Vonage Holdings (VG) Q3 2019 Earnings Call Transcript

Vonage Holdings (VG)
Q3 2019 Earnings Call
Nov 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. third-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 of investor relations.

Please, go ahead.

Hunter Blankenbaker -- Vice President of Investor Relations

Ok. Great. Thanks, Debbie, and good morning, and welcome to our third-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 third-quarter results, Dave will provide a more detailed view on our third-quarter results and our fourth-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 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 third-quarter earnings press release or the third-quarter earnings slides posted on the IR site. Additionally, during prepared remarks, all comparisons to prior periods are year-over-year, unless otherwise noted as sequential. So with that, I'll turn the call over to Alan.

Alan Masarek -- Chief Executive Officer

Thanks, Hunter. Good morning. We delivered a solid third quarter. Consolidated revenues increased 16% to $303 million, and Business revenues reached $207 million.

Business Service revenues grew 23% on an adjusted constant currency basis. Adjusted OIBDA was $45 million. I'm delighted to report that Vonage Campus, our first ever worldwide user developer partner and customer conference held last week in San Francisco, was a great success. We unveiled a completely revitalized Vonage brand as our single unified global identity.

Our new branding positions Vonage as a modern B2B SaaS company. At Campus, we highlighted our differentiation as the world's most flexible cloud communications platform to emphasize our ownership of the entire communications stack across Unified Communications, Contact Center and programmable APIs. Campus had more than 1,000 registered attendees, representing a broad cross-section of communications users. This is consistent with our integrated strategy for platform-based communications, where we uniquely serve the entirety of the cloud communications TAM from 1 flexible cloud-native platform.

Vonage Campus helped me to step back and reflect on the enormity of our transformation. I joined as Vonage's CEO exactly five years ago today. Our goal then and our goal now is largely unchanged. We are building a profitable high-growth B2B cloud communications company based on our One Vonage platform strategy.

As I look to the future, business revenues will be an ever-increasing percentage of consolidated revenues, and I expect consolidated organic revenue growth to continue to increase. Our acquisition strategy sparked this transformation. Our One Vonage strategy uniquely positioned us as a fully owned cloud-native technology platform. And at Vonage Campus, we revealed a revitalized company operating under a single global brand.

We have been on this path for five years, and we are well positioned to drive this transformation to fruition. Now moving to third-quarter performance. We continue to execute the three strategic initiatives we outlined to start the year. First, within API platform.

To accelerate overall revenue growth with specific emphasis growing high-value APIs. Second, within applications. To progress toward achieving industry-leading revenue growth by focusing on mid-market and enterprise customers. And third, to continue building out the One Vonage platform to differentiate our programmable APIs and applications.

Let's dive deeper on these three initiatives. Starting with API platform. Revenues grew 48% based on constant currency driven by existing customer growth and increased revenue traction in high-value APIs. Existing customers like Amazon, Google and Airbnb, increased usage on our platform, while we added significant new multinational customers.

Growth came from all geographies. And notably, our U.S. growth rate was its highest in seven quarters. Revenue growth for high-value APIs outpaced total platform revenue growth.

For example, video API usage grew rapidly, especially within healthcare and education verticals. Messages API with Whatsapp also grew quickly as enterprises increasingly engage customers through social messaging. Finally, at Vonage Campus, we announced conversation API, which uniquely enables customized real-time communications that maintain contacts across multiple channels, including voice, chat and SMS. Our registered developer community grew to almost 900,000 and our partner network grew to more than 300 systems integrators, consultants and service providers, including Accenture, Tata Consulting and Orange Business Services.

Now moving to applications. Our goal is to achieve industry-leading revenue growth. Achieving this goal requires a shift toward mid-market and enterprise customers, the fastest-growth segment and away from legacy micro customers, a segment that is growing much more slowly. To highlight our customer mix challenge, note that our micro and SMB segment, defined as those with MRR less than $1,000, comprises 48% of applications revenue.

It grew 5% in the third quarter. Our mid-market and enterprise segment, defined as those with MRR greater than $1,000, comprises 52% of applications revenue. It grew 12% during the quarter. As Dave will explain, third-quarter revenue growth in this cohort was lower partially due to revenue deferral associated with certain large customer installations, which instead will be recognized in future quarters and be additive to revenue growth.

That said, third-quarter performance in the mid-market and enterprise segment lags competitors, and our teams are working intensively to meaningfully improve performance. To do this, we are driving two key initiatives. The first initiative is product-development based. Growth acceleration depends on delivering product features required by mid-market and enterprise customers that are demonstrably better than the competition, and this also includes support for international companies needed by multinational clients.

The second initiative involves sales and marketing. We must align sales and marketing in support of our field, channel and alliance routes to market that focus on these mid-market and enterprise customers. Let's dive deeper into these two initiatives. First, regarding product development. The One Vonage platform enables faster innovation cycles, improved stability and reliability and tighter product integration.

Evidencing these benefits at Vonage Campus, we announced Vonage Meetings, our proprietary fully integrated video solution built from our video APIs. We also announced App Center, our in-app marketplace that enables customers to easily integrate third-party SaaS applications into Vonage Business Cloud. We are also rapidly adding international support into Vonage Business Cloud. We recently added Israel to our existing U.K.

and Australia footprint. In 2020, we plan to add many additional European and APAC countries. In the interim, we are winning within our supported countries. For example, we recently won the largest holiday park operator in the U.K., already a Vonage Contact Center customer.

