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Vonage Holdings (NYSE:VG)
Q2 2019 Earnings Call
Aug 06, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Vonage Holdings Corp. second-quarter 2019 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Hunter Blankenbaker, vice president, investor relations.

Please go ahead.

Hunter Blankenbaker -- Vice President, Investor Relations

Great. Thank you, Kate, and good morning, and welcome to our second-quarter 2019 earnings conference call. Speaking on our call this morning is Alan Masarek, chief executive officer; and Dave Pearson, CFO. Also, joining us is Omar Javaid, president of the API platform.

Alan will discuss our strategy and second-quarter results, and Dave will provide a more detailed view on our second-quarter results and third-quarter guidance. Slides that accompany today's discussion are available on the IR website. At the conclusion of our prepared remarks, we'll be happy to take your questions. As referenced on Slide 2, I would like to remind everyone that statements made during this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management's expectations, depend on assumptions that may be incorrect or imprecise, and are subject to risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties is highlighted on the second page of the slides and contained in our SEC filings. We caution listeners are not to rely unduly on these statements and disclaim any intent or obligation to update them. During this call, we will be referring to non-GAAP financial measures.

A reconciliation to GAAP is available in the second-quarter earnings release or the second-quarter earnings slides posted to the IR website. Additionally, during the prepared remarks today, all comparisons to prior periods are on a year-over-year basis unless otherwise noted as sequential. So with that, I'd like to turn the call over to Alan.

Alan Masarek -- Chief Executive Officer

Thank you, Hunter. Good morning. I am pleased to report solid second-quarter results as our One Vonage programmable platform strategy gained momentum with customers. Business revenues reached $200 million and business service revenue growth accelerated to 25% on an adjusted constant-currency basis.

Consolidated revenue was $298 million, adjusted EBITDA was $38 million. During the second quarter, we continued to execute the three strategic initiatives we outlined to start the year. First, within the applications group, driving revenue growth among mid-market and enterprise customers. Second, within the API Platform group, accelerating overall revenue growth, yet with specific emphasis growing higher value APIs even faster.

And third, the continued development and enhancement of the One Vonage platform via integration of you UCaaS and CCaaS along with programmable APIs. Let me dive deeper on each of these three initiatives. Within applications, we continue to focus on product, sales and marketing efforts, targeting mid-market and enterprise customers. There are two key priorities driving our progress.

The first key priority is the One Vonage platform itself. Because we own the entire communication staff across UCaaS, CCaaS and programmable APIs, we provide integrated programmable solutions demanded by mid-market and enterprise customers. Highlighting this point, we sold 31 combined UCaaS and CCaaS deals in the second quarter versus 14 deals in the first quarter. Of these 31 combined deals, 10 were from CX Cloud Express and our new voice-media based contact center solution, launched just this April, that's embedded within Vonage Business Cloud.

Our success selling integrated solutions highlights three essential points: first, mid-market and enterprise customers are buying UCaaS and CCaaS solutions together; second, UCaaS and CCaaS solutions must be seamlessly integrated and increasingly be programmable. And finally, to deliver truly seamless solutions, it is critical to own the full technology stack and thereby control the product roadmap across a commonly architected platform. Our success selling integrated solutions reinforces our One Vonage platform strategy. It highlights the strategic priority businesses are placing on integrating employee and customer-based communications.

One example of an integrated UCaaS and CCaaS sale was the leader in self-publishing solutions for book authors worldwide. Key to building this seven-figure TCB deal was our ability to improve customer and agent experience via tight Salesforce integrations. Now moving on to the second key priority driving our progress among mid-market and enterprise accounts, we continue improving marketing, demand Gen and go-to-market capabilities across each of our routes to market. Within the master agent channel, we continue to see excellent bookings growth and significant increases in deal size.

Also, our channel partners are embracing NewVoiceMedia contact center, as well as CX Cloud Express embedded within Vonage Business Cloud. And as a result, we're seeing strong growth of channel-sourced sales pipeline. A notable tailwind was the leading platform company for home renovation and design, which selected Vonage for its contact-center needs. We won this seven-figure TCB deal due to our deep integration into Salesforce, coupled with our omni channel solution across voice, chat, email, SMS, visual IVR, and performance dashboards.

Within our direct sales teams worldwide, our investments in products, sales, and marketing are taking hold. Our strategic shift targeting mid-market and enterprise is still early, but competitive win rates are improving and sales productivity is increasing. In addition, each route to market is supported by our strategic relationship with Salesforce.com. More specifically, NewVoiceMedia's contact center is embedded within Salesforce Service Cloud, enabling direct access of our contact center functionality from within Salesforce.

As a Salesforce premier partner, our alliances team works closely with Salesforce account executives and ecosystem partners. And because we have embedded the NewVoiceMedia product into Salesforce and focused our go-to-market with Salesforce, our sales pipeline converts at high-win rates. Our mid-market enterprise cohort grew 17% in the second quarter and now represents 53% of application group service MRR. While we clearly have more product, sales and marketing improvements to make, we expect in-year acceleration of the mid-market and enterprise service revenue growth rate.

Now moving to the API platform group. Second-quarter revenue growth accelerated to 49%, reflecting increased market momentum as communication APIs mature beyond SMS into other forms of strategic communication. This quarter, we also added email to strengthen our position as an all-in-one platform for programmable business communications. Our higher value APIs, like voice, video, verify, and chat apps performed very well on the second quarter, with revenues growing even faster than the overall growth rate of 49%.

