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Vonage Holdings Corp (NASDAQ:VG)
Q4 2020 Earnings Call
Feb 19, 2021, 12:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Vonage Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce Hunter Blankenbaker, Vice President of Investor Relations. Thank you, you may begin.

Hunter Blankenbaker -- Vice President of Investor Relations

Thank you, operator, and good morning. And welcome to our fourth quarter 2020 earnings conference call. Speaking on our call this morning is Rory Read Chief Executive Officer; and Steve Lasher, Chief Financial Officer. Also joining us is Jay Bellissimo, Chief Operating Officer; Omar Javaid, President of the API Platform; Rodolpho Cardenuto, Head of Unified Communications and Contact Center; and Tim Shaughnessy, our previous Interim CFO. Rory will discuss our strategy and fourth quarter results and Steve will provide a more detailed view on our fourth quarter and full year results and 2021 first quarter and full-year 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 fourth quarter earnings press release, or the fourth quarter earnings slides posted on the IR website. Additionally, during prepared remarks today, all comparisons to prior periods or year over year, unless otherwise noted as sequential. So with that, I'll turn the call over to Rory.

Rory Read -- Chief Executive Officer

Thanks, Hunter, and thank you to everyone for joining us today. I hope you and your families are staying safe and healthy. I would like to start by thanking our Vonage team members around the world for their unwavering support and commitment to our customers during these extraordinary times. Our vision is to accelerate the world's ability to connect and 2020 presented many opportunities to do just that and to make a real difference for our customers. We helped our customers address unprecedented challenges by finding new ways to work, connect and engage. One example is StoryCorps, the national nonprofit that has brought together more than 600,000 people to record intimate face-to-face conversation about their lives and leave a legacy. It is the world's largest single collection of human voices ever gathered and it is preserved at the US Library of Congress for generations to come. StoryCorps asked for our help in making these human connections possible when in-person interviews were no longer an option. And we launched StoryCorps Connect. StoryCorps Connect is a free video platform powered by Vonage created to reduce the impact of isolation and preserve people stories at this monumental point in our history. Everyone at Vonage is extremely proud of the solutions we are creating to connect people and businesses across our planet, and this is needed more than ever right now. As we have discussed, our strategy is to leverage our single global cloud communications platform that powers our customers and partners next generation engagement solutions using our APIs, unified communications and contact center innovation to perform better, connect easier and to create new business models. To execute on this strategy for the past 6 months, we have focused on optimizing our business for improved operational efficiency.

This has allowed us to make strategic investments to drive growth and we are starting to see the initial results of this work. In parallel, we have established our strategic operating plan for the next three years. Today, I'll focus my comments on three areas. One, our solid fourth quarter results; two, our 2021 product and go to market investment activities; and three, an update on the sale of our consumer business. Steve Lasher, our new CFO will follow with a more detailed look at the quarter and full-year as well as our 2021 guidance. I'll start with the fourth-quarter financial results. Vonage communication platform total revenues were $245 million with service revenues of $230 million, a 17% increase year-over-year.

Within this result, API revenues grew 33% year-over-year, highlighted by high-value APIs and our unified communications and contact center applications service revenues grew 4%, again slightly ahead of expectations. Consolidated revenues totaled $323 million and we delivered adjusted EBITDA of $48 million both above expectations. As committed, we announced this morning that we are making important new disclosures on our Vonage communication platform operating expense, and adjusted EBITDA. This is to provide greater transparency to help our investors better understand and value our business and do enable them to track our progress on the Rule of 40 as calculated by VCPs service revenue growth percentage plus it's adjusted EBITDA margin. We exited the fourth quarter of 2020 with the VCP Rule of 40 of 15%.

We are committed to steadily improve our Rule of 40 results over the next 3 years. We expect to exit fiscal 2021 in the 20% range and our plan for 2022 is to be in the mid '20s range and above 30 in 2023. I'll now provide a few fourth quarter highlights by products starting with API. Revenues grew 33% year-over-year to $119 million. We saw momentum in nearly every industry as digital communication channels have become a primary differentiator in the way businesses engage customers.

API product strength was driven by three key areas: First, high-value APIs grew 130% year-over-year with voice and video usage accelerating sequentially as customers continue to expand on our platform. Second, dollar-based net expansion increased to 121% driven by momentum across most industries. We are also seeing additional improvement in travel and hospitality. And third, we remain well positioned with global scale and the diverse customer set across the world in multiple industries, including healthcare, education, gaming, social and [Indecipherable] events providing a broad-based balanced growth trajectory. I'll now highlight virtual events. Vonage powers more than a dozen virtual events platforms on multiple continents. We signed several large customers in fourth quarter winning against both competitors who offer simple video conferencing solutions and other CPaaS companies. SpotMe is a new Vonage customer that provides event solutions to more than 250 global brands including Daimler, SAP and Johnson & Johnson. Disrupted by the pandemic, SpotMe needed to build an online platform to keep operating and to meet customer needs. They chose Vonage because of our high-quality video API, ability to enable real-time streaming and our secure platform with global reach. Now moving to unified communications and contact center products, service revenues grew 4%. Fourth quarter bookings were up sequentially for the second quarter in a row, but remains slightly down year-to-year.

