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Dynamic quotes 
OFFON

VONAGE HOLDINGS CORP.

(VG)
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VONAGE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/06/2021 | 04:34pm EDT
You should read the following discussion together with our condensed
consolidated financial statements and the related notes included elsewhere in
this Form 10-Q and our audited financial statements included in our Annual
Report on Form 10-K. This discussion contains forward-looking statements. These
forward-looking statements are based on information available at the time the
statements are made and/or management's belief as of that time with respect to
future events and involve risks and uncertainties that could cause actual
results and outcomes to be materially different. Important factors that could
cause such differences include but are not limited to: realizing the benefits of
optimization and cost-saving initiatives; the impact of the COVID-19 pandemic;
the competition we face; the expansion of competition in the cloud
communications market; risks related to the acquisition or integration of
businesses we have acquired; our ability to adapt to rapid changes in the cloud
communications market; the nascent state of the cloud communications for
business market; our ability to retain customers and attract new customers
cost-effectively; the risk associated with developing and maintaining effective
internal sales teams and effective distribution channels; security breaches and
other compromises of information security; risks associated with sales of our
services to medium-sized and enterprise customers; our reliance on third-party
hardware and software; our dependence on third-party facilities, equipment,
systems and services; system disruptions or flaws in our technology and systems;
our ability to comply with data privacy and related regulatory matters; our
ability to scale our business and grow efficiently; our dependence on third
party vendors; the impact of fluctuations in economic conditions, particularly
on our small and medium business customers; our ability to obtain or maintain
relevant intellectual property licenses or to protect our trademarks and
internally developed software; restrictions in our debt agreements that may
limit our operating flexibility; our ability to obtain additional financing if
required; our ability to raise funds necessary to settle conversion of the 2024
convertible senior notes; conditional conversion features of the convertible
senior notes; the cash settlement of the convertible senior notes; the effects
of the capped call transactions in connection with the convertible senior notes;
fraudulent use of our name or services; intellectual property and other
litigation that have been and may be brought against us; reliance on third
parties for our 911 services; uncertainties relating to regulation of business
services; risks associated with legislative, regulatory or judicial actions
regarding our business products; risks associated with operating abroad; risks
associated with the taxation of our business; governmental regulation and taxes
in our international operations; liability under anti-corruption laws or from
governmental export controls or economic sanctions; our dependence on our
customers' unimpeded access to broadband connections; foreign currency exchange
risk; 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; certain provisions of our
charter documents; and other factors that are set forth under "Risk Factors" in
Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31,
2020. While we may elect to update forward-looking statements at some point in
the future, we specifically disclaim any obligation to do so, and therefore, you
should not rely on these forward-looking statements as representing our views as
of any date subsequent to the date this Form 10-Q is filed with the Securities
and Exchange Commission.
Financial Information Presentation
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. For the
financial information discussed in this Quarterly Report on Form 10-Q, other
than per share and per line amounts, dollar amounts are presented in thousands,
except where noted. All trademarks are the property of their owners.
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.
                                       24

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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.
Consumer
For our Consumer customers, we enable users to access and utilize our services
and features, via their existing internet connections, including over 3G/4G,
LTE, Cable, or DSL broadband networks. This technology enables us to offer our
Consumer customers attractively priced voice and messaging services and other
features around the world on a variety of devices. Our Consumer strategy is
focused on the continued penetration of our core North American markets, which
provide value in international long distance and target under-served segments.
Services Outside of the United States
We have operations in the United States, United Kingdom, Canada, Israel, Hong
Kong, and Singapore, and provide a wide range of communications solutions to our
customers located in many countries around the world.
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 reduced to
protect the health of our employees and to comply with local guidelines, and we
have also modified the usage of Vonage offices worldwide to comply with social
distancing (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.
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.
Regulation. Our business has developed in a relatively lightly regulated
environment. See the discussion under "Regulation" in Note 9 to our condensed
consolidated financial statements for a discussion of regulatory issues that
impact us.
                                       25

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Key Operating Data

The table below includes key operating data that our management uses to measure the growth and operating performance of the Vonage Communications Platform segment:

