vg-20201231
00012728302020FYfalseP2YP3YP5Y00012728302020-01-012020-12-31iso4217:USD00012728302020-06-30xbrli:shares00012728302021-01-3100012728302019-01-012019-12-3100012728302018-01-012018-12-310001272830us-gaap:RetainedEarningsMember2020-01-012020-12-310001272830us-gaap:ServiceMembervg:VonageCommunicationsPlatformMember2020-01-012020-12-310001272830us-gaap:ServiceMembervg:VonageCommunicationsPlatformMember2019-01-012019-12-310001272830us-gaap:ServiceMembervg:VonageCommunicationsPlatformMember2018-01-012018-12-310001272830us-gaap:ProductMembervg:VonageCommunicationsPlatformMember2020-01-012020-12-310001272830us-gaap:ProductMembervg:VonageCommunicationsPlatformMember2019-01-012019-12-310001272830us-gaap:ProductMembervg:VonageCommunicationsPlatformMember2018-01-012018-12-310001272830vg:USFMembervg:VonageCommunicationsPlatformMember2020-01-012020-12-310001272830vg:USFMembervg:VonageCommunicationsPlatformMember2019-01-012019-12-310001272830vg:USFMembervg:VonageCommunicationsPlatformMember2018-01-012018-12-310001272830vg:VonageCommunicationsPlatformMember2020-01-012020-12-310001272830vg:VonageCommunicationsPlatformMember2019-01-012019-12-310001272830vg:VonageCommunicationsPlatformMember2018-01-012018-12-310001272830us-gaap:ServiceMembervg:ConsumerServicesMember2020-01-012020-12-310001272830us-gaap:ServiceMembervg:ConsumerServicesMember2019-01-012019-12-310001272830us-gaap:ServiceMembervg:ConsumerServicesMember2018-01-012018-12-310001272830us-gaap:ProductMembervg:ConsumerServicesMember2020-01-012020-12-310001272830us-gaap:ProductMembervg:ConsumerServicesMember2019-01-012019-12-310001272830us-gaap:ProductMembervg:ConsumerServicesMember2018-01-012018-12-310001272830vg:USFMembervg:ConsumerServicesMember2020-01-012020-12-310001272830vg:USFMembervg:ConsumerServicesMember2019-01-012019-12-310001272830vg:USFMembervg:ConsumerServicesMember2018-01-012018-12-310001272830vg:ConsumerServicesMember2020-01-012020-12-310001272830vg:ConsumerServicesMember2019-01-012019-12-310001272830vg:ConsumerServicesMember2018-01-012018-12-3100012728302020-12-310001272830us-gaap:DomesticCountryMember2020-12-310001272830us-gaap:StateAndLocalJurisdictionMember2020-12-310001272830us-gaap:ForeignCountryMember2020-12-3100012728302019-12-31iso4217:USDxbrli:shares00012728302018-12-3100012728302017-12-310001272830us-gaap:CommonStockMember2017-12-310001272830us-gaap:AdditionalPaidInCapitalMember2017-12-310001272830us-gaap:RetainedEarningsMember2017-12-310001272830us-gaap:TreasuryStockMember2017-12-310001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2017-12-310001272830us-gaap:AccountingStandardsUpdate201409Memberus-gaap:RetainedEarningsMembersrt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2017-12-310001272830srt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2017-12-310001272830us-gaap:CommonStockMember2018-01-012018-12-310001272830us-gaap:AdditionalPaidInCapitalMember2018-01-012018-12-310001272830us-gaap:TreasuryStockMember2018-01-012018-12-310001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-01-012018-12-310001272830us-gaap:RetainedEarningsMember2018-01-012018-12-310001272830us-gaap:CommonStockMember2018-12-310001272830us-gaap:AdditionalPaidInCapitalMember2018-12-310001272830us-gaap:RetainedEarningsMember2018-12-310001272830us-gaap:TreasuryStockMember2018-12-310001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310001272830us-gaap:RetainedEarningsMembersrt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:AccountingStandardsUpdate201602Member2018-12-310001272830srt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2018-12-310001272830us-gaap:CommonStockMember2019-01-012019-12-310001272830us-gaap:AdditionalPaidInCapitalMember2019-01-012019-12-310001272830us-gaap:TreasuryStockMember2019-01-012019-12-310001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-12-310001272830us-gaap:RetainedEarningsMember2019-01-012019-12-310001272830us-gaap:CommonStockMember2019-12-310001272830us-gaap:AdditionalPaidInCapitalMember2019-12-310001272830us-gaap:RetainedEarningsMember2019-12-310001272830us-gaap:TreasuryStockMember2019-12-310001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001272830us-gaap:CommonStockMember2020-01-012020-12-310001272830us-gaap:AdditionalPaidInCapitalMember2020-01-012020-12-310001272830us-gaap:TreasuryStockMember2020-01-012020-12-310001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-12-310001272830us-gaap:CommonStockMember2020-12-310001272830us-gaap:AdditionalPaidInCapitalMember2020-12-310001272830us-gaap:RetainedEarningsMember2020-12-310001272830us-gaap:TreasuryStockMember2020-12-310001272830us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-31xbrli:pure0001272830country:US2020-01-012020-12-310001272830country:US2019-01-012019-12-310001272830country:US2018-01-012018-12-31vg:billing_cycle0001272830srt:MaximumMembervg:NetworkEquipmentAndComputerHardwareMember2020-01-012020-12-310001272830vg:CustomerPremisesEquipmentMember2020-01-012020-12-310001272830srt:MinimumMembervg:PurchasedIntangibleAssetsMember2020-01-012020-12-310001272830srt:MaximumMembervg:PurchasedIntangibleAssetsMember2020-01-012020-12-310001272830vg:RestrictedCashLeaseDepositsMember2020-12-310001272830vg:RestrictedCashLeaseDepositsMember2019-12-310001272830country:USvg:VonageCommunicationsPlatformMember2020-01-012020-12-310001272830country:USvg:ConsumerServicesMember2020-01-012020-12-310001272830country:USvg:VonageCommunicationsPlatformMember2019-01-012019-12-310001272830country:USvg:ConsumerServicesMember2019-01-012019-12-310001272830country:USvg:VonageCommunicationsPlatformMember2018-01-012018-12-310001272830country:USvg:ConsumerServicesMember2018-01-012018-12-310001272830country:GBvg:VonageCommunicationsPlatformMember2020-01-012020-12-310001272830country:GBvg:ConsumerServicesMember2020-01-012020-12-310001272830country:GB2020-01-012020-12-310001272830country:GBvg:VonageCommunicationsPlatformMember2019-01-012019-12-310001272830country:GBvg:ConsumerServicesMember2019-01-012019-12-310001272830country:GB2019-01-012019-12-310001272830country:GBvg:VonageCommunicationsPlatformMember2018-01-012018-12-310001272830country:GBvg:ConsumerServicesMember2018-01-012018-12-310001272830country:GB2018-01-012018-12-310001272830vg:NonUSExcludingCanadaAndUnitedKingdomMembervg:VonageCommunicationsPlatformMember2020-01-012020-12-310001272830vg:NonUSExcludingCanadaAndUnitedKingdomMembervg:ConsumerServicesMember2020-01-012020-12-310001272830vg:NonUSExcludingCanadaAndUnitedKingdomMember2020-01-012020-12-310001272830vg:NonUSExcludingCanadaAndUnitedKingdomMembervg:VonageCommunicationsPlatformMember2019-01-012019-12-310001272830vg:NonUSExcludingCanadaAndUnitedKingdomMembervg:ConsumerServicesMember2019-01-012019-12-310001272830vg:NonUSExcludingCanadaAndUnitedKingdomMember2019-01-012019-12-310001272830vg:NonUSExcludingCanadaAndUnitedKingdomMembervg:VonageCommunicationsPlatformMember2018-01-012018-12-310001272830vg:NonUSExcludingCanadaAndUnitedKingdomMembervg:ConsumerServicesMember2018-01-012018-12-310001272830vg:NonUSExcludingCanadaAndUnitedKingdomMember2018-01-012018-12-310001272830us-gaap:ServiceMember2020-01-012020-12-310001272830us-gaap:ServiceMember2019-01-012019-12-310001272830us-gaap:ServiceMember2018-01-012018-12-310001272830us-gaap:ProductMember2020-01-012020-12-310001272830us-gaap:ProductMember2019-01-012019-12-310001272830us-gaap:ProductMember2018-01-012018-12-310001272830vg:USFMember2020-01-012020-12-310001272830vg:USFMember2019-01-012019-12-310001272830vg:USFMember2018-01-012018-12-310001272830vg:SubscriptionservicesMember2020-01-012020-12-310001272830vg:UsageMember2020-01-012020-12-310001272830vg:USFandothersMember2020-01-012020-12-310001272830vg:SubscriptionservicesMember2019-01-012019-12-310001272830vg:UsageMember2019-01-012019-12-310001272830vg:USFandothersMember2019-01-012019-12-310001272830vg:SubscriptionservicesMember2018-01-012018-12-310001272830vg:UsageMember2018-01-012018-12-310001272830vg:USFandothersMember2018-01-012018-12-310001272830srt:MinimumMember2020-01-012020-12-310001272830srt:MaximumMember2020-01-012020-12-3100012728302021-01-012020-12-310001272830vg:NewVoiceMediaMember2018-10-310001272830vg:NewVoiceMediaMember2018-10-312018-10-31iso4217:GBP0001272830currency:GBPvg:NewVoiceMediaMember2018-10-312018-10-310001272830vg:NewVoiceMediaMember2020-01-012020-12-310001272830vg:NewVoiceMediaMember2019-12-310001272830us-gaap:TradeNamesMembervg:NewVoiceMediaMember2018-10-310001272830vg:NewVoiceMediaMemberus-gaap:CustomerRelationshipsMember2018-10-310001272830us-gaap:TechnologyBasedIntangibleAssetsMembervg:NewVoiceMediaMember2018-10-310001272830vg:NewVoiceMediaMember2019-01-012019-12-310001272830vg:NewVoiceMediaMember2018-01-012018-12-310001272830vg:TokBoxMember2018-08-010001272830vg:TokBoxMember2018-08-012018-08-010001272830vg:TokBoxMember2020-01-012020-12-310001272830vg:TokBoxMemberus-gaap:CustomerRelationshipsMember2018-08-010001272830us-gaap:TechnologyBasedIntangibleAssetsMembervg:TokBoxMember2018-08-010001272830vg:TokBoxMember2018-01-012018-12-310001272830us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-12-310001272830us-gaap:RestrictedStockUnitsRSUMember2019-01-012019-12-310001272830us-gaap:RestrictedStockUnitsRSUMember2018-01-012018-12-310001272830us-gaap:EmployeeStockOptionMember2020-01-012020-12-310001272830us-gaap:EmployeeStockOptionMember2019-01-012019-12-310001272830us-gaap:EmployeeStockOptionMember2018-01-012018-12-310001272830srt:MinimumMemberus-gaap:CustomerRelationshipsMember2020-01-012020-12-310001272830srt:MaximumMemberus-gaap:CustomerRelationshipsMember2020-01-012020-12-310001272830us-gaap:CustomerRelationshipsMember2020-12-310001272830us-gaap:CustomerRelationshipsMember2019-12-310001272830srt:MinimumMemberus-gaap:TechnologyBasedIntangibleAssetsMember2020-01-012020-12-310001272830srt:MaximumMemberus-gaap:TechnologyBasedIntangibleAssetsMember2020-01-012020-12-310001272830us-gaap:TechnologyBasedIntangibleAssetsMember2020-12-310001272830us-gaap:TechnologyBasedIntangibleAssetsMember2019-12-310001272830srt:MinimumMemberus-gaap:PatentsMember2020-01-012020-12-310001272830srt:MaximumMemberus-gaap:PatentsMember2020-01-012020-12-310001272830us-gaap:PatentsMember2020-12-310001272830us-gaap:PatentsMember2019-12-310001272830srt:MinimumMemberus-gaap:TradeNamesMember2020-01-012020-12-310001272830srt:MaximumMemberus-gaap:TradeNamesMember2020-01-012020-12-310001272830us-gaap:TradeNamesMember2020-12-310001272830us-gaap:TradeNamesMember2019-12-310001272830us-gaap:NoncompeteAgreementsMember2020-01-012020-12-310001272830us-gaap:NoncompeteAgreementsMember2020-12-310001272830us-gaap:NoncompeteAgreementsMember2019-12-3100012728302019-06-30iso4217:USDvg:unit00012728302019-06-1400012728302019-06-142019-06-140001272830vg:TermLoanMemberus-gaap:SecuredDebtMembervg:CreditFacility2016Member2016-06-030001272830us-gaap:RevolvingCreditFacilityMembervg:CreditFacility2016Memberus-gaap:LineOfCreditMember2016-06-030001272830vg:TermLoanMemberus-gaap:SecuredDebtMembervg:CreditFacility2018Member2018-07-310001272830us-gaap:RevolvingCreditFacilityMemberus-gaap:LineOfCreditMembervg:CreditFacility2018Member2018-07-310001272830us-gaap:RevolvingCreditFacilityMemberus-gaap:LineOfCreditMembervg:CreditFacility2018Member2018-08-012018-08-010001272830us-gaap:LondonInterbankOfferedRateLIBORMembervg:LIBORRateOptionMembervg:CreditFacility2018Membervg:LeverageRatioTermOneMember2018-07-312018-07-310001272830us-gaap:LondonInterbankOfferedRateLIBORMembervg:LIBORRateOptionMembervg:LeverageRatioTermFourMembervg:CreditFacility2018Member2018-07-312018-07-310001272830us-gaap:FederalFundsEffectiveSwapRateMembervg:CreditFacility2018Membervg:BaseRateOptionMember2018-07-312018-07-310001272830us-gaap:BaseRateMembervg:CreditFacility2018Membervg:BaseRateOptionMember2018-07-312018-07-310001272830us-gaap:BaseRateMembervg:CreditFacility2018Membervg:LeverageRatioTermOneMembervg:BaseRateOptionMember2018-07-312018-07-310001272830us-gaap:BaseRateMembervg:LeverageRatioTermFourMembervg:CreditFacility2018Membervg:BaseRateOptionMember2018-07-312018-07-310001272830us-gaap:RevolvingCreditFacilityMemberus-gaap:LineOfCreditMembervg:CreditFacility2018Member2020-01-012020-12-310001272830vg:CreditFacility2018Member2020-12-310001272830vg:TermLoanMemberus-gaap:SecuredDebtMembervg:CreditFacility2018Member2019-01-012019-12-310001272830us-gaap:RevolvingCreditFacilityMemberus-gaap:LineOfCreditMembervg:CreditFacility2018Member2019-01-012019-12-310001272830us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001272830us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2020-12-310001272830us-gaap:CommonStockMember2020-12-310001272830us-gaap:PerformanceSharesMember2020-01-012020-12-310001272830us-gaap:PerformanceSharesMemberus-gaap:ShareBasedCompensationAwardTrancheThreeMember2020-01-012020-12-310001272830us-gaap:ShareBasedCompensationAwardTrancheTwoMemberus-gaap:PerformanceSharesMember2020-01-012020-12-310001272830us-gaap:PerformanceSharesMemberus-gaap:ShareBasedCompensationAwardTrancheOneMember2020-01-012020-12-310001272830vg:AssumedThroughAcquisitionsMember2020-12-310001272830vg:IncentivePlan2006Member2020-12-310001272830vg:IncentivePlan2015Member2020-12-310001272830srt:MaximumMembervg:StockOptionAndStockAppreciationRightsMember2020-12-310001272830srt:MaximumMembervg:StockOptionAndStockAppreciationRightsMembersrt:DirectorMember2020-12-310001272830us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-01-012020-12-310001272830us-gaap:SellingGeneralAndAdministrativeExpensesMember2019-01-012019-12-310001272830us-gaap:SellingGeneralAndAdministrativeExpensesMember2018-01-012018-12-310001272830vg:ExercisePriceRangeRangeOneMember2020-01-012020-12-310001272830vg:ExercisePriceRangeRangeOneMember2020-12-310001272830vg:ExercisePriceRangeRangeTwoMember2020-01-012020-12-310001272830vg:ExercisePriceRangeRangeTwoMember2020-12-310001272830vg:ExercisePriceRangeRangeThreeMember2020-01-012020-12-310001272830vg:ExercisePriceRangeRangeThreeMember2020-12-310001272830vg:NetworkEquipmentMember2020-12-310001272830vg:NetworkEquipmentMember2019-12-310001272830us-gaap:LeaseholdsAndLeaseholdImprovementsMember2020-12-310001272830us-gaap:LeaseholdsAndLeaseholdImprovementsMember2019-12-310001272830vg:CustomerPremisesEquipmentMember2020-12-310001272830vg:CustomerPremisesEquipmentMember2019-12-310001272830us-gaap:FurnitureAndFixturesMember2020-12-310001272830us-gaap:FurnitureAndFixturesMember2019-12-310001272830us-gaap:LetterOfCreditMember2020-12-310001272830us-gaap:LetterOfCreditMember2019-12-310001272830us-gaap:ThreatenedLitigationMembervg:CollectionAndRemittanceOfStateAndMunicipalTaxesMember2020-12-310001272830country:US2020-12-310001272830country:US2019-12-310001272830country:GB2020-12-310001272830country:GB2019-12-310001272830country:IL2020-12-310001272830country:IL2019-12-3100012728302020-01-012020-03-3100012728302020-04-012020-06-3000012728302020-07-012020-09-3000012728302020-10-012020-12-3100012728302019-01-012019-03-3100012728302019-04-012019-06-3000012728302019-07-012019-09-3000012728302019-10-012019-12-31

UNITED STATES SECURITIES AND EXCHANGE COMMISSION • WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934or                        Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the fiscal year ended12/31/2020
For the transition period from             to             
 
 Commission file number 001-32887
VONAGE HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
 
Delaware11-3547680
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
23 Main StreetHolmdel,New Jersey,07733
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (732528-2600
 
 Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, Par Value $0.001 Per ShareVGNasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   No  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes    No  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer                 Accelerated filer               Non-accelerated filer              Smaller reporting company              Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.)   
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    No  
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2020 was $2,334,361,986 based on the closing price of $10.06 per share.
The number of shares outstanding of the registrant’s common stock as of January 31, 2021 was 249,132,070.
Documents Incorporated By Reference
Selected portions of the Vonage Holdings Corp. definitive Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2020, are incorporated by reference in Part III of this Form 10-K.



