vg-20200930false000127283012/312020Q300012728302020-01-012020-09-30xbrli:shares00012728302020-10-31iso4217:USD00012728302020-09-3000012728302019-12-31iso4217:USDxbrli:shares00012728302020-07-012020-09-3000012728302019-07-012019-09-3000012728302019-01-012019-09-3000012728302018-12-3100012728302019-09-300001272830us-gaap:CommonStockMember2019-06-300001272830us-gaap:AdditionalPaidInCapitalMember2019-06-300001272830us-gaap:RetainedEarningsMember2019-06-300001272830us-gaap:TreasuryStockMember2019-06-300001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-3000012728302019-06-300001272830us-gaap:CommonStockMember2019-07-012019-09-300001272830us-gaap:AdditionalPaidInCapitalMember2019-07-012019-09-300001272830us-gaap:TreasuryStockMember2019-07-012019-09-300001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-07-012019-09-300001272830us-gaap:RetainedEarningsMember2019-07-012019-09-300001272830us-gaap:CommonStockMember2019-09-300001272830us-gaap:AdditionalPaidInCapitalMember2019-09-300001272830us-gaap:RetainedEarningsMember2019-09-300001272830us-gaap:TreasuryStockMember2019-09-300001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-300001272830us-gaap:CommonStockMember2020-06-300001272830us-gaap:AdditionalPaidInCapitalMember2020-06-300001272830us-gaap:RetainedEarningsMember2020-06-300001272830us-gaap:TreasuryStockMember2020-06-300001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-3000012728302020-06-300001272830us-gaap:CommonStockMember2020-07-012020-09-300001272830us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-300001272830us-gaap:TreasuryStockMember2020-07-012020-09-300001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-07-012020-09-300001272830us-gaap:RetainedEarningsMember2020-07-012020-09-300001272830us-gaap:CommonStockMember2020-09-300001272830us-gaap:AdditionalPaidInCapitalMember2020-09-300001272830us-gaap:RetainedEarningsMember2020-09-300001272830us-gaap:TreasuryStockMember2020-09-300001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-09-300001272830us-gaap:CommonStockMember2018-12-310001272830us-gaap:AdditionalPaidInCapitalMember2018-12-310001272830us-gaap:RetainedEarningsMember2018-12-310001272830us-gaap:TreasuryStockMember2018-12-310001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310001272830us-gaap:RetainedEarningsMemberus-gaap:AccountingStandardsUpdate201602Member2018-12-310001272830us-gaap:AccountingStandardsUpdate201602Member2018-12-310001272830us-gaap:CommonStockMember2019-01-012019-09-300001272830us-gaap:AdditionalPaidInCapitalMember2019-01-012019-09-300001272830us-gaap:TreasuryStockMember2019-01-012019-09-300001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-09-300001272830us-gaap:RetainedEarningsMember2019-01-012019-09-300001272830us-gaap:CommonStockMember2019-12-310001272830us-gaap:AdditionalPaidInCapitalMember2019-12-310001272830us-gaap:RetainedEarningsMember2019-12-310001272830us-gaap:TreasuryStockMember2019-12-310001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001272830us-gaap:CommonStockMember2020-01-012020-09-300001272830us-gaap:AdditionalPaidInCapitalMember2020-01-012020-09-300001272830us-gaap:TreasuryStockMember2020-01-012020-09-300001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-09-300001272830us-gaap:RetainedEarningsMember2020-01-012020-09-30xbrli:pure0001272830country:US2020-07-012020-09-300001272830country:US2020-01-012020-09-300001272830country:US2019-07-012019-09-300001272830country:US2019-01-012019-09-300001272830us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Member2020-09-300001272830us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Member2019-12-310001272830us-gaap:CustomerRelationshipsMember2020-09-300001272830us-gaap:CustomerRelationshipsMember2019-12-310001272830us-gaap:TechnologyBasedIntangibleAssetsMember2020-09-300001272830us-gaap:TechnologyBasedIntangibleAssetsMember2019-12-310001272830us-gaap:PatentsMember2020-09-300001272830us-gaap:PatentsMember2019-12-310001272830us-gaap:TradeNamesMember2020-09-300001272830us-gaap:TradeNamesMember2019-12-310001272830us-gaap:NoncompeteAgreementsMember2020-09-300001272830us-gaap:NoncompeteAgreementsMember2019-12-310001272830vg:VonageCommunicationsPlatformMembercountry:US2020-07-012020-09-300001272830vg:ConsumerServicesMembercountry:US2020-07-012020-09-300001272830vg:VonageCommunicationsPlatformMembercountry:US2019-07-012019-09-300001272830vg:ConsumerServicesMembercountry:US2019-07-012019-09-300001272830country:CAvg:VonageCommunicationsPlatformMember2020-07-012020-09-300001272830country:CAvg:ConsumerServicesMember2020-07-012020-09-300001272830country:CA2020-07-012020-09-300001272830country:CAvg:VonageCommunicationsPlatformMember2019-07-012019-09-300001272830country:CAvg:ConsumerServicesMember2019-07-012019-09-300001272830country:CA2019-07-012019-09-300001272830country:GBvg:VonageCommunicationsPlatformMember2020-07-012020-09-300001272830country:GBvg:ConsumerServicesMember2020-07-012020-09-300001272830country:GB2020-07-012020-09-300001272830country:GBvg:VonageCommunicationsPlatformMember2019-07-012019-09-300001272830country:GBvg:ConsumerServicesMember2019-07-012019-09-300001272830country:GB2019-07-012019-09-300001272830vg:VonageCommunicationsPlatformMembervg:NonUSExcludingCanadaAndUnitedKingdomMember2020-07-012020-09-300001272830vg:ConsumerServicesMembervg:NonUSExcludingCanadaAndUnitedKingdomMember2020-07-012020-09-300001272830vg:NonUSExcludingCanadaAndUnitedKingdomMember2020-07-012020-09-300001272830vg:VonageCommunicationsPlatformMembervg:NonUSExcludingCanadaAndUnitedKingdomMember2019-07-012019-09-300001272830vg:ConsumerServicesMembervg:NonUSExcludingCanadaAndUnitedKingdomMember2019-07-012019-09-300001272830vg:NonUSExcludingCanadaAndUnitedKingdomMember2019-07-012019-09-300001272830vg:VonageCommunicationsPlatformMember2020-07-012020-09-300001272830vg:ConsumerServicesMember2020-07-012020-09-300001272830vg:VonageCommunicationsPlatformMember2019-07-012019-09-300001272830vg:ConsumerServicesMember2019-07-012019-09-300001272830vg:VonageCommunicationsPlatformMemberus-gaap:ServiceMember2020-07-012020-09-300001272830vg:ConsumerServicesMemberus-gaap:ServiceMember2020-07-012020-09-300001272830us-gaap:ServiceMember2020-07-012020-09-300001272830vg:VonageCommunicationsPlatformMemberus-gaap:ServiceMember2019-07-012019-09-300001272830vg:ConsumerServicesMemberus-gaap:ServiceMember2019-07-012019-09-300001272830us-gaap:ServiceMember2019-07-012019-09-300001272830vg:VonageCommunicationsPlatformMemberus-gaap:ProductMember2020-07-012020-09-300001272830vg:ConsumerServicesMemberus-gaap:ProductMember2020-07-012020-09-300001272830us-gaap:ProductMember2020-07-012020-09-300001272830vg:VonageCommunicationsPlatformMemberus-gaap:ProductMember2019-07-012019-09-300001272830vg:ConsumerServicesMemberus-gaap:ProductMember2019-07-012019-09-300001272830us-gaap:ProductMember2019-07-012019-09-300001272830vg:VonageCommunicationsPlatformMembervg:USFMember2020-07-012020-09-300001272830vg:ConsumerServicesMembervg:USFMember2020-07-012020-09-300001272830vg:USFMember2020-07-012020-09-300001272830vg:VonageCommunicationsPlatformMembervg:USFMember2019-07-012019-09-300001272830vg:ConsumerServicesMembervg:USFMember2019-07-012019-09-300001272830vg:USFMember2019-07-012019-09-300001272830vg:VonageCommunicationsPlatformMembercountry:US2020-01-012020-09-300001272830vg:ConsumerServicesMembercountry:US2020-01-012020-09-300001272830vg:VonageCommunicationsPlatformMembercountry:US2019-01-012019-09-300001272830vg:ConsumerServicesMembercountry:US2019-01-012019-09-300001272830country:CAvg:VonageCommunicationsPlatformMember2020-01-012020-09-300001272830country:CAvg:ConsumerServicesMember2020-01-012020-09-300001272830country:CA2020-01-012020-09-300001272830country:CAvg:VonageCommunicationsPlatformMember2019-01-012019-09-300001272830country:CAvg:ConsumerServicesMember2019-01-012019-09-300001272830country:CA2019-01-012019-09-300001272830country:GBvg:VonageCommunicationsPlatformMember2020-01-012020-09-300001272830country:GBvg:ConsumerServicesMember2020-01-012020-09-300001272830country:GB2020-01-012020-09-300001272830country:GBvg:VonageCommunicationsPlatformMember2019-01-012019-09-300001272830country:GBvg:ConsumerServicesMember2019-01-012019-09-300001272830country:GB2019-01-012019-09-300001272830vg:VonageCommunicationsPlatformMembervg:NonUSExcludingCanadaAndUnitedKingdomMember2020-01-012020-09-300001272830vg:ConsumerServicesMembervg:NonUSExcludingCanadaAndUnitedKingdomMember2020-01-012020-09-300001272830vg:NonUSExcludingCanadaAndUnitedKingdomMember2020-01-012020-09-300001272830vg:VonageCommunicationsPlatformMembervg:NonUSExcludingCanadaAndUnitedKingdomMember2019-01-012019-09-300001272830vg:ConsumerServicesMembervg:NonUSExcludingCanadaAndUnitedKingdomMember2019-01-012019-09-300001272830vg:NonUSExcludingCanadaAndUnitedKingdomMember2019-01-012019-09-300001272830vg:VonageCommunicationsPlatformMember2020-01-012020-09-300001272830vg:ConsumerServicesMember2020-01-012020-09-300001272830vg:VonageCommunicationsPlatformMember2019-01-012019-09-300001272830vg:ConsumerServicesMember2019-01-012019-09-300001272830vg:VonageCommunicationsPlatformMemberus-gaap:ServiceMember2020-01-012020-09-300001272830vg:ConsumerServicesMemberus-gaap:ServiceMember2020-01-012020-09-300001272830us-gaap:ServiceMember2020-01-012020