   Vonage Communications Platform                                   Three Months Ended
                                                                        March 31,
                                                                  2021                2020
  Service revenue per customer                                $    582$ 475
  Vonage Communications Platform service revenue churn             0.5   %            0.8  %


Service Revenue 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 revenue per customer increased from $475 for the three months
ended March 31, 2020 to $582 for the three months ended March 31, 2021 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 Service Revenue Churn. Vonage Communications
Platform service revenue churn is calculated by dividing the service revenue
from customers or customer locations that have been confirmed to be foregone
during a period by the simple average of the total service revenue from all
customers in that period. Service 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
service revenue from all customers during the period is the total service
revenue as defined herein on the first day of the period, plus the total service
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 service revenue churn
differently, and their service revenue churn data may not be directly comparable
to ours. Vonage Communications Platform revenue churn decreased from 0.8% for
the three months ended March 31, 2020 to 0.5% for the three months ended
March 31, 2021.  Our service 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.
The table below includes key operating data that our management uses to measure
the growth and operating performance of the Consumer segment:
      Consumer                                                 Three Months Ended
                                                                   March 31,
                                                             2021             2020
      Average monthly revenues per subscriber line       $   29.05$     27.35
      Subscriber lines (at period end)                     867,243        
1,037,794
      Customer churn                                           1.9  %            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 $27.35 for the three months ended March 31, 2020
to $29.05 for the three months ended March 31, 2021 due primarily to the
Company's ability to retain its more tenured customers.
                                       26

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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 1,037,794 as of March 31, 2020 to 867,243 as of March 31, 2021,
reflecting planned actions to enhance the profitability of the assisted sales
channel by eliminating lower performing locations and restructuring the pricing
offers, and to shift investment to our business market.
Customer Churn. Customer churn is calculated by dividing the number of customers
that have terminated during a period by the simple average of number of
customers in a given period. The simple average number of customers during the
period is the number of customers on the first day of the period, plus the
number of customers on the last day of the period, divided by two. Terminations,
as used in the calculation of churn statistics, do not include customers
terminated during the period if termination occurred within the first month
after activation. Other companies may calculate customer churn differently, and
their customer churn data may not be directly comparable to ours. Customer churn
increased to 1.9% for the three months ended March 31, 2021 from 1.8% for the
three months ended March 31, 2020, respectively. 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.

REVENUE

Revenues consist of services revenue and customer equipment and shipping fee
revenue. Substantially all of our revenues are services revenue. For Consumer
customers in the United States, we offer domestic and international rate plans,
including a variety of residential plans and mobile plans. For our VCP
customers, we offer micro, SMB, mid-market, and enterprise customers several
service plans with different pricing structures and contractual requirements
ranging in duration from month-to-month to three years. In addition, we provide
managed equipment to VCP customers for which the customers pay a monthly fee.
Customers also have the opportunity to purchase premium features for additional
fees. In addition, we derive revenue from usage-based fees earned from customers
using our cloud-based software products. These usage-based software products
include our messaging, voice, Verify and chat APIs. Usage-based fees include
number of text messages sent or received using our messaging APIs, minutes of
call duration activity for our voice APIs, and number of converted
authentications for our Verify API. Services revenue is offset by the cost of
certain customer acquisition activities, such as rebates and promotions. In
addition, in certain instances, we charge disconnect fees which are recognized
as revenue at the time the disconnect fees are collected from our customer.
In the United States, we charge regulatory, compliance and intellectual
property, and E-911 recovery fees on a monthly basis to defray costs, and to
cover taxes that we are charged by the suppliers of telecommunications services.
In addition, we recognize revenue on a gross basis for contributions to the USF
and related fees. All other taxes are recorded on a net basis.
Revenues are generated from sales of customer equipment directly to customers
for replacement devices, or for upgrading their device at the time of customer
sign-up for which we charge an additional fee. In addition, customer equipment
and shipping revenues include revenues from the sale of VoIP telephones in order
to access our small and medium business services. Customer equipment and
shipping revenues also include the fees that customers are charged for shipping
their customer equipment to them.

