Company Quick10K Filing
Vonage Holdings
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 250 $2,797
10-K 2020-02-21 Annual: 2019-12-31
10-Q 2019-11-06 Quarter: 2019-09-30
10-Q 2019-08-06 Quarter: 2019-06-30
10-Q 2019-05-08 Quarter: 2019-03-31
10-K 2019-02-27 Annual: 2018-12-31
10-Q 2018-11-02 Quarter: 2018-09-30
10-Q 2018-08-01 Quarter: 2018-06-30
10-Q 2018-05-08 Quarter: 2018-03-31
10-K 2018-02-27 Annual: 2017-12-31
10-Q 2017-11-07 Quarter: 2017-09-30
10-Q 2017-08-03 Quarter: 2017-06-30
10-Q 2017-05-09 Quarter: 2017-03-31
10-K 2017-02-28 Annual: 2016-12-31
10-Q 2016-10-27 Quarter: 2016-09-30
10-Q 2016-08-04 Quarter: 2016-06-30
10-Q 2016-05-06 Quarter: 2016-03-31
10-K 2016-02-12 Annual: 2015-12-31
10-Q 2015-11-04 Quarter: 2015-09-30
10-Q 2015-07-30 Quarter: 2015-06-30
10-Q 2015-05-07 Quarter: 2015-03-31
10-K 2015-02-13 Annual: 2014-12-31
10-Q 2014-11-05 Quarter: 2014-09-30
10-Q 2014-07-31 Quarter: 2014-06-30
10-Q 2014-05-01 Quarter: 2014-03-31
10-K 2014-02-13 Annual: 2013-12-31
10-Q 2013-11-06 Quarter: 2013-09-30
10-Q 2013-07-31 Quarter: 2013-06-30
10-Q 2013-05-01 Quarter: 2013-03-31
10-K 2013-02-13 Annual: 2012-12-31
10-Q 2012-11-01 Quarter: 2012-09-30
10-Q 2012-08-01 Quarter: 2012-06-30
10-Q 2012-05-03 Quarter: 2012-03-31
10-K 2012-02-16 Annual: 2011-12-31
10-Q 2011-11-04 Quarter: 2011-09-30
10-Q 2011-08-04 Quarter: 2011-06-30
10-Q 2011-05-05 Quarter: 2011-03-31
10-K 2011-02-17 Annual: 2010-12-31
10-Q 2010-11-04 Quarter: 2010-09-30
10-Q 2010-08-05 Quarter: 2010-06-30
10-Q 2010-05-07 Quarter: 2010-03-31
10-K 2010-02-26 Annual: 2009-12-31
8-K 2020-02-18 Earnings, Exhibits
8-K 2020-01-07 Officers, Regulation FD, Exhibits
8-K 2019-12-19 Regulation FD, Exhibits
8-K 2019-11-11 Regulation FD, Exhibits
8-K 2019-11-06 Earnings, Exhibits
8-K 2019-09-24 Officers
8-K 2019-08-26 Officers
8-K 2019-08-23 Other Events
8-K 2019-08-06 Earnings, Regulation FD, Exhibits
8-K 2019-06-11 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-06-06 Shareholder Vote
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-04-06 Officers, Regulation FD, Exhibits
8-K 2019-03-15 Enter Agreement, Officers, Regulation FD, Exhibits
8-K 2019-03-15 Officers
8-K 2019-03-11 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-02-21 Earnings, Exhibits
8-K 2018-11-02 Earnings, Exhibits
8-K 2018-10-31 M&A, Exhibits
8-K 2018-09-20 Enter Agreement, Exhibits
8-K 2018-09-20 Regulation FD, Exhibits
8-K 2018-08-01 Earnings, Regulation FD, Exhibits
8-K 2018-07-31 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-13 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-05-28 Other Events
8-K 2018-05-14 Officers
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-03-19 Officers
8-K 2018-02-21 Earnings, Exhibits
VG 2019-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Delinquent Section 16(A) Reports
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Note 1. Nature of Business
Note 2. Summary of Significant Accounting Policies
Note 3. Revenue Recognition
Note 4. Acquisitions and Dispositions
Note 5. Earnings per Share
Note 6. Goodwill and Intangible Assets
Note 7. Income Taxes
Note 8. Long-Term Debt
Note 9. Fair Value of Financial Instruments
Note 10. Common Stock
Note 11. Employee Stock Benefit Plans
Note 12. Leases
Note 13. Property and Equipment
Note 14. Accrued Liabilities
Note 15. Commitments and Contingencies
Note 16. Industry Segment and Geographic Information
Note 17. Cash Flow Information
Note 18. Quarterly Financial Information (Unaudited)
EX-4.5 a10-k2019exhibit45.htm
EX-21.1 a10-k2019exhibit211.htm
EX-23.1 a10-k2019exhibit231.htm
EX-31.1 a10-k2019exhibit311.htm
EX-31.2 a10-k2019exhibit312.htm
EX-32.1 a10-k2019exhibit321.htm

Vonage Holdings Earnings 2019-12-31

VG 10K Annual Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
ENS 2,906 3,182 1,886 2,917 729 163 289 3,622 25% 12.5 5%
I 2,898 12,242 16,339 2,203 0 -3,651 -3,651 16,708 0% -4.6 -30%
IRDM 2,802 3,917 2,344 546 0 -57 349 2,432 0% 7.0 -1%
VG 2,797 1,355 797 1,112 655 7 84 3,047 59% 36.1 0%
CCOI 2,751 949 1,126 531 312 16 166 2,342 59% 14.1 2%
CTV 2,562 3,909 2,238 1,660 501 95 219 3,236 30% 14.8 2%
BDC 2,361 3,823 2,395 2,536 986 197 401 3,524 39% 8.8 5%
AXE 2,341 4,911 3,213 8,669 1,723 192 403 3,659 20% 9.1 4%
WCC 2,213 5,068 2,933 8,190 1,579 231 428 3,526 19% 8.2 5%
ESE 2,087 1,326 514 807 301 85 151 2,266 37% 15.0 6%

Document
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION • WASHINGTON, D.C. 20549
   
FORM 10-K
     
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
 
or                        
 
Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
 
For the fiscal year ended
12/31/2019
 
 
 
 
 
For the transition period from             to             
 
 Commission file number 001-32887
VONAGE HOLDINGS CORP.
  
(Exact name of registrant as specified in its charter)
 
Delaware
 
11-3547680
(State or other jurisdiction of
incorporation or organization)
 
 
 
 
(I.R.S. Employer Identification No.)
23 Main Street
Holmdel
,
New Jersey
,
07733
(Address of principal executive offices)
 
 
 
 
(Zip Code)

Registrant’s telephone number, including area code: (732528-2600
 
 
 
 Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, Par Value $0.001 Per Share
 
VG
 
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
 
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   No  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes    No  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer                 Accelerated filer               Non-accelerated filer              Smaller reporting company              Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.)   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    No  
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2019 was $2,588,190,451 based on the closing price of $11.33 per share.
The number of shares outstanding of the registrant’s common stock as of January 31, 2020 was 242,918,708.
Documents Incorporated By Reference
Selected portions of the Vonage Holdings Corp. definitive Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2019, are incorporated by reference in Part III of this Form 10-K.



VONAGE HOLDINGS CORP.
FORM 10-K
FOR THE FISCAL YEAR ENDED December 31, 2019
 
TABLE OF CONTENTS
 
 
 
Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
 
 
 

FORWARD-LOOKING STATEMENTS

VONAGE ANNUAL REPORT 2019


FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements and other information which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995, or the Litigation Reform Act. These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.
The words "plan," “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events, are subject to certain risks, uncertainties, and assumptions, and are not a guarantee of future performance. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in such forward-looking statements or information. In light of the significant uncertainties in these forward-looking statements, you should not place undue reliance on these forward-looking statements. The forward-looking statements and information contained in this Annual Report on Form 10-K relate to events and state our beliefs and the assumptions made by us only as to the date of this Annual Report on Form 10-K. We do not intend to update these forward-looking statements, except as required by law.
In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. Important factors that could cause such differences include, but are not limited to: the competition we face; the expansion of competition in the cloud communications market; risks related to the acquisition or integration of businesses we have acquired; our ability to adapt to rapid changes in the cloud communications market; the nascent state of the cloud communications for business market; our ability to retain customers and attract new customers cost-effectively; developing and maintaining market awareness and a strong brand; developing and maintaining effective distribution channels; security breaches and other compromises of information security; risks associated with sales of our services to medium-sized and enterprise customers; our reliance on third-party hardware and software; our dependence on third-party vendors; system disruptions or flaws in our technology and systems; our ability to comply with data privacy and related regulatory matters; our ability to scale our business and grow efficiently; the impact of fluctuations in economic conditions, particularly on our small and medium business customers; the effects of significant foreign currency fluctuations; our ability to obtain or maintain relevant intellectual property licenses or to protect our trademarks and internally developed software; fraudulent use of our name or services; restrictions in our debt agreements that may limit our operating flexibility; our ability to obtain additional financing if required; retaining senior executives and other key employees; intellectual property and other litigation that have been and may be brought against us; rapid developments in global API regulation and uncertainties relating to regulation of VoIP services; risks associated with legislative, regulatory or judicial actions regarding our business products; reliance on third parties for our 911 services; liability under anti-corruption laws or from governmental export controls or economic sanctions; actions of activist shareholders; risks associated with the taxation of our business; governmental regulation and taxes in our international operations; our history of net losses and ability to achieve consistent profitability in the future; our ability to fully realize the benefits of our net operating loss carry-forwards if an ownership change occurs; risks associated with the settlement and conditional conversion of our Convertible Senior Notes; potential effects the capped call transactions may have on our stock in connection with our Convertible Senior Notes; certain provisions of our charter documents; and other factors that are set forth in the “Risk Factors” section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and amendments to these reports.
  

FINANCIAL INFORMATION PRESENTATION

For the financial information discussed in this Annual Report on Form 10-K, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted.

1     VONAGE ANNUAL REPORT 2019



GLOSSARY OF TERMS

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:

2016 Credit Facility
 
$125 million senior secured term loan and $325 million revolving facility due 2020
2018 Credit Facility
 
$100 million senior secured term loan and $500 million revolving facility due 2023
Convertible Senior Notes
 
$345 million aggregate principal amount of 1.75% convertible notes due 2024
API
 
Application Program Interfaces
API Platform Group
 
Comprised of CPaaS programmable communication solutions for business customers
Applications Group
 
Comprised of UCaaS and CCaaS communication solutions for business customers
ASC
 
The FASB Accounting Standards Codification, which the FASB established as the source of authoritative GAAP
ASU
 
Accounting Standards Updates - updates to the ASC
CCaaS
 
Contact Center as a Service
Code
 
Internal Revenue Code of 1986, as amended
CPaaS
 
Communications Platform as a Service
CRM
 
Customer Relationship Management
Exchange Act
 
The Securities Exchange Act of 1934, as amended
ECP
 
Electronic Check Payments
EPS
 
Earnings Per Share
FASB
 
Financial Accounting Standards Board
FCC
 
Federal Communications Commission
FCPA
 
Foreign Corrupt Practice Act
GDPR
 
European Union General Data Protection Regulation
IP
 
Internet Protocol
IRS
 
Internal Revenue Service
LIBOR
 
London Inter-Bank Offered Rate
MPLS
 
Multi-Protocol Label Switching
NOLs
 
Net Operating Losses
NVM
 
NewVoiceMedia Limited
QoS
 
Quality of Service
SaaS
 
Software as a Service
SAB
 
Staff Accounting Bulletins
SD-WAN
 
Software-Defined Wide Area Network
SEC
 
U.S. Securities and Exchange Commission
SIP
 
Session Initiation Protocol
SMB
 
Small to medium-sized business
SMS
 
Short Message Service
TCJA
 
Tax Cuts and Jobs Act enacted in 2017
TokBox
 
Collectively, Telefonica Digital, Inc., TokBox, Inc., and TokBox Australia Pty Limited
TSR
 
Total Shareholder Return
UCaaS
 
Unified Communications as a Service
UI
 
User Interface
USF
 
Federal Universal Service Fund
VBC
 
Vonage Business Cloud
VoIP
 
Voice over Internet Protocol

2     VONAGE ANNUAL REPORT 2019



PART I

 
ITEM 1. Business
 

OVERVIEW AND STRATEGY

At Vonage, our strategy is to build the world’s most flexible cloud communications platform. Our mission is to make communications more flexible, intelligent, and personal to help businesses differentiate themselves by creating a better experience for their customers and employees. We provide UCaaS and CCaaS business solutions in our Applications Group and CPaaS business solutions in our API Platform Group, all built from a single platform. True to our roots as a technology disruptor, our flexible approach helps us to better serve the growing collaboration, communications, and customer experience needs of companies, across all communications channels. Every company is different, which is why we believe it is essential to provide communications flexibility to our customers. Vonage customers can choose from our Applications products, or may use our portfolio of APIs to create their own applications and integrations. Or, our customers may use Applications while customizing with APIs to fit their business needs. Whatever our customers choose, we provide our customers the ability and flexibility to integrate voice, video, messaging and chat apps and social media from a single owned platform.

We also provide a robust set of feature-rich residential communication solutions that allow consumers to connect their home phones and mobile phones to one number. We also offer competitive international long-distance rates.
Our business is organized under two reportable segments: Business and Consumer. Additional discussion of our reportable segments is included in Note 16, Industry Segment and Geographical Information to the Consolidated Financial Statements.

EVOLUTION OF VONAGE

Founded in 2001, Vonage was among the first companies to provide Voice over Internet Protocol technology offering feature-rich, low-cost voice services. Over recent years and through multiple acquisitions discussed in detail below, Vonage has transformed from solely a provider of VoIP communication services to predominantly a SaaS company offering a suite of communications solutions for businesses.
Beginning in November 2013 and continuing through September 2015, Vonage acquired five companies: Vocalocity, Inc., Telesphere Networks Ltd., Simple Signal Inc., gUnify LLC and iCore Networks Inc. With these acquisitions, Vonage began its execution of a pivot from a solely residential communications provider to establishing the foundation of unified communications as a service sector, addressing the needs of businesses to improve how they communicate with their customers and their employees.
In June 2016, Vonage completed the acquisition of Nexmo, Inc., a global leader in communications platform as a service sector of the cloud communications market. The acquisition of Nexmo accelerated Vonage's growth strategy to provide APIs for text messaging and voice communications, allowing developers and enterprises to embed contextual, programmable communications into mobile apps, websites, and business systems.
In August 2018, Vonage acquired TokBox Inc., an industry leader in WebRTC programmable video that enables developers and enterprises to integrate live video into websites, mobile apps and IoT devices with only a few lines of code. The acquisition of TokBox meaningfully broadened Vonage's API capabilities by adding video to its existing services in voice, SMS and IP messaging. This addition enables businesses to benefit from simple, flexible and scalable programmable video solutions to create deeper customer relationships for businesses.
In October 2018, Vonage completed the acquisition of NewVoiceMedia, an industry-leading cloud contact center as a service provider. This acquisition enabled Vonage to combine its robust UCaaS and CPaaS solutions with NVM's pure-play cloud contact center offerings, culminating in the Company's ability to provide an end-to-end communication experience for a company's employees and its customers. The addition of NewVoiceMedia helps to accelerate our growth strategy and leadership position in business communications, strengthening our presence with global mid-market and enterprise clients, and deepening our integrations and key go-to-market relationships with CRM platforms like Salesforce.com. In fact, NewVoiceMedia has a long and strategic relationship with Salesforce as the leading contact center provider in the Salesforce ecosystem.
Recently in August 2019, we acquired intellectual property assets from Over.ai in order to integrate conversational artificial intelligence into our Business product offerings. We also hired certain key employees and engineers from Over.ai in connection with this asset acquisition.
 

