, while we'll be selling the bundle as well, through all of our channels. So it really is one plus one equals three proposition.

Perfect. Okay. Thanks, guys.

Thank you. And our next question comes from the line of Rich Valera from Needham & Company.

Thank you. I was wondering if you could give me a little more color on the growth expectations for the respective parts of the business segment, particularly Nexmo and UCaaS? And maybe relate them to the fourth quarter growth rates, they were 43% and 18%, respectively? But how do we expect those to trend into 2017?

Hi, Rich. It's Dave. So, first of all, we're thinking about this -- and we're in a very dynamic and competitive market, and we're thinking, about increasingly CPaaS and UCaaS as one business, across which we're dynamically able to allocate capital.

That being said, as we sit here today, CPaaS looks like a mid 30%s organic grower, and UCaaS looks like a mid-teens percent organic grower. On UCaaS, service revenue will actually grow a bit faster, mid to high teens. As I mentioned in my script, there will be a bit less access, and a bit less product, and service which is MMR is what we're focused on.

And I know you mentioned, Dave, that you were going to deploy access more selectively in 2017. Why is that?

Sure. Yes, it's not about withholding it in anyway. It's really about the fact that the salesforce now has Essentials, and Premier has both products, the pure over-the-top product, and the fully integrated QoS product in their sales bag across the sales channels. And so, where it fits for a customer, and they don't need QoS, we've got the ability to sell them Essentials.

We've also in some cases, have the ability to sell the Premier product over-the-top, or without QoS. So it's simply making sure that the -- that it's the right application for access, because there is costs that comes along with that. But we continue to believe in the right circumstances, that it is the right product. And especially in the enterprise, where people are very concerned about quality, you're still going to see access.

I'll just add one follow-up to that. It's our SmartWAN tools, which is SD-WAN, software-defined wide area networking, we branded as SmartWAN lets us provide QoS, even in a broadband situation. So it's less necessary at times to pull the private circuit in that office to have a dedicated Voice line, SmartWAN can handle that.

Now, certain situations, you have to pull the private circuit, but others you can provide QoS via SmartWAN. So if you think about the gradations of delivery, you go from pure over-the-top, up to SmartWAN delivery, up further to needing -- to actually pull a private circuit and sell access. And because of the growth in SmartWAN, which we're seeing a lot of success in, that's really why you're going to see less sale of that -- or a slower growth in access.

Got it. Thanks for that clarification.

Thank you. And our next question comes from the line of Catharine Trebnick from Dougherty.

Hi there, guys. Thanks for taking my question. Can you give us a little bit more background on what percentage of revenue you expect the Amazon Chime to be by the end of 2017 for modeling purposes? Thanks.

Hey, Catharine. It's Alan. I can't give you a percentage. The product we expect will release the end of Q2, and we're going to initially distribute it to our base of customers as an added element of functionality for free. And then, they'll be, so then -- and Amazon will be selling it through their web assets, where they become a distribution channel for us.

We're very excited about the prospect, but we don't know how successful it's going to be. So we can't provide a percentage, if you will, in terms of how significant it's going to be. But this is an important strategic relationship.

Well, and then in addition to that, how much of -- how much of Nexmo might be folded into the Amazon Chime opportunity going forward?

It's really not a Nexmo issue, relative to the Chime situation. The Chime is a marriage between the UCaaS solution, and the Chime audio conferencing, video and collaboration system. We separately have a lot of business through Nexmo with Amazon Web Services.

I mentioned on the call, AWS has as one of their products, their simple notification service where we provide the SMS delivery for them. That is growing substantially. As I mentioned, that was up -- the volume of messages was up 73% sequentially in the quarter.

All right. Thank you all. I'll catch you on the post call. Bye-bye.

Thanks, Catharine.

Thank you. Our next question comes from the line of Dmitry Netis from William Blair.

Can you hear me?

Yes.

Okay. Thank you. A couple of questions. I joined a little bit late, so I apologize if I'm being repetitive, but for Nexmo, what are you projecting in 2017? The Street was baking in $124 million. I'm wondering, you're still in that range, lower or higher, and whether you're going to continue to report?

It sounds like maybe not, since you're talking about unifying UCaaS and CPaaS into one reporting segment. But it doesn't look like Nexmo will be split up going forward, is that correct?

Well, so the plan is to report the way we reported today, which is business as one segment, and increasingly we're -- we've put the two operations together. We will be giving color from a product perspective on CPaaS and UCaaS where it's relevant.