VONAGE HOLDINGS CORP.
FORM 10-K
FOR THE FISCAL YEAR ENDED December 31, 2020
TABLE OF CONTENTS
 
  Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
 

FORWARD-LOOKING STATEMENTS
VONAGE ANNUAL REPORT 2020


Table of Contents    
                
FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements and other information which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995, or the Litigation Reform Act. These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.
The words "plan," “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events, are subject to certain risks, uncertainties, and assumptions, and are not a guarantee of future performance. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in such forward-looking statements or information. In light of the significant uncertainties in these forward-looking statements, you should not place undue reliance on these forward-looking statements. The forward-looking statements and information contained in this Annual Report on Form 10-K relate to events and state our beliefs and the assumptions made by us only as to the date of this Annual Report on Form 10-K. We do not intend to update these forward-looking statements, except as required by law.
In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. Important factors that could cause such differences include, but are not limited to: the competition we face; the expansion of competition in the cloud communications market; our ability to adapt to rapid changes in the cloud communications market; realizing the expected benefits of our business optimization or other cost-savings plans; risks related to the acquisition or integration of businesses we have acquired; our ability to scale our business and grow efficiently; the nascent state of the cloud communications for business market; our ability to retain customers and attract new customers cost-effectively; developing and maintaining effective distribution channels; risks associated with sales of our services to medium-sized and enterprise customers; the effects of COVID-19 on our business; our reliance on third-party hardware and software; our dependence on third-party vendors; reliance on third parties for our 911 services; the impact of fluctuations in economic conditions, particularly on our small and medium business customers; the effects of significant foreign currency fluctuations; developing and maintaining market awareness and a strong brand; retaining senior executives and other key employees; security breaches and other compromises of information security; system disruptions or flaws in our technology and systems; our ability to comply with data privacy and related regulatory matters; unfavorable litigation or governmental investigations; our ability to obtain or maintain relevant intellectual property licenses or to protect our trademarks and internally developed software; fraudulent use of our name or services; intellectual property and other litigation that have been and may be brought against us; rapid developments in global API regulation and uncertainties relating to regulation of VoIP services; liability under anti-corruption laws or from governmental export controls or economic sanctions; risks associated with the taxation of our business; governmental regulation and taxes in our international operations; our history of net losses and ability to achieve consistent profitability in the future; our ability to fully realize the benefits of our net operating loss carry-forwards if an ownership change occurs; actions of activist shareholders; restrictions in our debt agreements that may limit our operating flexibility; our ability to obtain additional financing if required; risks associated with the settlement and conditional conversion of our Convertible Senior Notes; potential effects the capped call transactions may have on our stock in connection with our Convertible Senior Notes; certain provisions of our charter documents; and other factors that are set forth in the “Risk Factors” section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and amendments to these reports.

FINANCIAL INFORMATION PRESENTATION

For the financial information discussed in this Annual Report on Form 10-K, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted.
1     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
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
APIApplication Program Interfaces
ASCThe FASB Accounting Standards Codification, which the FASB established as the source of authoritative GAAP
ASUAccounting Standards Updates - updates to the ASC
CCaaS or CCContact Center as a Service
CodeInternal Revenue Code of 1986, as amended
CPaaSCommunications Platform as a Service
CRMCustomer Relationship Management
Exchange ActThe Securities Exchange Act of 1934, as amended
ECPElectronic Check Payments
EPSEarnings Per Share
FASBFinancial Accounting Standards Board
FCCFederal Communications Commission
FCPAForeign Corrupt Practice Act
GDPREuropean Union General Data Protection Regulation
IPInternet Protocol
IRSInternal Revenue Service
LIBORLondon Inter-Bank Offered Rate
MPLSMulti-Protocol Label Switching
NOLsNet Operating Losses
NVMNewVoiceMedia Limited
QoSQuality of Service
SaaSSoftware as a Service
SABStaff Accounting Bulletins
SD-WANSoftware-Defined Wide Area Network
SECU.S. Securities and Exchange Commission
SIPSession Initiation Protocol
SMBSmall to medium-sized business
SMSShort Message Service
TokBoxCollectively, Telefonica Digital, Inc., TokBox, Inc., and TokBox Australia Pty Limited
TSRTotal Shareholder Return
UCaaS or UCUnified Communications as a Service
UIUser Interface
USFFederal Universal Service Fund
VBCVonage Business Communications
VCCVonage Contact Center
VCPVonage Communications Platform, formerly referred to as Business
VoIPVoice over Internet Protocol
2     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
PART I

ITEM 1. Business
 

OVERVIEW AND STRATEGY

At Vonage, our vision is to accelerate the world's ability to connect. We are observing a secular change in the way business is done, with a fundamental shift in how communications technologies are being leveraged in almost every industry. Through the Vonage Communications Platform, our strategy is to deliver a single leading cloud communications platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. We believe that the Vonage Communications Platform's products and services are well positioned to take advantage of emerging trends with sizable, growing total addressable markets as companies look to cloud-based communications solutions and API programming architectures as part of their digital transformation.

For our Consumer customers, we enable users to access and utilize our services and features, via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices. Our Consumer strategy is focused on the continued penetration of our core North American markets, which provide value in international long distance and target under-served segments.

EVOLUTION OF VONAGE

Founded in 2001, Vonage was among the first companies to provide Voice over Internet Protocol technology offering feature-rich, low-cost home phone services. Through a series of strategic acquisitions and organic growth, Vonage since has transformed from a VoIP-based residential service provider to a global leader in business cloud communications.
Beginning in November 2013 and continuing through September 2015, Vonage acquired four unified communications-as-a-service companies which began its transformation into a buisness-to-business cloud communications company. In 2016 and 2018, Vonage expanded its offering into the API space with the completion of the acquisition of Nexmo, Inc., a global leader in communications platform as a service and TokBox Inc., an industry leader in WebRTC programmable video that enables developers and enterprises to integrate live video into existing websites, mobile apps and IoT devices with only a few lines of code.
Also in 2018, Vonage completed the acquisition of NewVoiceMedia, an industry-leading cloud contact center-as-a-service provider. This acquisition enabled Vonage to combine its robust Unified Communications and API solutions with NVM's pure-play cloud contact center offerings, culminating in our ability to provide an end-to-end communication experience for an organization's team members and customers.
3     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
OPERATING SEGMENTS
Our business is organized under two reportable operating segments: Vonage Communications Platform and Consumer. The Vonage Communications Platform includes our APIs, Unified Communications, Contact Center service offerings and products. The Vonage Communications Platform represents the Company’s strategic business as the source of future growth. Our Consumer segment includes our communications solutions for residential customers based on the Company's roots in providing VoIP communication services. Additional discussions of our reportable segments is included in Note 16, Industry Segment and Geographical Information to the Consolidated Financial Statements. The following tables summarize our revenues for each of our operating segments for the years ended December 31, 2020, 2019, and 2018:
https://cdn.kscope.io/02b52105ae69c8056607c276b40dc5b2-vg-20201231_g1.jpg
Vonage Communications Platform

Our strategic business is the Vonage Communications Platform, which delivers a single leading cloud communications platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. The Vonage Communications Platform brings unique value to businesses by providing multiple communications channels - including video, voice, messaging, email, verification, and artificial intelligence - that integrate into the applications, products and workflows that our customers are already using. We believe this delivers both the power and the flexibility to our customers to address the growing need to transform their communications, connections and experiences for customers and enables the type of business continuity, remote work, and remote delivery of services that are now essential for team members.

The following provides a more detailed description of the products and services within the Vonage Communications Platform:
APIs
Our APIs are fully programmable, embeddable and customizable, enabling software developers to build communications capabilities such as messaging and voice calling within their applications without having to build or maintain communications infrastructure.
Our APIs aim to remove the complexities of the global communications networks and deliver video, voice, chat, messaging, verification, and artificial intelligence capabilities that developers can easily embed into their applications with a low risk, pay-as-you-go business model that fosters innovation. Developers adopt our APIs via a low friction, self service model on our website where they start with a free trial account and pay for additional usage via prepaid accounts. Customers include digital native companies that are looking to disrupt an existing industry, enterprises undergoing digital transformation, and enterprise SaaS companies looking to enhance their products with embedded communications capabilities.
The need for companies to jump between these modes of communication is being driven by today's customer. There is an increased need among businesses to provide their customers with the ability to connect and communicate on their customers' own preferred channels. In an increasingly digital world, this is what customers have come to expect. Our APIs enable businesses to implement these programmable capabilities quickly, with just a few lines of code, and without the need for in-house IT support or expertise.
4     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Our APIs include, but are not limited to, the following:
Communications APIs

Voice API: Voice API enables companies to deliver better and more flexible voice experiences when communicating with their customers within the context of their existing business workflow, backed by the quality, strength and reliability of the Vonage network in the United States and tier one carriers globally.
SIP Trunking: Session Initiation Protocol Trunking enables companies to rapidly connect their private branch exchanges to the global telecommunications networks using a pay as you go model and without having to negotiate lengthy carrier contracts.
SMS API: SMS API enables companies to send and receive SMS messages within the context of their existing business workflows. The direct to carrier approach and patented Adaptive Routing algorithm enables us to deliver messages reliably and with low latency, globally.
Messages API and Dispatch API: Together they enable brands to engage with their customers wherever they prefer, elevating customer communications by meeting customers on the channels they find most engaging.
Video API: Programmable video enables developers, independent software vendors, and enterprises to incorporate highly scalable point-to-point and multi-party video into websites, mobile applications and IoT devices with only a few lines of code.
Authentication APIs

Verify: Verify API enables companies to deploy two-factor-authentication for their applications to help them acquire genuine customers and to protect against fraud. With a single API call, Verify delivers messages via SMS and voice calls if required to ensure high conversion rates. In addition, customers pay only for successful authentications.
Number Insight: Number Insight API enables companies to get real time intelligence on phone numbers anywhere in the world to ensure numbers are valid and reachable and to discover other insights such as carrier information, roaming status whether a landline or mobile, and caller name.
Use Case APIs and Programmable Numbers

Audit API: Enables organizations to build security information and event management alerts, and access real-time information on user activities and events within accounts.
Reports API: Reports API allows applications to access all voice and data in a single location.
Virtual Phone Numbers: We offer phone numbers that are local all over the world enabling our customers to have a local presence globally. We also offer toll free numbers and short codes in the United States and Canada. Our numbers can be provisioned and de-provisioned programmatically to enable maximum utilization.
    Our product offerings combined with the strength of our network, enables us to partner closely with customers to ensure that they are successful through a personalized account management experience, high quality support and consulting services. Our APIs products are supported through our close relationships with tier one carriers across the globe and offer local numbers in more countries along with its private MPLS network with numerous points of presence in the United States allowing us to offer high voice quality, lower costs and increased reliability. Our extensive network of more than one million developers provides customers with the ability to foster rapid innovations, including extensive developer documentation, sample codes, tutorials, libraries and free online support.

Unified Communications

Vonage Business Communications
Vonage Business Communications is our cloud-native, proprietary technology platform which delivers integrated unified communication services. It provides a cost-effective, highly scalable, feature-rich solution, delivered over-the-top of a customer’s broadband. All VBC features and functionality offerings include access to a mobile application, including the ability to update account profiles, manage devices, and contact call logs directly from a mobile device. We also offer virtual extensions, which connects employees to a business phone number through their mobile phones.
5     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
VBC integrates with other third-party software applications to improve workflow and enhance productivity via the Vonage App Center ecosystem. Built on a microservices architecture, Vonage App Center creates embedded, UI-level integrations with high-value applications, placing critical functionality at the fingertips of VBC users within a single, familiar interface. Our software uses a combination of open APIs and pre-built integrations to enhance functionality with data from other third-party enterprise applications including Salesforce, Microsoft Dynamics, Microsoft Teams, NetSuite, Zendesk, Oracle Sales Cloud, Hubspot, and others. The investments we have made have enabled scalability to allow Vonage Business Communications to serve a broader customer base.
The launch of VBC was quickly followed by innovations to improve and build upon this service with new features and functionality that we believe transforms the way businesses connect, including:
VBC Desktop Connect App, which allows employees to start their day in the redesigned Vonage Business Cloud Mobile App and switch to the desktop when they reach the office;
VonageFlow, a proprietary workstream collaboration solution;
Business Inbox, which allows customers to reply to messages sent in messaging apps like Facebook Messenger, providing the ability to respond to customers in real-time directly within the app, organizing customer requests in one unified inbox; and
Vonage Meetings, a programmable video capability which is fully integrated with VBC and leverages Vonage APIs to enable voice, SMS, social, team messaging, and video all within a single interview for a simple, clean user experience.
Vonage Business Enterprise
Vonage Business Enterprise is a purpose-built cloud based platform for existing mid-market and enterprise customers, providing a complete set of enhanced unified communication and collaboration services, including: voice, data, video, mobile and contact center services. We focus on customers for whom guaranteed quality of service and uniformity of services across all locations is critical. We deliver services to this customer base over our private, nationwide, fully redundant, secure IP MPLS network using network points of presence that allow us to deliver dedicated, secure and private bandwidth utilizing all forms of last mile technologies including EoC and Fiber and bandwidth ranging from 1.5Mbps to 1Gbps. Services we deliver include Wide Area Networking, or WAN, Internet Access, MPLS VPN, Managed Firewall, Hosted UCaaS, Hosted Video Conferencing, Web Collaboration, Secure Instant Messaging & Presence, Mobility and Fixed Mobile Convergence.
Vonage Contact Center
Vonage Contact Center provides customers with a robust offering, driving intelligent interactions for customers and agents through emerging technologies such as skills-based routing, real-time sentiment analysis and chatbots. With VCC, we enhance the agent and customer experience by providing a modern contact center with seamless integration into productivity tools and business applications - all on a single, flexible, and unified platform. Our cloud contact center solution can be integrated with the VBC unified communications solution providing an end-to-end communications experience for enhanced customer engagement and conversation. By integrating with today’s leading business applications, productivity tools and CRMs such as Salesforce, ServiceNow, and Microsoft Dynamics, Vonage Contact Center solution delivers better omni-channel interactions and robust analytics, giving businesses the ability to customized agent, employee, and customer connections and workflows to deliver great customer experiences and enhanced productivity - from anywhere.
With the Vonage Contact Center solution, we believe that Vonage is the only cloud communication company that can combine deep CRM integrations with the full range of programmable communications capabilities to enhance the way agents connect with each other and with customers.
6     VONAGE ANNUAL REPORT 2020