-09-300001272830vg:VonageCommunicationsPlatformMemberus-gaap:ServiceMember2019-01-012019-09-300001272830vg:ConsumerServicesMemberus-gaap:ServiceMember2019-01-012019-09-300001272830us-gaap:ServiceMember2019-01-012019-09-300001272830vg:VonageCommunicationsPlatformMemberus-gaap:ProductMember2020-01-012020-09-300001272830vg:ConsumerServicesMemberus-gaap:ProductMember2020-01-012020-09-300001272830us-gaap:ProductMember2020-01-012020-09-300001272830vg:VonageCommunicationsPlatformMemberus-gaap:ProductMember2019-01-012019-09-300001272830vg:ConsumerServicesMemberus-gaap:ProductMember2019-01-012019-09-300001272830us-gaap:ProductMember2019-01-012019-09-300001272830vg:VonageCommunicationsPlatformMembervg:USFMember2020-01-012020-09-300001272830vg:ConsumerServicesMembervg:USFMember2020-01-012020-09-300001272830vg:USFMember2020-01-012020-09-300001272830vg:VonageCommunicationsPlatformMembervg:USFMember2019-01-012019-09-300001272830vg:ConsumerServicesMembervg:USFMember2019-01-012019-09-300001272830vg:USFMember2019-01-012019-09-300001272830vg:SubscriptionservicesMember2020-07-012020-09-300001272830vg:SubscriptionservicesMember2020-01-012020-09-300001272830vg:UsageMember2020-07-012020-09-300001272830vg:UsageMember2020-01-012020-09-300001272830vg:USFandothersMember2020-07-012020-09-300001272830vg:USFandothersMember2020-01-012020-09-300001272830vg:SubscriptionservicesMember2019-07-012019-09-300001272830vg:SubscriptionservicesMember2019-01-012019-09-300001272830vg:UsageMember2019-07-012019-09-300001272830vg:UsageMember2019-01-012019-09-300001272830vg:USFandothersMember2019-07-012019-09-300001272830vg:USFandothersMember2019-01-012019-09-300001272830srt:ScenarioForecastMember2020-10-012021-09-300001272830srt:MinimumMember2020-07-012020-09-300001272830srt:MaximumMember2020-07-012020-09-3000012728302021-01-012020-09-300001272830vg:CurrentandNonCurrentPortionMember2020-09-300001272830vg:CurrentandNonCurrentPortionMember2019-12-310001272830us-gaap:RestrictedStockUnitsRSUMember2020-07-012020-09-300001272830us-gaap:RestrictedStockUnitsRSUMember2019-07-012019-09-300001272830us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-09-300001272830us-gaap:RestrictedStockUnitsRSUMember2019-01-012019-09-300001272830us-gaap:EmployeeStockOptionMember2020-07-012020-09-300001272830us-gaap:EmployeeStockOptionMember2019-07-012019-09-300001272830us-gaap:EmployeeStockOptionMember2020-01-012020-09-300001272830us-gaap:EmployeeStockOptionMember2019-01-012019-09-300001272830vg:AlternativeMinimumTaxMember2020-01-012020-09-300001272830us-gaap:DomesticCountryMember2020-09-300001272830us-gaap:StateAndLocalJurisdictionMember2020-09-300001272830us-gaap:ForeignCountryMemberus-gaap:HerMajestysRevenueAndCustomsHMRCMember2020-09-3000012728302019-04-012019-06-3000012728302019-06-012019-06-30iso4217:USDvg:unit00012728302018-07-310001272830us-gaap:LineOfCreditMember2020-01-012020-09-300001272830us-gaap:LineOfCreditMember2019-01-012019-09-300001272830us-gaap:SecuredDebtMember2019-01-012019-09-30vg:agreement00012728302017-07-1400012728302017-07-310001272830us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember2020-09-300001272830us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember2019-09-300001272830vg:ServiceandProductMembervg:VonageCommunicationsPlatformMember2020-07-012020-09-300001272830vg:ServiceandProductMembervg:ConsumerServicesMember2020-07-012020-09-300001272830vg:ServiceandProductMember2020-07-012020-09-300001272830vg:ServiceandProductMembervg:VonageCommunicationsPlatformMember2020-01-012020-09-300001272830vg:ServiceandProductMembervg:ConsumerServicesMember2020-01-012020-09-300001272830vg:ServiceandProductMember2020-01-012020-09-300001272830vg:ServiceandProductMembervg:VonageCommunicationsPlatformMember2019-07-012019-09-300001272830vg:ServiceandProductMembervg:ConsumerServicesMember2019-07-012019-09-300001272830vg:ServiceandProductMember2019-07-012019-09-300001272830vg:ServiceandProductMembervg:VonageCommunicationsPlatformMember2019-01-012019-09-300001272830vg:ServiceandProductMembervg:ConsumerServicesMember2019-01-012019-09-300001272830vg:ServiceandProductMember2019-01-012019-09-300001272830country:US2020-09-300001272830country:US2019-12-310001272830country:GB2020-09-300001272830country:GB2019-12-310001272830country:IL2020-09-300001272830country:IL2019-12-31
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 September 30, 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: (732) 528-2600
(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 | October 31, 2020 |
Common Stock, par value $0.001 | | 248,332,776 | | 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.
