VG 10-Q Quarterly Report Sept. 30, 2019

VG 10-Q Quarter ended Sept. 30, 2019

Exhibits

Exhibits

VONAGE HOLDINGS CORP

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PROXIES

DEF 14A	Filed on April 26, 2021
DEF 14A	Filed on April 27, 2020
DEF 14A	Filed on April 25, 2019
DEF 14A	Filed on April 25, 2018
DEF 14A	Filed on April 28, 2017
DEF 14A	Filed on April 25, 2016
DEF 14A	Filed on April 24, 2015
DEF 14A	Filed on April 23, 2014
DEF 14A	Filed on April 26, 2013
DEF 14A	Filed on April 27, 2012
DEF 14A	Filed on April 28, 2011
DEF 14A	Filed on April 28, 2010

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From __________ to __________

Commission File Number 001-32887

VONAGE HOLDINGS CORP .

(Exact name of registrant as specified in its charter)



Delaware					11-3547680
(State or other jurisdiction of incorporation or organization)					(IRS Employer Identification No.)

23 Main Street	Holmdel	,	NJ	,	07733
(Address of principal executive offices)					(Zip Code)

Registrant’s telephone number, including area code: ( 732 ) 528-2600

(Former name, former address and former fiscal year, if changed since last report): Not Applicable

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001	VG	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	o

Non-accelerated filer	o
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class	Outstanding at		October 31, 2019
Common Stock, par value $0.001		242,626,703		shares

VONAGE HOLDINGS CORP.

INDEX



Part 1 - Financial Information

		Page
Item 1.	Condensed Consolidated Financial Statements and Notes
	Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018	3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	4
	Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2019 and 2018	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	6
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018	7
	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4	Controls and Procedures	46

Part II. Other Information

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	50

	Signature	51

Financial Information Presentation

For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted.

PART 1 - FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)



	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	18,741		$	5,057
Accounts receivable, net of allowance of $4,984 and $3,542, respectively	94,423			75,342
Inventory, net of allowance of $61 and $152, respectively	970			1,470
Deferred customer acquisition costs, current portion	12,529			11,755
Prepaid expenses	28,146			26,496
Other current assets	8,110			7,634
Total current assets	162,919			127,754
Property and equipment, net of accumulated depreciation of $110,631 and $104,999, respectively	48,330			49,262
Operating lease right-of-use assets	53,561			—
Goodwill	589,923			598,499
Software, net of accumulated amortization of $99,981 and $100,870, respectively	34,269			17,430
Deferred customer acquisition costs	50,672			37,881
Restricted cash	2,054			2,047
Intangible assets, net of accumulated amortization of $203,530 and $162,788, respectively	255,256			299,911
Deferred tax assets	103,302			102,560
Other assets	32,148			24,144
Total assets	$	1,332,434		$	1,259,488
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	47,158		$	53,262
Accrued expenses	116,488			87,370
Deferred revenue, current portion	61,105			53,447
Operating lease liabilities, current portion	13,260			—
Current portion of notes payable	—			10,000
Total current liabilities	238,011			204,079
Indebtedness under revolving credit facility	235,500			425,000
Notes payable, net of current portion	—			84,228
Convertible senior notes, net	273,265			—
Operating lease liabilities	47,872			—
Other liabilities	3,021			10,413
Total liabilities	797,669			723,720
Commitments and Contingencies (Note 10)
Stockholders’ Equity:
Common stock, par value $0.001 per share; 596,950 shares authorized at September 30, 2019, and December 31, 2018	315			310
Additional paid-in capital	1,481,077			1,415,682
Accumulated deficit	( 628,634		)	( 611,985		)
Treasury stock, at cost	( 305,381		)	( 275,009		)
Accumulated other comprehensive (loss) income	( 12,612		)	6,770
Total stockholders’ equity	534,765			535,768
Total liabilities and stockholders’ equity	$	1,332,434		$	1,259,488

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018

Total revenues	$	302,534		$	261,531		$	879,659		$	774,979

Operating Expenses:
Cost of revenues (exclusive of depreciation and amortization)	133,833			104,351			375,465			315,122
Sales and marketing	83,628			74,380			274,513			229,201
Engineering and development	16,901			14,309			50,318			35,504
General and administrative	41,306			37,620			113,380			97,376
Depreciation and amortization	21,319			16,024			63,195			51,886
Total operating expenses	296,987			246,684			876,871			729,089
Income from operations	5,547			14,847			2,788			45,890
Other Income (Expense):
Interest expense	( 8,454		)	( 3,036		)	( 24,517		)	( 9,294		)
Other income (expense), net	58			347			( 505		)	431
Total other income (expense), net	( 8,396		)	( 2,689		)	( 25,022		)	( 8,863		)
(Loss) Income before income taxes benefit	( 2,849		)	12,158			( 22,234		)	37,027
Income tax (expense) benefit	( 18,248		)	( 2,570		)	5,127			5,644
Net (loss) income	$	( 21,097	)	$	9,588		$	( 17,107	)	$	42,671

(Loss) Earnings per common share:
Basic	$	( 0.09	)	$	0.04		$	( 0.07	)	$	0.18
Diluted	$	( 0.09	)	$	0.04		$	( 0.07	)	$	0.17
Weighted-average common shares outstanding:
Basic	242,336			239,303			241,786			236,775
Diluted	242,336			249,516			241,786			248,780

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) / INCOME

(In thousands)

(Unaudited)



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019			2018		2019			2018

Net (loss) income	$	( 21,097	)	$	9,588	$	( 17,107	)	$	42,671
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax expense (benefit) of $847, ($2,346), $938, and ($3,702), respectively	( 16,459		)	1,525		( 17,594		)	( 4,576		)
Unrealized (loss) gain on derivatives, net of tax expense (benefit) of $71, ($745), $364 and ($354), respectively	( 307		)	530		( 1,788		)	1,538
Total other comprehensive (loss) income	( 16,766		)	2,055		( 19,382		)	( 3,038		)
Comprehensive (loss) income	$	( 37,863	)	$	11,643	$	( 36,489	)	$	39,633

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended
	September 30,
	2019			2018
Cash flows from operating activities:
Net (loss) income	$	( 17,107	)	$	42,671
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	20,098			24,412
Amortization of intangibles	43,097			27,306
Deferred income taxes	( 7,630		)	( 9,506		)
Amortization of deferred customer acquisition costs	7,981			7,002
Allowance for doubtful accounts and obsolete inventory	1,384			1,643
Amortization of financing costs and debt discount	5,311			764
Loss on disposal of property and equipment	745			168
Loss on extinguishment of debt	—			14
Share-based expense	32,152			24,495
Changes in derivatives	( 398		)	( 65		)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	( 23,211		)	( 15,085		)
Inventory	552			1,274
Prepaid expenses and other current assets	( 2,238		)	6,416
Deferred customer acquisition costs	( 21,708		)	( 18,008		)
Accounts payable and accrued expenses	24,043			6,898
Deferred revenue	6,867			( 2,704		)
Other assets - deferred cloud computing implementation costs	( 11,929		)	( 5,009		)
Other assets and liabilities	1,841			1,777
Net cash provided by operating activities	59,850			94,463
Cash flows used in investing activities:
Capital expenditures	( 15,426		)	( 10,687		)
Acquisition and development of software assets	( 20,836		)	( 6,198		)
Acquisitions, net of cash acquired	( 3,000		)	( 32,299		)
Net cash used in investing activities	( 39,262		)	( 49,184		)
Cash flows provided by/(used in) financing activities:
Principal payments on capital lease obligations and other financing obligations	—			( 119		)
Payments for short and long-term debt	( 418,500		)	( 293,688		)
Proceeds from issuance of long-term debt	479,000			272,000
Payments of debt issuance costs	( 9,715		)	( 3,376		)
Payments for capped call transactions and costs	( 28,325		)	—
Common stock repurchases	( 10,000		)	—
Employee taxes paid on withholding shares	( 20,372		)	( 31,064		)
Proceeds from exercise of stock options	1,678			6,117
Net cash used in financing activities	( 6,234		)	( 50,130		)
Effect of exchange rate changes on cash	( 663		)	( 757		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	13,691			( 5,608		)
Cash, cash equivalents, and restricted cash, beginning of period	7,104			33,327
Cash, cash equivalents, and restricted cash, end of period	$	20,795		$	27,719
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	17,108		$	8,454
Income taxes	$	3,435		$	5,669
Non-cash investing activities:
Capital expenditures included in accounts payable and accrued liabilities	$	657		$	1,840
Debt issuance costs included in accounts payable and accrued liabilities	$	328		$	—
Issuance of shares for asset acquisition	$	3,000		$	—

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income		Total
Balance at June 30, 2018	$	309	$	1,396,407	$	( 614,630	)	$	( 271,890	)	$	8,916	$	519,112
Stock option exercises	1		1,061										1,062
Share-based expense			8,523										8,523
Employee taxes paid on withholding shares								( 2,446		)			( 2,446		)
Foreign currency translation adjustment											1,525		1,525
Unrealized gain on derivatives											530		530
Net income					9,588								9,588
Balance at September 30, 2018	$	310	$	1,405,991	$	( 605,042	)	$	( 274,336	)	$	10,971	$	537,894



	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income			Total
Balance at June 30, 2019	$	314	$	1,464,742	$	( 607,537	)	$	( 304,031	)	$	4,154		$	557,642
Stock option exercises	1		414											415
Share-based expense			12,921											12,921
Employee taxes paid on withholding shares								( 1,350		)				( 1,350		)
Common stock issued for acquisition of assets			3,000											3,000
Foreign currency translation adjustment											( 16,459		)	( 16,459		)
Unrealized loss on derivatives											( 307		)	( 307		)
Net loss					( 21,097		)							( 21,097		)
Balance at September 30, 2019	$	315	$	1,481,077	$	( 628,634	)	$	( 305,381	)	$	( 12,612	)	$	534,765

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income			Total
Balance at December 31, 2017	$	298	$	1,375,391	$	( 672,561	)	$	( 244,239	)	$	14,009		$	472,898
Cumulative effect adjustment upon the adoption of Topic 606					24,848									24,848
Stock option exercises	12		6,105											6,117
Share-based expense			24,495											24,495
Employee taxes paid on withholding shares								( 30,097		)				( 30,097		)
Foreign currency translation adjustment											( 4,576		)	( 4,576		)
Unrealized gain on derivatives											1,538			1,538
Net income					42,671									42,671
Balance at September 30, 2018	$	310	$	1,405,991	$	( 605,042	)	$	( 274,336	)	$	10,971		$	537,894