Table of Contents    
                

Consumer
For our Consumer segment, we enable customers to access and utilize our services and features via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices. Our home telephone services are offered to customers through several service plans with different pricing structures. The service plans include basic features such as voicemail, call waiting, and call forwarding as well as unique features such as Simulring, Visual Voicemail, Boomerang and Extensions. We also charge for local and international calling outside of plan limits.
We have two primary Consumer offerings available in the United States: Vonage World and Vonage North America. Each of our Consumer calling plans provides a number of basic features including call waiting, caller ID with name, call forwarding, and voicemail. Vonage plans also include unlimited Vonage Visual Voicemail, which is “readable voicemail” delivered via email or SMS text message, Vonage Extensions, which extends the plan, and inbound calling, to additional phone numbers and devices, and selective call block, which allows users to block unwanted calls. We also offer, in some cases for additional fees, features such as area code selection, virtual phone numbers, and web-enabled voicemail. Additionally, we also provides similar product offerings to customers in both Canada and the United Kingdom.
NETWORK OPERATIONS
Our network uses our customer’s existing or Vonage procured high-speed broadband Internet service to allow calls over the Internet either from a standard telephone through a Vonage-enabled device or through soft phone software or mobile client applications. Our Unified Communications services are not dependent on any specific type or provider of Internet service, and our customers are free to change their Internet service provider in response to a competitive alternative, or because they have moved to a different location. For many of our Business Enterprise customers, our Unified Communications services are delivered over the Company's private, nationwide, fault tolerant, secure IP MPLS network under multi-year contracts to provide the high level of interconnection quality and the ability to offer service level agreements, or SLA, guaranteeing certain levels of voice service performance.
Our network is scalable and geographically distributed for robustness, high availability, and reliability across multiple call processing sites, using regional data interconnection points, where calls to non-Vonage customers are interconnected with the public switched telephone network. We periodically assess the locations of its regional data connection points in connection with efforts to improve the quality of and efficiency in delivering our service. Our interconnections with the public switched telephone network, or IP/SIP networks, are made pursuant to commercial agreements we have with several telecommunications providers. Under these agreements, we transfer calls originated by customers to other carriers who connect the call to the called party or connect peer to peer. We have a varying degree of settlement arrangements with our carrier partners for indirect third party or direct termination of calls. The calls are routed from our network to other carriers’ interconnected circuits at co-location facilities in which the Company leases space. This method of connecting to the public switched telephone or IP/SIP networks allows us to expand capacity quickly, as necessary to meet call volume, and to provide redundancy within the network.
Because Vonage’s system is standards based and not constrained to use any specific broadband service provider to connect to our customers, we can centrally manage and share resources across our customer base to minimize capital investment when entering new markets.
MARKETING
In connection with our transformation from a consumer telecommunications company to a business-focused SaaS provider, beginning in 2020 we introduced a rebranding of the Company and began a focused pivot to drive relevancy in our key business markets. Our marketing objective is to help drive growth, revenue, and relevancy across our business markets. Vonage employs an integrated multi-channel approach to marketing, whereby we evaluate and focus efforts on efficient marketing vehicles to accomplish its goals with the greatest return on investment. To do this, we make use of both broad-reaching and highly-targeted media channels.
For VCP customers, our primary source of lead acquisition is digital marketing in the form of search engine marketing, digital advertising, social media advertising, and affiliate programs. We also utilize database marketing and lead aggregators to source business leads and use direct marketing and account-based marketing to help source leads and create interest in our solutions. For Consumer customers, we have a highly optimized acquisition approach and focus mainly on digital advertising channels.
7     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
We make use of marketing research to gain insights into brand, product, and service performance, and utilize those learnings to improve our messaging and media plans. Market research is also leveraged in the areas of testing, retention marketing, and product marketing to ensure we bring compelling products and services to market for our customers.
The Vonage brand is a meaningful factor for customers as they consider business services. We continue to invest in the equity of our brand in order to retain and expand our customer base and to position Vonage as a technology leader that delivers innovative, unified communication services and APIs to help businesses around the world accelerate digital transformation for a fundamentally new way of doing business.
SALES AND DISTRIBUTION
Enterprise Sales
In order to continue to expand in the enterprise sales channel, which we define as businesses larger than 1,000 seats, the enterprise sales organization is positioned to provide high quality business services for Enterprise, through our fully managed solution, which utilizes BroadSoft’s enterprise-grade call processing platform, with a broad portfolio of products delivered over its own private, national MPLS network, with numerous Points-of-Presence, or POPs, across the country and our own team of service delivery project managers using our proprietary provisioning tool Zeus, or with SmartWan, as well as our industry leading CPaaS products. Additionally, Contact Center solutions are commonly integrated into Enterprise solutions
Developer Ecosystem
Our API platform products are principally adopted and consumed by software developers all over the world. Given the nature of the business, we invest significant time and effort to build, recruit, and maintain developers and various software ecosystems. We have a large developer ecosystem worldwide with over one million registered developers.
Field Sales and Inside Sales - SMB and Midmarket
We utilize our team of sales agents (or field sales team), primarily based in geographic territories comprising customers and prospects to market and sell our business services. These filed sales agents utilize a consistent, automated, highly-structured sales process to effectively educate prospective customers regarding our services. We have developed a scalable model applicable to both existing and new markets now have a field sales presence in 20 markets within the United States and made significant expansion into new markets globally primarily supporting Vonage APIs. For customers in the SMB segment, we leverage an Inside Sales team to provide solutions across our cloud communications offerings.
Channel Sales
In addition to the inside sales and field sales team, Vonage also has a dedicated team focused on channel sales who work with channel partners to market and sell business services, which helps to broaden sales distribution. Vonage continues to develop and expand this channel program by adding new a new Channel Chief, channel managers, and additional national master agents. Vonage now has a broad and deep coverage of the U.S. market through a network of over 20,000 sub agents and resellers.
Self-Service    
Customers can subscribe to consumer services at Vonage websites, http://www.vonageforhome.com, http://www.vonageforhome.ca, http://www.vonageforhome.co.uk. U.S. VCP customers can subscribe to Unified Communications services at www.vonage.com, through our main toll-free number 1-844-365-9460, or through campaign-driven sales lines listed on our www.vonage.com web pages. Additionally, Vonage's API enablement and developer focus lends itself to a self-service model. Developers can register, sign up and test, and scale their businesses easily and quickly without having to engage with anyone at Vonage at www.vonage.com. This allows customers to self-provision their accounts with the aim of improving the customer experience while reducing customer acquisition costs.
INTELLECTUAL PROPERTY
Vonage currently owns over 248 issued U.S. patents as well as a number of foreign patents and pending U.S. and foreign patent applications. The Company routinely reviews technological developments with technology staff and business units to identify the aspects of Vonage technology that provide us with a technological or commercial advantage and seek intellectual property and patent protection as appropriate to protect such key proprietary technology in the United States and internationally, based on our assessment in light of applicable law. The Company's policies require our employees to assign intellectual property rights developed in the scope of or in relation to, company business and to treat proprietary know-how and materials as confidential information.
8     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Vonage has acquired multiple U.S. and foreign patents, and obtained licenses to numerous other patents. The Company owns numerous United States and international trademarks and service marks and have applied for registration of trademarks and service marks in the United States and abroad to establish and protect brand names as part of intellectual property strategy.
COMPETITION
In connection with its cloud communications products, Vonage faces competition from the traditional telephone and cable companies as discussed below, as well as from vendors of premises-based solutions or hosted solutions including the following:
Independent cloud service providers;
Premises-based business communication equipment providers;
Hosted communication services providers;
Traditional technology companies; and
Emerging competitors in technology companies.

As the cloud communications market evolves, and the convergence of voice, video, messaging, mobility and data networking technologies accelerates, Vonage may face competition in the future from companies that do not currently compete in the market, including companies that currently compete in other sectors, companies that serve consumers rather than business customers, or companies which expand their market presence to include cloud communications.
Vonage faces strong competition from traditional telephone companies, cable companies, wireless companies, alternative communication providers, direct unified communications providers, legacy consumer VOIP businesses, large technology incumbents, and collaboration providers in the consumer, mobile, SMB and enterprise markets. Because most of the Company's target customers are already purchasing communications services from one or more of these providers, success is dependent upon our ability to attract these customers away from their existing providers. The principal competitive factors affecting our ability to attract and retain customers are price, call quality, brand awareness, customer service, network and system reliability, service features and capabilities, scalability, usability, simplicity, mobile integration and the unique ability to deliver APIs to business customers in addition to our Unified Communications and Contact Center Communications offerings.
There is a continuing trend toward consolidation of competitive companies, including the acquisition of alternative communication providers by Internet product and software companies with significant resources. In addition, certain of our competitors have partnered and may in the future partner with other competitors to offer products and services, leveraging their collective competitive positions. Vonage is also subject to the risk of future disruptive technologies, which could give rise to significant new competition.
HUMAN CAPITAL MANAGEMENT
Successful execution of our strategy is dependent on attracting, developing and retaining key employees and members of our management team. At Vonage, we believe our culture is our human capital competitive advantage that empowers us to win in the marketplace. We believe the substantial skills, experience, and industry knowledge of our employees. These beliefs are built on a core set of values: accountability, collaboration, trust, and excellence. Vonage leaders strive to foster an environment that empowers team members to drive results, delight customers, and inspire teams.
There are several ways in which we attract, develop, and retain highly qualified talent, including:
Strategic Approach to Work-Life Balance, Diversity, and Inclusion. As part of our strategic plan, we have implemented flexible remote working and parental leave for all employees, have mandatory unconscious bias and culture training for all employees, implement company-sponsored networking events for female employees, and have milestones in place to achieve gender pay parity. Objectives and key results for our senior executives also include metrics on diversity, pay equity, voluntary terminations, and internal mobility. We have also established a Diversity, Equity, and Inclusion Committee that is focused on promoting race, gender, and ethnic diversity throughout the organization.
Investments in Employee Training and Development. In order to foster internal promotion and development, we continue to implement accelerated leadership development and emerging leadership programs to a diverse set of employees throughout the organization. We also continue to implement development and training programs for all employees including product and sales, Code of Conduct, conflicts of interest, information security and cybersecurity, anti-harassment and anti-bribery, and insider trading prohibitions.

9     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
EMPLOYEES
As of December 31, 2020, we had 2,198 employees, none of which are subject to a collective bargaining agreement.

AVAILABLE INFORMATION
Vonage was incorporated in Delaware in May 2000 and changed our name to Vonage Holdings Corp. in February 2001. Vonage maintains a website with the address www.vonage.com. References to our website are provided as a convenience, and the information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the U.S. Securities and Exchange Commission, or SEC. Copies are also available, without charge, by writing to Vonage’s Investor Relations Department at Vonage Holdings Corp., 23 Main Street, Holmdel, NJ 07733 or calling us at 732.365.1328 or sending an email through the Vonage Investor Relations website at http://ir.vonage.com/. Reports filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
10     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
ITEM 1A. Risk Factors
You should carefully consider the risks below, as well as all of the other information contained in this Annual Report on Form 10-K and our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K, in evaluating our company and our business. Any of these risks could materially adversely affect our business, financial condition and results of operations and the trading price of our common stock.
Risks Relating to our Business Operations, Strategic Planning and Product Development
If we are unable to compete successfully, we could lose market share and revenue.
The business cloud communications markets and consumer services markets in which we participate are highly competitive. We face intense competition from a broad set of companies, including: software as a service companies, contact center as a service companies, other alternative communication providers, and other providers of cloud communications services; and traditional telephone, wireless service providers, cable companies and alternative communications providers with consumer offerings
Many of these providers are substantially larger and better capitalized than us and have the advantage of greater name and brand name recognition, and have a large existing customer base. These service providers may have the ability to devote greater resources to their communications services and may be able to respond more quickly and effectively than we can to new or changing opportunities. Our competitors' financial resources may allow them to offer services at prices below cost or even for free in order to maintain and gain market share or otherwise improve their competitive positions. Some of our competitors also could use their greater financial resources to develop and market services with more attractive features and more robust customer service. To the extent that these or other companies strengthen their offerings, we may have to reduce our prices, increase promotions, or offer additional features, which may adversely impact our revenues and profitability.

As the cloud communications services market evolves, and the convergence of voice, video, messaging, mobility, artificial intelligence and data networking technologies accelerates, we may face competition in the future from companies that do not currently compete in the cloud communications services market.
As the cloud communications services market evolves, combining voice, video, messaging, mobility, artificial intelligence and data networks, and information technology and communication applications, opportunity is created for new competitors to enter the cloud communications services market and offer competing products, including companies that currently compete in other sectors, companies that serve consumer rather than business customers, or companies which expand their market presence to include business communications. This new competition may take many forms, and may offer products and applications similar to ours. If these new competitors emerge, the cloud communications services market may become increasingly competitive and we may not be able to maintain or improve our market position. Our failure to do so could materially and adversely affect our business and results of operations.
If we fail to adapt to rapid changes in the market for cloud communications services, then our products and services could become obsolete.
The market for our products and services is constantly and rapidly evolving as we and our competitors introduce new and enhanced products and services and react to changes in the cloud communications services industry and customer demands. We may not be able to develop or acquire new products and plans or product and plan enhancements that compete effectively with present or emerging cloud communications services technologies or differentiate our products and plans based on functionality and performance. In addition, we may not be able to establish or maintain strategic alliances that will permit enhancement opportunities or innovative distribution methods for our products and plans.
To address these issues, we are targeting revenue growth in large, existing markets, which require us to enhance our current products and plans, and develop new products and plans on a timely basis to keep pace with market needs and satisfy the increasingly sophisticated requirements of customers. If we are unable to attract users of these services our net revenues may fail to grow as we expect.
11     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Cloud communications services are complex, and new products and plans and enhancements to existing products and plans can require long development and testing periods. Any delays in developing and releasing new or enhanced products and plans could cause us to lose revenue opportunities and customers. Any technical flaws in products we release could diminish the innovative impact of the products and have a negative effect on customer adoption and our reputation.
We also are subject to the risk of future disruptive technologies. New products based on new technologies or new industry standards could render our existing products obsolete and unmarketable. If new technologies develop that are able to deliver competing voice and messaging services at lower prices, better or more conveniently, it could have a material adverse effect on us.
The market for our API products and platform is relatively nascent and may not experience the growth that we anticipate.
    The utilization of APIs to embed contextual, programmable real time communications into mobile apps, websites and business systems workflows, remains a relatively new market, and developers and organizations may not yet recognize the need for, or benefits of, our products and platform. It is important that we are able to educate developers, organizational leaders, and other potential customers regarding our products and platform in order to help grow the market and to realize our market share. If we fail to achieve the foregoing, the market for our products and platform or our share of that market could fail to grow significantly. If the API market, or our share of that market, does not experience significant growth, then our business, results of operations and financial condition could be adversely affected.
We may not fully realize the expected benefits of our business optimization plans or other cost-saving initiatives, which may negatively impact our results of operations and financial condition.
Since the third quarter of 2020, the Company has been implementing a business optimization and alignment project to focus the use of Company resources and drive operational execution. The Company may pursue similar cost-saving initiatives in the future. We may not achieve the operational improvements and efficiencies that we have targeted in this project.
Implementing any restructuring, optimization, or cost-savings plan presents significant potential risks that may impair our ability to achieve anticipated operating improvements and/or cost reductions. These risks include (but are not limited to) higher than anticipated costs in implementing these plans, management distraction from ongoing business activities, failure to maintain adequate controls and procedures while executing these plans, damage to our reputation, brand image, and workforce attrition beyond our planned reductions, and our ability to provide optimal service to our customers. Any of these risks could have a negative impact on our profitability and on our results of operations and financial condition.
We may face difficulties related to the acquisition or integration of businesses, which could harm our growth or operating results.
In August 2018, we acquired TokBox with the intention of integrating and adding video to our VCP offerings in voice, SMS, and IP messaging. In October 2018, we completed the acquisition of NewVoiceMedia as a contact center provider, with the intention of combining our UC, CC and API solutions to provide an end-to-end communications experience for a company's employees and customers. In August 2019, we acquired intellectual property assets from Over.ai in order to integrate conversational artificial intelligence into our Business product offerings. In addition, we have made several acquisitions over the past several years to build our business services and continue to periodically review acquisition opportunities.
Acquisition and integration activities require substantial management time and resources. Acquisitions of existing businesses involve substantial risks, including the risk that we may not be able to integrate the operations, personnel, services, or technologies, the potential disruption of our ongoing businesses, the diversion of management attention, the maximization of financial and strategic opportunities, the difficulty in developing or maintaining controls and procedures, and the dilution to our existing stockholders from the issuance of additional shares of common stock. We may elect to acquire additional businesses or assets in the future. However, we cannot predict or guarantee that we will be able to identify suitable acquisition candidates or consummate any acquisition. As a result of these and other risks, we may not produce anticipated revenue, profitability, or synergies.
Acquisitions may require us to issue debt or equity securities, use our cash resources, incur debt or contingent liabilities, amortize intangibles, or write-off acquisition-related expenses. If we are unable to successfully integrate any acquired businesses or assets we may not receive the intended benefits of such acquisition. In addition, we cannot predict market reactions to any acquisitions we may make or to any failure to announce any future acquisitions.
Further, there may be risks or liabilities that such due diligence efforts fail to discover, are not disclosed to us, or that we inadequately assess. The discovery of material liabilities associated with acquisitions or joint venture opportunities, economic risks faced by joint venture partners, or any failure of joint venture partners to perform their obligations could adversely affect our business, results of operations, and financial condition.
12     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Our Vonage Communications Platform segment is growing rapidly, and any inability to scale our business and grow efficiently could materially and adversely harm our business and results of operations.
As our VCP segment expands, we will need to continue to improve our application architecture, integrate our products and applications across our technology platforms, integrate with third-party systems, and maintain infrastructure performance. We expect the number of users, the amount of data transferred and processed, the number of locations where our service is being used, and the volume of communications over our networks to continue to expand. To address this growth, we will need to scale our systems and customer services organization. Our ability to execute on these initiatives may impact system and network performance, customer satisfaction, and ultimately, sales and revenue. These efforts may also divert management resources. These factors may materially and adversely harm our business and results of operations.
Risks Relating to Customer Attraction and Sales
If we are unsuccessful at retaining customers or attracting new customers, we may experience a reduction in revenue or may be required to spend more money or alter our marketing approaches to grow our customer base.
Our rate of customer terminations for our UC and CC services could increase in the future if customers are not satisfied with the quality and reliability of our network, the value proposition of our products, and the ability of our customer service to meet the needs and expectations of our customers. For our API customers, our ability to grow revenue depends, in part, on our ability to maintain and grow usage of our platform by new and existing customers. If we are not able to increase customer usage of our products, our revenue may decline which would adversely impact our business, results of operations and financial condition. Our API customers are charged based on their usage of our products and generally our customers do not have long-term contractual financial commitments to us, therefore, usage rates may fluctuate at any time. In addition, our agreements with business customers typically provide for service level commitments. If we are unable to meet these commitments or if we suffer extended periods of downtime for our products or platform, our business, results of operations and financial condition could be adversely affected. Our ability to attract and retain customers for our consumer services are impacted by our pricing, brand awareness, customer service, network and system reliability and service features and capabilities. A material decline in the usage of our business and consumer products could cause us to spend significantly more on sales and marketing than we currently budget in order to maintain or increase revenue from customers, which could adversely affect our business, results of operations and financial condition.
Our success in the cloud communications market for our business services depends in part on developing and maintaining effective distribution channels. The failure to develop and maintain these channels could materially and adversely affect our business.
A portion of our business revenue is generated through our direct sales, or “field sales,” team. This channel consists of sales agents that market and sell our business services products to customers to customers through direct, commonly face-to-face interaction. Our continued success requires that we continue developing and maintaining a successful sales organization. If we fail to do so, or if our sales agents are not successful in their sales efforts, our sales may decrease and our operating results would suffer.
A portion of our business revenue is generated through indirect channel sales. These channels consist of third-party resellers and value-added distributors that market and sell our business services products to customers. These channels may generate an increasing portion of our business revenue in the future. Generally, we do not have long-term contracts with these third-party resellers and value-added distributors, and the loss of or reduction in sales through these third parties could materially reduce our revenues. We also compete for preference amongst our current or potential resellers with our competitors. Our continued success requires that we continue developing and maintaining successful relationships with these third-party resellers and value-added distributors. If we fail to do so, or if our resellers are not successful in their sales efforts, our sales may decrease and our operating results would suffer.
13     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Sales of our UC and CC business services to medium-sized and enterprise customers involve significant risks which, if not managed effectively, could materially and adversely affect our business and results of operations.
As we continue to expand our sales efforts to medium-sized and larger businesses, we may incur higher selling expense and longer, more complex, sales cycles. Customers in this market segment may also require bespoke features and integration services, increasing the complexity and expense related to the sales and delivery process, and requiring highly skilled sales and support personnel. As a result, we may devote greater sales and support to these customers, which may result in increased costs and a strain on our support resources. In addition, the rollout of our products with medium-sized and enterprise customers can take longer periods of time compared to smaller customers, which can result in longer lead times in realizing revenues. These factors could materially and adversely affect our results of operations and our overall ability to grow our customer base.
Risks Relating to External Factors and Third Parties
The recent coronavirus (COVID-19) pandemic and the global attempt to contain it has impacted and may continue to impact our business and results of operations.

