Venture Global Inc (VG) 2018 Q1 法說會逐字稿

Good day, and welcome to the Vonage First Quarter 2018 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.

Okay, great. Thank you, Nicole, and good morning, and welcome to our first quarter 2018 earnings conference call.

Speaking on our call this morning will be Alan Masarek, Chief Executive Officer; and Dave Pearson, CFO. Also joining us is Kenny Wyatt, our Chief Revenue Officer.

Alan will discuss our strategy and first quarter results, and Dave will provide a more detailed view on our first quarter results.

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 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 first quarter earnings press release or the first quarter earnings slides posted on the IR website.

With that, I will now turn the call over to Alan.

Thanks, Hunter. Good morning, everyone. We delivered a strong first quarter. Business revenues were $137 million, a 22% increase. Consolidated revenues were $254 million, a 4% increase and adjusted OIBDA was $42 million.

I'll start this morning by reviewing the progress of our corporate transformation. In just 4 years, we have executed a strategy to transform Vonage into a cloud communications leader. Central to this strategy, we are creating a single communications platform, internally referred to as One Vonage, from which we will drive better business outcomes on behalf of our customers. Our One Vonage communications platform is the integration of the Nexmo platform and Vonage Business Cloud, the UCaaS platform stack we announced last quarter. Both platform stacks leverage a microservices architecture with open APIs built on a public cloud infrastructure.

From our One Vonage platform, we will provide solutions, ranging from packaged applications like PBX, contact center and collaboration in WorkStream messaging, to programmable communication applications delivered via Nexmo software APIs to integrations into other workflow applications via our Vonage Integration Suite. As one example of the power of our platform approach, we are using Nexmo's sentiments analysis as an AI agent that identifies in real time the effectiveness of a customer care call and then uses skills-based routing to escalate as necessary to improve caller satisfaction. This has created a superior contact center offering and as a result, we believe we can grow contact center revenues even faster than the 60% growth we delivered this quarter. As another example, we won a large contact center customer by combining our voice API, VAPI, with Nexmo's sentiment analysis. This solution replaced $250,000 in voice services ARR, previously provided by one of our public UCaaS competitors.

Now let's review some enhancements made to our cloud platforms during the quarter. We launched Vee, a chatbot that uses artificial intelligence to provide self-service to customers using Natural Language Commands. Last week, we rolled out Vee for Workplace by Facebook, which was highlighted at Facebook's F8 conference. Industry analysts lauded the launch for demonstrating the value of combining Vonage and Nexmo technology to drive innovation. We also launched our next-gen Vonage Integration Suite, which enables integration of our communications solutions into other workflow tools. The new Vonage Integration Suite reflects a complete reengineering of gUnify's middleware technology. For VAPI, we delivered split recording, an essential feature of our call centers to improve transcription quality. Also, VAPI solutions can now be terminated in 34 countries across the world. We also launched messages API into early developer access. The messages API enables brands to reach their customers via multiple channels, including leading chat apps and SMS. When paired with our new workflows API, also in early developer access, developers create solutions that prioritize message delivery to preferred channels and then automatically fail over to other channels. These patent pending solutions create richer customer experiences and significantly expand the addressable market for messaging. While these new products demonstrate great progress, I'm even more excited about the roadmap ahead, across both Vonage's unified communications offerings and Nexmo's programmable communications.

We even have a great team collaboration solution in the works and an even more innovative messaging solution in development.

These enhanced products reflect our accelerating pace of innovation. What's more, they demonstrate that our platform strategy to combine unified communications and programmable communications is delivering better business outcomes to customers in ways competitors cannot match.

Now let's switch to improved -- to review the improvements in our go-to-market execution as well as the post sales experience we deliver customers. Within our UCaaS products, we continue to make good progress. Service revenue grew 16%, as we emphasized Vonage Business Cloud for customers up through the middle market. In the quarter, nearly 80% of bookings were on Vonage Business Cloud. An average order size of Vonage Business Cloud booking grew 28%. We also introduced our new channel program, including a new partner portal with enhanced marketing services and a partner teaming model with our field sales force now deployed across 20 markets. The channel is an important element of our growth strategy, and our combination of unified communication solutions and programmable communications APIs is resonating well with partners. We are strengthening existing partnerships with master agents and adding new partnerships with managed service providers, independent software vendors, systems integrators and VARs. In the first quarter, we signed 45 new channel partners.

