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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
 
(IRS Employer Identification No.)
 
 
 
23 Main Street
Holmdel
,
NJ
,
07733
(Address of principal executive offices)
 
 
 
 
(Zip Code)
Registrant’s telephone number, including area code: (732528-2600
(Former name, former address and former fiscal year, if changed since last report): Not Applicable

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
 
VG
 
Nasdaq Global Select Market
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  x  No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation 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  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
x
  
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o  
  
 
 
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  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at
May 1, 2020
Common Stock, par value $0.001
 
245,368,168
 
shares


 

VONAGE HOLDINGS CORP.
INDEX
 
Part 1 - Financial Information
 
 
 
 
 
 
Page
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

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

2

 

GLOSSARY OF TERMS

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

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
CPaaS
 
Communications Platform as a Service
CRM
 
Customer Relationship Management
Exchange Act
 
The Securities Exchange Act of 1934, as amended
EPS
 
Earnings Per Share
FASB
 
Financial Accounting Standards Board
FCC
 
Federal Communications Commission
IP
 
Internet Protocol
LIBOR
 
London Inter-Bank Offered Rate
MPLS
 
Multi-Protocol Label Switching
NOLs
 
Net Operating Losses
SaaS
 
Software as a Service
SAB
 
Staff Accounting Bulletin
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
UCaaS
 
Unified Communications as a Service
USF
 
Federal Universal Service Fund
VoIP
 
Voice over Internet Protocol

3

 

PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value) 
 
March 31,
2020
 
December 31,
2019
Assets
(Unaudited) 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
43,073

 
$
23,620

Accounts receivable, net of allowance of $6,736 and $5,494, respectively
96,238

 
101,813

Inventory, net of allowance of $73 and $76, respectively
1,346

 
1,475

Deferred customer acquisition costs, current portion
14,971

 
13,834

Prepaid expenses
26,263

 
22,338

Other current assets
11,175

 
9,988

Total current assets
193,066

 
173,068

Property and equipment, net of accumulated depreciation of $111,169 and $109,646, respectively
43,144

 
48,371

Operating lease right-of-use assets
33,735

 
50,847

Goodwill
591,022

 
602,970

Software, net of accumulated amortization of $103,067 and $102,133, respectively
50,678

 
40,300

Deferred customer acquisition costs
58,891

 
55,148

Restricted cash
2,039

 
2,015

Intangible assets, net of accumulated amortization of $233,079 and $221,182, respectively
227,979

 
249,905

Deferred tax assets
106,262

 
108,347

Other assets
32,813

 
33,729

Total assets
$
1,339,629

 
$
1,364,700

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
32,789

 
$
42,366

Accrued expenses
118,907

 
137,589

Deferred revenue, current portion
61,022

 
59,464

Operating lease liabilities, current portion
11,917

 
12,477

Total current liabilities
224,635

 
251,896

Indebtedness under revolving credit facility
265,500

 
220,500

Convertible senior notes, net
280,111

 
276,658

Operating lease liabilities
28,018

 
45,722

Other liabilities
2,652

 
2,862

Total liabilities
800,916

 
797,638

Commitments and Contingencies (Note 9)

 

Stockholders’ Equity:
 
 
 
Common stock, par value $0.001 per share; 596,950 shares authorized at March 31, 2020, and December 31, 2019
320

 
316

Additional paid-in capital
1,506,664

 
1,494,469

Accumulated deficit
(634,764
)
 
(631,009
)
Treasury stock, at cost
(318,791
)
 
(306,043
)
Accumulated other comprehensive (loss) income
(14,716
)
 
9,329

Total stockholders’ equity
538,713

 
567,062

Total liabilities and stockholders’ equity
$
1,339,629

 
$
1,364,700


See accompanying notes to condensed consolidated financial statements.

4

 


VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2020
 
2019
 
 
 
 
Revenues:
 
 
 
Service, access and product revenues
$
283,077

 
$
260,110

USF revenues
14,380

 
19,431

Total revenues
297,457

 
279,541

 
 
 
 
Operating Expenses:
 
 
 
Service, access and product cost of revenues (excluding depreciation and amortization)
113,038

 
93,980

USF cost of revenues
14,380

 
19,431

Sales and marketing
85,621

 
95,523

Engineering and development
19,203

 
16,526

General and administrative
40,882

 
35,459

Depreciation and amortization
20,485

 
21,214

Total operating expenses
293,609

 
282,133

Income (loss) from operations
3,848

 
(2,592
)
Other Income (Expense):
 
 
 
Interest expense
(8,082
)
 
(7,576
)
Other income (expense), net
229

 
(416
)
Total other expense, net
(7,853
)
 
(7,992
)
Loss before income tax benefit
(4,005
)
 
(10,584
)
Income tax benefit
250

 
10,050

Net loss
$
(3,755
)
 
$
(534
)
 
 
 
 
Loss per common share:
 
 
 
Basic and diluted
$
(0.02
)
 
$

Weighted-average common shares outstanding:
 
 
 
Basic and diluted
243,627

 
240,527


See accompanying notes to condensed consolidated financial statements.

