Venture Global Inc (VG) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Vonage Holdings Corp. Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note today's event is being recorded. I would now like to turn the conference over to Hunter Blankenbaker, Vice President, Investor Relations. Please go ahead, sir.

Okay, great. Thanks, Rocco, and good morning, and welcome to our third quarter 2017 earnings conference call. Speaking on our call this morning will be Alan Masarek, Chief Executive Officer; and Dave Pearson, CFO. Also joining us are Kenny Wyatt, our Chief Revenue Officer; and Tony Jamous, President of Nexmo, the Vonage API Platform. Alan will discuss our strategy and third quarter results and Dave will provide a more detailed view on 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'll be happy to take your questions.

As referenced on Slide 2, I would like to remind everyone that statements made during this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's expectations, depend on assumptions that may be incorrect or imprecise and are subject to risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties is highlighted on the second page of the slides and contained in our SEC filings. We caution listeners not to rely unduly on these statements and disclaim any intent or obligation to update them.

During this call, we will be referring to non-GAAP financial measures. A reconciliation to GAAP is available in the third quarter earnings press release or the earnings slides posted on the IR website.

With that, I'll turn the call over to Alan.

Thank you, Hunter. Good morning. I'm proud to announce that in addition to delivering record results this quarter, for the first time, Vonage Business revenues exceed those of Consumer Services. I would like to thank our employees, our board and, of course, you, our investors, for supporting our team while we transform Vonage into the market leader in business cloud communications. Now a few highlights of the quarter.

Vonage consolidated revenues were $253 million, our 10th consecutive quarter of year-over-year growth.

Vonage Business revenues were $129 million, representing 51% of total revenue and 22% growth. And adjusted OIBDA was $51 million, our best ever. And we now forecast 2017 consolidated revenues to exceed $1 billion.

Now let's start off with a review of our strategy. Simply stated, our strategy is to use our cloud communication services to deliver better business outcomes to our customers. Our approach integrates our UCaaS services into our customers' cloud-based CRM and productivity tools, and then uses our CPaaS services from Nexmo to directly link with our customers' customers.

Our end-to-end solution helps customers navigate their own digital transformations. It enables them to operate better and to engage their customers in new connected ways. In fact, new research by IDC proves that companies using both UCaaS and CPaaS can improve time-to-market, customer satisfaction and profits more than 30%. And our sales focus is organized around 4 customer segments. The first is enterprise, targeting customers larger than 1,000 seats. Second is mid-market, defined as 50 to 1000 seats. Third is small business, those with fewer than 50 seats. The fourth segment is for CPaaS customers who use Nexmo, the Vonage API platform, either as a stand-alone service integrated into their existing products or integrated with our UCaaS services.

Now to highlight specifics by customer segment, let's start with enterprise, where our product strategy is to use Vonage Premier, our BroadSoft-based UCaaS offering that we deliver as a managed solution that includes Quality of Service, QoS, over our network or with SmartWAN. We frequently bundle our advanced contact center service along with CPaaS features from Nexmo, and we wrap this into a proprietary solution using our unique provisioning and service delivery. In the third quarter, enterprise service revenue accelerated, and we won some large enterprise deals. Enterprise customers currently comprise 11% of UCaaS revenues. And enterprise revenues grew 30% in the third quarter compared to the year-ago quarter. We continue to invest heavily in our enterprise sales force, and our sales pipeline is building really well.

GateHouse Media, a large U.S. newspaper publisher, selected Vonage for their 10,000 employees across 400 locations as well as for their contact center needs. Among the reasons Vonage won the deal was our partnership with workforce optimization company, Prodoscore, which provides Google machine learning capabilities. GateHouse also noted Vonage's integration into Salesforce and SugarCRM as well as our analytics and reporting features and our SmartWAN and MPLS solutions. We won this company -- this customer via our channel partner, Vivo.

A second win was TriMark USA, the largest national provider of commercial kitchen supplies. TriMark selected us for their 2,400 employees across 18 locations due to our mobility solution, Skype for Business integration, contact center solution from BroadSoft and SmartWAN for failover. And existing enterprise customers expanded with us this quarter, including WeWork with 600 new seats and a 2-year contract extension for sales to its members, and Cumulus Media, adding more than 1,500 seats.