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 |
| | |
| | |
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 |
| | |
VCP | | Vonage Communications Platform, formerly referred to as Business |
VoIP | | Voice over Internet Protocol |
PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Assets | (Unaudited) | | |
Current assets: | | | |
Cash and cash equivalents | $ | 48,370 | | | $ | 23,620 | |
Accounts receivable, net of allowance of $8,808 and $5,494, respectively | 119,553 | | | 101,813 | |
Inventory, net of allowance of $64 and $76, respectively | 614 | | | 1,475 | |
Deferred customer acquisition costs, current portion | 16,884 | | | 13,834 | |
Prepaid expenses | 36,362 | | | 22,338 | |
Other current assets | 6,277 | | | 9,988 | |
Total current assets | 228,060 | | | 173,068 | |
Property and equipment, net of accumulated depreciation of $120,127 and $109,646, respectively | 37,449 | | | 48,371 | |
Operating lease right-of-use assets | 22,971 | | | 50,847 | |
Goodwill | 606,958 | | | 602,970 | |
Software, net of accumulated amortization of $106,857 and $102,133, respectively | 69,389 | | | 40,300 | |
Deferred customer acquisition costs | 62,760 | | | 55,148 | |
Restricted cash | 1,999 | | | 2,015 | |
Intangible assets, net of accumulated amortization of $264,820 and $221,182, respectively | 208,507 | | | 249,905 | |
Deferred tax assets | 115,178 | | | 108,347 | |
Other assets | 34,643 | | | 33,729 | |
Total assets | $ | 1,387,914 | | | $ | 1,364,700 | |
Liabilities and Stockholders’ Equity | | | |
| | | |
Current liabilities: | | | |
Accounts payable | $ | 34,442 | | | $ | 42,366 | |
Accrued expenses | 149,476 | | | 137,589 | |
Deferred revenue, current portion | 62,813 | | | 59,464 | |
Operating lease liabilities, current portion | 11,481 | | | 12,477 | |
| | | |
| | | |
Total current liabilities | 258,212 | | | 251,896 | |
Indebtedness under revolving credit facility | 240,500 | | | 220,500 | |
| | | |
Convertible senior notes, net | 287,176 | | | 276,658 | |
Operating lease liabilities | 21,747 | | | 45,722 | |
Other liabilities | 3,048 | | | 2,862 | |
Total liabilities | 810,683 | | | 797,638 | |
Commitments and Contingencies (Note 9) | | | |
Stockholders’ Equity: | | | |
Common stock, par value 0.001 per share; 596,950 shares authorized at September 30, 2020, and December 31, 2019 | 323 | | | 316 | |
Additional paid-in capital | 1,539,527 | | | 1,494,469 | |
Accumulated deficit | (653,256) | | | (631,009) | |
Treasury stock, at cost | (319,911) | | | (306,043) | |
Accumulated other comprehensive income | 10,548 | | | 9,329 | |
Total stockholders’ equity | 577,231 | | | 567,062 | |
Total liabilities and stockholders’ equity | $ | 1,387,914 | | | $ | 1,364,700 | |
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Revenues: | | | | | | | |
Service, access and product revenues | $ | 298,991 | | | $ | 279,871 | | | $ | 878,584 | | | $ | 819,006 | |
USF revenues | 17,658 | | | 22,663 | | | 46,055 | | | 60,653 | |
Total revenues | 316,649 | | | 302,534 | | | 924,639 | | | 879,659 | |
| | | | | | | |
Operating Expenses: | | | | | | | |
Service, access and product cost of revenues (excluding depreciation and amortization) | 124,243 | | | 111,170 | | | 357,252 | | | 314,812 | |
USF cost of revenues | 17,658 | | | 22,663 | | | 46,055 | | | 60,653 | |
| | | | | | | |
Sales and marketing | 85,505 | | | 83,628 | | | 261,953 | | | 274,513 | |
Engineering and development | 20,110 | | | 16,901 | | | 59,097 | | | 50,318 | |
General and administrative | 56,835 | | | 41,306 | | | 140,537 | | | 113,380 | |
Depreciation and amortization | 22,887 | | | 21,319 | | | 64,064 | | | 63,195 | |
Total operating expenses | 327,238 | | | 296,987 | | | 928,958 | | | 876,871 | |
(Loss) Income from operations | (10,589) | | | 5,547 | | | (4,319) | | | 2,788 | |
Other Income (Expense): | | | | | | | |
Interest expense | (7,373) | | | (8,454) | | | (24,776) | | | (24,517) | |
Other income (expense), net | (37) | | | 58 | | | 154 | | | (505) | |