5

 

VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) / INCOME
(In thousands)
(Unaudited)
 
  
Three Months Ended
 
March 31,
 
2020
 
2019
 
 
 
 
Net loss
$
(3,755
)
 
$
(534
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment, net of tax (benefit) expense of ($470) and 433, respectively
(23,627
)
 
5,208

Unrealized loss on derivatives, net of tax (benefit) expense of ($50) and $28, respectively
(418
)
 
(687
)
Total other comprehensive (loss) income
(24,045
)
 
4,521

Comprehensive (loss) income
$
(27,800
)
 
$
3,987




See accompanying notes to condensed consolidated financial statements.

6

 

VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Three Months Ended
 
March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net loss
$
(3,755
)
 
$
(534
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
6,331

 
6,656

Amortization of intangibles
14,154

 
14,558

Deferred income taxes
1,468

 
(10,283
)
Amortization of deferred customer acquisition costs
3,661

 
2,530

Allowances for doubtful accounts and obsolete inventory
1,448

 
80

Amortization of financing costs and debt discount
3,656

 
270

Loss on disposal of property and equipment
741

 
514

Share-based expense
11,116

 
8,015

Changes in derivatives
(133
)
 
(133
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,361

 
1,083

Inventory
127

 
179

Prepaid expenses and other current assets
(5,387
)
 
170

Deferred customer acquisition costs
(9,042
)
 
(7,459
)
Accounts payable and accrued expenses
(25,459
)
 
(10,793
)
Deferred revenue
2,934

 
(312
)
Other assets - deferred cloud computing implementation costs
(669
)
 
(3,022
)
Other assets and liabilities
(1,049
)
 
1,231

Net cash provided by operating activities
2,503

 
2,750

Cash flows used in investing activities:
 
 
 
Capital expenditures
(2,887
)
 
(5,277
)
Purchase of intangible assets
(75
)
 

Acquisition and development of software assets
(10,273
)
 
(5,497
)
Net cash used in investing activities
(13,235
)
 
(10,774
)
Cash flows provided by/(used in) financing activities:
 
 
 
Payments for short and long-term debt

 
(2,500
)
Proceeds from issuance of long-term debt
45,000

 
41,500

Payments of debt issuance costs

 
(128
)
Employee taxes paid on withholding shares
(12,656
)
 
(18,566
)
Proceeds from exercise of stock options
155

 
480

Net cash provided by financing activities
32,499

 
20,786

Effect of exchange rate changes on cash
(2,290
)
 
260

Net increase in cash, cash equivalents, and restricted cash
19,477

 
13,022

Cash, cash equivalents, and restricted cash, beginning of period
25,635

 
7,104

Cash, cash equivalents, and restricted cash, end of period
$
45,112

 
$
20,126

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the periods for:
 
 
 
Interest
$
2,866

 
$
6,929

Income taxes
$
1,249

 
$
148

Non-cash investing activities:
 
 
 
Acquisition of long-term assets included in accounts payable and accrued expenses
$
2,119

 
$
334


See accompanying notes to condensed consolidated financial statements.

7

 

VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 

 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Balance at December 31, 2018
 
$
310

 
$
1,415,682

 
$
(611,985
)
 
$
(275,009
)
 
$
6,770

 
$
535,768

Cumulative effect adjustment upon
  the adoption of Topic 842
 
 
 
 
 
458

 
 
 
 
 
458

Stock option exercises
 
4

 
476

 
 
 
 
 
 
 
480

Share-based expense
 
 
 
8,015

 
 
 
 
 
 
 
8,015

Employee taxes paid on
  withholding shares
 
 
 
 
 
 
 
(18,566
)
 
 
 
(18,566
)
Foreign currency translation
  adjustment
 
 
 
 
 
 
 
 
 
5,208

 
5,208

Unrealized gain on derivatives
 
 
 
 
 
 
 
 
 
(687
)
 
(687
)
Net loss
 
 
 
 
 
(534
)
 
 
 
 
 
(534
)
Balance at March 31, 2019
 
$
314

 
$
1,424,173

 
$
(612,061
)
 
$
(293,575
)
 
$
11,291

 
$
530,142


 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Balance at December 31, 2019
 
$
316

 
$
1,494,469

 
$
(631,009
)
 
$
(306,043
)
 
$
9,329

 
$
567,062

Stock option exercises
 
4

 
151

 
 
 
 
 
 
 
155

Share-based expense
 
 
 
12,044

 
 
 
 
 
 
 
12,044

Employee taxes paid on withholding
  shares
 
 
 
 
 
 
 
(12,748
)
 
 
 
(12,748
)
Foreign currency translation
  adjustment
 
 
 
 
 
 
 
 
 
(23,627
)
 
(23,627
)
Unrealized loss on derivatives
 
 
 
 
 
 
 
 
 
(418
)
 
(418
)
Net loss
 
 
 
 
 
(3,755
)
 
 
 
 
 
(3,755
)
Balance at March 31, 2020
 
$
320

 
$
1,506,664

 
$
(634,764
)
 
$
(318,791
)
 
$
(14,716
)
 
$
538,713



See accompanying notes to condensed consolidated financial statements.