3     VONAGE ANNUAL REPORT 2019



SERVICE OFFERINGS
Business
For our Business customers, our Applications Group provides innovative, cloud-based UCaaS solutions, comprised of integrated voice, text, video, data, collaboration, contact center and mobile applications over our flexible, scalable Session Initiation Protocol based VoIP network. We support the full range of business customers, using the Company's two UCaaS product families: Vonage Business Cloud, based on our cloud-native, proprietary platform; and Vonage Enterprise, based on Broadsoft’s call processing platform in combination with other Vonage cloud-based solutions. Our UCaaS subscription revenue generation efforts are focused on customer acquisition and retention as well as providing additional services to existing customers as they grow and scale. Our Applications Group also provides customers with a robust CCaaS offering, driving intelligent interactions for customers through emerging technologies such as skills-based routing, real-time sentiment analysis, and chatbots.
Our API Platform Group also offers CPaaS solutions via communications APIs to developers designed to enhance the way businesses communicate with their customers by embedding contextual communications into apps, websites, and business processes. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment or onsite expertise.
Our customer base spans a wide variety of industries, including manufacturing, automotive, legal, information technology, financial services, construction, real estate, engineering, healthcare, and nonprofit organizations.
We have a robust set of product families tailored to serve the full range of the business value chain, from the SMB market through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with cloud-based business applications and CRM solutions, to improve productivity and streamline communication, including Google’s G Suite, Zendesk, Salesforce, Oracle, Clio, and others.
The following provides a more detailed description of our Business services under its Applications Group and API Platform Group:
Applications
The Company's Applications are comprised of its UCaaS and CCaaS service offerings which covers a wide range of solutions as follows:
Vonage Business Cloud
Vonage Business Cloud utilizes our cloud-native, proprietary technology platform which aims to deliver seamless, integrated cloud-based unified communication services. It provides a cost-effective, highly scalable, feature-rich solution, delivered over-the-top of a customer’s broadband. Vonage SmartWAN uses SD-WAN technology to optimize QoS for unified communications across a company’s multiple locations over a private or public network to improve redundancy across locations for business customers that rely on high quantities of voice, video and data communications in their day-to-day operations. All of our Vonage Business Cloud offerings includes access to our mobile application. Additional features include the ability to update account profiles, manage devices, and contact call logs directly from their mobile devices. We also offer virtual extensions, which connects employees to a business phone number through their mobile phones.
Vonage Business Cloud also integrates with other third-party software applications to improve workflow and enhance productivity via the Vonage App Center ecosystem. Built on a microservices architecture, Vonage App Center creates embedded, UI-level integrations with high-value applications, placing critical functionality at the fingertips of VBC users within a single, familiar interface. Our software uses a combination of open APIs and pre-built integrations to enhance functionality with data from other third-party enterprise applications including Salesforce, Microsoft Dynamics, NetSuite, Zendesk, Oracle Sales Cloud, Hubspot, and others. The investments we have made have enabled scalability to allow Vonage Business Cloud to serve a broader customer base.
The launch of Vonage Business Cloud was quickly followed by innovations to improve and build upon this service with new features and functionality that we believe transforms the way businesses connect, including:
Vonage Business Cloud Desktop Connect App, which allows employees to start their day in the redesigned Vonage Business Cloud Mobile App and switch to the desktop when they reach the office;
Vee, our virtual customer assistant chatbot integrated with a cloud-based unified communications solution that aids customers in managing their account services via simple natural-language text commands
VonageFlow, our proprietary workstream collaboration solution;

4     VONAGE ANNUAL REPORT 2019



Business Inbox, which allows customers to reply to messages sent in messaging apps like Facebook Messenger, providing the ability to respond to customers in real-time directly within the app, organizing customer requests in one unified inbox; and
CX Cloud, an advanced omni-channel contact center product suite allowing businesses to utilize Vonage APIs to customize their interactions with customers via real-time sentiment analysis, chatbots, and interactive voice response; and
Vonage Meetings, a programmable video capability which is fully integrated with VBC and leverages Vonage APIs to enable voice, SMS, social, team messaging, email and video all within in a single interview for a simple, clean user experience.
Vonage Enterprise
Vonage Enterprise is a purpose-built cloud based platform for mid-market and enterprise customers, providing a complete set of enhanced unified communication and collaboration services, including: voice, data, video, mobile and contact center services. We focus on customers for whom guaranteed quality of service and uniformity of services across all locations is critical. We deliver services to this customer base over our private, nationwide, fully redundant, secure IP MPLS network using 21 network POPs that allow us to deliver dedicated, secure and private bandwidth utilizing all forms of last mile technologies including EoC and Fiber and bandwidth ranging from 1.5Mbps to 1Gbps. Services we deliver include Wide Area Networking, or WAN, Internet Access, MPLS VPN, Managed Firewall, Hosted UCaaS, Hosted Video Conferencing, Web Collaboration, Secure Instant Messaging & Presence, Mobility and Fixed Mobile Convergence.
Vonage Enterprise services include features such as Single Number Reach, which provides each user one number, available over numerous devices including desk phones, tablets and smartphones, Shared Line Appearance, Busy Lamp Field, Phone Paging, Outlook Integration, IM, Presence, and Video. Vonage also delivers SIP Trunking, over the same network, to customers using premises PBXs, with the ability to overlay UCaaS features where the premises PBX is deficient or for disaster recovery and business continuity requirements. This product also supports a hybrid deployment where some locations may be fully hosted and others may continue to use the premises PBX. Vonage Enterprise customers also have the ability to utilize our gUnify middleware layer to integrate communications with the core, SaaS-based business applications that companies use as part of their every-day workflow, such as Google for Work, Salesforce, Zendesk, and others.
Vonage Enterprise customers also receive access to a custom-built portal through which they can fully administer all services, online bill pay, manage trouble tickets, manage bandwidth and services, access detailed Call Analytics, and execute moves, adds and changes.
Vonage's Contact Center Solution
With the 2018 acquisition of NVM, Vonage also provides customers with a robust CCaaS offering, driving intelligent interactions for customers through emerging technologies such as skills-based routing, real-time sentiment analysis and chatbots. Our cloud contact center solution, combined with Vonage's offering, provides an end-to-end communications experience for enhanced customer engagement and conversation. By integrating with CRMs, Vonage's Contact Center solution delivers better omni-channel interactions and robust analytics.
With Vonage's Contact Center solution, we believe that Vonage is the only cloud communication company that can combine deep CRM integrations with the full range of programmable communications used by a business's employees and its customers.
Vonage APIs
The communications industry is undergoing a major transformation from dedicated communications applications and devices to communications embedded in other applications and devices where the communications happens within the context of those applications. For example, when calling or messaging a taxi driver, consumers can do this within the taxi app which has all the necessary context such as the pickup location and payment method, resulting in a better experience for both parties. Similarly, when contacting a company consumers can communicate within the context of the company’s branded mobile app or website and agents within the context of their CRM desktop application, delivering a better experience for consumers and improving productivity for contact center agents. We call this type of communications “contextual” because it is context rich and delivers a better experience. This trend is enabled by a new category of cloud communications platforms that enable software developers to build communications capabilities such as messaging and voice calling within their applications without having to build or maintain communications infrastructure. Programmable communications via APIs enable enterprises to improve the ways they engage their customers through personalized and contextual communications for deeper engagement and more meaningful relationships.

5     VONAGE ANNUAL REPORT 2019



While innovative software companies were the early adopters of cloud communication platforms, over time virtually all companies will benefit from the new approach as part of their digital transformation journey. As more startups disrupt existing industries, established enterprises will innovate with communications APIs in order to more effectively compete with the new entrants and with their traditional competitors. Over time, we believe enterprises of all sizes will adopt contextual communications to deliver better business outcomes.
Vonage APIs aims to remove the complexities of the global communications networks and deliver voice, messaging, and authentication capabilities that developers can easily embed into their applications with a low risk, pay as you go business model that fosters innovation. Developers adopt our APIs via a low friction, self service model on our website where they start with a free trial account and pay for additional usage via prepaid accounts. Our customers include digital native companies that are looking to disrupt an existing industry, enterprises undergoing digital transformation, and enterprise SaaS companies looking to enhance their products with embedded communications capabilities.
We are observing an increased need among businesses to provide their customers with the ability to connect and communicate by their customers' own preferred channels (chat, voice, SMS, social messaging, etc). The need for companies to jump between modes of communication is being driven by today's customer. In a digital world, this is what customers have come to expect. These same businesses are therefore seeking the ability to implement these API tools quickly and without the need for in-house IT support or expertise.
Our platform includes the following products:

Voice API: Our Voice API enables companies to deliver better and more flexible voice experiences when communicating with their customers within the context of their existing business workflow, backed by the quality, strength and reliability of the Vonage network in the United States and tier one carriers globally.
SIP Trunking: Our SIP Trunking enables companies to rapidly connect their PBX to the global telecommunications networks using a pay as you go model and without having to negotiate lengthy carrier contracts.
SMS API: Our SMS API enables companies to send and receive SMS messages within the context of their existing business workflows. Our direct to carrier approach and patented Adaptive Routing algorithm enables us to deliver messages reliably and with low latency, globally.
Verify: Our Verify API enables companies to deploy two-factor-authentication for their applications to help them acquire genuine customers and to protect against fraud. With a single API call, Verify delivers messages via SMS and voice calls if required to ensure high conversion rates. In addition, customers pay only for successful authentications.
Number Insight: Our Number Insight API enables companies to get real time intelligence on phone numbers anywhere in the world to ensure numbers are valid and reachable and to discover other insights such as carrier information, roaming status whether a landline or mobile, and caller name.
Virtual Phone Numbers: We offer phone numbers that are local all over the world enabling our customers to have a local presence globally. We also offer toll free numbers and short codes in the United States and Canada. Our numbers can be provisioned and de-provisioned programmatically to enable maximum utilizations.
Messages API and Dispatch API: Together they enable brands to engage with their customers wherever they prefer, elevating customer communications by meeting customers on the channels they find most engaging.
Video API: Our programmable video enables developers, independent software vendors, and enterprises to incorporate highly scalable point-to-point and multi-party video into websites, mobile applications and IoT devices with only a few lines of code.
Our product offerings combined with the strength of our network enable us to partner closely with our customers to ensure that they are successful through a personalized account management experience, high quality support and consulting services. The Company's CPaaS products are supported through our close relationships with tier one carriers across the globe and offer local numbers in more countries along with our private MPLS network with 21 points of presence in the United States allowing us to offer high voice quality, lower costs and increased reliability. Additionally, Vonage has office locations all over the world, including the United States, United Kingdom, Israel, France, Germany, Hong Kong, Singapore, Japan, Korea and China. Our extensive network of developers provides customers with the ability to foster rapid innovations, including extensive developer documentation, sample codes, tutorials, libraries and free online support.


6     VONAGE ANNUAL REPORT 2019



Consumer
Our home telephone services are offered to customers through several service plans with different pricing structures. The service plans include basic features such as voicemail, call waiting, and call forwarding as well as unique features such as Simulring, Visual Voicemail and Extensions. We also charge for local and international calling outside of plan limits. We also charge for local and international calling outside of plan limits.
We have two primary Consumer offerings available in the United States: Vonage World and Vonage North America. Each of our Consumer calling plans provides a number of basic features including call waiting, caller ID with name, call forwarding, and voicemail. Our plans also include unlimited Vonage Visual Voicemail, which is “readable voicemail” delivered via email or SMS text message, Vonage Extensions, which extends the plan, and inbound calling, to additional phone numbers and devices, and selective call block, which allows users to block unwanted calls. We also offer, in some cases for additional fees, features such as area code selection, virtual phone number, and web-enabled voicemail. Additionally, we also provide similar product offerings to customers in both Canada and the United Kingdom.
In order to access our consumer services, a customer need only connect a standard telephone to a broadband Internet connection through a small Vonage-enabled device. After connecting the device, our customers can use their telephone to make and receive calls. Vonage-enabled devices allow customers to use the Internet connection for their computer and telephones at the same time while ensuring a high quality calling experience. Our plug-and-play Vonage-enabled devices permit portability as customers can take their Vonage device to different locations where broadband service is available. We generally have not charged new customers for the adapters permitting use of our service.

NETWORK OPERATIONS
The Vonage network uses our customer’s existing or Vonage procured high-speed broadband Internet service to allow calls over the Internet either from a standard telephone through a Vonage-enabled device or through soft phone software or mobile client applications. Our UCaaS services are not dependent on any specific type or provider of Internet service, and our customers are free to change their Internet service provider in response to a competitive alternative, or because they have moved to a different location. For many of our Vonage Enterprise customers, our UCaaS services are delivered over the Company's private, nationwide, fault tolerant, secure IP MPLS network under multi-year contracts to provide the high level of interconnection quality and the ability to offer service level agreements, or SLA, guaranteeing certain levels of voice service performance.
Our network is scalable and geographically distributed for robustness, high availability, and reliability across multiple call processing sites, using regional data interconnection points, where calls to non-Vonage customers are interconnected with the public switched telephone network. We periodically assess the locations of our regional data connection points in connection with efforts to improve the quality of and efficiency in delivering our service. Our interconnections with the public switched telephone network, or IP/SIP networks, are made pursuant to commercial agreements we have with several telecommunications providers. Under these agreements, we transfer calls originated by our customers to other carriers who connect the call to the called party or connect peer to peer. We have a varying degree of settlement arrangements with our carrier partners for indirect third party or direct termination of our calls. The calls are routed from our network to other carriers’ interconnected circuits at co-location facilities in which we lease space. This method of connecting to the public switched telephone or IP/SIP networks allows us to expand capacity quickly, as necessary to meet call volume, and to provide redundancy within our network.
Because Vonage’s system is standards based and not constrained to use any specific broadband service provider to connect to our customers, we can centrally manage and share resources across our customer base to minimize capital investment when entering new markets.
  
