Venture Global Inc (VG) 2019 Q4 法說會逐字稿

Good day, and welcome to the Vonage Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Hunter Blankenbaker. Please go ahead.

Great. Thank you, Sarah. Good morning, and welcome to our fourth quarter 2019 earnings conference call. Speaking on the call this morning is Alan Masarek, Chief Executive Officer; and Dave Pearson, CFO. Also joining us is Omar Javaid, President of the API Platform; and Rodolpho Cardenuto, President of the Applications Group. Alan will discuss our strategy, fourth quarter and full year results, and Dave will provide a more detailed view on the fourth quarter and full year results and our 2020 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 these 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 the 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 IR website. Additionally, during the prepared remarks today, all comparisons to prior periods are year-over-year, unless otherwise noted as sequential.

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

Thanks, Hunter. Good morning. In 2019, we took a number of decisive actions to enable long-term success. First, we completed the move to our own technology across our core UCaaS, CCaaS and CPaaS products. Second, we created highly focused go-to-market efforts. In API, we focused on driving accelerated revenue growth in high-value APIs like video, voice and messaging. In Applications, we focused on driving accelerated revenue growth among Mid-Market & Enterprise customers. Third, we revitalized the Vonage brand with a new unified global identity. And fourth, we invested significantly in product innovation and platform enhancement, including incorporating artificial intelligence throughout our products via the acquisition of Over.ai.

In the context of these decisive actions, full year 2019 results were solid. Business revenues increased to $804 million, reflecting 32% revenue growth. And full year business service revenue growth was 37%. Consolidated revenues were $1.19 billion and adjusted OIBDA was $158 million.

Our performance is driven by our unique strategy of owning the complete range of UCaaS, CCaaS and CPaaS solutions. This enables us to uniquely address the entire cloud communications TAM.

Customers use our solutions in many ways, ranging from programmable communication APIs, like video, voice and messaging, to SaaS offerings like Vonage Business Cloud and Contact Center. The cross-functionality of our products provides a superior user experience and best addresses our clients' digital transformation and customer experience needs. Moreover, we are increasingly developing these products from a single cloud-native technology stack that we recently rebranded as the Vonage Communications Platform.

Vonage's product strategy is being recognized by industry analysts. In 2019, we were named a leader in Gartner's Magic Quadrant for Contact Center as well as in IDC's Marketscape for Cloud Communications Platforms. Additionally, Frost & Sullivan recognized Vonage as a CPaaS Market Growth and Innovation Leader and as Asia Pacific CPaaS Provider of the Year.

With that as a backdrop, let's review fourth quarter highlights starting with API Platform. In the fourth quarter, API Platform delivered industry-leading organic revenue growth of 50%. This growth was driven by increased traction of high-value APIs, which grew at nearly double the overall rate and includes programmable APIs for video as well as voice and messaging.

Regarding video, I want to highlight its significance as a core element of our API go-to-market strategy. Where applicable, we lead with and most often win with video. For example, recent wins include Teladoc Health, the telehealth leader that uses our video API for over-the-web medical treatment, and Peloton Corporation, the leader in streaming exercise classes that uses our video APIs to stream those classes.

We also use video to sell in additional products. For example, the world's largest health care company began using our video API in early 2019 to enable HIPAA-compliant telehealth. More recently, the same client deployed video for behavioral health and video coaching, and at the same time, deployed our SMS and voice APIs to address other customer engagement needs.

Of course, where video is not applicable, we lead with our other APIs. I'll cite 3 examples. First, one the largest global food companies uses our conversation API, which enables customized real-time conversations to automate order fulfillment. Second, Freshworks, an innovative leader in business software, uses our messages API to enable customers to communicate over multiple channels, including SMS, MMS, WhatsApp and Facebook Messenger. And then third, Grant Thornton, the global accounting firm, uses multiple of Vonage's APIs to build superior customer engagement capabilities into their clients' applications.

Finally, we continue to improve our go-to-market capabilities, including building our partner and developer community. We ended the year with 360 API partners and 940,000 registered developers.

Now switching to Applications. Pro forma service revenue growth in the fourth quarter was 8%, matching our guided expectations. This growth rate reflects increasing Mid-Market & Enterprise success, offset by slower growth in the micro segment as we reallocate its associated marketing spend to Mid-Market & Enterprise. Revenues from Mid-Market & Enterprise customers, which we define as those with greater than $12,000 of ARR, annual recurring revenue, accelerated to 14% in the fourth quarter from 12% in the third quarter. Revenues from customers with greater than $120,000 of ARR, which we define as enterprise customers, accelerated to 21% in the fourth quarter from 17% in the third quarter.

Bookings from the combined Mid-Market & Enterprise cohort comprised 62% of total new logo bookings in the fourth quarter versus 37% in the year-ago quarter. This bookings trend is highly favorable for long-term growth. Yet, it creates near-term revenue drag as micro segment bookings, which convert to revenue almost immediately, are replaced with Mid-Market & Enterprise bookings that take longer to install.

