Venture Global Inc (VG) 2017 Q4 法說會逐字稿

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

Okay. Thanks, Denise, and thanks, everyone, for joining us this morning on fourth 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, the President of Nexmo. Alan will discuss our strategy in fourth quarter and year-end results, and Dave will provide a more detailed view on our fourth quarter and full year financial results and our 2018 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, depends 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 slide 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 on the site. With that, I would like to turn the call over to Alan.

Thanks, Hunter. Good morning, and thanks for joining us. I'd like to start this morning's call by reviewing the strategy I outlined for you a year ago. Critical to our strategy and to our success is the integration of our UCaaS and CPaaS platforms into one cohesive service. Our strategy includes the integration of our UCaaS services into businesses' CRM and business applications and the use of CPaaS solutions to directly integrate with our customers' customers. We also provide market-leading CCaaS contact center as a service solutions, giving our customers a comprehensive communications and collaboration solution. This end-to-end approach is particularly critical as clouded option moves upmarket and larger companies undergo their own digital transformations. With our solution, businesses are able to operate better and to engage their customers in new connected ways that deliver better business outcomes. In fact, Frost & Sullivan awarded Vonage their Strategy Innovation and Leadership Award for our comprehensive capabilities.

So given our unique strategy, how did we do? The answer, we did really, really well. I'm proud of what our team accomplished. We substantially completed the integration of Nexmo into Vonage, transforming Vonage into a leading cloud communications company. We successfully moved our UCaaS focus to mid-market and enterprise customers. In fact, in 2017 we won 12 separate seven-figure deals with aggregate contract value greater than $60 million. Our integrated capabilities continue to be a strategic differentiator. In fact, Compass Health Brands signed a seven-figure TCV deal with us in the fourth quarter, because we integrated our UCaaS and contact center solutions into their workflow applications and provided Vonage Reach, a marketing automation solution built on top of the Vonage API platform. We also won a seven-figure deal with Zedi, a leader in oil and gas technology. We replaced Zedi's Avia System with our UCaaS solution, integrated with contract center, Office 365 and Salesforce. Zedi will also be implementing the Vonage API platform across several use cases.

So to summarize 2017, our team delivered a transformational year, highlighted by 5 important milestones: first, consolidated revenues exceeded $1 billion; second, Vonage business became our majority revenue segment; third, we released our new communications software platform, the Vonage Business Cloud, after a multiyear development effort, much more on this shortly; fourth, we successfully integrated Nexmo into Vonage and delivered CPaaS organic revenue growth of 39%; and fifth, we generated OIBDA of $180 million.

Now let's review specific achievements in Vonage business, where revenues grew to $499 million, a 33% GAAP increase. Underlying these results, we continued to invest in our omnichannel sales infrastructure. We added Kenny Wyatt as Chief Revenue Officer, a new Channel Chief and more recently, new Heads of Insight Sales, Post Sales and Digital Marketing. In the United States, we expanded field sales to 20 markets and doubled our enterprise sales team.

We significantly expanded our European headquarters in London and hired sales leadership in key European countries. In APAC, we hired a new General Manager and opened offices in Beijing, Shanghai, Shenzhen and Tokyo.

I believe we now have the industry's broadest omnichannel distribution, led by proven sales leaders within each route to market. We also finished the buildout of our new communications software platform. So I'm thrilled to report the release of Vonage Business Cloud, our integrated industry-leading communications platform that culminates a multiyear software development effort. Vonage Business Cloud, or VBC, is our platform of the future, and a majority of our customers are already running on it.

As such, we have retired Vonage Essentials. Vonage Business Cloud was designed and built for the public cloud, not just a lift-and-shift of legacy technology into the cloud. VBC leverages modern cloud-based technologies, including auto scaling, surveillance functions, containers, managed data bases and machine learning, ensuring that our customer's communication solutions are future-proofed. Vonage Business Cloud is a highly elastic platform, designed for high availability and cross-region failover, ensuring customer's communication solutions are always accessible. This approach is much more than simply running communications in multiple data centers, like what is done by our public UCaaS competitors.

Vonage Business Cloud also includes next generation mobile and desktop applications as well as collaboration built on Amazon Chime. The entire platform is deployed on AWS, enabling faster innovation and accelerated international expansion.