This client selected Vonage Business Cloud to replace its disparate PBX providers. It is now a seven-figure TCV customer across 400 Contact Center seats and 1,700 Vonage Business Cloud seats. Validating this product progress, Vonage was recently named a leader in Gartner's CCaaS Magic Quadrant for Western Europe and a visionary in Gartner's North America CCaaS Magic Quadrant. And second, regarding alignment of sales and marketing in support of mid-market and enterprise customers, we are syncing our marketing, messaging, brand and sales channels with our upmarket product capabilities.

Results are early, but we did win five, seven-figure TCV deals during the quarter. Within our field channel and alliance routes to market, we increased sales capacity and overall reps' productivity. By teaming our routes to market, most large deals were channel sourced and included Contact Center. A notable channel win was a global media company that selected Vonage for advanced Contact Center.

We won this seven-figure TCV deal based on deep sales force integration, coupled with omni-channel capabilities across voice, chat, email, SMS and visual IVR. Our product in-bench strategy with salesforce.com is driving competitive differentiation and larger customer wins. Among contact center providers, we enjoy the highest rating on the Salesforce app exchange due to our embedded integration into Salesforce, ease of use and premier partner support. To summarize, I am proud of our team's progress.

We continue building the foundational elements necessary to lead the broader cloud communications market. And while we continue to show good aggregate business segment revenue growth at 23%, based on adjusted constant currency, more work remains to fully realize our potential. Within API platform, we need to continue to drive accelerated revenue growth of high-value APIs. Within applications, we need to drive the accelerated mid-market and enterprise revenue growth as we align our product development and sales and marketing efforts to this very important cohort.

Finally, I want to thank our investors for their support, while we complete the transformation of Vonage. Thank you. I'll now turn the call over to Dave.

David Pearson -- Chief Financial Officer

Thanks, Alan, and good morning, everyone. The third quarter came in consistent with our guidance across all key metrics. Let's begin with a review of the quarter on Slide 10. Vonage Business revenue was $207 million, representing 68% of total revenue and a 34% GAAP increase.

Business Service revenue increased 23% on an adjusted constant currency basis. This was our 23rd straight quarter of more than 20% organic growth of Vonage Business Service revenue. 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. As with the prior quarter, this revenue growth rate is adjusted in two ways. The performance for the NewVoiceMedia and TokBox acquisitions as if we owned both for the full year 2018.

And it adds back the writedown of approximately $1 million of NewVoiceMedia's deferred revenue balance, which was required under GAAP purchase accounting rules. Also as in prior quarters, we have included tables on Slides 20 through 22 of today's presentation and in the press release that provide detail on the adjustments I just noted and the disaggregation of our Business revenue by product. API platform revenue, all of which is service, was $80 million, up 46% GAAP and 48% on an adjusted constant currency basis. Revenue from applications was $126 million, of which $103 million was service.

Application service revenue was up 32% GAAP and 8% on an adjusted constant currency basis. I'd like to provide more color on application service revenue, which was impacted in the quarter by growth of deferred revenue. As we have been moving upmarket and booking larger Contact Center deals, the lag between booking and install has elongated. This is because larger customers tend to require more customization and have internal constraints on when they release new tools to their employees.

As an example, we signed our largest ever Contact Center deal in Q1, but the revenue from this just starting to be recognized in October. Results of this timing lag is lower in-period revenue, but higher deferred revenue, reflecting build work on in-process installs of Contact Center customers prior to going live. Total deferred revenue exiting the third quarter was $61 million, of which Contact Center accounted for $36 million, an increase of $5 million year-to-date. We estimate the in-quarter impact of this increased lag to be approximately $1 million, so expect to benefit from recognition of these deferred revenues as customers go live on our services over the next several quarters.

Business Service margin for the third quarter of 52% was flat sequentially driven by margin improvement across most of our products, offset by product mix or growth of certain lower-margin products. Moving to Slide 11. Third quarter Business Service revenue per customer was $451, a 25% increase, reflecting our successful move upmarket and the acquisition of NewVoiceMedia and TokBox. Sequential business revenue churn remained at a record low of 1%, down from 1.1% year-over-year, a result of our move upmarket and product improvements.

Moving to Slide 12. Consumer revenue for the third quarter was $96 million, down 11%. This revenue was at the high end of our expectations partially due to churn of 1.8%, which was flat year-over-year and only slightly higher sequentially despite pricing actions we took. Average revenue per line increased by $1.26 from the prior year.

This increase was driven mostly by higher USF fees, which we passed through to customers, as well as the pricing actions and the overall maturity of our customer base. We ended the quarter with 1.1 million consumer subscriber lines. Tenured customers, we define as being with us for two or more years, now represent 90% of our consumer customer base. Consumer Service margin for the quarter was 90%, up from 89%.

And due to lower termination rates and increased allocation of certain shared network costs to the Business segment, so that revenue becomes a greater proportion of the whole. Turning to Slide 13. Consolidated revenues for the third quarter were $303 million, up $41 million or 16% on a GAAP basis and 9% adjusted constant currency. Now moving to income statement cost items on Slide 15.

Consolidated sales and marketing expense for the third quarter was $84 million, up $9 million. This is primarily the result of the additions of NewVoiceMedia and TokBox, followed by small increases in organic media, developer relations and international marketing spend. Engineering and development costs were $17 million, up $3 million, reflecting primarily the acquisitions, followed by continued investments in the One Vonage platform. For greater context, in addition to what is on the income statement, now that we own our own advanced software stack, we are capitalizing certain software development expenses.

E&D expense plus capitalized software for Q3 totaled $25 million, representing a competitive amount of total development spend relative to our peers. One could also consider the recent acquisitions we have made as an additional form of development investment. General and administrative expense for the third quarter was $41 million, up $4 million. This difference is primarily due to higher share-based expense and compensation from acquired companies.