We did answer before a question on CPaaS growth, and we said it was going to be on an organic basis, so pro forma, as if we owned it for all of 2016, it will grow in the mid 30%s. The implication there, as you will recall when we bought it, we said that we thought it would do, in 2017, because we were buying it at two times, between $115 million and $125 million of revenue in 2017. The mid 30%s implies the very upper end of that guidance.

Got it. Okay, Dave, thanks. And then just in general, if I take that comment, roll that into your guidance for 2017, and look where UCaaS is shaking out, consumer slightly down from what the Street has been projecting as well. I don't think you'll be penalized too much for that, given the trajectory of that business there. But the expectation has been for both Vonage business, UCaaS side of the business, as well as Nexmo, to reaccelerate in terms of organic growth going into 2017.

So is there anywhere along the line, maybe it's second half, that you would feel now that you've got that guidance, I don't want to put words in your mouth, but do you feel that's a conservative guide, to give you a little bit of room to outperform those numbers going through the year, and show that growth as you've outlined last year?

We put together and communicated an achievable plan. And throughout the year, we did a lot of building in 2016, we still have building to do in 2017, and we've got a new CRO, and we feel very, very good about that. So we'll be updating as we go, but there's certainly that opportunity.

Okay. Great. And then, a couple of more on the -- looking at the EPS, missing by about $0.02 here, that's entirely due to taxes, it seems like? But maybe I'm missing something, but if you could comment on that, Dave? And then, the pre-payment that you mentioned that affected your free cash flow. Can you walk me over that one, once again? Whether that [is going] to recur, or is that a one-time thing that you don't expect to recur in 2017 timeframe?

Sure. So yes on net income. That difference is tax, is GAAP taxes. And just in general, net income has a lot of noise in it right now, because we made acquisitions, so we have amortization.

We also have payments. As you will recall, a portion of the consideration to Nexmo employees, and they owned a big part of the company, vests over the course of the year, as an incentive tool. So that's also in G&A and net income.

As it relates to the pre-payments, this was for hosting capacity and several other products that we're able to acquire the services of in bulk. We do not expect that will be a regular occurrence.

For instance, this hosting capacity, it's the amount which we pre-purchased, is counted in years, not months, so I would not expect to see those types of payments occur on a regular basis. And they'll be bled off of the balance sheet into our operating cost, as they're consumed.

Thank you. And our next question comes from the line of Greg Burns from Sidoti.

Good morning. When we look at the EBITDA guidance for 2017, is more than 100% of that still coming from consumer, or are we -- can we read -- or is the business segment is going to be a break even for 2017, or still at a little loss? Can you give us a little more color on the complexion of that EBITDA guidance?

Yes. So first of all, yes, we can. We are a functional organization, and we are able to segment from a gross margin perspective. It's much more difficult to pull apart below that, and get to OIBDA.

But if you use some simplified allocation assumptions, obviously, you have a lot of cash flow coming from consumer. You're going to be around break-even in business, and you're going to be investing in Nexmo. Those are the three components that go into the $165 million.

Okay. So business ex Nexmo, UCaaS is about at a break-even and Nexmo's a -- ?

Yes, break-even to positive in UCaaS, investment in Nexmo, and highly positive in consumer.

Okay. And then, I just wanted to dig in on the slow down in the UCaaS growth. This quarter there was some items impacting it. Could you just touch on those items again? And then just looking into 2017, is it something you're proactively doing, where we're only going to see a mid to high teens type growth, as opposed to what we saw in 2016? Or is it just scale or market-related issues that are weighing on the growth number for next year?

Sure. So just to unpack the numbers, and then Alan can comment on this as well. If you look just -- if you go to table 2 in the press release, and you look at service revenue versus product revenue, you'll actually, in business, and you take out Nexmo, which is the revenue of which is footnoted, you'll actually see that it's product revenue that went down in the quarter.

If you look at service revenue, it was actually up $2.6 million, just in UCaaS in the quarter. To that $2.6 million of organic growth, you would add service credits which were $300,000 to $400,000 elevated in the fourth quarter. So you then have a quarter that had $3 million of service growth, and did not benefit from some one-timers that we had in 3Q, which included a USF increase which is not in service, but is in total, and some other equalization of fees.

So when you put that all together, we actually had a strong organic growth quarter in UCaaS. The other component that is working against it, that you're seeing in product is bad debt on equipment, so we had about $300,000 there. But that caused a $600,000 swing, because that $300,000 was -- it was $300,000 higher in 3Q than it should have been, and we took that out of 4Q so that actually made a $600,000 swing there.

In addition on equipment, we are increasingly moving to a rental model. So you're taking money out of in-quarter, and you're spreading it over subsequent quarters. So you can really -- a lot of the difference relative to expectations within product for the reasons that I cited.