Only Vonage Business Cloud also includes SmartWAN, our award-winning SDWAN solution, so we can provide QoS to over-the-top customers using public broadband. We think this is a game changer.

For enterprise customers with specialized needs, we will continue using our BroadSoft-based platform. We have rebranded Vonage Premier as Vonage Enterprise, to better reflect its focus on very large customers. Within enterprise, our pipeline for seven-figure deals has more than doubled. We have a strong backlog of uninstalled MRR and our go-to market investments are working well.

Additionally, contact center and SmartWAN represent significant opportunities for new customer growth and upsell. We expect mid-market enterprise service revenues to grow greater than 25% in 2018.

Moving to CPaaS. We delivered strong results with the Vonage API platform,, and I'm confident we are barely scratching the surface of the large opportunity in CPaaS. Our strategy is to first support the integrations of CPaaS, UCaaS and contact center services to deliver better business outcomes; and second, to deliver standalone communication microservices that could be integrated into customers' existing products via our APIs. For the year, Vonage API platform revenues were $140 million, an organic increase of 39%, and this was driven by execution across 4 growth initiatives. Our first growth initiative was to increase the number of registered developers.

In 2017, we more than doubled registered developers to 430,000, and we revamped our developer experience with a new portal and new tools to simplify the building of communications' use cases. Our second initiative was to rapidly innovate our conversation platform. And in 2017, we enhanced our voice API, expanded its global reach to 30 countries and drove greater developer awareness. VAPI sales momentum continues to build and we launched new features, including voice playground and speech synthesis markup language, or SSML. Voice playground helps developers test preconfigured use cases like IVR, conferencing and audio stream, without any coding. The SSML feature enables programmed speech to sound highly lifelike, and this provides a superior experience for text-to-speech use cases. Our third initiative was to grow U.S.-based revenues at a higher rate than rest of world. And in 2017, we increased U.S. revenues by 57%. Our fourth growth initiative was to increase our salesforce and enhance our product offerings for enterprise customers. In 2017, we doubled the size of our sales force and improved the tools, functionality and reporting required by enterprise customers. We also launched reports API, enabling customers to integrate transaction data into their business intelligence software and we launched redact API, enabling customers to programmatically control sensitive data for GDPR compliance. Now for this year, for 2018, our focus is to continue to build out our omnichannel sales presence, to increase our UCaaS focus on mid-market and enterprise customers, to leverage Vonage Business Cloud as the future platform underlying our CPaaS, UCaaS and contact center solutions, and finally, to accelerate the development of greater voice functionality in our APIs.

For 2018, we expect Vonage business service revenue growth of 22%, at the midpoint of our guidance. Within this growth rate, we expect mid-market and enterprise service revenues to grow greater than 25%, and Vonage API platform revenues to grow at a rate once again approaching 40%.

For full year 2018, Vonage business will comprise nearly 60% of consolidated revenues, and with our focus on profitable growth, we expect to generate record OIBDA and record free cash flow.

So in closing, I'm really pleased with our performance. We are building a unique company, focused on using cloud communications to deliver better business outcomes for our customers. And I'm confident the execution of our strategy will continue to translate into superior performance for our shareholders.

I'll now turn the call over to Dave for a deeper review of fourth quarter financials and 2018 guidance.

Thanks, Alan, and good morning, everyone. 2017 was a strong year in which we met or exceeded all of our financial performance expectations.

Let's begin with a review of the fourth quarter and 2017 on Slide 6. Consolidated revenue for the fourth quarter was $254 million, up $7 million or 3%. For the full year, consolidated revenue was $1,002,000,000, up 5%. With business now the larger of the 2 segments as of 3Q, and the business segment growing almost twice as fast as consumer is declining, Vonage is now positioned as a long-term consolidated revenue and cash flow growth company.

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 for the fourth quarter was $134 million, representing 53% of total revenue and a 21% GAAP increase.

For the full year, Vonage Business revenue was $499 million, a 33% GAAP increase.

Fourth quarter UCaaS revenue was $94 million, led by service revenue organic growth of 16%. Service revenue does not include access, which we are slowing by design, or USF, which is a pass-through. For the full year, UCaaS revenue was $359 million, representing 15% total and 17% service revenue growth on an organic basis, consistent with our guidance. The organic growth numbers reflect the completion of the sale of our hosted infrastructure business on May 31 and the adjustments of one-time items from the comparable 2016 quarter and year.