Total other expense, net | (7,410) | | | (8,396) | | | (24,622) | | | (25,022) | |
Loss before income tax benefit | (17,999) | | | (2,849) | | | (28,941) | | | (22,234) | |
Income tax benefit (expense) | 7,937 | | | (18,248) | | | 6,694 | | | 5,127 | |
Net loss | $ | (10,062) | | | $ | (21,097) | | | $ | (22,247) | | | $ | (17,107) | |
| | | | | | | |
Loss per common share: | | | | | | | |
Basic and diluted | $ | (0.04) | | | $ | (0.09) | | | $ | (0.09) | | | $ | (0.07) | |
| | | | | | | |
Weighted-average common shares outstanding: | | | | | | | |
Basic and diluted | 246,697 | | | 242,336 | | | 245,242 | | | 241,786 | |
| | | | | | | |
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Net loss | $ | (10,062) | | | $ | (21,097) | | | $ | (22,247) | | | $ | (17,107) | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustment, net of tax expense (benefit) of $(1,086), $847, $(1,275), and $938, respectively | 19,776 | | | (16,459) | | | 218 | | | (17,594) | |
Unrealized gain (loss) on derivatives, net of tax expense (benefit) of $—, $71, $(4) and $364, respectively | — | | | (307) | | | 1,001 | | | (1,788) | |
Total other comprehensive income (loss) | 19,776 | | | (16,766) | | | 1,219 | | | (19,382) | |
Comprehensive income (loss) | $ | 9,714 | | | $ | (37,863) | | | $ | (21,028) | | | $ | (36,489) | |
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, |
| 2020 | | 2019 |
Cash flows from operating activities: | | | |
Net loss | $ | (22,247) | | | $ | (17,107) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | 22,531 | | | 20,098 | |
Amortization of intangibles | 41,533 | | | 43,097 | |
| | | |
Deferred income taxes | (8,130) | | | (7,630) | |
Amortization of deferred customer acquisition costs | 11,653 | | | 7,981 | |
| | | |
Allowances for doubtful accounts and obsolete inventory | 4,778 | | | 1,384 | |
Amortization of financing costs and debt discount | 11,127 | | | 5,311 | |
Loss on disposal of property and equipment | 743 | | | 745 | |
Share-based expense | 33,972 | | | 32,152 | |
Changes in derivatives | 1,055 | | | (398) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (19,825) | | | (23,211) | |
Inventory | 869 | | | 552 | |
Prepaid expenses and other current assets | (10,453) | | | (2,238) | |
Deferred customer acquisition costs | (22,342) | | | (21,708) | |
| | | |
Accounts payable and accrued expenses | 1,612 | | | 24,043 | |
Deferred revenue | 2,997 | | | 6,867 | |
Other assets - deferred cloud computing implementation costs | (5,394) | | | (11,929) | |
Other assets and liabilities | 6,952 | | | 1,841 | |
Net cash provided by operating activities | 51,431 | | | 59,850 | |
Cash flows used in investing activities: | | | |
Capital expenditures | (7,718) | | | (15,426) | |
Purchase of intangible assets | (260) | | | — | |
Acquisition and development of software assets | (30,256) | | | (20,836) | |
Acquisitions, net of cash acquired | — | | | (3,000) | |
| | | |
Net cash used in investing activities | (38,234) | | | (39,262) | |
Cash flows provided by/(used in) financing activities: | | | |
| | | |
Payments for short and long-term debt | (55,000) | | | (418,500) | |
Proceeds from issuance of long-term debt | 75,000 | | | 479,000 | |
Payments of debt issuance costs | — | | | (9,715) | |
Payments for capped call transactions and costs | — | | | (28,325) | |
Common stock repurchases | — | | | (10,000) | |
Employee taxes paid on withholding shares | (15,180) | | | (20,372) | |
Proceeds from exercise of stock options | 8,051 | | | 1,678 | |
Net cash provided by/(used in) financing activities | 12,871 | | | (6,234) | |
Effect of exchange rate changes on cash | (1,334) | | | (663) | |
Net increase in cash, cash equivalents, and restricted cash | 24,734 | | | 13,691 | |
Cash, cash equivalents, and restricted cash, beginning of period | 25,635 | | | 7,104 | |
Cash, cash equivalents, and restricted cash, end of period | $ | 50,369 | | | $ | 20,795 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
See accompanying notes to condensed consolidated financial statements.