MARKETING
In connection with our transformation from a consumer telecommunications company to a business-focused SaaS provider, beginning in 2020 we initiated a rebranding of the Company and began implementing a new approach to marketing. Our marketing objective is to help drive growth and revenue across our business markets. We employ an integrated multi-channel approach to marketing, whereby we evaluate and focus our efforts on efficient marketing vehicles to accomplish our goals with the greatest return on investment. To do this, we make use of both broad-reaching and highly-targeted media channels.
For our business customers, our primary source of lead acquisition is digital marketing in the form of search engine marketing, digital advertising, social media advertising, and affiliate programs. We also utilize database marketing and lead aggregators to source business leads. We use direct marketing and account-based marketing to help source leads and create interest in our solutions. We have a significant strategy of using third-party and proprietary events to source business leads and convert prospects. For our residential customers, we have highly optimized our acquisition approach and focus mainly on digital advertising channels.

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We make use of marketing research to gain consumer insights into brand, product, and service performance, and utilize those learnings to improve our messaging and media plans. Market research is also leveraged in the areas of testing, retention marketing, and product marketing to ensure we bring compelling products and services to market for our customers.
We believe our brand is a meaningful factor for customers as they consider business services. We invest in our brand in order to retain and expand our customer base and to position Vonage as a technology leader that delivers innovative, unified communication services and communications APIs, serving the full range of businesses and enterprises. We expect these investments to continue as we further establish Vonage as a leading business services brand and pivot beyond our residential brand heritage.

SALES AND DISTRIBUTION
Enterprise Sales
In order to continue to expand in the enterprise sales channel, which we define as businesses larger than 1,000 seats, our enterprise sales organization is positioned to provide high quality business services for Enterprise, through our fully managed solution, which utilizes BroadSoft’s enterprise-grade call processing platform, with a broad portfolio of products delivered over our own private, national MPLS network, with 21 Points-of-Presence, or POPs, across the country and our own team of service delivery project managers using our proprietary provisioning tool Zeus, or with SmartWan, as well as our industry leading CPaaS products. Additionally, Contact Center solutions are commonly integrated into Enterprise solutions
Developer Ecosystem
Our API platform products are principally adopted and consumed by software developers all over the world. Given the nature of the business, we invest significant time and effort to build, recruit, and maintain developers and various software ecosystems. We have a large developer ecosystem worldwide with over 940,000 registered developers.
Field Sales and Inside Sales - SMB and Midmarket
We utilize our team of sales agents, primarily based in geographic territories comprising customers and prospects, which we refer to as our field sales team, to market and sell our business services. These field sales agents utilize a consistent, automated, highly-structured sales process to effectively educate prospective customers regarding our services. We have developed a scalable model applicable to both existing and new markets. We now have field sales presence in 20 markets within the United States and made significant expansion into new markets globally primarily supporting Vonage APIs. For customers in the SMB segment, we leverage an Inside Sales team to provide solutions across our cloud communications offerings.
Channel Sales
In addition to inside sales and our field sales team, we also have a dedicated team focused on channel sales who work with our channel partners to market and sell our business services, which helps to broaden our sales distribution. We continue to develop and expand this channel program by adding new senior management, channel managers, and additional national master agents. We now have a broad and deep coverage of the U.S. market through a network of over 20,000 sub agents and resellers.
Self-Service
Customers can subscribe to our consumer services at our websites, http://www.vonage.com, http://www.vonage.ca, http://www.vonage.co.uk and several affiliate websites, or through multiple toll free numbers including 1-877-4VONAGE. Business customers can subscribe to our services at our websites, including https://business.vonage.com/, http://www.vonagebusiness.com, https://enterprise.vonage.com, and https://www.nexmo.com, or through toll free numbers including 1-877-862-2562 and 1- 855-593-7326. Additionally, Vonage's API enablement and developer focus lends itself to a self-service model. Our developers can register, sign up and test, and scale their businesses easily and quickly without having to engage with anyone at Vonage. This allows customers to self-provision their accounts with the aim of improving the customer experience while reducing customer acquisition costs.

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INTELLECTUAL PROPERTY
We currently own over 235 issued U.S. patents as well as a number of foreign patents and pending U.S. and foreign patent applications. We routinely review our technological developments with our technology staff and business units to identify the aspects of our technology that provide us with a technological or commercial advantage and seek intellectual property and patent protection as appropriate to protect such key proprietary technology in the United States and internationally, based on our assessment in light of applicable law. Our company policies require our employees to assign intellectual property rights developed in the scope of or in relation to our business to us and to treat proprietary know-how and materials as our confidential information.
We have acquired multiple U.S. and foreign patents, and obtained licenses to numerous other patents. We are the owner of numerous United States and international trademarks and service marks and have applied for registration of our trademarks and service marks in the United States and abroad to establish and protect our brand names as part of our intellectual property strategy.
COMPETITION
In connection with our cloud communications products, we face competition from the traditional telephone and cable companies as discussed below, as well as from vendors of premises-based solutions or hosted solutions including the following:
Independent cloud service providers;
Premises-based business communication equipment providers;
Hosted communication services providers;
Traditional technology companies; and
Emerging competitors in technology companies.

As the cloud communications market evolves, and the convergence of voice, video, messaging, mobility and data networking technologies accelerates, we may face competition in the future from companies that do not currently compete in the market, including companies that currently compete in other sectors, companies that serve consumers rather than business customers, or companies which expand their market presence to include cloud communications.
We face strong competition from traditional telephone companies, cable companies, wireless companies, alternative communication providers, direct unified communications providers, legacy consumer VOIP businesses, large technology incumbents, and collaboration providers in the consumer, mobile, SMB and enterprise markets. Because most of our target customers are already purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract these customers away from their existing providers. We believe that the principal competitive factors affecting our ability to attract and retain customers are price, call quality, brand awareness, customer service, network and system reliability, service features and capabilities, scalability, usability, simplicity, mobile integration and the unique ability to deliver CPaaS communications tools to business customers in addition to our UCaaS and CCaaS offerings.
There is a continuing trend toward consolidation of competitive companies, including the acquisition of alternative communication providers by Internet product and software companies with significant resources. In addition, certain of our competitors have partnered and may in the future partner with other competitors to offer products and services, leveraging their collective competitive positions. We also are subject to the risk of future disruptive technologies, which could give rise to significant new competition.

EMPLOYEES
As of December 31, 2019, we had 2,264 employees. None of our employees are subject to a collective bargaining agreement.

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AVAILABLE INFORMATION
We were incorporated in Delaware in May 2000 and changed our name to Vonage Holdings Corp. in February 2001. We maintain a website with the address www.vonage.com. References to our website are provided as a convenience, and the information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the U.S. Securities and Exchange Commission, or SEC. Copies are also available, without charge, by writing to Vonage’s Investor Relations Department at Vonage Holdings Corp., 23 Main Street, Holmdel, NJ 07733 or calling us at 732.365.1328 or sending an email through the Vonage Investor Relations website at http://ir.vonage.com/. Reports filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

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ITEM 1A. Risk Factors
You should carefully consider the risks below, as well as all of the other information contained in this Annual Report on Form 10-K and our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K, in evaluating our company and our business. Any of these risks could materially adversely affect our business, financial condition and results of operations and the trading price of our common stock.
If we are unable to compete successfully, we could lose market share and revenue.
The business cloud communications markets and consumer services market in which we participate are highly competitive. We face intense competition from a broad set of companies, including:

software as a service companies, contact center as a service companies, other alternative communication providers, and other providers of cloud communications services; and
traditional telephone, wireless service providers, cable companies and alternative communications providers with consumer offerings
Many of these providers are substantially larger and better capitalized than us and have the advantage of greater name and brand name recognition and a large existing customer base. These service providers may have the ability to devote greater resources to their communications services and may be able to respond more quickly and effectively than we can to new or changing opportunities. Our competitors' financial resources may allow them to offer services at prices below cost or even for free in order to maintain and gain market share or otherwise improve their competitive positions. Some of our competitors also could use their greater financial resources to develop and market telephony and messaging services with more attractive features and more robust customer service. In addition, because of the other services our competitors provide, some of these service providers choose to offer cloud communications services as part of a bundle that includes other products, such as high speed Internet access and wireless telephone service. These bundled offers may enable our competitors to offer cloud communications services at prices with which we may not be able to compete or to offer functionality that integrates cloud communications services with their other offerings, both of which may be more desirable. As we continue the introduction of applications that integrate different forms of voice, video, and messaging services over multiple devices, we face competition from emerging competitors focused on similar integration, as well as from established alternative communication providers. Any of these competitive factors could make it more difficult for us to attract and retain customers, reduce our market share and revenues, or cause us to lower our prices or offer additional features that may result in additional costs without commensurate price increases. In order to compete with such service providers, we may have to reduce our prices, which would impair our profitability, or offer additional features that may cause us to incur additional costs without commensurate price increases. To the extent that these or other companies strengthen their offerings, we may have to reduce our prices, increase promotions, or offer additional features, which may adversely impact our revenues and profitability.
With our offering of cloud-based contact center services, we also compete with large legacy technology vendors that offer on-premise enterprise telephony and contact center systems and legacy on-premise software companies that come from a computer-telephony integration heritage. These companies are supplementing their traditional on-premise contact center systems with cloud offerings, either through acquisition or in-house development. Additionally, we compete with vendors that historically provided other contact center services and technologies and expanded to offer cloud contact center software. We also face competition from smaller contact center service providers with specialized contact center software offerings. Our actual and potential competitors may enjoy competitive advantages over us, including greater name recognition, longer operating histories, and larger marketing budgets, as well as greater financial or technical resources. With the introduction of new technologies and market entrants, we expect competition to intensify in the future.
In connection with our emphasis on the international long distance market for consumer customers, we face competition from low-cost international calling cards, digital calling cards and VoIP providers in addition to traditional telephone companies, cable companies, and wireless companies. To the extent that these providers target marketing to the same ethnic segments that we target or strengthen their offerings to these segments, we may have to reduce our prices or increase promotions, which would impair our profitability, or offer additional features that may cause us to incur additional costs without commensurate price increase.
As a result of increasing competition, domestic and international telephony and messaging rates have generally decreased during the past few years, and we expect this trend to continue. Continued rate pressures or increasing cost to use our services could lessen or eliminate the pricing advantage that we maintain over certain competitors and cause customers or potential customers to select alternative providers or cause us to lower our prices, which would adversely impact our revenues and profitability.

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As the cloud communications services market evolves, and the convergence of voice, video, messaging, mobility and data networking technologies accelerates, we may face competition in the future from companies that do not currently compete in the cloud communications services market.
As the cloud communications services market evolves, combining voice, video, messaging and data networks, and information technology and communication applications, opportunity is created for new competitors to enter the cloud communications services market and offer competing products, including companies that currently compete in other sectors, companies that serve consumer rather than business customers, or companies which expand their market presence to include business communications. This new competition may take many forms, and may offer products and applications similar to ours. If these new competitors emerge, the cloud communications services market will become increasingly competitive and we may not be able to maintain or improve our market position. Our failure to do so could materially and adversely affect our business and results of operations.
If we fail to adapt to rapid changes in the market for cloud communications services, then our products and services could become obsolete.
The market for our products and services is constantly and rapidly evolving as we and our competitors introduce new and enhanced products and services and react to changes in the cloud communications services industry and customer demands. We may not be able to develop or acquire new products and plans or product and plan enhancements that compete effectively with present or emerging cloud communications services technologies or differentiate our products and plans based on functionality and performance. In addition, we may not be able to establish or maintain strategic alliances that will permit enhancement opportunities or innovative distribution methods for our products and plans.
To address these issues, we are targeting revenue growth in large, existing markets, which require us to enhance our current products and plans, and develop new products and plans on a timely basis to keep pace with market needs and satisfy the increasingly sophisticated requirements of customers. If we are unable to attract users of these services our net revenues may fail to grow as we expect.
Cloud communications services are complex, and new products and plans and enhancements to existing products and plans can require long development and testing periods. Any delays in developing and releasing new or enhanced products and plans could cause us to lose revenue opportunities and customers. Any technical flaws in products we release could diminish the innovative impact of the products and have a negative effect on customer adoption and our reputation.
We also are subject to the risk of future disruptive technologies. New products based on new technologies or new industry standards could render our existing products obsolete and unmarketable. If new technologies develop that are able to deliver competing voice and messaging services at lower prices, better or more conveniently, it could have a material adverse effect on us.
The market for our API Platform products and platform is relatively nascent and may not experience the growth that we anticipate.
The utilization of APIs to embed contextual, programmable real time communications into mobile apps, websites and business systems workflows, remains a relatively new market, and developers and organizations may not yet recognize the need for, or benefits of, our products and platform. It is important that we are able to educate developers, organizational leaders, and other potential customers regarding our products and platform in order to help grow the market and to realize our market share. If we fail to achieve the foregoing, the market for our products and platform or our share of that market could fail to grow significantly. If the API Platform market, or our share of that market, does not experience significant growth, then our business, results of operations and financial condition could be adversely affected.