In terms of long-term growth, and growth for the year, it really goes back to what we said before, which is we believe this is an achievable plan. And it reflects a fully built machine at the lower end of the market, where we're absolutely doing everything we can, and feel like we have a very, very strong position in that market; and then, continued build out and continued execution of the longer sales cycles at the mid market, and particularly in the enterprise.

Thank you. Our next question comes from the line of Tim Horan from Oppenheimer.

Thank, guys. Can you give us more color on the Amazon relationship? Are they actually going to be using you for Voice services? Are they reselling your Voice network? And the $15 price point that they have, is that embedded with your service in that new product, the churn product? Thanks.

Hey, Tim, it's Alan. So as I mentioned before in an earlier question, they'll sell our product, our UCaaS solution bundled with Chime on their web assets. What we're doing, is we're taking their premium Chime product, and providing it free to our base, and the -- it's just a value-adder. The opportunity is for us to then take a product that they sell at their premium at $15, and we can then go to our base and say here is, this amount of value that is provided at no additional cost.

So would your Voice capabilities embedded with Chime, how much are they going to be charging for that?

We will not -- well, they'll be charging what we charge in effect, because they're not going to -- we cannot obviously have them create channel conflict in the sale of our products. So that's all been addressed in the deal. And this has been a relationship that's been underway for a very long -- or has been in the works for a very long period of time. They actually have an incentive to sell our product as well, as a distribution channel for us.

So your product embedded with Chime, what do you think they're going to be charging for that?

It will be, this is Joe. It will be our standard pricing. We're actually their UCaaS provider in their web assets. So those links will come into our channel, and we'll be pricing that based on the number of seats, just like we do today in our own channel. So we control the pricing of the entire [product].

Okay. Are they your customers or Amazon's customers?

They're our customers.

Okay. Sorry. That makes a lot more sense. And is this going to be more of a global offering, or is it more US-based?

US-based.

Thank you. Our next question comes from the line of Mike Latimore from Northland Capital Markets.

Hey, guys. Thanks a lot. On the UCaaS business, is it -- should we assume Essentials and Premier grows at a similar rate, or do you think one will clearly grow faster than the other in 2017?

It's fairly even. It clearly, there's a lot less friction at the lower end. And so, that's a positive for Essentials, and historically it has grown faster.

At the same time, our data and our experience shows that the upper end of the market is actually growing faster now, just the TAM and the adoption because it's earlier. So those two things are cancelling each other out for the year, at a high level.

Got it. And then again, with regard to Amazon Chime, do you think that offering is more attractive to the Essentials or Premier base? And also, you already have conferencing applications. So, if a customer wants to have the conferencing feature, how do you position Chime versus what you already have?

Yes, Mike. So obviously, the collaboration suite, this productivity suite is pretty compelling. We think it's -- you really have to get above 10, 20 seats for this type of suite. So what we're excited about, is across both our platforms, whether it's Essential or Premier, this is an option we think will be very attractive to the customer base.

So on the Essential side, we believe it helps us to move up market to a 10-plus, 20-plus seat through our inside sales channel, because it's filling a collaboration suite void we had before. So that's a very positive thing for us on that side. We do have collaboration features through our Premier offering, but either one of those will be, up to the customer's choice to choose. So it gives us both, a much richer feature set for what I would call, the small to mid, which is 10, 20, 30, 40 seats, that we can put across all of our channels, so it gives us advantages across all.

Yes, okay. Thanks.

Thank you. And our next question comes from the line of Will Power from Baird.

Great. Thanks. Just a couple of questions. I know you've gotten asked this a couple of times, but just thinking about the UCaaS market. Some of your competitors have been talking about accelerating growth in the mid market and enterprise. And it sounds like you're seeing that to a degree, but you're not perhaps manifested to the same degree, on the revenue growth outlook for 2017.

So I was just trying to understand, is there anything new competitively from Skype or others, or some of your other competitors? And, again, just trying to -- just parse the growth rate expectations for 2017, versus what you've had here, over the last one to two years?

No. We've not seen a change in the competitive landscape -- make clearly, as I just noted, the mid market and enterprise is -- has a lower penetration, and therefore is growing faster. The competition there is intense. It is more intense than it is at the lower end, but it hasn't increased or decreased as of late.

I would say, that our model is one that -- where we've been very focused on building a balanced set of sales channels. You've seen the various competitors swing very hard away from direct, and towards channel. We've been doing a lot of state work to make sure that we're very balanced across that, and that takes a little more time, but will put us in very good stead, in terms of the infrastructure.