In fact, the channel was instrumental to us winning a highly competitive seven-figure deal with Flight Center Management, a global travel company. Keys to the win were our contact center solution and Nexmo products, which Flight Center will use to provide better customer experiences for its global customer base. Ken McMahon, our new Senior Vice President of Client Operations, has hit the ground running. His team is enabling faster monetization of backlog, more automated onboarding and most important, a better customer experience. We also just introduced industry-leading programs to optimize the post-sales experience for Vonage Business Cloud customers. We announced a 30-day install guarantee and a five 9s uptime SLA when deployed with our SmartWAN solution. SmartWAN is a differentiator within mid-market and enterprise segments, and SmartWAN revenues grew more than 100% year-over-year. Our investments are aligning well with our strategic focus on the higher growth mid-market and enterprise segments. We had another excellent quarter of mid-market in enterprise wins. In addition to Flight Center Management and many others, we added Barnes & Noble, and we meaningfully increased bookings from the [huge] residential real estate company signed last year. Bookings from mid-market customers, or those between 100 and 1000 seats, more than tripled year-over-year, excluding Access which we are deemphasizing.

For our Nexmo products, the team delivered strong performance and we continue rapidly signing new developers, ending the quarter with 485,000. Registrations of U.S.-based developers increased 70% sequentially. We also see success in our land and expand strategy as revenues from new customers added in the first quarter of 2017 increased 7 fold in the first quarter of 2018. We are seeing significant traction in Nexmo's Partner program. We added 30 partners, including many large ISVs and software companies, including Microsoft, Google, Facebook and Amazon. For example, using Microsoft's workflow tools, enterprises can embed Nexmo's real-time communications to notify sales reps when opportunities are added on Microsoft Dynamics. We're also generating very strong global growth. APAC revenue increased 52%. We added new customers, like BlueCloud, a contact center company in Australia and the APAC traffic for Verifone, a leader in payment solutions. In China, our business is growing very quickly. We now serve the leading bike sharing company, the leading car sharing company, the 3 largest cloud infrastructure companies, the 2 largest e-commerce marketplaces and the leading messaging app.

We're also seeing good momentum with VAPI. For example, Globe Labs, the digital arm of Globe Telecom in the Philippines selected VAPI to enable voice for its contact centers. Globe also uses Nexmo's text-to-speech for billing, debt collection and marketing promotions.

So in closing, these are really exciting times at Vonage. We are building a unique communications company based on a differentiated cloud communications platform. We believe that communications are key to driving business transformation and that the best communication solutions drive better business outcomes by linking employee and customer communications seamlessly into company workflows. I'm pleased with our financial results, and I envision continued value unlocked as consolidated revenue growth accelerates.

That said, I'm proudest of our team's progress, transforming Vonage into a business communications leader. Our pace of innovation is accelerating and I believe results will accelerate too. I look forward to updating you on our progress. And I'll now turn the call over to Dave to discuss our results in greater detail. Thank you.

Thanks, Alan, and good morning, everyone. I am pleased to review our financial results for the first quarter of 2018.

As in the past, 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.

Starting on Slide 6. Consolidated revenues for the third quarter were $254 million, up $10 million due to the $25 million of growth Vonage business added, more than offsetting the managed decline of $15 million in consumer. Given that business is now the larger of the 2 segments and growing twice as fast as consumer is declining, Vonage is now a consolidated revenue growth and cash flow company.

Service margin and gross margin were both consistent with the last 3 quarters at 70% and 59%, respectively, and down year-over-year due to services and product mix changes.

This last 3 quarters of stability of our consulted margin structure speaks to the power of our common, scaled network infrastructure that serves both our consumer and business segments.