GAAP net loss was $21 million, down $31 million. And adjusted net loss for the quarter was $4 million or $0.02 per diluted share, down $25 million. The decreases were primarily due to an update to our projected 2019 tax benefit and secondarily, acquisition-related higher operating expenses.Turning ahead to Slide 16. Third quarter adjusted OIBDA was $45 million, down $5 million year-over-year and up $7 million sequentially.

The year-over-year decline was due primarily to higher costs from the 2018 acquisitions of TokBox, which we only owned for part of 3Q '18, and NewVoiceMedia, which we did not own in the year ago quarter. We also incurred a $1 million impact from the NewVoiceMedia deferred revenue writedown. Moving to Slide 17. Capex for the quarter was $14 million, up $9 million due primarily to the aforementioned development of new functionality on the One V software platform, driving adjusted OIBDA minus capex of $31 million.

On Slide 18, we ended the quarter with $562 million of net debt, down $13 million sequentially. As of September 30, we were 3.6 times net levered and have significant liquidity under our total debt covenant of 4.5 times. On Slide 19, our expectations for the fourth quarter are as follows: Vonage Business revenue of between $214 million and $216 million; Consumer revenue in the $90 million to $91 million range; and adjusted OIBDA of between $43 million and $46 million. Accordingly, 2019 full-year adjusted OIBDA is now expected to be in the $157 million to $160 million range.

These adjusted OIBDA guidance numbers take into account the previously mentioned increase in Contact Center deferred revenue, which impacts OIBDA dollar for dollar. In conclusion, we feel good about our financial performance for the third quarter and are in strong position to deliver on our strategic and financial objectives. I'll now turn the call over to Hunter to initiate the Q&A.

Hunter Blankenbaker -- Vice President of Investor Relations

OK. Great. Thanks, Dave. Debbie, let's go ahead and turn it over to Q&A, please.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Samad Samana from -- with Jefferies.

Samad Samana -- Jefferies -- Analyst

So if we could -- can you guys hear me?

Alan Masarek -- Chief Executive Officer

Yes. Sure.

Samad Samana -- Jefferies -- Analyst

Great. So maybe if we could just talk about a lot of announcements came out of the conference last week. I think notably, the video solution in the App Center. I'm curious maybe if you've got initial feedback from customers on the video solution? And how you think about that in terms of changing the nature of the conversation in terms of go-to-market with customers? And then I have one follow-up question to that.

Alan Masarek -- Chief Executive Officer

Great question, Samad. It's Alan. Let me ask Omar to take that.

Omar Javaid -- President, API Platform

This is Omar. So from the video, as you may recall that originally, we had done a partnership with Amazon on Chime, so it's very similar to what RingCentral does today with Zoom, right? They have a partnership with Zoom. And what we announced, what we've been working on behind the scenes since we acquired TokBox was building a fully integrated video experience using the TokBox video API, which is what we announced last week. So I think it does have a lot of one, I think it dovetails exactly with what Alan was describing as our One Vonage strategy with building products on top of our platform.

So I think that's one. Second thing is, I think from a customer experience standpoint, you have an integrated product offering. So you have voice, you have video, you have messaging all in 1 integrated app. This is true on mobile.

This is true on web, and this is true on desktop as well. And this is using the latest and greatest web RTC technologies. Now in terms of go to market, I think this gives us a lot of leverage in terms of not only a strong story, but also the underlying technology platform. I think this is something we'll probably market a lot more aggressively in the next year.

Samad Samana -- Jefferies -- Analyst

Great. And then just one on the fourth-quarter outlook. And as you guys move into targeting larger customers and the timing continues to evolve in terms of booking to implementation. Maybe if you could just give us a color on what the Q4 pipeline looks like with mid-market and enterprise customers? And then maybe if you could give any color, maybe going forward on bookings, so we can suss that out versus just thinking about the revenue, given the lag in the rev rec timing.

Alan Masarek -- Chief Executive Officer

Sure.

David Pearson -- Chief Financial Officer

Sure. So we had strong bookings quarters in each of the first, second and third quarters. And in fact, we talked a bit about Contact Center, specifically on this revenue deferral elongation. We had a very strong third quarter of bookings in Contact Center.

So that remains strong. In terms of how that expresses itself in 4Q, the 4Q apps growth rate looks a lot like the 3Q apps growth rate because we're still experiencing that elongation. But that does -- that kind of stretching on the rubber band eventually stops, and actually, we start to get the benefit of this deferred revenue actually hitting the income statement.

Alan Masarek -- Chief Executive Officer

Let me add to that as well. Sort of broadly what you're seeing in applications is a strengthening of the pipeline across the board simply because if you think about 2019, where we quit actively selling third-party solutions and went all-in on our own products only as recently as Q2, now that sort of the transitional complexity is behind us or largely behind us. And now everyone's focused now on our own products where we control the road map and our ability to execute our product development more quickly, as evidenced by, for instance, the video meetings, the Vonage, that Omar just referenced. And now that value proposition is getting tighter and tighter as we move forward.

And again, as we direct our sales and marketing across those a collective market channels, which is principally field channel and our Alliances group.

Operator

The next question comes from Meta Marshall with Morgan Stanley.

Meta Marshall -- Morgan Stanley -- Analyst

I wanted to dive in on maybe kind of the API's business success outside of traditional geographies. And then maybe also -- I know we've kind of -- you've rebranded a lot of the Contact Center piece under the Vonage brand. But just kind of how cloud -- CX Cloud Express versus NewVoiceMedia was? Or just how that will be branded going forward? And how you'll look at kind of the lighter-weight versus the heavier-weight Contact Center product?

Alan Masarek -- Chief Executive Officer

I want to ask Omar to start on sort of your API-oriented questions.