8


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)



Note 1.    Nature of Business
Nature of Operations
Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. At Vonage, our strategy is to continually redefine business communications. We are making communications more flexible, intelligent and personal to help enterprises the world over stay ahead. We provide unified communications, contact centers and programmable communications APIs, built on what we believe to be the world's most flexible cloud communications platform. True to our roots as a technology disruptor, our flexible approach helps us better serve the growing collaboration, communications, and customer experience needs of companies, across all communications channels.
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. 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.
We also provide a robust suite of feature-rich residential communication solutions that allow consumers to connect their home phones and mobile phones on one number and we offer attractive international long distance rates that help create a loyal base of satisfied customers.
Customers in the United States represented 69% and 73% of our consolidated revenues for the three months ended March 31, 2020 and 2019, respectively, with the balance in Canada, the United Kingdom, China, Singapore, Netherlands, and other countries around the world.
Unaudited Interim Financial Information
The accompanying unaudited interim condensed consolidated financial statements and information have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the SEC's regulations for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the Company's financial position, results of operations, comprehensive income, cash flows, and stockholders’ equity for the periods presented. The results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on February 21, 2020.
Use of Estimates
Our condensed consolidated financial statements and notes thereof are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, including uncertainty in the current economic environment due to the recent outbreak of the novel coronavirus COVID-19.


9


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates are used for such items as depreciable lives for long-lived assets including intangible assets, tax provisions, uncollectible accounts, convertible notes, and assets and liabilities assumed in business combinations, among others. In addition, estimates are used to test long-lived assets and goodwill for impairment.
COVID-19 has created and may continue to create uncertainty in customer payments, reduced usage, and issuance of customer credits to distressed customers served by certain product lines. As of the date of our condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates or judgments. However, these estimates may change as new events occur and additional information is obtained, which may result in changes being recognized in our condensed consolidated financial statements in future periods. In particular and in light of the COVID-19 pandemic, the assumptions and estimates associated with collectability assessment of revenue and credit losses of accounts receivable may have a material impact our consolidated financial statements in future periods, depending on the duration or degree of the impact of the COVID-19 pandemic on the global economy.
Reclassifications
Reclassifications have been made to our condensed consolidated financial statements for the prior year periods to conform to classifications used in the current year periods. The reclassifications did not affect results of operations or net assets.
Note 2.    Summary of Significant Accounting Policies
This footnote should be read in conjunction with the complete description of our significant accounting policies under Note 2, Summary of Significant Accounting Policies to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Service, Access, and Product Cost of Revenues
Service, access, and product cost of revenues excludes depreciation and amortization expense of $9,609 and $9,418 for the three months ended March 31, 2020 and 2019, respectively. In addition, costs of goods sold included in service, access, and product cost of revenues during the three months ended March 31, 2020 and 2019 were $3,676 and $5,628, respectively.
Sales and Marketing Expenses
We incurred advertising costs, which are included in sales and marketing, of $9,460 and $17,750 for the three months ended March 31, 2020 and 2019, respectively.
Fair Value of Financial Instruments
The Company records certain of its financial assets at fair value on a recurring basis. Certain of the Company's other financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable and accounts payable, approximate fair value and are classified as Level 1 because of their short-term maturities. We believe the fair value of our 2018 Credit Facility at March 31, 2020 and December 31, 2019 was approximately the same as its carrying amount as market conditions, including available interest rates, credit spread relative to our credit rating, and illiquidity, remain relatively unchanged from the issuance date of our debt obligations for a similar debt instrument and are classified as Level 3 within the fair value hierarchy.

10


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of the inputs, or assumptions, we use in the determination of fair value, and we classify financial assets and liabilities carried at fair value in one of the following three categories:
Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 - observable prices that are based on inputs not quoted on active markets but corroborated by market data; and
Level 3 - unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.
As of March 31, 2020 and December 31, 2019, the fair value of the 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) was approximately $277,800 and $309,641, respectively. The fair value was determined based on the quoted price for the Convertible Senior Notes in an inactive market on the last trading day of the reporting period and is classified as Level 2 in the fair value hierarchy.
Supplemental Balance Sheet Information
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to amounts included in the consolidated statements of cash flows:
 
As of March 31,
 
As of December 31
 
2020
 
2019
 
2019
 
2018
Cash and cash equivalents
$
43,073

 
$
18,254

 
$
23,620

 
$
5,057

Restricted cash
2,039

 
1,872

 
2,015

 
2,047

Total cash, cash equivalents and restricted cash
$
45,112

 
$
20,126

 
$
25,635

 
$
7,104



Intangible assets, net
 
March 31, 2020
 
December 31, 2019
Customer relationships
$
144,956

 
$
157,184

Developed technology
80,903

 
89,199

Patents and patent licenses
1,083

 
1,326

Trade names
1,037

 
2,196

Finite-lived intangible assets, net
$
227,979

 
$
249,905



Accrued expenses
 
March 31, 2020
 
December 31, 2019
Compensation and related taxes and temporary labor
$
24,258

 
$
40,101

Marketing
17,507

 
15,294

Taxes and fees
14,846

 
22,922

Telecommunications
40,148

 
40,498

Interest
2,426

 
873

Customer credits
4,067

 
2,772

Professional fees
4,124

 
4,482

Inventory
708

 
871

Other accruals
10,823

 
9,776

Accrued expenses
$
118,907

 
$
137,589



11


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Goodwill
The Company's goodwill is derived primarily from the acquisitions of Vocalocity, Telesphere, iCore, Simple Signal, Nexmo, TokBox, and NewVoiceMedia which are included in the Company's Business segment. The following table provides a summary of the changes in the carrying amounts of goodwill:
Balance at December 31, 2019
$
602,970