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 June 30, 2019 | | $ | 314 | | | $ | 1,464,742 | | | $ | (607,537) | | | $ | (304,031) | | | $ | 4,154 | | | $ | 557,642 | |
| | | | | | | | | | | | |
Stock option exercises | | 1 | | | 414 | | | | | | | | | 415 | |
Share-based expense | | | | 12,921 | | | | | | | | | 12,921 | |
Employee taxes paid on withholding shares | | | | | | | | (1,350) | | | | | (1,350) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Common stock issued for acquisition of assets | | | | 3,000 | | | | | | | | | 3,000 | |
Foreign currency translation adjustment | | | | | | | | | | (16,459) | | | (16,459) | |
Unrealized gain on derivatives | | | | | | | | | | (307) | | | (307) | |
Net loss | | | | | | (21,097) | | | | | | | (21,097) | |
Balance at September 30, 2019 | | $ | 315 | | | $ | 1,481,077 | | | $ | (628,634) | | | $ | (305,381) | | | $ | (12,612) | | | $ | 534,765 | |
| | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Treasury Stock | | Accumulated Other Comprehensive Income | | Total |
Balance at June 30, 2020 | | $ | 320 | | | $ | 1,519,055 | | | $ | (643,194) | | | $ | (319,314) | | | $ | (9,228) | | | $ | 547,639 | |
Stock option exercises | | 3 | | | 7,805 | | | | | | | | | 7,808 | |
Share-based expense | | | | 12,667 | | | | | | | | | 12,667 | |
Employee taxes paid on withholding shares | | | | | | | | (597) | | | | | (597) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | 19,776 | | | 19,776 | |
| | | | | | | | | | | | |
Net loss | | | | | | (10,062) | | | | | | | (10,062) | |
Balance at September 30, 2020 | | $ | 323 | | | $ | 1,539,527 | | | $ | (653,256) | | | $ | (319,911) | | | $ | 10,548 | | | $ | 577,231 | |
See accompanying notes to condensed consolidated financial statements. |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | 5 | | | 1,673 | | | | | | | | | 1,678 | |
Share-based expense | | | | 32,152 | | | | | | | | | 32,152 | |
Employee taxes paid on withholding shares | | | | | | | | (20,372) | | | | | (20,372) | |
Common stock repurchases | | | | | | | | (10,000) | | | | | (10,000) | |
Equity component of convertible notes, net of issuance costs and tax | | | | 50,123 | | | | | | | | | 50,123 | |
Purchase of capped calls, net of tax | | | | (21,553) | | | | | | | | | (21,553) | |
Common stock issued for acquisition of assets | | | | 3,000 | | | | | | | | | 3,000 | |
Foreign currency translation adjustment | | | | | | | | | | (17,594) | | | (17,594) | |
Unrealized gain on derivatives | | | | | | | | | | (1,788) | | | (1,788) | |
Net loss | | | | | | (17,107) | | | | | | | (17,107) | |
Balance at September 30, 2019 | | $ | 315 | | | $ | 1,481,077 | | | $ | (628,634) | | | $ | (305,381) | | | $ | (12,612) | | | $ | 534,765 | |
| | | | | | | | | | | | |
| | 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 | | 7 | | | 8,044 | | | | | | | | | 8,051 | |
Share-based expense | | | | 37,014 | | | | | | | | | 37,014 | |
Employee taxes paid on withholding shares | | | | | | | | (13,868) | | | | | (13,868) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | 218 | | | 218 | |
Unrealized loss on derivatives | | | | | | | | | | 1,001 | | | 1,001 | |
Net loss | | | | | | (22,247) | | | | | | | (22,247) | |
Balance at September 30, 2020 | | $ | 323 | | | $ | 1,539,527 | | | $ | (653,256) | | | $ | (319,911) | | | $ | 10,548 | | | $ | 577,231 | |
See accompanying notes to condensed consolidated financial statements.
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, we are observing a secular shift in the way businesses need to operate. We believe that this shift is driving a growing communications revolution across all industries and modes of communications. We believe that Vonage's Communications APIs, Unified Communications and Contact Center products and services are well positioned to take advantage of this emerging trend with sizable, growing total addressable markets as companies look to cloud-based communications solutions and API programming architectures as part of their digital transformation.
Our strategic business is the Vonage Communications Platform formerly referred to as "Business," which is our single enterprise cloud communications platform, offering our wide range of enterprise communications services and solutions including Communications APIs, Unified Communications, and Contact Center Communications The Vonage Communications Platform brings unique value to businesses by providing multiple communications channels - video, voice, messaging, email and verification - that integrate into applications, products and workflows. This delivers both the power and the flexibility our customers need to disrupt their industries, and enables the type of business continuity, remote work, and remote delivery of services that are now essential for companies to work and serve customers from anywhere. Vonage products and services enable our business customers to fundamentally change how they engage with their customers and team members. We have a robust set of solutions and services that meet the needs of businesses of all sizes, from micro, to SMB through mid-market and enterprise. We provide customers with multiple deployment options designed to provide the reliability and quality of service they demand. Vonage solutions also integrate with today's leading business applications, CRM and productivity tools,, including Google’s G Suite, Zendesk, Salesforce’s Sales and Service Clouds, Microsoft Dynamics, ServiceNow, Oracle, and Clio among others, to drive internal communications and collaboration among team members and external engagement with customers.
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 68% and 72% of our consolidated revenues for the three months ended September 30, 2020 and 2019 and 69% and 72% for the nine months ended September 30, 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 nine months ended September 30, 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.
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 materially 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 continued 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, net assets or cash flows.
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 $13,649 and $9,658 for the three months ended September 30, 2020 and 2019 and $35,953 and $28,220 for the nine months ended September 30, 2020 and 2019, respectively. In addition, costs of goods sold included in service, access, and product cost of revenues during the three months ended September 30, 2020 and 2019 were $2,707 and $5,921 and during the nine months ended September 30, 2020 and 2019 were $8,802 and $17,112, respectively.
Sales and Marketing Expenses
We incurred advertising costs, which are included in sales and marketing of $10,785 and $11,437 for the three months ended September 30, 2020 and 2019 and $34,535 and $45,773 for the nine months ended September 30, 2020 and 2019, respectively.