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

                                       27

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Results of Operations The following table sets forth our condensed consolidated statements of operations for the periods indicated:

                                                                       Three Months Ended
                                                                           March 31,
                                                                      2021           2020

Total revenues                                                     $ 332,900$ 297,457

Operating Expenses:
Cost of revenues (exclusive of depreciation and amortization)        156,787        127,418
Sales and marketing                                                   81,474         85,621
Engineering and development                                           20,360         19,203
General and administrative                                            44,933         40,882
Depreciation and amortization                                         20,417         20,485
Total operating expenses                                             323,971        293,609
Income from operations                                                 8,929          3,848
Other Income (Expense):
Interest expense                                                      (7,298)        (8,082)
Other income (expense), net                                              174            229
Total other income (expense), net                                     (7,124)        (7,853)
Income (Loss) before income tax benefit                                1,805         (4,005)
Income tax (expense) benefit                                          (2,181)           250
Net loss                                                           $    (376)$  (3,755)



Management's Discussion of the Results of Operations for the Three Months Ended
March 31, 2021 and 2020
The Company reported income before income taxes of $1,805 for the three months
ended March 31, 2021 and loss from income taxes of $4,005 for the three months
ended March 31, 2020, respectively. The income before income taxes for the three
months ended March 31, 2021 was primarily due to higher gross margin of $6,074
driven by increased sales within the VCP platform primarily associated with API
service offerings. This was slightly offset by higher operating expenses of
$993.
The Company reported net loss of $376 and $3,755 for the three months ended
March 31, 2021 and March 31, 2020, respectively. The decrease in net loss for
the three months ended March 31, 2021 compared to the three months ended
March 31, 2020 was due to the income before income taxes for the three months
ended March 31, 2021 and loss before income taxes for the three months ended
March 31, 2020 as discussed above. While the Company reported an income before
income tax for the three months ended March 31, 2021, the Company recognized a
tax expense of $2,181 as compared to tax benefit of $250 during the prior year
quarter. The tax expense during the three months ended March 31, 2021 was driven
by an increase in permanent items related to limitations on executive
compensation and the inclusion of foreign income in the U.S. due to foreign
disregarded entities.
                                       28

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Segment Adjusted EBITDA
The following graphs illustrate the composition of our Adjusted EBITDA with
respect to each of our reportable segments for the three months ended March 31,
2021 and March 31, 2020.

[[Image Removed: vg-20210331_g1.jpg]]
The Adjusted EBITDA for Vonage Communications Platform has improved from loss of
$21,088 for the three months ended March 31, 2020 to loss of $1,846 for the
three months ended March 31, 2021, respectively. This improvement in Vonage
Communications Platform Adjusted EBITDA is primarily due to an increase in
Vonage Communications Platform gross margin of $17,579 as the Company experience
growth in API services as compared to the prior year. Adjusted EBITDA for Vonage
Communications Platform was also positively impacted in the current quarter 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.
Consolidated Gross Margin for the three months ended March 31, 2021 and
March 31, 2020
We calculate gross margin as total revenues less cost of revenues, 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 consolidated revenues,
cost of revenues and the composition of gross margin for the three months ended
March 31, 2021 and 2020:
(in thousands, except percentages)                                  Three Months Ended
                                                                         March 31,
                                                                                   Dollar       Percent
                                                      2021           2020          Change       Change
Service, access and product revenues               $ 314,793$ 283,077$ 31,716          11  %
USF revenues                                          18,107         14,380         3,727          26  %
Total revenues                                       332,900        297,457        35,443          12  %

Service, access and product cost of revenues 138,680 113,038

        25,642          23  %
USF cost of revenues                                  18,107         14,380         3,727          26  %
Total cost of revenues (1)                           156,787        127,418        29,369          23  %
Gross margin                                       $ 176,113$ 170,039$  6,074           4  %


(1) Excludes depreciation and amortization of $13,647 and $9,609 for the three
months ended March 31, 2021 and 2020, respectively.
Total revenues and cost of revenues were impacted by the following trends and
uncertainties:
                                       29