Before diving further into the results, I'd like to review with you some reporting changes we've made to align with our strategy and reflect Vonage's transformation into a cloud communications company. We have updated our income statement and summary operating data, which I'll also refer to as KPIs to give investors more clarity on consolidated Vonage as well as on the business segment, which is expected to account for more than 55% of consolidated revenue in 2018.

We believe these changes will enable investors to better compare Vonage to our peers. We made 3 income statement reclassifications in the first quarter of 2018: one, moving the remainder of Access-related or non-cloud revenue out of service revenue and into product/Access revenue; two, moving cost associated with delivering Access and non-cloud products out of cost of revenues, this aligns the cost of providing these services with the revenue associated with them; and three, allocating certain network operations employee cost to business from consumer to reflect their core focus on business operations and the greater revenue contribution of business.

In addition, we have shifted resources within our product development operation to make significant investments in our One Vonage proprietary communications platform. This resulted in higher engineering and development cost this quarter. As these shifts affect income statement geography within the quarter, they had no impact on consolidated revenues, operating income, net income or adjusted OIBDA. In addition, we created new business KPIs to better reflect how we manage the segment on a combined basis. These changes are: one, adopting the service revenue per customer metric, which includes UCaaS and CPaaS services to enable investors to track our land and expand strategy and the move to mid-market and enterprise customers; and two, adding CPaaS services to our current definition of revenue churn, which now reflects retention for all of Vonage Business.

We are organized to deliver all of our services using a common platform in Salesforce, and these new metrics reflect this strategy. This quarter, we are providing our legacy KPIs and the new ones on a historical four quarters basis. Only these newly enhanced comprehensive metrics will be provided going forward. There is no change to our consumer segment reporting metrics.

Moving to Slide 7. Let me now turn to our segment financial results, starting with Vonage Business. Vonage Business total revenue was $137 million, representing 54% of total Vonage revenue and a 22% GAAP increase. Within this, UCaaS service revenue was $74 million, growing at an organic rate of 16% and CPaaS service revenue was $42 million, a 42% organic increase.

Service revenue, as you will recall, does not include Access, which we are growing slower by design; or USF, which is a pass-through. We expect second quarter business revenue to be in the $143 million to $144 million area, continuing to reflect the strong service growth and the deemphasis of Access and sale of handsets.

The organic growth numbers reflect 2 main adjustments. The completion of the sale of our hosted infrastructure business, and the change in presentation of Nexmo's trading revenue from net to gross, both of which occurred in the second quarter of 2017. As we've done in the past, we included a table on Slide 13 of today's presentation, showing 5 quarters of these adjustments to facilitate pro forma analysis.

Overall, business service margin for the first quarter was 54%, down from 59% in the prior year due to mix changes from lower margin services growing faster, the aforementioned net-to-gross change and allocations.

Moving to page 8. First quarter service revenue per customer was $328, a 3% increase versus $317 a year ago, reflecting our successful efforts to move upmarket and grow current customers.

Factors impacting this new KPI over time and causing quarter-to-quarter fluctuations will likely include the move-up market and execution of our land and expand strategy, offset by diversification of the customer base and early adoption of our services.

First quarter business revenue churn was 1.2%, flat year-over-year. Factors impacting this new KPI over time will likely include lower churn from providing better and more services offset by the episodic nature of some of our customers.

Moving on to Slide 9. Consumer revenue for the first quarter was $117 million, down 11%, the 6th consecutive quarter of improvement in the rate of decline. Consumer customer churn was 1.9%, down from 2.2% a year ago and the fourth straight quarter of this record low churn.

We ended the quarter with 1.4 million consumer subscriber lines and average revenue per line of $26.58, up from $26.10 in the year-ago quarter. This increase was driven by, primarily, higher USF and a greater weighting toward higher-ARPU tenured customers who now represent 83% of the base and have churn of 1.4%. Consumer service margin for the first quarter was 87%, up from 81%, due to previously discussed allocation to business and organic cost improvements.

Now moving to income statement cost items on page 10. Consolidated sales and marketing expense for the first quarter was $77 million, down $5 million. Main driver of the decline was the effect of the adoption of AFC 606 and the shift of certain product development resource costs into engineering and development to support the technological innovation we have discussed.