As this Mid-Market & Enterprise shift continues, we expect improved service revenue growth in the second half of 2020. In fact, we expect Q4 2020 Mid-Market & Enterprise service revenue growth of at least 20%.

With that as a backdrop, let me highlight 4 key proof points of our Mid-Market & Enterprise progress. The first proof point is that we have stocked our sales teams with more enterprise sales executives focused on solution selling to Mid-Market & Enterprise customers. To this point, I am thrilled to welcome Rodolpho Cardenuto as President of Applications. Formerly the President of SAP Americas and President of SAP's Global Partner Operations unit, Rodolpho brings global enterprise sales leadership experience.

The second proof point of Mid-Market & Enterprise progress is our success with channel partners. In the fourth quarter, channel-sourced bookings grew nearly 100%, and the channel originated 60% of all North American field sales. Further, the majority of our enterprise growth came from the channel. In fact, in the fourth quarter, we signed 12 7-figure TCV, total contract value deals, including a 14,000-seat deal with University of Pennsylvania. The 12 deals in the fourth quarter are the most wins in this 7-figure TCV deal category during any quarter in 2019. And lastly, we extended our channel reach by expanding our key master agent relationships into the U.K. and Australia.

The third proof point of Mid-Market & Enterprise progress is the success of our go-to-market and product embed strategy with Salesforce.com. Our Salesforce integration was key to winning a 7-figure TCV deal with LendingPoint, a leading fintech company. The deal started with Contact Center, but UCaaS was added as LendingPoint realized the value of an integrated solution. We also won Empower Pharmacy, another enterprise deal based on the strength of our Salesforce integration. LendingPoint and Empower were both channel originated, highlighting that our Salesforce embed strategy is highly valued by channel partners.

And the fourth proof point of Mid-Market & Enterprise progress is the improvements we have made in our platform to best serve Mid-Market & Enterprise customers. One example is Vonage Meetings, our fully integrated video solution. Vonage Meetings is the exemplar of our platform strategy because it is built from the same video APIs we sell to developers and enterprises worldwide.

On the international front, we expect to add support in Ireland, Germany, France and the Netherlands in this first quarter, plus 5 more countries in the second quarter and many more in the second half.

In closing, during my remarks thus far this morning, I've cited a variety of organizational, product and go-to-market actions focused on improving performance and increasing shareholder value. I now want to announce 2 additional actions aimed at increasing shareholder value.

First, in light of the progress we have made transforming Vonage into a pure-play business SaaS company, including today's guidance that business segment revenues will comprise greater than 75% of 2020 consolidated revenues, the company is initiating a strategic review of its Consumer segment, including the feasibility of its divestiture, to further the company's goal of becoming a pure-play business SaaS company. The review will be led by the Board working with management and with the assistance of financial and legal advisers and will include an operational review with the assistance of consultants.

And second, the company planned several reporting and disclosure changes that will take effect with Q1 reporting. These changes, which Dave will explain, are designed to provide better transparency while making it easier to compare performance with our peers.

And with that, I'll turn the call to Dave.

Thanks, Alan, and good morning, everyone. I'm pleased to give a financial overview of the fourth quarter and full year 2019. All comparisons to prior periods are year-over-year, unless otherwise noted as sequential.

Let's begin on Slide 9. We exceeded our 4Q revenue guidance across the board and finished squarely in the adjusted OIBDA range. Starting with Vonage Business on Slide 10. Revenue in the fourth quarter was $218 million, representing 70% of consolidated revenue. This was a 28% GAAP increase.

For the full year, Vonage Business revenue was $804 million, a 32% GAAP increase. Business service revenue growth is our focus as we continue to deemphasize access circuits, sell fewer desk phones and pass through USF fees to the federal government.

Looking at service revenue growth on an adjusted basis. Normalizing for acquisitions and other onetime items, Vonage Business service revenues increased 24% for the fourth quarter and 22% for the full year 2019. On a constant currency basis, Business service revenues increased 26% for the fourth quarter. We have included tables on Slides 26 through 31 of today's presentation and in the press release that provide detail on the adjustments that form organic revenue and the disaggregation of Business revenue by product category.

API platform revenue, all of which is service, was $90 million in the fourth quarter, up 50%. For the full year, API revenue was $308 million, representing a 47% increase. Fourth quarter revenue from Applications was $128 million, of which $107 million was service, up 8% on an adjusted basis. For the full year, Applications revenue was $496 million, of which $412 million was service, up 10% on an adjusted basis.

Vonage Business segment revenue churn was 1.2%, as planned when we guided 4Q, up from 1.1%. And monthly revenue per customer was up 21% to $476, reflecting our successful move upmarket.