Now moving on to mid-market. Our product plan in the mid-market is to sell Vonage Essentials, our proprietary UCaaS solution, to customers up to 1,000 seats. To accelerate our distribution efforts upmarket, we've now built out our field sales presence in 20 U.S. markets. We also named Bob Chrisman our new Channel Chief, demonstrating our commitment to indirect distribution to augment direct sales. Bob brings deep experience across the master agent channel typically used by carriers as well as great expertise working with the SIs, VARs and resellers more common in software sales.

And finally, we are reallocating marketing dollars upmarket, given better growth rates in those segments. From a product perspective, we are executing against 3 key initiatives to help drive our move upmarket. These initiatives include functionality improvements, cloud infrastructure and SmartWAN. So first, regarding functionality improvements.

We launched our next-gen mobile and desktop applications with an enhanced user interface and messaging capability. We also released VonageReach, the first prepackaged CPaaS product being sold by our UCaaS sales teams. Second, regarding cloud infrastructure. We have completed the move of Vonage Essentials to Amazon Web Services. Vonage Essentials is deployed across 459,000 UCaaS seats, comprising 55% of our UCaaS revenue. By deploying it fully in a public cloud infrastructure, we can innovate more quickly, enabling faster product updates -- upgrades and accelerated global expansion. And third, regarding SmartWAN. We expanded its QoS capabilities to manage data traffic in addition to voice traffic. And SmartWAN will be available with Vonage Essentials early in the new year.

Turning now to small businesses, those with fewer than 50 seats. We are deploying a self-service model that allows customers to self-sign-up and self-provision their accounts. This is designed to improve the customer experience while reducing customer acquisition costs. We will also use third-party distribution channels, such as Amazon, for this small business segment. We had expected the Vonage Essentials plus Chime bundle to start selling this year on amazon.com and AWS Marketplace, but the launch date has moved to early 2018, so Amazon could automate sales tax collection for the bundle.

So if you look at these enhancements we've made across the 3 primary UCaaS segments, they're equating to delivering a better customer experience. That has resulted in our UCaaS churn rate improving to 1.2% in the quarter, which is a 20 basis point improvement sequentially.

As we look ahead, we expect to accelerate revenue growth because of our unique ability to deliver better business outcomes by combining CPaaS and UCaaS. We also have the largest multichannel sales organization and a $1.8 million backlog of MRR, monthly recurring revenue, primarily from past enterprise wins not yet installed.

Now let's turn to Nexmo, the Vonage API platform, which generated third quarter revenue of $38 million, reflecting 45% year-over-year growth. The strategy for Nexmo is to first support the integrations of our CPaaS and UCaaS services to deliver those better business outcomes; and second, to deliver stand-alone APIs and tools to be integrated into our customers' existing products. Let me review our accomplishments this quarter.

First, developer growth and awareness continues to build at an impressive pace. We added 62,000 registered developers to end the quarter with 371,000. And developer sign-ups using our voice API saw the highest sequential increase since its launch. Second, we have expanded our sales force and global presence in Germany, China, Japan and the U.S. We also opened our new European headquarters in London's Silicon Roundabout. And we opened 3 sales offices in China, in Shenzhen, Shanghai and Beijing; and our first sales office in Tokyo. These new offices build on our #1 market share position in Asia-Pac and augment existing offices in Singapore, Hong Kong and Seoul. Our expansion is driving key customer wins, including Rakuten, Japan's largest e-commerce site; UnionBank Philippines; BBVA; and L'Occitane Korea. We also saw excellent growth from existing customers like Alibaba, Grab and Tencent. In fact, Asia-Pac CPaaS revenues were up 35% sequentially. And third, we have enhanced our programmable voice and messaging APIs to support use cases around AI, chatbots and enhanced customer engagement.

In the quarter, VAPI usage, the voice API, increased 3x sequentially. And large customers like Gett and Renren grew quickly. We believe usage in the fourth quarter will accelerate even more quickly, and VAPI will be a key revenue growth driver in 2018.

And finally, our Consumer segment continues to stabilize. Revenue losses are declining and third quarter churn is once again at a historic low of 1.9%.

So to summarize, our strategy of delivering better business outcomes to our customers enabled another very strong quarter. Building on this strength, 2017 consolidated revenue will exceed $1 billion. And with Vonage Business growth accelerating and it being our majority segment, we expect sustainable, long-term consolidated revenue and cash flow growth.