The global spread of the novel coronavirus (COVID-19) and the various measures to contain its effects have created significant volatility, uncertainty, and economic disruption worldwide. As a result of the COVID-19 pandemic, all travel has been severely curtailed and we have temporarily closed the majority of Vonage offices worldwide (including our corporate headquarters), both of which disrupt how we typically operate our business. COVID-19 has impacted some of our customers more than others, including customers in the travel, hospitality, retail, and other industries where physical interaction is critical. We have experienced and expect that we will continue to experience slowdowns in bookings and customer payments; increased customer churn and reduced usage; and issuance of customer credits to distressed customers served by certain product lines, including SMS API, Vonage Business Cloud, and Vonage Business Enterprise. Moreover, as businesses and educational institutions have pivoted to cloud-based communications in light of social distancing, we are experiencing and expect to experience intense competition from our existing competitors, and also emerging competitors seeking to capitalize on the growing industry.

The full extent to which the COVID-19 pandemic and the various responses to it impact our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the effect on our customers and customer demand for and ability to pay for our services; disruptions or restrictions on our employees’ ability to work and travel; and any secondary and tertiary effects of the foregoing on our customers, partners, and other entities in our supply and demand chain, including long-term or permanent impairments to individual businesses and industrial segments. If we need to access the capital markets and other sources of liquidity, there can be no assurance that financing may be available on attractive terms, if at all.

In addition to COVID-19, our operations, and the operations of our vendors and customers, may also suffer interruptions caused by natural disasters, acts of terrorism or other pandemic diseases, and such operations may be further affected by government reactions due to such incidents. Such uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.
Our ability to provide our telephony service and manage related customer accounts is dependent upon third-party facilities, equipment, and systems, the failure of which could cause delays of or interruptions to our service, damage our reputation, cause us to lose customers, limit our growth, and affect our financial condition.
Our success depends on our ability to provide quality and reliable telephony service, which is in part dependent upon the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Unlike traditional wireline telephone service or wireless service, our telephony service typically requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customer's Internet service provider and electric utility company, respectively, and not by us. The quality of some broadband Internet connections may be too poor for customers to use our telephony services properly. In addition, if there is any interruption to a customer's broadband Internet service or electrical power supply, that customer will be unable to make or receive calls, including emergency calls, using our telephony service.
14     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
We outsource several of our network functions to third-party providers. For example, we outsource the maintenance of our regional data connection points, which are the facilities at which our network interconnects with the public switched telephone network. If our third-party service providers fail to maintain these facilities properly, or fail to respond quickly to problems, our customers may experience service interruptions. Interruptions in our service caused by third-party facilities have in the past caused and may in the future cause us to lose customers or cause us to offer substantial customer credits, which could adversely affect our revenue and profitability. If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers, and our brand, reputation, and growth will be negatively impacted.
There can be no guarantee that these third party providers will be able or willing to supply services to us in the future on commercially reasonable terms, or that we will be able to engage alternative or additional providers. Our ability to provide our services may be impacted during any transition, which could have an adverse effect on our business, financial condition or results of operations.
We rely on third-party vendors that may be difficult to replace or may not perform adequately.
It is vital to our customers that there be a minimum of disruption to the performance of our API, UC and CC services. We are therefore vulnerable to service interruptions of our third-party data center providers, such as IBM Softlayer and Amazon Web Services, or AWS; and of third-party hosted services. We may experience interruptions, delays and outages in third-party service and availability due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints caused by technical failures, natural disasters, fraud or security attacks. To the extent that we do not effectively address interruptions, delays and outages in our data center providers’ and other hosted providers’ service and availability or capacity constraints, our business, results of operations and financial condition may be adversely affected.
In some cases we rely on purchased or leased hardware and software licensed from third parties in order to provide our services. For example, Broadsoft, Inc. provides us with infrastructure, call termination and origination services, and other hardware and software in connection with certain of our Enterprise offerings. We also integrate third-party licensed software components into our platform. This hardware and software may not continue to be available on commercially reasonable terms or pricing or may fail to continue to be updated to remain competitive. The loss of the right to use this third party hardware or software may increase our expenses or impact the provisioning of our services. The failure of this third party hardware or software could materially impact the performance of our services and may cause material harm to our business or results of operations.
We depend on third-party vendors to supply, configure and deliver the phones that we sell. Any delays in delivery, or failure to operate effectively with our own servers and systems, may result in delay or failure of our services, which could harm our business, financial condition and results of operations.
We rely on Yealink Inc. and Polycom, Inc. to provide, and a single fulfillment agent to configure and deliver, the phones that we offer for sale to our customers that use our UC and CC services. If these third parties are unable to deliver phones of acceptable quality or quantity, or in a timely manner, we may be forced to offer replacements at a higher cost than what is currently contracted. In addition, these phones must interoperate with our servers and systems. If either of our providers changes the operation of their phones, we may be required to engage in development efforts to ensure that the new phones interoperate with our system. The failure of our vendor-supplied phones to operate effectively with our system could impact our customers’ ability to use our services and could cause customers to cancel our services, which may cause material harm to our business or results of operations.
We rely on third parties to provide a portion of our customer service representatives, provide aspects of our E-911 service, which differs from traditional 911 service, and initiate local number portability for our customers. If these third parties do not provide our customers with reliable, high-quality service, our reputation will be harmed and we may lose customers.
We offer our customers support 24 hours a day, seven days a week through both our comprehensive online account management website and our toll free number. Our customer support is currently provided via United States based employees as well as third party partners located in various global locations. Our third-party providers generally represent us without identifying themselves as independent parties. The ability to support our customers may be disrupted by natural disasters, inclement weather conditions, civil unrest, and other adverse events in the locations where our customer support is provided.
We also contract for services required to provide E-911 services including assistance in routing emergency calls, terminating E-911 calls, operating a national call center that is available 24 hours a day, seven days a week to receive certain emergency calls, and maintaining PSAP databases for the purpose of deploying and operating E-911 services. Interruptions in service from our vendor could cause failures in our customers’ access to E-911 services and expose us to liability and damage our reputation. We also have agreements with companies that initiate our local number portability, which allow new customers to retain their existing telephone numbers when subscribing to our services.
15     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
If any of these third parties do not provide reliable, high-quality service, our reputation and our business will be harmed. In addition, industry consolidation among providers of services to us may impact our ability to obtain these services or increase our expense for these services.
We market our products and services to small and medium-sized businesses, which may be disproportionately impacted by fluctuations in economic conditions.
We market our products to small and medium-sized businesses. Customers in this market may be affected by economic downturns to a greater extent, and may have more limited financial resources, than larger or more established businesses. If customers in our VCP markets experience financial hardship as a result of a weak economy, the demand for our services could be materially and adversely affected.
Significant foreign currency exchange rate fluctuations could adversely affect our financial results.
Because our consolidated financial statements are presented in U.S. dollars, increases or decreases in the value of the U.S. dollar relative to other currencies in which we transact business could materially adversely affect our financial results. For example, our API business collects revenues in Euros, and accordingly the strengthening of the U.S. dollar relative to the Euro adversely affects our revenue and operating results presented in U.S. dollars. In addition, Following the departure of the U.K. from the EU and the EEA on January 31, 2020 (commonly referred to as “Brexit”) and the expiration of a transition period on December 31, 2020, there continues to be uncertainty over the practical consequences of Brexit including the potential for Brexit to contribute to long-term instability in financial, stock and currency exchange markets, greater restrictions on the supply and availability of goods and services between the U.K. and EEA region, and a general deterioration in consumer sentiment and credit conditions leading to overall negative economic growth and increased risk of merchant default. Brexit has continued to cause significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the fluctuation of the U.S. dollar against foreign currencies in which we conduct business, such as the British Pound, Euro and other currencies. Such fluctuations of the U.S. dollar relative to other currencies may adversely affect our revenue and operating results. In addition, Brexit may affect our ability to negotiate future customer and vendor contracts, and changes to U.K. border and immigration policy could likewise occur as a result of Brexit, affecting our U.K. operation's ability to recruit and retain employees from outside the U.K.
Risks Relating to Marketing and Talent Management
Growth of our business will depend on market awareness and a strong brand, and any failure to develop, maintain, protect and enhance our brand would hurt our ability to retain or attract subscribers.
Beginning in 2020, we introduced a rebranding of the Company and began implementing a new marketing campaign. Building and maintaining market awareness, brand recognition and goodwill in a cost-effective manner is important to our overall success in achieving widespread acceptance of our existing and future solutions and products and is an important element in attracting new customers. While we may choose to engage in a broader marketing campaign to further promote our brand, this effort may not be successful, or our marketing techniques or content may be challenged. The success of our business also relies on our ability to attract new customers in a cost-effective manner by using a variety of marketing channels. Our efforts in developing our brand may be hindered by the marketing efforts of our competitors and our reliance on any strategic partners to promote our brand. If we are unable to cost-effectively maintain and increase awareness of our brand, our business, financial condition, cash flows and results of operations could be harmed.
We depend on the continued services of our senior management and other key employees, the loss of any of whom could adversely affect our business, results of operations and financial condition.
Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue opportunities and services innovations. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. None of our executive officers or other senior management personnel is bound by a written employment agreement and any of them may therefore terminate employment with us at any time with no advance notice. The replacement of any of these senior management personnel would likely involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives and acquisition integrations. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, financial condition, or results of operations.
16     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Risks Relating to Cybersecurity, IT Systems, Data Privacy and Fraud
Security breaches and other cybersecurity or technological risks could compromise our information systems and network and expose us to liability, which could cause our business and reputation to suffer and which could have a material adverse effect on our business, financial condition, and operating results.
There are several inherent risks to engaging in a technology business, including our reliance on our data centers and networks, and the use and interconnectivity of those networks. A significant portion of our operations relies heavily on our ability to provide secure processing, storage and transmission of confidential and other sensitive data, including intellectual property, proprietary business information, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, storage, and transmission of this information is critical to our operations and business strategy. As seen in our industry and others, these activities have been, and will continue to be, subject to continually evolving cybersecurity and other technological risks. Targeted attacks, such as advanced persistent threat is prevalent throughout the Internet and associated with the theft of intellectual property and state-sponsored espionage. Due to the nature of our business and reliance on the Internet, we are susceptible to this type of attack. In addition, physical security of devices located within our offices, and/or remote devices, pose cybersecurity and other technological risks that could negatively impact our business and reputation.
We also operate Internet based, worldwide data, voice, video communications, and messaging services and electronic billing, which require the transmission of confidential and at times personal or sensitive customer or employee information over public networks that may or may not support end to end security. Despite our security measures, which include the development, operation and maintenance of systems and processes that are designed to protect consumer and employee information and prevent fraudulent credit card transactions and other security breaches, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to error, malfeasance or other disruptions by a current or former employee or third-party provider and our failure to mitigate such fraud or breaches may adversely affect our operating results. Any such breach could compromise our systems and network and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations, damage to our reputation, and a loss of confidence in our products and services, as well as our ability to keep personally identifiable information confidential, which could adversely affect our business.
We have been subject to cybersecurity incidents from external sources including “brute force” and distributed denial of service attacks, as well as attacks that introduce fraudulent VoIP traffic. Although these incidents have not had a material adverse effect financially or on our ability to provide services, this may not continue to be the case going forward. There can be no assurance that cybersecurity incidents will not occur in the future, potentially more frequently and/or on a more significant scale.
There can be no assurance that we are adequately protecting our information or that we will not experience future incidents. The expenses associated with protecting our information could reduce our operating margins. We maintain insurance intended to cover some of these risks, however, this insurance may not be sufficient to cover all of our losses from any future breaches of our systems. In addition, third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions, which results in the storage and processing of customer information by third parties. While we engage in certain actions to reduce the exposure resulting from outsourcing, unauthorized access, loss or destruction of data or other cybersecurity incidents could occur, resulting in similar costs and consequences as those discussed above.
Flaws in our technology and systems or our failure to adapt our systems to any new Internet Protocol could cause delays or interruptions of service, which could damage our reputation, cause us to lose customers, and limit our growth.
Our service may be disrupted by problems with our technology and systems that we provide to customers, software or facilities and overloading of our network. As we attract new customers, we expect increased call volume that we need to manage to avoid network interruptions. Interruptions have caused and may in the future cause us to lose customers and offer substantial customer credits, which could adversely affect our revenue and profitability. Network interruptions have also impaired our ability at times to sign-up new customers and the ability of customers to manage their accounts. If service interruptions or other outages adversely affect the perceived reliability of our service or customer service, we may have difficulty attracting and retaining customers and our brand reputation and growth may suffer.
17     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
The storage, processing, and use of personal information and other confidential information subjects us to evolving governmental laws and regulation, commercial standards, contractual obligations, and other legal obligations related to consumer and data privacy, which may have a material impact on our costs, use of our products and services, or expose us to increased liability.
Federal, state, local and foreign laws and regulations, commercial commitments and industry standards, each provide for obligations and restrictions with respect to data privacy and security, as well as the collection, storage, retention, use, processing, transmission, sharing, disclosure and protection of personal information and other customer data. The evolving nature of these obligations and restrictions dictates that differing interpretations, inconsistency or conflicts among countries or rules, and general uncertainty impact the application to our business. These new laws, such as the European Union General Data Protection Regulation (GDPR) or California Consumer Privacy Act (CCPA), also impact our innovation and business drivers in developing new and emerging technologies (e.g., artificial intelligence and machine learning).
These obligations and restrictions may limit our ability to collect, store, retain, process, use, transmit and share data with our customers, employees, and third party providers, which in turn could limit the ability of our customers to collect, store, retain, protect, use, process, transmit, share and disclose data with others through our products and services. Compliance with, and other burdens imposed by, such obligations and restrictions could increase the cost of our operations and impact our ability to market our products and services through effective segmentation.
Failure to comply with obligations and restrictions related to applicable data protection laws, regulations, standards, and codes of conduct, as well as our own posted privacy policies and contractual commitments could subject us to lawsuits, fines, criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity, loss of user confidence in our services, and loss of users, which could materially harm our business. Additionally, third-party contractors may have access to customer or employee data. If these or other third-party vendors violate obligations and restrictions related to applicable data protection laws or our policies, such violations may also put our customers’ or employees’ information at risk and could in turn have a material and adverse effect on our business.
Third parties may be capable of fraudulently using our name to obtain access to customer accounts and other personal information, use our services to commit fraud or steal our services or equipment, which could damage our reputation, limit our growth, and cause us to incur additional expenses.
Our customers have been subject to “phishing,” which occurs when a third party calls or sends an email or pop-up message to a customer that claims to be from a business or organization that provides services to the customer. The purpose of the inquiry is typically to encourage the customer to visit a bogus website designed to look like a website operated by the legitimate business or organization or provide information to the operator. At the bogus website, the operator attempts to trick the customer into divulging customer account or other personal information such as credit card information or to introduce viruses through “Trojan horse” programs to the customers’ computers. This has resulted in identity theft from our customers and the unauthorized use of Vonage services. Third parties have also used our communications services to commit fraud. Although we have engaged a third party to assist in the shutdown of purported phishing sites, if we are unable to detect and prevent “phishing,” use of our services for fraud, and similar activities, our brand reputation and growth may suffer and we may incur additional costs, including costs to increase security, or be required to credit significant amounts to customers.
Third parties also have used our communications services and obtained delivery of our equipment without paying, including by submitting fraudulent credit card information. This has resulted in our incurring the cost of providing the services, including incurring call termination fees, or providing the equipment without any corresponding revenues. We have implemented anti-fraud procedures in order to limit the expenses resulting from theft of service or equipment. If our procedures are not effective, theft of service or equipment could significantly increase our expenses and negatively impact our profitability.
18     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Risks Relating to Litigation, Regulatory and Tax Matters
Unfavorable litigation or governmental investigation results could require us to pay significant amounts or lead to onerous operating procedures.
We are subject from time to time to lawsuits both in the United States and in foreign countries, including claims and investigations relating to competition, intellectual property rights (including patents), employment and labor matters, personal injury and property damage, customer privacy, regulatory requirements, advertising, marketing and selling practices, and credit and collection issues. Greater constraints on the use of arbitration to resolve certain of these disputes could adversely affect our business. We also spend substantial resources complying with various regulatory and government standards, including any related investigations and litigation. We may incur significant expenses defending any such suit or government investigation and may be required to pay amounts or otherwise change our operations in ways that could adversely impact our businesses, results of operations or financial condition.
If we fail to protect unique aspects of our internally developed systems, technology, products, and software and our trademarks, we may become involved in costly litigation or our business or brand may be harmed.
Our ability to compete effectively is dependent in large part upon the maintenance and protection of systems and software that we have developed internally based on open standards. While we own 248 U.S. patents as well as a number of foreign patents and pending U.S. and foreign patent applications, we cannot patent much of the technology that is important to our business. Our pending patent applications may not be granted. Any issued patent that we own may be challenged, narrowed, invalidated, or circumvented. To date, we have relied on patent, copyright and trade secret laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights to this technology. We typically enter into confidentiality agreements with our employees, consultants, customers, partners, and vendors in an effort to control access to and distribution of technology, software, documentation, and other information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use this technology without authorization. Policing unauthorized use of this technology is difficult. The steps we take may not prevent misappropriation of the technology we rely on. In addition, effective protection may be unavailable or limited in some jurisdictions outside the United States, Canada, and the United Kingdom. Litigation may be necessary in the future to enforce or protect our rights or to determine the validity and scope of the rights of others. That litigation could cause us to incur substantial costs and divert resources away from our daily business, which in turn could materially adversely affect our business.
We may be subject to damaging and disruptive intellectual property disputes that could materially and adversely affect our business, results of operations, and financial condition, as well as the continued viability of our company.
There has been substantial litigation in the cloud communications, VoIP, telecommunications, hosted services, and related industries regarding intellectual property rights and, given the rapid technological change in our industry, expansion into new technological and geographical markets, and our continual development of new products and services, we and/or our commercial partners may be subject to infringement claims from time to time.  For example, we may be unaware of filed patent applications and issued patents that could include claims that might be interpreted to cover our products and services.  We have been subject to patent infringement claims in the past, and from time to time we receive letters from third parties offering an opportunity for us to obtain licenses to patents that may be relevant to our business or alleging that our services infringe upon third party patents or other intellectual property. We may seek to obtain rights to third party technology in the future, but may not be able to agree upon commercially reasonable terms or at all with respect to obtaining such rights. If we are unable to extend existing licenses or are unable to obtain rights to other technology that may be commercially advantageous or necessary for our product and service offerings, we may experience a decrease in the quality of our products or services or we may lose the ability to provide our products and services on a non-infringing basis until alternative technology or suitable alternative products and services can be developed, identified, obtained either through acquisition, license or other grants of rights, and integrated.
The regulatory framework for API services continues to develop, as many existing regulations may not fully contemplate this type of service or business model; future legislative, regulatory or judicial actions impacting API could adversely affect our business and financial results of operations, increase the cost and complexity of compliance, and expose us to liability.
In many countries where we offer API products, it is not clear how our APIs fit into the communications regulatory framework. The Company is also expanding into new regions, such as the Asia Pacific (including China), where regulations are unclear and subject to rapid change. Regulators could claim that our API products are subject to licensing and substantive communications regulatory requirements, could modify their regulations to explicitly expand the obligations to which our API products are subject, or could increase the level of scrutiny and enforcement they apply.
19     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Future legislative, judicial or other regulatory actions could have a negative effect on our business. If our API products become subject to additional rules and regulations applicable to technology or communications providers, we may incur significant litigation and compliance costs, or it may significantly impact our ability to compete. Moreover, the regulatory environment is constantly evolving and changes to the applicable regulations could impose additional compliance costs and require modifications to our technology operations. We may also experience interruptions or limitations on the delivery and use of our API products on our platform, or incur significant losses based on the timing of customer payments and any difficulty in collecting accounts receivable from our API customers. Any decreased use of our products and services or limitation on our ability to collect payments from our customers could adversely affect our business, results of operations, and financial condition.
We may also have to restructure or discontinue certain of our service offerings, exit certain markets, or raise the price of our services in response to regulatory changes or actions, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost or complexity of doing business, limit our growth, or impact our results of operations.
Our VoIP services are subject to country-specific governmental regulation and related actions and taxes that may increase our costs or impact our product offerings.
In many countries, we are not a regulated telecommunications business subject primarily to regulations surrounding provision of emergency services and payment into universal service type funds. In some countries, providing VoIP services is or may be illegal. We may need to change our service offerings to avoid regulation as a telecommunications business in a jurisdiction, or if we are treated as a fully regulated telecommunications business, we may be required to incur additional expenses. In addition, if governments believe that we are providing unauthorized service in their countries, they may pursue fines, penalties, or other governmental action, including criminal action, that may damage our brand and reputation. If we use a local partner to provide services in a country and the local partner does not comply with applicable governmental regulations, we may face additional regulation, liabilities, penalties or other governmental action, and our brand and reputation may be harmed.
In addition to the risk of being directly subjected to regulation, decisions by foreign regulators to increase the charge for terminating international calls into their countries could cause increased costs, impact margin, and impact churn. These regulatory actions may be taken without notice and cause us to react quickly to changing market conditions. These efforts could divert management’s efforts and attention from ordinary business operations which could materially and adversely affect our results of operations.
As a United States-based company, any foreign subsidiary or joint venture that we use for international operations may be subject to a variety of governmental regulations in the countries where we market our products, including tariffs, taxes and employment regulations different from those in the U.S. For example, distributions of earnings and other payments, including interest, received from our foreign subsidiaries may be subject to withholding taxes imposed by the jurisdiction in which such entities are formed or operating, which will reduce the amount of after-tax cash we can receive. In general, as a United States corporation, we may claim a foreign tax credit against our federal income tax expense for such foreign withholding taxes and for foreign income taxes paid directly by foreign corporate entities in which we own 10% or more of the voting stock. The ability to claim such foreign tax credits and to utilize net foreign losses is, however, subject to numerous limitations, and we may incur incremental tax costs as a result of these limitations or because we are not currently in a tax-paying position in the United States. We may also be required to include in our income for United States federal income tax purposes our proportionate share of certain earnings of those foreign subsidiaries that are classified as “controlled foreign corporations” without regard to whether distributions have been actually received from such subsidiaries.
Our VoIP services are subject to regulation in the United States, United Kingdom, and Canada, and in additional countries as we expand globally. Future legislative, regulatory or judicial actions could adversely affect our business and expose us to liability and limit our growth potential.
The United States, United Kingdom, and Canada have applied some traditional telephone company regulations to VoIP and continue to evaluate how VoIP should be regulated, as are other countries as we expand globally. The effects of future regulatory developments are uncertain. At the federal level in the U.S., the Federal Communications Commission has imposed certain telecommunications regulations on VoIP services including, but not limited to; requirements to provide E-911 service; communications Assistance for Law Enforcement Act obligations; obligation to support Universal Service; customer Proprietary Network Information, or CPNI, requirements; disability access obligations; local Number Portability requirements; and consumer protection, including protection from unwanted telemarketing and other calls. As we expand globally, these types of regulations are likely to be similarly enacted and enforced by local regulatory authorities.
20     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
In general, the focus of interconnected VoIP telecommunications regulation is at the federal level. On November 12, 2004, the FCC issued a declaratory ruling providing that our service is subject to federal regulation and preempted the Minnesota Public Utilities Commission from imposing certain of its regulations on us. While this ruling does not exempt us from all state oversight of our service, it effectively prevents state telecommunications regulators from imposing certain burdensome and inconsistent market entry requirements and certain other state utility rules and regulations on our service. Despite this, Vonage may be subject to state and local regulatory requirements including: payment of state and local E-911 fees; and State Universal Service support obligations.
In Canada, the Canadian Radio-Television and Telecommunications Commission, or CRTC, regulates VOIP Service. In the UK, the Office of Communications, or OFCOM, regulates voice services. Other regulatory bodies in various jurisdictions regulate services Vonage offers its customers. These regulated services are similar to those regulated in the United States discussed above. Future legislative, judicial or other regulatory actions could have a negative effect on our business. If we become subject to the rules and regulations applicable to telecommunications providers in individual states or other foreign jurisdictions, we may incur significant litigation and compliance costs, and we may have to restructure our service offerings, exit certain markets, or raise the price of our services, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth.
Customer misuse of our API products in violation of the Telephone Consumer Protection Act may cause us to face litigation risk.
The Telephone Consumer Protection Act of 1991 restricts telemarketing and the use of automatic SMS text messages without proper consent. The scope and interpretation of the laws that are or may be applicable to the delivery of text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face liability.
We may be exposed to liabilities under anti-corruption, export control and economic sanction regulations, and similar laws and regulations, and any determination that we violated any of these laws or regulations could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, the UK Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials, political parties, and/or private parties by persons and entities for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make sales internationally. In addition, we plan to expand our international operations through potential joint ventures with local partners. Our international activities create the risk of unauthorized payments or offers of payments by one of our employees, consultants, partners, sales agents or distributors, even though these parties are not always subject to our control. It is our policy to prohibit these practices by our employees, consultants, partners, sales agents or distributors, however, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, partners, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA, the UK Bribery Act or other laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results, and financial condition.
Our products and services may be subject to export control and economic sanctions regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department's Office of Foreign Assets Controls. Our products and services must be offered and sold in compliance with these laws and regulations. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face liability. In addition, changes in our products or services, changes in applicable regulations, or change in the target of such regulations, could also result in decreased use of our products and services, or in our decreased ability to sell our products or provide our services to existing or prospective customers with international operations. Any decreased use of our products and services or limitation on our ability to export our products and provide our services could adversely affect our business, results of operations and financial condition.
21     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Our API offerings may be subject to liability for historic and future sales, use and similar taxes, that may increase our costs or impact our product offerings.
In some United States tax jurisdictions in which we conduct operations, sales and use and telecommunications taxes could apply to our API products. Historically, we have not billed or collected these taxes from our API customers. It is possible that some tax jurisdictions may assert that such taxes are applicable to our API products, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes on our API customers in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our business, results of operations and financial condition. To the extent that we decide to collect such taxes from our API customers in the future, we may have some customers that question the incremental tax charges and some may seek to negotiate lower pricing from us, which could adversely affect our business, results of operations and financial condition.
The global scope of our operations may subject us to potentially adverse tax consequences.
We generally report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Intercompany relationships are subject to complex transfer pricing regulations in various jurisdictions. If revenue and taxing authorities disagree with positions we have taken we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. In addition, changes in tax laws of countries in which we do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our business, cash flows, results of operations and financial position.
We have incurred cumulative losses since our inception and may not achieve consistent profitability in the future.
We incurred a net loss attributable to Vonage of $36,212 for the year ended December 31, 2020 and our accumulated deficit is $667,221 from our inception through December 31, 2020. Although we have achieved profitability in prior years and believe we will achieve consistent profitability in the future, we ultimately may not be successful.  We believe that our ability to achieve consistent profitability will depend, among other factors, on our ability to continue to achieve and maintain substantive operational improvements and structural cost reductions while maintaining and growing our net revenues.  In addition, certain of the costs of our business are not within our control and may increase.  For example, we and other telecommunications providers are subject to regulatory termination charges imposed by regulatory authorities in countries to which customers make calls.
We may be unable to fully realize the benefits of our net operating loss, or NOL, carry forwards if an ownership change occurs.
If we were to experience a “change in ownership” under Section 382 of the Internal Revenue Code, or Section 382, the NOL carryforward limitations under Section 382 would impose an annual limit on the amount of the future taxable income that may be offset by our NOL generated prior to the change in ownership. If a change in ownership were to occur, we may be unable to use a significant portion of our NOL to offset future taxable income. In general, a change in ownership occurs when, as of any testing date, there has been a cumulative change in the stock ownership of the corporation held by 5% stockholders of more than 50 percentage points over an applicable three-year period. For these purposes, a 5% stockholder is generally any person or group of persons that at any time during an applicable three-year period has owned 5% or more of our outstanding common stock. In addition, persons who own less than 5% of the outstanding common stock are grouped together as one or more “public group” 5% stockholders. Under Section 382, stock ownership would be determined under complex attribution rules and generally includes shares held directly, indirectly through intervening entities, and constructively by certain related parties and certain unrelated parties acting as a group. We have implemented a Tax Benefits Preservation Plan intended to provide a meaningful deterrent effect against acquisitions that could cause a change in ownership, however this is not a guarantee against such a change in ownership.
22     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Risks Relating to Stock Ownership and Indebtedness
Actions of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.
We have been and may continue to be subject to proposals by stockholders urging us to take certain corporate actions. For example, on February 26, 2020, we renewed a cooperation agreement with an activist shareholder and certain related investors. If activist stockholder activities continue, our business could be adversely affected because responding to proxy contests and reacting to other actions by activist stockholders can be costly and time-consuming, disrupt our operations, and divert the attention of management and our employees. For example, we may be required to retain the services of various professionals to advise us on activist stockholder matters, including legal, financial, and communications advisers, the costs of which may negatively impact our future financial results. This may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
The debt agreements governing our financing contain restrictions that may limit our flexibility in operating our business or executing on our acquisition strategy.
On July 31, 2018, we replaced our 2016 Credit Facility previously consisting of a $125 million senior secured term loan and a $325 million revolving credit facility with the 2018 Credit Facility consisting of a $100 million senior secured term loan and a $500 million revolving facility. The 2018 Credit Facility contains customary representations and warranties and affirmative covenants that limit our ability and/or the ability of certain of our subsidiaries to engage in specified types of transactions. These covenants and other restrictions may under certain circumstances limit, but not necessarily preclude, our and certain of our subsidiaries’ ability to, among other things: consolidate or merge; create liens; incur additional indebtedness; dispose of assets; consummate acquisitions; make investments; or pay dividends and other distributions.