The other thing is that, and we mentioned it a little bit before, but that a lot of enterprises, the key for them to go to the cloud is having that QoS, because they're just not willing to be over-the-top. And so, we think that's the approach that we offer at the high end with Premier.

At the same time, those entities that want QoS also tend to have a longer sales cycle. And when you're offering access and that type of service delivery, which these companies want, you also have a longer install cycle. So you're just seeing that in the numbers. And that helps explain the difference.

Okay. And then, maybe just quickly on the buyback from here, what's the key driver? What kind of underpins, the plans to utilize the rest of that timing, or magnitude as you look over the next 12 to 24 months?

Sure. So the Board authorized two years ago $100 million, and we intend to execute that $100 million buyback. We, after two years, we're -- or after exactly halfway through it, we're exactly -- we bought almost exactly half the amount of stock. So we intend to continue to execute that.

For the last several quarters, we reached up, and bought Nexmo, which was an irreplaceable asset and used cash to do it. We decided that the strategic flexibility was important, and we wanted to use some of that capital to deleverage over the last couple of quarters, and also have the flexibility to do what we did back in May, when the stock pulled back, we acquired well over $20 million of stock in a two-week period, not only providing a very good backstop to investors, but also just making some highly accretive trades.

We want to continue to have that ability. We want to continue to delever. So really it's a question of balancing those things. But we fully intend to execute on the $100 million, and two years from now, be finished with the program.

Thank you. And our next question comes from the line of Adam Ilkowitz from Citi.

Hi. Thanks for taking the question. I was wondering -- you were talking about the costs and the investments being made to Nexmo. If we look at your service revenue margin in business as you reported, how would we look at just the UCaaS side of the business? Do you feel you're at a margin that is similar to a peer level, or your consumer business? Or if not, how long would it take to get there? And is the question more about scale, or is it about something else? Thank you.

Sure. So we're -- you get a sense of what service margin is without Nexmo, when you look back to the fourth quarter of last year. That's the UCaaS business by itself, although it's improved since then just with bigger scale.

And Nexmo, we talked about -- and with Nexmo, service margin and gross margin are the same, because there is no USF, and there's no product or service delivery or anything like that. We made a filing over the summer, which after the acquisition, which talked specifically about Nexmo gross margin and service margin. And that right now during this land grab phase is in the 20% area.

We think that there is near- and medium-term upside to those numbers. But clearly during this land grab, we're trying to optimize adoption of the APIs, and repositioning Nexmo or diversifying Nexmo into other markets, and in particular, US Voice. That has the benefits of greater -- of a longer tail of customers, greater diversity in customers, but it also happens to be where the higher margin is.

Voice is a higher margin product. US is a higher margin market. And for us in US Voice, that's where we really get the advantages of our network, which is where there's a good amount of margin accretion. So as that mix shift occurs towards US Voice, and it's going to take time because we're still growing on the international SMS side as well, and we get the benefits of scale, you're going to start to see that gross margin or service margin go up.

Thanks. And just one final one, you mentioned on the slides, in talking about your own remarks, about having financial flexibility, and you talked about the buyback program, being somewhat dependent on M&A. Can you just talk about the landscape, and what, if anything you need, whether it's from a product or geographical standpoint, what interests you in the market these days? Thanks.

Sure. First of all, we think we see everything, just based on our position in the industry, and the fact that we've been acquisitive, and so, it really falls into three categories. One is continued UCaaS consolidation, and that's there. The assets of the smaller players are not getting more expensive.

Those are things that we can execute on, but those are purely -- in general, they're purely customer acquisition or salesforce acquisition plays for us, so they're almost like organic growth. You're just increasing organic growth.

Second would be things like Nexmo, that are technology-driven add-ons or product enhancements. We don't feel like we need to do anything there. For instance, in contact center, we've got very good products there. Some are embedded in BroadSoft.

Simple versions are embedded in Essentials, and then we have resale relationships where necessary. But we still look at things like that, like Nexmo and technology enhancements, don't feel like we have to do anything.

The last piece would be industry consolidation, and we think that's heating up, and there won't be as many UCaaS companies in two years as there are today. Again, we don't feel like we need to do anything there, or that there's anything imminent, but we think it's going to happen. And with our balance sheet and cash flow, we can be a driver, and control our own destiny in that, if it occurs.

Thank you. This concludes our question-and-answer session for today. I would like to turn the conference back over to Hunter Blankenbaker for any closing comments.

Okay. Thank you, Karen. That concludes our call today. We look forward to speaking with you throughout the quarter, as well as next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.