As we have done in the past, we included a table in the press release and on Slide 16 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.

Revenue churn was 1.2%, flat sequentially and down materially from 1.4% in Q4 '16.

CPaaS product revenue for the fourth quarter was $40 million, a 50% GAAP increase.

CPaaS organic growth was 36% in the quarter, after adjusting for the change in presentation of Nexmo's trading revenue from net to gross that we adopted in the second quarter.

For the full year, CPaaS revenue was $140 million, up 39% organically and ahead of our original guidance.

The table in the press release and on Slide 16 also shows CPaaS revenue pro forma analysis. Overall business service margin during the fourth quarter was 55%, up from 54% sequentially due to service margin increases across our UCaaS and CPaaS products. Service margin went down from 58% in the prior year due to faster growth of CPaaS.

Moving to Slide 8. Total consumer revenue for the fourth quarter was $120 million, down 12%. For the full year, total consumer revenue was $503 million, down 13%, ahead of our expectations of a mid-teens decline.

On Slide 9, consumer customer churn for the fourth quarter was 1.9%, consistent with the prior quarter and down materially from 2.2% in the year-ago quarter. We continue to believe we can sustain consumer churn rates at or below 2% given the dynamics of the tenured base and our demonstrated ability to profitably acquire customers with lower churn profiles.

Subscriber engagement levels are high, with over 95% of subscribers actively using the service each month for an average of almost 500 minutes each. We ended the year with 1.5 million consumer subscriber lines, and average revenue per line of $26.33, up from $26.11 a year ago. Consumer service margin for the fourth quarter was 84%, up from 81%, reflecting our ability to hold or improve margins despite the declining top line.

This speaks to the power of our common, scaled network infrastructure that serves both our Consumer and Business segments.

Now moving to income statement cost items on Slide 10. Consolidated sales and marketing expense for the fourth quarter was $78 million, down $6 million. For the full year, consolidated sales and marketing was $313 million, down $18 million from the prior year.

During 2017, we continued to remix sales and marketing spend in 3 ways: from consumer to business, from mass media to digital and from working media to sales and success-based sales commissions.

General and administrative expense for the fourth quarter, on Slide 11, was $24 million, down $10 million.

For the full year, G&A was down $1 million. These decreases reflect several factors: headcount reductions in operational efficiencies, reduction in contractual payouts to Nexmo employees as part of the acquisition in 2016 and lower bonus expense.

Moving to Slide 13. Fourth quarter adjusted OIBDA was $51 million, flat sequentially and up $14 million or 38% from the prior year. Full year adjusted OIBDA was $180 million, up 13%. This OIBDA result, which ramped throughout the year, was driven by higher revenue and the sales and marketing and G&A operating leverage realized through the year.

Adjusted net income was similarly up meaningfully in 2017. In 4Q, it was $21 million or $0.09 per share, up $16 million. Full year adjusted net income was $67 million or $0.30 per share, up 70% from $40 million or $0.17 per share in the year-ago quarter. The increase is due to the higher OIBDA and lower taxes.

At the end of 4Q, with the passage of the new corporate tax law, we took a $69 million noncash charge to adjust the value of our NOL. Hence, adjusted net income also excludes this onetime noncash charge to remeasure our net deferred tax asset at the new 21% corporate income tax rate. We finished the year with a $556 million federal NOL, which continues to be a valuable corporate asset.

Moving to Slide 14. CapEx for the quarter, including the acquisition and development of software assets, was $8 million. For the year, CapEx was $33 million, down from $38 million in 2016.

Fourth quarter free cash flow, which we define as net cash provided by operating activities minus capital expenditures, was $39 million, up $24 million, primarily due to the higher OIBDA. Adjusted OIBDA minus CapEx was $43 million in the fourth quarter, up $15 million, $147 million for 2017, which was up 20%. This strong cash flow is highly strategic to us, enabling execution against the following 4 capital allocation priorities: One, organic growth. Through investment and execution, we more than doubled the size of the business assets we acquired, growing Vonage Business 21% organically in 2017; and Vonage's consolidated growth rate will accelerate as the growth of business is much greater than the rate of consumer decline.

Two, M&A. We are a disciplined acquirer, having purchased our unique set of business assets for less than $600 million. Moreover, we have a balance sheet and cash flow profile that enables us to continue to make value-enhancing acquisitions.