Within this mid-market and enterprise bookings were up and accounted for more than half of our total bookings. We continue to see traction in cross-sales not only in unified communication and contact center products, but also in combination with our programmable APIs as we work with our customers to help them drive better business outcomes. One example is Gannett Company Incorporated, the largest US newspaper publisher. Gannett had several disparate onsite PBX systems from multiple acquisitions. They wanted a platform that unified all team members and provided the flexibility to work from anywhere while delivering voice, video, messaging and social media from a single-user interface. They chose Vonage for our integrated unified communications and contact center solutions that seamlessly integrate with their productivity and CRM applications as well as our ability to scale with them using our communication APIs. Another example is Great Wolf Resorts, a brand leader in the indoor family water park resorts category. Great Wolf chose Vonage because it needed a partner that could provide a contact center solution with deep Salesforce integration and help them create a differentiated user experience. Great Wolf is using our Vonage contact center solution along with our AI capabilities and programmable voice and messaging APIs to offer new customized and interactive engagement experiences for all of their [Indecipherable]. We expect our improving booking trajectory to continue throughout 2021 and translate into increasing unified communication and contact center growth rate in the second half of the year.

2021 would be a year of execution and targeted growth as we further invest in our product development and a tailored go to market, so we can provide our customers with the communication solution that best fits their needs and win a disproportional share of the market. I'm confident we are putting the right sales structure and strategy in place. Our new e-commerce platform and self-service capabilities for micro and small business markets are new cost effective ways to scale growth. We'll augment this with a more strategic focus on enterprise and VCP cross selling, leveraging our strong direct Salesforce. The channel is a key part of our growth strategy and we started building a stronger channel foundation in 2020. We will make further investments in 2021 to differentiate our channel program with additional support in key markets, new incentive, product innovation and new infrastructure that will make it even easier to partner with Vonage. Finally, as we committed we have completed a comprehensive nine-month strategic review of the consumer business through the assistance of financial accounting and legal advisor. Based on this review, which included a detailed analysis of the consumer business financial, profitability and potential valuation, the Vonage Board has determined that it is in the best interest of our company's shareholders to terminate the sales process and retain the consumer business. We have reached out to approximately 70 strategic and financial sponsors, to gauge their interest in a potential acquisition of the consumer business. A number of the potential acquirer expressed interest in the business, but none at the value that the board believed was acceptable to move forward with a sales transaction. Our decision was driven by valuation and $600 million of cash generation we expect from consumer over the next 5-year.

We can run this business easily, efficiently and without distraction. Moreover, this decision ensures a strong balance sheet and financial flexibility to invest in BCP capabilities and potential M&A. Importantly, the detailed financial reporting now available, will enable investor to evaluate BCP in a manner comparable to a stand-alone business. In closing, Vonage is in the right place, at the right time and a large and growing market. We have improved the business over the last six months by creating operational efficiencies that allow us to invest in growth opportunities and to consistently execute on our commitment. We will focus our execution on efficiently delivering a compelling solution portfolio in attractive market to create differentiated value to our customers.

We are making solid early progress, but we have much more work to do to build an even better Vonage. We are committed to delivering improved growth and profitability across 2021 and will drive further efficiencies and growth opportunities as we scale our business in 2022 and 2023. We look forward to sharing more details during our Analyst Day on March 5. I am pleased to enter this important year with a strong leadership team, enhanced by our critical senior leadership higher since our last earnings call. With this leadership team now in place, we are set to execute.

Jay Bellissimo joined us as Chief Operating Officer, leading sales operations and our go-to-market strategy across the Vonage Communications Platform. He has deep knowledge and operational expertise and software-as-a-service, cloud solution and artificial intelligence with a proven track record of helping organizations accelerate digital and business transformation effort by moving to the cloud. Steve Lasher, who we introduced earlier in the call has joined as our new Chief Financial Officer. Steve's deep knowledge of technology and the software space and a long history of leadership in finance, business transformation and business development will make a significant impact on helping Vonage drive revenue growth and increase profitability while we invest, to strengthen our innovation capability to create differentiated value for our customer.

And we announced yesterday that Savinay Berry will join as Executive Vice President of Product & Engineering responsible for the global leadership of Vonage's engineering, product management, IT and security team, focused on driving the company's technology strategy and innovation of the Vonage Communication Platform and its portfolio solution. Savinay has extensive experience in technology, software and the cloud with a track record of developing highly innovative products and [Indecipherable] heading results driven transformational change. Each of these executives have deep cloud and SaaS experience with a long history of demonstrating results in building growth businesses at scale.

Before turning the call over to Steve, I'd like to thank Tim Shaughnessy for his strong work as our Interim CFO, which has helped us to become more efficient and develop better operational execution. He has also played a key role in the consumer review and driving greater transparency in our financial reporting. Thank you, Tim.

And with that, I'll turn the call over to Steve.

Stephen Lasher -- Chief Financial Officer

Good morning everyone, and thank you, Rory for the warm introduction. I'm honored and excited to be the CFO of Vonage. I believe there is a huge opportunity in front of us. And I am looking forward to working with Rory and the leadership team to capture more market share while driving operational excellence and profitability.

Turning to our results, I'll cover the following topics. First, I'll begin with a brief discussion of our consolidated Q4 and full year 2020 performance. Second, as Rory mentioned, this quarter we began providing additional disclosures on our Vonage Communications platform and consumer segment, so review these results in more detail. And third, I'll cover our first quarter and full year 2021 guidance.

And with that let me dive right in, beginning on slide 7. Consolidated revenue of $323 million increased 4% driven by a 12% increase in VCP revenues offset by the client and consumer. For the full year consolidated revenues were 1.2 billion, a 5% increase. Fourth quarter consolidated gross margin was 54% down slightly due to the faster growth of relatively lower margin BCP revenue which now represent 76% of consolidated revenue up from 70% in the prior year.