I'll now turn the call to Dave to cover Q3 in greater detail and to update you regarding increases in our guidance.

Thanks, Alan, and good morning, everyone. I'm pleased to review our financial results for the third quarter of 2017. As in the past, 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 6.

Consolidated revenue for the third quarter was $253 million, up $5 million due to the organic growth of our UCaaS and CPaaS businesses more than offsetting the decline in Consumer Services. Now that Business is the larger segment and is growing significantly faster than Consumer is declining, we will begin to see expanding organic top line growth. This quarter, we not only achieved a crossover in revenue contribution, we also saw gross margin gains across all of our products, giving us high confidence in the ability to grow cash flow along with revenue.

Moving to Slide 7. Let me now turn to our segment financial results, starting with Vonage Business, which consists of our UCaaS and CPaaS products.

Vonage Business total revenue was $129 million, representing 51% of total Vonage revenue and a 22% GAAP increase. UCaaS revenue is $91 million, led by service revenue of $71 million, which grew at an organic rate of 16%. Service revenue, which does not include access, which we are growing slower by design, for USF, which is a pass-through, is the metric on which management is most focused and which is most comparable to our UCaaS competitors.

The organic growth numbers reflect the completion of the sale of our Hosted Infrastructure business on May 31, which removes $1.6 million of revenue, and the adjustment of onetime items from the comparable 2016 quarter. As we have done in the past, we included a table in the press release and on Slide 13 of today's presentation showing revenue from the Hosted Infrastructure business over the last 5 quarters and the onetime items to facilitate pro forma analysis.

Third quarter average UCaaS revenue per seat was $43.53, down from $45.50, as expected, due to factors that impact revenue but not seats, including our plan to sell access more selectively, the removal of Hosted Infrastructure revenue from the sale in May and our decision to rent hardware and recognize revenue over the life of the contract rather than all revenue at the time of sale. Revenue churn was 1.2%, down materially from 1.4% sequentially and year-over-year. While churn fluctuates based on seasonal and other factors, we're focused on operational actions that improve churn.

Vonage Business grew total seats to 710,000, adding 94,000 seats from the year-ago quarter. CPaaS revenue was $38 million, a 61% GAAP increase. CPaaS organic revenue was up 45% after adjusting for the change in presentation for Nexmo's trading revenue from net to gross that we adopted in the second quarter. Table in the press release and Slide 13 show the pro forma analysis.

Overall, Business Service margin during the third quarter was 54%, up from 53% sequentially due to service margin increases across our products. Service margin was down from 60% in the prior year due to faster growth of the CPaaS products and the aforementioned net to gross change.

Moving on to Consumer. As Alan noted, our ongoing efforts to optimize Consumer are yielding strong results. Consumer revenue for the third quarter was $124 million, down 13%, the fourth consecutive quarter of improvement in the rate of decline and above our expectations. Consumer customer churn was 1.9%, down from 2.2% a year ago. Churn gains are not just from the greater proportion of tenured customers, which has grown to 81% of our base, we've also lowered churn within this tenured cohort to 1.5%. While churn can move around quarter-to-quarter, we believe we can sustain consumer churn rates below 2%, given the performance of the tenured base and our demonstrated ability to profitably acquire customers with lower churn profiles.

We ended the quarter with 1.5 million Consumer subscriber lines and average revenue per line of $26.29, virtually flat to $26.36 a year ago. Consumer service margin for the third quarter was 83%, up from 81%, reflecting our ability to improve margin despite a declining top line. This speaks to the power of our common scale network infrastructure that serves both our Consumer and Business segments.

Moving to Page 8. To give you a sense of the high utilization of our Consumer service, more than 95% of our customers are active callers for an average of 500 minutes of usage each month. Given these results and the visibility we have after 3 years of optimizing the Consumer segment, we are, again, substantially updating our cash flow expectations for Consumer. We now anticipate Consumer to generate at least $700 million of allocated after-tax free cash flow between 4Q 2017 and 2021, with significant additional cash generation after 2021. This $700 million represents an increase of over $150 million versus when we made this projection at the start of 2017.

Now moving to income statement cost items on Page 9. Consolidated sales and marketing expense for the third quarter was $74 million, down $10 million. This reduction reflects planned actions to reduce and shift Consumer marketing dollars to much more efficient digital marketing channels, offset by increased Business-focused marketing. We expect sales and marketing spend in the fourth quarter to be up slightly.