	Common Stock		Additional Paid-in Capital			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income			Total
Balance at December 31, 2018	$	310	$	1,415,682		$	( 611,985	)	$	( 275,009	)	$	6,770		$	535,768
Cumulative effect adjustment upon the adoption of Topic 842						458									458
Stock option exercises	5		1,673												1,678
Share-based expense			32,152												32,152
Employee taxes paid on withholding shares									( 20,372		)				( 20,372		)
Common stock repurchases									( 10,000		)				( 10,000		)
Equity component of convertible notes, net of issuance costs and tax			50,123												50,123
Purchase of capped calls, net of tax			( 21,553		)										( 21,553		)
Common stock issued for acquisition of assets			3,000												3,000
Foreign currency translation adjustment												( 17,594		)	( 17,594		)
Unrealized loss on derivatives												( 1,788		)	( 1,788		)
Net loss						( 17,107		)							( 17,107		)
Balance at September 30, 2019	$	315	$	1,481,077		$	( 628,634	)	$	( 305,381	)	$	( 12,612	)	$	534,765

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 1. Nature of Business

Nature of Operations

Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. At Vonage, we are redefining business communications. We are embracing technology to transform how businesses communicate to create better business outcomes. Our cloud communications platform enables businesses of all sizes to collaborate more productively and engage their customers more efficiently across any device. All of our cloud communications solutions are designed to allow businesses to be more productive by integrating communications with all their existing business productivity tools and our programmable solutions allow customers to engage with their customers via embedded voice, chat, or messaging to create seamless and contextual communications that makes doing business easier for end customers.

For our business customers, we provide innovative, cloud-based Unified Communications as a Service, or UCaaS, solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable Session Initiation Protocol, or SIP, based Voice over Internet Protocol, or VoIP, network. We also offer Communications Platform as a Service, or CPaaS, solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. With the acquisition of NewVoiceMedia on October 31, 2018, Vonage also provides customers with a robust Contact Center as a Service, or CCaaS, offering, driving intelligent interactions for customers through emerging technologies such as skills-based routing, real-time sentiment analysis and chatbots. NewVoiceMedia's cloud contact center solution, combined with Vonage's offering, provides an end-to-end communications experience for enhanced customer engagement and conversation. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment.

We also provide a robust suite of feature-rich residential communication solutions that allow consumers to connect their home phones and mobile phones on one number and we offer attractive international long distance rates that help create a loyal base of satisfied customers.

Customers in the United States represented 72 % and 79 % of our consolidated revenues for the three months ended September 30, 2019 and 2018 and 72 % and 80 % for the nine months ended September 30, 2019 and 2018 , respectively, with the balance in Canada, the United Kingdom, China, Singapore, Netherlands, and other countries around the world.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements and information have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the SEC's regulations for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the Company's financial position, results of operations, comprehensive income, cash flows, and stockholders’ equity for the periods presented. The results for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on February 27, 2019 .

Use of Estimates

Our condensed consolidated financial statements and notes thereof are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Reclassifications

Reclassifications have been made to our condensed consolidated financial statements for the prior year periods to conform to classifications used in the current year periods. The reclassifications did not affect results of operations or net assets.

Note 2. Summary of Significant Accounting Policies

This footnote should be read in conjunction with the complete description of our significant accounting policies under Note 2, Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2018 .

Cost of Revenues

Cost of revenues excludes depreciation and amortization expense of $ 9,658 and $ 6,386 for the three months ended September 30, 2019 and 2018 and $ 28,220 and $ 19,046 for the nine months ended September 30, 2019 and 2018 , respectively. In addition, costs of goods sold included in cost of revenues during the three months ended September 30, 2019 and 2018 were $ 5,921 and $ 6,386 and during the nine months ended September 30, 2019 and 2018 were $ 17,112 and $ 18,854 , respectively.

Sales and Marketing Expenses

We incurred advertising costs, which are included in sales and marketing, of $ 11,437 and $ 12,883 for the three months ended September 30, 2019 and 2018 and $ 45,773 and $ 41,805 for the nine months ended September 30, 2019 and 2018 , respectively.

Leases

At inception of a contract, the Company determines whether the contract is or contains a lease. Further, the Company determines if the arrangement qualifies as an operating lease or a finance lease. Operating leases are included in operating lease right-of-use assets, operating lease liabilities - current portion and operating lease liabilities on the Company's consolidated balance sheet. The Company does not have any finance leases as of September 30, 2019 and January 1, 2019.

A right-of-use asset represents the Company's right to use the underlying asset for the lease term and the lease liabilities represent our obligation to make lease payments under the leasing arrangement. We recognize an operating lease right-of-use asset and operating lease liability at the arrangement's commencement date based upon the present value of the lease payments over the lease term. We utilize our incremental borrowing rate based on the information available at the commencement date in order to determine the present value of lease payments or the implicit rate when readily determinable. The Company's lease arrangements may include options to extend or terminate the lease arrangement. Such options are included in the determination of lease term when it is reasonably certain that the Company will exercise that option. The Company recognizes lease expense for lease payments on a straight-line basis over the term of the lease. The Company has made an accounting policy election for leases that at the commencement date have terms of twelve months or less to not recognize an operating lease right-of-use assets or operating lease liabilities on its balance sheet. Instead, the Company recognizes lease payments as an expense in accordance with the lease terms.

Fair Value of Financial Instruments

The Company records certain of its financial assets at fair value on a recurring basis as described below. Certain of the Company's other financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of their short-term maturities. We believe the fair value of our 2018 Credit Facility at September 30, 2019 and December 31, 2018 was approximately the same as its carrying amount as market conditions, including available interest rates, credit spread relative to our credit rating, and illiquidity, remain relatively unchanged from the issuance date of our debt obligations for a similar debt instrument and are classified as Level 3 within the fair value hierarchy.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of the inputs, or assumptions, we use in the determination of fair value, and we classify financial assets and liabilities carried at fair value in one of the following three categories:

• Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

• Level 2 - observable prices that are based on inputs not quoted on active markets but corroborated by market data; and

• Level 3 - unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The following table presents the assets that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2019 and December 31, 2018 :



	September 30, 2019		December 31, 2018
Level 2 Measurements
Interest rate swaps ⁽¹⁾	$	106	$	1,859

(1) Included in other assets on our condensed consolidated balance sheets.

As of September 30, 2019 , the fair value of the 1.75 % convertible senior notes due 2024 (the “Convertible Senior Notes”) was approximately $ 355,202 . The fair value was determined based on the quoted price for the Convertible Senior Notes in an inactive market on the last trading day of the reporting period and is classified as Level 2 in the fair value hierarchy.

Supplemental Balance Sheet Information

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to amounts included in the consolidated statements of cash flows:



	As of September 30,				As of December 31
	2019		2018		2018		2017
Cash and cash equivalents	$	18,741	$	25,735	$	5,057	$	31,360
Restricted cash	2,054		1,984		2,047		1,967
Total cash, cash equivalents and restricted cash	$	20,795	$	27,719	$	7,104	$	33,327

Intangible assets, net



	September 30, 2019		December 31, 2018
Customer relationships	$	158,804	$	187,887
Developed technology	91,547		104,368
Patents and patent licenses	1,655		2,514
Trade names	3,250		5,005
Non-compete agreements	—		137
Finite-lived intangible assets, net	$	255,256	$	299,911

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Accrued expenses



	September 30, 2019		December 31, 2018
Compensation and related taxes and temporary labor	$	28,410	$	33,249
Marketing	13,728		10,238
Taxes and fees	17,903		11,189
Telecommunications	36,500		21,403
Interest	2,147		65
Customer credits	2,701		3,325
Professional fees	3,167		2,049
Inventory	997		1,188
Other accruals	10,935		4,664
Accrued expenses	$	116,488	$	87,370

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, " Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the use of a new current expected credit loss ("CECL") model in estimating allowances for doubtful accounts with respect to accounts receivable, straight-line receivable and notes receivable. Receivables from revenue transactions, or trade receivables, are recognized when the corresponding revenue is recognized under ASC Topic 606, Revenue from Contracts with Customers . The CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and record allowances that when deducted from the balance of the receivables, represent the estimated net amounts expected to be collected. Given the generally short term nature of trade receivables, we do not expect to apply a discounted cash flow methodology. However, the Company will consider whether historical loss rates are consistent with expectations of forward-looking estimates for our trade receivables. In November 2018, the FASB issued ASU 2018-19 to clarify that operating lease receivables recorded by lessors are explicitly excluded from the scope of Topic 326. In April 2019, the FASB issued ASU 2019-04 to improve certain codifications including Topic 326 where accrued interest on receivables, recoveries, variable interest rates and prepayments are addressed. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. While we are still evaluating the impact of this guidance on our condensed consolidated financial statements, we currently believe it will not have a material impact upon adoption.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

The following standard was adopted by the Company during the nine months ended September 30, 2019:

In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-04, "Intangibles - Goodwill and Other". The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. This ASU is effective for an annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this ASU during the third quarter of 2019. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, " Leases (Topic 842)" which replaces the guidance on accounting for leases in Topic 840. The new guidance increases transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for most leases and disclose key information about leasing arrangements.

The Company adopted the new standard on January 1, 2019 using a modified retrospective transition approach, which involves applying the new standard to all leases existing at the date of the initial application with any cumulative impact of the adoption recorded to retained earnings. In addition, we elected the package of practical expedients permitted under the transition guidance which allows the Company to carry forward the historical lease classification. The adoption of Topic 842 has had a significant effect on our balance sheet, mostly related to (1) the recognition of new right-of-use assets and new lease liabilities on our balance sheet for our existing operating leases (most notably leases of office space and co-location space); and (2) the derecognition of existing assets (most notably prepaid rent), and existing liabilities (most notably deferred rent) related to such leases. It will not materially affect our earnings or cash flows. We recorded the following transactions on January 1, 2019:


•	Recognized currently unrecognized right-of-use assets of $ 57.3 million net of deferred rent and lease incentives which were previously included in other liabilities.


•	Recognized currently unrecognized lease liabilities of $ 64.5 million (based on the present value of the remaining minimum rental payments for existing operating leases).


•	Recognized an adjustment to retained earnings of $ 458 thousand related to release of deferred tax assets.

Note 3. Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers which is further described in Note 2, Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2018.