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If we are unsuccessful at retaining customers or attracting new consumer or business customers we may experience a reduction in revenue or may be required to spend more money or alter our marketing approaches to grow our customer base.
Our rate of customer terminations for our Applications Group services could increase in the future if customers are not satisfied with the quality and reliability of our network, the value proposition of our products, and the ability of our customer service to meet the needs and expectations of our customers. For our API Platform customers, our ability to grow revenue depends, in part, on our ability to maintain and grow usage of our platform by new and existing customers. If we are not able to increase customer usage of our products, our revenue may decline which would adversely impact our business, results of operations and financial condition. Our API customers are charged based on their usage of our products and generally our customers do not have long-term contractual financial commitments to us, therefore, usage rates may fluctuate at any time. In addition, our agreements with business customers typically provide for service level commitments. If we are unable to meet these commitments or if we suffer extended periods of downtime for our products or platform, our business, results of operations and financial condition could be adversely affected. Our ability to attract and retain customers for our consumer services are impacted by our pricing, brand awareness, customer service, network and system reliability and service features and capabilities. Competition from traditional telephone companies, cable companies, wireless companies, alternative communication providers, low-cost international calling cards, disruptive technologies, general economic conditions, and our ability to activated and register new customers on our network also influence churn rate. A material decline in the usage of our business and consumer products could cause us to spend significantly more on sales and marketing than we currently budget in order to maintain or increase revenue from customers, which could adversely affect our business, results of operations and financial condition.
We may face difficulties related to the acquisition or integration of businesses, which could harm our growth or operating results.
In August 2018, we acquired TokBox with the intention of integrating and adding video to our Business offerings in voice, SMS, and IP messaging. In October 2018, we completed the acquisition of NewVoiceMedia as a contact center provider, with the intention of combining our Applications Group and API Platform solutions to provide an end-to-end communications experience for a company's employees and customers. In August 2019, we acquired intellectual property assets from Over.ai in order to integrate conversational artificial intelligence into our Business product offerings. In addition, we have made several acquisitions over the past several years to build our business services and continue to periodically review acquisition opportunities.
Acquisition and integration activities require substantial management time and resources. Acquisitions of existing businesses involve substantial risks, including the risk that we may not be able to integrate the operations, personnel, services, or technologies, the potential disruption of our ongoing businesses, the diversion of management attention, the maximization of financial and strategic opportunities, the difficulty in developing or maintaining controls and procedures, and the dilution to our existing stockholders from the issuance of additional shares of common stock. We may elect to acquire additional businesses or assets in the future. However, we cannot predict or guarantee that we will be able to identify suitable acquisition candidates or consummate any acquisition. As a result of these and other risks, we may not produce anticipated revenue, profitability, or synergies.
Acquisitions may require us to issue debt or equity securities, use our cash resources, incur debt or contingent liabilities, amortize intangibles, or write-off acquisition-related expenses. If we are unable to successfully integrate any acquired businesses or assets we may not receive the intended benefits of such acquisition. In addition, we cannot predict market reactions to any acquisitions we may make or to any failure to announce any future acquisitions.
Further, there may be risks or liabilities that such due diligence efforts fail to discover, are not disclosed to us, or that we inadequately assess. The discovery of material liabilities associated with acquisitions or joint venture opportunities, economic risks faced by joint venture partners, or any failure of joint venture partners to perform their obligations could adversely affect our business, results of operations, and financial condition.

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Growth of our business will depend on market awareness and a strong brand, and any failure to develop, maintain, protect and enhance our brand would hurt our ability to retain or attract subscribers.
Beginning in 2020, we initiated a rebranding of the Company and began implementing a new marketing campaign. Building and maintaining market awareness, brand recognition and goodwill in a cost-effective manner is important to our overall success in achieving widespread acceptance of our existing and future solutions and products and is an important element in attracting new customers. While we may choose to engage in a broader marketing campaign to further promote our brand, this effort may not be successful, or our marketing techniques or content may be challenged. The success of our business also relies on our ability to attract new customers in a cost-effective manner by using a variety of marketing channels. We use developer events and developer evangelism, search engine marketing and optimization, and other marketing efforts such as regional customer events, email campaigns, advertising and public relations events. These methods are prioritized depending on effectiveness and efficiency, and may be altered if costs increase dramatically or if the results do not meet expectations. Our efforts in developing our brand may be hindered by the marketing efforts of our competitors and our reliance on any strategic partners to promote our brand. If we are unable to cost-effectively maintain and increase awareness of our brand, our business, financial condition, cash flows and results of operations could be harmed.
Our success in the cloud communications market for our business services depends in part on developing and maintaining effective distribution channels. The failure to develop and maintain these channels could materially and adversely affect our business.
A portion of our business revenue is generated through our direct sales, or “field sales,” team. This channel consists of sales agents that market and sell our business services products to customers to customers through direct, commonly face-to-face interaction. Our continued success requires that we continue developing and maintaining a successful sales organization. If we fail to do so, or if our sales agents are not successful in their sales efforts, our sales may decrease and our operating results would suffer.
A portion of our business revenue is generated through indirect channel sales. These channels consist of third-party resellers and value-added distributors that market and sell our business services products to customers. These channels may generate an increasing portion of our business revenue in the future. Generally, we do not have long-term contracts with these third-party resellers and value-added distributors, and the loss of or reduction in sales through these third parties could materially reduce our revenues. We also compete for preference amongst our current or potential resellers with our competitors. Our continued success requires that we continue developing and maintaining successful relationships with these third-party resellers and value-added distributors. If we fail to do so, or if our resellers are not successful in their sales efforts, our sales may decrease and our operating results would suffer.
Security breaches and other cybersecurity or technological risks could compromise our information systems and network and expose us to liability, which could cause our business and reputation to suffer and which could have a material adverse effect on our business, financial condition, and operating results.
There are several inherent risks to engaging in a technology business, including our reliance on our data centers and networks, and the use and interconnectivity of those networks. A significant portion of our operations relies heavily on our ability to provide secure processing, storage and transmission of confidential and other sensitive data, including intellectual property, proprietary business information, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, storage, and transmission of this information is critical to our operations and business strategy. As seen in our industry and others, these activities have been, and will continue to be, subject to continually evolving cybersecurity and other technological risks. Targeted attacks, such as advanced persistent threat is prevalent throughout the Internet and associated with the theft of intellectual property and state-sponsored espionage. Due to the nature of our business and reliance on the Internet, we are susceptible to this type of attack. In addition, physical security of devices located within our offices, and/or remote devices, pose cybersecurity and other technological risks that could negatively impact our business and reputation.
We also operate Internet based, worldwide data, voice, video communications, and messaging services and electronic billing, which require the transmission of confidential and at times personal or sensitive customer or employee information over public networks that may or may not support end to end security. Despite our security measures, which include the development, operation and maintenance of systems and processes that are designed to protect consumer and employee information and prevent fraudulent credit card transactions and other security breaches, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to error, malfeasance or other disruptions by a current or former employee or third-party provider and our failure to mitigate such fraud or breaches may adversely affect our operating results. Any such breach could compromise our systems and network and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations, damage to our reputation, and a loss of confidence in our products and services, as well as our ability to keep personally identifiable information confidential, which could adversely affect our business.

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We have been subject to cybersecurity incidents from external sources including “brute force” and distributed denial of service attacks, as well as attacks that introduce fraudulent VoIP traffic. Although these incidents have not had a material adverse effect financially or on our ability to provide services, this may not continue to be the case going forward. There can be no assurance that cybersecurity incidents will not occur in the future, potentially more frequently and/or on a more significant scale.
There can be no assurance that we are adequately protecting our information or that we will not experience future incidents. The expenses associated with protecting our information could reduce our operating margins. We maintain insurance intended to cover some of these risks, however, this insurance may not be sufficient to cover all of our losses from any future breaches of our systems. In addition, third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions, which results in the storage and processing of customer information by third parties. While we engage in certain actions to reduce the exposure resulting from outsourcing, unauthorized access, loss or destruction of data or other cybersecurity incidents could occur, resulting in similar costs and consequences as those discussed above.
We make available on our website our privacy policy, which describes how we collect, use, and disclose our customers' personal information. To the extent we expand our operations into new geographies, such as areas in the Asia Pacific including China, we may become subject to local data security, privacy, data retention, and disclosure laws and regulations. Due to more burdensome and country-specific requirements, it may be difficult for us to comply with these laws and regulations if they were deemed to be applicable to us. In addition, risks related to cybercrime and fraud increase when establishing a global presence.
We are subject to Payment Card Industry, or PCI, data security standards, which require periodic audits by independent third parties to assess compliance. PCI data security standards are a comprehensive set of requirements for enhancing payment account data security that was developed by the PCI Security Standards Council including American Express, Discover Financial Services, JCB International, MasterCard Worldwide, and VISA Inc., to help facilitate the broad adoption of consistent data security measures. Failure to comply with the security requirements as identified in subsequent audits or rectify a security issue may result in fines. While we believe it is unusual, restrictions on accepting payment cards, including a complete restriction, may be imposed on companies that are not compliant. Further, the law relating to the liability of providers of online payment services is currently unsettled and states may enact their own rules with which we may not comply.
We rely on third-party providers to process and guarantee payments made by Vonage and its affiliates’ subscribers, up to certain limits, and we may be unable to prevent our customers from fraudulently receiving goods and services. Our liability risk will increase if a larger fraction of our Vonage transactions involve fraudulent or disputed credit card transactions. Any costs we incur as a result of fraudulent or disputed transactions could harm our business. In addition, the functionality of our current billing system relies on certain third party vendors delivering services. If these vendors are unable or unwilling to provide services, we will not be able to charge for our services in a timely or scalable fashion, which could significantly decrease our revenue and have a material adverse effect on our business, financial condition and operating results.
Sales of our Applications business services to medium-sized and enterprise customers involve significant risks which, if not managed effectively, could materially and adversely affect our business and results of operations.
As we continue to expand our sales efforts to medium-sized and larger businesses, we may incur higher selling expense and longer, more complex, sales cycles. Customers in this market segment may also require bespoke features and integration services, increasing the complexity and expense related to the sales and delivery process, and requiring highly skilled sales and support personnel. As a result, we may devote greater sales and support to these customers, which may result in increased costs and a strain on our support resources. In addition, the rollout of our products with medium-sized and enterprise customers can take longer periods of time compared to smaller customers, which can result in longer lead times in realizing revenues. These factors could materially and adversely affect our results of operations and our overall ability to grow our customer base.
Our ability to provide our telephony service and manage related customer accounts is dependent upon third-party facilities, equipment, and systems, the failure of which could cause delays of or interruptions to our service, damage our reputation, cause us to lose customers, limit our growth, and affect our financial condition.
Our success depends on our ability to provide quality and reliable telephony service, which is in part dependent upon the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Unlike traditional wireline telephone service or wireless service, our telephony service typically requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customer's Internet service provider and electric utility company, respectively, and not by us. The quality of some broadband Internet connections may be too poor for customers to use our telephony services properly. In addition, if there is any interruption to a customer's broadband Internet service or electrical power supply, that customer will be unable to make or receive calls, including emergency calls, using our telephony service.

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We outsource several of our network functions to third-party providers. For example, we outsource the maintenance of our regional data connection points, which are the facilities at which our network interconnects with the public switched telephone network. If our third-party service providers fail to maintain these facilities properly, or fail to respond quickly to problems, our customers may experience service interruptions. Interruptions in our service caused by third-party facilities have in the past caused and may in the future cause us to lose customers or cause us to offer substantial customer credits, which could adversely affect our revenue and profitability. If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers, and our brand, reputation, and growth will be negatively impacted.
There can be no guarantee that these third party providers will be able or willing to supply services to us in the future on commercially reasonable terms, or that we will be able to engage alternative or additional providers. Our ability to provide our services may be impacted during any transition, which could have an adverse effect on our business, financial condition or results of operations.
We rely on third-party vendors that may be difficult to replace or may not perform adequately.
It is vital to our customers that there be a minimum of disruption to the performance of our API and Applications services. We are therefore vulnerable to service interruptions of our third-party data center providers, such as IBM Softlayer and Amazon Web Services, or AWS; and of third-party hosted services. We may experience interruptions, delays and outages in third-party service and availability due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints caused by technical failures, natural disasters, fraud or security attacks. To the extent that we do not effectively address interruptions, delays and outages in our data center providers’ and other hosted providers’ service and availability or capacity constraints, our business, results of operations and financial condition may be adversely affected.
In some cases we rely on purchased or leased hardware and software licensed from third parties in order to provide our services. For example, Broadsoft, Inc. provides us with infrastructure, call termination and origination services, and other hardware and software in connection with certain of our Enterprise offerings. We also integrate third-party licensed software components into our platform. This hardware and software may not continue to be available on commercially reasonable terms or pricing or may fail to continue to be updated to remain competitive. The loss of the right to use this third party hardware or software may increase our expenses or impact the provisioning of our services. The failure of this third party hardware or software could materially impact the performance of our services and may cause material harm to our business or results of operations.
We outsource some of our cloud infrastructure to AWS which hosts certain of our products and platform. Customers of our products need to be able to access our platform at any time, without interruption or degradation of performance. AWS runs its own platform that we access, and we are, therefore, vulnerable to service interruptions at AWS. To the extent that we do not effectively address capacity constraints, either through AWS or alternative providers of cloud infrastructure, our business, results of operations and financial condition may be adversely affected. In addition, any changes in service levels from AWS may adversely affect our ability to meet our customers’ requirements.
Flaws in our technology and systems or our failure to adapt our systems to any new Internet Protocol could cause delays or interruptions of service, which could damage our reputation, cause us to lose customers, and limit our growth.
Our service may be disrupted by problems with our technology and systems that we provide to customers, software or facilities and overloading of our network. As we attract new customers, we expect increased call volume that we need to manage to avoid network interruptions. Interruptions have caused and may in the future cause us to lose customers and offer substantial customer credits, which could adversely affect our revenue and profitability. Network interruptions have also impaired our ability at times to sign-up new customers and the ability of customers to manage their accounts. If service interruptions or other outages adversely affect the perceived reliability of our service or customer service, we may have difficulty attracting and retaining customers and our brand reputation and growth may suffer.
Unpredictable technological disruptions, natural disasters, pandemic diseases, or other disruptions outside of our control could cause significant business interruptions resulting in harm to our business operations and financial condition.
We utilize third-party Internet-based or “cloud” computing services in connection with some of our business operations. Any disruption to the Internet or to our third-party Web hosting or cloud computing providers, including technological or business-related disruptions, could adversely impact the experience of our customers and have adverse effects on our operations. In addition, fires, floods, earthquakes, power losses, telecommunications failures, and similar "Acts of God" could damage these systems and hardware or cause them to fail completely. While we do maintain redundant systems consistent with industry best practices, certain events could result in downtime for our operations and could adversely affect our business.