Fair Value of Financial Instruments
Certain of the Company's other financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable and accounts payable, approximate fair value due to their short-term nature and as such are classified as Level 1. We believe the fair value of our 2018 Credit Facility at September 30, 2020 and December 31, 2019 was approximately the same as its carrying amount as the facility bears interest at a variable rate indexed to current market conditions and is classified as Level 2 within the fair value hierarchy.
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 September 30, 2020 and December 31, 2019, the fair value of the 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) was approximately $333,953 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 September 30, | | As of December 31, |
| 2020 | | 2019 | | 2019 | | 2018 |
Cash and cash equivalents | $ | 48,370 | | | $ | 18,741 | | | $ | 23,620 | | | $ | 5,057 | |
Restricted cash | 1,999 | | | 2,054 | | | 2,015 | | | 2,047 | |
Total cash, cash equivalents and restricted cash | $ | 50,369 | | | $ | 20,795 | | | $ | 25,635 | | | $ | 7,104 | |
The following tables provides supplemental information of intangible assets and accrued expenses within the consolidated balance sheets:
Intangible assets, net
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | | Gross Carrying Value | Accumulated Amortization | Net Carrying Value |
Customer relationships | $ | 275,205 | | $ | (139,232) | | $ | 135,973 | | | $ | 272,767 | | $ | (115,583) | | $ | 157,184 | |
Developed technology | 169,175 | | (97,151) | | 72,024 | | | 169,722 | | (80,523) | | 89,199 | |
Patents and patent licenses | 20,905 | | (20,395) | | 510 | | | 20,554 | | (19,228) | | 1,326 | |
Trade names | 7,025 | | (7,025) | | — | | | 7,074 | | (4,878) | | 2,196 | |
Non-compete agreements | 1,017 | | (1,017) | | — | | | 970 | | (970) | | — | |
Total intangible assets | $ | 473,327 | | $ | (264,820) | | $ | 208,507 | | | $ | 471,087 | | $ | (221,182) | | $ | 249,905 | |
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Accrued expenses
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Compensation and related taxes and temporary labor | $ | 35,154 | | | $ | 40,101 | |
Marketing | 18,987 | | | 15,294 | |
Taxes and fees | 25,736 | | | 22,922 | |
Telecommunications | 42,511 | | | 40,498 | |
Severance | 9,121 | | | — | |
Interest | 2,378 | | | 873 | |
Customer credits | 3,867 | | | 2,772 | |
Professional fees | 2,770 | | | 4,482 | |
Inventory | 910 | | | 871 | |
Other accruals | 8,042 | | | 9,776 | |
Accrued expenses | $ | 149,476 | | | $ | 137,589 | |
During the third quarter of September 30, 2020, the Company initiated a business-wide optimization and alignment project to focus the Company's resources and drive stronger operational execution, which includes the previously announced Consumer evaluation. In connection with this project, the Company initiated a reduction in workforce incurring accrued severance costs of $9,121 related to employee exits as well as abandoning a portion of its office leases as further described in Note 7, Leases which together resulted in total restructuring expense included in general and administrative expense during the three months ended September 30, 2020 of $15,182.
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 Vonage Communications Platform 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 | 3,988 | |
Balance at September 30, 2020 | $ | 606,958 | |
Recent Accounting Pronouncements
The following standards were adopted by the Company during the current year:
In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity". This ASU simplifies the accounting for certain convertible instruments such that the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASC 815, or that do not result in substantial premiums accounted for as paid-in-captial. As a result, more convertible debt instruments will be accounted for as a single liability measured at its amortized cost. In addition, the ASU requires the use of the if-converted method to be applied to convertible instruments when calculating earnings per share. The ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, using either a modified retrospective or a full retrospective approach. Early adoption is permitted for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this standard on our condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
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 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. Due to the COVID-19 pandemic and impact on economic conditions, the Company included in its estimate of expected credit losses additional reserves related to trade receivables for those customers in industries most significantly impacted by these events. The Company will continue to actively monitor the impact of the COVID-19 pandemic on its estimate of expected credit losses.