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

Our ability to comply with such financial and other covenants may be affected by events beyond our control, so we may not be able to comply with these covenants. A breach of any such covenant could result in a default under the 2018 Credit Facility. In that case, the lenders could elect to declare due and payable immediately all amounts due under the 2018 Credit Facility, including principal and accrued interest.
If we require additional capital, we may not be able to obtain additional financing on favorable terms or at all.
We may need to pursue additional financing to respond to new competitive pressures, pay extraordinary expenses such as litigation settlements or judgments or fund growth, including through acquisitions. Because of our past significant losses and our limited tangible assets, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the capital markets. In addition, the credit documentation for our recent financing contains affirmative and negative covenants that affect, and in many respects may significantly limit or prohibit, among other things, our and certain of our subsidiaries’ ability to incur, refinance or modify indebtedness and create liens. Our credit card processors have the ability to impose significant holdbacks in certain circumstances. The reinstatement of such holdbacks likely would have a material adverse effect on our liquidity. Under our credit card processing agreements with our Visa, MasterCard, American Express, and Discover credit card processors, the credit card processor has the right, in certain circumstances, including adverse events affecting our business, to impose a holdback of our advanced payments purchased using a Visa, MasterCard, American Express, or Discover credit card, as applicable, or demand additional reserves or other security. If circumstances were to occur that would allow any of these processors to reinstate a holdback, the negative impact on our liquidity likely would be significant. In addition, our Visa and MasterCard credit card processing agreement may be terminated by the credit card processor at its discretion if we are deemed to be financially insecure. As a significant portion of payments to us are made through Visa and MasterCard credit cards, if the credit card processor does not assist in transitioning our business to another credit card processor, the negative impact on our liquidity likely would be significant. There were no cash reserves and cash-collateralized letters of credit with any credit card processors as of December 31, 2020.
23     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
We may not have the ability to raise the funds necessary to settle conversions of the convertible senior notes due 2024 in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the notes.
    Holders of our 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) have the right to require us to repurchase their Convertible Senior Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Convertible Senior Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Senior Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Senior Notes surrendered therefor or Convertible Senior Notes being converted. In addition, our ability to repurchase the Convertible Senior Notes or to pay cash upon conversions of the Convertible Senior Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Convertible Senior Notes at a time when the repurchase is required by the indenture setting forth the terms of the Convertible Senior Notes or to pay any cash payable on future conversions of the Convertible Senior Notes as required by the indenture would constitute a default under the indenture. A default under the indenture setting forth the terms of the Convertible Senior Notes or the occurrence of the fundamental change itself may lead to a default under our 2018 Credit Facility or other agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Senior Notes or make cash payments upon conversions thereof. The increase in the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption may not adequately compensate holders for any lost value of such holders’ Convertible Senior Notes as a result of such transaction.
    If a make-whole fundamental change occurs prior to the maturity date or if we issue a notice of redemption with respect to the Convertible Senior Notes, under certain circumstances, we will increase the conversion rate by a number of additional shares of our common stock for Convertible Senior Notes converted in connection with such make-whole fundamental change or notice of redemption, as the case may be. The increase in the conversion rate will be determined based on the date on which the specified corporate transaction becomes effective, or the date of the notice of redemption, as the case may be and the price paid (or deemed to be paid) per share of our common stock in such transaction or with respect to such redemption, as the case may be. The increase in the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption may not adequately compensate holders for any lost value of such holders’ Convertible Senior Notes as a result of such transaction or redemption. In addition, if the price per share of our common stock paid (or deemed paid) in the transaction is greater than $60.00 per share or less than $11.73 per share (in each case, subject to adjustment), no additional shares will be added to the conversion rate. Moreover, in no event will the conversion rate per $1,000 aggregate principal amount of Convertible Senior Notes as a result of this adjustment exceed 85.2514 shares of common stock, subject to adjustment in the same manner as the conversion rate.
    Our obligation to increase the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption could be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness and equitable remedies.
The conditional conversion feature of the Convertible Senior Notes, if triggered, may adversely affect our financial condition and operating results.
    In the event the conditional conversion feature of the Convertible Senior Notes is triggered, holders of Convertible Senior Notes will be entitled to convert the Convertible Senior Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Senior Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of Convertible Senior Notes do not elect to convert their Convertible Senior Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Senior Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
24     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, could have a material effect on our reported financial results.
    Under certain circumstances, convertible debt instruments (such as the Convertible Senior Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Convertible Senior Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Convertible Senior Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Senior Notes, then our diluted earnings per share could be adversely affected.
The capped call transactions entered into in connection with the pricing of the Convertible Senior Notes may affect the value of the Convertible Senior Notes and our common stock.
    In connection with the pricing of the Convertible Senior Notes and subsequently in connection with the exercise of the initial purchasers’ exercise of their option to purchase additional Convertible Senior Notes, we entered into capped call transactions (the “Capped Calls”) with certain option counterparties. The Capped Calls are expected generally to reduce the potential dilution upon conversion of the Convertible Senior Notes and/or offset any cash payments we are required to make in excess of the aggregate principal amount of converted Convertible Senior Notes, as the case may be, with such reduction and/or offset subject to a cap.
    In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of the Convertible Senior Notes and prior to the maturity of the Convertible Senior Notes (and are likely to do so during any observation period related to a conversion of the Convertible Senior Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Convertible Senior Notes, which could affect holders’ ability to convert the Convertible Senior Notes and, to the extent the activity occurs during any observation period related to a conversion of Convertible Senior Notes, it could affect the number of shares and value of the consideration that holders will receive upon conversion of the Convertible Senior Notes.
    In addition, if any such Capped Call fails to become effective, the option counterparty party thereto may unwind its hedge positions with respect to our common stock, which could adversely affect the value of our common stock and, if the Convertible Senior Notes have been issued, the value of the Convertible Senior Notes.
Our certificate of incorporation and bylaws and the agreements governing our indebtedness contain provisions that could delay or discourage a takeover attempt, which could prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.
Certain provisions of our Restated Certificate of Incorporation and our Amended and Restated By-laws may make it more difficult for, or have the effect of discouraging, a third party from acquiring control of us or changing our board of directors and management. These provisions permit our board of directors to issue additional shares of common stock and preferred stock and to establish the number of shares, series designation, voting powers if any, preferences, other special rights, qualifications, limitations or restrictions of any series of preferred stock; limit the ability of stockholders to amend our Restated Certificate of incorporation and Amended and Restated By-laws, including supermajority requirements; allow only our board of directors, Chairman of the board of directors or Chief Executive Officer to call special meetings of our stockholders; eliminate the ability of stockholders to act by written consent; require advance notice for stockholder proposals and director nominations; and limit the removal of directors and the filling of director vacancies.
In addition, our Restated Certificate of Incorporation and Amended and Restated By-laws were amended on June 13, 2018 to declassify our Board of Directors. The declassification of the Board commenced with the 2019 annual meeting of stockholders and will result in the Board being fully declassified (and all Board members standing for annual elections) commencing with the 2021 annual meeting of stockholders. A classified structure will therefore remain in place during the phase-in period.
Such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices. Any delay or prevention of, or significant payments required to be made upon, a change of control transaction or changes in our board of directors or management could deter potential acquirors or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.
25     VONAGE ANNUAL REPORT 2020