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Our operations, and the operations of our vendors and customers, may also suffer interruptions caused by natural disasters, acts of terrorism or pandemic diseases, and such operations may be further affected by government reactions due to such incidents. For example, the Company has both employees and business operations in the Asia Pacific, including China. The recent and ongoing coronavirus outbreak stemming from China (COVID-19) has resulted in increased travel restrictions and extended shutdown of certain businesses in China and the larger Asia Pacific region. These or any further political or governmental developments or health concerns in China, or other countries in which we operate, could result in social, economic or labor instability. Such uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.
The storage, processing, and use of personal information and other confidential information subjects us to evolving governmental laws and regulation, commercial standards, contractual obligations, and other legal obligations related to consumer and data privacy, which may have a material impact on our costs, use of our products and services, or expose us to increased liability.
Federal, state, local and foreign laws and regulations, commercial commitments and industry standards, each provide for obligations and restrictions with respect to data privacy and security, as well as the collection, storage, retention, use, processing, transmission, sharing, disclosure and protection of personal information and other customer data. The evolving nature of these obligations and restrictions dictates that differing interpretations, inconsistency or conflicts among countries or rules, and general uncertainty impact the application to our business. These new laws may also impact our innovation and business drivers in developing new and emerging technologies (e.g., artificial intelligence and machine learning).
These obligations and restrictions may limit our ability to collect, store, process, use, transmit and share data with our customers, employees, and third party providers, which in turn could limit the ability of our customers to collect, store, retain, protect, use, process, transmit, share and disclose data with others through our products and services. Compliance with, and other burdens imposed by, such obligations and restrictions could increase the cost of our operations and impact our ability to market our products and services through effective segmentation.
An example of data privacy and security obligations and restrictions include the European Union General Data Protection Regulation, GDPR. The GDPR was adopted in April 2016 and comprehensively regulates the processing of personal data of any individual residing in the EU. The GDPR effectively requires any company processing data of EU residents to develop a comprehensive privacy program. The GDPR became effective on May 25, 2018. In addition, in January 2017, the European Commission introduced a new proposed ePrivacy regulation that would restrict communications service provider’s ability to use metadata and content from communications services. In order to become effective, the proposal needs to be adopted by the European Council and European Parliament. In October 2016, the Federal Communications Commission adopted a new privacy rules for the U.S. communications industry. These rules greatly extended the scope of FCC privacy regulation. Numerous parties have filed petitions for reconsideration at the FCC on the new privacy rules.
Additionally, California enacted the California Consumer Privacy Act ("CCPA"), which is a sweeping legislation with some similarities to GDPR, which came into effect on January 1, 2020. Pursuant to the CCPA, we are required, among other things, to make certain enhanced disclosures related to California residents regarding our use and disclosure of their personal information, allow California residents to opt-out of certain uses and disclosures of their personal information without penalty, provide Californians with other choices related to personal data in our possession, and obtain opt-in consent before engaging in certain uses of personal information relating to Californians under the age of 16.
Failure to comply with obligations and restrictions related to applicable data protection laws, regulations, standards, and codes of conduct, as well as our own posted privacy policies and contractual commitments could subject us to lawsuits, fines, criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity, loss of user confidence in our services, and loss of users, which could materially harm our business. Additionally, third-party contractors may have access to customer or employee data. If these or other third-party vendors violate obligations and restrictions related to applicable data protection laws or our policies, such violations may also put our customers’ or employees’ information at risk and could in turn have a material and adverse effect on our business.
Our Business segment is growing rapidly, and any inability to scale our business and grow efficiently could materially and adversely harm our business and results of operations.
As our Business segment expands, we will need to continue to improve our application architecture, integrate our products and applications across our technology platforms, integrate with third-party systems, and maintain infrastructure performance. We expect the number of users, the amount of data transferred and processed, the number of locations where our service is being used, and the volume of communications over our networks to continue to expand. To address this growth, we will need to scale our systems and customer services organization. Our ability to execute on these initiatives may impact system and network performance, customer satisfaction, and ultimately, sales and revenue. These efforts may also divert management resources. These factors may materially and adversely harm our business and results of operations.

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We depend on third-party vendors to supply, configure and deliver the phones that we sell. Any delays in delivery, or failure to operate effectively with our own servers and systems, may result in delay or failure of our services, which could harm our business, financial condition and results of operations.
We rely on Yealink Inc. and Polycom, Inc. to provide, and a single fulfillment agent to configure and deliver, the phones that we offer for sale to our customers that use our Applications services. If these third parties are unable to deliver phones of acceptable quality or quantity, or in a timely manner, we may be forced to offer replacements at a higher cost than what is currently contracted. In addition, these phones must interoperate with our servers and systems. If either of our providers changes the operation of their phones, we may be required to engage in development efforts to ensure that the new phones interoperate with our system. The failure of our vendor-supplied phones to operate effectively with our system could impact our customers’ ability to use our services and could cause customers to cancel our services, which may cause material harm to our business or results of operations.
We market our products and services to small and medium-sized businesses, which may be disproportionately impacted by fluctuations in economic conditions.
We market our products to small and medium-sized businesses. Customers in this market may be affected by economic downturns to a greater extent, and may have more limited financial resources, than larger or more established businesses. If customers in our Business markets experience financial hardship as a result of a weak economy, the demand for our services could be materially and adversely affected.
Significant foreign currency exchange rate fluctuations could adversely affect our financial results.
Because our consolidated financial statements are presented in U.S. dollars, increases or decreases in the value of the U.S. dollar relative to other currencies in which we transact business could materially adversely affect our financial results. For example, our API business collects revenues in Euros, and accordingly the strengthening of the U.S. dollar relative to the Euro adversely affects our revenue and operating results presented in U.S. dollars. In addition, on June 23, 2016, the United Kingdom held a referendum in which a majority of voters approved an exit from the European Union, or E.U., commonly referred to as "Brexit." As a result of this referendum, the U.K. officially withdrew from the EU on January 31, 2020, subject to a transition period until the end of 2020 while the U.K. and EU negotiate additional arrangements. Brexit has continued to cause significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business, such as the British Pound, Euro and other currencies. Such strengthening of the U.S. dollar relative to other currencies may adversely affect our revenue and operating results. In addition, changes to U.K. border and immigration policy could likewise occur as a result of Brexit, affecting our U.K. operation's ability to recruit and retain employees from outside the U.K.
If we fail to protect unique aspects of our internally developed systems, technology, products, and software and our trademarks, we may become involved in costly litigation or our business or brand may be harmed.
Our ability to compete effectively is dependent in large part upon the maintenance and protection of systems and software that we have developed internally based on open standards. While we own over 235 issued U.S. patents as well as a number of foreign patents and over 45 pending U.S. patent applications along with a number of foreign patent applications, we cannot patent much of the technology that is important to our business. Our pending patent applications may not be granted. Any issued patent that we own may be challenged, narrowed, invalidated, or circumvented. To date, we have relied on patent, copyright and trade secret laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights to this technology. We typically enter into confidentiality agreements with our employees, consultants, customers, partners, and vendors in an effort to control access to and distribution of technology, software, documentation, and other information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use this technology without authorization. Policing unauthorized use of this technology is difficult. The steps we take may not prevent misappropriation of the technology we rely on. In addition, effective protection may be unavailable or limited in some jurisdictions outside the United States, Canada, and the United Kingdom. Litigation may be necessary in the future to enforce or protect our rights or to determine the validity and scope of the rights of others. That litigation could cause us to incur substantial costs and divert resources away from our daily business, which in turn could materially adversely affect our business.
The unlicensed use of our brands by third parties could harm our reputation, cause confusion among our customers, and impair our ability to market our services. To that end, we have registered numerous trademarks and service marks and have applied for registration of our trademarks and service marks in the United States and abroad to establish and protect our brand names as part of our intellectual property strategy. If our applications receive objections or are successfully opposed by third parties, it may be difficult for us to prevent third parties from using our brand without our permission. Moreover, successful opposition to our applications might encourage third parties to make additional oppositions or commence trademark infringement proceedings against us, which could be costly and time consuming to defend against. If we decide to take limited or no action to protect our trademarks, our trademark rights may be diluted and subject to challenge or invalidation, which could materially and adversely affect our brand in the marketplace.

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Third parties may be capable of fraudulently using our name to obtain access to customer accounts and other personal information, use our services to commit fraud or steal our services or equipment, which could damage our reputation, limit our growth, and cause us to incur additional expenses.
Our customers have been subject to “phishing,” which occurs when a third party calls or sends an email or pop-up message to a customer that claims to be from a business or organization that provides services to the customer. The purpose of the inquiry is typically to encourage the customer to visit a bogus website designed to look like a website operated by the legitimate business or organization or provide information to the operator. At the bogus website, the operator attempts to trick the customer into divulging customer account or other personal information such as credit card information or to introduce viruses through “Trojan horse” programs to the customers’ computers. This has resulted in identity theft from our customers and the unauthorized use of Vonage services. Third parties have also used our communications services to commit fraud. Although we have engaged a third party to assist in the shutdown of purported phishing sites, if we are unable to detect and prevent “phishing,” use of our services for fraud, and similar activities, our brand reputation and growth may suffer and we may incur additional costs, including costs to increase security, or be required to credit significant amounts to customers.
Third parties also have used our communications services and obtained delivery of our equipment without paying, including by submitting fraudulent credit card information. This has resulted in our incurring the cost of providing the services, including incurring call termination fees, or providing the equipment without any corresponding revenues. We have implemented anti-fraud procedures in order to limit the expenses resulting from theft of service or equipment. If our procedures are not effective, theft of service or equipment could significantly increase our expenses and negatively impact our profitability.
The debt agreements governing our financing contain restrictions that may limit our flexibility in operating our business or executing on our acquisition strategy.
On July 31, 2018, we replaced our 2016 Credit Facility previously consisting of a $125 million senior secured term loan and a $325 million revolving credit facility with the 2018 Credit Facility consisting of a $100 million senior secured term loan and a $500 million revolving facility. The 2018 Credit Facility contains customary representations and warranties and affirmative covenants that limit our ability and/or the ability of certain of our subsidiaries to engage in specified types of transactions. These covenants and other restrictions may under certain circumstances limit, but not necessarily preclude, our and certain of our subsidiaries’ ability to, among other things:

consolidate or merge;
create liens;
incur additional indebtedness;
dispose of assets;
consummate acquisitions;
make investments; or
pay dividends and other distributions.

Under the 2018 Credit Facility, we are required to comply with financial covenants, including the following financial covenants:
specified maximum consolidated leverage ratio;
specified minimum consolidated fixed coverage charge ratio, minimum cash position and maximum capital expenditures.

Our ability to comply with such financial and other covenants may be affected by events beyond our control, so we may not be able to comply with these covenants. A breach of any such covenant could result in a default under the 2018 Credit Facility. In that case, the lenders could elect to declare due and payable immediately all amounts due under the 2018 Credit Facility, including principal and accrued interest.

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If we require additional capital, we may not be able to obtain additional financing on favorable terms or at all.
We may need to pursue additional financing to respond to new competitive pressures, pay extraordinary expenses such as litigation settlements or judgments or fund growth, including through acquisitions. Because of our past significant losses and our limited tangible assets, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the capital markets. In addition, the credit documentation for our recent financing contains affirmative and negative covenants that affect, and in many respects may significantly limit or prohibit, among other things, our and certain of our subsidiaries’ ability to incur, refinance or modify indebtedness and create liens. Our credit card processors have the ability to impose significant holdbacks in certain circumstances. The reinstatement of such holdbacks likely would have a material adverse effect on our liquidity. Under our credit card processing agreements with our Visa, MasterCard, American Express, and Discover credit card processors, the credit card processor has the right, in certain circumstances, including adverse events affecting our business, to impose a holdback of our advanced payments purchased using a Visa, MasterCard, American Express, or Discover credit card, as applicable, or demand additional reserves or other security. If circumstances were to occur that would allow any of these processors to reinstate a holdback, the negative impact on our liquidity likely would be significant. In addition, our Visa and MasterCard credit card processing agreement may be terminated by the credit card processor at its discretion if we are deemed to be financially insecure. As a significant portion of payments to us are made through Visa and MasterCard credit cards, if the credit card processor does not assist in transitioning our business to another credit card processor, the negative impact on our liquidity likely would be significant. There were no cash reserves and cash-collateralized letters of credit with any credit card processors as of December 31, 2018.
We depend on the continued services of our senior management and other key employees, the loss of any of whom could adversely affect our business, results of operations and financial condition.
Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue opportunities and services innovations. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. For example, Chief Financial Officer David Pearson has announced his retirement, effective May 2020. None of our executive officers or other senior management personnel is bound by a written employment agreement and any of them may therefore terminate employment with us at any time with no advance notice. The replacement of any of these senior management personnel would likely involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives and acquisition integrations. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, financial condition, or results of operations.
We may be subject to damaging and disruptive intellectual property disputes that could materially and adversely affect our business, results of operations, and financial condition, as well as the continued viability of our company.
There has been substantial litigation in the cloud communications, Applications, VoIP, telecommunications, hosted services, and related industries regarding intellectual property rights and, given the rapid technological change in our industry, expansion into new technological and geographical markets, and our continual development of new products and services, we and/or our commercial partners may be subject to infringement claims from time to time.  For example, we may be unaware of filed patent applications and issued patents that could include claims that might be interpreted to cover our products and services.  We have been subject to patent infringement claims in the past, and from time to time we receive letters from third parties offering an opportunity for us to obtain licenses to patents that may be relevant to our business or alleging that our services infringe upon third party patents or other intellectual property. We may seek to obtain rights to third party technology in the future, but may not be able to agree upon commercially reasonable terms or at all with respect to obtaining such rights. If we are unable to extend existing licenses or are unable to obtain rights to other technology that may be commercially advantageous or necessary for our product and service offerings, we may experience a decrease in the quality of our products or services or we may lose the ability to provide our products and services on a non-infringing basis until alternative technology or suitable alternative products and services can be developed, identified, obtained either through acquisition, license or other grants of rights, and integrated.
Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our services and could cause us to pay substantial royalties, licensing fees, damages or settlement fees. Our agreements with certain customers, vendors, or partners may obligate us to defend or indemnify them in connection with such claims of infringement, further increasing our costs of defense and potential liability. Although we generally limit our contractual liability regarding such obligations, we may incur significant liability with respect to them, and disputes with our customers, vendors or partners over such obligations may have an adverse relationship on our relations with those entities. The defense of any lawsuit could divert management’s efforts and attention from ordinary business operations and result in time-consuming and expensive litigation, regardless of the merits of such claims. These outcomes may:

result in the loss of a substantial number of existing customers or prohibit the acquisition of new customers;
cause us to accelerate expenditures to preserve existing revenues;

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cause existing or new vendors to require prepayments or letters of credit;
cause our credit card processors to demand reserves or letters of credit or make holdbacks;
result in substantial employee layoffs;
materially and adversely affect our brand in the marketplace and cause a substantial loss of goodwill;
cause our stock price to decline significantly;
materially and adversely affect our liquidity, including our ability to pay debts and other obligations as they become due;
cause us to change our business methods or services;    
require us to cease certain business operations or offering certain products and services; and
lead to our bankruptcy or liquidation.
The regulatory framework for API services continues to develop, as many existing regulations may not fully contemplate this type of service or business model; future legislative, regulatory or judicial actions impacting API could adversely affect our business and financial results of operations, increase the cost and complexity of compliance, and expose us to liability.
In many countries where we offer API products, it is not clear how our API Platform fits into the communications regulatory framework. The Company is also expanding into new regions, such as the Asia Pacific (including China), where regulations are unclear and subject to rapid change. Regulators could claim that our API products are subject to licensing and substantive communications regulatory requirements, could modify their regulations to explicitly expand the obligations to which our API products are subject, or could increase the level of scrutiny and enforcement they apply.
Future legislative, judicial or other regulatory actions could have a negative effect on our business. If our API products become subject to additional rules and regulations applicable to technology or communications providers, we may incur significant litigation and compliance costs, or it may significantly impact our ability to compete. Moreover, the regulatory environment is constantly evolving and changes to the applicable regulations could impose additional compliance costs and require modifications to our technology operations. We may also experience interruptions or limitations on the delivery and use of our API products on our platform, or incur significant losses based on the timing of customer payments and any difficulty in collecting accounts receivable from our API Platform customers. Any decreased use of our products and services or limitation on our ability to collect payments from our customers could adversely affect our business, results of operations, and financial condition.
We may also have to restructure or discontinue certain of our service offerings, exit certain markets, or raise the price of our services in response to regulatory changes or actions, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost or complexity of doing business, limit our growth, or impact our results of operations.
Our VoIP services are subject to country-specific governmental regulation and related actions and taxes that may increase our costs or impact our product offerings.
In many countries, we are not a regulated telecommunications business subject primarily to regulations surrounding provision of emergency services and payment into universal service type funds. In some countries, providing VoIP services is or may be illegal. We may need to change our service offerings to avoid regulation as a telecommunications business in a jurisdiction, or if we are treated as a fully regulated telecommunications business, we may be required to incur additional expenses. In addition, if governments believe that we are providing unauthorized service in their countries, they may pursue fines, penalties, or other governmental action, including criminal action, that may damage our brand and reputation. If we use a local partner to provide services in a country and the local partner does not comply with applicable governmental regulations, we may face additional regulation, liabilities, penalties or other governmental action, and our brand and reputation may be harmed.
In addition to the risk of being directly subjected to regulation, decisions by foreign regulators to increase the charge for terminating international calls into their countries could cause increased costs, impact margin, and impact churn. These regulatory actions may be taken without notice and cause us to react quickly to changing market conditions. These efforts could divert management’s efforts and attention from ordinary business operations which could materially and adversely affect our results of operations.