General and administrative expense for the third quarter was $27 million, down $1 million and down $10 million sequentially. As you will recall, last quarter's G&A included higher Nexmo acquisition-related costs, severance charges and higher bonus accrual. We expect fourth quarter G&A to be lower than third quarter.

Turning ahead to Slide 10. Third quarter adjusted OIBDA was $51 million, up $10 million sequentially and year-over-year. Year-over-year increase in adjusted OIBDA is primarily due to the lower marketing in Consumer and lower corporate G&A. The sequential increase was due to these same factors and higher gross profit. Adjusted net income for the quarter was our highest ever at $17 million or $0.07 per share, up $4 million. The adjusted net income metric removes noncash items such as amortization of intangibles from acquired companies and other acquisition-related items, giving a clear picture of our strong operational performance.

Moving to Slide 11. CapEx for the quarter, including the acquisition and development of software assets, was $9 million, up from $7 million in the prior year. Adjusted OIBDA minus capital expenditures was $42 million, up $8 million, highlighting the strong cash flow generation of our business. Free cash flow, which we define as net cash provided by operating activities minus capital expenditures and acquisition and development of software assets, was $39 million, up $19 million, primarily due to the higher OIBDA. This strong cash flow is highly strategic to us, enabling us to pay down $37 million of debt in the quarter, resulting in net debt of $249 million or 1.7x trailing adjusted OIBDA.

Our balance sheet remains strong and continues to afford us the flexibility to pursue attractive capital deployment opportunities.

Regarding guidance, on Page 12, we are updating our 2017 total revenue and adjusted OIBDA guidance, given the materially better consolidated performance relative to what we laid out at the beginning of the year. Total revenue guidance is increased to at least $1 billion and as high as $1,005,000,000. Within this, we expect Consumer revenue of at least $500 million and as high as $505 million. There is no change to Vonage Business guidance, which we updated and increased last quarter.

Regarding cash flow. Due to the strong performance year-to-date, we are raising adjusted OIBDA guidance to at least $180 million.

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

Okay, great. Thanks, Dave. Rocco, let's turn it over to questions. (Operator Instructions)

(Operator Instructions) Today's first question comes from George Sutton of Craig-Hallum.

So you were early in the space to make investments in direct sales going back 12, 18 months ago. And it sounds like there may be an increased focus on building out indirect even more. Can you just give us a sense of the ROI that you've been seeing on these investments, thus far? And I'll give my second question in a related here, and I'll quote Alan. You said that the enterprise pipeline is building really well. I was wondering if you could quantify that a little bit.

George, it's Alan. Let me have Kenny Wyatt answer that.

George, good morning. As we mentioned last quarter, we continued to expand the direct sales team. I think we've intimated 21 markets by the end of the year, we're certainly marching towards that. And we're making investments. You saw an announcement this quarter, the new Channel Chief that we brought in from the software industry, as we continued to try to change the paradigm, if you will, of how we sell to indirect. I view this in a very omnichannel lens, right. I view this as -- we've got multiple segments that Alan laid out, 3 specific segments in the UCaaS space, 1 in the CPaaS space, that we have to execute across a variety of different distribution methods in order to maximize bookings and eventually revenue. So yes, we continue to expand direct sales team as promised, and I think you'll start to see us be better indexed, if you will, on the indirect side as we continue to build that piece of the business. Regarding enterprise pipeline, you saw some nice trends, obviously. Alan mentioned a 30% increase in revenues year-over-year on enterprise. We -- as we continue to see adoption in that space -- and we define enterprise as above 1,000 seats. As we continue to see adoption increase in the enterprise space, the pipeline, the funnel is also increasing sequentially quarter-over-quarter as well as year-over-year. We announced, I think you remember, in second quarter, some nice enterprise wins. We continue to see those 7-figure deals increase both in the pipeline as well as, as we execute on those on a quarterly basis.

Just as kind of a quick follow-up to it. You are seeing the ROI in the direct sales that you're hoping to see?