Foreign currency translation adjustment
(11,948
)
Balance at March 31, 2020
$
591,022


Recent Accounting Pronouncements
The following standard was adopted by the Company during the three months ended March 31, 2020:
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)". This ASU provides an easier and more cost efficient way for companies to modify contracts that reference the London Interbank Offered Rate ("LIBOR") and other rates that are being phased out. The ASU (1) allows eligible contracts that are modified to be accounted for as a continuation of those contracts - a simplification that eliminates the need for companies to reassess or remeasure the contracts for accounting purposes; (2) permits companies to preserve their hedge accounting during the transition period; and (3) enables companies to make a one-time election to transfer or sell held-to-maturity debt securities that are affected by rate reform. It is effective as of March 12, 2020 through December 31, 2022. The Company adopted the ASU when effective. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes by removing certain exceptions currently permissible under ASC Topic 740. This ASU also requires entities to: (1) recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amounts incurred as non-income based tax; (2) evaluate when a step-up in the tax basis of goodwill should be considered as part of the business combination and when it should be considered a separate transaction;(3) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (4) reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation and other minor improvements. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company adopted the new standard on January 1, 2020. The adoption of the ASU did not have a material impact on our condensed consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the use of a new current expected credit loss ("CECL") model in estimating allowances for doubtful accounts with respect to accounts receivable. Receivables from revenue transactions, or trade receivables, are recognized when the corresponding revenue is recognized under ASC Topic 606, Revenue from Contracts with Customers. The CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and record allowances that when deducted from the balance of the receivables, represent the estimated net amounts expected to be collected. Given the generally short term nature of trade receivables, we do not apply a discounted cash flow methodology. However, the Company considers whether historical loss rates are consistent with expectations of forward-looking estimates for our trade receivables. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted of the new standard on January 1, 2020. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and related disclosures. The Company will continue to actively monitor the impact of the COVID-19 pandemic on its estimate of expected credit losses.

12


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Note 3.  Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers which is further described in Note 2, Summary of Significant Accounting Policies and Note 3, Revenue Recognition to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019.
Disaggregation of Revenue
The following tables detail our revenue from customers disaggregated by primary geographical market and source of revenue. The tables also include a reconciliation of the disaggregated revenue for our Business and Consumer segments.
 
Three Months Ended
 
Three Months Ended
 
March 31, 2020
 
March 31, 2019
 
Business
 
Consumer
 
Total
 
Business
 
Consumer
 
Total
Primary geographical markets
 
 
 
 
 
 
 
 
 
 
 
United States
$
126,547

 
$
80,007

 
$
206,554

 
$
112,438

 
$
91,866

 
$
204,304

Canada
1,933

 
4,566

 
6,499

 
1,407

 
5,168

 
$
6,575

United Kingdom
16,291

 
2,631

 
18,922

 
23,881

 
2,910

 
$
26,791

Other Countries
65,482

 

 
65,482

 
41,871

 

 
$
41,871

 
$
210,253

 
$
87,204

 
$
297,457

 
$
179,597

 
$
99,944

 
$
279,541

Major Sources of Revenue
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$
195,649

 
$
77,243

 
$
272,892

 
$
159,345

 
$
89,000

 
$
248,345

Access and product revenues
10,122

 
63

 
10,185

 
11,697

 
68

 
11,765

USF revenues
4,482

 
9,898

 
14,380

 
8,555

 
10,876

 
19,431

 
$
210,253

 
$
87,204

 
$
297,457

 
$
179,597

 
$
99,944

 
$
279,541


In addition, the Company recognizes service revenues from its customers through subscription services provided or through usage or pay-per-use type arrangements. During the three months ended March 31, 2020, the Company recognized $156,455 related to subscription services, $93,047 related to usage, and $47,955 related to other revenues such as USF, other regulatory fees, and credits. During the three months ended March 31, 2019, the Company recognized $162,546 related to subscription services, $67,847 related to usage, and $49,148 related to other revenues such as USF, other regulatory fees, and credits.
Contract Assets and Liabilities
The following table provides information about receivables and contract liabilities from contracts with customers:
 
March 31, 2020
December 31, 2019
Receivables (1)
$
96,238

$
101,813

Contract liabilities (2)
61,022

59,464


(1) Amounts included in accounts receivables on our condensed consolidated balance sheet.
(2) Amounts included in deferred revenues and other liabilities on our condensed consolidated balance sheet.
Our deferred revenue represents the advance consideration received from customers for subscription services and is predominantly recognized over the following performance period which is generally a month as transfer of control occurs. During the three months ended March 31, 2020, the Company recognized revenue of $108,875, related to its contract liabilities. During the three months ended March 31, 2019, the Company recognized revenue of $100,434, related to its contract liabilities. We expect to recognize $61,022 into revenue over the next twelve months related to our deferred revenue as of March 31, 2020.
Remaining Performance Obligation
Transaction price allocated to the remaining performance obligation represents contracted revenue that has not yet been recognized. The typical subscription term may range from 1 month to 3 years. Contracted revenue as of March 31, 2020 that has not yet been recognized was approximately $0.4 billion. This excludes contracts with an original expected length of less than one year. The Company expects to recognize the majority of its remaining performance obligation over the next 18 months.