Omar Javaid -- President, API Platform

Sure. Meta, this is Omar. So on API, I think your question was on our performance in geographies where we have done well, sort of historically. So I think, Alan referred to it in his opening remarks, we've had -- I think, overall, we've seen a lot of strength in terms of growth.

Historically, Asia Pacific, for example, has been a market where we've been very strong and that continues to be the case. The U.S. or, let's say, North America has been a market that we put additional focus on, and we've seen really good results as a result of that. So we're seeing good customer acquisition in North America.

I think there's a lot of opportunity in that market as well. So EMEA and APAC are strong for us, and they've historically been strong for us. They continue to be strong for us. I think what we're seeing is good momentum in the U.S.

and the Americas, in general.

Alan Masarek -- Chief Executive Officer

And Meta, it's Alan. Let me take the rebranding question. I think the key construct here is that -- and by virtue, what we've done uniquely is build a platform. That platform covers all the elements -- the major elements of the TAM, whether you're a buyer who's going to buy prepackaged, either Contact Center or Unified Communications or increasingly a hybrid of the two or APIs.

And so the point is the rebranding went through and said, as we are a single platform, we are a single global brand, a single identity. So then more specifically to your question about CX Cloud Express or more -- the larger more advanced contact center, it really almost doesn't matter. It's simply now from one common stack being able to provide the appropriate product or appropriate solution for the customer. What we find is larger customers tend to default what we refer to as advanced contact center, formerly NVM, while more mid-market or perhaps even large SMBs will default to a more lighter-weight version at lower price point, which is currently branded as the CX Cloud Express.

The whole notion is, you could enter into our system at those two vantage points or you could come in purely on a Unified Communications solutions. Quite frankly, you could come in with an API doing two factor authentication. And along the way, you simply migrate within a common stack into wherever your use case is required.

Meta Marshall -- Morgan Stanley -- Analyst

Got it. And so I mean, I guess, just to put a finer point on that, you would expect more kind of traction still with NewVoiceMedia -- or kind of your advanced contact center, but you still expect kind of decent pull-through of the lighter-weight product as an add-on to the UC platform?

Alan Masarek -- Chief Executive Officer

Absolutely. And we saw that in the quarter. Where you're ultimately going to is, what we refer to as, a single pane of glass, which is in one product, a user could either access UC functionality, if that's what they needed or a contact center functionality, if that's what they needed. But it's in a common solution.

What we have found is that the lighter-weight has worked very well within sort of the traditional master agent channel, which tends to focus much more on mid-market and it fits well there while we find that larger enterprises clearly default to the heavier-weight. But again, we're just following, if you will, the use cases required by our customers.

Operator

The next question comes from Rich Valera with Needham & Company.

Rich Valera -- Needham and Company -- Analyst

A question on your mid-market enterprise go to market. That initiative has sort of been in place for well over a year and kind of the headline numbers we've seen from a revenue perspective have shown continued deceleration there. So just wondering if there are any metrics you can provide for us to show us that you are, in fact, gaining traction on mid-market enterprise. And then relatedly, your 4Q guidance, it looks like Business Service guidance is about $5 million to $6 million below where the previous guidance would have put it.

So I just wanted, Dave, if you could tie maybe -- the tie between the new guidance and the old, and how much of that's deferred, and how much of that is something else?

Alan Masarek -- Chief Executive Officer

Rich, thanks. Let me start. It's Alan. The macro point is that the pipelines going forward in upmarket -- mid-market enterprise are improving significantly.

The deceleration in the year is really a function of -- by virtue of pulling back from third-party solutions, focusing everything on our owned applications, Vonage Business Cloud and NewVoiceMedia, that's probably the period, if you think back, as sort of the period of the greatest sort of transitional complexity. That's getting quickly behind us, while the product capabilities are improving dramatically in our own product and sales and marketing is much more effectively aligning around our upmarket routes to market. That's going to -- that sort of transition is coming through and is looking better clearly in the future.

David Pearson -- Chief Financial Officer

And then, Rich, on the map. Yes, the midpoint of Business at this point based on the guidance we just gave for the year is now $801 million, whereas it was $805 million. And we said in August, we thought we might be a bit higher than that midpoint. What changed is, we've got an additional about $3 million of currency headwind in the second half, of which about $1.5 million was in 3Q.

And at this rate, $1.5 million will be in 4Q. And then we have about $2 million of difference from this deferred revenue elongation or revenue recognition elongation in the CCaaS product, $1 million in the third quarter, as I referred to, and then another $1 million in the fourth quarter. In addition, in the first half, we had some currency. So that kind of maps you back to what we said in August.

In addition, in the first half, we had about another $2 million of currency pain. So if you were going back all the way to our original guidance, we would still have been above the midpoint, kind of between the midpoint and the high.

Operator

The next question comes from Will Power with Baird.

Will Power -- Robert W. Baird and Company -- Analyst

I guess I was hoping to unpack the application services revenue just a bit further. So if you look at that 8% growth, is there a way to break out for us the kind of the UCaaS piece versus NewVoiceMedia? I know NewVoiceMedia is facing some pressure due to deferrals, which you've addressed. If you put that aside, is NewVoiceMedia still growing double digits? Any further color? And then I guess the second part of that is, is that a business that can still grow 20%? Or is that a teen grower as we think about the NewVoiceMedia piece?

David Pearson -- Chief Financial Officer

Yes. I'd say two things. The difference in the growth in the quarter was primarily almost completely tied to Contact Center and this issue on the deferred revenue that we talked about. So UCaaS was relatively stable in the quarter.