Absolutely. But I think the focus for me, since I've been here the last couple of quarters, has really been the productivity of that investment that we made, right? So we've -- I think we've done a nice job of expanding across key cities where we see market adoption, at least in North America. Now my emphasis has been how do we make that investment that much more productive, right? We do that through analytics, we do that through sales tools. We're doing that through teaming with our indirect partners, right, so -- in order to increase velocity of the closes of those field sales resources. So the answer is, yes, we're seeing those ROI realized.

And our next question today comes from Dmitry Netis of William Blair.

Couple of quick ones from me. Alan, just if you could give us a sense of the impact you may foresee from this BroadSoft/Cisco combination. How are you guys thinking about your relationship going forward? Is there any change, immediate or potentially longer term, from this? Can you give us a little bit of an update of your thinking around the stack that you're using from BroadSoft? And then I have a follow-up.

Okay. So I don't think the impact is problematic at all. And we've talked about this before. Remember, we have more than half our revenues are on Vonage Essentials today. And as I talked very specifically about in my prepared remarks, we're moving that up. We want our own technology to be up to -- able to serve up to the enterprise, up to the 1,000 seats. With BroadSoft itself, the partnership continues very strongly. And we have a contract with 7 more years to run that guarantees our pricing and their support of the software that we use. When Cisco bought them, the first thing that they announced was that they will continue to support the service provider distribution approach. So we are -- one, we have a terrific relationship with them anyways, and we've been great partners, and we'll continue to be great partners for the enterprise. But we're also naturally hedged because we have our own technology, which is moving up, up and up, and then we are contractually protected. So we think at the end of the day, where BroadSoft went is actually a good thing, ultimately, because Cisco will continue to invest in their development and is going to support the service provider distribution.

Okay, great. And then my follow-up is on Nexmo side. I think, just to clarify, you did say organically that business grew 45%?

Yes.

Okay, great. And as I look into the VAPI piece of the business, I mean, that's a newer product for you. You'd mentioned it increased 3x. How did it grow potentially here in the U.S.? I know your presence was mostly in Asia but -- and internationally where you had a big installed base of SMS customers. You're coming in domestically here, voice is going to be one of the bigger drivers. Have you seen traction in voice here in the U.S.? And also what is the competitive advantage on the voice side potentially over some of the competitors which -- that also have some network assets just like you are and are coming on to market here as well? So give just a sense of that.

Let me start, and I'll turn it over to Tony. So the way to characterize VAPI in 2017, it's sort of been the build-and-test year, and it's going to be meaningful, we believe, as a revenue contributor worldwide, not just in the United States, in 2018. What makes me so excited is that we post a 45% organic growth rate, yet the materiality from a revenue contribution point of view of VAPI in 2017 is not there yet. It's growing very quickly, being tested across the board, being deployed in large accounts, but it's late in the year and it's off of basically a 0 base. So to be able to hit the organic growth rates without it is what really is, again, an element of what drives my enthusiasm going forward. How we competitively position it and some of the wins, let me turn over to Tony, he can talk about that.

Dmitry, this is Tony speaking here. Talking about the competitive advantage, you mentioned the network, and indeed in the U.S. specifically, we have to rely on the Vonage network, but unlike others in the market, we also have a global network. As you recall, Nexmo when it was acquired by Vonage, the majority of the revenue was coming from overseas, and we spent years building that network. So it's really a global network, not only in the U.S. The second differentiator is really on the functionalities that this API provides that enables higher level of use cases. So to give you an example, we are the only API in the market that supports WebSocket, which enables the developer to get access to the audio stream in real-time, and that opens up applications such as artificial intelligence, voice, chatbots and have the potential to really disrupt markets such as IVR markets. So instead of going through a menu that is static, you can then have a natural language conversation with the machine. So expanding the number of use cases and the global network and adding all these functionalities enable us to differentiate in the long term.

And our next question today comes from Greg Burns with Sidoti & Company.

I just had a question about the strong profit performance this quarter. It looks like it's going to continue into the fourth quarter. But is this a timing issue where maybe some investments haven't been made that you expect spending to increase? Or is this kind of a level of profitability we could expect from the business as we move into 2018?