In particular, messages API is seeing strong traction as brand seek to communicate with customers on their customers-preferred channels using a single API that integrates with SMS, MMS, as well as the popular social chat apps. For example, ByteDance, the AI-powered content platform well known for the TikTok app, selected our messages API for WhatsApp. Their intent is to expand with us across 150 global markets and 75 languages. Our go-to-market investments, including our partner program and developer relations, are driving good results.

In the quarter, we grew our API partner program to 280 partners and increased registered developers to 845,000. Now moving onto product and engineering. We believe ownership of the One Vonage platform provides competitive advantage. By building functionality at the platform level as programmable APIs, we innovate faster, leverage engineering spend more efficiently, and future-proof customers' communications needs.

We sell API-based functionality two ways: first, we sell functionality to developers as programmable APIs; and second, we sell the same functionality embedded within our applications. Said differently, we build once, sell twice. During the quarter, we introduced new Vonage Business Cloud enterprise features, built from the One Vonage platform, including additional SaaS integrations and enhanced reliability and scalability. Later this year, we expect to release Vonage Meetings, our video meeting solution built from TokBox's programmable video technology.

Vonage Meetings will be fully integrated into Vonage Flow, our proprietary team messaging solution released last year, as well as with CX Cloud Express, our embedded contact-center solution. Finally, we know AI, artificial intelligence-based services, will play an increasingly important role in business communications as enterprises focus on their digital transformations. As such, our Tel Aviv, Israel-based engineering team has been focused on AI initiatives aimed in helping businesses deliver great customer experiences, delivered both as programmable APIs, as well as embedded into our core applications. In that context, this morning, we announced the purchase of the assets of Over.ai, a Tel Aviv-based provider of a conversational AI.

We are acquiring Over.ai's entire 23% technical team, as well as the AI intellectual property. We will deploy their engineers and technology to power conversational AI across the One Vonage platform. We welcome Over.ai's team into our existing engineering center in Tel Aviv. To summarize, I am pleased with our team's performance and confident about our strategic potential.

With our One Vonage technology platform across UCaaS, CCaaS and programmable APIs, we are uniquely positioned to deliver differentiated communication solutions, and in doing so, to capitalize on a vast opportunity in cloud communications. And finally, I'm delighted to announce Vonage Campus, our inaugural worldwide user partner and developer conference to be held October 29th and 30th in San Francisco. We look forward to seeing many of you there. I'll now turn the call over to Dave to give more detail on our second-quarter financial performance.

Thank you.

Dave Pearson -- Chief Financial Officer

Thanks, Alan, and good morning, everyone. We had a solid second quarter, featuring strong growth in Vonage Business, results above our guidance, and continued upmarket momentum. Let's begin with the review of the quarter on Slide 8. Vonage Business total revenue was $200 million, representing 67% of total revenues and a 35% GAAP increase.

Business service revenue growth is our focus as we deemphasize access circuits, sell fewer desk phones, and pass through USF revenues to the federal government. Business service revenue increased 23% on an adjusted basis in the second quarter. On an adjusted constant currency basis, the service revenue growth rate was 25%. As with the prior quarter, this revenue growth rate is adjusted in two ways.

The pro formas for the acquisitions of TokBox and NewVoiceMedia as if we owned both assets for the full year 2018 and it adds back the writedown of approximately $2 million of NewVoiceMedia's deferred revenue balance under GAAP purchase accounting rules. We have included tables on Slides 20 through 23 of today's presentation and in the press release that provide additional detail on the adjustments I just noted and the disaggregation of our business revenue by product category. Revenue from applications was $122 million for the quarter, of which $102 million was service. Application service revenue was up 35% on a GAAP basis and 11% adjusted.

API Platform revenue, all of which is service, was $78 million, up 49% GAAP, 42% adjusted and 49% adjusted constant currency. Business service margin for the second quarter was 52%, down 60 basis points versus the year-ago quarter as projected. We saw margin improvement across many of our products, offset by product mix with a faster growth of lower margin products. Moving to Slide 9.

Second-quarter business service revenue per customer was $440, a 26% increase from $348 a year ago, reflecting our successful move upmarket and the acquisitions of NewVoiceMedia and TokBox, both of which further improved our upmarket position. Business revenue churn declined to 1% from 1.2%, sequentially, and in the prior-year quarter, again the result of the move upmarket. Moving to Slide 10. Consumer revenue for the second quarter was $98 million, down 13%.

This was slightly better than our expectations partially due to sequentially lower and flat year-over-year churn of 1.7%. Our average revenue per line increased $0.52 from the prior year to $26.89 due to selective pricing actions and maturity of the base. We ended the quarter with 1.2 million consumer subscriber lines. Tenured customers, we define as being with us for two or more years, now represent 89% of our consumer customer base.

Consumer service margin for the quarter was 90%, up from 88% due to lower termination rates and the increased allocation of certain shared network costs to the business segment as that revenue becomes a greater proportion of the whole. Turning to Slide 11. Consolidated revenues for the second quarter were $298 million, up $38 million or 15% on a GAAP basis and 7% adjusted. Importantly, as our business segment is now significantly larger than consumer and continues to grow to much higher rate than consumer's declining, we continue to expect to exit the year with double-digit consolidated organic growth.

Slide 12. Consolidated gross margins were down slightly at 57%, reflecting the changing mix of business versus consumer revenues and the deferred revenue writedown. Now moving to income statement cost items on Slide 13. Consolidated sales and marketing expense for the second quarter was $95 million, up $18 million.