General and administrative expense for the first quarter was $28 million, down $8 million. The main difference is the much lower vesting payouts to Nexmo employees as part of the deal consideration, on the acquisition in 2016. Engineering and development costs were $11 million, an increase of 29% from the year-ago quarter, reflecting the investment in the VBC technology platform.

Turning ahead to Slide 11. First quarter adjusted OIBDA was $42 million, up $5 million. The increase in adjusted OIBDA is due to better operating performance, the effect of 606, offset by the change of our headquarters lease from capital to operating. We expect 2Q adjusted OIBDA to, once again, be in the low $40 million area.

GAAP net income of $25 million was up $19 million from the prior quarter. Adjusted net income for the quarter was $31 million or $0.13 per share, up $16 million. The adjusted net income metric removes noncash items, giving a clear picture of our strong operational performance.

Moving to Slide 12. CapEx for the quarter was $6 million, down $1 million, leading to adjusted OIBDA minus CapEx of $36 million, up $6 million. Free cash flow, which we define as net cash provided by operating activities minus CapEx and acquisition and development of software assets was $17 million, up $7 million, due primarily to the higher OIBDA.

This strong cash flow was highly strategic to us. It has enabled us to reduce net debt by nearly $100 million over the last 4 quarters, ending the quarter with net leverage of 1.1x trailing adjusted OIBDA.

Our balance sheet remains strong and continues to afford us the flexibility to pursue attractive capital deployment opportunities. That concludes my prepared remarks. I'll now turn the call over to Hunter, to initiate the Q&A.

Okay, Nicole. Let's go ahead with the first question, please.

(Operator Instructions) Our first question comes from George Sutton of Craig-Hallum Capital.

It's Jason on for George. A couple of questions on the channel, probably, I guess one for Alan. If you can give us some more reaction on the new -- the new channel portal that you launched. How -- and then the other follow-up would be, how quickly can channel partners get up to speed on the new CPaaS product that you're introducing? And then for Dave, I know you've established some goals on where you want the channel contribution to be at. So just wondering if you could give some thoughts on where you think sales and marketing spend would go if you can achieve those targets?

Jason, let me have Kenny answer your questions on the channel and the portal.

Hey, Jason, good morning. So we launched -- as you know, we launched 2 pretty significant channel programs in the quarter. The first was what you just mentioned, which was the portal. This is -- feedback we received from the channel was we want it to be easy to do business with Vonage. And so the portal enables us to go do that through sharing marketing leads and programs with -- directly with the channel, getting their ticketing done through channel, the compensation done through -- sorry through the portal, as well as things like deal registration. So it really lays a nice foundation for us to continue to accelerate our revenue in the channel. As it relates to CPaaS, we launched VonageReach, as you know, late last year to the channel, and we're seeing a nice uptick with that product. But more than that, we're also seeing a couple of our masters actually use the CPaaS product to run their own business, which has been pretty interesting, as they utilized our product to enable their own agents, if you will, with that product. And so we're seeing that -- the usage and adoption happen with the channel. We're going to continue to focus here as a key route to market for our 2018 strategy.

And I'd say that the activities that we're pursuing in the channel are built into our guidance and into our sales and marketing view. In general, sales and marketing will be flat to slightly down as the year progresses, and some of that is some remixing between media and sales commissions which would be the channel.

Our next question comes from Rich Valera of Needham & Company.

Another question on sales. Was hoping you could address where you think you are on the productivity of the direct sales teams you added last year. I think you added 8 teams in new cities last year. Is there still some productivity to come as particularly, the ones added late last year, maybe, continue to ramp up that productivity curve?

Yes, Rich, it's Kenny. The answer to your question is yes. Particularly those that we added in the third and the fourth quarter, as you know, we kind of ramped that market rollout late last year and so I'm still expanding productivity gains to come up for those brand-new reps. And how we're enabling that really is in 2 ways: one is the ecosystem we surround that rep with through sales tools and kind of smart selling strategies for them; but also, equally as important is channel teaming. We just launched channel teaming earlier in the quarter, and so that's where we're essentially taking our channel partner acceleration, teaming it with our field sales teams in order to continue to accelerate those deals through the funnel. So those 2 key strategies is what we expect to continue to drive rep productivity northbound.