On Slide 12, business service margin ended the quarter at 53%, representing a 3% decrease year-over-year but a 1% increase sequentially.

Moving to Slide 13. Consumer revenue for the fourth quarter was $92 million, down 11%. For the full year, Consumer revenue was $385 million, down 13%.

On Slide 14, Consumer service margin for the fourth quarter was 90%, up 1% year-over-year and sequentially. On Slide 15, 4Q Consumer customer churn was 1.7% and ARPU was $27.57, both consistent with prior periods. We ended the year with nearly 1.1 million consumer subscriber lines, with tenured subscribers accounting for more than 90% of the space.

Turning to Slide 16. Consolidated revenue for the fourth quarter was $310 million and for the full year was $1.19 billion, both up 13%.

Now moving to income statement cost items. Sales and marketing expense for the fourth quarter was seasonally high at $89 million, up $7 million from the prior year, mostly due to NewVoiceMedia expenses, including a significant presence at Dreamforce as well as Vonage Campus, our inaugural user conference at which we relaunched the Vonage brand.

For the full year, consolidated sales and marketing was $363 million, up $52 million from the prior year, with much of that increase driven by the acquisitions of TokBox and NewVoiceMedia.

On Slide 17, engineering and development expense for Q4 was $19 million, up $2 million for the quarter and $17 million for the year. E&D expense plus capitalized software for the year was $98 million, representing 14% of business service revenue. We also consider recent acquisitions, including Over.ai, NewVoiceMedia and TokBox as additional forms of development investment.

General and administrative expense increased $1 million for the fourth quarter and $17 million for the full year. These increases primarily reflect the impact of the acquired businesses.

Moving to Slide 18. Fourth quarter adjusted OIBDA was $44 million, up $3 million. Full year adjusted OIBDA was $158 million, down $20 million. This decline is primarily due to the shifting segment revenue mix combined with the impact of acquisitions, being partially offset by higher business gross profit dollars.

Adjusted net income in 4Q was $15 million or $0.06 per share, up $4 million. Full year adjusted net income was $46 million or $0.19 per share, down consistent with OIBDA. OIBDA minus CapEx was $32 million in the fourth quarter and $109 million for the year. Free cash flow, which includes items such as working capital and post-M&A integration, was $20 million in the quarter and $44 million in the year.

From a leverage perspective, we exited the year with approximately 3.4x net debt to last 12 months adjusted OIBDA. Recall that in June, we issued $345 million in convertible notes, which lowered and fixed interest expense, extended maturities and expanded overall access to capital. The net proceeds from this transaction, which also included a $10 million share buyback, went to pay down existing bank debt. The result was that we repurchased almost 1 million shares and achieved an effective conversion price of $23.46 per share. Our next debt maturity is more than 3 years away, and the convert doesn't mature until the year after that.

Before I walk through 2020 guidance, I wanted to describe the reporting changes we are implementing in the first quarter, reflecting our transition to a business SaaS company and moving us further away from legacy telco terminology and practices. These changes will make it easier to compare Vonage to competitors and track our progress. They include: first, changing adjusted OIBDA to adjusted EBITDA. These are essentially the same number. Second, moving customer subscription references from monthly recurring revenue or MRR to annual recurring revenue or ARR. Third, providing more comparable customer retention metrics. Fourth, offering bookings mix information on the success of our Mid-Market & Enterprise focused in applications. And lastly, reviewing our revenue reporting structure as it relates to the USF fees we collect on behalf of the FCC. USF revenues are pure pass-through that generate no gross margin.

In 2019 and prior, we reflected these USF fees in our gross revenues. For 2020, we are evaluating new revenue reporting treatment that highlights operating revenue. As such, we are excluding USF revenue from 2020 revenue guidance, the result of which will be lower reported revenue but higher gross margin.

Moving on to guidance on Slide 21. This guidance assumes constant currency and excludes USF. To help you tie your models, on Slide 25 we have included our estimate of what USF would have been in 2020 under the fourth quarter 2019 approach as well as a reconciliation to 2019 revenues without USF.

Starting with Business segment guidance for 2020, we expect revenues in the range of $875 million to $895 million. As we continue to include USF and Business segment revenue guidance, we estimate that gross revenues would have been approximately $46 million higher on a comparable basis to 2019.

I would like to highlight 2 further items regarding the Business revenue trajectory: One, within our guidance range, Business service revenue, which is our focus, is expected to grow 16% to 18% on an adjusted basis; and two, product and access revenue, which is negative gross margin, will be down by approximately $10 million from 2019 as we continue to deemphasize access circuits and desk phones.

Moving to the Consumer segment. We expect 2020 revenue in the $290 million area, excluding USF. If we continued to include USF, we estimate that gross revenues would have been $37 million higher on a comparable basis to 2019.