Disaggregation of Revenue

The following tables details our revenue from customers disaggregated by primary geographical market, source of revenue, and timing of revenue recognition. The tables also include a reconciliation of the disaggregated revenue for our Business and Consumer segments.



	Three Months Ended						Three Months Ended
	September 30, 2019						September 30, 2018
	Business		Consumer		Total		Business		Consumer		Total
Primary geographical markets
United States	$	127,976	$	88,567	$	216,543	$	107,446	$	99,061	$	206,507
Canada	2,138		4,817		6,955		919		5,781		$	6,700
United Kingdom	13,910		2,620		16,530		6,505		3,054		$	9,559
Other Countries ⁽¹⁾	62,506		—		62,506		38,765		—		$	38,765
	$	206,530	$	96,004	$	302,534	$	153,635	$	107,896	$	261,531
Major Sources of Revenue
Service revenues	$	183,701	$	83,981	$	267,682	$	133,709	$	97,093	$	230,802
Access and product revenues	12,120		69		12,189		12,427		92		12,519
USF revenues	10,709		11,954		22,663		7,499		10,711		18,210
	$	206,530	$	96,004	$	302,534	$	153,635	$	107,896	$	261,531

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

(1) No individual other international country represented greater than 10% of total revenue during the periods presented.



	Nine Months Ended						Nine Months Ended
	September 30, 2019						September 30, 2018
	Business		Consumer		Total		Business		Consumer		Total
Primary geographical markets
United States	$	363,312	$	270,270	$	633,582	$	311,562	$	309,056	$	620,618
Canada	5,496		14,927		20,423		2,293		18,275		$	20,568
United Kingdom	53,416		8,315		61,731		20,315		9,503		$	29,818
Other Countries ⁽¹⁾	163,923		—		163,923		103,975		—		$	103,975
	$	586,147	$	293,512	$	879,659	$	438,145	$	336,834	$	774,979
Major Sources of Revenue
Service revenues	$	523,060	$	260,225	$	783,285	$	377,703	$	301,954	$	679,657
Access and product revenues	35,524		197		35,721		37,674		472		38,146
USF revenues	27,563		33,090		60,653		22,768		34,408		57,176
	$	586,147	$	293,512	$	879,659	$	438,145	$	336,834	$	774,979

(1) No individual other international country represented greater than 10% of total revenue during the periods presented.

In addition, the Company recognizes service revenues from its customers through subscription services provided or through usage or pay-per-use type arrangements. During the three and nine months ended September 30, 2019 , the Company recognized $ 146,127 and $ 467,893 related to subscription services, $ 87,677 and $ 242,192 related to usage, and $ 68,730 and $ 169,574 related to other revenues such as USF, other regulatory fees, and credits. During the three and nine months ended September 30, 2018 , the Company recognized $ 149,091 and $ 452,257 related to subscription services, $ 63,857 and $ 175,764 related to usage, and $ 48,583 and $ 146,958 related to other revenues such as USF, other regulatory fees, and credits.

Contract Assets and Liabilities

The following table provides information about receivables and contract liabilities from contracts with customers:

(1) Amounts included in accounts receivables on our condensed consolidated balance sheet.

(2) Amounts included in deferred revenues and other liabilities on our condensed consolidated balance sheet.

Our deferred revenue represents the advance consideration received from customers for subscription services and is predominantly recognized over the following performance period which is generally a month as transfer of control occurs. During the three and nine months ended September 30, 2019 , the Company recognized revenue of $ 111,739 and $ 344,935 , respectively, related to its contract liabilities. During the three and nine months ended September 30, 2018 , the Company recognized revenue of $ 105,494 and $ 332,480 , respectively, related to its contract liabilities. We expect to recognize $ 61,105 into revenue over the next twelve months related to our deferred revenue as of September 30, 2019 .

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Contract Acquisition Costs

We have various commission programs for internal sales personnel and channel partners that are incremental to the acquisition of customer contracts. These costs are recorded as deferred contract acquisition costs on the consolidated balance sheets which eligible employees and third parties may earn commission on sales of services and products to customers. We expect that these commission fees are recoverable and, therefore, we have capitalized $ 63,201 and $ 49,636 as contract costs, net of accumulated amortization, as of September 30, 2019 and December 31, 2018 , respectively, included within deferred customer acquisitions costs, current portion and deferred customer acquisition costs on our condensed consolidated balance sheet. Capitalized commission fees are amortized to sales and marketing expense over estimated customer life, which is 7 years for Business customers. The amounts amortized to sales and marketing expense were $ 3,060 and $ 7,981 for the three and nine months ended September 30, 2019 , and $ 2,579 and $ 7,002 for the three and nine months ended September 30, 2018 , respectively. There were no impairment losses recognized in relation to the costs capitalized during the three and six months ended September 30, 2019 and 2018. In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year and for residuals and renewals.

Note 4. Acquisitions and Dispositions

Acquisition of NewVoiceMedia

On October 31, 2018, the Company acquired 100 % of the issued and outstanding shares of NewVoiceMedia Limited (“NewVoiceMedia”), a cloud Contact Center-as-a-Service (CCaaS) provider, for a purchase price of $ 350,179 paid in cash.

The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair value on the acquisition date. The initial accounting for the business combination is not complete because the evaluations necessary to assess the fair values of certain net assets acquired inclusive of deferred tax liabilities is still in process. The allocation of the purchase price may be modified up to one year from the date of the acquisition as more information is obtained about the fair value of assets acquired and liabilities assumed. The Company expects its analysis to be completed by the close of the fourth quarter. Under the terms of the offer, NewVoiceMedia shareholders received cash in the amount of approximately $ 341 million as well as transactions costs incurred by NewVoiceMedia which were paid by the Company of approximately $ 9 million on the date of the acquisition.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

The table below summarizes the NewVoiceMedia assets acquired and liabilities assumed as of October 31, 2018:



	Preliminary Acquisition Date Fair Value as of December 31, 2018		Measurement period adjustments			Revised Preliminary Acquisition Date Fair Value
Assets
Cash and cash equivalents	$	1,994				$	1,994
Accounts receivable	13,747		( 1,448		)	12,299
Other current assets	3,907					3,907
Property and equipment	3,474					3,474
Intangible assets	154,300					154,300
Other assets	378					378
Total assets acquired	177,800		( 1,448		)	176,352

Liabilities
Accounts payable	4,712					4,712
Accrued expenses	4,145					4,145
Deferred tax liabilities	7,756					7,756
Deferred revenue	22,000		800			22,800
Total liabilities assumed	38,613		800			39,413

Net identifiable assets acquired	139,187		( 2,248		)	136,939
Goodwill	210,992		2,248			213,240
Total purchase price	$	350,179	$	—		$	350,179

The Company recorded goodwill of $ 213,240 which is attributable to the Business segment and is not deductible for tax purposes. The factors that resulted in goodwill arising from the acquisition include the revenues and synergies anticipated with the ability to provide a contact center solution to our existing suite of cloud communication services along with a skilled workforce proficient in API development. In addition, the Company incurred and expensed acquisition related transaction costs included in general and administrative expense related to the acquisition of NewVoiceMedia of $ 311 for the nine months ended September 30, 2019 .

Supplemental Pro Forma Information (unaudited)

The following supplemental pro forma information represents the results of operations if Vonage had acquired NewVoiceMedia on January 1, 2018.



	Nine Months Ended
	September 30, 2018
Revenue	$	827,152
Net income	( 10,450		)
Earnings per share - basic	$	( 0.04	)
Earnings per share - diluted	$	( 0.04	)

The pro forma information has been adjusted to include the pro-forma impact of amortization of intangible assets based on the preliminary purchase price allocations. The pro forma data has also been adjusted to eliminate non-recurring transaction costs as well as the related tax impact of pro forma adjustments. There were no transactions between Vonage and NewVoiceMedia. The pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings or any related integration costs.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Acquisition of TokBox

On August 1, 2018, the Company acquired 100 % of the issued and outstanding shares of Telefonica Digital, Inc. (“TDI”), a subsidiary of Telefonica, S.A., and TDI’s subsidiaries, TokBox, Inc. (“TokBox”) and TokBox Australia Pty Limited, for a purchase price of $ 32,906 paid in cash. San Francisco-based TokBox develops and operates the OpenTok Platform and is a provider in the WebRTC programmable video segment of the cloud communications market which will compliment the Company's existing portfolio of programmable communications.

The table below summarizes the TokBox assets acquired and liabilities assumed as of August 1, 2018:



	Acquisition Date Fair Value
Assets
Cash and cash equivalents	$	557
Current assets	2,205
Property and equipment	124
Intangible assets	15,602
Deferred tax asset	92
Restricted cash	50
Total assets acquired	18,630

Liabilities
Accounts payable	371
Accrued expenses	6,003
Total liabilities assumed	6,374

Net identifiable assets acquired	12,256
Goodwill	20,650
Net assets acquired	$	32,906

The Company recorded goodwill of $ 20,650 which is attributable to the Business segment and is deductible for tax purposes. The factors that resulted in goodwill arising from the acquisition include the revenues expected to be achieved by incorporating a video feature in the Company's API platform along with a skilled workforce proficient in API development.

Supplemental Pro Forma Information

The following supplemental pro forma information represents the results of operations as if Vonage had acquired TokBox on January 1, 2018.



	Nine Months Ended
	September 30, 2018
Revenue	$	780,846
Net income	27,601
Earnings per share - basic	$	0.12
Earnings per share - diluted	$	0.11

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

The pro forma information has been adjusted to include the pro-forma impact of amortization of intangible assets based on the preliminary purchase price allocations. The pro forma data has also been adjusted to eliminate non-recurring transaction costs as well as the related tax impact of pro forma adjustments. There were no transactions between Vonage and TokBox. The pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings or any related integration costs.