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As a United States-based company, any foreign subsidiary or joint venture that we use for international operations may be subject to a variety of governmental regulations in the countries where we market our products, including tariffs, taxes and employment regulations different from those in the U.S. For example, distributions of earnings and other payments, including interest, received from our foreign subsidiaries may be subject to withholding taxes imposed by the jurisdiction in which such entities are formed or operating, which will reduce the amount of after-tax cash we can receive. In general, as a United States corporation, we may claim a foreign tax credit against our federal income tax expense for such foreign withholding taxes and for foreign income taxes paid directly by foreign corporate entities in which we own 10% or more of the voting stock. The ability to claim such foreign tax credits and to utilize net foreign losses is, however, subject to numerous limitations, and we may incur incremental tax costs as a result of these limitations or because we are not currently in a tax-paying position in the United States. We may also be required to include in our income for United States federal income tax purposes our proportionate share of certain earnings of those foreign subsidiaries that are classified as “controlled foreign corporations” without regard to whether distributions have been actually received from such subsidiaries.
Our VoIP services are subject to regulation in the United States, United Kingdom, and Canada, and in additional countries as we expand globally. Future legislative, regulatory or judicial actions could adversely affect our business and expose us to liability and limit our growth potential.
The United States, United Kingdom, and Canada have applied some traditional telephone company regulations to VoIP and continue to evaluate how VoIP should be regulated, as are other countries as we expand globally. The effects of future regulatory developments are uncertain. At the federal level in the U.S., the Federal Communications Commission has imposed certain telecommunications regulations on VoIP services including, but not limited to:

Requirements to provide E-911 service;
Communications Assistance for Law Enforcement Act obligations;
Obligation to support Universal Service;
Customer Proprietary Network Information, or CPNI, requirements;
Disability access obligations;
Local Number Portability requirements; and
Consumer protection, including protection from unwanted telemarketing and other calls.
As we expand globally, these types of regulations are likely to be similarly enacted and enforced by local regulatory authorities.
In general, the focus of interconnected VoIP telecommunications regulation is at the federal level. On November 12, 2004, the FCC issued a declaratory ruling providing that our service is subject to federal regulation and preempted the Minnesota Public Utilities Commission from imposing certain of its regulations on us. While this ruling does not exempt us from all state oversight of our service, it effectively prevents state telecommunications regulators from imposing certain burdensome and inconsistent market entry requirements and certain other state utility rules and regulations on our service. Despite this, Vonage may be subject to state and local regulatory requirements including:

Payment of state and local E-911 fees; and
State Universal Service support obligations.
In Canada, the Canadian Radio-Television and Telecommunications Commission, or CRTC, regulates VOIP Service. In the UK, the Office of Communications, or OFCOM, regulates voice services. Other regulatory bodies in various jurisdictions regulate services Vonage offers its customers. These regulated services are similar to those regulated in the United States discussed above. Future legislative, judicial or other regulatory actions could have a negative effect on our business. If we become subject to the rules and regulations applicable to telecommunications providers in individual states or other foreign jurisdictions, we may incur significant litigation and compliance costs, and we may have to restructure our service offerings, exit certain markets, or raise the price of our services, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth.

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We rely on third parties to provide a portion of our customer service representatives, provide aspects of our E-911 service, which differs from traditional 911 service, and initiate local number portability for our customers. If these third parties do not provide our customers with reliable, high-quality service, our reputation will be harmed and we may lose customers.
We offer our customers support 24 hours a day, seven days a week through both our comprehensive online account management website and our toll free number. Our customer support is currently provided via United States based employees as well as third party partners located in various global locations. Our third-party providers generally represent us without identifying themselves as independent parties. The ability to support our customers may be disrupted by natural disasters, inclement weather conditions, civil unrest, and other adverse events in the locations where our customer support is provided.
We also contract for services required to provide E-911 services including assistance in routing emergency calls, terminating E-911 calls, operating a national call center that is available 24 hours a day, seven days a week to receive certain emergency calls, and maintaining PSAP databases for the purpose of deploying and operating E-911 services. Interruptions in service from our vendor could cause failures in our customers’ access to E-911 services and expose us to liability and damage our reputation.
We also have agreements with companies that initiate our local number portability, which allow new customers to retain their existing telephone numbers when subscribing to our services.
If any of these third parties do not provide reliable, high-quality service, our reputation and our business will be harmed. In addition, industry consolidation among providers of services to us may impact our ability to obtain these services or increase our expense for these services.
Customer misuse of our API products in violation of the Telephone Consumer Protection Act may cause us to face litigation risk.
The Telephone Consumer Protection Act of 1991 restricts telemarketing and the use of automatic SMS text messages without proper consent. The scope and interpretation of the laws that are or may be applicable to the delivery of text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face liability.
We may be exposed to liabilities under anti-corruption, export control and economic sanction regulations, and similar laws and regulations, and any determination that we violated any of these laws or regulations could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, the UK Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials, political parties, and/or private parties by persons and entities for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make sales internationally. In addition, we plan to expand our international operations through potential joint ventures with local partners. Our international activities create the risk of unauthorized payments or offers of payments by one of our employees, consultants, partners, sales agents or distributors, even though these parties are not always subject to our control. It is our policy to prohibit these practices by our employees, consultants, partners, sales agents or distributors, however, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, partners, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA, the UK Bribery Act or other laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results, and financial condition.
Our products and services may be subject to export control and economic sanctions regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department's Office of Foreign Assets Controls. Our products and services must be offered and sold in compliance with these laws and regulations. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face liability. In addition, changes in our products or services, changes in applicable regulations, or change in the target of such regulations, could also result in decreased use of our products and services, or in our decreased ability to sell our products or provide our services to existing or prospective customers with international operations. Any decreased use of our products and services or limitation on our ability to export our products and provide our services could adversely affect our business, results of operations and financial condition.

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Actions of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.
From time to time, we may be subject to proposals by stockholders urging us to take certain corporate actions. For example, on March 15, 2019, we entered into a cooperation agreement with an activist shareholder and certain related investors. If activist stockholder activities ensue, our business could be adversely affected because responding to proxy contests and reacting to other actions by activist stockholders can be costly and time-consuming, disrupt our operations, and divert the attention of management and our employees. For example, we may be required to retain the services of various professionals to advise us on activist stockholder matters, including legal, financial, and communications advisers, the costs of which may negatively impact our future financial results. This may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Our API Platform offerings may be subject to liability for historic and future sales, use and similar taxes, that may increase our costs or impact our product offerings.
In some United States tax jurisdictions in which we conduct operations, sales and use and telecommunications taxes could apply to our API products. Historically, we have not billed or collected these taxes from our API customers. It is possible that some tax jurisdictions may assert that such taxes are applicable to our API products, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes on our API customers in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our business, results of operations and financial condition. To the extent that we decide to collect such taxes from our API customers in the future, we may have some customers that question the incremental tax charges and some may seek to negotiate lower pricing from us, which could adversely affect our business, results of operations and financial condition.
The global scope of our operations may subject us to potentially adverse tax consequences.
We generally report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Intercompany relationships are subject to complex transfer pricing regulations in various jurisdictions. If revenue and taxing authorities disagree with positions we have taken we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. In addition, changes in tax laws of countries in which we do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our business, cash flows, results of operations and financial position.
We have incurred cumulative losses since our inception and may not achieve consistent profitability in the future.
We incurred a net loss attributable to Vonage of $19,482 for the year ended December 31, 2019 and our accumulated deficit is $631,009 from our inception through December 31, 2019. Although we have achieved profitability in prior years and believe we will achieve consistent profitability in the future, we ultimately may not be successful.  We believe that our ability to achieve consistent profitability will depend, among other factors, on our ability to continue to achieve and maintain substantive operational improvements and structural cost reductions while maintaining and growing our net revenues.  In addition, certain of the costs of our business are not within our control and may increase.  For example, we and other telecommunications providers are subject to regulatory termination charges imposed by regulatory authorities in countries to which customers make calls.
We may be unable to fully realize the benefits of our net operating loss, or NOL, carry forwards if an ownership change occurs.
If we were to experience a “change in ownership” under Section 382 of the Internal Revenue Code, or Section 382, the NOL carryforward limitations under Section 382 would impose an annual limit on the amount of the future taxable income that may be offset by our NOL generated prior to the change in ownership. If a change in ownership were to occur, we may be unable to use a significant portion of our NOL to offset future taxable income. In general, a change in ownership occurs when, as of any testing date, there has been a cumulative change in the stock ownership of the corporation held by 5% stockholders of more than 50 percentage points over an applicable three-year period. For these purposes, a 5% stockholder is generally any person or group of persons that at any time during an applicable three-year period has owned 5% or more of our outstanding common stock. In addition, persons who own less than 5% of the outstanding common stock are grouped together as one or more “public group” 5% stockholders. Under Section 382, stock ownership would be determined under complex attribution rules and generally includes shares held directly, indirectly through intervening entities, and constructively by certain related parties and certain unrelated parties acting as a group. We have implemented a Tax Benefits Preservation Plan intended to provide a meaningful deterrent effect against acquisitions that could cause a change in ownership, however this is not a guarantee against such a change in ownership.

24     VONAGE ANNUAL REPORT 2019



We may not have the ability to raise the funds necessary to settle conversions of the convertible senior notes due 2024 in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the notes.
Holders of our 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) have the right to require us to repurchase their Convertible Senior Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Convertible Senior Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Senior Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Senior Notes surrendered therefor or Convertible Senior Notes being converted. In addition, our ability to repurchase the Convertible Senior Notes or to pay cash upon conversions of the Convertible Senior Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Convertible Senior Notes at a time when the repurchase is required by the indenture setting forth the terms of the Convertible Senior Notes or to pay any cash payable on future conversions of the Convertible Senior Notes as required by the indenture would constitute a default under the indenture. A default under the indenture setting forth the terms of the Convertible Senior Notes or the occurrence of the fundamental change itself may lead to a default under our 2018 Credit Facility or other agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Senior Notes or make cash payments upon conversions thereof. The increase in the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption may not adequately compensate holders for any lost value of such holders’ Convertible Senior Notes as a result of such transaction.
If a make-whole fundamental change occurs prior to the maturity date or if we issue a notice of redemption with respect to the Convertible Senior Notes, under certain circumstances, we will increase the conversion rate by a number of additional shares of our common stock for Convertible Senior Notes converted in connection with such make-whole fundamental change or notice of redemption, as the case may be. The increase in the conversion rate will be determined based on the date on which the specified corporate transaction becomes effective, or the date of the notice of redemption, as the case may be and the price paid (or deemed to be paid) per share of our common stock in such transaction or with respect to such redemption, as the case may be. The increase in the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption may not adequately compensate holders for any lost value of such holders’ Convertible Senior Notes as a result of such transaction or redemption. In addition, if the price per share of our common stock paid (or deemed paid) in the transaction is greater than $60.00 per share or less than $11.73 per share (in each case, subject to adjustment), no additional shares will be added to the conversion rate. Moreover, in no event will the conversion rate per $1,000 aggregate principal amount of Convertible Senior Notes as a result of this adjustment exceed 85.2514 shares of common stock, subject to adjustment in the same manner as the conversion rate.
Our obligation to increase the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption could be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness and equitable remedies.
The conditional conversion feature of the Convertible Senior Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Senior Notes is triggered, holders of Convertible Senior Notes will be entitled to convert the Convertible Senior Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Senior Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of Convertible Senior Notes do not elect to convert their Convertible Senior Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Senior Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

25     VONAGE ANNUAL REPORT 2019



Convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, could have a material effect on our reported financial results.
Under certain circumstances, convertible debt instruments (such as the Convertible Senior Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Convertible Senior Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Convertible Senior Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Senior Notes, then our diluted earnings per share could be adversely affected.
The capped call transactions entered into in connection with the pricing of the Convertible Senior Notes may affect the value of the Convertible Senior Notes and our common stock.
In connection with the pricing of the Convertible Senior Notes and subsequently in connection with the exercise of the initial purchasers’ exercise of their option to purchase additional Convertible Senior Notes, we entered into capped call transactions (the “Capped Calls”) with certain option counterparties. The Capped Calls are expected generally to reduce the potential dilution upon conversion of the Convertible Senior Notes and/or offset any cash payments we are required to make in excess of the aggregate principal amount of converted Convertible Senior Notes, as the case may be, with such reduction and/or offset subject to a cap.
In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of the Convertible Senior Notes and prior to the maturity of the Convertible Senior Notes (and are likely to do so during any observation period related to a conversion of the Convertible Senior Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Convertible Senior Notes, which could affect holders’ ability to convert the Convertible Senior Notes and, to the extent the activity occurs during any observation period related to a conversion of Convertible Senior Notes, it could affect the number of shares and value of the consideration that holders will receive upon conversion of the Convertible Senior Notes.
In addition, if any such Capped Call fails to become effective, the option counterparty party thereto may unwind its hedge positions with respect to our common stock, which could adversely affect the value of our common stock and, if the Convertible Senior Notes have been issued, the value of the Convertible Senior Notes.
Our certificate of incorporation and bylaws and the agreements governing our indebtedness contain provisions that could delay or discourage a takeover attempt, which could prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.
Certain provisions of our Restated Certificate of Incorporation and our Amended and Restated By-laws may make it more difficult for, or have the effect of discouraging, a third party from acquiring control of us or changing our board of directors and management. These provisions:

permit our board of directors to issue additional shares of common stock and preferred stock and to establish the number of shares, series designation, voting powers if any, preferences, other special rights, qualifications, limitations or restrictions of any series of preferred stock;
limit the ability of stockholders to amend our Restated Certificate of incorporation and Amended and Restated By-laws, including supermajority requirements;
allow only our board of directors, Chairman of the board of directors or Chief Executive Officer to call special meetings of our stockholders;
eliminate the ability of stockholders to act by written consent;
require advance notice for stockholder proposals and director nominations; and
limit the removal of directors and the filling of director vacancies.
In addition, our Restated Certificate of Incorporation and Amended and Restated By-laws were amended on June 13, 2018 to declassify our Board of Directors. The declassification of the Board will be phased in commencing with the 2019 annual meeting of stockholders and will result in the Board being fully declassified (and all Board members standing for annual elections) commencing with the 2021 annual meeting of stockholders. A classified structure will therefore remain in place during the phase-in period.