Table of Contents    
                

ITEM 1B. Unresolved Staff Comments
None.
 
ITEM 2. Properties
Our headquarters are located in Holmdel, New Jersey. We also lease office, building space and research and development sites around the world, primarily in the United States, Europe, Israel, Australia, and Asia. We sublease portions of office space including space in our Holmdel, NJ location to a third parties. Due to the impact of COVID-19, we analyzed our real estate footprint, our ability to work primarily as a remote organization, and that a significant amount of real estate was not fully utilized. As a result, we had decided to close offices in certain locations worldwide by December 31, 2020. We believe that the remaining facilities that we occupy are in good condition and adequate for our current needs. We have established a program to lease temporary work spaces based on the office re-openings and future needs, and do not anticipate leasing any material additional space.
ITEM 3. Legal Proceedings
Refer to Note 15, Commitments and Contingencies to our Consolidated Financial Statements included in this Annual Report on Form 10-K for a discussion of recent developments regarding our legal proceedings.

ITEM 4. Mine Safety Disclosures
Not Applicable.


26     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
PART II

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

Price Range of Common Stock
Our common stock was listed on the New York Stock Exchange from May 24, 2006 to December 30, 2019 and transferred to the Nasdaq Global Select Market starting December 31, 2019, both listings are under the ticker symbol “VG”.
 
Holders
At January 31, 2021, we had approximately 460 stockholders of record. This number does not include beneficial owners whose shares are held in street name. 
Dividends
We have never paid cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock for at least the next 12 months. We intend to retain all of our earnings, if any, for general corporate purposes, and, if appropriate, to finance the expansion of our business.
27     VONAGE ANNUAL REPORT 2020



Table of Contents    
                

Stock Performance Graph
The graphs below and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, or the Exchange Act, nor shall such information be deemed incorporated by reference into any filing under the Securities Act of 1933, or the Securities Act, or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act.
The graph below compares the cumulative total return of our common stock between December 31, 2015 and December 31, 2020, with the cumulative total return of (1) NASDAQ Telecommunications, (2) Russell 2000 Index, and (3) NASDAQ Computer. This graph assumes the investment of $100 on December 31, 2015 in our common stock, NASDAQ Telecommunications, Russell 2000 Index, and NASDAQ Computer, and assumes the reinvestment of dividends, if any.
COMPARISON OF THE CUMULATIVE TOTAL RETURN ON COMMON STOCK BET
WE
COMPARISON OF THE CUMULATIVE TOTAL RETURN ON COMMON STOCK BETWEEN DECEMBER 31, 2015 AND DECEMBER 31, 2020
Among Vonage Holdings Corp., the NASDAQ Telecommunications, the Russell 2000 Index, and the NASDAQ Computer.
https://cdn.kscope.io/02b52105ae69c8056607c276b40dc5b2-vg-20201231_g2.jpg
  
December 31,
  
20162017201820192020
Vonage Holdings Corp.$119.34 $177.18 $152.09 $129.09 $224.39 
NASDAQ Telecommunications$114.87 $134.90 $138.98 $154.80 $188.92 
Russell 2000 Index$119.48 $135.18 $118.72 $146.89 $173.86 
NASDAQ Computer$112.27 $155.80 $150.06 $225.59 $338.35 

Common Stock Repurchases

See Note 10, Common Stock to the Company's Consolidated Financial Statements for information regarding common stock repurchases.


28     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
ITEM 6. Selected Financial Data
The following table presents the Company's historical selected financial data. This information should be read in conjunction with the Consolidated Financial Statements and the related notes thereto listed in Item 15 and included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company has completed several acquisitions as further described in Note 4, Acquisitions and Dispositions to the Company's Consolidated Financial Statements.
  
For the years ended December 31,
(In thousands, except per share amounts)2020
2019 (1)
2018 (2)
2017
2016 (3)
Statement of Operations Data:
Total revenues$1,247,934 $1,189,346 $1,048,782 $1,002,286 $955,621 
(Loss) income from operations(149)6,763 51,911 59,391 44,154 
Net (loss) income$(36,212)$(19,482)$35,728 $(33,933)$13,151 
(Loss) Earnings per common share
Basic$(0.15)$(0.08)$0.15 $(0.15)$0.06 
Diluted$(0.15)$(0.08)$0.14 $(0.15)$0.06 
Weighted-average common shares outstanding:
Basic246,082 242,018 237,499 225,311 215,751 
Diluted246,082 242,018 248,892 225,311 231,941 
Statement of Cash Flow Data:
Net cash provided by operating activities$83,880 $92,926 $123,205 $128,058 $93,456 
Net cash used in investing activities(52,723)(52,079)(407,230)(30,737)(191,449)
Net cash (used in) provided by financing activities(10,850)(21,921)258,212 (96,242)68,054 
Balance Sheet Data:
Total assets1,395,836 1,364,700 1,259,488 858,681 935,666 
Total notes payable, indebtedness under revolving credit facility and convertible notes, net506,284 497,158 519,228 232,515 318,874 
Capital lease obligations— — — 140 3,428 
Total stockholders’ equity602,774 567,062 535,768 472,898 436,541 

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





29     VONAGE ANNUAL REPORT 2020



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

You should read the following discussion together with “Selected Financial Data” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under “Item 1A—Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read in connection with, the consolidated financial statements and related notes thereof. Components of management's discussion and analysis of financial condition and results of operations include:
Overview
Results of Operations
Non-GAAP Measures
Liquidity and Capital Resources
Contractual Obligations
Summary of Critical Accounting Policies and Estimates
Off-Balance Sheet Arrangements
OVERVIEW
At Vonage, our vision is to accelerate the world's ability to connect. We are observing a secular change in the way business is done, with a fundamental shift in how communications technologies are being leveraged in almost every industry. Through the Vonage Communications Platform, our strategy is to deliver a single leading cloud communications platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. We believe that the Vonage Communications Platform's products and services are well positioned to take advantage of emerging trends 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 business is organized under two reportable operating segments: Vonage Communications Platform and Consumer. The Vonage Communications Platform includes our Unified Communications, Contact Center Communications, and APIs service offerings and represents the Company’s strategic business as the source of future growth. Our Consumer segment includes our communications solutions for residential customers based on our roots in providing VoIP communication services.

30     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Impact of COVID-19
A novel strain of coronavirus, or COVID-19, was first identified in China in December 2019 and subsequently declared a pandemic on March 11, 2020, by the World Health Organization. To date, COVID-19 has impacted nearly all regions around the world and resulted in travel restrictions and business slowdowns worldwide. The full impact of the pandemic on our business, operations and financial results has and will depend on various factors that continue to evolve, which we may not accurately predict. In response to the COVID-19 pandemic, governments across the world have enacted measures aimed at containing the spread of the virus, including ordering the closure of all businesses not deemed "essential," restricting residents to their homes, and the practice of social distancing when engaging in authorized activities. While some of these restrictions have been lifted on a global scale, many regions, including the United States where Vonage is headquartered, are experiencing a resurgence of COVID-19. As a result of the COVID-19 pandemic, all travel has been severely curtailed to protect the health of our employees and to comply with local guidelines, and we have temporarily closed the majority of Vonage offices worldwide (including our corporate headquarters), both of which disrupt how we typically operate our business.

COVID-19 has impacted some of our customers more than others, including customers in the travel, hospitality, retail, and other industries where physical interaction is critical. We have experienced and expect that we will continue to experience slowdowns in bookings and customer payments, customer churn and reduced usage, and issuance of customer credits to distressed customers served by certain product lines in the Vonage Communications Platform. In addition, COVID-19 may have impacts on many additional aspects of our operations, directly and indirectly, including with respect to its impacts on customer behaviors, our business and our employees, and the market generally, and the scope and nature of these impacts continue to evolve each day.

Recent Significant Events
Coincident with the July 1st appointment of Mr. Read as President and Chief Executive Officer, the Company initiated a business-wide optimization and alignment project to focus the Company's resources and drive stronger operational execution, which also includes the previously announced Consumer evaluation for potential sale. In connection with this project, the Company initiated a reduction in workforce which resulted in a restructuring charge during the last two quarters of 2020. In addition, the Company abandoned certain of its leased facilities during the second half of 2020 and closed a few offices worldwide by December 31, 2020 as a result of COVID-19 impact. These actions are expected to result in a reduction in operating expenses of approximately $50 million annually. The Company expects to reinvest a portion of the cost savings into key areas of the business. In addition, the Company may have opportunities for further cost saving initiatives as the Company continues to streamline and optimize its business processes which may result in further restructuring charges.

The Company completed a comprehensive strategic review of the Consumer segment with the assistance of financial, accounting, and legal advisors. Based on this review, which included a detailed analysis of the Consumer business’ financials, profitability and potential valuation, the Company has determined that it is in the best interests of the Company and its shareholders to terminate the sale process and retain the Consumer business.

Trends in Our Industry
A number of trends in our industry have a significant effect on our results of operations and are important to an understanding of our financial statements.
Competitive landscape. The business cloud communications markets and consumer services market in which we participate are highly competitive. We face competition from a broad set of companies, including (i) SaaS companies, CCaaS companies, other alternative communication providers, other providers of cloud communication services and (ii) traditional telephone, wireless service providers, cable companies, and alternative communications providers with consumer offerings. As the cloud communications market evolves, and the convergence of voice, video, messaging, mobility and data networking technologies accelerates, we may face competition in the future from companies that do not currently compete in the market, including companies that currently compete in other sectors, companies that serve consumers rather than business customers, or companies which expand their market presence to include cloud communications. Moreover, as businesses and educational institutions are quickly pivoting to cloud-based communications in light the increased need for remote work and remote learning due to the COVID-19 pandemic, we are experiencing intense competition from our existing competitors, and also emerging competitors, seeking to capitalize on the growing needs for businesses and educators to transform their operations. For additional information, refer to "Competition" in Part I, Business.
Regulation.  Our business has developed in a relatively lightly regulated environment. For further discussion regarding regulatory issues which impact the Company, refer to "Regulation" in Note 15, Commitments and Contingencies to our financial statements.
31     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Key Operating Data
The table below includes key operating data that our management uses to measure the growth and operating performance of the VCP segment:
 
Vonage Communications PlatformFor the Years Ended December 31,
202020192018
Service revenues per customer$516 $447 $358 
Vonage Communications Platform revenue churn1.1 %1.1 %1.1 %
Service revenues per customer.  Service revenues per customer for a particular period is calculated by dividing the average monthly service revenues for the period by the average number of customers over the number of months in the period. The average number of customers is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Service revenues excludes revenues from trading and auction customers. Service revenues per customer increased from $447 for 2019 to $516 for 2020 primarily driven by the Company's successful efforts to attract larger VCP customers and to expand services provided to our existing VCP customers.
Vonage Communications Platform revenue churn.  Vonage Communication Platform revenue churn is calculated by dividing the revenue from customers or customer locations that have been confirmed to be foregone during a period by the simple average of the total revenue from all customers in that period. Revenue for purposes of determining VCP revenue churn is service revenue excluding revenue from our trading and auction customers, and usage in excess of a customer’s contracted service plan, regulatory fees charged to customers, and credits. The simple average of total revenue from all customers during the period is the total revenue as defined herein on the first day of the period, plus the total revenue as defined herein on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate business revenue churn differently, and their VCP revenue churn data may not be directly comparable to ours. Vonage Communications Platform revenue churn decreased from 1.1% for 2019 and to 1.1% for 2020.  Our revenue churn may fluctuate over time due to economic conditions, seasonality in certain customer's operations, loss of customers who are acquired, and competitive pressures including promotional pricing. We are continuing to invest in our overall quality of service which includes customer care headcount and systems, billing systems, on-boarding processes and self-service options to ensure we scale our processes to our growth and continue to improve the overall customer experience.
32     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
The table below includes key operating data that our management uses to measure the growth and operating performance of the Consumer segment:
 
ConsumerFor the Years Ended December 31,
202020192018
Average monthly revenues per subscriber line$27.77 $27.04 $26.42 
Subscriber lines (at period end)909,965 1,087,819 1,287,649 
Customer churn1.7 %1.8 %1.8 %
Average monthly revenues per subscriber line.  Average monthly revenues per subscriber line for a particular period is calculated by dividing our revenues for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. The simple average number of subscriber lines for the period is the number of subscriber lines on the first day of the period, plus the number of subscriber lines on the last day of the period, divided by two. Our average monthly revenues per subscriber line increased from $27.04 for 2019 to $27.77 for 2020 due primarily to the Company's ability to retain its more tenured customer.
Subscriber lines.  Our subscriber lines include, as of a particular date, all paid subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines, including fax lines bundled with subscriber lines in our small office home office calling plans and soft phones, but do not include our virtual phone numbers and toll free numbers, which only allow inbound telephone calls to customers. Subscriber lines decreased from 1,087,819 as of December 31, 2019 to 909,965 as of December 31, 2020, reflecting planned actions to enhance the profitability of the assisted sales channel by eliminating lower performing locations and restructuring the pricing offers, and to shift investment to our VCP market.
Customer churn.  Customer churn is calculated by dividing the number of customers that have terminated during a period by the simple average of number of customers in a given period. The simple average number of customers during the period is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate customer churn differently, and their customer churn data may not be directly comparable to ours. Customer churn decreased to 1.7% for 2020 from 1.8% for 2019. We maximize customer value by focusing marketing spend on higher return channels and away from assisted selling channels which had higher early life churn. We monitor customer churn on a daily basis and use it as an indicator of the level of customer satisfaction. Customers who have been with us for a year or more tend to have a lower churn rate than customers who have not. In addition, our customers who are international callers generally churn at a lower rate than customers who are domestic callers. Our customer churn will fluctuate over time due to economic conditions, competitive pressures including promotional pricing targeting international long distance callers, marketplace perception of our services, and our ability to provide high quality customer care and network quality and add future innovative products and services. See the discussion above for detail regarding churn impacting our business customers.