Three, liability management. We were able to utilize low-cost leverage to find M&A and quickly retire this debt due to our strong cash flow. We paid down $46 million of debt in the fourth quarter and reduced net debt by $90 million for the year 2017, resulting in net debt of $202 million or 1.1x trailing adjusted OIBDA. We remain financially and strategically flexible as our industry evolves.

Four, buyback. In 2017, we repurchased $10 million of stock at an average price of less than $6 per share. Since beginning the repurchase of stock in August 2012, we have bought back 57 million shares of Vonage stock, at the highly accretive average price of $3.33, returning almost $200 million to shareholders.

Our share count is roughly the same now as it was in 2012, meaning we offset 5 years of employee share issuance and 4 acquisitions that included stock consideration.

Before ending my comments with 2018 guidance, I will comment on the impact of the new revenue recognition standard or Accounting Standard 606, which we adopted on January 1. This new rule will not significantly change how we recognize revenue but will impact adjusted OIBDA as follows: first, we will put an asset on the balance sheet of $35 million to $40 million to reflect commissions paid up through 2017 on current UCaaS customers. This asset represents the remaining value of commissions paid to acquire our customers and will be amortized over their expected remaining life, causing a small amount of additional sales and marketing cost each quarter. Second, as of 1/1/2018, we have begun spreading a significant amount of sales commissions over the expected life of each customer acquired. These commissions will no longer be period costs, but instead will be capitalized in accordance with the guidance. This will result in the deferral of certain sales commissions into an asset, which will then also be amortized. This will be a near-term sales and marketing expense positive which will more than offset the drag of the amortization expense from the historical asset.

The net effect of these changes will be a decrease in GAAP sales and marketing expense and a corresponding increase in operating income and adjusted OIBDA of at least $10 million in 2018.

Moving on to guidance on Slide 15. Our expectations for the full year 2018 are as follows. Consolidated revenue is expected to be in the range of $1,030,000,000 to $1,045,000,000. We expect Vonage Business revenue to be in the range of $590 million to $605 million, for GAAP revenue growth of 20% and organic service revenue growth of 22%, both at the midpoint of the range. The organic growth number removes the effects of the sale of [hosted infrastructure] and the net-to-gross accounting change. Business revenue will ramp through the year with 1Q expected in the $136 million to $137 million area. Consumer revenue is expected to contribute between $435 and $440 million or decline in the 12% to 13% area, consistent with 2017 and our continued focus on now optimizing its value. We expect to deliver at least $195 million of adjusted OIBDA, including the effect of 606. As with 2017, adjusted OIBDA will build throughout the year, starting in the low $40 million area in 1Q as we reset annual employee benefits. We expect CapEx to be close to 2017 in the $35 million area. Combining the components of guidance I just discussed, we expect to deliver at least $160 million of adjusted OIBDA minus CapEx in 2018.

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

Okay, great. Thank you, Dave. Denise, let's turn it over to Q&A, please.

(Operator Instructions) And your first question this morning will be from Rich Valera of Needham & Company.

Alan, I think you said in your prepared remarks that you doubled your pipeline of mid-market opportunities. Just curious if you could give more color on that, sort of doubling relative to what? And if you could give any sense of the magnitude of that, any kind of more color or numbers around that?

So we doubled the pipeline of enterprise customers, and so we gave you the sum of mid-market and enterprise growth, which is really our area of focus in UCaaS. So we define that as 100 seats and greater all the way up to super large enterprises. And so in aggregate, our focus in that segment will grow that more than 25%. But within enterprise itself, obviously, the larger end of those types of customers, we've doubled that pipeline.

I'm sorry, that was relative to which timeframe, Alan, is that year-over-year?

Year-over-year, correct.

Got it. And then, maybe this one's for Tony. On the Nexmo product, it sounds like you're developing some kind of higher level, let's call it, almost applications within that platform. Have you thought about changing your -- having an alternative pricing model at all that isn't purely transaction based, having something where you would actually be licensing out any kind of higher level application there, or maybe doing that -- keeping it through the transaction base and using them to pull through more volume? Just curious, your thoughts on that.