Goodwill

The Company's goodwill is derived primarily from the acquisitions of Vocalocity, Telesphere, iCore, Simple Signal, Nexmo, TokBox, and NewVoiceMedia which are included in the Company's Business segment. The following table provides a summary of the changes in the carrying amounts of goodwill:



Balance at December 31, 2018	$	598,499
Increase in goodwill related to measurement period adjustments to initial acquisition accounting of NewVoiceMedia	2,248
Foreign currency translation adjustment	( 10,824		)
Balance at September 30, 2019	$	589,923

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 5. Earnings Per Share

The following table sets forth the computation for basic and diluted (loss)/earnings per share for the three and nine months ended September 30, 2019 and 2018 :



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019			2018		2019			2018
Numerator
Net (loss) income	$	( 21,097	)	$	9,588	$	( 17,107	)	$	42,671
Denominator
Basic weighted average common shares outstanding	242,336			239,303		241,786			236,775
Dilutive effect of stock options and restricted stock units	—			10,213		—			12,005
Diluted weighted average common shares outstanding	242,336			249,516		241,786			248,780
Basic (loss) earnings per share
Basic (loss) earnings per share	$	( 0.09	)	$	0.04	$	( 0.07	)	$	0.18
Diluted (loss) earnings per share
Diluted (loss) earnings per share	$	( 0.09	)	$	0.04	$	( 0.07	)	$	0.17

For the three and nine months ended September 30, 2019 and 2018 , the following were excluded from the calculation of diluted (loss)/earnings per common share because of their anti-dilutive effects:



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2019	2018	2019	2018
Restricted stock units	10,616	3,368	10,616	2,200
Stock options	5,087	1,637	5,087	1,013
	15,703	5,005	15,703	3,213

As the Company expects to settle the principal amount of its outstanding convertible senior notes in cash and any excess in cash or shares of the Company’s common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of $ 16.72 per share. The Company's convertible senior notes are further described in Note 7, Long-Term Debt .

Note 6. Income Taxes

The income tax consisted of the following:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
(Loss) income before income taxes	$	( 2,849	)	$	12,158		$	( 22,234	)	$	37,027
Income tax (expense) benefit	( 18,248		)	( 2,570		)	5,127			5,644
Effective tax rate	( 640.5		)%	21.1		%	23.1		%	( 15.2		)%

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Typically, the Company has calculated its provision for income taxes during its interim reporting periods by applying an estimate of the annual effective tax rate for the full year "ordinary" income or loss for the respective reporting period. For the nine months ended September 30, 2019, the Company has computed its provision for income taxes under the discrete method which allows the Company to calculate its tax provision based upon the actual effective tax rate for the year-to-date. The discrete method was determined to be appropriate method for estimating its tax provision for the nine months ended September 30, 2019 as it provides a reliable estimate as opposed to changes in estimated "ordinary" income or loss which would have resulted in significant fluctuations when estimating the annual effective tax rate.

For the three and nine months ended September 30, 2019 , our effective tax rate was different than the statutory rate primarily due to a discrete period tax benefit of $ 544 and $ 6,697 , respectively, which were recognized related to excess tax benefits on equity compensation. In addition, the Company’s actual effective tax rate for the current year has reduced the expected annual benefit as a result of permanent adjustments related to limitations on executive compensation deductibility and inclusion of income in the U.S. due to foreign disregarded entities.

For the three and nine months ended September 30, 2018, the Company recognized income tax equal to pre-tax income multiplied by our annual effective income tax rate. In addition, adjustments were recorded for discrete period items and changes to our state effective tax rate which can cause the rate to fluctuate from quarter to quarter.

For the nine months ended September 30, 2018 , our effective tax rate was different than the statutory rate due to a permanent adjustment of $ 5,312 related to the new Global Intangible Low-Taxed Income ("GILTI") tax rules that were enacted as part of tax reform enacted in December 2017. In addition, the Company recorded a discrete period tax benefit of $ 1,912 and $ 19,228 during the three and nine months ended September 30, 2018 , respectively, which was recognized related to excess tax benefits on equity compensation.

Uncertain Tax Positions

The Company had uncertain tax benefits of $ 1,203 and $ 1,107 as of September 30, 2019 and December 31, 2018 , respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company incurred interest expense or penalties of $ 149 for both the three and nine months ended September 30, 2019 , respectively, and the Company did no t incur any interest expense penalties during the three and nine months ended September 30, 2018 . The following table reconciles the total amounts of uncertain tax benefits:



	September 30, 2019			December 31, 2018
Balance as of January 1	$	1,107		$	1,086
Increase due to current year positions	—			1,107
Increase (decrease) due to prior year positions	154			( 1,086		)
Decrease due to settlements and payments	( 86		)	—
Increase due to foreign currency fluctuation	28			—
Uncertain tax benefits as of the end of the period	$	1,203		$	1,107

Net Operating Loss Carry Forwards ("NOLs")

As of September 30, 2019 , the Company has U.S. Federal and state NOL carryforwards of $ 578,522 and $ 245,403 , respectively, which expire at various times through 2037. In addition, we have NOLs for United Kingdom tax purposes of $ 162,535 with no expiration date.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 7. Long-Term Debt

This footnote should be read in conjunction with the complete description of our financing arrangements under Note 7, Long-Term Debt and Revolving Credit Facility , to our Annual Report on Form 10-K for the year ended December 31, 2018 .

The following table summarizes the Company's long-term debt as of September 30, 2019 and December 31, 2018 :



	September 30, 2019		December 31, 2018
Term note payable - due 2023	$	—	95,000
Revolving credit facility - due 2023	235,500		425,000
Convertible senior notes - due 2024	345,000		—
Long-term debt including current maturities	580,500		520,000
Less current maturities	—		10,000
Less unamortized discount	64,229		—
Less debt issuance costs	7,506		772
Total long-term debt	$	508,765	$	509,228

Convertible Senior Notes

In June 2019, the Company issued $ 300.0 million aggregate principal amount of 1.75 % convertible senior notes due 2024 in a private placement and an additional $ 45.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option of the initial purchasers (collectively, "Convertible Senior Notes"). The Convertible Senior Notes are the Company's senior unsecured obligations. The Convertible Senior Notes bear interest at a rate of 1.75 % per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2019. The Convertible Senior Notes will mature on June 1, 2024, unless earlier redeemed, repurchased or converted. We may not redeem the notes prior to June 5, 2022. On or after June 5, 2022, we may redeem for cash all or a portion of the notes if the last reported sale price of the Company's common stock has been at least 130 % of the conversion price then in effect on (i) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date the Company provides notice of redemption and (ii) the trading day immediately preceding the date the Company provides such notice. The total net proceeds from the offering, after deducting initial purchase discounts and expenses payable by the Company, were $ 334.8 million .

Each $ 1,000 principal amount of the Convertible Senior Notes is initially convertible into 59.8256 shares of the Company's common stock, which is equivalent to an initial conversion price of approximately $ 16.72 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change or a redemption period, each as defined in the indenture setting forth the terms of the Convertible Senior Notes, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Convertible Senior Notes in connection with such make-whole fundamental change or during the relevant redemption period.

The Company used the net proceeds from the offering to (i) pay the cost of the capped call transactions described below, (ii) to repurchase approximately $ 10 million in shares of its common stock from purchasers of the Convertible Senior Notes in privately negotiated transactions effected through one of the initial purchasers or an affiliate thereof concurrently with the pricing of the Convertible Senior Notes described below and (iii) to repay the outstanding principal balance under its credit facility.

Prior to December 1, 2023, the notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. We will satisfy any conversion election by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. The Convertible Senior Notes and shares of common stock issuable upon conversion, if any, have not been registered under the Securities Act, or under any U.S. state securities laws or other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

During the three months ended September 30, 2019, the conditions allowing holders of the Convertible Senior Notes to convert were not met.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

In accounting for the issuance of the Convertible Senior Notes, the Company separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense at an effective interest rate of 6.4 % over the contractual terms of the Convertible Senior Notes.

In accounting for the transaction costs related to the Convertible Senior Notes, the Company allocated the total amount incurred to the liability and equity components of the Convertible Senior Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were $ 7,973 were recorded as additional debt discount and will be amortized to interest expense using the effective interest method over the contractual terms of the Convertible Senior Notes. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.

The net carrying amount of the liability component of the Convertible Senior Notes was as follows:



	September 30, 2019
Principal	$	345,000
Unamortized discount	( 64,229		)
Unamortized issuance cost	( 7,506		)
Net carrying amount	$	273,265

The net carrying amount of the equity component of the Convertible Senior Notes was as follows:



	September 30, 2019
Proceeds allocated to the conversion option (debt discount)	$	67,664
Issuance cost	( 1,944		)
Income tax expense	( 15,597		)
Net carrying amount	$	50,123

The following table sets forth the interest expense recognized related to the Convertible Senior Notes:



	Three Months Ended	Nine Months Ended
	September 30, 2019	September 30, 2019
Contractual interest expense	1,543	$	1,819
Amortization of debt discount	2,948	3,435
Amortization of debt issuance costs	391	465
Total interest expense related to the Convertible Senior Notes	4,882	$	5,719

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

In connection with the pricing of the Convertible Senior Notes and subsequently in connection with the exercise of the initial purchaser's option to purchase additional notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the "Capped Calls"). The Capped Calls each have a strike price of $ 16.72 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Convertible Senior Notes. The Capped Calls have initial cap prices of $ 23.46 per share, subject to certain adjustments. The Capped Calls are expected generally to reduce potential dilution to the Company's common stock upon any conversion of notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap. The initial cap price of the Capped Call transactions was $ 23.46 . The net cost of $ 28,325 incurred to purchase the Capped Calls and related income tax benefit of $ 6,772 was recorded as a reduction to additional paid-in capital on the Company's consolidated balance sheet and are not accounted for as derivatives.

Concurrently with the issuance of the Convertible Senior Notes, the Company’s board of directors approved the repurchase of an aggregate of 852,515 , or $ 10,000 , of shares of the Company’s outstanding common stock in privately negotiated transactions at a price of $ 11.73 per share, which was equal to the closing price per share of the Company’s common stock on June 11, 2019, the date of the pricing of the offering of the Convertible Senior Notes. The share repurchase was recorded to treasury stock on the Company's consolidated balance sheet.

2018 Term Note and Revolving Credit Facility

On July 31, 2018, the Company replaced its 2016 Credit Facility previously consisting of a $ 125 million term loan and a $ 325 million revolving credit facility with the 2018 Credit Facility consisting of a $ 100 million senior secured term loan and a $ 500 million revolving credit facility. The co-borrowers under the 2018 Credit Facility are the Company and Vonage America Inc., the Company’s wholly owned subsidiary. Obligations under the 2018 Credit Facility are guaranteed, fully and unconditionally, by the Company’s other United States subsidiaries and are secured by substantially all of the assets of each borrower and each guarantor.