For consolidated revenue, which is simply the sum of the Business and Consumer segments, we expect revenue in the range of $1.165 billion to $1.185 billion, again, excluding USF. We expect full year 2020 adjusted EBITDA of at least $155 million and CapEx in the $60 million area.

With regard to the first quarter, excluding USF, we expect Business segment revenues in the $200 million area, which we estimate would have been $11 million higher under the 2019 USF approach; consumer revenues in the $77 million area, which we estimate would have also been $11 million higher under the 2019 USF approach; consolidated revenues in the $277 million area and adjusted EBITDA in the $32 million area as we reset annual employee benefits and fully relaunch the Vonage brand. In terms of cash flow progression, and consistent with history, we expect that adjusted EBITDA will build throughout the year.

The growth investments we made in 2019 have positioned Vonage well for the future, both strategically and financially. For 2020, as Alan highlighted in his remarks, our team and Board, with the assistance of our bankers and legal advisers, will be performing a strategic review of the Consumer segment. While we regularly review our portfolio now that the company has been transformed into a business SaaS leader, this is the right time to undertake this special project.

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

Okay. Great. Thank you, Dave. Sarah, let's go ahead and queue up the first question, please.

(Operator Instructions) Our first question comes from Rich Valera with Needham & Company.

I was wondering if you could talk about what the bookings growth was in that above $12,000 per year ARR cohort and how that changed from 3Q to 4Q.

Rich, it's Alan. Let me ask Rodolpho to take that question. Remember -- as you may recall, at your conference, we talked about that total bookings were flat Q2 to Q3, up in Q4, but more importantly was the composition change.

So let me turn that -- composition being much more high -- or much more upmarket than them. Rodolpho?

Sure. Thank you, Alan. Richard, thanks for the question. Just to illustrate, I think what Alan mentioned during his remarks was that we are moving toward Mid-Market & Enterprise. And the Mid-Market & Enterprise, we have the ARR over $12,000 and AR (sic) [ARR] over $120,000 for each one of those segments. The bookings for those segments were -- they moved it from 12% to 14%, and they moved from 17% to 21%. So a very high-growth for the Enterprise segment, which is defined as $120,000 ARR.

Got it. And then Alan, you mentioned the significant headwind you're seeing in the micro SMB segment as you reallocate marketing dollars to kind of the MME business. I'm just wondering why not maintain some of that marketing spend and not create the kind of significant revenue headwind that you're getting from that segment and maybe just sort of bump up overall marketing spend? I'm sure you've considered that, but I just wanted to get your thoughts on that.

Rich, it's simply a capital allocation decision. The relationship of CAC to LTV in micro is just substantially inferior to what it is in the Mid-Market & Enterprise segments. And so where in the past, for several years, we invested most of our marketing dollars and go-to-market efforts in that micro segment. But that segment has slowed, it's become increasingly commoditized and price sensitive. It just made no sense to sort of over-allocate our marketing dollars down there when we now have what we believe to be excellent product market fit upmarket, where we get a much better return on those allocated dollars.

Our next question comes from George Sutton with Craig-Hallum.

I am a fan of your contemplation of the strategic alternatives for the consumer business. I'm just curious why now. And I'm curious if there were other contemplations relative to strategic opportunities.

I think why now is really about the maturation or the transformation of the Business, business. And as we talked about -- we've always talked about where we're going is to be a pure-play SaaS leader. Now that can happen in a number of different ways. It could happen with the consumer business continuing to decline and eventually becoming almost irrelevant in our financials. Or it could happen via a transaction, which is what this review will actually cover. It will consider all of the operational, financial and strategic considerations and come out with a -- in consultation with advisers and led by the Board with what we believe will be the right answer.

As it relates to a strategic transaction, it could take a number of different forms, and we don't want to prejudge it. But we're open to any structure that enhances shareholder value. That could include a sale of the business. It could include the sale of a stake, minority or majority, in the business and/or any other structure that we think enhances shareholder value but also highlights the Business, business that we have and the strength of that business.

George, it's Alan. The last other comment is now that consumer is less than 1/4 of the revenues and -- I tend to look at this as this is an opportunity to sort of create what I would refer to as the capstone of the transformation that we set out on over 5 years ago. And again, we only do this or contemplate it now because we think Business is maturing rapidly enough to be its own public company ultimately. So this is a bullish sign for what we see and what's happening in the Business segment.

Great. Just a quick follow-up on guidance. My sense is, looking over the last several quarters, guidance has previously been, if I were to use an adjective, hopeful or possible. I'm curious as you're thinking through your 2020 guidance, are there adjectives that would be more appropriate like conservative or rational. Just curious.

Well, I think you saw in the fourth quarter, we exceeded revenue guidance and squarely hit our EBITDA guidance. Our plan is to continue to guide in a way that reflects the business and reflects some of the risks that we see out in the market, whether it be in the world, in the global environment or in the competitive environment. So I think we -- and we felt good about the 4Q guidance when we gave it, and we feel good about the guidance.