If you looked at it that way. But it really does come down to the cohorts, and it's the same story. And see, the lower end cohort was low but stable, the upper end cohort because of this deferred revenue did deaccelerate. So we think, again, in the fourth quarter, where it's hard to get that back, but you're going to start to see that benefit come.

In terms of other factors, so you had about 1% -- if you think about 11% going to 8%, you have about 1% from that deferred revenue, 1% from what we think about is inorganic things that happened back in the third quarter, when we didn't own NewVoiceMedia and about 0.5% from currency. So there's very little organic that -- when you add that back up, there's very little organic difference. As it relates to how that applications business can grow, I mean we think ultimately, it can be a 20% grower, but we're not outlooking that or budgeting to that. This is a business mix shift, that Alan was talking about, takes time.

But I think we have the right pieces in place right now, and that the factors that has the most impact in this quarter tend to be nonrecurring in nature.

Alan Masarek -- Chief Executive Officer

Well, it's Alan. Let me just add to that real quickly. So the comment about how well Contact Center can grow in the future. I think the important thing to remember is that when we go upmarket, we are increasingly using a Contact Center-led motion to drag UC.

What we're finding increasingly is customers are buying those products together. It's always been challenging by any vendor to differentiate UC. On the Contact Center side, though, it is quite easy to differentiate, particularly given our embed strategy with Salesforce, which makes our product, we believe, demonstrably better based on the win rates that we see in those environments where the customer is using Salesforce. So we find over and over again that you win heads up against other Contact Center players in a Salesforce environment, and it pulls UC.

It's precisely the example that I've cited with the resort park operator in the U.K. that was already an advanced Contact Center customer, but that pulled in 1,700 UC seats. We're seeing that all over the place.

Will Power -- Robert W. Baird and Company -- Analyst

OK. All right. And then if I can just squeeze in a second one. I think you talked about product development and sales and marketing to help improve results.

So if you put that in combination with the Vonage branding announced at Campus, how do we think about the cost road map from here and the likelihood that we could see a step function increase as we kind of head into 2020 around those initiatives?

David Pearson -- Chief Financial Officer

Yes. I'll comment on the flows. I mean obviously, we're in the middle of the budget process, so we can't make any statements about 2020. So you've got two different factors.

You've got obviously a growing sales force, which pushes that number up. You've got a shift of dollars out of the low end of the market. And at one time, most of our marketing dollars were deployed in the low end of the market. It was the most reliable and fastest return that you could get.

As that market has slowed down, and we've seen it in -- within this year, you can see changes in our sales and marketing dollars and mix within the year. We are moving dollars out of that over time out of that market, making the ones that we keep there more efficient and putting them into the upmarket. That upmarket really has -- for 2020 has two flavors. One is brand and two is lead generation.

Where all that math ends up for 2020, again, we're working through. But the majority of it is going to be a remixing of our marketing spend.

Operator

The next question comes from James Breen with William Blair.

James Breen -- William Blair and Company -- Analyst

Just on the Consumer side, the declines weren't as great this quarter as we've seen in the past. Just some commentary there. Do you think that business is starting to sort of flatten out from the decline perspective because churn didn't seem to be up? ARPUs were up a little bit.

David Pearson -- Chief Financial Officer

Sure. So I think churn is generally stable. And the fact that 90%-plus of the base is tenured, we have a pretty good idea of how they act. Churn was up sequentially by 10 basis points, and that really was because of the price up we did.

That price up is also what's driving the lower revenue decrease than we, and I think the market expected. So the price increase that we took primarily a little bit in the first quarter and primarily in the second quarter was more effective than we thought. That being said, we're not planning on taking price increases regularly. So I think you saw that 11% decrease, you're going to see that in 2020, kind of looking forward, you're going to see that decrease revert back to the organic rate, which again, based on the size of the base, it's going to be more in the mid-teens.

That will take a little bit of time to go from the 11% to the mid-teens. Clearly, if we wanted to take another price increase, we could do that, but we like to align that with value being added, features being added in the market dynamics.

Operator

The next question comes from Catharine Trebnick with Dougherty.

Catharine Trebnick -- Dougherty and Company -- Analyst

I have two. One, I wasn't unfortunately able to attend the rebanding or your conference last week. Can you simplify this? Because it seems like from what I gather Nexmo is now at Vonage, and it seems like you're willing off your platform maybe not only to have a UCaaS Contact Center, but perhaps maybe -- I just might want IVR or I might just want an omni-channel and not the rest of it. And how do you plan -- is that correct kind of assumption? And then how do you plan on pricing this?

Alan Masarek -- Chief Executive Officer

Well, Catharine, it's Alan. I'll just start on brand, and I'll ask Omar to jump in sort of on your product-specific questions. What we did very clearly is to announce that our go-forward global brand is Vonage, which means that we will sunset the acquired company brand names, Nexmo, NewVoiceMedia, TokBox and the like. So all our research suggests that there's great favorability in the Vonage brand, high levels of awareness, and it's the correct brand to go forward with.

I mean, again, as I spoke about it at Campus is that we have -- the brand is associated with disruption. Clearly, that's what we did 20 years ago when Vonage disrupted the residential telephony market and the positioning is we're doing it all over again, again, from the platform approach. The product naming architectures underneath around Contact -- Vonage Contact Center, Vonage Business Cloud, Vonage API platform, you'll have opportunities for discrete product names as we package things going forward, yet again, simply based upon where we see the demand. Let me turn it now to Omar.

Omar Javaid -- President, API Platform

Catharine, this is Omar. You had a question on, is it pricing on the same product?