Yes, it's primarily a level of profitability. I would say that we expect EBITDA margins this year consistent with the guidance we just gave to be in the high teens. It can move around quarter-to-quarter. It was higher this quarter. I would expect it to be consistent, within our guidance, for next quarter to be consistent with this quarter. But I think you are seeing a permanently lower level of sales and marketing in Consumer. I think we've stabilized that at this point. We'll see sales and marketing go up in Business on an allocated basis, but at the same time, consolidated revenue will be growing. We've had a lot of noise and onetime items in our G&A, including amortization of Nexmo, contingent consideration. Most of that's done. We're down below $1 million per quarter. And so we expect to be in this G&A context for some time to come. But I will say that having made the operational improvements and some of the choices that we made in Consumer, that this type of profitability in terms of dollars, we think we can sustain growing EBITDA even within the crossover between Consumer and Business.

Okay. And then in terms -- you mentioned VAPI as being your lever for growth on the CPaaS business. You also touched on launching the Reach products. Where are you in terms of the sell opportunity between your UCaaS and CPaaS solutions? And how do you see that playing out next year?

Let me have Kenny take that.

As we mentioned, we launched this quarter for the first time a -- what I call a finished product on CPaaS. And if you think about, it really is, we're taking a number of use cases, putting them in a bundle and then taking that bundle or that use case, if you will, to buyers of UCaaS through our UCaaS distribution, in this case, primarily our field sales teams as well as our channel. We have seen some early success on that, but I will tell you it's early, right? This is a different sale that we were pushing through that distribution, and we expect to see a lot more behind the few green shoots that we've seen here over the past month or so after launching that product.

And our next question today comes from Rich Valera of Needham & Company.

Alan, question around the $1.8 million of MRR in backlog, backlog that you mentioned. I was hoping you give some context for that. One, sort of, what is that comprised of? How does it compare to historical levels? And how quickly we think that can convert to revenue?

So the backlog is primarily from enterprises. You think about -- just because of the nature of the beast of enterprises, they tend to install over multiple quarters. So it's not 100% from enterprises, but as you might expect, it's mostly. And if you look back to -- I'll just highlight 2 of the big deals that we mentioned over the last couple of quarters. The huge real estate company for over 20,000 seats, we said that was going to install over as many as 6 quarters, and we did that 2 quarters ago. And then when we spoke about MyEyeDr last quarter, again, it installs over multiple quarters. So the expectation is this $1.8 million of backlog will install over the next 4 quarters in the main. The whole strategy here in enterprise, quite frankly, but it's across -- I mean, obviously, the mid-market and small you install much more quickly. But the -- in enterprises, to stack more and more enterprise wins so that they will continue to feed revenue going forward, and that's precisely what's happening. Because that $1.8 million backlog is much higher than it was a year ago before we had these large enterprise wins.

Got it. That makes sense. And then you mentioned you're going to be at 20 of your 21 targeted markets, direct sales presence markets, you're at 20 right now, and you're going to be at 21 by the year-end. Just wondering if you can give us any sort of qualitative sense of how we should expect those to kind of spool up and become more productive as we head into 2018. Like what can we expect in terms of increased sales productivity out of these new markets that have been added this year as we move into next year?

Kenny, take that.

Rich, it's Kenny. So we really have a -- we really have kind of a land-and-expand approach in each one of these markets, right? We're putting in a handful of reps and a manager to make sure that we get as much productivity out of the reps as possible. Obviously, we're softening the market with marketing campaigns, if you will, inside of the local markets. We're doing a lot of kind of guerilla marketing tactics, if you will, of softening that marketing and getting it ready for a direct field channel to start attacking it as we enter those markets. But more importantly, we're also using our indirect. This is probably a change in strategy that we've deployed in the past. We're really using our channel partners as a way also to soften those markets as we move in there. Obviously, there is a lot of leverage in the indirect partners, and we're utilizing those in conjunction with our direct sales team to make sure we get full productivity out of those resources.

And our next question today comes from Michael Rollins of Citi Investment Research.

I was curious, if you could fast-forward a few years from now, if you look at the CPaaS or I'd like to call the quick-to-communicate category, what are going to be the key characteristics to be successful? Is it going to be low cost? Is it going to be product quality? Or would you expect that some of the competitors all kind of look similar? How should we think about the factors of success? And then maybe walk us backward to some of the things that you're doing strategically to get to that vision of the future.

Tony, why don't to take that, please.