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Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020
Total revenues increased 12% for the three months ended March 31, 2021 as
compared to the prior year period. The increase was primarily due to the VCP
customer growth driving an increase in revenues of $45,201 as a result of
increased usage on the Company's API Platform in the current year. Due to the
increase in the USF rate, USF revenues increased as well. The increase in total
revenues was partially offset by declining Consumer revenues of $9,758 in
connection with the continued decline of Consumer subscriber lines. The Company
continues to expect that the Consumer portion of the Company's overall business
will become less significant. The Company will focus its resources in an effort
to increase market share in its VCP communications platforms.
Total cost of revenues increased 23% for the three months ended March 31, 2021
as compared to the prior year period driven by increased costs incurred in
servicing our VCP customers of $27,622 due to the increase in customers and
higher volume of API usage. There was also an increase in costs in Consumer of
$1,747 mainly due to the increase in USF costs offset by the decline in
subscriber lines resulting in lower international and long-distance termination
costs.
Vonage Communications Platform Gross Margin for the Three Months Ended March 31,
2021 and 2020
                                                                                    Three Months Ended
                                                                                        March 31,
                                                                                                  Dollar             Percent
(in thousands, except percentages)                            2021               2020             Change              Change

Revenues

Service revenues                                          $ 240,442$ 195,649$ 44,793                   23  %
Access and product revenues(1)                                8,598             10,122            (1,524)                 (15) %

Service, access and product revenues excluding USF 249,040

   205,771            43,269                   21  %
USF revenues                                                  6,414              4,482             1,932                   43  %
Total revenues                                              255,454            210,253            45,201                   21  %

Cost of revenues
Service cost of revenues (2)                                120,017             92,357            27,660                   30  %
Access and product cost of revenues (1)                       9,626             11,596            (1,970)                 (17) %
Service, access and product cost of revenues
excluding USF                                               129,643            103,953            25,690                   25  %
USF cost of revenues                                          6,414              4,482             1,932                   43  %
Total cost of revenues                                      136,057            108,435            27,622                   25  %

Segment gross margin
Service margin                                              120,425            103,292            17,133                   17  %
Gross margin excluding USF (Service, access and
product margin)                                             119,397            101,818            17,579                   17  %
Segment gross margin                                      $ 119,397$ 101,818$ 17,579                   17  %


Segment gross Margin %
Service margin %                                            50.1  %           52.8  %
Gross margin excluding USF (Service, access and
product margin) %                                           47.9  %           49.5  %
Segment gross margin %                                      46.7  %           48.4  %


(1) Includes customer premise equipment, access, and shipping and handling.
(2) Excludes depreciation and amortization of $13,310 and $8,519 for the three
months ended March 31, 2021 and 2020, respectively.
Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020
The following table describes the increase in VCP gross margin for the three
months ended March 31, 2021 as compared to the three months ended March 31,
2020:
                                       30

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(in thousands) Service gross margin increase is primarily due to increased usage of the Company's API services primarily related to SMS services in APAC

$ 17,133 Access and product gross margin increased due to lower costs providing access services to VCP customers during the current quarter

                             446

Increase in segment gross margin                                            

$ 17,579




Vonage Communications Platform service gross margin percentage decreased to
50.1% for the three months ended March 31, 2021 from 52.8% for the three months
ended March 31, 2020. The decrease in business service gross margin percentage
is a result of greater proportion of lower margin services across our VCP
segment during the quarter ended March 31, 2021 as compared to the same period
in the prior quarter as revenues from API services has grown to 50% of VCP
revenues for the three months ended March 31, 2021 from 41% of VCP revenues
during the prior year quarter. 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.
Consumer Gross Margin for the Three Months Ended March 31, 2021 and 2020
                                                                                   Three Months Ended
                                                                                        March 31,
                                                                                                 Dollar             Percent
(in thousands, except percentages)                           2021              2020              Change              Change

Revenues

Service revenues                                          $ 65,697$ 77,243$ (11,546)                 (15) %
Access and product revenues(1)                                  56                63                 (7)                 (11) %