During the third quarter of 2018, the Company used $ 232,000 of the proceeds available under our 2018 Credit Facility plus cash on hand to retire all of the debt outstanding under our 2016 Credit Facility and to cover transaction fees and expenses. Total transaction fees and expense incurred were $ 3,376 , of which $ 474 was allocated to the term note and $ 2,813 was allocated to the revolving credit facility which will be amortized over the term of 2018 Credit Facility. The remaining $ 89 of transaction fees and expenses were expensed during the year ended December 31, 2018. The Company recognized a loss on extinguishment of debt of $ 14 which primarily consisted of the write off of previously deferred financing costs partially offset by the realization of a portion of gains associated with the interest rate swaps included in accumulated other comprehensive income during the year ended December 31, 2018. Remaining proceeds available from the undrawn revolving credit facility under our 2018 Credit Facility will be used for general corporate purposes and to fund potential additional acquisitions.

During the nine months ended September 30, 2019 , we repaid $ 323.5 million under the revolving credit facility, $ 95 million under the 2018 term note, and borrowed $ 134 million under the revolving credit facility. In addition, the effective interest rate was 4.81 % as of September 30, 2019 .

During the nine months ended September 30, 2018 , we made mandatory repayments of $ 2.5 million under the 2018 term note and made discretionary repayments of $ 18 million under the 2018 revolving credit facility.

As of September 30, 2019 , we were in compliance with all covenants, including financial covenants, for the 2018 Credit Facility.

2016 Financing

During the nine months ended September 30, 2018, we made mandatory repayments of $ 9.4 million under the term note and made discretionary repayments of $ 35.0 million under the revolving credit facility and borrowed $ 40.0 million under the revolving credit facility.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Interest Rate Swaps

On July 14, 2017, we executed on three interest rate swap agreements in order to hedge the variability of expected future cash interest payments related to the 2016 Credit Facility. The swaps have an aggregate notional amount of $ 150 million and were effective from July 31, 2017 through June 3, 2020 concurrent with the term of the 2016 Credit Facility. Under the swaps our interest rate is fixed at 4.7 % . The interest rate swaps are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging .

As of September 30, 2019 and December 31, 2018 , the fair market value of the swaps was $ 106 and $ 1,859 , respectively, which is included in other assets on our condensed consolidated balance sheet. The following table summarizes the effects of ASC 815 on the Company's accumulated OCI balance attributable to cash flow derivatives:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018

Accumulated OCI beginning balance	$	( 506	)	$	1,973		$	975		$	965
Reclassified from accumulated OCI to income:
Due to reclassification of previously deferred gain	( 133		)	( 336		)	( 398		)	( 336		)
Change in fair value of cash flow hedge accounting contracts, net of tax	( 174		)	866			( 1,390		)	1,874
Accumulated OCI ending balance, net of tax benefit of $29 and $34, respectively	$	( 813	)	$	2,503		$	( 813	)	$	2,503
Gains expected to be reclassified from accumulated OCI during the next 12 months	$	531		$	531		$	531		$	531

Note 8. Leases

The Company entered into various operating lease agreements for certain of our existing office and telecommunications co-location space as well as operating leases for certain equipment. The operating leases expire at various times through 2026, some of which provide the Company options to extend the leases for terms up to 5 years beyond the original term.

During the three and nine months ended September 30, 2019 , the Company incurred operating lease expense of $ 3,529 and $ 11,196 , respectively, related to its operating leases. Additionally, the remaining weighted average lease term for our operating leases was 6.99 years and the weighted average discount rate utilized to measure the Company's operating leases was 5.18 % as of September 30, 2019 .

Supplemental cash flow related to the Company's operating leases is as follows:



	Nine Months Ended
	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	12,753

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	7,718

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Maturities of lease liabilities as of September 30, 2019 are as follows:



2019 (excluding the nine months ended September 30, 2019)	$	3,926
2020	14,952
2021	11,495
2022	7,580
2023	7,196
Thereafter	27,770
Total lease payments	72,919
Less imputed interest	( 11,787		)
Total	$	61,132

Minimal rental commitments under non-cancelable operating leases in effect as of December 31, 2018 were as follows (as calculated under ASC 840, Leases ):



2019	$	17,204
2020	14,209
2021	10,378
2022	8,206
2023	8,154
Thereafter	9,908
Total minimum payments required	$	68,059

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 9. Common Stock

As of September 30, 2019 and December 31, 2018 , the Company had 596,950 shares of common stock authorized and had 23,448 shares available for grants under our share-based compensation programs as of September 30, 2019 . For a detailed description of our share-based compensation programs refer to Note 10, Employee Stock Benefit Plans in our Annual Report on Form 10-K for the year ended December 31, 2018 . The following table reflects the changes in the Company's common stock issued and outstanding:



For the Three Months Ended
(in thousands)	Issued	Treasury		Outstanding
Balance at June 30, 2018	308,569	( 69,751	)	238,818
Shares issued under the 2015 Equity Incentive Plan	893	—		893
Employee taxes paid on withholding shares	—	( 188	)	( 188	)
Balance at September 30, 2018	309,462	( 69,939	)	239,523

Balance at June 30, 2019	314,725	( 72,757	)	241,968
Shares issued under the 2015 Equity Incentive Plan	465	—		465
Employee taxes paid on withholding shares	—	( 113	)	( 113	)
Assets acquisition	240	—		240
Common stock repurchases (Note 7)	—			—
Balance at September 30, 2019	315,430	( 72,870	)	242,560


For the Nine Months Ended
(in thousands)	Issued	Treasury		Outstanding
Balance at December 31, 2017	298,174	( 67,235	)	230,939
Shares issued under the 2015 Equity Incentive Plan	11,288	—		11,288
Employee taxes paid on withholding shares	—	( 2,704	)	( 2,704	)
Balance at September 30, 2018	309,462	( 69,939	)	239,523

Balance at December 31, 2018	309,736	( 69,993	)	239,743
Shares issued under the 2015 Equity Incentive Plan	5,454	—		5,454
Employee taxes paid on withholding shares	—	( 2,024	)	( 2,024	)
Assets acquisition	240	—		240
Common stock repurchases (Note 7)	—	( 853	)	( 853	)
Balance at September 30, 2019	315,430	( 72,870	)	242,560

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 10. Commitments and Contingencies

Litigation

From time to time we are subject to legal proceedings, claims, investigations, and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. From time to time, we receive letters or other communications from third parties inviting us to obtain patent licenses that might be relevant to our business or alleging that our services infringe upon third party patents or other intellectual property. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. We believe that we have valid defenses with respect to the legal matters pending against us and are vigorously defending these matters. Given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome in such matters and our inability to reasonably estimate the amount of loss or range of loss, it is possible that the resolution of one or more of these matters could have a material adverse effect on our condensed consolidated financial position, cash flows or results of operations.

Regulation

Telephony services are subject to a broad spectrum of state, federal and foreign regulations. Because of the uncertainty over whether Voice over Internet Protocol (“VoIP”) should be treated as a telecommunications or information service, we have been involved in a substantial amount of state and federal regulatory activity. Implementation and interpretation of the existing laws and regulations is ongoing and is subject to litigation by various federal and state agencies and courts. Due to the uncertainty over the regulatory classification of VoIP service, there can be no assurance that we will not be subject to new regulations or existing regulations under new interpretations, and that such change would not introduce material additional costs to our business. The Company continues to monitor federal regulations relating to net neutrality, rural call completion issues, number slamming, 911 access, access to telecommunication equipment and services by persons with disabilities, caller ID services, number portability, unwanted calls to reassigned numbers, and robocalling. As we continue to expand globally, these types of regulations are likely to be similarly enacted and enforced by the local regulatory authorities.

State and Municipal Taxes

In accordance with generally accepted accounting principles, we make a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability or range of liability can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. From time to time, we have received inquiries from a number of states and local taxing agencies with respect to the remittance of sales, use, telecommunications, and excise taxes. Several jurisdictions are currently conducting tax audits of the Company's records. While the Company collects or has accrued for taxes that it believes are required to be remitted, it has reviewed its positions in those various jurisdictions as well as other regulatory fees and has established appropriate reserves. As such, we have established reserves of $ 4,547 and $ 3,302 as of September 30, 2019 and December 31, 2018 , respectively, as our best estimate of the potential tax exposure for any retroactive assessment.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 11. Industry Segment and Geographic Information

ASC 280 "Segment Reporting" establishes reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. Our chief operating decision-maker reviews revenue and gross margin information for each of our reportable segments, but does not review operating expenses on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.

Business

For our Business customers, we provide innovative, cloud-based UCaaS solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable SIP based VoIP network. Through Nexmo, the Vonage API Platform, we also offer CPaaS solutions designed to enhance the way businesses communicate with their customers embedding communications into apps, websites and business processes. Together we have a robust set of product families tailored to serve the full range of the business value chain, from the SMB, market, through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and CRM solutions, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud, Oracle, Clio, and other CRM solutions. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment.

Consumer

For our Consumer customers, we enable users to access and utilize our services and features, via a single “identity,” either a number or user name, regardless of how they are connected to the Internet, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices.

For our segments we categorize revenues as follows:

Services revenues . Services revenues consists primarily of revenue attributable to our communication services for Consumer and Software Defined Wide Area Network, or SD-WAN, UCaaS and CPaaS services for Business,

Access and product revenues. Product revenues include equipment sold to customers, shipping and handling, professional services, and broadband access, as well as revenues associated with providing access services to Business customers.

USF revenues. USF revenues represent fees passed on to customers to offset required contributions to the USF.

For our segments we categorize cost of revenues as follows:

Services cost of revenues. Services cost of revenues consists of costs associated with network operations and technical support personnel, communication origination, and termination services provided by third party carriers and excludes depreciation and amortization.

Access and product cost of revenues . Product cost of revenues includes equipment sold to customers, shipping and handling, professional services, cost of certain products including equipment or services that we give customers as promotions, and broadband access, as well as costs associated with providing access services to Business customers.