Consolidated operating expenses were $159 million, down 1% year-over-year improving our expense to revenue ratio by 3 points as we continue to optimize the business for faster growth and improved profitability. I'll discuss OpEx in more detail in our segment results. Consolidated 4th quarter adjusted EBITDA of $48 million was up 3 million year-over-year due to improving revenue performance and cost structure action. For the full year, adjusted EBITDA was 170 million an 8% increase. Before turning to segment results, I would like to highlight that we've included an 8-quarter historical view of the VCP and consumer segment on slide 16 and 17 in the earnings presentation. Now let's review the fourth quarter VCP segment results, beginning on slide 8. VCP service revenues increased 17% to $230 million. Service revenue excludes product, access circuits and USF fees which totaled $15 million in Q4, down 7 million.

Full year 2020 VCP service revenues were $856 million, a 19% increase. Within VCP API revenue all of which are service were $190 million in the fourth quarter, up 33%. High-value APIs grew 130% year-over-year with particular strength in video, voice and IP messaging. High-value APIs represented roughly 20% of the total API revenue. Unified communications and contact center service revenues were $111 million in the fourth quarter, up 4%. VCP revenue churn was 1.3% in the fourth quarter. Churn within UC and CC was at record low. However, this was offset by higher churn on our API platform, driven by a loss of certain customer traffic in Asia due to government regulation. Monthly service revenue per customer increased 60% to $552 due to increases in average customer size across the VCP platform. Moving to slide 9 VCP gross margin in the fourth quarter was 46%, down 100 basis point year-over-year driven by mix dynamics within the quarter. For the full year, VCP growth margins were 48%, up 100 basis point. VCP sales and marketing expense for the fourth quarter was 77 million, down 7 million versus the prior year and down 6 million sequentially. Due to our business. Optimization effort to improve the efficiency of our sales and marketing this was offset by selective investments into our API sales team, VCP engineering and development expenses were $20 million, up 22% reflecting increased investment on the VCP platform including video and voice functionality and scalability. E&D expenses plus capitalized software total 32 millions which represent 14% of VCP service revenue. VCP general and administrative expenses for the fourth quarter was 38 million, up 2 million due to higher restructuring charges primarily related to lease abandonment and consulting fees on the consumer strategic review. VCP-adjusted EBITDA was negative $4 million, improving from negative $18 million in the prior year and negative 14 million in the third quarter. VCP-adjusted EBITDA benefited from our effort to drive greater operational efficiencies while growing revenue. Moving to slide 10, consumer segment revenues were $79 million in the fourth quarter and totaled $333 million for the full year, a 14% decrease.

We ended the quarter with approximately 900,000 consumer subscriber lines 2-year plus tenured customers now represent 94% of our consumer base and 5-year plus customers are 79% which had churn rate of 1.6% and 1.5% respectively. Consumers average monthly revenue per line was $28.13 up 56% reflecting higher USFP and targeted price increases that we implemented during the year. Churn of 1.7% was stable compared to the prior year quarter and down 10 basis points sequentially. Consumer-adjusted EBITDA was $52 million in the fourth quarter and $227 million for the full year. This business provide profitability cash generation, which help fuel our growth initiatives.

On slide 11, we ended the 4th quarter with $517 million of net debt, down $20 million sequentially. As of December 31, net debt was 3 times last 12 months adjusted EBITDA. Given the strong cash flows of the consumer business and improving cash flows of VCP, we expect to continue to pay down debt in 2021, ending the year below 2.5 times. Moving on to guidance on slide 12. For the first quarter, we expect Vonage communication platform revenues in the range of 240-244 million. We expect Vonage communication platform service revenue growth of approximately 16% to 18%.

Embedded in this guidance are the following trends. In API, we expect first quarter year-over-year growth in the 34 to 36 range reflecting continued positive trends in high value and messaging with regard to unified communications and contact center. We expect service revenue growth in the low single digit. We believe first quarter service revenue represents the trough of the UC, CC growth rate decline. And that we will see a modest improvement in growth rate in each quarter of 2021 thereafter. We expect first quarter VCP adjusted EBITDA to be in the range of negative $7 million to negative $3 million. Within Consumer, we expect revenue in the $75 million range and adjusted EBITDA of approximately $9 million on a consolidated basis we expect total revenue of $314 to $318 million and adjusted EBITDA in $46-million range. With the sequential decline due to the reset of annual employee benefit and a step-up in sales and marketing activities. For the full year. We expect Vonage communication platform. Total revenues in the range of 1 billion 38 million to 1 billion 54 million. Within this, we expect service revenue growth of 15% to 17% driven by API growth approaching 30% and UC and CC service revenue growth in the low to mid single digit. We expect VCP adjusted EBITDA to be positive for the full year of 2021 in the 5 million to 9 million range. A substantial increase from negative $57 million in 2020 reflecting our focus on continued operational efficiencies. For consumer we expect 2021 revenue in the $285 million range and adjusted EBITDA in the $185 million to $189 million range. Total consolidated revenues are expected to be in the range of 1 billion 323 million to 1 billion 339 million. We expect full-year 2021 adjusted EBITDA in the $190 million to the $200 million range. With that, I'll turn it over the operator initiate the Q&A.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]

Our first question comes from the line of Ryan MacWilliams of Stephens. Please proceed with your question.

Ryan MacWilliams -- Stephens Inc -- Analyst

Thanks for taking the question. So just to dig in to start on the consumer decision, how are the interest levels during the sales process and what was the valuation that you were trying to achieve here and just given how extensive this review was, this is to really close the book on Vonage potentially selling a consumer business.