Our next question comes from Samad Samana with Jefferies.

So maybe first, just a follow-up on the strategic review. Any idea on what the time line of that looks like? And then you guys also mentioned that there will be a full operational review as well. And so I'm wondering with all of the changes in 2019, what you view as may -- are residual operational changes that may still need to be made? And then I have a follow-up.

Yes. So just to be clear, the review is about consumer. So the operational aspect has to do with our combined network, our combined brand and other things like that, that inure to the company that in a scenario where the company has separated, you have to think through those items.

As it relates to the time line, we're not going to prejudge it. I think what we can say though is that this is a very high priority for the Board and for management. And we've got a good team on board to help us, and we're going to initiate this project immediately and keep people posted as we have earnings calls.

Great. And then on the guidance, I know that you guys gave a total business revenues outlook and business services. But if I think back to maybe where some of the noise has been, it's been application growth versus API business growth. And maybe could we get a sense at least directionally of how we should think about the adjusted growth rate for application services and API business services in 2020?

Yes. So for the year, the apps -- and again, we think about service revenue growth because we're -- as I mentioned in my -- not only qualitatively but also quantitatively, we're deemphasizing product and access pretty aggressively, and that's a negative gross margin.

For the year, our guidance implies apps growth still in the single digits. And we talked about -- at a conference about a month ago, that the first half of 2020 would look a lot like the second half of 2019. And then in the second half of 2020, we would start to see some growth in the Applications' service revenue rate. And that's still the way we look at it.

A finer point on that. We believe that the first quarter really is the maximum growth trough of the apps business, and again, will be in that single-digit context.

As it relates to API, our guidance implies an API growth rate in the low 30% area for the year 2020. We just did a 50%. Clearly, there's some seasonality in the fourth quarter. We're also taking into account what we see as -- and we're not prognosticators about the economy, but what we see right now in the global environment.

Great. And then Alan, one for you. As I think about the rebrand and some of the large deal activity that you mentioned in 4Q and the bookings momentum, how should we think about -- are you getting more -- are you getting at a higher level inside of organizations when you're selling? Are you being viewed more strategically? And then I guess -- this is all one question, I promise. But are you seeing that resonate with larger customers? And that's it for me.

Samad, the simple answer is yes, kind of across the board on the upmarket traction, which means we're seeing -- we've got the right product. The brand is resonating. The upmarket channels, whether it's our North American field channel organization, international field organizations, they're creating the right relationships with upmarket customers. And then the beauty of the platform story is that those larger customers need an integrated solution. And so we are often seeing bundled sales, not just Contact Center and UCaaS but increasingly also API being brought into those larger customers.

So this -- it's sort of coming as a wave across all of the elements. And again, now we're having to sort of -- as this is happening, we're obviously dealing with the headwind as we sort of the question answered for Rich relative to the micro side purposely slowing down as we reallocate marketing spend away from it.

But when you look at what's happening and sort of look at sort of the stat that I quoted in my prepared remarks, the business is quite healthy. You just got to get through these near-term headwinds, and you'll see that growth coming out the other side. I often describe it as this U shape. And as Dave just said, this U shape is really going to begin to manifest itself in the second half of 2020.

Our next question comes from Sterling Auty with JPMorgan.

In terms of the potential for a divestiture of the consumer business, can you just, from a high level, give us a sense of the infrastructure overlap between Consumer and the business side of the revenue? In other words, what gives you the thought or ability to split the businesses at this point? Would it be some sort of sale and leasing capacity to the network or something else? I know you haven't even begun the review, but you -- obviously, there had to be some thought to begin the process. So just kind of curious, that thought process.

Sure. So if you think about 2 layers. One would be call processing and the other would be network. Today, the billing systems, the BSS and OSS that runs Consumer is separate from the BSS and OSS that runs Business. So that is relatively straightforward. Where they're highly intermixed is in the network, where we have a very scaled termination network. And that, I think, is where the focus of this review needs to be in terms of separation.

I think, absolutely, there's a scenario where -- or we would explore scenarios where there continues to be sharing or maintaining that scale because a lot of the scale does come in terms of minute termination from consumer, although that -- we've been scaling API and applications very quickly. And you have to recall that API is a very high-volume business in and of itself.

So it really is about that network. And I think we've seen -- out in the market, we've seen examples of where there can be effective network sharing and maintenance of that -- the benefits of that scale.

Great. And then on the channel commentary, a lot of positive comments around the momentum in the channel this quarter. If I rewind to the third quarter, there was talk of what has happened on elongated implementations, et cetera. Curious what changed. Did you change something in terms of implementation, seeing better implementation success? Did you change SPIFFs? What are the things that really motivated the momentum in the channel this quarter?