This is primarily the result of the additions of TokBox and NewVoiceMedia followed by small increases in organic media, developer relations and international marketing spend. Engineering and developing costs were $17 million, up $7 million, reflecting primarily the acquisitions followed by continued investments in the One Vonage platform. General and administrative expense for the second quarter was $37 million, up $5 million. More than 100% or $6 million of this increase is attributable to the acquisitions and related transformation and integration costs.

GAAP net income was $5 million, down $4 million and adjusted net income for the quarter was $20 million or $0.08 per diluted share, up $3 million. This increase was due to an update to our expected 2019 tax benefit. Note that the adjusted net income metric removes noncash items and transaction-related costs. Turning ahead to Slide 14.

Second-quarter adjusted OIBDA was $38 million, down $7 million year over year and up $6 million, sequentially. The decline was due to the acquisition-related factors I discussed earlier, including the deferred revenue writedown, which directly reduced OIBDA by $2 million in the quarter. Moving to Slide 15. Capex for the quarter was $12 million, up $6 million due to higher capitalized software, driving adjusted OIBDA minus capex of $26 million.

On Slide 16, during the second quarter, we optimized our capital structure through the issuance of a convertible debt security and corresponding capped call overlay. This $345 million capital raise lowered and fixed interest expense and extended maturities on a portion of our debt and extended access to capital. We used the net proceeds from this transaction, which also included a $10 million share buyback to pay down existing bank debt. Result is, we retired almost 1 million shares and achieved an effective conversion price of $23.46.

On Slide 17, we ended the quarter with $575 million of net debt, up $34 million, sequentially. The increase is entirely due to the convertible issuance costs, absent which, debt would have been reduced. As of June 30th, we were 3.6 times net levered and have over $250 million of unused revolver capacity. On Slide 18, as Alan mentioned, the Over.ai assets bringing talented group of artificial intelligence engineers an important IP to Vonage.

This transaction, which is expected to close this week, does not significantly impact debt as we are paying $6 million for these assets, half in cash, half in stock. We believe that this consideration represents an attractive value for a very talented group of AI-centric developers, an important intellectual properties. Moving on to guidance on Slide 19, our expectations for the third quarter are follows: Vonage business revenue of between $206 million and $208 million; consumer revenue of between $96 million and $97 million; and adjusted OIBDA of between $44 million and $46 million. The suggested OIBDA range takes into account the loss of roughly $1 million of revenue in OIBDA from the required NewVoiceMedia, deferred revenue writedown, operating expenses related to 23 Over.ai engineers joining Vonage this week and some currency headwind.

In conclusion, we feel very good about our financial performance for the second quarter and are now in an even better position to deliver on our strategic and financial objectives for the year. We'll now turn the call over to Hunter to initiate the Q&A.

Hunter Blankenbaker -- Vice President, Investor Relations

OK. Good. Thanks, Dave. And, Kate, can you please launch the first question?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Rich Valera of Needham. Please go ahead.

Rich Valera -- Needham and Company -- Analyst

Thank you. Good morning, gentlemen. Real strong performance on the API business in the quarter. Wondering if you can give us a sense of your expectations for the growth rate of that business into the second half.

Do we think it can be sustained at these growth rates? And a little more granularity on what you think is driving that acceleration would be great. Thanks.

Dave Pearson -- Chief Financial Officer

Thanks, Rich. So we talked about the fact that business is somewhat seasonal. So the general backdrop is that the business is growing very quickly and we feel very good about it continuing to perform well into the 40s on a year-over-year basis. It is a seasonal business, however.

So baked into our 3Q guidance is a slightly lower sequential increase than what we saw from the first quarter to the second quarter. But when you look at that year over year, because the seasonality was the same in the third quarter of last year, you are looking at a rate that's relatively similar to what we saw, which is well into the mid-40s.

Rich Valera -- Needham and Company -- Analyst

Got it. And then just on the applications growth, 11%, it seemingly implies a still pretty underwhelming growth rate in the kind of UC business. Can you give us any more color on what's going on under the covers in the UC business? And what gives you the confidence that maybe that picks up in the back half from a year-over-year growth rate?

Alan Masarek -- Chief Executive Officer

Hi, Rich, it's Alan. So when we think about applications in total, first, it's doing precisely what we thought it would do where it's going to be flattish to down Q2s and 3 -- Q2 and 3 relative to Q1 and then begin increasing at the end of the year into Q4. What you find is just this continued shift from the downmarket business where we started from, where we have moved our marketing effort away from that, and as a result that growth rate is much less, is simply pulling down what is a much better growth upmarket. Even within upmarket, we think the growth will continue to improve.

In the current quarter, you actually see things like on the CCaaS side, on the NewVoiceMedia side, if you note on the balance sheet, the deferred revenue grew quite a bit. That is effectively all related to NewVoiceMedia. And so it just speaks to the timing of when business is booked versus installed when we actually recognized the revenue.

Rich Valera -- Needham and Company -- Analyst

Got it. That's helpful. Thank you, gentlemen.

Operator

The next question is from John DiFucci of Jefferies. Please go ahead.

John DiFucci -- Jefferies -- Analyst

Thanks. I have just a follow-up to that question because when I look at your GAAP revenue for the application side, Alan, it accelerated but the non-GAAP when you make those adjustments, it actually decelerated a little bit. And the non-GAAP adjustments are really due to the NewVoiceMedia. So I would assume that most of -- and it only decelerated, it's a little bit but -- and it's still growing at a nice rate.