Great, and just a quick one on contact center. I think, Alan, you mentioned that contact center revenue was up 60% in the quarter. I was curious just to get a sense of the magnitude of that revenue in an absolute sense if there's any color you'd be willing to give there. And kind of how significant do you view contact center as a driver of overall business revenue going forward?

Rich, I can't share with you the specific numbers, but we view contact center as a very integral element. One, because it is increasingly driving UC. So CC is driving UC, but the other is so much of the programmable communications, the Nexmo APIs, relate to external communication to customers and how you route that customer internally to the appropriate employee. So for instance, I'm on a website, I now want to be routed to the appropriate person who can follow up on the part of the website that I'm interested in. I'm looking at an airline flight or what have you. The software understands the itinerary I was trying to book and routes me through the right IVRs -- through the IVRs to the correct agent. So there's a natural marriage between Nexmo and contact center. So we -- many of the examples that I gave in my prepared remarks show how we're doubling down in this area to make that experience better and to tie-in Nexmo more tightly.

Our next question comes from Dmitry Netis of William Blair.

I wanted to kind of touch on your guidance a little bit and kind of the reporting that you've done to make sure that we're kind of still on track. Just -- your guidance for the business service, is it still kind of in that [590, 605] range? I know that the service revenue -- I think I've heard you say [143, 144] for the June quarter. Does that still kind of line you up for the guidance you outlined in the previous 2 quarter for the full year? And then same thing on the EBITDA, I mean, are you still expecting kind of $195 million of EBITDA this year? And within that business guidance -- revenue guidance, will Nexmo still grow at 40%. So just kind of wanted to dot the Is, cross the Ts here.

Yes, there is no change to our annual guidance. We decided to just give people as we did last quarter, a view into 2Q, so people can understand how the revenue and the OIBDA is ramping. I would say that relative to when we gave guidance on revenue, we are deaccelerating Access faster than we thought, but that's a good thing for us. It's an intentional thing and its -- Access tends to be a pretty big cost driver. And we are shifting handset sales more into rental, which pushes that revenue out. But there is no change to our guidance on revenue. On EBITDA, same story. As you recall, last year, through the first half, we printed $78 million of adjusted OIBDA and obviously, had a result that was $100 million ahead of that. So we're seeing what we think is a similar trajectory this year and just wanted to help people understand that, similar to last year, what 2Q looks like.

Okay, Dave. And then as far as the mix shift within the business service revenue, with Nexmo growing 40% versus UCaaS implied guidance. How does that sort of translate, as you kind of move into June and then the rest of the year? Has there been any changes there?

No. So when gave guidance, we thought about it and we run the business on a consolidated business. We decided to give people the UCaaS and the CPaaS revenue difference just so they understand what's happening. But as with the KPIs, we're really starting to -- or more and more running the business on a combined basis. And so when we gave the guidance, it was on a combined basis and we stand by that guidance on a combined basis.

Our next question comes from Tim Horan of Oppenheimer.

Kind of more of a qualitative question. But I guess, where are you in the integration, both functionally with CPaaS and UCaaS and the go-to-market strategy? I guess, on the timing of it at a higher level and maybe just some qualitative more examples on customer wins here. And just following that up, it looks like the business revenue growth is going to accelerate each quarter for the remainder of the year. I know you're not giving guidance for next year but it seems like it's accelerating exiting the year. Just any thoughts on what the longer-term outlook is for the combined business revenue growth?