Hunter Blankenbaker -- Vice President of Investor Relations

Hey, Ryan. Thank you for the question. There is no question we went through a comprehensive, strategic review. First, we had to understand and we brought in accounting and professional consultant to really dissect the business and pull it apart,. it's always been our intention to give greater transparency to our investors so that they could understand VCP, the Vonage Communication Platform and the consumer business. It was definitely robust on approaching 70 strategic and financial sponsor. There is no question, we went through two rounds of discussion and we had quite a number of interest, but at the end of the day. Ryan, it really comes down to. This is a very efficient access of capital for us. We can run it efficiently without distraction and this gives us real flexibility as we continue the strategic pivot of Vonage from its traditional heritage to this leader in the global communication platform space. There is no question we will continue to invest in VCP to drive faster growth as I mentioned in the progression of the Rule of 40 over the next three years, and that's something we'll dig into at the Analyst Day on March 5, but I believe that this is clearly the right decision and clearly we've closed the book on this one. End of discussion.

Ryan MacWilliams -- Stephens Inc -- Analyst

Thanks. And the guidance for positive adjusted EBITDA for VCP was a nice surprise. I especially like to [Indecipherable] in the video API segment, but since you are keeping consumer and his cash flow why is it important to you to have this positive adjusted EBITDA next year for VCP and why not drive even more investment through the API business and [Indecipherable] want to accelerate growth.

Hunter Blankenbaker -- Vice President of Investor Relations

Yeah, it's just modestly positive, Ryan, there is no question about it and we want to keep it in that range. The optimal model in terms of VCP has always going to be focused on growth at the top in terms of the service revenue. I want to make that strategic pivot, but we also over the course of the next 2, 3-year journey is to make sure that business is very sustainable on an ongoing basis and can fund the investment and growth that we really want to drive in that space. We're not going to go heavy on the bottom line in terms of driving it.

You're going to see, we've tried to keep our fire power in terms of marketing and sales investment quarter after quarter this year to continue to improve that growth trajectory, right. And the work from Jay Bellissimo and his team as they come on with Rodolpho and Omar, Joy Corso on the marketing side, you're going to see us invest in velocity marketing to drive UC and CC and cross-sell and you're going to see continued focus to extend that API momentum as we go forward. I think that's a really important to be part of the ongoing strategic direction of the company. This is not our bottom line as you mention focus, going to keep it in that general range, but then continue to focus on capturing more growth, accelerating the business over the next 2, 3 years as we improved our efficiency, and at the same time, Ryan invest in product innovation this year and next, so that in '22 and '23, those years become the year of the product and those product enhancements give our next leg up in terms of additional product growth. That's where we're going and that's the strategy we're on.

Ryan MacWilliams -- Stephens Inc -- Analyst

Thanks. Look forward hearing more on the Investor Day.

Hunter Blankenbaker -- Vice President of Investor Relations

Yeah, me too. Thanks, Ryan.

Operator

Thank you. Our next question comes from the line of Tim Horan with Oppenheimer. Please proceed with your question.

Tim Horan -- Oppenheimer -- Analyst

Thanks guys. Can we delve into the API a little bit more. We're seeing kind of viral growth from a bunch of more developer platinum-focused business models out there. Is this still an important part of the strategy and it may be used to give kind of developer numbers that working on the platform. Can you give us an update there. Thank you.

Hunter Blankenbaker -- Vice President of Investor Relations

Hey, Jim, how are you. Good to speak to you.

Rory Read -- Chief Executive Officer

Hey, Tim, from the standpoint of API, there is no question about -- it's a key component to the strategy. The Vonage Communication Platform is built on that API Platform and really leverages those APIs to build once and sell many across the purpose-built capability, we see that same kind of momentum and you saw Steve's comments about continued strong growth as he kind of looked at 1Q. We don't know exactly how the moderation of the pandemic will occur and we all hope that it moderates as soon as possible, but there is no question that the market and the way people work has changed forever, and it will continue to be more and more virtually based and more and more communications driven. So we think we're at the beginning of the 5 to 7 year trend in this kind of programing technique and this kind of approach around API. You're going to see us continue to invest in that platform using the dollars and capabilities of the business to enable us to continue to grow that and you're going to see that I think we'll take a a piece on the developer background at the Analyst Day, so we could kind of go deeper there.

Jay, Omar, anything you want to add in terms of API going forward.

Jay Bellissimo -- Chief Operating Officer

Rory, it's. Jay, I would just add also that we've got great diversity when you look at our balance across the geographies APAC 30% of our revenue, Americas 38% and EMEA 20% and we see a lot of great opportunity to really go across the GOs and go deep in those GOs and that's providing some really good year-over-year momentum as well as quarter-to-quarter momentum. So we see a very positive outlook in terms of building that and then the other point I'd highlight, it's just the customer expansion. We're seeing more and more customers engage and use the wider portfolio of our APIs. With that, over to you, Omar.

Omar Javaid -- President, API Platform Group

Thank you Jay and great question, I'm glad that you recognized the power of the developer community. So I'll just share some insights there for you.

We have the second largest developer ecosystem in this space. We have over 1 million registered developers. And just to give you some recent facts here, we've got I think recently about 3.1 million documentation views, 10.3 million SDK installs representing about 13.5 billion API request and as already mentioned, we are going to be highlighting a lot of this and go through this in a lot more detail in the Investor Day. But this is an area that we have been investing in for quite some time and we see a lot of great momentum from it.

Tim Horan -- Oppenheimer -- Analyst

Exactly what I was looking for. Thank you. Look forward to the Analyst Day.

Hunter Blankenbaker -- Vice President of Investor Relations

Thanks, Tim.

Operator

Thank you. Our next question comes from the line of Rich Valera with Needham & Company. Please proceed with your question.