13


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Contract Acquisition Costs
We have various commission programs for internal sales personnel and channel partners that are incremental to the acquisition of customer contracts. These costs are recorded as deferred contract acquisition costs on the consolidated balance sheets which eligible employees and third parties may earn a commission on sales of services and products to customers. We expect that these commission fees are recoverable and, therefore, we have capitalized $73,862 and $68,982 as contract costs, net of accumulated amortization, as of March 31, 2020 and December 31, 2019, respectively, included within deferred customer acquisitions costs, current portion and deferred customer acquisition costs on our condensed consolidated balance sheet. Capitalized commission fees are amortized to sales and marketing expense over estimated customer life, which is 7 years for Business customers. The amounts amortized to sales and marketing expense were $3,661 and $2,530 for the three months ended March 31, 2020 and March 31, 2019, respectively. There were no impairment losses recognized in relation to the costs capitalized during the three months ended March 31, 2020 and 2019. In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year and for residuals and renewals.
Note 4.    Earnings Per Share
The following table sets forth the computation for basic and diluted loss per share for the three months ended March 31, 2020 and 2019:
 
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
Numerator
 
 
 
 
Net loss
 
$
(3,755
)
 
$
(534
)
Denominator
 
 
 
 
Weighted average common shares outstanding for basic and diluted net loss per share
 
243,627

 
240,527

Basic and diluted loss per share
 
 
 
 
Basic and diluted loss per share
 
$
(0.02
)
 
$


For the three months ended March 31, 2020 and 2019, the following were excluded from the calculation of diluted loss per common share because of their anti-dilutive effects: 
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
Restricted stock units
 
13,894

 
10,997

Stock options
 
4,878

 
5,643

 
 
18,772

 
16,640



As the Company expects to settle the principal amount of its outstanding convertible senior notes in cash and any excess in cash or shares of the Company’s common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of $16.72 per share. The Company's Convertible Senior Notes are further described in Note 6, Long-Term Debt.


14


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Note 5. Income Taxes

The income tax consisted of the following:
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
Loss before income taxes
 
$
(4,005
)
 
$
(10,584
)
Income tax benefit
 
250

 
10,050

Effective tax rate
 
6.2
%
 
95.0
%

The Company calculates its provision for income taxes during its interim reporting periods by applying an estimate of the annual effective tax rate for the full year "ordinary" income or loss for the respective reporting period. In addition, adjustments are recorded for discrete period items and changes to our state effective tax rate which can cause the rate to fluctuate from quarter to quarter.
For the three months ended March 31, 2020, our effective tax rate was different than the statutory rate primarily due to a discrete period tax benefit of $2,115, which was recognized related to excess tax benefits on equity compensation. In addition, the Company’s actual effective tax rate for the current year has reduced the expected annual benefit as a result of permanent adjustments related to limitations on executive compensation deductibility and inclusion of income in the U.S. due to foreign disregarded entities.
For the three months ended March 31, 2019, our effective tax rate was different than the statutory rate primarily due to a discrete period tax benefit of $4,749, which was recognized related to excess tax benefits on equity compensation for the three months ended March 31, 2019.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, which is commonly known as the CARES Act, was enacted into law. As permitted by the CARES Act, the Company intends to accelerate the refund request for previously paid Alternative Minimum Taxes and defer the employer portion of the social security payroll tax. We continue to assess the Company's potential benefits of the CARES Act and ongoing government guidance related to COVID-19.
Uncertain Tax Positions
The Company had uncertain tax benefits of $714 and $914 as of March 31, 2020 and December 31, 2019, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company did not incur any interest expense or penalties during the three months ended March 31, 2020 and March 31, 2019, respectively. The following table reconciles the total amounts of uncertain tax benefits:
 
March 31, 2020
 
December 31, 2019
Balance as of January 1
$
914

 
$
1,107

Increase due to current year positions

 
155

Decrease due to prior year positions

 
(243
)
Decrease due to settlements and payments
(173
)
 
(86
)
Decrease due to lapse of applicable statute of limitations

 
(71
)
(Decrease) increase due to foreign currency fluctuation
(27
)
 
52

Uncertain tax benefits as of the end of the period
$
714

 
$
914


Net Operating Loss Carry Forwards ("NOLs")
As of March 31, 2020, the Company has U.S. Federal and state NOL carryforwards of $509,313 and $237,667, respectively, which expire at various times through 2037. In addition, we have NOLs for United Kingdom tax purposes of $165,104 with no expiration date.