I would assume that, that's mostly due to the CCaaS business. And that UCaaS may have actually accelerated by itself. And if that's -- well, first of all, is that true? And second of all, if it is, what's happening there? Is it just -- is there something specific to Vonage? Or are you -- or is it more that you're benefiting from sort of this whole business moving to the cloud to sort of the market? And then I have a follow-up. Thanks.

Alan Masarek -- Chief Executive Officer

Let me have Dave take that to start with.

Dave Pearson -- Chief Financial Officer

Sure. We didn't see anything unusual or unexpected in the quarter nor a change in the dynamic between UC and CC. What I will say is that the CC business is chunkier than the UC business because you tend to have much larger ARR, MRR sales and they take time to install. So for in instance, we had a huge booking in the quarter, in the first half of the year in CCaaS, which we talked about last quarter's call.

That's going to take a year to ramp. It started ramping, but it's going to take a year to get to full power. So you do see some chunkiness there, which could fit into what you were saying. But overall, we did not see a change in the dynamic.

Alan Masarek -- Chief Executive Officer

And I think relative to sort of the broader question, this industry, we are seeing specific inflection moving as large and large companies are moving to cloud, that is undeniable. And we are benefiting by that curve. We just are, in a sense, weighed down by the fact that we remain over indexed to the micro segment, which is growing far slower and is no longer our area of focus. What we talked about is that now from a proportionality perspective, 53% is upmarket across all applications.

It's up slightly from 52% last quarter. But again, I like to characterize this every day is a good day as you get more and more of your revenue upmarket. And in upmarket, your churn comes down, your ability to upsell those customers improve. It's just a far better place to play.

John DiFucci -- Jefferies -- Analyst

I like that too, Alan. Every day is a good day. But my follow-up question, it has to do with guidance. So you guys beat guidance for this quarter.

You guided the third quarter above where the street was, anyway, but you left the annual guidance unchanged. And I'm just curious, just -- I don't know just some commentary around that. Is this simply prudent given what appears to be jitters around the macro environment? You guys saw what happened to the market yesterday. Or are you seeing something in your specific business that gives you pause regarding the fourth quarter?

Dave Pearson -- Chief Financial Officer

There is no pause. It's really our convention is to give annual guidance at the start of the year and then update that guidance only if we're going to be outside the range we gave or there is an extraordinary event, like an acquisition, that would push us out of the range or fundamentally change the guidance and then to give quarterly guidance forward each quarter. So we're sticking with that convention because we didn't see anything extraordinary. We did do a small acquisition and that will effect EBITDA a bit, but will still be in the range.

When you unpack that a little bit in terms of what we're seeing, based on the first three quarters, including the midpoint of what we just gave, we are running a bit ahead of the midpoint of the guidance that we gave in revenue. And that's -- and so the midpoint with 805, we're running $2 million to $3 million ahead of that, after absorbing what looks like a 4 million-dollar currency headwind in the year, if the currency -- if the dollar-euro stays where it is today. So that's a GAAP number that would have been $4 million higher based on the currency adjustment, but still in the range. And then as it relates to EBITDA, the guidance range there was $160 million to $165 million.

We're still in that range. When you take into account the Over.ai acquisition, where we have 23 people joining on one day, as well as currency, which is also a drag on that because we have some significant costs that are over there. That puts us at the low end of that range. But in both cases, in revenue and EBITDA, we're still in the ranges that we gave.

So didn't see the need to change it. I thought we would give that color.

John DiFucci -- Jefferies -- Analyst

Great. Thank you very much, guys. And nice job.

Alan Masarek -- Chief Executive Officer

Thanks, John.

Operator

The next question is from Nandan Amladi of Guggenheim Partners. Please go ahead.

Nandan Amladi -- Guggenheim Partners -- Analyst

Hi, good morning. Thanks for taking my question. We're talking a little bit at enterprise-connect about your channel development efforts. Can you give us an update on how things are going there? And how you're able to differentiate your offering relative to the other two major vendors in this space?

Alan Masarek -- Chief Executive Officer

Hi, good morning, it's Alan. We continue to make very, very good progress throughout the master agent channel. As you know, I've discussed, going back now, six or seven quarters, we have new leadership, and then we have focused on our partner programs, our partner portal, as well as creating products that targets the channel more than certain others. And so -- and to be specific about it, CX Cloud Express, which is NewVoiceMedia -- or think of it as NewVoiceMedia light, which is embedded inside Vonage's Business Cloud, is really targeting the channel because it targets the mid-market, which is their sweet spot.

And as I've talked about, we announced or released CX Cloud Express only at the beginning of the quarter. And in the quarter, we did 10 deals on CX Cloud Express. We also did 21 NewVoiceMedia contact center deals, and now the channel is embracing that, as well. So it's a function of a go-to-market focus and a tools focus in terms of the channel portal and programs, as well as a product focus.

All those items seem to be taking hold, and we continue to see good strength -- excellent strength, as well as larger deal sizes.

Nandan Amladi -- Guggenheim Partners -- Analyst

Thank you.

Operator

The next question is from George Sutton of Craig-Hallum. Please go ahead.

George Sutton -- Craig-Hallum Capital Group -- Analyst

Hey, Alan, you talked about a lot of your deals that combine UCaaS and CCaaS, but you also mentioned that customers were increasingly looking for programmability. That limits the number of competitors that can really do that. Can you discuss what you were referring to there? And maybe some tangible examples?