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 Vonage Communications Platform, or VCP, and Consumer segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| September 30, 2020 | | September 30, 2019 |
| VCP | | Consumer | | Total | | VCP | | Consumer | | Total |
Primary geographical markets | | | | | | | | | | | |
United States | $ | 140,376 | | | $ | 76,282 | | | $ | 216,658 | | | $ | 127,976 | | | $ | 88,567 | | | $ | 216,543 | |
Canada | 2,261 | | | 4,014 | | | 6,275 | | | 2,138 | | | 4,817 | | | 6,955 | |
United Kingdom | 17,592 | | | 2,527 | | | 20,119 | | | 13,910 | | | 2,620 | | | 16,530 | |
Other Countries | 73,597 | | | — | | | 73,597 | | | 62,506 | | | — | | | 62,506 | |
| $ | 233,826 | | | $ | 82,823 | | | $ | 316,649 | | | $ | 206,530 | | | $ | 96,004 | | | $ | 302,534 | |
Major Sources of Revenue | | | | | | | | | | | |
Service revenues | $ | 218,456 | | | $ | 71,693 | | | $ | 290,149 | | | $ | 183,701 | | | $ | 83,981 | | | $ | 267,682 | |
Access and product revenues | 8,757 | | | 85 | | | 8,842 | | | 12,120 | | | 69 | | | 12,189 | |
USF revenues | 6,613 | | | 11,045 | | | 17,658 | | | 10,709 | | | 11,954 | | | 22,663 | |
| $ | 233,826 | | | $ | 82,823 | | | $ | 316,649 | | | $ | 206,530 | | | $ | 96,004 | | | $ | 302,534 | |
| | | | | | | | | | | |
| Nine Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 |
| VCP | | Consumer | | Total | | VCP | | Consumer | | Total |
Primary geographical markets | | | | | | | | | | | |
United States | $ | 399,743 | | | $ | 234,051 | | | $ | 633,794 | | | $ | 363,312 | | | $ | 270,270 | | | $ | 633,582 | |
Canada | 6,206 | | | 12,677 | | | 18,883 | | | 5,496 | | | 14,927 | | | $ | 20,423 | |
United Kingdom | 50,597 | | | 7,583 | | | 58,180 | | | 53,416 | | | 8,315 | | | $ | 61,731 | |
Other Countries | 213,782 | | | — | | | 213,782 | | | 163,923 | | | — | | | $ | 163,923 | |
| $ | 670,328 | | | $ | 254,311 | | | $ | 924,639 | | | $ | 586,147 | | | $ | 293,512 | | | $ | 879,659 | |
Major Sources of Revenue | | | | | | | | | | | |
Service revenues | $ | 626,416 | | | $ | 223,981 | | | $ | 850,397 | | | $ | 523,060 | | | $ | 260,225 | | | $ | 783,285 | |
Access and product revenues | 27,987 | | | 200 | | | 28,187 | | | 35,524 | | | 197 | | | 35,721 | |
USF revenues | 15,925 | | | 30,130 | | | 46,055 | | | 27,563 | | | 33,090 | | | 60,653 | |
| $ | 670,328 | | | $ | 254,311 | | | $ | 924,639 | | | $ | 586,147 | | | $ | 293,512 | | | $ | 879,659 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | |
| | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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 and nine months ended September 30, 2020, the Company recognized $152,636 and $463,218 related to subscription services, $116,557 and $320,983 related to usage, and $47,456 and $140,438 related to other revenues such as USF, other regulatory fees, and credits. During the three and nine months ended September 30, 2019, the Company recognized $146,127 and $467,893 related to subscription services, $87,677 and $242,192 related to usage, and $68,730 and $169,574 related to other revenues such as USF, other regulatory fees, and credits.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Contract Assets and Liabilities
The following table provides information about receivables and contract liabilities from contracts with customers:
| | | | | | | | |
| September 30, 2020 | December 31, 2019 |
Receivables (1) | $ | 119,553 | | $ | 101,813 | |
Contract liabilities (2) | 62,813 | | 59,464 | |
(1) Amounts included in accounts receivables on our condensed consolidated balance sheets.
(2) Amounts included in deferred revenues on our condensed consolidated balance sheet.
Our deferred revenue represents the advance consideration received from customers for subscription services and is predominantly recognized as transfer of control occurs. During the three and nine months ended September 30, 2020, the Company recognized revenue of $106,866 and $325,252, respectively, related to its contract liabilities. During the three and nine months ended September 30, 2019, the Company recognized revenue of $111,739 and $344,935, respectively, related to its contract liabilities. We expect to recognize $62,813 into revenue over the next twelve months related to our deferred revenue as of September 30, 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 September 30, 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.
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 $79,644 and $68,982 as contract costs, net of accumulated amortization, as of September 30, 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 Vonage Communications Platform customers. The amounts amortized to sales and marketing expense were $4,086 and $11,653 for the three and nine months ended September 30, 2020, and $3,060 and $7,981 for the three and nine months ended September 30, 2019, respectively. There were no impairment losses recognized in relation to the costs capitalized during the nine months ended September 30, 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.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 4. Earnings Per Share
The following table sets forth the computation for basic and diluted loss per share for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Numerator | | | | | | | | |
Net loss | | $ | (10,062) | | | $ | (21,097) | | | $ | (22,247) | | | $ | (17,107) | |
Denominator | | | | | | | | |
Weighted average common shares outstanding for basic and diluted net loss per share | | 246,697 | | | 242,336 | | | 245,242 | | | 241,786 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Basic and diluted loss per share | | | | | | | | |
Basic and diluted loss per share | | $ | (0.04) | | | $ | (0.09) | | | $ | (0.09) | | | $ | (0.07) | |
| | | | | | | | |
| | | | | | | | |
For the three and nine months ended September 30, 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 | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Restricted stock units | | 14,165 | | | 10,616 | | | 14,165 | | | 10,616 | |
Stock options | | 2,129 | | | 5,087 | | | 2,129 | | | 5,087 | |
| | | | | | | | |
| | 16,294 | | | 15,703 | | | 16,294 | | | 15,703 | |
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.
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 | Nine Months Ended |
| | September 30, | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Loss before income taxes | | $ | (17,999) | | | $ | (2,849) | | < |