Yes, hi, Rich. So indeed, the CPaaS pricing model is a transactional base model and that works well for a lot of the transactional APIs, sending a message or sending a phone call. However, as we move into the enterprise segment, we see that enterprises requires more stability in terms of their pricing, more predictability, so we're developing new models within the enterprise packages to provide them more certainty around that. So indeed, there is some, I would say, different type of pricing that is more recurrent than transactional.

Rich, it's Kenny. Just to add to that very quickly. In 2017, we launched VonageReach, which, as Tony mentioned, it is doing just that, right? Taking specific use cases out of CPaaS, out of transactional model, and putting them in a, what we call, finished product, if you will. In fact one of the TCB deals that Alan mentioned in his script included just that, included a prepackaged CPaaS solution sold to the enterprise.

The next question will be from Dmitry Netis of William Blair.

This is Steven Sarver in for Dmitry. I guess on Nexmo, as you guys said that it's going to approach 40% growth in 2018 again, which seems to be a little bit higher than what the street would look, modeling I think there at about 30%. So this would kind of imply that the UCaaS growth expectation in 2018 is a little bit lower than we were expecting. So I guess what is going on with UCaaS in that, if CPaaS is expected to grow faster than expectations, I guess what would this do to gross margins in 2018? Could you still see expansion or could they stay similar to some 2017 because of the lower margin profile from Nexmo?

Sure, it's Dave. I'll take that question. CPaaS is growing, it's exiting the year at this high 30s growth rate, approaching 40, and we think it's going to continue to grow that way off a higher base. Within UCaaS, we exited the year right on our guidance, which was mid-teens total growth and 17% service revenue growth, so 2 points higher. For 2018, as we discussed, as Alan referred to, we're actually remixing a bit where the dollars -- where the sales and marketing dollars are going within UCaaS and where the focus is, consistent with how the market's growing. So what you're seeing within UCaaS is a bit of a shift, whereby the less than 100 seats business is growing lower, consistent with the market, is growing lower than our average UCaaS growth. And the 100-plus seat cohort, it's growing much faster than our average. And so as you see that mix, that's what's leading to the growth outcome. We started this business in the lower end of the market. We continue to believe that, that's a very good place to market, in our brands, in our products, it's differentiated there, but we're positioning for the growth upmarket. And so the growth rates reflect that and the dynamics that have occurred between less than 100 seats and the greater than 100 seats in terms of market growth. As it relates to gross margin impact, I don't see any gross margin impact -- significant impact from that dynamic. This year, we're looking at relatively flat consolidated and business gross margins, with a slight upward bias. And so as you see the growth, even though the growth of CPaaS is greater, and that is a lower margin product, historically, on the SMS side, that's being offset by efficiencies and overall growth.

The next question will be from Catharine Trebnick of Dougherty.

Alan, could you give us a little bit more insight on the rollout of Amazon and how that would work and perhaps if you could or quantify any upside to what that might be to your current guide or is that in the guide?

Hey, Catharine. It's in the guide for Amazon. Are you referring to Amazon Chime?

Yes.

Yes, so it's in the guide. We expect to be on AWS marketplace now in Q2 and we have yet to solve -- or Amazon has yet to solve the SAT -- the tax issue for the bundle on amazon.com. So it's in our guide. We've basically taken out anything significant there, but we continue to work on that Amazon relationship. And there's tentacles all over Alexa for Business providing much of the SMS underpinning to their simple notification service. Obviously, they are a public cloud partner, very significant with our roll-out of our new Vonage Business cloud. So very significant relationship, we've just -- we have nothing yet on the sales through amazon.com.

The next question will be from George Sutton of Craig-Hallum Capital.

My first question is around the Vonage Business Cloud, and congratulations for kind of having that up and running now. So I'm curious as we look at the SMB and the mid-market parts of your business, how do you think they are influenced by this new offering? And you've talked about being at a 1000 point -- I'm sorry, 1000 seats by the end of 2018, what limits your ability to scale that up substantially further over time? That's really what I'm curious about.

The -- we're excited about Vonage Business Cloud. We've been working on this for 3 years. And it is our platform of the future, and over some extended period of time, beyond 2018, it could very well be our platform for everything. Remember, on the BroadSoft based sales, it's all success-based CapEx. And so if we need a BroadSoft license, we buy a BroadSoft license. But we are putting our resources into developing our own technology. What's significant also about the Vonage Business Cloud, is it's the platform that will underpin all of our solutions, whether it's UCaaS in the PBX use case, CCaaS in contact center use case and CPaaS itself. It's the platform ultimately that will underpin all those APIs. So very excited about it and the way it was architected as well. We've now moved those Vonage Essentials customers, virtually all of them, over to the new platform, so they've been running for some time and that's what enabled us to retire Vonage Essentials.