Alan Masarek -- Chief Executive Officer

Let me start, and I'll turn it over to Omar, who can describe it. Our focus is -- when we talk about the One Vonage programmable strategy, the focus is that you're only going to win over the long haul, but first with integrated solutions. And so you -- I cited those several examples where you're seeing UCaaS and CCaaS increasingly being bought together, particularly within the mid-market enterprise. On top of that, because it's built from programmable APIs, those applications are they themselves programmable, meaning as an example, we talked about last quarter, we released, what we call, smart numbers, which is the branded term -- last quarter, we talked about phone number programmability.

So now you're bringing extra functionality to those mid-market and enterprise customers. It's early in the world of programmability, but if you speak to customers about future proofing their requirements, our solution is just different. And I believe better than what competitors can provide when you're just architected sort of the old way, more monolithically. You're not build from micro services architecture.

But we're seeing examples over and over and over again, where we're winning based, it's not about them using that programmability right now, the promise of that programmability tomorrow. Omar, you may add to that?

Omar Javaid -- president, API Platform

Yes. Excuse me. Just to extend a bit on Alan's comments. So what we are beginning to see is -- the backdrop of all of this is customers that are buying our solutions or really solutions in general here, they're going through digital transformation, right? So they're trying to change from the ground up the way that they operate.

And some of the areas that they tackle first are really the customer experience because they found -- they get tremendous value out of sort of rethinking that customer experience. So to Alan's point, we acquired, next month, we have this API Platform, and we've -- as we have rebuilt our products and rebuilt our technology, we look at our own products and the application group as leveraging those communication APIs, which third parties all over the world leverage for their applications, as well. So what we are beginning to see and what we hope to see accelerate is that customers -- the application customers today either our UCaaS solution or a CCaaS solution or the combined -- sort of a combined UCaaS and CCaaS solutions, will be able to build -- will be able to rapidly build customized experiences using those APIs. And so we have seen examples of that.

So for example, the ability to quickly enable SMS or messaging alerts. The ability to do verify the 2FA very quickly. So these are capabilities that we bring to the table. And as you pointed out, it's a very limited set of competitors that can actually match those skills.

George Sutton -- Craig-Hallum Capital Group -- Analyst

So I'm not sure if the Gartner folks listen to these calls, but they clearly haven't been paying attention to your progress. Curious if you could just sort of address their recent Magic Quadrant?

Alan Masarek -- Chief Executive Officer

The simple answer is we did not apply. They -- and again it's frustrating to our investors, it's frustrating on every which way, I understand that. Last year, in 2018, we weren't in the quadrant because the requirements were to have a certain scale across in UCaaS, across the three main regions of the world, and we did not have that presence in Asia PAC. This year, they changed that.

And it's only two of three of the major regions of the world. And we certainly qualified for that. Yet, they said, you cannot do it with a third-party call procstack. And in the U.K., up until very recently, we used BroadSoft there, not Vonage Business Cloud.

And so yet again, we did not qualify, so we chose not to apply.

George Sutton -- Craig-Hallum Capital Group -- Analyst

Ok. Makes sense. Thank you.

Operator

The next question is from Catharine Trebnick of Dougherty. Please go ahead.

Catharine Trebnick -- Dougherty and Company -- Analyst

Thank you. Nice print, you guys, I like the guide. So quick question, I have two. One, how does the new acquisition tying in with the work you're doing with Google AI? And the second part of the question really has to do with the high-value APIs.

Could you reiterate again which were the three this quarter? Thank you.

Alan Masarek -- Chief Executive Officer

Let me have Omar take that.

Omar Javaid -- president, API Platform

Hi, Catharine.

Catharine Trebnick -- Dougherty and Company -- Analyst

Hi.

Omar Javaid -- president, API Platform

So to your question Over.ai and Google, the short answer really is that it enhances it, so -- and it's very astute question and really the base of it is we saw, as Alan stated in his opening remarks, that as companies are going through their digital transformations, as we see AI and machine learning is more and more important. So this is really about bolstering our capabilities both with the skill sets and the intellectual property. So it isn't meant to supplant. What we're trying to do with Google AI and other AI technology, it's really about accelerating our own internal efforts.

Alan Masarek -- Chief Executive Officer

And then within the top, on the higher value, it's just voice, video and verify, as well as things like we cited the messages API, which can default to the social apps, in particular we're seeing super strength in the Whatsapp connection there, as well. And let me make one other point about Over.ai. This is an acquihire. These 23 heads are headcount that was already approved headcounts in the budget.

The only sort of drag on EBITDA is the fact that we're hiring these folks now in one day as opposed to it would have taken us half a year to bring in those people in the ordinary course. So the key thing about this is that we have an existing AI group within that engineering team who already had a relationship and working with Over.ai. We've now, really as a talent and IP acquisition, just folded that group directly into the existing engineering hub and the existing efforts within Tel Aviv.

Catharine Trebnick -- Dougherty and Company -- Analyst

All right, thanks. And then any time frame on when you expect some new proof of concepts to come out from the combined group?

Omar Javaid -- president, API Platform

Yeah, that's a great question. In fact, we've been -- we have been working with this group for quite some time. And so just refer to Alan's opening remarks, we look at this benefiting both the applications business and the API business. I think that what you will -- where you will see our initial focus in terms of proof of concepts will be on the applications side, and we will then sort of shift to the API side.