Rich Valera -- Needham and Company -- Analyst

Thank you. Good morning. At the risk of I guess front running the Analyst Day, I'm going to ask a couple of questions on the apps business. First,

I know you've had some initiative to kind of shore up the base of that business, particularly the VBE, Cohort and the micro SMB component. Just wanted to kind of get your status updates on those initiatives. Have you seen some stabilization or improvement in that part of the base. And then just high level in terms of how you're thinking about go to market for MME there. I know historically, it really been aligned with Salesforce and going after accounts that were sort of standardized and Salesforce and leveraging that integration. Can you give us any high-level thoughts about how you're thinking about going to market and MME going forward. Thank you.

Thanks, Rich.

Hunter Blankenbaker -- Vice President of Investor Relations

Hey, Rich. There is no question that the focus to tailor that go to market by customer segment, where the products best fit and where we apply the right go-to-market is the right strategy. You're going to see us continue to build out this self-service and e-commerce at the bottom of that in the micro and beginning with small then you're going to see a lot of work around the channel, particularly in the second and third quarter, as we introduce new capabilities, new incentives new programs, make it easier and better to win with Vonage and then that powerful sales force that's what's going to drive that direct Salesforce at the top of the stack at mid and enterprise. It's tailoring to each area to get the efficiency and then the work that Joy Corso is doing from our CMO perspective to drive the velocity, marketing, particularly across micro, small and mid. We're seeing some really interesting traction on some investments that we've done here in the first quarter and as we get that information will accelerate that through the balance of the year. So why don't I pass that over to Jay and Rodolpho just to add a little bit more color.

Rodolpho Cardenuto -- Head of Unified Communications and Contact Center

Rodolpho did you want to start.

Hunter Blankenbaker -- Vice President of Investor Relations

Yeah, thank you for the question. Let me, I think you commented about the VBE and the micro business, it's important to notice that our, we are banding the curve as you've seen the revenue progression asking. So our Q2 last year, we have been progressing from Q2, Q3 and Q4, and we expect that to continue during this year.

This is because that we are bending the curve in VBE and micro business. One important thing to notice in terms of estimate that we did in the e-commerce. Now we have an easy acquisition for our customers using commerce, self provisioning [Indecipherable] easy provisioning for the customer and self support also. Those were the process and that are we implemented to make a microbusiness very profitable and growth for us. And in terms of our Salesforce, we are doubling down with Salesforce. We had the best experience to the sales force now, but we are also implementing and actually evolving with the ServiceNow and Microsoft with Microsoft that we have the 2 connections now, Microsoft Teams at Microsoft Dynamics. We have a very good integration with Microsoft Teams and our UC our solutions and we have a very good a solution.

Also for Microsoft Dynamics. With the free cash solutions, not to mention out. It is now that we are getting a lot of attractions with them. So, we are moving from a doubling down with the Salesforce Contact Center, but also moving with the ServiceNow and and a solutions with Microsoft.

Jay Bellissimo -- Chief Operating Officer

Hey, Rich. I see. Okay. I'm sorry I was just going to add a couple of quick points to Rodolpho a couple of other things. For the portfolio in the UC and CC space is, we've seen some really good sequential growth in the bookings and we're planning to exit the year in the high single digits and service revenue and with that, we expect next year's service revenue to be in double digits, based on the trends we're seeing today. Obviously, there are some unknowns with the the impacts of pandemic, but we're feeling good about this business and the growth into Rodolpho's point. Yes, Salesforce has been a key part, but as he alluded to, we are also looking at the partnerships with ServiceNow and Microsoft. Over to you, Rory. Yeah. And Jay, I think that's an important point while you want to do, look, Rich. Let's see. And we talked and Steve's comment that looks for the trough in 1Q. And then we should see year-to-year bookings growth starting in 2Q. We should see a steady improvement into the mid high single-digit in the 2021 timeframe. And as we look into next year, I think we can get into that low-mid double-digit growth rate in '22 as we continue to progress through this transition. Thanks, Rich.

Operator

Thank you. Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

Meta Marshall -- Morgan Stanley -- Analyst

Great, thanks. It's just a little bit more on the UCC business, just is there any different trend that you're seeing between maybe the contact center piece of the business in the UC piece of the business, find out are fairly well integrated at this point, but just any commentary there and then the second would be, just on kind of the gross margin. Clearly you're doing well with the higher margin API business. You're seeing a lot of growth, kind of in that higher value API business, but the gross margins in this segment just continue to kind of fall off. So just what are we seeing in terms of the competitiveness or the margins of the rest of the API business. Thanks.

Rory Read -- Chief Executive Officer

Thanks Meta. This is Rory. So first comment would be on the UC and CC. We're seeing some very good cross sell activity across that portfolio and again where we see the CC strength. It's definitely in mid and enterprise where we can definitely leverage the strength of our direct sales force to go to market.

You see, we have it not only there in that cross-sell, but then across the bottom a mid, small and micro where we're going to use those more efficient techniques with the channel and with the e-commerce to drive that growth. I think CC continues to have strength, particularly, as it's related around Salesforce. And then the expansion with ServiceNow and Microsoft that opens up more opportunity. That's really going to be a direct Vonage sales play and the leverage that continued growth and when we gave those kind of feel for the next several quarters that movement of the business is really a UC and CC combination going from the trough here and low single digit into the mid and high single digits across the 2021 time period, and then further in '22. But I'll let Steve Lasher give an update on gross margin and give you a feel for where we're sitting on that. Steve.