Well, I'll just start and then Rodolpho come over at the top. I think there's sort of 2 different comments or 2 different answers. The performance in the channel is driven -- the bookings performance, nearly 100% growth in bookings performance in the channel representing 60% of all of North American field activity. That's a function of -- for the core blocking and tackling with the channel in terms of having a better product, and I spoke very specifically about our Salesforce embed strategy and how that's resonated with the channel, creating awareness about our products within the channel just blocking and tackling, marketing and relationship-building with our channel partners. That sort of work across the board, that's a very organic effort.

That has nothing to do with the elongated book-to-bill. That continues. As I said in my prepared remarks, the better we do upmarket, so we said 62% of bookings in the fourth quarter were Mid-Market & Enterprise versus 37% in the year-ago quarter, fabulous for the business. But those upmarket bookings take longer to install than the micro bookings that they replaced, which turned into revenue almost immediately. And so the performance in the channel and the elongated book-to-bill are sort of different issues.

Our next question comes from Mike Latimore with Northland Capital Markets.

Great. On the API CPaaS business, for the deals in the quarter, how many of those deals are kind of greenfield opportunities versus replacing somebody?

Omar, why don't you take that on API?

So we -- for the year, I would say, just given the growth that we've seen that Dave referred to in the opening remarks on the financials, we've focused a lot on our high-value products. So I would say the -- particularly with high-value products, we are seeing more new customers. So we have a significant base, right? As Dave mentioned, the business as well as -- his product line is the largest product line in the company. We see a lot of new customers particularly with the high value such as video. And we think that, that mix, in other words, skewing towards newer customers will continue into 2020.

We do have a large existing base of customers. And Alan mentioned the dynamic of -- with some of the case studies, some of the great logo wins that we had, where we started with one API and brought in a number of others, right, through cross-selling. So there's also that dynamic as well, but what we see with -- particularly of high value is new customer acquisition.

And then on the EBITDA forecast for the year, $155 million plus, how much of that comes from the Consumer business?

Yes. So it's below the gross margin for a functional organization right now. So the gross margin is the best guide. And that's what the strategic review is all about, which is trying to perfect what this might look like if it were actually 2 full segments.

What I can say is that you can do some very simple math on the gross margin. In 2020, we will lose about roughly -- these are very rough numbers just to make the math easy, about $40 million of consumer gross margin in 2020. We will gain about $70 million of business gross margin and we'll have $10 million of consumer variable cost go away. So that creates about $40 million extra gross profit dollars to go around in 2020.

We're redeploying that $40 million because we're keeping EBITDA relatively flat into marketing, a little bit less than half of that is going into marketing. And roughly half of that is going into engineering and development, which is an investment in our combined platform.

Our next question comes from Meta Marshall with Morgan Stanley.

Great. Maybe first question for me. Just any estimate of the headwind from kind of the transition off of some of the Broad -- or moving those customers off of BroadSoft-based products? And just how much longer that could potentially be a headwind?

I'll take that. So the headwind on BroadSoft is not significant. There are about 3,000 of our 105,000 Applications customers on BroadSoft and they skew larger. And they're being migrated, starting with the small -- over to Vonage Business Cloud, starting with the smaller and then moving up to the larger.

And so some of those migrations can create a small amount of elevated churn. And in other instances, as we exit access, as Dave spoke about, there may be a customer that has a lot of access that we're no longer interested in but also had a portion of UCaaS, BroadSoft UCaaS and that we might lose that customer based upon the decision to exit the access. But all in all, it's not a significant headwind. A much more significant headwind is simply the difference in book-to-bill timing between Mid-Market & Enterprise focus versus micro.

Got it. And then maybe just a second question for me. On the Applications segment, any difference in trends between kind of what would be the legacy NewVoiceMedia or the Contact Center business and the UC business?

Well, the trends are -- the Contact Center is a key element of our go-to-market because we find that -- particularly among larger deals, that we just have a demonstrably better solution in a Salesforce environment, particularly in many of the CRM environments but particularly with Salesforce because what we find is we lead with Contact Center in those situations, and it pulls UC with.

So we think the performance of NewVoiceMedia since we bought it has been very strong for us because again it just -- it gives us a differentiated halo by which to sell both Contact Center and UC.

Our next question comes from Catharine Trebnick with Dougherty.

So netting this out, it seems that you are maybe believing that the -- with the consumer divestiture that the Business segment would be breakeven or close to breakeven?

I think that's what the review is for, is primarily about how you would separate the businesses and whether it makes operational sense to separate the businesses. Clearly, there's a view that once this is over that Business -- the Business segment could be a compelling public company, but that's what the review is for.

Okay. And then the second question has to do with international. You hired another executive to help you in Europe. Can you give us an idea of any new programs you put in place to drive EMEA sales and Asia Pac and pretty much what the plans are going forward to lift revenue from those 2 regions?

Let me ask Rodolpho to take that.