But this is all pretty new, and we're looking to move pretty aggressively here in general.

Catharine Trebnick -- Dougherty and Company -- Analyst

Great. Thank you very much.

Operator

The next question is from Michael Rollins of Citi Investment Research. Please go ahead.

Michael Rollins -- Citi -- Analyst

Thanks. Couple of questions. First, as you described the focus to upmarket for the size of deals and customers that you're going after, does the balance sheet play a role in your customers purchasing decision? And if so, how do you look at the balance sheet strategy going forward? And then secondly, can you just give us an update on how you see the competitive landscape? And who are the toughest competitors in each of the key product verticals that you're offering into the business marketplace?

Alan Masarek -- Chief Executive Officer

Sure. Let me have Dave take the balance-sheet question.

Dave Pearson -- Chief Financial Officer

On the balance-sheet side, right now we're on our maximum leverage point that we project right now. We're able to go up to 4.5 times debt based on the facilities that we have now and having -- putting the convertible place actually unlocked, a turn of leverage relative to the bank loan that we had. It also fixed that 4.5 times capacity across the five years of the security. So we feel very good about our liquidity and our ability to use our balance sheet offensively.

That being said, we don't have any plans to be any more highly levered than we are today. I think that -- and in fact, we're paying down debt every quarter. This quarter, it went up. And more than 100% of that increase was from the fees on the convertible issuance, which was a very positive thing from a cost to capital and financial engineering perspective.

But we do believe that over time, financial heft and financial flexibility will be an important differentiator for customers as you move upmarket. People want to do business with companies that are going to be around for a while. And I think it feeds into what we're talking about on George's question relative to future proofing. If you're a sizable company, it's going to be around for a while.

And your future proofed on the technology, those two things fit together.

Alan Masarek -- Chief Executive Officer

And then Mike, to your other question on the top competitors. It's pretty straightforward. Within the API side, it's really ourselves and Twilio. We're really the only two players with a full all-in-one platform across the major modes of communication.

We're the largest by a lot. We're growing -- looks to be the fastest relative to anyone else. It's sort of a kind of a two-horse race at this point, and we continue to make a great deal of progress in a market which is just growing in very attractive ways. In the application side, really the best performing competitor today is RingCentral.

Obviously, as evidenced in their growth rates, we continue to make moves to overtake them. We've got still work to do, as I cited across the product work we're doing around Vonage Business Cloud and creating a differentiated offering, our sales and marketing and demand gen efforts, what we're doing across our routes to market, all those efforts are in place. We're seeing good results. We're seeing good bookings.

It's heading in the right direction. Clearly, we still have work to do to overtake someone who's growing as fast as RingCentral.

Michael Rollins -- Citi -- Analyst

Thanks very much.

Operator

[Operator instructions] The next question comes from Will Power of Baird. Please go ahead.

Will Power -- Robert W. Baird -- Analyst

Great, thanks. Yeah, I guess kind of a two-part question tied to contact centers. I was wondering if you could kind of dig into what's driving the increased interest in the integrated UC contact center product? How much of that is the market driving that versus you all pushing a combined product more aggressively? And I guess kind of tied to that, as you look at the mid-market enterprise, MRR growth, I think 17%, I think it was down slightly from last quarter. Is that a number that we could expect as you accelerate? As some of those recent ones in contact centers start to flow through.

How do we think about that going forward?

Alan Masarek -- Chief Executive Officer

Well, let me start, and I'll turn it over to Omar. So simple answer is the 17% versus the 20% last quarter is really a timing issue and it should accelerate based on all the factors that I spoke to, and we do see in-year acceleration. And on your first point, on the UC-CC combo, it was simply following by our demand. When we bought NewVoiceMedia, we created the applications group, which is UCaaS and CCaaS combined, simply because following the buyer demand.

That applications motion is very similar, whether you're going to buy UCaaS or CCaaS and increasingly on a combined basis. And you're seeing more and more of that within mid-market and enterprise. And quite frankly, while we do it now with a fully owned solution, our competitors do it with a third-party solution, like inContact, but they're doing it the same way. We also have done third-party research, which validates about how IT professionals and others of the decision-makers really are increasingly insisting on the UC and CC solution being from a common technology stack.

Much of this goes to how the world is evolving in terms of contact centers are getting ever more virtual rather than having a big center with 300 agents in one building. Increasingly a virtual work, somebody takes a three-hour shift from home, and you have to be able to reversible because the biggest problem with the contact center world is turnover. Brands are trying to drive a better customer experience. If there are folks who are front facing the customer turn over all the time, they just can't do that.

So you have to go to accommodate distributed workers from contact center and distributed increasingly mobilized workers on the UC side. It becomes really all and the same. That's we believe why you're seeing more integration. Omar, do you want to add to that?

Omar Javaid -- president, API Platform

No. I think that was perfectly answered. We have done third party. So we've seen customer demand drivers this way, so it's not really vendor-driven or it's not really pushed by us per se.

And that's kind of what fueled the acquisition in the first place and then what we've done with the growth, we're absolutely seeing customer demand. And as just like any other firm, we do a lot of research. And to Alan's point, the third-party research has consistently shown -- and we do this quarterly, consistently shown a lot of interest and desire by economic buyers sort of across -- this is across medium-size companies and larger and in fact what you see the largest companies get the stronger net in that preferences. So we think that it's a pretty strong combination.