Catharine Trebnick -- Dougherty and Company -- Analyst

Well, it seems to me, yes, I get the fact you can get Contact Center, any API flavor. So are you going to switch this to a more basic, like on the API, you're going to do usage-based pricing in this new model? Or are you going to do base pricing?

Omar Javaid -- President, API Platform

That's a great question. So yes, so the applications business is a SaaS business, subscription business. And you're right to point out that on the API side, it's usage-based. What part of the -- and this is something we don't talk about as much, but part of the flexibility that we could have, we haven't implemented it, but there's no, I look at it as a benefit of the One Vonage approach that we're taking is that some of these things we could offer on a usage-based pricing model, like we did on the APIs.

So there's some very interesting product areas that we think are candidates for that. So we have abilities to do it. We haven't done that. We haven't sort of seen the right timing in the market yet for that.

Catharine Trebnick -- Dougherty and Company -- Analyst

OK. That helps a lot. And then the second question has to do with SD WAN. In the last year, that was a big trigger for growth and where does that stand in this new One platform?

Alan Masarek -- Chief Executive Officer

Omar will take that as well relative to our strategy on access and QoS. Omar?

Catharine Trebnick -- Dougherty and Company -- Analyst

We can catch it on the post call, Alan.

Alan Masarek -- Chief Executive Officer

So yes, in its simplest, as Dave mentioned in his comments, we are exiting the traditional provision of access, the pure connectivity into the office where if you reached a bundle into our bill, we buy it and resell it from never had that building or that office complex wired. We have replaced access with SmartWAN as our quality-of-service approach, and that continues to grow very attractively. It is just an element of our offering. And again, it's a piece that we can control as opposed to in the past, if that T1 or whatever in the office went down, we had no control over.

So that's the approach that we're taking forward.

Operator

The next question comes from Tim Horan with Oppenheimer.

Tim Horan -- Oppenheimer and Company Inc. -- Analyst

Two questions. Maybe first, on the Consumer side, you kind of mentioned that maybe there was a way to add more features and services on Consumer, maybe just any thoughts around that. And it might sound a little crazy, but Consumer, it feels like the triple-play bundle with the cable guys is disintegrating and there might be a way to kind of stabilize or grow that business a little bit more because a lot of people still want their home phone lines. Just curious on your thoughts on that.

David Pearson -- Chief Financial Officer

Thanks, Tim. So we haven't seen a change in the secular trend, which is away from home phone service. We clearly are adding new customers. But that is a relatively small amount of the business.

And we're not -- sitting here right now, we're not seeing opportunities to step on the gas or to add more than what we're getting or at least to do that with any kind of reasonable CAC. What we found over the last couple of years as we brought the spend down and brought the CAC down, we tried to test adding some spending back to see what we got, and every time, it was pushing on the string a bit. So we don't see the opportunity to really -- to shift it as we stand right now, and we feel like focus on business, kind of, the focus of the team and the focus of the capital is the right one. As it relates to features, that was really a comment about when we do a price up, we tend to tie that to -- and when we tell the customer about it, we tend to highlight the features they're getting.

And every once in a while, we do add something like boomerang is one that's particularly attractive to customers calling between India and U.S. but we're not -- just to be clear, we're not spending a lot of development time today on new features for that. Also, when we do a price up, we may adjust the bundles, we may say, OK, price going up $1 or $2, but you're going to get more minutes or what have you, which was part of my comment.

Tim Horan -- Oppenheimer and Company Inc. -- Analyst

Got it. And the second question, maybe just on the API side. It looks like you're growing faster than 1 of your largest peers right now, congratulations. And I guess, maybe can you talk about the relative product quality versus them? And do you think you can kind of continue that? And I guess on the API side, are you having much success with the go-to-market integrating around the application front?

Omar Javaid -- President, API Platform

Sorry, Alan, do you want me to take that?

Alan Masarek -- Chief Executive Officer

Yes. Please, Omar.

Omar Javaid -- President, API Platform

So thanks. Yes, we have been seeing really good growth. And I think your observation is correct. We're definitely growing faster than some of our larger competitors.

So in terms of what we're seeing in product mix, as Alan said in his opening remarks, this year was not only to grow revenue, but was to pay particular focus on growing, what we call, the high-value APIs. And we've seen really good progress this year in that regard. And we've seen that across the board, in Asia Pacific, in EMEA and in the U.S. I think, in particular, in the video API, we've seen a lot of really good traction, particularly in healthcare type customers, education, etc.

So we've seen not only good customer wins there, but then usage also growing. So I think that's kind of one standout. We've also seen some good sort of not only customer wins but also good usage to begin on voice as well on our voice API. Now you asked a question I think on relative stability of the platform.

When we acquired Nexmo, I think now it's 3.5 years ago, a great company, but really without messaging API, right? Really around SNS. So we've invested very heavily in terms of R&D to build that to sort of make the product line broader and deeper with voice, with conversational API, with video, through the acquisition of TokBox and a number of other things. And when Alan referred to it in his opening remarks as well, we've grown the developer, the registered developer ecosystem. One of the things that we do, just as a matter of -- sort of a matter, of course, of business is survey the developers.

So for example, for the second year in a row, we won an award around this -- around the overall developer experience, very competitive situation. So we're happy to receive that award, and our own customer satisfaction surveys. Even when we acquired Nexmo, they had a high customer satisfaction, in this case, the customers being developers. And we've continued to grow that actually since acquiring the company.

So I'll have to double check, I think it might actually be the highest now that it has been since we acquired the company. So I think that -- a couple of those things are a testament to the strength and kind of the depth and breadth of the product line there.

Tim Horan -- Oppenheimer and Company Inc. -- Analyst

Sorry, one last one. So you think your voice and video APIs are on par with your competitors at this point?