Tim, this is Alan. Let me take the first one, and Dave will take the second. We feel really good about the integration on UCaaS and CPaaS. What I described in my prepared remarks is, we built out the Vonage Business Cloud stack, focused initially in UCaaS-oriented applications. And we will be marrying that with the Nexmo stack, technologically, to have one single platform. So if you think about it in a simple way, underlying Vonage Business Cloud, there's video, there's audio, there's messaging. And under Nexmo, there's video, audio and messaging. So it just makes good sense to bring that together under what we now refer to as the One Vonage platform. As that work is going on, and it's very active right now and will continue throughout the year and into next, operationally and organizationally, we've been integrating in a very big way. So organizationally, our business -- every functional area reports up to a common leader. Kenny is the Chief Revenue Officer for all business revenues. Omar is the Chief Product Officer for all products. Sagi is CTO et cetera for all engineering across both. Then what's happening on the ground with the sales people is on deals of any size, the sales people -- the UCaaS sales people are actually leading with CPaaS, because it gives them the ability to go into a customer opportunity and basically, talk about the unexpressed need as opposed to the expressed need. So as a customer, I'm looking to move my prem PBX to the cloud, rather than going in there competitively against others and have to sort of pound the table and say buy me, because my hunt group or my auto attendant is better. You can actually shift the conversation to talk about, how I'm going to help that company with its business outcomes using these Nexmo tools to how it communicates with its customers. So just by -- sales people gravitate to what works and that's exactly what that gravitating to. So this whole process is accelerating and so we're very, very bullish about it. And everything that we're doing, both in terms of technical integration and organizational integration and operational integration, all is driving towards this result. Turning over to Dave.

Tim, right now we're not prepared to comment on 2019 quantitatively, other than to say that we feel like there's good momentum and that momentum is going to build in 2018. And that the math behind our consolidated growth is absolutely going the right way, to the point where, as we've talked about, we see a double-digit consolidated revenue growth quarter at some point in 2019.

Our next question comes from Will Power of Baird.

Just a couple of questions. Maybe, just starting on the UCaaS side, drilling down on the 16% services growth. I guess at least qualitatively -- maybe I missed this. But any further color you can provide in terms of what the SMB trends look like versus mid-market enterprise and maybe just any updates competitively within the larger companies are targeting?

So Will, hey, it's Alan again. So consistent with what we said last quarter, our focus is upmarket, mid-market and enterprise. That growth rate we expect for the year to be greater than 25%. And the micro segment, which we're over-indexed to because that's where we came from, is slower than the 16%. And the upmarket, mid-market and enterprise is higher than it than -- is higher. So our -- we're driving to the upmarket. All our programs are moving to the upmarket and we're just growing our way out of being over-indexed to the micro segment.

Okay. That make sense. And I guess as you target the enterprise segment in a bigger way, any update as to what you're seeing competitively? Is it pretty status quo with the last couple of quarters?

Kenny, why don't you take that.

Yes, it's a -- well it is. We continue to see in the enterprise space not only kind of the traditional providers that oftentimes we're replacing from an on-prem perspective but also, competition from our cloud communications peers in those same deals. I mean, the good news is we continue to see, in that enterprise space, adoption occurring and accelerating for moving away -- it is the cloud value prop, moving away from an on-prem system to unlock the value, the opportunities to integrate into things like back-office systems and utilize things like CPaaS as you move to the cloud.

Okay. And then I just want to ask a question on Nexmo. You called out the continuing success in Asia PAC. I guess, I wonder what you're seeing for Nexmo in the U.S. at this point. I mean, I think VAPI is still early, but I'd just be curious if there are any numbers you can provide as to either absolute revenue, revenue growth, both in terms of messaging and voice as we look at the U.S. market?

Yes, Will, it's Kenny, again. We don't share kind of segment -- sorry, geographic-specific growth rates or total revenue. But what I'll tell you is 2 things. One is, we're starting to see voice and VAPI adoption in the U.S. Alan mentioned a couple of key features that we launched earlier this year along with the program around them, things like split recording and call whisper. But we're starting to see pretty significant take rates for those in the U.S. Obviously, it's small, but growing very, very quickly. The second thing I'd tell you is, we continue to see traction in the U.S. broadly across the entire portfolio. Some pretty big wins this quarter around things like 2FA as well as things like SMS for, for instance, Shopify here, right in the U.S. where we are -- we're seeing customers like that adopt not only kind of the SMS platform, but also expected to continue to grow on the VAPI platform as well.

Our next question comes from Catharine Trebnick of Dougherty.