33     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
RESULTS OF OPERATIONS
The following table sets forth our consolidated statement of income for the periods indicated: 
  For the Years Ended December 31,
  202020192018
Total revenues$1,247,934 $1,189,346 $1,048,782 
Operating Expenses:
Cost of revenues (excluding depreciation and amortization)553,523 511,084 426,995 
Sales and marketing342,053 363,111 311,433 
Engineering and development81,484 69,460 52,139 
General and administrative182,106 152,672 135,324 
Depreciation and amortization88,917 86,256 70,980 
Total operating expenses1,248,083 1,182,583 996,871 
(Loss) Income from operations(149)6,763 51,911 
Other Income (Expense):
Interest expense(32,160)(32,821)(15,068)
Other income (expense), net314 (50)(318)
Total other income (expense), net(31,846)(32,871)(15,386)
(Loss) Income before income taxes(31,995)(26,108)36,525 
Income tax (expense) benefit (4,217)6,626 (797)
Net (loss) income$(36,212)$(19,482)$35,728 
 


Management's discussion of the results of operations for the Years Ended December 31, 2020 and 2019

The Company reported loss before income taxes of $31,995 and $26,108 for the years ended December 31, 2020 and 2019, respectively. The higher loss before income taxes as compared to the prior year was primarily caused by higher operating expenses of $23,061. The increase in operating expenses was mainly driven by an increase in general and administrative expense resulting from costs associated with the employee exit costs as a result of restructuring activities, the abandonment of a portion of the Company's office locations and increased reserves associated with indirect taxes. Also attributing was an increase in engineering and development expenses in connection with the Company's continued focus on further enhancing the service offerings within the Vonage Communications Platform. The increase in operating expenses was slightly offset by decrease in sales and marketing expenses due to lower media marketing costs along with certain marketing events being cancelled as a result of the COVID-19 pandemic. The increase in operating expenses was offset by higher gross margin of $16,149 primarily as a result of higher usage of APIs within the VCP segment.

The Company reported net loss of $36,212 and $19,482, respectively, for the years ended December 31, 2020 and 2019. The increase in net loss for the year ended December 31, 2020 is mainly due to the aforementioned increase in loss before income taxes offset by the increase in income tax expense of $10,843 due to an adjustment related to a limitation against the deductibility of officer’s compensation stemming from the impact of CEO and CFO succession and related costs during the current year. In addition, there was an increase to the valuation allowance related to the United Kingdom.

34     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Segment Adjusted EBITDA

The following graphs illustrate the composition of our Adjusted EBITDA with respect to each of our reportable segments for the years ended December 31, 2020, 2019, and 2018.

https://cdn.kscope.io/02b52105ae69c8056607c276b40dc5b2-vg-20201231_g3.jpg

The Adjusted EBITDA for Vonage Communications Platform has improved from $(114,555) and $(103,266) for the years ended December 31, 2018 and 2019, respectively, to $(56,968) for they year ended December 31, 2020. This improvement in Vonage Communications Platform Adjusted EBITDA is primarily due to an increase in Vonage Communications Platform gross margin of $61,272 as the Company experience growth in API services as compared to the prior year along with lower sales and marketing costs as a result of less travel due to COVID-19. Adjusted EBITDA for Vonage Communications Platform was also positively impacted in the current year due to cost saving initiatives executed in the second half of 2020. The decline year over year of Adjusted EBITDA for Consumer is primarily driven by the decrease in subscriber lines year over year as further described below.
35     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Consolidated Gross Margin for the Years Ended December 31, 2020, 2019, and 2018

We calculate gross margin as total revenues less cost of service, which primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services and costs incurred when a customer first subscribes to our service. The following table presents total revenues, cost of revenues and the composition of gross margin for the years ended December 31, 2020, 2019, and 2018:
For the years ended December 31,$ Change 2019 to 2020% Change 2019 to 2020$ Change 2018 to 2019% Change 2018 to 2019
(in thousands, except percentages)202020192018
Service, access and product revenues$1,185,357 $1,106,472 $971,723 $78,885 %$134,749 14 %
USF revenues$62,577 $82,874 $77,059 $(20,297)(24)%$5,815 %
Total revenues$1,247,934 $1,189,346 $1,048,782 $58,588 %$140,564 13 %
Service, access and product cost of revenues490,946 428,210 349,905 62,736 15 %78,305 22 %
USF cost of revenues62,577 82,874 77,090 (20,297)(24)%5,784 %
Cost of revenues (1)
553,523 511,084 426,995 42,439 %84,089 20 %
Gross margin$694,411 $678,262 $621,787 $16,149 %$56,475 %
 
(1) Excludes depreciation and amortization of $51,408, $38,167, and $27,754, respectively.
Total revenues and cost of revenues were impacted by the following trends and uncertainties:

For the year ended December 31, 2020 compared to the year ended December 31, 2019
Total revenues increased 5% for the year ended December 31, 2020 as compared to the prior year period. The increase is primarily due to VCP customer growth driving an increase in revenues of $111,177 despite a decline in USF revenues as more of the Company's VCP services are based upon software service rather than telecommunication services. This was partially offset by declining consumer revenues of $52,589 in connection with the continued decline of subscriber lines. The Company continues to expect that the Consumer portion of the Company's overall business will become less significant. As a result, the Company continues to allocate its resources on enhancing service provided under the Vonage Communications Platform.
Cost of revenues increased 8% for the year ended December 31, 2020 as compared to the prior year period driven by increased costs incurred in servicing our business customers of $49,905 due to higher usage of the Company's APIs along with an increase in customers year over year. This was partially offset by a decrease in costs in Consumer of $7,466 as subscriber lines continues to decline resulting in lower international and long-distance termination costs.

36     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Vonage Communications Platform Gross Margin for the Years Ended December 31, 2020, 2019, and 2018
For the years ended December 31,$ Change 2019 to 2020% Change 2019 to 2020$ Change 2018 to 2019% Change 2018 to 2019
(in thousands, except percentages)202020192018
Revenues
Service revenues$856,492 $719,514 $526,707 $136,978 19 %$192,807 37 %
Access and product revenues (1)
36,584 46,232 50,068 (9,648)(21)%(3,836)(8)%
Service, access and product revenues893,076 765,746 576,775 127,330 17 %188,971 33 %
USF revenues21,981 38,134 31,369 (16,153)(42)%6,765 22 %
Total revenues915,057 803,880 608,144 111,177 14 %195,736 32 %
Cost of revenues
Service cost of revenues (2)
413,079 336,045 239,096 77,034 23 %96,949 41 %
Access and product cost of revenues (1)
42,479 53,455 58,081 (10,976)(21)%(4,626)(8)%
Service, access and product cost of revenues455,558 389,500 297,177 66,058 17 %92,323 31 %
USF cost of revenues21,981 38,134 31,374 (16,153)(42)%6,760 22 %
Total cost of revenues477,539 427,634 328,551 49,905 12 %99,083 30 %
Segment gross margin
Service margin443,413 383,469 287,611 59,944 16 %95,858 33 %
Gross margin ex-USF (Service, access and product margin)437,518 376,246 279,598 61,272 16 %96,648 35 %
Segment gross margin$437,518 $376,246 $279,593 $61,272 16 %$96,653 35 %
Segment gross margin %
Service margin %51.8 %53.3 %54.6 %(1.5)%(1.3)%
Gross margin ex-USF (Service, access and product margin) %49.0 %49.1 %48.5 %(0.1)%0.6 %
Segment gross margin %47.8 %46.8 %46.0 %1.0 %0.8 %
 
(1) Includes customer premise equipment, access, and shipping and handling.
(2) Excludes depreciation and amortization of $47,701, $33,484, and $22,554, respectively.

For the year ended December 31, 2020 compared to the year ended December 31, 2019
The following table describes the increase in Vonage Communications Platform gross margin for the year ended December 31, 2020 as compared to the year ended December 31, 2019:
(in thousands)
Service gross margin increase is primarily due to increased usage of the Company's API services as customers expand their use of video APIs as a result of the ongoing COVID-19 pandemic along with an overall increase in the customer base further attributing to the increase in VCP Adjusted EBITDA$59,944 
Access and product gross margin increased due to lower costs providing access services to VCP customers during the current year1,328 
Increase in segment gross margin$61,272 

Vonage Communications Platform service gross margin percentage decreased to 51.8% for the year December 31, 2020 from 53.3% for the year ended December 31, 2019. The decrease in VCP service gross margin percentage is a result of greater proportion of lower margin services across our VCP segment during the year ended December 31, 2020 as compared to the prior year as usage of APIs has grown. Our gross margin percentage may continue to be impacted by changes in the mix of service offerings provided to our customers across our VCP segment.


37     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Consumer Gross Margin for the Years Ended December 31, 2020, 2019, and 2018
For the years ended December 31,$ Change 2019 to 2020% Change 2019 to 2020$ Change 2018 to 2019% Change 2018 to 2019
(in thousands, except percentages)202020192018
Revenues
Service revenues$292,003 $340,462 $394,389 $(48,459)(14)%$(53,927)(14)%
Access and product revenues (1)
278 264 559 14 %(295)(53)%
Service, access and product revenues292,281 340,726 394,948 (48,445)(14)%(54,222)(14)%
USF revenues40,596 44,740 45,690 (4,144)(9)%(950)(2)%
Total revenues332,877 385,466 440,638 (52,589)(14)%(55,172)(13)%
Cost of revenues
Service cost of revenues (2)
33,550 34,677 47,439 (1,127)(3)%(12,762)(27)%
Access and product cost of revenues (1)
1,838 4,033 5,289 (2,195)(54)%(1,256)(24)%
Service, access and product cost of revenues35,388 38,710 52,728 (3,322)(9)%(14,018)(27)%
USF cost of revenues40,596 44,740 45,716 (4,144)(9)%(976)(2)%
Total cost of revenues75,984 83,450 98,444 (7,466)(9)%(14,994)(15)%
Segment gross margin
Service margin258,453 305,785 346,950 (47,332)(15)%(41,165)(12)%
Gross margin ex-USF (Service, access and product margin)256,893 302,016 342,220 (45,123)(15)%(40,204)(12)%
Segment gross margin$256,893 $302,016 $342,194 $(45,123)(15)%$(40,204)(12)%
Segment gross margin %
Service margin %88.5 %89.8 %88.0 %(1.3)%1.8 %
Gross margin ex-USF (Service, access and product margin) %87.9 %88.6 %86.6 %(0.7)%2.0 %
Segment gross margin %77.2 %78.4 %77.7 %(1.2)%0.7 %
 
(1) Includes customer premise equipment, and shipping and handling.
(2) Excludes depreciation and amortization of $3,707, $4,683, and $5,200, respectively.

For the year ended December 31, 2020 compared to the year ended December 31, 2019
The following table describes the decrease in Consumer gross margin for the year ended December 31, 2020 as compared to the year ended December 31, 2019:
(in thousands)
Service gross margin decreased primarily due to a decrease in subscriber lines of 16% resulting in lower gross margin of $47,430 which has been declining over recent years as the Company has focused on the growth of the Vonage Communications Platform$(47,332)
Access and product gross margin increased 59% primarily due lower equipment costs associated with sales to customers during the current year2,209 
Decrease in segment gross margin$(45,123)

Consumer service gross margin percentage decreased to 88.5% for the year ended December 31, 2020 from 89.8% for the year ended December 31, 2019 due to slightly higher international and domestic termination rates.

38     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Other Operating Expenses
The following table presents our other operating expenses during the years ended December 31, 2020, 2019, and 2018, respectively:
For the years ended December 31,$ Change 2019 to 2020% Change 2019 to 2020$ Change 2018 to 2019% Change 2018 to 2019
(in thousands, except percentages)202020192018
Sales and marketing$342,053 $363,111 $311,433 $(21,058)(6)%$51,678 17 %
Engineering and development81,484 69,460 52,139 12,024 17 %17,321 33 %
General and administrative182,106 152,672 135,324 29,434 19 %17,348 13 %
Depreciation and amortization88,917 86,256 70,980 2,661 %15,276 22 %
Total other operating expenses$694,560 $671,499 $569,876 $23,061 %$101,623 18 %
 
For the year ended December 31, 2020 compared to the year ended December 31, 2019
Total other operating expenses increased by $23,061 during the year ended December 31, 2020 as compared to the year ended December 31, 2019 primarily due to the following:

Sales and marketing expense decreased 6%, primarily due to decreased spending in the current year related to media marketing initiatives, less travel by the Company's sales force, and attending fewer sales conferences this year than in the year due to the COVID-19 pandemic. These were offset by an increase in reserves for expected credit losses for trade receivables during the current year.
Engineering and development expense increased 17%, due to higher employee costs as the Company increased resources as part of its focus on the development of further functionality related to the Vonage Communications Platform in order to support customers through the mid-market and enterprise sector.
General and administrative expense increased 19%, primarily due to the expense related to the employee exit costs associated with restructuring activities along with CEO succession costs, the abandonment of certain of the Company's leased office locations, an increase in professional services related to strategic business reviews undertaken by the Company in the current year, higher personnel costs and stock compensation.


39     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Other Income (Expense)
For the years ended December 31,$ Change 2019 to 2020% Change 2019 to 2020$ Change 2018 to 2019% Change 2018 to 2019
(in thousands, except percentages)202020192018
Interest expense$(32,160)$(32,821)$(15,068)$661 %$(17,753)(118)%
Other income (expense), net314 (50)(318)364 728 %268 84 %
 $(31,846)$(32,871)$(15,386)$1,025 %$(17,485)(114)%
 
For the year ended December 31, 2020 compared to the year ended December 31, 2019

Interest expense. The interest expense decreased 2%, was mainly due to the realization of losses associated with the unwind of the Company's interest rate swaps in June 2020 and an increase in interest expense associated with the Convertible Senior Notes issued in June 2019, offset by lower interest expense due to lower principal balances on our 2018 Credit Facility.

Income Taxes
For the years ended December 31,$ Change 2019 to 2020% Change 2019 to 2020$ Change 2018 to 2019% Change 2018 to 2019
(in thousands, except percentages)202020192018
Income tax (expense) benefit $(4,217)$6,626 $(797)$(10,843)(164)%$7,423 931 %
Effective tax rate(13)%25 %%

For the year ended December 31, 2020 compared to the year ended December 31, 2019     
We recognize income taxes equal to pre-tax income multiplied by our annual effective income tax rate. 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.
During the year ended December 31, 2020, we recognized tax expense of $4,217 related to U.S., state and foreign income tax expense. The Company recorded a permanent adjustment related to a limitation against the deductibility of officer’s compensation stemming from the impact of CEO and CFO succession and related costs during the current year. In addition, there was an increase to the valuation allowance related to the United Kingdom.
During the year ended December 31, 2019, we recognized tax benefit of $6,626 related to U.S., state and foreign income tax expense. The Company recorded a permanent benefit related to the equity based stock compensation and an interested related adjustment in the United Kingdom.

40     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
NON-GAAP METRICS
Adjusted EBITDA is a non-GAAP financial measure and is the primary basis used as the measure of profit or loss for our businesses. Adjusted EBITDA is defined as net income or net loss attributable to Vonage before income tax expense or benefit, interest expense, depreciation and amortization, stock-based expense, amortization of costs to implement cloud computing arrangements, acquisition related transaction and integration costs, organizational transformation costs, restructuring activities, and other non-recurring items. Organizational transformation includes employee related exits including CEO succession, system change management, facility exit costs, and rebranding. Restructuring activities relate to the Company's business-wide optimization and alignment project initiated in 2020 which included employee related exits and further facility exit costs executed upon as part of the overall project. Other non-recurring items principally include certain litigation charges and other non-recurring project costs such as the review of the Consumer business and the business optimization project, both of which were initiated in 2020. This is also consistent with the measure used under our bank credit assessment. Our management and our Board of Directors utilize Adjusted EBITDA to evaluate our consolidated operating performance and the performance of our operating segments and to allocate resources and capital to our segments. It is also a significant performance measure in our annual incentive compensation programs. We believe that Adjusted EBITDA is useful to our investors as a basis for comparing our operating performance with that of other companies in our industries, although our measure of Adjusted EBITDA may not be directly comparable to that of other companies.
Our reconciliation of the aggregate amount of Adjusted EBITDA to consolidated income before taxes is presented below:

Years Ended December 31,
202020192018
Net (Loss) Income$(36,212)$(19,482)$35,728 
Income tax4,217 (6,626)797 
Interest expense32,160 32,821 15,068 
Depreciation and amortization88,917 86,256 70,980 
Amortization of costs to implement cloud computing arrangements2,885 1,362 — 
Share-based expense45,667 45,242 33,020 
Acquisition related transactions and integration costs— 701 14,645 
Acquisition related consideration accounted for as compensation— — 1,425 
Organizational transformation5,119 14,533 4,331 
Restructuring activities18,913 — — 
Other non-recurring items8,518 3,289 1,742 
Adjusted EBITDA$170,184 $158,096 $177,736 


41     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
LIQUIDITY AND CAPITAL RESOURCES

Overview

For the year ended December 31, 2020, we had lower net cash from operations compared to the years ended December 31, 2019 and 2018 primarily due to lower net income. We expect to continue to balance efforts to grow our revenue while consistently achieving operating profitability. To grow our revenue, we continue to make investments in growth initiatives, marketing, application development, network quality and expansion, and customer care. We believe that cash flow from operations and cash on hand will fund our operations for at least the next twelve months.
The following table sets forth a summary of our cash flows for the periods indicated: 
  For the years ended December 31,$ Change 2019 to 2020$ Change 2018 to 2019
(dollars in thousands)202020192018
Net cash provided by operating activities$83,880 $92,926 $123,205 $(9,046)$(30,279)
Net cash used in investing activities(52,723)(52,079)(407,230)(644)355,151 
Net cash (used in) provided by financing activities(10,850)(21,921)258,212 11,071 (280,133)
Operating Activities
The following table describes the changes in cash provided by operating activities for the year ended December 31, 2020 as compared to the year ended December 31, 2019:
(in thousands)
Increase in operating income adjusted for non-cash items primarily due to increased gross margin driven by growth within VCP during the year$15,469 
Decrease in working capital driven primarily by prepayments for annual licenses, CEO succession payments and vendor payments which was slightly offset by improvement in operating cash flows as a result of benefits under the CARES Act and timing of accounts receivable collections(24,515)
Decrease in cash provided by operating activities$(9,046)
Investing Activities
The following table describes the changes in cash used in/provided by investing activities for the year ended December 31, 2020 as compared to the year ended December 31, 2019:
(in thousands)
Increase in payments to acquire and develop software assets (13,352)
Decrease in payments related to capital expenditures9,702 
Decrease in cash paid related to prior year acquisitions of business$3,000 
Decrease in current year payments to acquire new patents
Increase in cash used in investing activities$(644)
42     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Financing Activities
The following table describes the changes in cash used financing activities for the year ended December 31, 2020 as compared to the year ended December 31, 2019:
(in thousands)
Decreased borrowings net of repayments during the current year$(50,500)
Prior year amount represents payment for the capped call transaction in connection with the June 2019 issuance of the Convertible Senior Notes$28,325 
Prior year amount represents payments for share repurchases in connection with the June 2019 issuance of the Convertible Senior Notes10,000 
Prior year amount represents payments for financing costs in connection with the June 2019 issuance of the Convertible Senior Notes10,043 
Increase in proceeds received from exercise of stock options due to fewer exercises in 20208,329 
Decrease in payments associated with taxes on share based compensation due to lower vesting in 20204,874 
Decrease in cash provided by financing activities$11,071 
Sources of Liquidity

    The principal sources of liquidity are derived from available borrowings under our existing financing arrangements, existing cash on hand, and cash flows from operations. As described in Note 8, Long-Term Debt, to the Consolidated Financial Statements, the Company's financing arrangements consist of its Convertible Senior Notes and the 2018 Credit Facility comprised of a $100,000 term note and a $500,000 revolving credit facility. The COVID-19 pandemic has caused disruption in global capital markets. This could result in future financing becoming more difficult or expensive to obtain or the Company may not be able to obtain financing on acceptable terms or at all.