USF cost of revenues. USF cost of revenues represents contributions to the Federal USF and related fees.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Information about our segment results for the three and nine months ended September 30, 2019 were as follows:



	Three Months Ended									Nine Months Ended
	September 30, 2019									September 30, 2019
	Business			Consumer			Total			Business			Consumer			Total
Revenues
Service revenues	$	183,701		$	83,981		$	267,682		$	523,060		$	260,225		$	783,285
Access and product revenues ⁽¹⁾	12,120			69			12,189			35,524			197			35,721
Service, access and product revenues	195,821			84,050			279,871			558,584			260,422			819,006
USF revenues	10,709			11,954			22,663			27,563			33,090			60,653
Total revenues	206,530			96,004			302,534			586,147			293,512			879,659

Cost of revenues
Service cost of revenues ⁽²⁾	87,352			8,587			95,939			243,496			26,706			270,202
Access and product cost of revenues ⁽¹⁾	13,858			1,373			15,231			41,323			3,287			44,610
Service, access and product cost of revenues	101,210			9,960			111,170			284,819			29,993			314,812
USF cost of revenues	10,709			11,954			22,663			27,563			33,090			60,653
Total cost of revenues	111,919			21,914			133,833			312,382			63,083			375,465

Segment gross margin
Service margin	96,349			75,394			171,743			279,564			233,519			513,083
Access and product margin	( 1,738		)	( 1,304		)	( 3,042		)	( 5,799		)	( 3,090		)	( 8,889		)
Gross margin ex-USF (Service, access and product margin)	94,611			74,090			168,701			273,765			230,429			504,194
Segment gross margin	$	94,611		$	74,090		$	168,701		$	273,765		$	230,429		$	504,194

Segment gross margin %
Service margin %	52.4		%	89.8		%	64.2		%	53.4		%	89.7		%	65.5		%
Gross margin ex-USF (Service, access and product margin %)	48.3		%	88.1		%	60.3		%	49.0		%	88.5		%	61.6		%
Segment gross margin %	45.8		%	77.2		%	55.8		%	46.7		%	78.5		%	57.3		%

(1) Includes customer premise equipment, access, and shipping and handling.

(2) Excludes depreciation and amortization of $ 8,492 and $ 1,166 for the three months ended September 30, 2019 and $ 24,684 and $ 3,536 for nine months ended September 30, 2019 , respectively.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Information about our segment results for the three and nine months ended September 30, 2018 were as follows:



	Three Months Ended									Nine Months Ended
	September 30, 2018									September 30, 2018
	Business			Consumer			Total			Business			Consumer			Total
Revenues
Service revenues	$	133,709		$	97,093		$	230,802		$	377,703		$	301,954		$	679,657
Access and product revenues ⁽¹⁾	12,427			92			12,519			37,674			472			38,146
Service, access and product revenues	146,136			97,185			243,321			415,377			302,426			717,803
USF revenues	7,499			10,711			18,210			22,768			34,408			57,176
Total revenues	153,635			107,896			261,531			438,145			336,834			774,979

Cost of revenues
Service cost of revenues ⁽²⁾	59,600			10,661			70,261			172,917			37,050			209,967
Access and product cost of revenues ⁽¹⁾	14,887			993			15,880			43,291			4,657			47,948
Service, access and product cost of revenues	74,487			11,654			86,141			216,208			41,707			257,915
USF cost of revenues	7,499			10,711			18,210			22,773			34,434			57,207
Total cost of revenues	81,986			22,365			104,351			238,981			76,141			315,122

Segment gross margin
Service margin	74,109			86,432			160,541			204,786			264,904			469,690
Access and product margin	( 2,460		)	( 901		)	( 3,361		)	( 5,617		)	( 4,185		)	( 9,802		)
Gross margin ex-USF (Service, access and product margin)	71,649			85,531			157,180			199,169			260,719			459,888
USF margin	—			—			—			( 5		)	( 26		)	( 31		)
Segment gross margin	$	71,649		$	85,531		$	157,180		$	199,164		$	260,693		$	459,857

Segment gross margin %
Service margin %	55.4		%	89.0		%	69.6		%	54.2		%	87.7		%	69.1		%
Gross margin ex-USF (Service, access and product margin %)	49.0		%	88.0		%	64.6		%	47.9		%	86.2		%	64.1		%
Segment gross margin %	46.6		%	79.3		%	60.1		%	45.5		%	77.4		%	59.3		%

(1) Includes customer premise equipment, access, and shipping and handling.

(2) Excludes depreciation and amortization of $ 5,141 and $ 1,245 for the three months ended September 30, 2018 and $ 15,092 and $ 3,954 for the nine months ended September 30, 2018 , respectively.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

A reconciliation of the total of the reportable segments' gross margin to consolidated income before income taxes is as follows:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Total reportable gross margin	$	168,701		$	157,180		$	504,194		$	459,857
Sales and marketing	83,628			74,380			274,513			229,201
Engineering and development	16,901			14,309			50,318			35,504
General and administrative	41,306			37,620			113,380			97,376
Depreciation and amortization	21,319			16,024			63,195			51,886
(Loss) Income from operations	5,547			14,847			2,788			45,890

Interest expense	( 8,454		)	( 3,036		)	( 24,517		)	( 9,294		)
Other (expense) income, net	58			347			( 505		)	431
(Loss) Income before income taxes benefit	$	( 2,849	)	$	12,158		$	( 22,234	)	$	37,027

Information about our operations by geographic location is as follows:



	September 30, 2019		December 31, 2018
Long-lived assets:
United States	$	578,038	$	596,820
United Kingdom	345,214		366,594
Israel	4,526		1,688
	$	927,778	$	965,102



Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Financial Information Presentation

For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted. All trademarks are the property of their owners.

Overview and Strategy

At Vonage, our strategy is to redefine business communications. True to our roots as a technology disruptor, we are embracing technology to transform how businesses communicate to create better business outcomes. Our cloud communications platform enables businesses of all sizes to collaborate more productively and engage their customers more efficiently across any device.

We believe we have a unique set of capabilities and solutions to deliver on the full business communications value chain to help enterprises use cloud communications to improve how business gets done. Vonage offers a unique combination of unified communications, programmable communications and contact center to transform the way businesses communicate all on one platform. We build integrated solutions through programmable communications, complementing and adding more value and customizations to unified communications as a service and cloud contact center solutions.

The OneVonage microservices platform creates specific tools customers need to address the unique communication challenges their businesses face. All of our cloud communications solutions are designed to provide employees with the tools they need to connect, collaborate and be more productive internally while enabling them to engage with customers externally for a better customer experience and more meaningful relationships.

We also provide a robust set of feature-rich residential communication solutions that allow consumers to connect their home phones and mobile phones on one number and we offer attractive international long distance rates that help create a loyal base of satisfied customers.

Our business is organized under two reportable segments, Business and Consumer. Additional discussion of our reportable segments is included in Note 11, Industry Segment and Geographical Information to the Consolidated Financial Statements.

Segment Overview

We are a leading provider of cloud communications services for businesses and consumers. Our business services transform the way people work and businesses operate through a portfolio of communications solutions that enable internal collaboration among employees, while also keeping companies closely connected with their customers, across any mode of communication, on any cloud-connected device. Vonage customers can choose among or combine two separate service delivery options to suit their specific cloud communication needs. They can buy Vonage Business as a subscription through our Applications Group offering our UCaaS and CCaaS and they can buy our API Platform which consists of a broad set of programmable communication APIs. We also provide a robust suite of feature-rich residential communication solutions.

Business

For our Business customers, we provide innovative, cloud-based Unified Communications as a Service, or UCaaS, solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable Session Initiation Protocol based Voice over Internet Protocol, or VoIP, network. We also offer CPaaS solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. In August 2018, the Company completed the acquisition of TokBox which added video functionality to the CPaaS suite of services available to its customers. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment. We have a robust set of product families tailored to serve the full range of the business value chain, from the SMB market, through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and CRM solutions, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud, Oracle, and Clio. With our ability to integrate these cloud-based, workplace tools, Vonage integrates the entire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers that CPaaS provides. When combined with our MPLS network, as well as voice services over customers' broadband networks via our SmartWan solution, we create a differentiated offering. On October 31, 2018, the Company completed the acquisition of NewVoiceMedia, a leading provider of Contact Center as a Service, or CCaaS, solutions allowing the Company to compliment its existing suite of cloud communications services available to its customers.

Consumer

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

Services Outside of the United States

We currently have operations delivering our suite of communication solutions in the United States, United Kingdom, Hong Kong, Singapore, and Canada and believe that our platforms enables us to cost effectively deliver voice and messaging services to other locations throughout the world.

Trends in Our Industry

A number of trends in our industry have a significant effect on our results of operations and are important to an understanding of our financial statements.

Competitive landscape. We face intense competition from traditional telephone companies, wireless companies, cable companies, and alternative communication providers. Most traditional wireline and wireless telephone service providers and cable companies are substantially larger and better capitalized than we are and have the advantage of a large existing customer base. In addition, because our competitors provide other services, they often choose to offer VoIP services or other voice services as part of a bundle that includes other products, such as video, high speed Internet access, and wireless telephone service, which we do not offer. We also compete against alternative communication providers. Some of these service providers have chosen to sacrifice telephony revenue in order to gain market share and have offered their services at low prices or for free. As we continue to introduce applications that integrate different forms of voice and messaging services over multiple devices, we are facing competition from emerging competitors focused on similar integration, as well as from alternative voice communication providers. We also are subject to the risk of future disruptive technologies. In connection with our emphasis on the international long distance market in the United States, we face competition from low-cost international calling cards and VoIP providers in addition to traditional telephone companies, cable companies, and wireless companies, each of which may implement promotional pricing targeting international long distance callers.

Regulation. Our business has developed in a lightly regulated environment. See the discussion under "Regulation" in Note 10 to our financial statements for a discussion of regulatory issues that impact us.

Key Operating Data

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



Business	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Service revenue per customer	$	451		$	362		$	435		$	345
Business revenue churn	1.0		%	1.1		%	1.1		%	1.2		%

Service Revenue per Customer. Service revenues per customer for a particular period is calculated by dividing the average monthly service revenues for the period by the average number of customers over the number of months in the period. The average number of customers is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Service revenues excludes revenues from trading and auction customers. Service revenue per customer increased from $362 for the three months ended September 30, 2018 to $451 for the three months ended September 30, 2019 and increased from $345 for the nine months ended September 30, 2018 to $435 for the nine months ended September 30, 2019 primarily driven by the Company's successful efforts to attract larger business customers and to expand services provided to our existing business customers along with the acquisition of NewVoiceMedia and TokBox during the second half of 2018.