Omar Javaid -- President, API Platform

We do. We do. I think in the video, in fact, I think we're ahead. Because when we acquired TokBox from Telefonica, TokBox was one of the early companies and sort of a pioneer in terms of developer and contributor to WebRTC, which has become big.

And so if you just look at the amount of video that we do, the kind of customers that we have, I think video -- I would -- I think in video, we're pretty far ahead of anybody there. And on voice, I'm very comfortable saying we're on par there.

Operator

[Operator instructions] The next question comes from Mike Latimore with Northland Capital Markets.

Mike Latimore -- Northland Capital Markets -- Analyst

You mentioned bookings were strong. Can you provide a little more color on that, like a bookings growth rate number? And then second, how much of your bookings -- business bookings are coming from the channel at this point?

Alan Masarek -- Chief Executive Officer

Let me take that. Mike, it's Alan. So the booking strength that we're seeing, you have to remember, as we shift marketing spend, which traditionally was spent downmarket more transactionally, we're buying fewer of those leads, again, on purpose to buy fewer of those sort of super micro customers and shifting that working media spend into the -- in support of the upmarket channels. So we've actually managed down bookings in the downmarket channel, while bookings are going up attractively in the, what we referred to as, mid-market and enterprise.

And that -- and again, that growth in bookings, we don't sort of disclose the actual percentage growth in bookings, but it is moving definitely in the right direction, now focused on the owned product, on VB -- Vonage Business Cloud and NVM. Within those -- let me stop there. So Mike, did I address your question?

Mike Latimore -- Northland Capital Markets -- Analyst

Yes. That's great. And then the channel that -- what percent of bookings is coming kind of through the channel now?

Alan Masarek -- Chief Executive Officer

Yes. Sorry, I stopped because I forgot the tail end of your question. So on channel, as I mentioned in my remarks, basically, virtually all of what you would traditionally think as UC bookings are -- and now Contact Center bookings in North America are coming with a channel connection to it. So what we've done is we have fully teamed field, the direct sales force, channel and even our Alliances team, which is really working predominantly with the Salesforce ecosystem.

We teamed those resources where the Alliances group and channel are very, very focused in getting us additional at bats. They're more top of funnel, while the direct group is more closing at bottom of the funnel. You really sort of no longer can split them, and it's all coming across this coordinated effort across the three elements of the upmarket channels.

Operator

The next question comes from Ryan MacWilliams with Stephens Inc.

Ryan MacWilliams -- Stephens Inc. -- Analyst

David, would you mind walking through similar math for the lower Q4 adjusted EBITDA guidance? I know you mentioned the $1 million dollar-for-dollar decrease due to the extended Contact Center implementation. But is there anything else in here worth highlighting quarter to quarter?

David Pearson -- Chief Financial Officer

I'd say the one thing that's different is the Vonage Campus event. So the reason why sequentially, it would be lower. So the difference relative to what we thought it would be is the deferred. The difference sequentially quarter to quarter is Vonage Campus.

So we have several million dollars in there relative to the brand relaunch including the event itself, which puts pressure on the 4Q number relative to the 3Q number.

Ryan MacWilliams -- Stephens Inc. -- Analyst

Great. And then I apologize if this was addressed before. But is there a Vonage house view on the recent RingCentral-Avaya deal? And maybe what that means for the industry? And how it could impact your business?

Alan Masarek -- Chief Executive Officer

This is Alan. The house view on this is that this is just another example of the trend that all cloud vendors are enjoying as prem moves to cloud. We don't see any particular acceleration even within the Avaya community as a result of this deal. And I know some of this isn't expected until next year, but even next year, we think we're still getting our shot at the Avaya VAR community and other prem-based VAR communities based upon this trend that moves over.

The key thing as we've looked at this relationship is that the connectivity between Avaya as the provider and the downstream customer is most often very remote. The customer may have a Nortel device on their desk or an Avaya phone on their desk, but overwhelmingly, they're not even on a maintenance contract. And so when someone makes a decision to move from prem to cloud, who the hardware or the premise-based software provider is, is frequently unimportant. As I often hear, from premise-based CEOs, who I chat with, saying, when someone makes a decision to go from prem to a multi-tenanted true cloud solution, they don't even get the phone call.

So we're not seeing dramatic impact to it today, nor do we expect it tomorrow.

Operator

The next question comes from Adam Ilkowitz with Citi.

Adam Ilkowitz -- Citi -- Analyst

I wanted to talk about 2020 for a moment, if we could. I think, Alan, earlier in the year, we had talked about exiting the year toward a 30% service revenue growth rate, which may prove difficult at this point. And then you talked about international expansion and additional investments in sales and marketing. If I look at where people are expecting your results for 2020 to come out, it's a pretty healthy step-up in profitability for next year.

So I was just wondering if you can kind of talk through the puts and takes of that as we look out toward the next year.

David Pearson -- Chief Financial Officer

Yes, I'll give you the numbers and then Alan can colorize that. So as it relates to the exit rate, just to repeat it, it was the number approaching 30% or high 20s service revenue currency-adjusted growth rate. We're going to end up -- right now, based on the guidance we just gave, that number is going to be more in the -- somewhere in the mid-20s for the factors that we talked about on this call. As it relates to -- and obviously, that's the rate that we're taking into 2020.

As it relates to 2020 itself, right now, we're not prepared to make any more statements than the fact that we're deep in the budgeting process. We see a lot of opportunity to drive growth and we're thinking through capital allocation to that relative to cash flow, and also what are those opportunities we can actually execute with high confidence. You mentioned international expansion, I'm not sure what your question was there. That's clearly part of 2020, part of that discussion around how to remix the marketing dollars and how to spread them between international and the U.S.

as we see opportunities across them. I would just also note that for us, international is a bit of a product play in that in the U.S., multinational companies are requiring you to have an international presence. So from a product perspective, we have to do that development, and we are investing in that. And then it's just a question of how much marketing dollars we put behind the in-market marketing efforts in each individual market.