15


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Note 6.    Long-Term Debt
This footnote should be read in conjunction with the complete description of our financing arrangements under Note 8, Long-Term Debt, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.
The following table summarizes the Company's long-term debt as of March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
December 31, 2019
Revolving credit facility - due 2023
265,500

 
220,500

Convertible senior notes - due 2024
345,000

 
345,000

Long-term debt including current maturities
610,500

 
565,500

Less unamortized discount
58,180

 
61,234

Less debt issuance costs
6,709

 
7,108

Total long-term debt
$
545,611

 
$
497,158


Convertible Senior Notes
In June 2019, the Company issued $300.0 million aggregate principal amount of 1.75% convertible senior notes due 2024 in a private placement and an additional $45.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option of the initial purchasers (collectively, "Convertible Senior Notes"). The Convertible Senior Notes are the Company's senior unsecured obligations. The Convertible Senior Notes will mature on June 1, 2024, unless earlier redeemed, repurchased or converted. We may not redeem the notes prior to June 5, 2022. The total net proceeds from the offering, after deducting initial purchase discounts and expenses payable by the Company, were $334.8 million.
Each $1,000 principal amount of the Convertible Senior Notes is initially convertible into 59.8256 shares of the Company's common stock, which is equivalent to an initial conversion price of approximately $16.72 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change or a redemption period, each as defined in the indenture setting forth the terms of the Convertible Senior Notes, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Convertible Senior Notes in connection with such make-whole fundamental change or during the relevant redemption period.
Prior to December 1, 2023, the notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. We will satisfy any conversion election by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. During the three months ended March 31, 2020, the conditions allowing holders of the Convertible Senior Notes to convert were not met.
The net carrying amount of the liability component of the Convertible Senior Notes was as follows:
 
 
March 31, 2020
Principal
 
$
345,000

Unamortized discount
 
(58,180
)
Unamortized issuance cost
 
(6,709
)
Net carrying amount
 
$
280,111




16


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


The following table sets forth the interest expense recognized related to the Convertible Senior Notes:
 
Three Months Ended
 
March 31, 2020
Contractual interest expense
1,509

Amortization of debt discount
3,054

Amortization of debt issuance costs
399

Total interest expense related to the Convertible Senior Notes
4,962


In connection with the pricing of the Convertible Senior Notes and subsequently in connection with the exercise of the initial purchaser's option to purchase additional notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the "Capped Calls"). The Capped Calls each have a strike price of $16.72 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Convertible Senior Notes. The Capped Calls have initial cap prices of $23.46 per share, subject to certain adjustments. The Capped Calls are expected generally to reduce potential dilution to the Company's common stock upon any conversion of notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap. The initial cap price of the Capped Call transactions was $23.46. The net cost of $28,325 incurred to purchase the Capped Calls and related income tax benefit of $6,772 was recorded as a reduction to additional paid-in capital on the Company's consolidated balance sheet and are not accounted for as derivatives.
2018 Term Note and Revolving Credit Facility
On July 31, 2018, the Company entered into the 2018 Credit Facility consisting of a $100 million senior secured term loan and a $500 million revolving credit facility. The co-borrowers under the 2018 Credit Facility are the Company and Vonage America Inc., the Company’s wholly owned subsidiary. Obligations under the 2018 Credit Facility are guaranteed, fully and unconditionally, by the Company’s other United States subsidiaries and are secured by substantially all of the assets of each borrower and each guarantor.
During the three months ended March 31, 2020, we borrowed $45 million under the revolving credit facility. In addition, the effective interest rate was 3.71% as of March 31, 2020. During the three months ended March 31, 2019, we made mandatory repayments of $2.5 million under the 2018 term note and borrowed $41.5 million under the revolving credit facility. As of March 31, 2020, we were in compliance with all covenants, including financial covenants, for the 2018 Credit Facility. On April 6, 2020, the Company drew $30 million of the amounts available under the revolving portion of the 2018 Credit Facility to increase its cash position in light of volatility in capital markets.
Interest Rate Swaps
On July 14, 2017, we executed on three interest rate swap agreements in order to hedge the variability of expected future cash interest payments. The swaps have an aggregate notional amount of $150 million and were effective from July 31, 2017 through June 3, 2020. Under the swaps our interest rate is fixed at 4.7%. The interest rate swaps are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging.

17


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


As of March 31, 2020 and December 31, 2019, the fair market value of the swaps was a liability of $218 and an asset of $18, respectively, which is included in other assets on our condensed consolidated balance sheet. The following table summarizes the effects of ASC 815 on the Company's accumulated OCI balance attributable to cash flow derivatives:
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
 
 
 
 
 
Accumulated OCI beginning balance
 
$
(1,001
)
 
$
975

Reclassified from accumulated OCI to income:
 
 
 
 
Due to reclassification of previously deferred gain
 
(133
)
 
(133
)
Change in fair value of cash flow hedge accounting contracts, net of tax
 
(285
)
 
(554
)
Accumulated OCI ending balance, net of tax benefit of $46 and $365, respectively
 
$
(1,419
)
 
$
288

Gains expected to be reclassified from accumulated OCI during the next 12 months
 
$
531

 
$
531


Note 7.  Leases
    
The Company entered into various non-cancelable operating lease agreements for certain of our existing office and telecommunications co-location space as well as operating leases for certain equipment. The operating leases expire at various times through 2026. We are committed to pay a portion of the buildings’ operating expenses as required under the arrangements which we will separate as a non-lease component when readily determinable. The Company did not have any finance leases as of March 31, 2020 and December 31, 2019.