So sure. So if you fast-forward a few years, what we see is a shift in the market from the early adopter that's created that market, which are vision-native companies, your Uber and Airbnb marketplaces, to the enterprise. And these agile enterprises that are adopting this technology to build better customer engagement and customer experience requires you to have an enterprise sales model, an enterprise capability. These are things like SLA, premium support, partnership with system integrators that enable them to get a higher level of security [is one]. So I think this is going to be -- enterprise is going to be one area of differentiation to be able to capture that market as you cross the chasm into the early majority. The second item is really the developer experience, as there is always a developer involved, even within the enterprise. So enabling these developers to get stuff done, to build these applications much faster than with others is going to be a reason [take this vendor]. And thirdly, I would say, the number of use cases that the platform can enable, the more use cases you have, the bigger your addressable market, and the better is your ability to capture the growth of the market. So really, one is the enterprise ecosystem. Secondly is the developer experience. And third is the number of use cases you can address.

(Operator Instructions) Today's next question comes from Tim Horan of Oppenheimer.

Tony, can you talk about the enterprise market. What you think your win rate is on full share there as enterprises are adopting versus your -- I guess, versus your market share of your existing product? And to your point, I mean, the developer is really critical there. What are you offering to developers that's maybe different than your primary competitor in that enterprise market?

Sure. So we gradually see the shift happening from these early adopters. The marketplace [division] made it into the enterprise, and we see this adoption rate goes up actually. Of course, it's a slower uptake when it comes to enterprise because they buy it differently, they need to have SLAs, sometimes they need consulting, but the -- one enterprise can have multiple use cases because [its order] organization, and they're really on a path of modernizing their customer experience. And when it comes to the developer experience, specifically, if you go to our website and look at our developer center, you see not only we have documentation of our API, but we also have developer tools such as tutorial, Quickstarts, [SDK] to enable better mobile experiences. So the developer doesn't need to reinvent the wheel every time they want to build a communication application. That speed up the time of development and provide more peace of mind for the developer within the enterprise. Because increasingly, you have this pressure on IT and the resources there are limited, so they need to have these tools to do things faster and better.

So not to put words in your mouth, but do you think you have a better set of tools than your primary competitor at this point for enterprise customers?

Yes, I believe we have. We have a good developer center, at least the new version that we actually went live a couple of months ago. We have good feedback from the developer community. And it's also open source available for -- on GitHub. So -- but this is just the beginning. We have a developer relation team that is growing, that keeps evolving the developer experience. And we're going to see more of this coming in, in the next few quarters and years to continue providing the ultimate developer experience for our customers.

And sorry, just a follow-up. Dave, on your margins, just to clarify, do you think EBITDA margins can continue to expand off of this point over the next couple of years? I think you had a goal of getting to 25%. And I guess, specifically, where are we with Business revenue -- with Business margins at this point? And where should they be trending from here?

Yes, so I would expect EBITDA margins to stay in the high teens to kind of 20% context on a consolidated basis for the next several years. And again, you have -- the effect of which are the result of Business getting more allocated profitability and Consumer creeping down over time. And so that's the area that we're going to be in for the next couple of years. As it relates to Business margin, we committed -- and, again, this is on an allocated basis because we're a functional organization. But we committed to having Business breakeven in 2017 before G&A allocation, that's UCaaS. And that's where we will be with CPaaS, a slight drag on that. We are running that as one unit and looking at this as more of by customer segment as opposed to by product. But in general, we're going to be holding Business gross margin relatively steady given the mix shift that's occurring between UCaaS and CPaaS, but growing revenue substantially. So that will lead to higher profitability. And then having Consumer, I would expect Consumer contribution to come down at the same rate as revenue. We just missed revenue being down 12% instead of 13% in this quarter, given the rounding. And I would expect Consumer revenue to -- the decline rate to continue to improve and for profitability to essentially track that same trajectory.

And our next question today comes from Michael Latimore of Northland Capital Markets.

Alan, I think you mentioned the potential for Business segment to -- the growth rate to improve in the fourth quarter. Was that specific to UCaaS or the overall Business segment?