Uses of Liquidity
    The Company's requirements for liquidity and capital resources are generally for the purposes of operating activities, debt service obligations, and capital expenditures. For the year ended December 31, 2020, capital expenditures were primarily for the implementation of software solutions and purchase of network equipment as we continue to expand our network. Our capital expenditures for the year ended December 31, 2020 were $52,723, of which $41,840 was for software acquisition and development. The majority of these expenditures are comprised of investments in information technology and systems infrastructure, including an electronic data warehouse, online customer service, and customer management platforms for the Vonage Communications Platform. For 2021, we believe our capital and software expenditures will be approximately $65 million.
Available Borrowings Under the 2018 Credit Facility
We maintain significant availability under our line of credit to meet our short-term liquidity requirements. As of December 31, 2020, amounts available under the 2018 Credit Facility totaled $284.5 million.

43     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The table below summarizes our contractual obligations at December 31, 2020, and the effect such obligations are expected to have on our liquidity and cash flow in future periods. 
  Payments Due by Period
(dollars in thousands)Total1 year or less2-3
years
4-5
years
After 5
years
 (unaudited)
Contractual Obligations:
Convertible senior notes$345,000 $— $— $345,000 $— 
2018 revolving credit facility212,500 — 212,500 — — 
Interest associated with outstanding debt40,382 13,615 24,033 2,734 — 
Operating lease obligations47,098 13,134 18,046 8,396 7,522 
Purchase obligations59,525 32,539 26,986 — — 
Total contractual obligations704,505 59,288 281,565 356,130 7,522 
Other Commercial Commitments:
Standby letters of credit1,502 1,502 — — — 
Total contractual obligations and other commercial commitments$706,007 $60,790 $281,565 $356,130 $7,522 
Convertible Senior Notes. The company issued $345 million aggregate principal amount of 1.75% convertible senior notes due 2024. As of December 31, 2020, interest associated with the convertible senior note is approximately $6,038 for 2021 through 2023 annually and $2,734 in 2024. See Note 8, Long-Term Debt in the notes to the Consolidated Financial Statements.
2018 Credit Facility. The 2018 Credit Facility was entered in July 2018 consisting of a $100,000 term note and a $500,000 revolving credit facility. As of December 31, 2020, the 2018 revolving credit facility balance was $215,500, matures on July 31, 2023 and interest associated with the outstanding debt is approximately $7,577 in 2021 and in 2022, and $4,380 in 2023, respectively. See Note 8, Long-Term Debt in the notes to the Consolidated Financial Statements.
Operating Lease Obligations. At December 31, 2020, we had future commitments for office spaces leased in Holmdel, New Jersey for our headquarters, various other locations for field sales and administration offices in the United States and other countries, in Tel Aviv, Israel for application development, in London, United Kingdom for our UK offices, and for operating leases for co-location facilities mainly in the United States that accommodate a portion of our network equipment. As part of the Company's business optimization evaluation, the Company decided to close certain office locations worldwide by December 31, 2020 and will lease agile workspaces when needed after the COVID-19 occupancy restrictions are lifted. As of December 31, 2020, operating lease obligations are approximately $13,134 in 2021, $9,645 in 2022, $8,401 in 2023, $4,148 in 2024, $4,248 in 2025, and $7,522 thereafter.
    Purchase obligations. The purchase obligations are primarily commitments to vendors who will provide license patents to us, provide web hosting service, provide electricity to our office, provide cloud-based data warehousing, provide software maintenance service, and provide insurance to us. In certain cases, we may terminate these arrangements early upon payment of specified fees. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented do not provide a reliable indicator of our expected future cash outflows or changes in our expected cash position. As of December 31, 2020, purchase obligations are approximately $32,539 in 2021, $23,441 in 2022, and $3,545 in 2023, respectively. See also Note 15, Commitments and Contingencies to our Consolidated Financial Statements.
44     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses, and the related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. The SEC has defined critical accounting policies as those policies management believes are most important to the portrayal of the Company's financial condition and results of operations and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the following critical accounting policies and estimates addressed below. Our significant accounting policies are summarized in Note 2, Summary of Significant Accounting Policies to our Consolidated Financial Statements. The following describes our critical accounting policies and estimates:
Use of Estimates
    Our consolidated financial statements and notes thereto 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 reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates, including uncertainty in the current economic environment due to the recent outbreak of the novel coronavirus COVID-19.
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.
Revenue Recognition
    The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers which is further described in Note 3, Revenue Recognition to the Consolidated Financial Statements
We measure revenue based upon consideration specified by contracts with our customers. Revenue is recognized when our performance obligation under the contract is satisfied by transferring control over the product or service to the customer. We derive our revenues for our Consumer and Vonage Communications Platform segments primarily from the sale of our communication services and customer equipment as further described below. The majority of the Company's contracts with customers have a single performance obligation for service revenues. We recognize revenue with customers when control transfers, which occurs upon delivery of a service or product. For our VCP segment, the typical life of a service customer is seven years.
Service Revenues
Substantially all of our revenues are service revenues, which are derived from monthly subscription fees under usage based or pay-per-use type billing arrangements, and contract-based services plans. For consumer customers in the United States, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. For business customers, we offer small and medium business, mid-market, and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years. In addition, we provide managed equipment to business customers for a monthly fee. Customers also have the opportunity to purchase premium features for additional fees. We also derive service revenues from per minute fees for international calls if not covered under a plan, including calls made via applications for mobile devices and other stand-alone products, and for any calling minutes in excess of a customer's monthly plan limits. For a portion of our customers, monthly subscription fees are automatically charged to customers' credit cards, debit cards or ECP in advance and are recognized over the following month as service is provided.
Service revenue also includes supplying messaging (SMS and Voice) services to customers as part of our API offerings. Revenue is recognized in the period when messages are sent by the customer. We also transact with providers or bulk SMS aggregators and sell services to these customers who then onsell to their customers. Since the aggregator is our customer, revenue is recognized on a gross basis with related costs included in cost of revenues.
In the United States, we charge regulatory, compliance, E-911 and intellectual property-related recovery fees on a monthly basis to defray costs and to cover taxes that we are charged by the suppliers of telecommunications services. These charges, along with the remittance to the relevant government entity, are recorded on a gross basis. In addition, we charge customers USF fees from customers to recover our obligation to contribute to the fund, as allowed by the FCC. We recognize USF revenue on a gross basis and record the related fees in cost of revenues.
45     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Customer Equipment and Shipping Revenues
Revenues are generated from sales of customer equipment directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. In addition, customer equipment and shipping revenues include revenues from the sale of VoIP telephones in order to access our small and medium business services. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them.
Valuation of Goodwill and Intangible Assets
As of December 31, 2020, the Company had goodwill of $624,328 consisting of $173,784 associated with APIs through the acquisitions of Nexmo and TokBox and $450,544 associated with the Unified Communications and Contact Center Communications as a result of acquisitions of NVM, iCore, Simple Signal, Telesphere, and Vocalocity. The Company does not have any goodwill allocated to its Consumer segment as of December 31, 2020. In addition, the Company recognized intangible assets measured primarily based upon significant inputs that are not observable in the market and represent Level 3 measurements as defined by ASC 820, Fair Value Measurements.
    The Company applies ASC 805, Business Combinations and ASC 350, Intangibles - Goodwill and Other to account for goodwill and intangible assets. The Company amortizes all finite-lived intangible assets over their respective estimated useful lives while goodwill has an indefinite life and is not amortized. Goodwill and intangible assets not subject to amortization are tested for impairment on an annual basis on October 1st and, when specific circumstances dictate, between annual tests. The Company tests for goodwill at the reporting unit level, which is identified by assessing whether the components of the Company's operating segments constitute businesses for which discrete financial information is available. With respect to the annual goodwill impairment test on October 1st, the Company identified the UC/CC and API reporting units which collectively represent the VCP segment as of that date.
On January 26, 2017, the FASB issued ASC No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. A goodwill impairment loss is measured as the amount by which a reporting unit's carrying amount, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance allows an entity to assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any).
The Company performed a qualitative assessment of macroeconomic, industry and market events and circumstances, and the overall financial performance of its APIs reporting unit and its Unified Communications and Contact Center Communications reporting unit as of October 1st with respect to the annual goodwill impairment test. The Company determined it was not more likely than not that the fair value of the goodwill attributed each of the reporting units was less than its carrying amount and accordingly, no impairment needed to be recognized for the year ended December 31, 2020. There were also no impairments recorded during the years ended December 31, 2019 and 2018, respectively.

We also perform a review of our purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life of the asset is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There was no impairment of purchased-intangible assets identified for the years ended December 31, 2020, 2019, or 2018.
46     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Valuation of Income Taxes
We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred taxes primarily consist of net operating loss carry forwards, or NOLs, intangibles and prepaids. We are required to record a valuation allowance against our net deferred tax assets if we conclude that it is more likely than not that taxable income generated in the future will be insufficient to utilize the future income tax benefit from our net deferred tax assets (namely, the NOLs) prior to expiration. We periodically review this conclusion, which requires significant management judgment. If we are able to conclude in a future period that a future income tax benefit from our net deferred tax assets has a greater than 50% likelihood of being realized, we are required in that period to reduce the related valuation allowance with a corresponding decrease in income tax expense. This would result in a non-cash benefit to our net income in the period of the determination. In subsequent periods, we would expect to recognize income tax expense equal to our pre-tax income multiplied by our effective income tax rate, an expense that was not recognized prior to the reduction of the valuation allowance.
As of December 31, 2020, we had NOLs for United States federal and state tax purposes, including those NOLs acquired as part of past business combinations, of $410,731 and $207,769, respectively, expiring at various times through 2037. In addition, we had Non-US NOLs of $159,152 primarily related to the United Kingdom which has no expiration date.
Under Section 382 of the Internal Revenue Code, if we undergo an “ownership change” which is generally defined as a greater than 50% change by value in our equity ownership over a three-year period, our ability to use our pre-change of control NOLs and other pre-change tax attributes against our post-change income may be limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. At December 31, 2020, there were no limitations on the use of our NOLs except for the NOLs of Vocalocity as of the date of acquisition for which the Company has reflected in the deferred tax asset.
Capitalized Software
    The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage. Capitalization is dependent on whether management with the relevant authority has authorized and committed to funding the project, it is probable the project will be completed, and the software will be used to perform the function intended. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized software is stated at cost less accumulated amortization and amortized on a straight-line basis over their estimated useful lives. During the years ended December 31, 2020, 2019, and 2018 the Company incurred $41,840, 28,488, and 7,714, respectively, related to the acquisition of software assets which was largely comprised of labor directly associated with internal-use projects.
Business Combinations
    We account for acquired businesses treated as a business combination using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related costs are expensed as incurred in the consolidated financial statements.  Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets acquired. Estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions believed to be reasonable, and when appropriate, include assistance from independent third-party appraisal firms.

OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.

47     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
    
We are exposed to financial market risks, including changes in currency exchange rates and interest rates.
Foreign Exchange Risk
We sell our products and services primarily in the United States, Canada, the European Union, and Asia. A portion of our sales denominated in Euros, the Canadian Dollar, and the British Pound Sterling, which are affected by changes in currency exchange rates. Our financial results could be affected by changes in foreign currency exchange rates, although foreign exchange risks have not been material to our financial position or results of operations to date.
We prepared a sensitivity analysis to determine the impact of hypothetical changes foreign currency exchange rates have on our results of operations. The foreign currency rate analysis assumed a uniform movement in currencies by 10% relative to the U.S. Dollar on our results. Based upon the results of this analysis, a 10% change in currency rates would have resulted in an increase or decrease in our earnings for the year ended December 31, 2020 of approximately $8 million.
On January 31, 2020, the United Kingdom officially withdrew from the European Union or , "EU". The 11-month transition period ended on December 31, 2020. As of January 1, 2021, the UK is no longer inside the EU's Single Market and Customs Union and is free to implement trade deals struck with third countries. Uncertainty and currency volatility in the British Pound Sterling exchange rate is expected to continue.
Interest Rate and Debt Risk
Our exposure to market risk for changes in interest rates primarily relates to our long-term debt.
As of December 31, 2020, if the interest rate on our variable rate debt changed by 1% on our 2018 revolving credit facility, our annual debt service payment would change by approximately $2,155.
As of December 31, 2020, we had $345.0 million outstanding on our 1.75% convertible senior notes due 2024. The Notes have 1.75% percent fixed annual interest rates and, therefore, our economic interest rate exposure on our convertible senior notes is fixed. However, the values of the convertible senior notes are exposed to interest rate risk. Generally, the fair market value of our fixed interest rate convertible senior notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair values of the convertible senior notes are affected by our stock price. The fair value of the convertible senior notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines in value. Additionally, we carry the convertible senior notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only.

ITEM 8. Financial Statements and Supplementary Data
The financial statements and schedules required by this Item are listed in Part IV, Item 15 in this Annual Report on Form 10-K.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
48     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
ITEM 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, as amended, as of the end of the period covered by this Annual Report on Form 10-K. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
We have implemented significant phases of reporting and transaction system upgrades and are in initial stages of consolidating and upgrading additional transaction systems. Controls over installed and upgraded applications have not changed significantly but may in planned future phases of system and application implementations. We are continually monitoring and assessing the COVID-19 situation in order to assess the impact on the design, implementation, and operating effectiveness of our internal controls. There were no other changes to controls during the quarter ended December 31, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. 

Inherent Limitations over Internal Controls

The Company's controls and other procedures are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.




49     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
Management’s Report on Internal Control Over Financial Reporting
February 19, 2021
To the Stockholders of Vonage Holdings Corp.:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2020, our internal control over financial reporting was effective.
Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting. This report appears on page F-4.
/s/    Rory Read/s/ Tim Shaughnessy
Rory Read
Chief Executive Office
Tim Shaughnessy
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
/s/ Stephen Lasher
Stephen Lasher
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
Report of the Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
See Report of Independent Registered Public Accounting Firm on page 56.


ITEM 9B. Other Information
None.
50     VONAGE ANNUAL REPORT 2020



Table of Contents    
                
PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

 The discussion under the headings “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Director Nomination Process”, “Corporate Governance – Board Committees – Audit Committee”, and “Executive Officers of Vonage” in our Proxy Statement for the 2021 Annual Meeting of Stockholders is hereby incorporated by reference.
We have adopted a Vonage Code of Conduct applicable to all of our directors, officers, and employees and a Vonage Finance Code of Ethics applicable to our chief financial officer and other employees in our finance organization. The Vonage Code of Conduct and Vonage Finance Code of Ethics are posted in the Investor Relations section of our website, www.vonage.com. We will provide you with print copies of our codes free of charge on written request to Vonage Investor Relations, 23 Main Street, Holmdel NJ, 07733. We intend to disclose any amendments to, or waivers from, provisions of our codes that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, or any person performing in similar functions, on our website promptly following the date of such amendment or waiver. 

ITEM 11. Executive Compensation  

The discussion under the headings “Compensation”, “Director Compensation”, “Corporate Governance – Compensation Committee Interlocks and Insider Participation”, and “Corporate Governance – Compensation Committee Report” in our Proxy Statement for the 2021 Annual Meeting of Stockholders is hereby incorporated by reference.

The “Compensation Committee Report” contained in our Proxy Statement shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, or the Securities Act, or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act.  

ITEM 12. Delinquent Section 16(a) Reports

The discussion under the headings “Stock Ownership Information” and “Equity Compensation Plan Information” in our Proxy Statement for the 2021 Annual Meeting of Stockholders is hereby incorporated by reference.