Business Revenue Churn . Business revenue churn is calculated by dividing the revenue from customers or customer locations that have been confirmed to be foregone during a period by the simple average of the total revenue from all customers in that period. Revenue for purposes of determining Business revenue churn is service revenue excluding revenue from our trading and auction customers, and usage in excess of a customer’s contracted service plan, regulatory fees charged to customers, and credits. The simple average of total revenue from all customers during the period is the total revenue as defined herein on the first day of the period, plus the total revenue as defined herein on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate business revenue churn differently, and their business revenue churn data may not be directly comparable to ours. Business revenue churn decreased from 1.1% for the three months ended September 30, 2018 to 1.0% for the three months ended September 30, 2019 , and from 1.2% for the nine months ended September 30, 2018 to 1.1% for the nine months ended September 30, 2019 , respectively. Our revenue churn may fluctuate over time due to economic conditions, seasonality in certain customer's operations, loss of customers who are acquired, and competitive pressures including promotional pricing. We are continuing to invest in our overall quality of service which includes customer care headcount and systems, billing systems, on-boarding processes and self-service options to ensure we scale our processes to our growth and continue to improve the overall customer experience.

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



Consumer	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Average monthly revenues per subscriber line	$	27.56		$	26.30		$	26.91		$	26.41
Subscriber lines (at period end)	1,136,112			1,341,662			1,136,112			1,341,662
Customer churn	1.8		%	1.8		%	1.8		%	1.8		%

Average Monthly Revenues per Subscriber Line. Average monthly revenues per subscriber line for a particular period is calculated by dividing our revenues for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. The simple average number of subscriber lines for the period is the number of subscriber lines on the first day of the period, plus the number of subscriber lines on the last day of the period, divided by two. Our average monthly revenues per subscriber line increased from $26.30 for the three months ended September 30, 2018 to $27.56 for the three months ended September 30, 2019 and increased slightly from $ 26.41 for the nine months ended September 30, 2018 to $26.91 for the nine months ended September 30, 2019 due primarily to the Company's ability to retain its more tenured customers.

Subscriber Lines. Our subscriber lines include, as of a particular date, all paid subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines, including fax lines bundled with subscriber lines in our small office home office calling plans and soft phones, but do not include our virtual phone numbers and toll free numbers, which only allow inbound telephone calls to customers. Subscriber lines decreased from 1,341,662 as of September 30, 2018 to 1,136,112 as of September 30, 2019 , reflecting planned actions to enhance the profitability of the assisted sales channel by eliminating lower performing locations and restructuring the pricing offers, and to shift investment to our business market.

Customer Churn. Customer churn is calculated by dividing the number of customers that have terminated during a period by the simple average of number of customers in a given period. The simple average number of customers during the period is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate customer churn differently, and their customer churn data may not be directly comparable to ours. Customer churn remained at 1.8% for the three and nine months ended September 30, 2018 and 2019, respectively. We monitor customer churn on a daily basis and use it as an indicator of the level of customer satisfaction. Customers who have been with us for a year or more tend to have a lower churn rate than customers who have not. In addition, our customers who are international callers generally churn at a lower rate than customers who are domestic callers. Our customer churn will fluctuate over time due to economic conditions, competitive pressures including promotional pricing targeting international long distance callers, marketplace perception of our services, and our ability to provide high quality customer care and network quality and add future innovative products and services. See the discussion below for detail regarding churn impacting our business customers.

REVENUE

Revenues consist of services revenue and customer equipment and shipping fee revenue. Substantially all of our revenues are services revenue. For Consumer customers in the United States, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. For our Business customers, we offer SMB, mid-market, and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years. In addition, we provide managed equipment to Business customers for which the customers pay a monthly fee. Customers also have the opportunity to purchase premium features for additional fees. In addition, we derive revenue from usage-based fees earned from customers using our cloud-based software products. These usage-based software products include our messaging, voice, Verify and chat APIs. Usage-based fees include number of text messages sent or received using our messaging APIs, minutes of call duration activity for our voice APIs, and number of converted authentications for our Verify API. Services revenue is offset by the cost of certain customer acquisition activities, such as rebates and promotions. In addition, in certain instances, we charge disconnect fees which are recognized as revenue at the time the disconnect fees are collected from our customer.

In the United States, we charge regulatory, compliance, E-911, and intellectual property-related recovery fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers of telecommunications services. In addition, we recognize revenue on a gross basis for contributions to the Federal Universal Service Fund, or USF, and related fees. All other taxes are recorded on a net basis.

Revenues are generated from sales of customer equipment directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. In addition, customer equipment and shipping revenues include revenues from the sale of VoIP telephones in order to access our small and medium business services. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them.

OPERATING EXPENSES

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

Results of Operations

The following table sets forth, as a percentage of total revenues, our condensed consolidated statements of operations for the periods indicated:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018

Total revenues	100	%	100	%	100	%	100	%

Operating Expenses:
Cost of revenues (exclusive of depreciation and amortization)	44		40		43		41
Sales and marketing	28		28		31		30
Engineering and development	5		6		6		4
General and administrative	14		14		13		12
Depreciation and amortization	7		6		7		7
Total operating expenses	98		94		100		94
Income from operations	2		6		—		6
Other Income (Expense):
Interest expense	(3	)	(1	)	(3	)	(1	)
Other income (expense), net	—		—		—		—
Total other income (expense), net	(3	)	(1	)	(3	)	(1	)
(Loss) income before income taxes	(1	)	5		(3	)	5
Income tax (expense) benefit	(6	)	(1	)	1		1
Net (loss) income	(7	)%	4	%	(2	)%	6	%

Management's Discussion of the Results of Operations for the Three and Nine Months Ended September 30, 2019 and 2018

The Company reported loss before income taxes of $2,849 for the three months ended September 30, 2019 and income before income taxes of $12,158 for the three months ended September 30, 2018 , and loss before income taxes of $22,234 for the nine months ended September 30, 2019 and income before income taxes of $37,027 for the nine months ended September 30, 2018 , respectively. The decrease was primarily driven by higher other operating expenses of $20,821 and $87,439 for the three and nine months ended September 30, 2019, respectively, as a result of the acquisitions of NewVoiceMedia in October 2018, and TokBox in August 2018 driven by increases in salary costs due to higher headcount, increases in sales and marketing expenses, and increases in depreciation and amortization expenses due to additional assets acquired. In addition, there were increases in engineering and development expenses in connection with the Company's continued transformation focused on innovation.

The Company reported net loss of $21,097 and net income of $9,588 for the three months ended September 30, 2019 and 2018 , and net loss of $17,107 and net income of $42,671 for the nine months ended September 30, 2019 and 2018 , respectively. The decrease in net (loss)/income for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 is mainly due to the aforementioned decrease in (loss)/income before income taxes and the increase in income tax expense of $15.678 . The decrease in net income for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 is mainly due to the aforementioned decrease in (loss)/income before income taxes and the increase in income tax expense of $517 .

We calculate gross margin as total revenues less cost of revenues, which primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services and costs incurred when a customer first subscribes to our service. The following table presents consolidated revenues, cost of revenues and the composition of gross margin for the three and nine months ended September 30, 2019 and 2018 :



(in thousands, except percentages)	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2019		2018		Dollar Change		Percent Change		2019		2018		Dollar Change		Percent Change
Total revenues	$	302,534	$	261,531	$	41,003	16	%	$	879,659	$	774,979	$	104,680	14	%
Cost of revenues ⁽¹⁾	133,833		104,351		29,482		28	%	375,465		315,122		60,343		19	%
Gross margin	$	168,701	$	157,180	$	11,521	7	%	$	504,194	$	459,857	$	44,337	10	%

(1) Excludes depreciation and amortization of $9,658 and $6,386 for the three months ended September 30, 2019 and 2018 , respectively and $28,220 and $19,046 for the nine months ended September 30, 2019 and 2018 , respectively.

Total revenues and cost of revenues were impacted by the following trends and uncertainties:

Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018

Total revenues increased 16% for the three months ended September 30, 2019 as compared to the prior year period. The increase is primarily due to the acquisition of NewVoiceMedia and TokBox in the second half of 2018 along with business customer growth driving an increase in revenues of $52,895 , offset by declining consumer revenues of $11,892 in connection with the continued decline of Consumer subscriber lines. The Company continues to expect that the Consumer portion of the Company's overall business will become less significant as the Company reallocates resources to increase market share in its Business communications platforms.

Cost of revenues increased 28% for the three months ended September 30, 2019 as compared to the prior year period driven by increased costs incurred in servicing our Business customers of $29,933 due to the increase in customers and prior year acquisitions. This was partially offset by a decrease in costs in Consumer of $451 as subscriber lines continues to decline resulting in lower international and long-distance termination costs.

Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018

Total revenues increased 14% for the nine months ended September 30, 2019 as compared to the prior year period. The increase is primarily due to the acquisition of NewVoiceMedia and TokBox in the second half of 2018 along with business customer growth driving an increase in revenues of $148,002 , offset by declining consumer revenues of $43,322 in connection with the continued decline of Consumer subscriber lines. The Company continues to expect that the Consumer portion of the Company's overall business will become less significant as the Company reallocates resources to increase market share in its Business communications platforms.

Cost of revenues increased 19% for the nine months ended September 30, 2019 as compared to the prior year period driven by increased costs incurred in servicing our Business customers of $73,401 due to the increase in customers and prior year acquisitions. This was partially offset by a decrease in costs in Consumer of $13,058 as subscriber lines continues to decline resulting in lower international and long-distance termination costs.

Business Gross Margin for the Three and Nine Months Ended September 30, 2019 and 2018



	Three Months Ended									Nine Months Ended
	September 30,									September 30,
(in thousands, except percentages)	2019		2018		Dollar Change			Percent Change		2019		2018		Dollar Change			Percent Change
Revenues
Service revenues	$	183,701	$	133,709	$	49,992		37	%	$	523,060	$	377,703	$	145,357		38	%
Access and product revenues ⁽¹⁾	12,120		12,427		(307		)	(2	)%	35,524		37,674		(2,150		)	(6	)%
Service, access and product revenues	195,821		146,136		49,685			34	%	558,584		415,377		143,207			34	%
USF revenues	10,709		7,499		3,210			43	%	27,563		22,768		4,795			21	%
Total revenues	206,530		153,635		52,895			34	%	586,147		438,145		148,002			34	%

Cost of revenues
Service cost of revenues ⁽²⁾	87,352		59,600		27,752			47	%	243,496		172,917		70,579			41	%
Access and product cost of revenues ⁽¹⁾	13,858		14,887		(1,029		)	(7	)%	41,323		43,291		(1,968		)	(5	)%
Service, access and product cost of revenues	101,210		74,487		26,723			36	%	284,819		216,208		68,611			32	%
USF cost of revenues	10,709		7,499		3,210			43	%	27,563		22,773		4,790			21	%
Total cost of revenues	111,919		81,986		29,933			37	%	312,382		238,981		73,401			31	%

Segment gross margin
Service margin	96,349		74,109		22,240			30	%	279,564		204,786		74,778			37	%
Gross margin ex-USF (Service, access and product margin)	94,611		71,649		22,962			32	%	273,765		199,169		74,596			37	%
Segment gross margin	$	94,611	$	71,649	$	22,962		32	%	$	273,765	$	199,164	$	74,601		37	%



Segment gross Margin %
Service margin %	52.4	%	55.4	%	53.4	%	54.2	%
Gross margin ex-USF (Service, access and product margin) %	48.3	%	49.0	%	49.0	%	47.9	%
Segment gross margin %	45.8	%	46.6	%	46.7	%	45.5	%


(1)	Includes customer premise equipment, access, and shipping and handling.