Yes. Thank you, Catharine. I think that's one important initiative for us is to expand our international footprint. What -- we already have a very good international footprint with CCaaS with a NewVoiceMedia platform and our portfolio. We are expanding that or adding to that the new CaaS portfolio. This first quarter, we are going to add a handful of new countries. And by the end of this year, we are going to add 15 new countries where you can support multinational companies from the U.S. and international countries in Europe and APAC and also support locally those companies in local markets as U.K. or France or Germany. We have the list of 15 countries that we are going to add. That's an important initiative for us.

Yes. Let me qualify, Catharine, just real fast. I've spoken often about the 20 in '20 program, 20 additional countries in 2020. What we're doing is we're actually cutting that back to 15. And the reason is because we want to not just serve U.S.-based multinationals in those 15 overseas locations, but we also want to have in-country local support in those same 15. And that's the expectation by the end of the year.

Our next question comes from Alex Kurtz with KeyBanc Capital Markets.

And I would also say this is, I think, a very interesting opportunity here to separate the businesses. So kind of also would underscore that comment earlier in the Q&A.

Just going back to the Consumer business. I think historically you've talked about the Consumer business driving a significant amount of free cash flow into the model. I'm sure this is part of the strategic review, but how would you think about the profitability and the EBITDA structure of the business services as a stand-alone entity, given what you've outlined to investors in the past about the free cash flow generating from consumer? I just imagine you wouldn't have outlined this today if you guys hadn't already thought about that a bit. So any context there would be helpful.

Yes. So first of all, we have a hypothesis that this could be compelling to create shareholder value and that there could be a market for the Consumer business. And as I said, that the Business, business could be a compelling public company and so -- sometime in the future. But again, that's what the review is for.

Typically, we used to update an allocated estimate of equity free cash flow from Consumer each year. We did not do it this year because we did not want to color the review or color the valuation of the Consumer business should we decide to proceed with a separation.

All of that being said, Consumer business continues to exceed our expectations. We continue to see very high gross margins, maintain very strong scale. Churn and ARPU are very stable. Tenured customers are now -- 5-year tenured customers now represent roughly 90% of the base...

For 5, it's 72%.

Sorry, 5-year customers represent 72% of the base, 2-year customers over 90%. And we've been able to take selective pricing actions that have not spiked churn materially but have led to the maintenance, or even in some cases, increases relative to what we thought in gross profit. So all of that is true. But the answer to that question will be in the review.

Okay. We're going to sneak in one last question. With the rebranding and replatforming of the UCaaS product this fall, I'm just wondering about whether or not there was a kind of a temporary slowdown in just pipeline development and how that may have impacted Q4 to Q1 activity, if at all.

It's Alan. Simple answer is it did not because the rebrand was released the end of October. Again, we stayed with Vonage as the brand. What we did is we relaunched it with new graphical presentation and iconography and the like, and we announced that we are sunsetting the acquired legacy brands.

But we've been full speed ahead on all activities around driving Mid-Market & Enterprise success and applications as I described in my remarks. So the brand activity and the replatforming -- brand activity is irrelevant. And the replatforming, if you're referring to moving away from the third-party product like BroadSoft and inContact, we did that effective the beginning of the second quarter last year. And so in effect, that's really all out of the -- out of our pipelines today. And we've been marching forward for now close to a year with our own product.

Our next question comes from Tim Horan with Oppenheimer.

I'll keep it to one but maybe a longer one. Alan, can you talk about maybe just a channel flow share, where you're at now and kind of where you can get to? And how scalable is it? It seems like we're just at the cusp of enterprises really moving to cloud-based communications. Broadly speaking, you have a small amount of flow share. And now your product is pretty close to equally as good as everyone else. I mean why can't you substantially capture a lot more flow share in the market? And one of your peers is talking about servicing the VARs a lot more, where the VARs would keep basically control of the customer and it would be their customers. Are you doing something similar?

This is Rodolpho. I'm taking that from Alan to talk a little bit about the channel. First, as we noted during the previous remarks, channel was growing and doubling the business with us. We had 99%, so very close to triple-digit growth from one year to the other in terms of a channel participation with our new bookings.

Let me just give some color about the channel because we recently -- 2 weeks ago, we had our channel -- or a panel adviser council together. It's a little bit over a dozen of our top channels together, where we validated a product strategy. We validated a strategy as a whole, the go-to-market and the brand with them. And what we wanted to validate is exactly the scalability and the full share with the channels.

In terms of the product, where we share that we are expanding the features' functionality and also the footprint, as I mentioned before, the footprint for the international -- for the strategy, the expansion of the TAM. Because one thing that is important, moving from micro to Mid-Market & Enterprise, as we noticed before, we are expanding the TAM. We are multiplying the TAM by fewer multiples there, which is important for the channel. And also, we validated the go-to market, the inside sales, the direct and the channel-first type of approach that we have this year. Of course, we are implementing a lot of things with them to make sure that we have this channel-first approach.