But we do think there are compelling opportunities there. And the NVM network of -- sales network and customer network, in Europe, in particular, is very strong.

Operator

The next question comes from George Sutton with Craig-Hallum.

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

I hopped on late, so I hope this wasn't addressed. But your new value proposition revolves around having the most flexible cloud communications platform, which is a new way of describing it. I wondered if you could go a little more into detail on that. And then one of the industry analysts, I thought, made an interesting observation.

He said, you're too polite in your marketing relative to others, and I would tend to agree. So I'm curious if you could address that as well.

Alan Masarek -- Chief Executive Officer

Craig, it's Alan -- excuse me, George, it's Alan. The reason we've gone with the flexible platform is really just -- it's fundamental in our belief that cloud communications is not -- should no longer be considered into these discrete camps around UCaaS, CCaaS and CPaaS, as an example. A matter of fact, I was reflecting after Vonage Campus, and I thought many vendors would have organized the campus event into three events. You could -- because there's this -- what I think is a more archaic view that says, the only IT buyers buy UCaaS for their employees' need.

And only the care and support group buys contact center software for integrations or interactions with customers, and only developers buy APIs. We're not seeing that. What we're seeing is, it's coming together. And so the whole approach about the flexibility of the platform is that it's a common platform, we build functionality into the platform, we then can either we sell it just based upon the use cases of the customer or the developer.

Where you enter in our process, we don't care. It's that flexibility in how you stitch it together, which is so important. And so that's the approach. And that's why we've anchored on this messaging and it's resonating really well.

And you see a very, very specific example where, for instance, UC and CC is just increasingly being bought together. You're seeing it everywhere. And that for all the vendors, whether they own a Contact Center like we do or resell somebody else's, they're all packaging their go-to-market that way. It's in response to the buyer demand.

As for your comment about whether we're being a little bit too polite in our marketing, my expectation is that we're going to be much more aggressive in our marketing. One of the things that we had to go through first was the unification about a single brand, and therefore, the sunsetting of the legacy brands. So if you think about the ability to put all wood behind one arrow, polite or otherwise, it was just very difficult to do that when you're distributed over multiple identities. Now we have a single global identity and we're going hard at it.

Operator

The next question comes from Jonathan Kees with Summit Insights Group.

Jonathan Kees -- Summit Insights Group -- Analyst

I wanted to ask specifically about sales and marketing. I'm kind of curious why sales and marketing for the Q3 was down a percentage of revenues, as well as dollar amount compared to the first two quarters, especially since TokBox and NewVoiceMedia are fully in there and the other two opex lines have been trading up, even over the last four quarters, and then you've also been spending money on branding. And as ancillary to that, I know, Dave, you're saying you're still in the budgeting process, so I guess you can only talk high level. How should we model for 2020 in terms of sales and marketing? Is it off Q3 base as a reference point? Or should we use the point from Q1 and Q2?

David Pearson -- Chief Financial Officer

Yes. So I made a reference to this earlier, which is a remix and the fact that we were heavy in the first half in marketing on, what we call, inside or in the lower end of the market. The thought at this time was that, again, that was efficient spend. And while we were making these structural investments and moving upmarket, that, that was the right place to deploy some capital.

We got what we thought were adequate returns from that. But I think what we found is that deploying that money upmarket makes much more sense. And by the way, we've budgeted it this way that we would be heavy, that we would do some testing and make a judgment. We ended up following in 3Q, really taking some of those dollars away from inside, so we're only deploying inside what is truly efficient and not kind of pushing the marginal sale that might not be efficient and to keep those dollars in 3Q in our pocket in advance of campus and the brand launch.

And now you're going to see that remix start to happen. So you're going to actually see marketing in Q4 as part of our EBITDA guidance. I noted this as that marketing starts to trend back up, and then it's clearly going to be up in 2020, the extent of which is the thing that we're still working through. I would just say that, again, it's moving dollars from inside toward sales, brand and very targeted upmarket lead generation.

And the amounts, again, are to be determined as we work through this, but we do now believe that with the investments that we've made and the strategy work we've done that we can effectively deploy that money upmarket now.

Operator

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

Hunter Blankenbaker -- Vice President of Investor Relations

OK. Great. Thanks, Debbie. We look forward to seeing many of you in the coming months at various investor conferences.

And for those unable to attend in person, these events will be webcast and you can follow our comments at the Vonage investor relations website. And please contact us if you need additional details. Thanks, again, for joining.

Operator

[Operator signoff]

Duration: 75 minutes

Call participants:

Hunter Blankenbaker -- Vice President of Investor Relations

Alan Masarek -- Chief Executive Officer

David Pearson -- Chief Financial Officer

Samad Samana -- Jefferies -- Analyst

Omar Javaid -- President, API Platform

Meta Marshall -- Morgan Stanley -- Analyst

Rich Valera -- Needham and Company -- Analyst

Will Power -- Robert W. Baird and Company -- Analyst

James Breen -- William Blair and Company -- Analyst

Catharine Trebnick -- Dougherty and Company -- Analyst

Tim Horan -- Oppenheimer and Company Inc. -- Analyst

Mike Latimore -- Northland Capital Markets -- Analyst

Ryan MacWilliams -- Stephens Inc. -- Analyst

Adam Ilkowitz -- Citi -- Analyst

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

Jonathan Kees -- Summit Insights Group -- Analyst

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