Will Power -- Robert W. Baird -- Analyst

OK. That's helpful. Thanks.

Operator

The next question is from Mike Latimore of Northland Capital Markets. Please go ahead.

Mike Latimore -- Northland Capital Markets -- Analyst

Yeah, thanks. Great quarter there, guys. On the API business, how much of that growth is coming from, say, current customers, current applications, just seeing more volume versus this kind of cross-sell/up-sell dynamic?

Alan Masarek -- Chief Executive Officer

Omar?

Omar Javaid -- president, API Platform

I'm sorry, I didn't catch that last part of that question, cross-sell dynamic?

Mike Latimore -- Northland Capital Markets -- Analyst

How much of the API growth is coming from just current customer, just volume growth versus cross-sell/up-sell?

Omar Javaid -- president, API Platform

That's a great question. So I think a couple of things. So we see a lot of existing customer growth, particularly in the messages API. And I think a lot of what you're seeing in terms of the numbers is existing customers growing and growing and growing.

So that, I'll just point you to Dave's remarks and Alan's remarks there. Now in terms of product mix, what we see, especially with the newer products or what we've termed as high-value APIs so that would be voice, that would be video, enhancements to the message API where we do -- where we connect to OTT apps like Whatsapp, for example. That is a combination of both existing customers, so existing customers that, say, started in messaging API, say, SMS, has enhanced those offerings with our additional product, say, voice or video. But what we -- where we're seeing a lot of activity is -- it's probably skewing more toward newer customers that start with those higher-value APIs.

So I think that's kind of the mix. I don't know if that answers your question.

Mike Latimore -- Northland Capital Markets -- Analyst

Yeah. And then on the -- how about in terms of just industry verticals. Are you seeing some kind of new verticals up and up to this kind of API, CPaaS model, that maybe it wasn't there a year ago, maybe more traditional economy kind of verticals?

Omar Javaid -- president, API Platform

That's a great question. So we have done I think a lot of -- like a lot of the companies in this space and probably where CPaaS was born, was adoption by digital natives. That's still a very, very strong area for us. But what we have seen, and I think we've talked about this in previous earnings calls, as well.

What we have seen is the traditional customers, the traditional large enterprises begin to adopt API technologies more and more. And I think this is a big trend. It's early. We started seeing it.

We began investing, in fact, in our go-to-market mid-last year pretty heavily in terms of both build out in sales, the sales capabilities, as well as partnerships, and then where we saw this happening and we continue to see it grow. So just to recap, we -- the traditional digital natives are a big part of that business and they're growing and we love that, but we're seeing a lot of the traditional enterprises, particularly large enterprises being interested in this, adopting this and we're seeing a lot of -- we see a lot of potential growth there, as well.

Alan Masarek -- Chief Executive Officer

Mike, there's a really good study that Gartner did that, in 2017, it was 5% of industry was -- 5% of businesses were using these programmable tools, expected to be 30% by 2020. And what's so interesting is everybody, whether you're digital native or an old brick-and-mortar enterprise, everyone's focused in trying to improve customer experience. And so these programmable tools are doing precisely that, how do I create something within some other digital environment by mobile app or an existing enterprise application proprietary otherwise where I can now embed in communications to make it better. You're seeing that everywhere.

Omar Javaid -- president, API Platform

Yeah, yeah. And just to -- that's a -- what we're also seeing is, number one, it's global. And what we're seeing in parts like, say, outside of the United States, are those companies, there's almost a leapfrog to give you an example like a lot of parts of the world kind of skipped landline and went directly to mobile. So there is a similar kind of effect there.

So it's really interesting, and we're the beneficiary of that, of course.

Mike Latimore -- Northland Capital Markets -- Analyst

OK, great. Long ways to run there. Thanks.

Omar Javaid -- president, API Platform

Yup.

Operator

The next question is from Jonathan Kees of Summit Insights Group. Please go ahead.

Jonathan Kees -- Summit Insights Group -- Analyst

Great. Thanks for taking my questions. I'll add my kudos to the strong numbers. I just wanted to follow up on, Alan, your commentary about the integration of CCaaS with UCaaS.

You've done that organizationally. And it sounds like you're leading with the NewVoiceMedia and not so much with your inContact partnership, and you're doing that in your sales approach in terms of the integration there. I'm just curious in terms of the software stack, something you've talked that before trying to put all on the same stack, where are you there? Not just with NewVoiceMedia but also with Nexmo and the other acquisitions, too? Thank you.

Alan Masarek -- Chief Executive Officer

Jonathan, OK. The strategy is to be a single stack that we own. That's what One Vonage is all about. And so we, effective the beginning of the second quarter, stopped selling new customers on BroadSoft and UCaaS side and inContact on the contact center side because we're focused all on our own stack, because we have a fundamental belief that you have to control the road map in order to be able to provide these seamlessly integrated solutions.

Our view of One Vonage, what we're doing is -- your characterization of Nexmo, let me sort of try to clarify that. Our stack is a programmable API stack. That's what One Vonage is. It's comprised of those micro services: video, audio, SMS, IP messaging, etc.

Those elements can be sold individually or in small bundles as APIs. That's what we referred to in the API Platform go-to-market or -- and/or built into the applications around known use cases, the UCaaS use case, the CCaaS use case or increasingly combined. That's what we're driving to uniquely. No one else combines owing all those elements, so that we can serve these big TAMs around these known application use cases or selling it unbundled because it's architected in that micro services way.