And we also validated the brand, the One Vonage, the Vonage for Business Enterprise approach with the channel. So -- and we got a very good A-plus grade from them.

I would just mention, Tim, as well -- it's Alan. So on the -- we've expanded also beyond sort of the traditional master agents into VARs, distis, the regional and global SIs in addition to all the work that we have done with what we refer to as our alliances team, which works very closely with Salesforce, where we actually have employees embedded in the major Salesforce cities throughout the world. And then we invest heavily in city and world tours and Dreamforce itself and the like. So I feel like the whole sort of scope of indirect distribution is ramping very attractively. We should see -- continue to see more and more flow share of product.

Our next question comes from James Breen with William Blair.

Can you just talk about the mix amongst your customers and how that's changed over the course of the last year or so in terms of the products they're taking? And potentially how some of the CPaaS products are working in with some of the UCaaS on the sales side?

Yes. Let me bring this together. We've already spoken about -- the way we -- the way to think about mix is by customer cohort and by product. From a customer cohort perspective, we already said 62% of the bookings in Applications were Mid-Market & Enterprise in Q4 versus 37% in the year-ago quarter. That is a very dramatic shift which actually will continue to increase, where that relationship of Mid-Market & Enterprise are going to get larger and micro, smaller. And that will happen through the year.

Then in addition to the cohort mix, you see the product mix changing because those upmarket customers, the Mid-Market & Enterprise, are increasingly taking a bundled solution of both UCaaS and CCaaS. Then when you get to -- so that's sort of the cohort plus the product side and the application.

Then you see situations on the CPaaS side, particularly where you have a Contact Center sale. CPaaS tends to be sort of the opposite side of the same coin. The natural partner with Contact Center is CPaaS because CPaaS is often focused on solutions dealing with customer engagement, either outbound to a prospect or inbound from a customer, and that's the perfect match with Contact Center. And you're just seeing it more and more. And that's why I spoke about the need for bringing Rodolpho in, one who has great experience in leading enterprise-focused sales organizations, and how we have restocked our sales teams over the course of last year that have more of a solution selling approach.

Our next question comes from Nandan Amladi with Guggenheim Partners.

As you're selling up into the mid-market and large enterprise and you're selling more subscriptions, more business-oriented revenue streams, how much of that is going to turn into deferred revenue benefit that ultimately helps your cash flow?

Yes. So we've been seeing that the trend is this elongation. We talked about it last quarter, and we're continuing to see that. And of course, eventually, we're going to be on a kind of an escalator of projects maturing and actually going into revenue and other projects being added. But as a general rule, as the projects get bigger and bigger or the customers get bigger and bigger in Contact Center, that will lead to more deferred revenue and that elongation will continue.

Nandan, I think you're asking also just from a cash flow perspective. So the Contact Center base traditionally functions like enterprise -- like noncommunication-oriented enterprise SaaS in the sense that it's billed upfront for the full year. While the UCaaS side, which is a traditional more communications orientation, which tends to bill monthly, as you see more combined UCaaS and CCaaS deals and larger deals, I think the trend will be more going towards an enterprise SaaS billing construct, which is 1 year in advance.

(Operator Instructions) Our next question will come from Will Power with Baird.

I guess I'd echo some of the previous comments: good luck on the consumer strategic process. I wondered if we could get a little bit more color on the application services segment. I'd love to -- as you look at the kind of organic growth, I think, of 8% or so this past quarter, is there a way to kind of help us break apart what UCaaS looks like versus NewVoiceMedia and Contact Center within those growth rates?

And then as you talk about the record number of 7-figure deals, did you say how many actually included both and how many of those were cross-selling those 2 pieces?

I didn't -- so Will, let me take that. I didn't -- we can get back to you in sort of the breakout on what was bundled among the large TCV deals and then enterprise deals in general that were not -- did not hit the 7-figure level.

Breaking out UC and CC is just not a -- it's not a productive exercise any longer. When we bought NewVoiceMedia, we reorganized the company to create what we now refer to as the Applications Group. We could have run it as a UCaaS vertical and a CCaaS vertical in addition obviously to what we do on the API platform side. But it made no sense because increasingly, these products are being bought together and bundled. Matter of fact, we talk often about our long-term product strategy we refer to as a single pane of glass, where you'll simply have our cloud communications platform and you'll either elect and pay for what we would traditionally refer to as UCaaS functionality and/or elect and pay for CCaaS functionality. But it will be a common stack. And so it really is not relevant to break it out. We don't run the company that way.

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

Great. Thanks, Sarah. That does wrap up the Q&A portion of the call. We look forward to seeing many of you during the coming months at various investor conferences. For those unable to attend in person, these events will be webcast and you can follow our comments on the Vonage Investor Relations website. Please contact us if you need any additional details, and thank you again for joining.

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