During the three months ended March 31, 2020 and March 31, 2019, the Company incurred operating lease expense of $2,965 and $3,941, respectively, related to its operating leases and sub-lease income of $319 and $266, respectively. Additionally, the remaining weighted average lease term for our operating leases was 4.10 years and the weighted average discount rate utilized to measure the Company's operating leases was 5.04% as of March 31, 2020.
    
Supplemental cash flow related to the Company's operating leases is as follows:

 
Three Months Ended
 
March 31, 2020
 
 
Cash paid for amounts included in the measurement of lease liabilities
$
4,139

Right-of-use assets obtained in exchange for lease obligations
$
1,261



18


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Maturities of operating lease liabilities as of March 31, 2020 and December 31, 2019 are as follows:

 
March 31, 2020
 
December 31, 2019
 
 
 
 
2020 (excluding the three months ended March 31, 2020 for the period ended March 31, 2020)
$
10,841

 
15,017

2021
11,879

 
11,663

2022
8,180

 
7,599

2023
6,552

 
7,197

2024
2,252

 
6,592

Thereafter
4,540

 
21,178

Total lease payments
44,244

 
69,246

Less imputed interest
(4,309
)
 
(11,047
)
Total
$
39,935

 
$
58,199




During the first quarter of 2020, the Company amended one of its office leases to remove a renewal period of 5 years beyond the initial lease term.  In the Company's adoption of ASC 842, the Company had included the available renewal term within the transition asset and liability as the renewal was highly probable at the time of adoption.  As a result, the Company's operating lease liability was reduced by $15,825 with a corresponding reduction in the Company's operating lease right-of-use assets as of March 31, 2020.

Note 8.    Common Stock
As of March 31, 2020 and December 31, 2019, the Company had 596,950 shares of common stock authorized and had 15,521 shares available for grants under our share-based compensation programs as of March 31, 2020. For a detailed description of our share-based compensation programs refer to Note 10, Employee Stock Benefit Plans in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. The following table reflects the changes in the Company's common stock issued and outstanding:
For the Three Months Ended
 
 
 
 
 
(in thousands)
Issued
 
Treasury
 
Outstanding
Balance at December 31, 2018
309,736

 
(69,993
)
 
239,743

Shares issued under the 2015 Equity Incentive Plan
4,497

 

 
4,497

Employee taxes paid on withholding shares

 
(1,864
)
 
(1,864
)
Balance at March 31, 2019
314,233

 
(71,857
)
 
242,376

 
 
 
 
 
 
Balance at December 31, 2019
315,808

 
(72,959
)
 
242,849

Shares issued under the 2015 Equity Incentive Plan
4,072

 

 
4,072

Employee taxes paid on withholding shares

 
(1,675
)
 
(1,675
)
Balance at March 31, 2020
319,880

 
(74,634
)
 
245,246




19


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Note 9.    Commitments and Contingencies
Litigation
From time to time we are subject to legal proceedings, claims, investigations, and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. From time to time, we receive letters or other communications from third parties inviting us to obtain patent licenses that might be relevant to our business or alleging that our services infringe upon third party patents or other intellectual property. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. We believe that we have valid defenses with respect to the legal matters pending against us and are vigorously defending these matters. Given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome in such matters and our inability to reasonably estimate the amount of loss or range of loss, it is possible that the resolution of one or more of these matters could have a material adverse effect on our condensed consolidated financial position, cash flows or results of operations.
Regulation
Telephony services are subject to a broad spectrum of state, federal and foreign regulations. Because of the uncertainty over whether Voice over Internet Protocol (“VoIP”) should be treated as a telecommunications or information service, we have been involved in a substantial amount of state and federal regulatory activity. Implementation and interpretation of the existing laws and regulations is ongoing and is subject to litigation by various federal and state agencies and courts. Due to the uncertainty over the regulatory classification of VoIP service, there can be no assurance that we will not be subject to new regulations or existing regulations under new interpretations, and that such change would not introduce material additional costs to our business. The Company continues to monitor federal regulations relating to net neutrality, rural call completion issues, number slamming, 911 access, access to telecommunication equipment and services by persons with disabilities, caller ID services, number portability, unwanted calls to reassigned numbers, and robocalling. As we continue to expand globally, these types of regulations are likely to be similarly enacted and enforced by the local regulatory authorities.    
State and Municipal Taxes
In accordance with generally accepted accounting principles, we make a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability or range of liability can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. From time to time, we have received inquiries from a number of states and local taxing agencies with respect to the remittance of sales, use, telecommunications, and excise taxes. Several jurisdictions are currently conducting tax audits of the Company's records. While the Company collects or has accrued for taxes that it believes are required to be remitted, it has reviewed its positions in those various jurisdictions as well as other regulatory fees and has established appropriate reserves. As such, we have established reserves of $3,703 and $3,175 as of March 31, 2020 and December 31, 2019, respectively, as our best estimate of the potential tax exposure for any retroactive assessment.