It's overall. And we talked about factors. Obviously, the CPaaS product is growing very well. And embedded in the guidance update that we did at the end of 2Q was closer to 40% growth for the year. It was 45% in the last quarter, and the fourth quarter tends to be a seasonally good one. UCaaS, we feel very good about the trajectory there. We are -- there's a mix shift happening there in the sense that, as we talked about, we're deemphasizing access. And just to be clear, the access business essentially -- the access product essentially did not grow in the third quarter, and that was by design, just so you can get a sense of the drag from that. So I think the way we look at it is the guidance as it relates to UCaaS and CPaaS that we gave at the start of the year, updated for 2Q, and we continue to be in that range. But moreover, we said about UCaaS that it would grow in the mid-teens. And when you look at that, doing the whole pro forma, that's what we expect to deliver for the year. And then service revenue would be 100 basis points plus better than that, also pro forma. And that's where we continue to outlook 2017.

Got it. And then you mentioned taking Essentials up to the 1,000 user seat range. When do you think the technology will be able to support up to a 1,000 seat kind of customer?

By the end of 2018. It already does. I mean, for instance, we already sell accounts of that size. We already have done that on Essentials. What we're doing though is the focus internally on how we create training of the sales people, commission plans, et cetera, is to focus them on our own technology. Now along the way, we're continuing to move its stability, scalability, audio quality, feature set, service delivery, and then the things I mentioned, cloud infrastructure, SmartWAN, et cetera. All that will make it ever more suitable for larger and larger accounts. That's the focus and that will be happening throughout the year. When we start the year, we won't be at 1,000 seats in terms of, sort of, the internal rule set and what the sales people are permitted to sell without getting some exception cleared. But by the end of the year, that number should move up to 1,000.

And our next question today comes from Will Power of Baird.

I just want to come back to some of the earlier CPaaS comments and the success you're continuing to have in Asia. I wonder if you can just help walk us through what some of the key drivers there are. What's differentiating you all in that market versus some of the competitors to drive the kind of growth you're seeing there? And I guess, the extension of that is maybe just a little more color on the U.S. and European markets, what you're seeing from a CPaaS perspective there relative to the growth you're seeing in Asia.

Okay. Tony, why don't you grab that?

Yes, so on top of our differentiation that I spoke about earlier, specifically, in Asia, we have a global network in some key markets that enable us to open up these markets that are -- that is high quality and delivering on the promise of the use cases we provide. But additionally to that, we have local teams. As Alan mentioned on the earning release, we have opened offices in -- 3 offices in China. We already have Singapore, Hong Kong and we opened Tokyo. And we are present in Seoul. So we have a local team with local expertise, and we've been around for a few years, we're just kind of doubling down on that market to help understand the local customer, to understand how to sell in local markets and how to support in local markets. And as you probably know, Asian customer behave differently than other customer, whether in their buying behavior or their expectation of support. So it's important to have a local touch to enable that market to grow and expand. And the -- what's driving the growth in Asia, if you see, really, the digital transformation in Asia is a trend that, in my opinion, will have much higher impact on the region because many countries and many enterprises are starting from scratch. They're building their technology instead of buying some of the existing software packages. So it's a great opportunity for us and to enter and provide them with APIs to help them to do so faster than other regions.

And our next question comes from Catharine Trebnick of Dougherty.

Mine is, during the quarter or just before the quarter, Nexmo prices were increased. What gave the management team comfort in raising the prices and the methodology behind that?

Tony, want to grab that?

Sure. So we look at our pricing from a competition standpoint, but also from the value we provide to our customers. If you take, for instance, in SMS, in SMS, you can buy a message at any price you want, but you're not going to -- you won't be able to get it at the quality required. So we believe that there had -- that we had a gap between the value provided to the customer and the price we provide to the customer. And therefore, we closed that gap by increasing some of the prices in certain countries.

Then outside Twilio being the competitor of Nexmo, are you seeing any other competitors? Or you think you're pretty much the 2 go-to players?

Tony?

So yes, we really see Twilio as the key competitor. When we -- how we measure that is by who are we competing with on deals. There is a small long tail of other providers, some of them are regional. But we don't see them on more than 10% of the deal. We believe it's a 2-race market right now, and that barriers to entry for newcomers is increasing. Think about how hard it is to build a developer experience, how hard it is to have high quality of service and a global network. All these are barriers to entry for many newcomers. And we primarily see Twilio on deals in the market right now.

This concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Okay. Thanks, Rocco. That does conclude our call for today, and we look forward to seeing many of you in the coming months at various investor conferences. For those that are unable to attend in person, these events will be webcast. Please contact us if you need any additional details. Thank you.

Thank you, sir. This concludes today's conference. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.