26     VONAGE ANNUAL REPORT 2019



Such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices. Any delay or prevention of, or significant payments required to be made upon, a change of control transaction or changes in our board of directors or management could deter potential acquirors or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.

 
  
ITEM 1B. Unresolved Staff Comments
None.
 
 
ITEM 2. Properties

Our headquarters are located in Holmdel, New Jersey. We also lease office, building space and research and development sites around the world, primarily in the United States, Europe, Israel, Australia and Asia. We sublease portions of office space including space in our Holmdel, NJ location to a third parties. We believe that the facilities that we occupy are in good condition, adequate for our current needs and do not anticipate leasing any material additional space.
 
 
ITEM 3. Legal Proceedings

Refer to Note 15, Commitments and Contingencies to our Consolidated Financial Statements included in this Annual Report on Form 10-K for a discussion of recent developments regarding our legal proceedings.

 
ITEM 4. Mine Safety Disclosures

Not Applicable.



27     VONAGE ANNUAL REPORT 2019



PART II

 
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 

Price Range of Common Stock
Our common stock was listed on the New York Stock Exchange from May 24, 2006 to December 30, 2019 and transferred to the Nasdaq Global Select Market starting December 31, 2019, both listings are under the ticker symbol “VG”.
 
Holders
At January 31, 2020, we had approximately 477 stockholders of record. This number does not include beneficial owners whose shares are held in street name. 
Dividends
We have never paid cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock for at least the next 12 months. We intend to retain all of our earnings, if any, for general corporate purposes, and, if appropriate, to finance the expansion of our business.

28     VONAGE ANNUAL REPORT 2019




Stock Performance Graph
The graphs below and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, or the Exchange Act, nor shall such information be deemed incorporated by reference into any filing under the Securities Act of 1933, or the Securities Act, or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act.
The graph below compares the cumulative total return of our common stock between December 31, 2014 and December 31, 2019, with the cumulative total return of (1) NASDAQ Telecommunications, (2) Russell 2000 Index, and (3) NASDAQ Computer. This graph assumes the investment of $100 on December 31, 2014 in our common stock, NASDAQ Telecommunications, Russell 2000 Index, and NASDAQ Computer, and assumes the reinvestment of dividends, if any.
COMPARISON OF THE CUMULATIVE TOTAL RETURN ON COMMON STOCK BET
WE
COMPARISON OF THE CUMULATIVE TOTAL RETURN ON COMMON STOCK BETWEEN DECEMBER 31, 2014 AND DECEMBER 31, 2019
Among Vonage Holdings Corp., the NASDAQ Telecommunications, the Russell 2000 Index, and the NASDAQ Computer.
 
chart-5f9115f580ea5eeb8b8.jpg
  
December 31,
  
2015

 
2016

 
2017

 
2018

 
2019

Vonage Holdings Corp.
$
150.66

 
$
179.79

 
$
266.93

 
$
229.13

 
$
194.49

NASDAQ Telecommunications
$
92.50

 
$
106.25

 
$
124.78

 
$
128.57

 
$
143.20

Russell 2000 Index
$
94.29

 
$
112.65

 
$
127.46

 
$
111.94

 
$
138.50

NASDAQ Computer
$
106.24

 
$
119.28

 
$
165.52

 
$
159.43

 
$
239.67


Common Stock Repurchases

See Note 10, Common Stock to the Company's Consolidated Financial Statements for information regarding common stock repurchases.
In connection with the issuance of the Convertible Senior Notes in June 2019, the Company repurchased an aggregate of 852,515, or $10 million, of shares of the Company’s outstanding common stock in privately negotiated transactions at a price of $11.73 per share, which was equal to the closing price per share of the Company’s common stock on June 11, 2019, the date of the pricing of the offering of the Convertible Senior Notes.


29     VONAGE ANNUAL REPORT 2019



 
ITEM 6. Selected Financial Data
The following table presents the Company's historical selected financial data. This information should be read in conjunction with the Consolidated Financial Statements and the related notes thereto listed in Item 15 and included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company has completed several acquisitions as further described in Note 4, Acquisitions and Dispositions to the Company's Consolidated Financial Statements.
  
For the years ended December 31,
(In thousands, except per share amounts)
2019 (1)
 
2018 (2)
 
2017
 
2016 (3)
 
2015 (4)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Total revenues
$
1,189,346

 
$
1,048,782

 
$
1,002,286

 
$
955,621

 
$
895,072

Income from operations
6,763

 
51,911

 
59,391

 
44,154

 
52,992

(Loss) Income from continuing operations
(19,482
)
 
35,728

 
(33,933
)
 
13,151

 
25,035

Discontinued operations

 

 

 

 
(2,439
)
Net (loss) income
(19,482
)
 
35,728

 
(33,933
)
 
13,151

 
22,596

Plus: Net loss from discontinued operations attributable to noncontrolling interest

 

 

 

 
59

Net (loss) income attributable to Vonage
$
(19,482
)
 
$
35,728

 
$
(33,933
)
 
$
13,151

 
$
22,655

(Loss) Earnings per common share - continuing operations:
 
 
 
 
 
 
 
 
 
Basic
$
(0.08
)
 
$
0.15

 
$
(0.15
)
 
$
0.06

 
$
0.12

Diluted
$
(0.08
)
 
$
0.14

 
$
(0.15
)
 
$
0.06

 
$
0.11

Loss per common share - discontinued operations attributable to Vonage:
 
 
 
 
 
 
 
 
 
Basic
$

 
$

 
$

 
$

 
$
(0.01
)
Diluted
$

 
$

 
$

 
$

 
$
(0.01
)
(Loss) Earnings per common share - attributable to Vonage:
 
 
 
 
 
 
 
 
 
Basic
$
(0.08
)
 
$
0.15

 
$
(0.15
)
 
$
0.06

 
$
0.11

Diluted
$
(0.08
)
 
$
0.14

 
$
(0.15
)
 
$
0.06

 
$
0.10

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
242,018

 
237,499

 
225,311

 
215,751

 
213,147

Diluted
242,018

 
248,892

 
225,311

 
231,941

 
224,110

Statement of Cash Flow Data:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
92,926

 
$
123,205

 
$
128,058

 
$
93,456

 
$
134,485

Net cash used in investing activities
(52,079
)
 
(407,230
)
 
(30,737
)
 
(191,449
)
 
(153,509
)
Net cash (used in) provided by financing activities
(21,921
)
 
258,212

 
(96,242
)
 
68,054

 
35,451

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
1,364,700

 
1,259,488

 
858,681

 
935,666

 
784,566

Total notes payable, indebtedness under revolving credit facility and convertible notes, net
497,158

 
519,228

 
232,515

 
318,874

 
210,392

Capital lease obligations

 

 
140

 
3,428

 
7,761

Total stockholders’ equity
567,062

 
535,768

 
472,898

 
436,541

 
388,741

  

(1) The year ended December 31, 2019 includes the impacts of the adoption of ASC Topic 842, Leases on January 1, 2019.
(2) The year ended December 31, 2018 includes the impacts of the adoption of ASC Topic 606, Revenue from Contracts with Customers on January 1, 2018, the acquisition of NVM, which was completed in the fourth quarter, and the acquisition of TokBox, which was completed in the third quarter.
(3) The year ended December 31, 2016 includes the impacts of the acquisition of Nexmo, which was completed in the second quarter.
(4) The year ended December 31, 2015 includes the impacts of the acquisition of iCore, which was completed in the third quarter and the acquisition of Simple Signal, which was completed in the second quarter.





30     VONAGE ANNUAL REPORT 2019



 
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with “Selected Financial Data” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under “Item 1A—Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
  
OVERVIEW
 
We are a leading provider of cloud communications services for businesses and consumers. Our business services transform the way people work and businesses operate through a portfolio of communications solutions that enable internal collaboration among employees, while also keeping companies closely connected with their customers, across any mode of communication, on any cloud-connected device. Vonage customers can choose among or combine two separate service delivery options to suit their specific cloud communication needs. They can buy Applications Group solutions as a subscription and they can buy our API Platform Group offerings and consume our cloud communication as a service product as programmable modules, delivered via APIs. We also provide a robust suite of feature-rich residential communication solutions.
Business
For our Business customers, we provide innovative, cloud-based Applications, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable SIP based VoIP network along with contact center solutions. We also offer API solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment. We have a robust set of product families tailored to serve the full range of the business value chain, from the SMB market, through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and CRM solutions, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud, Oracle, and Clio. With our ability to integrate these cloud-based, workplace tools, Vonage integrates the entire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers that APIs provides. When combined with our MPLS network, as well as voice services over customers' broadband networks via our SmartWan solution, we create a differentiated offering.
Consumer
For our Consumer customers, we enable users to access and utilize our services and features, via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices. Our Consumer strategy is focused on the continued penetration of our core North American markets, where we will continue to provide value in international long distance and target under-served segments.
Services outside of the United States
We currently have Applications and Consumer operations in the United States, United Kingdom, and Canada and believe that our low-cost Internet based communications platform enables us to cost effectively deliver voice and messaging services to other locations throughout the world. We also have operations in the United States, United Kingdom, Hong Kong, and Singapore, and provide Applications solutions to our customers located in many countries around the world.
Trends in Our Industry
A number of trends in our industry have a significant effect on our results of operations and are important to an understanding of our financial statements.

31     VONAGE ANNUAL REPORT 2019



Competitive landscape. The business cloud communications markets and consumer services market in which we participate are highly competitive. We face competition from a board set of companies, including (i) SaaS companies, CCaaS companies, other alternative communication providers, other providers of cloud communication services and (ii) traditional telephone, wireless service providers, cable companies, and alternative communications providers with consumer offerings. As the cloud communications market evolves, and the convergence of voice, video, messaging, mobility and data networking technologies accelerates, we may face competition in the future from companies that do not currently compete in the market, including companies that currently compete in other sectors, companies that serve consumers rather than business customers, or companies which expand their market presence to include cloud communications. For additional information, refer to "Competition" in Part I, Business.
Regulation.  Our business has developed in a relatively lightly regulated environment. For further discussion regarding regulatory issues which impacts the Company, refer to "Regulation" in Note 15, Commitments and Contingencies to our financial statements.
Key Operating Data
The table below includes key operating data that our management uses to measure the growth and operating performance of the Business segment:
 
Business
For the Years Ended December 31,
 
 
2019

 
2018

 
2017

Service revenues per customer
$
447

 
$
358

 
$
327

Business revenue churn
1.1
%
 
1.1
%
 
1.2
%
Service revenues per customer.  Service revenues per customer for a particular period is calculated by dividing the average monthly service revenues for the period by the average number of customers over the number of months in the period. The average number of customers is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Service revenues excludes revenues from trading and auction customers. Service revenues per customer increased from $358 for 2018 to $447 for 2019 primarily driven by the Company's successful efforts to attract larger business customers and to expand services provided to our existing business customers.
Business revenue churn.  Business revenue churn is calculated by dividing the revenue from customers or customer locations that have been confirmed to be foregone during a period by the simple average of the total revenue from all customers in that period. Revenue for purposes of determining Business revenue churn is service revenue excluding revenue from our trading and auction customers, and usage in excess of a customer’s contracted service plan, regulatory fees charged to customers, and credits. The simple average of total revenue from all customers during the period is the total revenue as defined herein on the first day of the period, plus the total revenue as defined herein on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate business revenue churn differently, and their business revenue churn data may not be directly comparable to ours. Business revenue churn was flat at 1.1% for 2018 and 2019.  Our revenue churn may fluctuate over time due to economic conditions, seasonality in certain customer's operations, loss of customers who are acquired, and competitive pressures including promotional pricing. We are continuing to invest in our overall quality of service which includes customer care headcount and systems, billing systems, on-boarding processes and self-service options to ensure we scale our processes to our growth and continue to improve the overall customer experience.