Service, access and product revenues excluding USF 65,753

  77,306            (11,553)                 (15) %
USF revenues                                                11,693             9,898              1,795                   18  %
Total revenues                                              77,446            87,204             (9,758)                 (11) %

Cost of revenues
Service cost of revenues (2)                                 8,513             8,512                  1                    -  %
Access and product cost of revenues (1)                        524               573                (49)                  (9) %
Service, access and product cost of revenues
excluding USF                                                9,037             9,085                (48)                  (1) %
USF cost of revenues                                        11,693             9,898              1,795                   18  %
Total cost of revenues                                      20,730            18,983              1,747                    9  %

Segment gross margin
Service margin                                              57,184            68,731            (11,547)                 (17) %
Gross margin excluding USF (Service, access and
product margin)                                             56,716            68,221            (11,505)                 (17) %
Segment gross margin                                      $ 56,716$ 68,221$ (11,505)                 (17) %


Segment gross Margin %
Service margin %                                        87.0  %           89.0  %
Gross margin excluding USF (Service, access and
product margin) %                                       86.3  %           88.2  %
Segment gross margin %                                  73.2  %           78.2  %

(1) Includes customer premise equipment and shipping and handling. (2) Excludes depreciation and amortization of $337 and $1,090 for the three months ended March 31, 2021 and 2020, respectively.

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Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020 The following table describes the decrease in consumer gross margin for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020:

                                                                                (in thousands)
Service gross margin decreased primarily due to a decrease in subscriber lines
of 16% resulting in lower gross margin of $11,455 which has been declining over
recent years as the Company has focused on the growth of the Vonage
Communications Platform                                                         $       (11,547)
Access and product gross margin increased 8% primarily due to lower equipment
costs associated with sales to customers during the current quarter                          42

Decrease in segment gross margin                                            

$ (11,505)




Consumer service gross margin percentage decreased to 87.0% for the three months
ended March 31, 2021 from 89.0% for the three months ended March 31, 2020 due to
slightly higher international and domestic termination rates.
Other Operating Expenses

The following table presents our other operating costs during the three months ended March 31, 2021 and 2020, respectively:

                                                           Three Months Ended
                                                                March 31,
                                                                          Dollar       Percent
(in thousands, except percentages)           2021           2020          Change       Change
Sales and marketing                       $  81,474$  85,621$ (4,147)         (5) %
Engineering and development                  20,360         19,203         1,157           6  %
General and administrative                   44,933         40,882         4,051          10  %
Depreciation and amortization                20,417         20,485           (68)          -  %
Total other operating expenses            $ 167,184$ 166,191$    993           1  %



Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020
Total other operating expenses increased by $993 as compared to the three months
ended March 31, 2020 due to the following:
•Sales and marketing expense decreased by $4,147, primarily due to the
realization of cost savings related to initiatives executed during the second
half of the prior year along with lower travel related costs in the current year
as travel continues to be limited due to the ongoing pandemic.
•Engineering and development expense increased by $1,157, in connection with the
Company's increased employee related costs as there is continued focus on
innovation and developing further functionality related to its proprietary
platform in order to support customers through the mid-market and enterprise
sector.
•General and administrative expense increased by $4,051, primarily due to the
expense with restructuring activities, an increase in stock compensation expense
to employees and a $2 million donation to the Company's foundation in the
current year. This was slightly offset by decreased employee costs as the
Company has begun to realize cost savings associated with the initiatives
executed upon in the prior year.
                                       32

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Other Income (Expense)


(in thousands, except percentages)                       Three Months Ended
                                                              March 31,
                                                                       Dollar      Percent
                                             2021          2020        Change      Change
Interest expense                          $ (7,298)$ (8,082)$  784          10  %
Other income (expense), net                    174           229         (55)        (24) %
                                          $ (7,124)$ (7,853)$  729



Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020
Interest expense. The decrease in interest expense of $784, or 10%, was mainly
due to lower interest expense due to lower principal balances on our 2018 Credit
Facility.
Income Taxes
       (in thousands, except percentages)                     Three Months
Ended
                                                                  March 31,
                                                                           Dollar       Percent
                                                 2021          2020        Change       Change
       Income tax (expense) benefit           $ (2,181)$ 250       $
(2,431)        972  %
       Effective tax rate                         (121) %       (6) %



Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020
The tax expense recorded for the three months ended March 31, 2021 compared to
the tax benefit for the three months ended March 31, 2020 is primarily due to an
increase in permanent items related to limitations on executive compensation,
the inclusion of foreign income in the U.S. due to foreign disregarded entities,
and limitation on foreign losses as compared to the three months ended March 31,
2020. For the three months ended March 31, 2021, the actual discrete was
determined to be the appropriate method for calculating the interim tax
provision as using the estimated annual effective tax rate method would have
produced an unreliable rate stemming from a marginal loss and large permanent
adjustments.
                                       33

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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 including defense costs and
other non-recurring project costs such as the review of the Consumer business
review 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:

                                                                             Three Months Ended
                                                                                  March 31,
                                                                           2021               2020
Net loss                                                               $     (376)$ (3,755)
Income tax expense (benefit)                                                2,181              (250)
Interest expense                                                            7,298             8,082
Depreciation and amortization                                              20,417            20,485
Amortization of costs to implement cloud computing arrangements               896               609
Share-based expense                                                        14,566            11,116

Organizational transformation                                                   -             1,194
Restructuring activities                                                    1,294                 -
Other non-recurring items                                                   1,891             1,356
Adjusted EBITDA                                                        $   48,167$ 38,837





                                       34
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Liquidity and Capital Resources
Overview
For the three months ended March 31, 2021, we had higher net cash from
operations compared to the prior year due to lower operating expenses during the
current year. We expect to continue to balance efforts to grow our revenue with
seeking to consistently achieve operating profitability. To grow our revenue, we
continue to make investments in growth initiatives, marketing, applications
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:

                                                                           Three Months Ended
                                                                               March 31,
                                                                                                   Dollar
(in thousands)                                                 2021               2020             Change
Net cash provided by operating activities                   $ 47,318$   2,503$ 44,815
Net cash used in investing activities                        (16,480)           (13,235)           (3,245)

Net cash (used in) provided by financing activities (21,019)

      32,499           (53,518)
Effect of exchange rate changes on cash and cash
equivalents                                                     (980)            (2,290)            1,310



Operating Activities
The following table describes the changes in cash provided by operating
activities for the three months ended March 31, 2021 as compared to the three
months ended March 31, 2020:
                                                                            

(in thousands) Increase in operating income adjusted for non-cash items primarily due to increased gross margin driven by growth within VCP during the quarter

         $         6,501
Increase in working capital driven primarily by timing of vendor payments,
prepayments for annual licenses and improvement in operating cash flows as a
result of benefits under the CARES Act. This was slightly offset due to the
timing in customer payments for annual subscription services                           38,314
Increase in cash provided by operating activities                           

$ 44,815



Investing Activities
The following table describes the changes in cash used in investing activities
for the three months ended March 31, 2021 as compared to the three months ended
March 31, 2020:
                                                                              (in thousands)
Increase in payments to acquire and develop software assets                            (3,592)
Decrease in payments related to capital expenditures                                      334

Decrease in payments to acquire new patents on our developed technology

                13
Increase in cash used in investing activities                                 $        (3,245)



Financing Activities
The following table describes the changes in cash (used in) provided by
financing activities for the three months ended March 31, 2021 as compared to
the three months ended March 31, 2020:
                                                                              (in thousands)
Decreased borrowings net of repayments during the current year                $       (50,000)
Decrease in payments associated with taxes on share based compensation due to
lower vesting in 2021                                                                  (3,985)

Increase in proceeds received from exercise of stock options due to fewer exercises in 2020

                                                                         467
Decrease in cash (used in) provided by financing activities                   $       (53,518)



                                       35
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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 6, Long-Term Debt, to the Condensed
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.
We maintain significant availability under our lines of credit to meet our
short-term liquidity requirements. As of March 31, 2021, amounts available under
the 2018 Credit Facility totaled $289.5 million.