Stephen Lasher -- Chief Financial Officer

Great, thank you Rory and thank you Meta for the question. As we look at our VCP gross margins when we take a look at first at where we are we had strong growth in API, 33% growth from a revenue perspective. And then also from a UC and CC perspective, 4% growth and if you look at the margins across the product they were relatively stable and purely is a mix within our product offerings within their so again with the mix within the API oriented businesses, our goal is obviously to improve margin, but we're really looking to drive the API scale as we go forward. And I really think that as we continue to expand the business and use the power of the global reach and the portfolio.

We will also at the same time look to improve the margins as we go forward.

Meta Marshall -- Morgan Stanley -- Analyst

Great, thanks.

Hunter Blankenbaker -- Vice President of Investor Relations

Thanks Meta. Next question.

Operator

Thank you. Our next question comes from the line of James Breen with William Blair. Please proceed with your question.

James Breen -- William Blair -- Analyst

Thanks for taking the question. Just a couple, one on the balance sheet side, I think you said that you're looking to get below sort of 2.5 times leverage sort of implies paying up around 30 million or so of debt this year, is that sort of the goal. Operating cash flow generation and the consumer sides around 20 based on your estimates and sort of running basically a breakeven. Steve.

Stephen Lasher -- Chief Financial Officer

Yeah. Thank you very much Breen for the question.

As we look to continue to operationalize the business, we are looking to pay down debt. Obviously, we want to make sure we are optimizing the business and if there are other opportunities for acquisition or the like. We will make sure we prioritize those, but as you've seen, we've made some real strong improvement in our profitability. Given the guidance as we move forward toward the end of 2021. We want to be second half profitable and full-year profitable, so again within that we're going to evaluate what do we do and continue to pay down the debt is one of our priority.

Hunter Blankenbaker -- Vice President of Investor Relations

Again on that one, really the focus again if there is opportunities for us to do strategic M&A, we're going to look at that hard. And then also the [undecipherable] for faster growth across VCP, this gives us more firepower and more flexibility.

James Breen -- William Blair -- Analyst

Thanks and then just on the sales side relative relationship with channel partners and agents, et cetera. Can you just give us some color around how that's progressed, maybe quarter quarter year-over-year in terms of being invited into more deals and may be the run rate.

Hunter Blankenbaker -- Vice President of Investor Relations

Yeah. So from the standpoint of the channel, I spent a lot of time over the past 6 month meeting with various channel partners across the ecosystem to really understand how to be a better partner with those channel partners and what would create that momentum both Rodolpho and Jay have a long track record of leveraging the exponential power of the channel to drive growth to drive expansion, while we're sleeping across the planet right, that's the power of the channel. We targeted and looked at our product, our portfolios, our documentation over the last 4, 5 months. We're making changes to all of that additional capabilities and then we're working right now in concert with feedback from our channel partners on the right next set of incentives and it really drive that growth. You'll see that launch for 2Q. And then we will see us continue to build that out this year. It suffices to say that this is going to continue to be even more important driver of our growth as you see us move up that curve from a VCP Rule of 40 exit of 2020 at 15, at 2021 at the 20 range, and then in 2022 in the mid '20s. That is a key piece of it. So just spot on that and we'll look forward to giving you updates as we go forward.

James Breen -- William Blair -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Mike Latimore with Northland Capital Markets. Please proceed with your question.

Mike Latimore -- Northland Capital Markets -- Analyst

Thanks. It's just two questions here. You just throughout the notion of strategic M&A, can you give a little more detail on what you're thinking as a potential kind of criteria there. It seems like your product portfolio pretty well-rounded out now. So just kind of curious what you might think about in terms of strategic M&A. And then second, in terms of new bookings opportunities for your API business, how important is this notion of cross selling into the application base there. It seems like a lot of the growth just coming from direct at this point.

Hunter Blankenbaker -- Vice President of Investor Relations

So let's talk about M&A. M&A is opportunistic, we always are looking to potentially augment our technical innovations and there is lots of opportunities out there, but it has to make sense. If it expands our reach, our revenue base and our capabilities in terms of route that's also attractive. At this point, we've done a really good job over the past three to four years and strategically pivoting the business, Vonage communication platform. I think we've got the base products as you point out, Mike, I think if there is any of that activity. It's opening up market expansion and TAM or it's augmenting technical innovation, it's going to be opportunistic and we're going to look at that going forward. Then from the API standpoint, I'll swing it over to Omar.

Omar Javaid -- President, API Platform Group

Hi, Mike. Thank you for the question. I think what you were asking for, how big is the opportunity in cross selling APIs to apps and vice versa versus focusing on APIs. I think as as we've laid out even before the opportunity within API is very strong. We continue to focus on it. Rory, Jay and team candidly wouldn't have it any other way. However, we see, we've invested a great deal. And we have a strong customer base on the app side and it would behoove us to figure out how to become stronger at selling those solutions within those customers. So I think that's an opportunity, but we are very, very focused on being great at the API business as well.

Mike Latimore -- Northland Capital Markets -- Analyst

Yeah. Thank you. Great. Next question. Thank you. Our next question comes from the line of Catharine Trebnick with Dougherty. Please proceed with your question.

Catharine Trebnick -- Dougherty and Company -- Analyst

Thank you. [Speech Overlap] Yeah, no sorry, I had you unmute, it was not [undecipherable] my part. Thank you for taking my question. One is, it seems you have a added a lot of senior management team recently. Are you moving to a more traditional management structure with engineering, sales and marketing and away from more what was happening in the year ago where you had two centers of power I would say with API and then the UC and CC Group. I'm just trying to understand the new organization structure and how that pans out for responsibilities enroll.