32     VONAGE ANNUAL REPORT 2019



The table below includes key operating data that our management uses to measure the growth and operating performance of the Consumer segment:
 
Consumer
For the Years Ended December 31,
 
 
2019

 
2018

 
2017

Average monthly revenues per subscriber line
$
27.04

 
$
26.42

 
$
26.19

Subscriber lines (at period end)
1,087,819

 
1,287,649

 
1,492,067

Customer churn
1.8
%
 
1.8
%
 
2.0
%

Average monthly revenues per subscriber line.  Average monthly revenues per subscriber line for a particular period is calculated by dividing our revenues for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. The simple average number of subscriber lines for the period is the number of subscriber lines on the first day of the period, plus the number of subscriber lines on the last day of the period, divided by two. Our average monthly revenues per subscriber line increased from $26.42 for 2018 to $27.04 for 2019 due primarily to the Company's ability to retain its more tenured customers.
Subscriber lines.  Our subscriber lines include, as of a particular date, all paid subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines, including fax lines bundled with subscriber lines in our small office home office calling plans and soft phones, but do not include our virtual phone numbers and toll free numbers, which only allow inbound telephone calls to customers. Subscriber lines decreased from 1,287,649 as of December 31, 2018 to 1,087,819 as of December 31, 2019, reflecting planned actions to enhance the profitability of the assisted sales channel by eliminating lower performing locations and restructuring the pricing offers, and to shift investment to our business market.
Customer churn.  Customer churn is calculated by dividing the number of customers that have terminated during a period by the simple average of number of customers in a given period. The simple average number of customers during the period is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate customer churn differently, and their customer churn data may not be directly comparable to ours. Customer churn was flat at 1.8% for 2019 and for 2018. We maximize customer value by focusing marketing spend on higher return channels and away from assisted selling channels which had higher early life churn. We monitor customer churn on a daily basis and use it as an indicator of the level of customer satisfaction. Customers who have been with us for a year or more tend to have a lower churn rate than customers who have not. In addition, our customers who are international callers generally churn at a lower rate than customers who are domestic callers. Our customer churn will fluctuate over time due to economic conditions, competitive pressures including promotional pricing targeting international long distance callers, marketplace perception of our services, and our ability to provide high quality customer care and network quality and add future innovative products and services. See the discussion above for detail regarding churn impacting our business customers.
REVENUES
Revenues consist of services revenue and customer equipment and shipping fee revenue. Substantially all of our revenues are services revenue. For Consumer customers in the United States, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. For our Business customers, we offer SMB, mid-market, and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years. In addition, we provide managed equipment to Business customers for which the customers pay a monthly fee. Customers also have the opportunity to purchase premium features for additional fees. In addition, we derive revenue from usage-based fees earned from customers using our cloud-based software products. These usage-based software products include our messaging, voice, Verify and chat APIs. Usage-based fees include number of text messages sent or received using our messaging APIs, minutes of call duration activity for our voice APIs, and number of converted authentications for our Verify API. Services revenue is offset by the cost of certain customer acquisition activities, such as rebates and promotions. In addition, in certain instances, we charge disconnect fees which are recognized as revenue at the time the disconnect fees are collected from our customer.
In the United States, we charge regulatory, compliance and intellectual property, and E-911 recovery fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers of telecommunications services. In addition, we recognize revenue on a gross basis for contributions to the USF and related fees. All other taxes are recorded on a net basis.

33     VONAGE ANNUAL REPORT 2019



Revenues are generated from sales of customer equipment directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. In addition, customer equipment and shipping revenues include revenues from the sale of VoIP telephones in order to access our small and medium business services. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them.

OPERATING EXPENSES
Operating expenses consist of cost of revenues, sales and marketing expense, engineering and development expense, general and administrative expense, and depreciation and amortization.

RESULTS OF OPERATIONS
The following table sets forth, as a percentage of consolidated operating revenues, our consolidated statement of income for the periods indicated: 
  
For the Years Ended December 31,
  
2019
 
2018
 
2017
Total revenues
100
 %
 
100
 %
 
100
 %
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
Cost of revenues (excluding depreciation and amortization)
43

 
40

 
41

Sales and marketing
30

 
30

 
31

Engineering and development
6

 
5

 
3

General and administrative
13

 
13

 
12

Depreciation and amortization
7

 
7

 
7

Total operating expenses
99

 
95

 
94

Income from operations
1

 
5

 
6

Other Income (Expense):
 
 
 
 
 
Interest expense
(3
)
 
(1
)
 
(1
)
Other income (expense), net

 

 

Total other income (expense), net
(3
)
 
(1
)
 
(1
)
(Loss) Income before income taxes
(2
)
 
4

 
5

Income tax benefit (expense)
1

 

 
(8
)
Net (loss) income
(1
)%
 
4
 %
 
(3
)%
 


Management's discussion of the results of operations for the Years Ended December 31, 2019, and 2018,

The Company reported loss before income taxes of $26,108 and income before income taxes of $36,525 for the years ended December 31, 2019 and 2018, respectively. The decrease in (loss)/income before income taxes as compared to the prior year was primarily caused by higher other operating expenses of $101,623 primarily as a result of the acquisitions of NVM and TokBox in 2018 driven by increases in salary costs due to higher headcount, increases in sales and marketing expenses, and increases in depreciation and amortization expenses due to additional intangible assets acquired. In addition, there were increases in engineering and development expenses in connection with the Company's continued transformation focused on innovation.

The Company reported net loss of $19,482 and net income of $35,728, respectively, for the years ended December 31, 2019 and 2018. The decrease in net (loss)/income for the year ended December 31, 2019 is mainly due to the aforementioned decrease in (loss)/income before income taxes and the increase in income tax benefit/(expense) of $7,423.


34     VONAGE ANNUAL REPORT 2019



We calculate gross margin as total revenues less cost of service, which primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services and costs incurred when a customer first subscribes to our service. The following table presents total revenues, cost of revenues and the composition of gross margin for the years ended December 31, 2019, and 2018:
 
 
For the years ended December 31,
 
$ Change 2018 to 2019
% Change 2018 to 2019
$ Change 2017 to 2018
% Change 2017 to 2018
(in thousands, except percentages)
2019
2018
2017
 
Total revenues
$
1,189,346

$
1,048,782

$
1,002,286

 
$
140,564

13
%
$
46,496

5
%
Cost of revenues (1)
511,084

426,995

404,954

 
84,089

20
%
22,041

5
%
Gross margin
$
678,262

$
621,787

$
597,332

 
$
56,475

9
%
$
24,455

4
%
 
(1) Excludes depreciation and amortization of $38,167, $27,754, and $27,308, respectively.
Total revenues and cost of revenues were impacted by the following trends and uncertainties:

For the year ended December 31, 2019 compared to the year ended December 31, 2018
Total revenues increased 13% for the year ended December 31, 2019 as compared to the prior year period. The increase is primarily due to business customer growth driving an increase in revenues of $195,736, offset by declining consumer revenues of $55,172 in connection with the continued decline of subscriber lines. The Company continues to expect that the Consumer portion of the Company's overall business will become less significant as the Company reallocates resources to increase market share in its Business communications platforms.
Cost of revenues increased 20% for the year ended December 31, 2019 as compared to the prior year period driven by increased costs incurred in servicing our business customers of $99,083 due to an increase in customers year over year. This was partially offset by a decrease in costs in Consumer of $14,994 as subscriber lines continues to decline resulting in lower international and long-distance termination costs.

35     VONAGE ANNUAL REPORT 2019



Business Gross Margin for the Years Ended December 31, 2019, 2018, and 2017
 
For the years ended December 31,
 
$ Change 2018 to 2019
% Change 2018 to 2019
$ Change 2017 to 2018
% Change 2017 to 2018
(in thousands, except percentages)
2019
2018
2017
 
Revenues
 
 
 
 
 
 
 
 
Service revenues
$
719,514

$
526,707

$
417,118

 
$
192,807

37
 %
$
109,589

26
 %
Access and product revenues (1)
46,232

50,068

54,971

 
(3,836
)
(8
)%
(4,903
)
(9
)%
Service, access and product revenues
765,746

576,775

472,089

 
188,971

33
 %
104,686

22
 %
USF revenues
38,134

31,369

26,833

 
6,765

22
 %
4,536

17
 %
Total revenues
803,880

608,144

498,922

 
195,736

32
 %
109,222

22
 %
 
 
 
 
 
 
 
 
 
Cost of revenues
 
 
 
 
 
 
 
 
Service cost of revenues (2)
336,045

239,096

184,054

 
96,949

41
 %
55,042

30
 %
Access and product cost of revenues (1)
53,455

58,081

57,906

 
(4,626
)
(8
)%
175

 %
Service, access and product cost of revenues
389,500

297,177

241,960

 
92,323

31
 %
55,217

23
 %
USF cost of revenues
38,134

31,374

26,833

 
6,760

22
 %
4,541

17
 %
Total cost of revenues
427,634

328,551

268,793

 
99,083

30
 %
59,758

22
 %
 
 
 
 
 
 
 
 
 
Segment gross margin
 
 
 
 
 
 
 
 
Service margin
383,469

287,611

233,064

 
95,858

33
 %
54,547

23
 %
Gross margin ex-USF (Service, access and product margin)
376,246

279,598

230,129

 
96,648

35
 %
49,469

21
 %
Segment gross margin
$
376,246

$
279,593

$
230,129

 
$
96,653

35
 %
$
49,464

21
 %
 
 
 
 
 
 
 
 
 
Segment gross margin %
 
 
 
 
 
 
 
 
Service margin %
53.3
%
54.6
%
55.9
%
 
(1.3
)%
 
(1.3
)%


Gross margin ex-USF (Service, access and product margin) %
49.1
%
48.5
%
48.7
%
 
0.6
 %
 
(0.2
)%
 
Segment gross margin %
46.8
%
46.0
%
46.1
%
 
0.8
 %
 
(0.1
)%
 
 
(1) Includes customer premise equipment, access, and shipping and handling.
(2) Excludes depreciation and amortization of $33,484, $22,554, and $20,100, respectively.

For the year ended December 31, 2019 compared to the year ended December 31, 2018
The following table describes the increase in business gross margin for the year ended December 31, 2019 as compared to the year ended December 31, 2018:
 
(in thousands)
Service gross margin excluding the impact of the acquisitions increased 11% primarily due to overall growth in our Business customer base of 6% as compared to the prior year
$
31,822

Service gross margin also increased due to acquisitions of TokBox on August 1, 2018 and NVM on October 31, 2018, respectively
64,036

Access and product gross margin increased due to higher costs providing access services to Business customers during the current year
790

USF gross margin increased mainly due to payment during the first quarter of 2018 for USF fees not collected in 2017
5

Increase in segment gross margin
$
96,653


36     VONAGE ANNUAL REPORT 2019



Business service gross margin percentage decreased to 53.3% for the year December 31, 2019 from 54.6% for the year ended December 31, 2018. The decrease in business service gross margin percentage is a result of faster growth of certain lower-margin products across our Business segment for the year ended December 31, 2019 as compared to the same period in the prior year. Our gross margin percentage may continue to be impacted by changes in the mix of service offerings provided to our customers across our Business segment.

Consumer Gross Margin for the Years Ended December 31, 2019, 2018, and 2017
 
For the years ended December 31,
 
$ Change 2018 to 2019
% Change 2018 to 2019
$ Change 2017 to 2018
% Change 2017 to 2018
(in thousands, except percentages)
2019
2018
2017
 
Revenues
 
 
 
 
 
 
 
 
Service revenues
$
340,462

$
394,389

$
454,340

 
$
(53,927
)
(14
)%
$
(59,951
)
(13
)%
Access and product revenues (1)
264

559

525

 
(295
)
(53
)%
34

6
 %
Service, access and product revenues
340,726

394,948

454,865

 
(54,222
)
(14
)%
(59,917
)
(13
)%
USF revenues
44,740

45,690

48,499

 
(950
)
(2
)%
(2,809
)
(6
)%
Total revenues
385,466

440,638

503,364

 
(55,172
)
(13
)%
(62,726
)
(12
)%
 
 
 
 
 
 
 
 
 
Cost of revenues
 
 
 
 
 
 
 
 
Service cost of revenues (2)
34,677

47,439

80,454

 
(12,762
)
(27
)%
(33,015
)
(41
)%
Access and product cost of revenues (1)
4,033

5,289

7,208

 
(1,256
)
(24
)%
(1,919
)
(27
)%
Service, access and product cost of revenues
38,710

52,728

87,662

 
(14,018
)
(27
)%
(34,934
)
(40
)%
USF cost of revenues
44,740

45,716

48,499

 
(976
)
(2
)%
(2,783
)
(6
)%
Total cost of revenues
83,450

98,444

136,161

 
(14,994
)
(15
)%
(37,717
)
(28
)%
 
 
 
 
 
 
 
 
 
Segment gross margin
 
 
 
 
 
 
 
 
Service margin
305,785

346,950

373,886

 
(41,165
)
(12
)%
(26,936
)
(7
)%
Gross margin ex-USF (Service, access and product margin)
302,016

342,220

367,203

 
(40,204
)
(12
)%
(24,983
)
(7
)%
Segment gross margin
$
302,016

$
342,194

$
367,203

 
$
(40,178
)
(12
)%
$
(25,009
)
(7
)%
 
 
 
 
 
 
 
 
 
Segment gross margin %
 
 
 
 
 
 
 
 
Service margin %
89.8
%
88.0
%
82.3
%
 
1.8
%
 
5.7
%
 
Gross margin ex-USF (Service, access and product margin) %
88.6
%
86.6
%
80.7
%
 
2.0
%
 
5.9
%
 
Segment gross margin %
78.4
%
77.7
%
72.9
%
 
0.7
%
 
4.8
%
 
 
(1) Includes customer premise equipment, and shipping and handling.
(2) Excludes depreciation and amortization of $4,683, $5,200, and $7,208, respectively.


37     VONAGE ANNUAL REPORT 2019



For the year ended December 31, 2019 compared to the year ended December 31, 2018
The following table describes the decrease in consumer gross margin for the year ended December 31, 2019 as compared to the year ended December 31, 2018:
 
(in thousands)
Service gross margin decreased primarily due to a decrease in subscriber lines of 16% resulting in lower gross margin of $41,874 as the Company is not actively pursuing expansion of the Consumer customer base. This was offset by a slight increase in average revenue per customer and lower overall costs incurred by the Consumer segment resulting in increased gross margin of $709
$
(41,165
)
Access and product gross margin increased 20% primarily due lower equipment costs associated with sales to customers during the current year
961

USF gross margin increased mainly due to payment during the first quarter of 2018 for USF fees not collected in 2017
26

Decrease in segment gross margin
$
(40,178
)
Consumer service gross margin percentage increased to 89.8% for the year ended December 31, 2019 from 88.0% for the year ended December 31, 2018 due to lower international and domestic termination rates and the allocation of certain shared network costs to Business as that revenue becomes a greater proportion of the whole. The increase in Consumer service margin percentage is also driven by overall lower costs attributed to consumer services as the Company shifts resources towards attracting more profitable Business customers.

Other Operating Expenses
The following table presents our other operating expenses during the years ended December 31, 2019, 2018, and 2017, respectively:
 
For the years ended December 31,
 
$ Change 2018 to 2019
% Change 2018 to 2019
$ Change 2017 to 2018
% Change 2017 to 2018
(in thousands, except percentages)
2019
2018
2017
 
Sales and marketing
$
363,111

$
311,433

$
313,251

 
$
51,678

17
%
$
(1,818
)
(1
)%
Engineering and development
69,460

52,139

29,630

 
17,321

33
%
22,509

76
 %
General and administrative
152,672

135,324

122,537

 
17,348

13
%
12,787

10
 %
Depreciation and amortization
86,256

70,980

72,523

 
15,276

22
%
(1,543