The next question will come from Jonathan Kees of Summit Insights Group.

Just wanted to ask in regards to the SmartWAN. I know you mentioned that you're tracking gross margins to be kind of flat for the year. But going forward, with the software content and SmartWAN, do you expect that to be a boost to gross margins? And I guess, I also want to dig further in terms of, you said you retired Essentials and you've migrated all the customers onto Vonage Business Cloud. So it sounds like that's a seamless cutover. Were the customers aware in terms of the transition? I would think that, that's something that would require also change in terms of their end terminals. But yes, but more detail on that too would be helpful.

Yes, I'll take the first part of that. So as it relates to SmartWAN, that is a higher margin product and access. And actually, access we're projecting in 2018, that access revenue will actually decline. So that is a net positive to gross margin, all things being equal. That increase in SmartWAN and decrease in access is built into that flat margin profile with the risk to the upside in margin that I talked about for 2018. That's part of that mix.

And I'll take the second, on the switch to Vonage Business Cloud, it is seamless to the endpoint, so it happens in the background, the underlying call prop, that whole re-architected solution is, again, not apparent to the end customer, other than to actually get an increase in functionality, but it requires no change at the endpoint. And that's how we've been able to move ten -- literally tens of thousands of customers to it.

The next question will come from Michael Rollins of Citi.

Couple, if I could. The first topic is, if you could discuss the relationship between investing in sales and marketing and growing revenue and is there anything holding you back from investing more to pursue more revenue growth following all the things that you described around the product enhancements, improvements and the focus that you have? And then if I could switch gears and just ask strategically, what's more important to the company at this point, expanding the product portfolio as you look at M&A opportunities or enhancing scale, whether it's from a service perspective or a marketing perspective?

Michael, it's Kenny. I'll take the first one. As you know, in 2017, we did quite a bit of investment in distribution, particularly in the mid-market and the enterprise. In fact, as promised, we grew -- we opened our 20th market in the fourth quarter of last year. And we will come to look at incremental markets as we see fit for incremental growth and mid-market and enterprise. We also though -- which you may not see is, we shifted and are continuing to shift the mix of where those investments are placed, right? A fair amount of our sales and marketing emphasis was focused on that micro business, if you will, way down market. And we've done a good job of changing that mix where we see additional growth opportunities in the mid-market enterprise; that's both sales and marketing dollars. As it relates to our financial flexibility, we will continue to invest where we see accretive growth. So as we see additional markets, as we see opportunities to spend additional OpEx for marketing, obviously we'll use that flexibility to generate incremental growth and mid-market enterprise.

Great. Then Mike, on your M&A question. So first off, we're not limited to product or scale necessarily or just choosing one. And we feel like we can pursue a number of opportunities and execute on a number of opportunities, if that's what makes sense. Consider on the product side, it really is a buy versus build. And I think right now, we've got the products we -- to take to market in terms of the big products. We're always, of course, innovating and adding features, but we've got the products we want to go-to market with, so it really comes down to, do you do a buy versus build on certain things such as contact center. We're constantly assessing that. As it relates to scale, we think that's another kind of bucket of M&A opportunity. In general, buying UCaaS seats from smaller providers is a good trade for us and it's not getting more expensive and I think it won't get more expensive over time. And we think that, that's pretty attractive and we're simply kind of weighing that smaller deals on that side relative to larger deals that could help the order of the industry. And so those are things that we're constantly assessing.

The next question will come from Tim Horan of Oppenheimer.

With the new cloud services, can you talk about how quickly you can customize services and maybe how this kind of compares to some of your larger OTT voice competitors? And then, Alan, just a high level question. Can you talk about the ability to kind of integrate more collaboration based services over time, like Slack and some of the other products that are out there. Are you kind of able to create those type of products?