Alan, I just have a clarification. You had said contact center was up [60%] year-over-year. Just so I understand apples to apples, when you're talking about that piece of the business. Is that the Vonage skill-based routing that you introduced in the middle of March, March 12 around? Or is this your resell arrangement with the other call providers, contact center providers? Or is this part of the BroadSoft suite?

Hey, Catharine, it's both. It's both. So we have -- within Vonage Business Cloud, there is a contact center where there's routing capability within BroadSoft itself on the Vonage Enterprise Solution. And then the advanced contact center resell relationship is within contact. So when we talk a contact center, we talk about it in aggregate.

And then you had mentioned that you had a pretty robust product roadmap and team collaboration. Is that going to be an in-house development effort? Or are you going to team with one of the -- the SLAC or one of the other big providers?

Well, this is in-house development and this will be owner IP. But our view is that you need an integrated product that functions in an integrated way. So not separate apps, like some of our competitors have where the user has to switch out of the communication app over to, let's say WorkStream messaging or what have you. So we'll have our own integrated solution, but we'll also integrate with others out there because obviously if you -- whether it's SLAC, Stride, Teams, WebEx or what have you, there is a great deal of activity by many large companies in their own sort of collaboration solutions and workstream messaging solutions. So ours will have our own integrated and also be able to integrate into others.

(Operator Instructions) Our next question comes from Michael Rollins of Citi.

I was curious if you could talk a bit more across the different sizes of enterprise that you're going after. If you could discuss how you view the barriers to competitive entry? Are they rising? Are they falling? And maybe you could share some anecdotes of what you're seeing competitively?

Let me -- I'll start -- and I'll turn it over to Kenny. The way we think of enterprise, Mike -- this is Alan again, is the best enterprise app -- the best enterprise prospects for cloud are distributed companies. So think about those with literally thousands of locations and you can sort of think through retail, foodservice, restaurants, insurance, finance, et cetera. Those companies with literally hundreds and thousands of locations, that's where the cloud works perfectly, as opposed to 10,000 employees in a common location. In those situations, prem is going to stick around much longer in our view. So that's been the focus from the enterprise side. The barrier in enterprise is that this is a complete step function increase in the required level of service delivery, enterprise support, monitoring, analytics, security and so forth. These companies have very high expectations. And I would suggest that there's a -- relatively few number of companies that have organized and resourced around -- to serve the higher needs of the enterprise segment.

This is Kenny, good morning. The thing I'll add to that is Alan is spot on, obviously. The service delivery piece of this, particularly, in the enterprise space is the key barrier to entry. I'll give you an example. We're in the -- we announced last year the large real estate win for 2017 and we're in the middle of implementing that very, very complex kind of multi-thousand-site deployment. And it's very complex, as you can imagine. You're taking thousands of users and moving them from an on-prem system to the cloud, while also not -- providing 0 interruptions in how they serve their customers every single day. To do that on one site is relatively straightforward. To do that across thousands of sites simultaneously becomes very, very complex. The good news is we built tools, people and processes in order to go handle these large kinds of multi-geographical, multiregional site deployments that tend to be very complex.

Our next question comes from Mike Latimore of Northland Capital.

This is actually Vijay for Mike Latimore. One quick question is on the CPaaS revenue. How do you see the CPaaS revenue growing for the rest of the year?

Sure. It's growing at a similar pace that it is right now. And again, as I mentioned to Dmitry, that's embedded in the guidance.

Okay. And one more question about the churn level. Do you see the churn levels to be at this current level for the rest of the year? Or is it going to change? Is there any reason for that?

I think churn will be flat to down slightly as the year progresses. This is a new KPI and so it includes the CPaaS business, which was not in the calculation before. That can lead to -- and also having bigger accounts can lead to both more stability but can also lead to more volatility, particularly, on the -- with some of the CPaaS services where some companies come in and out, seasonally. So there is some volatility there, but I think flat to slightly down is what 2018 looks like.

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

Okay, Nicole, thanks very much, and thanks, everyone, for listening in this morning. We look forward to visiting folks throughout the quarter at various investor conferences, and those will be webcast for those that cannot attend.

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