Jonathan Kees -- Summit Insights Group -- Analyst

OK. So it sounds like whether it's sold unbundled or bundled in terms of integration from a technology side, you are in the same stack on the same platform. That work is -- it sounds like it's mostly completed.

Alan Masarek -- Chief Executive Officer

That's the strategy. There is more work to be done. NewVoiceMedia, we just acquired 9 months ago. And so pulling that apart back into that micro service architecture, that's work under way, but that is precisely what we're driving to.

Omar Javaid -- president, API Platform

Yeah. And just to add a little bit, those -- to Alan's point on NewVoiceMedia, that is -- that there's multiple stages to that effort. So we began some integrations very shortly after acquiring NewVoiceMedia. And that's an ongoing effort.

So just putting my product hat on for a second, those are things that you're always effectively working on the product side of it.

Jonathan Kees -- Summit Insights Group -- Analyst

Great. That makes sense. Thank you.

Operator

The next question is from James Breen of William Blair. Please go ahead.

James Breen -- William Blair -- Analyst

Thanks. Just a couple of questions. First, just a follow-up, I think as Mike asked around API side. Are there any use cases that you've seen that sort of surprised you that are nontraditional that can, in the future, sort of increase the traditional TAM for that market? And then secondly on the consumer side, you talked about a pretty high percentage of lines now being two years and plus customers, when do we get to the point where that just basically stays flat and generates cash flow and doesn't weigh on the overall growth rates? Thanks.

Alan Masarek -- Chief Executive Officer

Let me ask Omar to take on the API, and then Dave will take on the consumer side.

Omar Javaid -- president, API Platform

Yeah, that's a great question. So we see a couple of them. And in fact, some of those use cases are what drove this talent acquisition of Over.ai. So what we've seen -- I think one of the use cases that we talked about in the past, we have a really interesting customer that uses augmented reality and virtual reality.

And this is a company that powers -- it's a B2B SaaS company, and they use our video APIs to power unique customer care, customer support use cases. So think you're a business, you have an issue with some of your equipment, you call these people, you call this company who provides -- who's effectively selling service plans. Think of them as IT service plans, and using a camera, it could be a camera on your smartphone, it could be on your laptop, it could be on your tablet, whatever the case might be. Using the video API, they can actually do see what the customer sees.

They can actually impose schematics. They can put drawings on it, right, to say, OK, these are -- this is the way the cable layout should be. It looks like there is a mistake there. So we think that's pretty powerful, and we think there's a much -- we think there's a pretty broad set of use case.

So we think once people see the power of some like that, we'll see a lot more of that. So that's one. I think the other one has been the power of artificial intelligence and machine learning. There's been a lot of -- there have been a lot of use cases there, all across the board.

Just to give you one example. There is a lot of -- when we talk about voice, most of the industry has been focused on basically making voice -- sort of voice minute or unit of voices as inexpensive as possible. And that's great. But there's now a growing trend and growing interest in voice quality.

So you see the importance of artificial intelligence both to analyze existing voice calls and even enhance the quality of the voice experience real-time. So that's one. And then there's a lot of data that's generated on the back end where machine learning -- where you can sort of constantly improve that experience based on a very, very large customer base across the network. So those are kind of two use cases I think that surprised me.

Alan Masarek -- Chief Executive Officer

Dave, you want to take the consumer question?

Dave Pearson -- Chief Financial Officer

Yeah, absolutely. So the question is when do we think consumer -- or could we get it to flat, so it's not a drag on consolidated growth. We're very happy with how the business is performing, the consumer business. It's exceeding our expectations this year.

And every day that the base becomes more tenured, it becomes more predictable. That being said, we're not projecting that it will get to a zero-revenue decline at any point in the future. What we are projecting is that eventually, the tenured base will go from roughly 90% of that base today to 100% of that base because I think we will be adding, over time, a number of customers that we add relative to that base will be de minimis. So the churn of the base will become the churn of the tenured cohort.

That churn today is in the one-four or one-five context. So I think the upside in that business over time is lowering churn and then being able to manage ARPU as well as possible. And we did that in the quarter. We took some pricing actions in areas that we thought we could and where it was warranted.

And we'll continue to look for those opportunities where we're adding value to customers, but it really is -- it's about managing the rate of decline not getting it to zero.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Hunter Blankenbaker for closing remarks.

Hunter Blankenbaker -- Vice President, Investor Relations

OK. Thanks, Kate. And that does wrap up today's call. We look forward to seeing many of you in the coming months and including tomorrow at various investor conferences.

Certainly, for those unable to attend in person, these events will be webcast and you can follow our comments at the Vonage's investor relations website. Please contact us if you need any additional details. Thanks, everybody.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Hunter Blankenbaker -- Vice President, Investor Relations

Alan Masarek -- Chief Executive Officer

Dave Pearson -- Chief Financial Officer

Rich Valera -- Needham and Company -- Analyst

John DiFucci -- Jefferies -- Analyst

Nandan Amladi -- Guggenheim Partners -- Analyst

George Sutton -- Craig-Hallum Capital Group -- Analyst

Omar Javaid -- president, API Platform

Catharine Trebnick -- Dougherty and Company -- Analyst

Michael Rollins -- Citi -- Analyst

Will Power -- Robert W. Baird -- Analyst

Mike Latimore -- Northland Capital Markets -- Analyst

Jonathan Kees -- Summit Insights Group -- Analyst

James Breen -- William Blair -- Analyst

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