Hunter Blankenbaker -- Vice President of Investor Relations

Sure Catherine. Hey, there is no question, I love the power of the Vonage communication platform. An API based platform with global reach leveraging this global carrier network, a cloud-based infrastructure around the world, we can reach any customer, any partner anywhere and our APIs give us this buildable base and these purpose-built applications built on top of it and UC and CC. That's the power of Vonage. It's diverse in terms of the geography representation of revenue. The industry representation let's leverage that. That's the power and one of the differentiators of Vonage.

And when you have the opportunity and you get into this and we're going to drive a culture around accountability, Collaboration, Trust and driving excellent. We're going to do what we say and own what we do and that's going to be our culture. Want to make sure that we augment our already strong senior leadership team with really amazing talent. I mean first Joy joins us in terms of the CMO, then we go get Jay, Lasher look at the scale there and then Savinay Berry, just yesterday these are opportunities in combination with the skills that we already have on board that are now building a company, not for today but for the next three years, and the next 5 years. That's the kind of idea that we're tackling here and we want to leverage that Vonage Communications that's what customers are looking for communications are going to rule the day over the next 5 to 7 year we are in the right place, at the right time, with the right team and then under that the technical team that we have in engineering and products, I'll go into any battle with that team anywhere. Thanks Catherine.

Catharine Trebnick -- Dougherty and Company -- Analyst

Yeah. And then the follow-up is could you parse for us what high-value API gross margins are, I know at one point in time. I was thinking the video API was around 60% any possibility you can parse some of that information out for us.

Hunter Blankenbaker -- Vice President of Investor Relations

Yeah, at the product level, we are not going to kind of get into that kind of levels for price to say high value is definitely on the higher end of the portfolio in terms of the mix, there is no question. And we are growing the higher and higher percentage of that as we go forward, but there is no, no question is the power of VCP and with the new disclosure now, you can see that business much more clearly over the past several years, how that's progressing and growing. And then with the work that we're going to do at Analyst Day we kind of set the vision for where we're going to go over the next three years. Thanks. Next question.

Operator

Thank you. Our next question comes from the line of George Sutton with Craig-Hallum. Please proceed with your question.

George Sutton -- Craig-Hallum -- Analyst

Thank you, Rory you gave about a 1500 basis point suggestion of improvement in your Rule of 40 over the next three years. I wondered if you could just break that down into growth versus margin plans.

Rory Read -- Chief Executive Officer

George, how you got to look at that as we kind of talked about at the beginning with Ryan, growth has to be the optimal driver, in an optimal kind of model, if we were looking three years down, three years out is a ways away. But as you go for that 30 or better number in that time frame, you're going to want to look for something in that mid-20s range on growth obviously higher is better but that part and then you want to be in that mid-single digit on the bottom. There is no question that the opportunity is on the growth side.

We're in the high teens today on VCP revenue growth. We need to accelerate that over the next several years. Bottom line, there is lots of ways to make those numbers but we definitely want to [Indecipherable] ourselves toward that growth driver. Does that help George?

George Sutton -- Craig-Hallum -- Analyst

That's very helpful. Thank you.

Rory Read -- Chief Executive Officer

Okay, next question.

Operator

Thank you. Our next question comes from the line of Will Power with Baird & Company. Please proceed with your question.

Will Power -- Baird -- Analyst

Okay, great, thanks. Yeah, I guess a couple of try to sneak in here, I guess, Rory, now that you've included the consumer strategic review. I wonder if you could just remind us of the strategic importance of having API, the UC Contact Center businesses together, how intertwined of those and could it make any sense to look at strategic alternatives for the UC contact center business just to help shine a brighter light on the API segments.

Hunter Blankenbaker -- Vice President of Investor Relations

From my standpoint, Will there is no question we're better together. The power of Vonage is in that reach and scope. I have no hesitation at all. The Vonage communication platform will be based on API based platform and we're going to use that global carrier network, that global infrastructure reach to be able to reach any customer, anywhere around the planet, and then what we're going to do is use those API to build those once and then build those into the UC and CC capability as we move forward.

There is no question that there is some different sellers, but we already are seeing examples and I referenced a couple in the prepared remarks, were customers are definitely seeing the power of UC and CC and that combination. And we're seeing a lot more in terms of our Salesforce flow in terms of combined cross-sell opportunities, but then they love the API work to build out and give them scale and reach as they build out this communications reach. Does that help?

Will Power -- Baird -- Analyst

Yeah, no, that helps. Thank you. I guess maybe just a second quick follow-up as we looked at the API segment in guidance. I think you all are expecting an acceleration in revenue growth from what was just reported side, I'm not have any further color as that kind of the key drivers behind the API outlook.

Hunter Blankenbaker -- Vice President of Investor Relations

You know, there is no question from an API standpoint, we've seen some impact from the pandemic around hospitality and travel.

But we've also seen acceleration and video and voice verification and some of the others. It's a little bit hard to predict how the moderation of the pandemic will occur across 2021, we all want it to moderate. It's the best. There is no question that this change away in the way business is done, it's going to continue, but I think that kind of momentum is just going to continue to go on what we've done is prudently looked at the full year, balancing what we're seeing in the short-term with the unknown of the moderation of the pandemic. So at the end of the day, we want to make sure we're delivering information that we are going to execute on and execute with external much.

Thanks. Will. Next question.

Operator

Thank you. Our next question comes from the line of Michael Rollins with Citi. Please proceed with your questions.