Yes. Hi, Tim. So Vonage Business Cloud is, relative to the competitors, is a platform for which we can innovate faster than they can. It would -- it's architected entirely in a public cloud -- with a public cloud approach. All the elements of the design lend themselves to fast innovation cycles, the ability to expand that platform internationally, which we intend to do. That architecture, and I said this to my comments, is incredibly different than what our competitors have tried to do who have had those stacks around for 10, 12 years that they're now trying to lift-and-shift those into public cloud. They, currently today, all sit in private [colos], not in a public cloud infrastructure like AWS. But it goes beyond just where it's hosted, it's really how it's architected. So that's a very, very important point to recognize and it has already replaced Vonage Essentials. And as you remember, Vonage Essentials was 55% of the revenue and 2/3 of our seats. So this -- we have now built a platform that has greater scalability and the opportunity for greater innovation cycles than the competition.

Your second question, relative to collaboration, so we have built our -- or we've included in Vonage Business Cloud, our collaboration built on Amazon Chime through that broad relationship. We have other elements on our own technology there. Now relative to integrations whether it's Slack or Stride or whatever, we have built-in, and certainly, even in Vonage Essentials, we've built in the integration with Team-One already. So we're not trying to play king maker, if you will, to say, "we're going to build a solution that is going to defeat Stride or going to defeat Slack," rather we'll integrate into those increasingly.

The next question will come from William Power of Robert W. Baird.

First question, I guess, perhaps, for Tony, just looking at the CPaaS growth and trends there. Maybe you could just speak to what the key drivers in the quarter were, sources of growth, U.S. versus international, just any update of what you're seeing competitively on the CPaaS front, I guess, in both those geographies. And then, Dave, just on EBITDA, I'm looking at Q1 guidance versus full year. Maybe just remind us of some of the seasonal aspects and why it looks like you expect that to improve more in the second half of the year?

Yes, maybe I can give some high-level on kind of what's driving the growth and we can dive into more details with Dave here. But essentially there is few drivers of the CPaaS growth, primarily around enterprises needing to use more software when they engage with their customers. So they need to embed communication in every app they have that needs to be interacting with their customer. That's kind of a high-level trend driven by the digital transformation. Specifically, to our business, we see growth in the U.S. We've grown the business in the U.S. faster last year than any other region and we see also growth happening with the expansion of our platform by adding new products, such as the programmable voice API and also the contextual communication APIs as well. So this is kind of the high-level trend and lastly, the enterprise adoption is also increasing. We see a shift from the early adopter, is where your digital native companies, your startups into the early maturity and these are the enterprises and there's much more enterprises out there than early stage companies.

Great. And on your OIBDA question, last year we saw the same trend. We did $37 million in Q1 of '17 and we finished the year with $51 million. The first quarter is a very heavy quarter for us in terms of payroll taxes as well as resetting the bonus accrual and other employee benefits. We also think that consistent with last year, we're going to see gains -- operational gains throughout the year on things like churn, where there'll be some OIBDA benefits. So it's a similar ramp to last year and that tends to be the way our EBITDA unfolds.

The next question will be from Mike Latimore of Northland Capital Management.

On the Vonage Business Cloud, what is sort of the sweet spot you're going to target that at in terms of seats. Is it under 1,000 now, or like what's the seat range and then where does that go over time in terms of the ceiling on seat count?

Mike, Vonage Business Cloud is our platform of the future. So it will serve to -- it already does serve customers from one line up to hundreds and hundreds and hundreds. The -- over a period of time, it will be more and more capable to serve even the very largest customers. BroadSoft still fits in enterprise use cases in certain specialized needs and it makes a great deal of sense. And we'll continue to buy those licenses on a success basis, where it makes the most sense. So there isn't really a sweet spot per se, other than the sweet spot from our sales and marketing approach, which is the growth is in the upmarket, mid-market and enterprise. Our focus is shifting to that, our platform is completely capable of taking us there and the -- we're simply just following the growth in the underlying market. We come from a traditional strength in micro and that segment is getting more and more saturated, so growth is slowing in the micro and so we're pushing aggressively our growth in the mid and enterprise.

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference back over to Hunter Blankenbaker for any closing remarks.

Okay, good. Thanks, Denise. That does concludes the Q&A portion of the call. We look forward to seeing many of you in the upcoming various Investor Conferences and Enterprise Connect, and for those unable to attend in person, these events will be webcast and you can follow our comments on the Vonage Investor Relations website. And please contact us if you need any additional details. So thanks, again, for joining.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.