20


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Note 10.  Industry Segment and Geographic Information
ASC 280, Segment Reporting establishes reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. Our chief operating decision-maker reviews revenue and gross margin information for each of our reportable segments, but does not review operating expenses on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.
Business
For our Business customers, our Applications Group provides innovative, cloud-based UCaaS and CCaaS solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable SIP based VoIP network. The API Platform Group also offers CPaaS solutions designed to enhance the way businesses communicate with their customers embedding communications into apps, websites and business processes. Together 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, Clio, and other CRM solutions. 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.
Consumer
For our Consumer customers, we enable users to access and utilize our UCaaS services and features, via a single “identity,” either a number or user name, regardless of how they are connected to the Internet, 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.
For our segments we categorize revenues as follows:
Services revenues. Services revenues consists primarily of revenue attributable to our communication services for Consumer and Software Defined Wide Area Network, or SD-WAN, UCaaS and CPaaS services for Business,
Access and product revenues. Product revenues include equipment sold to customers, shipping and handling, professional services, and broadband access, as well as revenues associated with providing access services to Business customers.
USF revenues. USF revenues represent fees passed on to customers to offset required contributions to the USF.
For our segments we categorize cost of revenues as follows:
Services cost of revenues. Services cost of revenues consists of costs associated with network operations and technical support personnel, communication origination, and termination services provided by third party carriers and excludes depreciation and amortization.
Access and product cost of revenues. Product cost of revenues includes equipment sold to customers, shipping and handling, professional services, cost of certain products including equipment or services that we give customers as promotions, and broadband access, as well as costs associated with providing access services to Business customers.
USF cost of revenues. USF cost of revenues represents contributions to the Federal USF and related fees.

21


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Information about our segment results for the three and three months ended March 31, 2020 were as follows:
 
Three Months Ended
 
March 31, 2020
 
Business
 
Consumer
 
Total
Revenues
 
 
 
 
 
Service revenues
$
195,649

 
$
77,243

 
$
272,892

Access and product revenues (1)
10,122

 
63

 
10,185

Service, access and product revenues excluding USF
205,771

 
77,306

 
283,077

USF revenues
4,482

 
9,898

 
14,380

Total revenues
210,253

 
87,204

 
297,457

 
 
 
 
 
 
Cost of revenues
 
 
 
 
 
Service cost of revenues (2)
92,357

 
8,512

 
100,869

Access and product cost of revenues (1)
11,596

 
573

 
12,169

Service, access and product cost of revenues excluding USF
103,953

 
9,085

 
113,038

USF cost of revenues
4,482

 
9,898

 
14,380

Total cost of revenues
108,435

 
18,983

 
127,418

 
 
 
 
 
 
Segment gross margin
 
 
 
 
 
Service margin
103,292

 
68,731

 
172,023

Access and product margin
(1,474
)
 
(510
)
 
(1,984
)
Gross margin excluding USF (Service, access and product margin)
101,818

 
68,221

 
170,039

USF margin

 

 

Segment gross margin
$
101,818

 
$
68,221

 
$
170,039

 
 
 
 
 
 
Segment gross margin %
 
 
 
 
 
Service margin %
52.8
%
 
89.0
%
 
63.0
%
Gross margin excluding USF (Service, access and product margin %)
49.5
%
 
88.2
%
 
60.1
%
Segment gross margin %
48.4
%
 
78.2
%
 
57.2
%

(1) Includes customer premise equipment, access, and shipping and handling.
(2) Excludes depreciation and amortization of $8,519 and $1,090 for the three months ended March 31, 2020, respectively.

22


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Information about our segment results for the three and three months ended March 31, 2019 were as follows:
 
Three Months Ended
 
March 31, 2019
 
Business
 
Consumer
 
Total
Revenues
 
 
 
 
 
Service revenues
$
159,345

 
$
89,000

 
$
248,345

Access and product revenues (1)
11,697

 
68

 
11,765

Service, access and product revenues excluding USF
171,042

 
89,068

 
260,110

USF revenues
8,555

 
10,876

 
19,431

Total revenues
179,597

 
99,944

 
279,541

 
 
 
 
 
 
Cost of revenues
 
 
 
 
 
Service cost of revenues (2)
69,854

 
9,258

 
79,112

Access and product cost of revenues (1)
13,871

 
997

 
14,868

Service, access and product cost of revenues excluding USF
83,725

 
10,255

 
93,980

USF cost of revenues
8,555

 
10,876

 
19,431

Total cost of revenues
92,280

 
21,131

 
113,411

 
 
 
 
 
 
Segment gross margin
 
 
 
 
 
Service margin
89,491

 
79,742

 
169,233

Access and product margin
(2,174
)
 
(929
)
 
(3,103
)
Gross margin excluding USF (Service, access and product margin)
87,317

 
78,813

 
166,130

USF margin