Michael Rollins -- Citi -- Analyst

Thanks and good morning. Two, if I could person. First, I was curious if you could provide an update on how you see the addressable markets in terms of revenue for the key product categories if you to look out over the next three to five years. And just take into account the evolving ways in which enterprise firms and their customers are engaging with each other. And then the second question goes back to just the management of the business. And curious if you're going to run, now that you've done the strategic review, you illuminated more financial disclosures for consumer. Are you going to run consumers essentially a company -- a smaller company within the Vantage portfolio and it will have its own balance sheet and its own specific objectives that are separate from the way you run and manage VCP. Thank you.

Hunter Blankenbaker -- Vice President of Investor Relations

Yeah, so Michael. I'll take the second one first and then you can remind me at the first one, guys, on the screen. The second one in terms of the consumer business, in terms of that, we definitely run that almost as a separate business today. There is some synergies across that, but they're relatively minor. This runs well. It's efficient. We have a strong small team that's working that. And I believe that we can run that business with well and without distraction. So you should think about that as a separate business segment set off to the side, running where it makes sense, we'll use some synergies, but for the most part that's pretty stand-alone. And then the market opportunity around API that debt in terms of the Vonage Communication Platform, there is no question. From my standpoint it is the reason they came to Vonage. I believe that this is a secular change in the way communication and programing is done across multiple modes of communication to embed in every workflow, every application, every business process, it's going to change and pandemic is unfortunate, as this has only accelerated that and we're going to see that continue to happen for the next three to five years. We are in the right place at the right time. Thanks, Michael. Next question.

Operator

Thank you. Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Samad Samana -- Jefferies -- Analyst

Hi, good morning and thank you for taking my question. I'll just squeeze one instance we're already over that 9:30 mark, but if I think about the changes in the senior management team, as you mentioned you've deepened the balance sheet you've made a lot of changes over the last 18 months, how should we think about maybe the turnover rate in the quota-carrying sales rep organization and maybe what was churn or retention there in 2020 and how should we think about in terms of backfilling or supplementing that in 2021. And then just, I know you have an Analyst Day coming up in a few weeks and don't want to steal the thunder from that, but maybe, how should we think about any additional strategic changes as it relates to the management of the business.

Hunter Blankenbaker -- Vice President of Investor Relations

Yeah. I feel good about the org structure and how we build the leadership team. So as can there always be small modifications we've done the major work over the past 6 months. I think with the four additions, I think we're in the right place in terms of the first question and Samad you talked about our sales team my experience in every business I've ever been part of the number one driver of sales productivity, and the reason you're asking is spot on it's time and patch.

We have seen strong continued flow through. So the longer someone is selling our products and our capabilities, the more productivity to have. We want to create that environment where they want to be part of that and continue to grow with the business, we've seen at or below industry levels of attrition over the past 2 years and over the past 12 months. It's actually decline, but it's something that I know Jay believes in big time in terms of driving that productivity comes from time and patch and we're going to, definitely manage that. So the data on that one, you should think that we're having the team at industry or lower attrition rates and that we're keeping those players focus to grow that business. Thanks. Next question.

Operator

Thank you. Our next question comes from the line of Sterling Audi with JP Morgan. Please proceed with your question.

Sterling Auty -- J.P. Morgan -- Analyst

Hi, this is Drew for Sterling. You've mentioned this e-commerce self-service platform that will drive growth with micro businesses and SMBs, is that a completely new solution? And if so, could you provide some more color on the strategy surrounding that.

Hunter Blankenbaker -- Vice President of Investor Relations

Sure, Drew. Great question, and I really want to emphasize, there is two pieces to it. It's not only the capabilities that we introduced over the past several quarters, it's something of the strategy that Rodolpho has been on and building out and that micro in the beginning, a small segment. The other part of it is the work that Joy Corso and the marketing team are doing to drive velocity marketing around that and as I mentioned in the first quarter, we've implemented a number of new velocity marketing tactics and we're seeing some very good signs. We're going to double down on that to drive that growth. But that's been our strategy since Rodolpho guy here at the end of 2019 and he has been driving that change. We will cover that a little bit more detail at the Analyst Day. Thanks, Drew.

Operator

Thank you. There are no further questions at this time, I would like to turn the call back over to Rory Read for any closing comments.

Rory Read -- Chief Executive Officer

Hey, I want to say thank you to everyone for participating as committed. We communicated greater and more transparent disclosures we closed on the strategic review consumer and we delivered a solid quarter and 4th quarter.

We have a strong leadership team and a committed Vonage set of team members that want to create a better vantage going forward. We're excited to tackle the 2021 and beyond and we look forward to sharing more information with you at our Analyst Day on March 5. I want to thank everyone for joining and the entire team that answered questions today, we appreciate it.

Everyone have a great day. Stay safe and stay strong. Thank you, everyone.

Operator

[Operator Closing Remarks]

Duration: 70 minutes

Call participants:

Hunter Blankenbaker -- Vice President of Investor Relations

Rory Read -- Chief Executive Officer

Stephen Lasher -- Chief Financial Officer

Jay Bellissimo -- Chief Operating Officer

Omar Javaid -- President, API Platform Group

Rodolpho Cardenuto -- Head of Unified Communications and Contact Center

Ryan MacWilliams -- Stephens Inc -- Analyst

Tim Horan -- Oppenheimer -- Analyst

Rich Valera -- Needham and Company -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

James Breen -- William Blair -- Analyst

Mike Latimore -- Northland Capital Markets -- Analyst

Catharine Trebnick -- Dougherty and Company -- Analyst

George Sutton -- Craig-Hallum -- Analyst

Will Power -- Baird -- Analyst

Michael Rollins -- Citi -- Analyst

Samad Samana -- Jefferies -- Analyst

Sterling Auty -- J.P. Morgan -- Analyst

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