Uses of Liquidity
The Company's requirements for liquidity and capital resources are generally for
the purposes of operating activities, debt service obligations, restructuring
initiatives, and capital expenditures. For the three months ended March 31,
2021, 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 three months ended March 31, 2021,
were $16,480, of which $13,865 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 full year 2021,
we estimate our capital and software expenditures will be approximately $65
million.
State and Local Sales Taxes
We have contingent liabilities for state and local sales taxes. As of March 31,
2021, we had a reserve of $8,648. If our ultimate liability exceeds this amount,
it could affect our liquidity unfavorably. However, we do not believe it will
significantly impair our liquidity.

Off-Balance Sheet Arrangements
Obligations under Certain Guarantee Contracts
We enter guarantee arrangements in the normal course of business to facilitate
transactions with third parties. These arrangements include financial and
performance guarantees, stand-by letters of credit, debt guarantees and
indemnifications. As of March 31, 2021 and December 31, 2020 we had stand-by
letters of credit of $1,502, respectively.

Contractual Obligations and Commitments
Except as set forth below and in Note 9. Commitments and Contingencies included
in Part 1, Item 1 of this Form 10-Q, there were no significant changes in our
commitments under contractual obligations as disclosed in the Company's Annual
Report on Form 10-K for the year ended December 31, 2020.
Contingencies
From time to time we are subject to legal proceedings, claims and investigations
relating to our business, including claims of alleged infringement of
commercial, employment, intellectual property rights, and other matters. From
time to time, we receive letters or other communications from third parties
inviting us to obtain patent licenses that might be relevant to our business or
alleging that our services infringe upon third-party patents or other
intellectual property. In accordance with generally accepted accounting
principles, we make a provision for a loss when it is both probable that a
liability has been incurred and the amount of the loss or range of loss can be
reasonably estimated. Such legal proceedings are inherently unpredictable and
subject to further uncertainties. Should any of these estimates and assumptions
change it is possible that the resolution of the matters described in Note 9,
Commitments and Contingencies included in Part 1, Item 1 of this Form 10-Q could
have a material adverse effect on our condensed consolidated financial position,
cash flows or results of operations.
                                       36

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Critical Accounting Policies
Our consolidated financial statements and accompanying notes are prepared in
accordance with U.S. GAAP. Our significant accounting policies are described in
Note 2, Summary of Significant Accounting Policies to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2020. The preparation of financial statements and related
disclosures in compliance with GAAP requires management to make estimates and
assumptions that affect the reported amount of assets, liabilities, revenues and
expenses as well as the disclosure of contingent assets and liabilities. The
application of these policies involves judgment regarding future events and
these judgments could materially affect the financial statements and disclosures
based on varying assumptions.
We identify our most critical accounting policies as those that are the most
pervasive and important to the portrayal of our financial position and results
of operations, and those that require the most difficult, subjective or complex
judgments by management regarding estimates. Our critical accounting policies
include revenue recognition, valuation of goodwill and intangible assets, income
taxes and capitalized software. As of March 31, 2021, our goodwill is
attributable to our VCP operating segment. We perform our annual test of
goodwill on October 1st. Additionally, we will assess our goodwill for
impairment between annual tests when specific circumstances dictate.
COVID-19 has created and may continue to create uncertainty in bookings and
customer payments, reduced usage, and issuance of customer credits to distressed
customers served by certain product lines. As of the date of our condensed
consolidated financial statements, we are not aware of any specific event or
circumstance that would require us to update our estimates or judgments.
However, these estimates may change as new events occur and additional
information is obtained, which may result in changes being recognized in our
condensed consolidated financial statements in future periods. In particular and
in light of the COVID-19 pandemic, the assumptions and estimates associated with
collectability assessment of revenue and credit losses of accounts receivable
may have a material impact our consolidated financial statements in future
periods, depending on the duration or degree of the impact of the COVID-19
pandemic on the global economy.

                                       37

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