(2)	Excludes depreciation and amortization of $8,492 and $5,141 for the three months ended September 30, 2019 and 2018 , respectively and $24,684 and $15,092 for the nine months ended September 30, 2019 and 2018 .

Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018

The following table describes the increase in business gross margin for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 :



	(in thousands)
Service gross margin excluding the impact of the acquisitions increased 10% primarily due to overall growth in our Business customer base of 7% as compared to the prior year quarter	$	7,158
Service gross margin also increased due to acquisitions of TokBox on August 1, 2018 and NewVoiceMedia on October 31, 2018, respectively	15,082
Access and product gross margin decreased due to higher costs providing access services to Business customers during the current quarter	722
Increase in segment gross margin	$	22,962

Business service gross margin percentage decreased to 52.4% for the three months ended September 30, 2019 from 55.4% for the three months ended September 30, 2018 . The decrease in business service gross margin percentage is a result of a greater proportion of lower margin services across our Business segment during the quarter ended September 30, 2019 as compared to the same period in the prior quarter. Our gross margin percentage may continue to be impacted by changes in the mix of service offerings provided to our customers across our Business segment.

Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018

The following table describes the increase in business gross margin for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 :



	(in thousands)
Service gross margin excluding the impact of the acquisitions increased 15% primarily due to overall growth in our Business customer base of 7% as compared to the prior year quarter	$	29,738
Service gross margin also increased due to acquisitions of TokBox on August 1, 2018 and NewVoiceMedia on October 31, 2018, respectively	45,040
Access and product gross margin decreased due to higher costs providing access services to Business customers during the current quarter	(182		)
USF gross margin increased mainly due to payment during the first quarter of 2018 for USF fees not collected in 2017	5
Increase in segment gross margin	$	74,601

Business service gross margin percentage decreased to 53.4% for the nine months ended September 30, 2019 from 54.2% for the nine months ended September 30, 2018 . The increase in business service gross margin percentage is a result of the acquisition of NewVoiceMedia along with the sale of a greater proportion of higher margin services across our Business segment for the nine months ended September 30, 2019 as compared to the same period in the prior quarter. Our gross margin percentage may continue to be impacted by changes in the mix of service offerings provided to our customers across our Business segment.

Consumer Gross Margin for the Three and Nine Months Ended September 30, 2019 and 2018



	Three Months Ended									Nine Months Ended
	September 30,									September 30,
(in thousands, except percentages)	2019		2018		Dollar Change			Percent Change		2019		2018		Dollar Change			Percent Change
Revenues
Service revenues	$	83,981	$	97,093	$	(13,112	)	(14	)%	$	260,225	$	301,954	$	(41,729	)	(14	)%
Access and product revenues ⁽¹⁾	69		92		(23		)	(25	)%	197		472		(275		)	(58	)%
Service, access and product revenues	84,050		97,185		(13,135		)	(14	)%	260,422		302,426		(42,004		)	(14	)%
USF revenues	11,954		10,711		1,243			12	%	33,090		34,408		(1,318		)	(4	)%
Total revenues	96,004		107,896		(11,892		)	(11	)%	293,512		336,834		(43,322		)	(13	)%

Cost of revenues
Service cost of revenues ⁽²⁾	8,587		10,661		(2,074		)	(19	)%	26,706		37,050		(10,344		)	(28	)%
Access and product cost of revenues ⁽¹⁾	1,373		993		380			38	%	3,287		4,657		(1,370		)	(29	)%
Service, access and product cost of revenues	9,960		11,654		(1,694		)	(15	)%	29,993		41,707		(11,714		)	(28	)%
USF cost of revenues	11,954		10,711		1,243			12	%	33,090		34,434		(1,344		)	(4	)%
Total cost of revenues	21,914		22,365		(451		)	(2	)%	63,083		76,141		(13,058		)	(17	)%

Segment gross margin
Service margin	75,394		86,432		(11,038		)	(13	)%	233,519		264,904		(31,385		)	(12	)%
Gross margin ex-USF (Service, access and product margin)	74,090		85,531		(11,441		)	(13	)%	230,429		260,719		(30,290		)	(12	)%
Segment gross margin	$	74,090	$	85,531	$	(11,441	)	(13	)%	$	230,429	$	260,693	$	(30,264	)	(12	)%



Segment gross Margin %
Service margin %	89.8	%	89.0	%	89.7	%	87.7	%
Gross margin ex-USF (Service, access and product margin) %	88.1	%	88.0	%	88.5	%	86.2	%
Segment gross margin %	77.2	%	79.3	%	78.5	%	77.4	%


(1)	Includes customer premise equipment and shipping and handling.


(2)	Excludes depreciation and amortization of $1,166 and $1,245 for the three months ended September 30, 2019 and 2018 , respectively and $3,536 and $3,954 for the nine months ended September 30, 2019 and 2018 .

Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018

The following table describes the decrease in consumer gross margin for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 :



	(in thousands)
Service gross margin decreased primarily due to a decrease in subscriber lines of 15% resulting in lower gross margin of $11,694 as we have reallocated resources focused on attracting Business customers. This was offset by a slight increase in average revenue per customer and lower overall costs incurred by the Consumer segment resulting in increased gross margin of $656	$	(11,038	)
Access and product gross margin increased 45% primarily due lower equipment costs associated with sales to customers during the current quarter	(403		)
Decrease in segment gross margin	$	(11,441	)

Consumer service gross margin percentage increased to 89.8% for the three months ended September 30, 2019 from 89.0% for the three months ended September 30, 2018 due to lower international and domestic termination rates and the allocation of certain shared network costs to Business as that revenue becomes a greater proportion of the whole. The increase in Consumer service margin percentage is also driven by overall lower costs attributed to consumer services as the Company shifts resources towards attracting more profitable Business customers.

Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018

The following table describes the decrease in consumer gross margin for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 :



	(in thousands)
Service gross margin decreased primarily due to a decrease in subscriber lines of 15% resulting in lower gross margin of $32,108 as we have reallocated resources focused on attracting Business customers. This was offset by a slight increase in average revenue per customer and lower overall costs incurred by the Consumer segment resulting in increased gross margin of $723	$	(31,385	)
Access and product gross margin increased 26% primarily due lower equipment costs associated with sales to customers during the current quarter	1,095
USF gross margin increased mainly due to payment during the first quarter of 2018 for USF fees not collected in 2017	26
Decrease in segment gross margin	$	(30,264	)

Consumer service gross margin percentage increased to 89.7% for the nine months ended September 30, 2019 from 87.7% for the nine months ended September 30, 2018 due to lower international and domestic termination rates and the allocation of certain shared network costs to Business as that revenue becomes a greater proportion of the whole. The increase in Consumer service margin percentage is also driven by overall lower costs attributed to consumer services as the Company shifts resources towards attracting more profitable Business customers.

Other Operating Expenses

The following table presents our other operating costs during the three and nine months ended September 30, 2019 and 2018 , respectively:



	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(in thousands, except percentages)	2019		2018		Dollar Change		Percent Change		2019		2018		Dollar Change		Percent Change
Sales and marketing	$	83,628	$	74,380	$	9,248	12	%	$	274,513	$	229,201	$	45,312	20	%
Engineering and development	16,901		14,309		2,592		18	%	50,318		35,504		14,814		42	%
General and administrative	41,306		37,620		3,686		10	%	113,380		97,376		16,004		16	%
Depreciation and amortization	21,319		16,024		5,295		33	%	63,195		51,886		11,309		22	%
Total other operating expenses	$	163,154	$	142,333	$	20,821	15	%	$	501,406	$	413,967	$	87,439	21	%

Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018

Total other operating expenses increased by $20,821 as compared to the three months ended September 30, 2018 due to the following:

•

Sales and marketing expense increased by $9,248 , primarily due to additional costs from TokBox and NewVoiceMedia which were acquired in August 2018 and October 2018, respectively. Additionally, sales and marketing costs were impacted by increased spending in the current year related to media marketing initiatives, expansion of the Company's sales force and the attendance at certain conferences which were not attended in the previous year.


•	Engineering and development expense increased by $2,592 , in connection with the Company's continued transformation focus on innovation especially in regards to developing further functionality related to its proprietary platform in order to support customers through the mid-market and enterprise sector.


•	General and administrative expense increased by $3,686 , primarily due to higher personnel costs driven by the increase in headcount following the acquisition of TokBox and NewVoiceMedia.


•	Depreciation and amortization expense increased by $5,295 primarily due to the amortization of acquired intangible assets related to TokBox and NewVoiceMedia.

Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018

Total other operating expenses increased by $87,439 as compared to the nine months ended September 30, 2018 due to the following:

•

Sales and marketing expense increased by $45,312 , primarily due to additional costs from TokBox and NewVoiceMedia which were acquired in August 2018 and October 2018, respectively. Additionally, sales and marketing costs were impacted by increased spending in the current year related to media marketing initiatives, expansion of the Company's sales force, and the attendance at certain conferences which were not attended in the previous year.


•	Engineering and development expense increased by $14,814 , in connection with the Company's continued transformation focus on innovation especially in regards to developing further functionality related to its proprietary platform in order to support customers through the mid-market and enterprise sector.


•	General and administrative expense increased by $16,004 , primarily due to higher personnel costs driven by the increase in headcount following the acquisition of TokBox and NewVoiceMedia.


•	Depreciation and amortization expense increased by $11,309 primarily due to the amortization of acquired intangible assets related to TokBox and NewVoiceMedia.

Other Income (Expense)



(in thousands, except percentages)	Three Months Ended											Nine Months Ended
	September 30,											September 30,
	2019			2018			Dollar Change			Percent Change		2019			2018			Dollar Change			Percent Change
Interest expense	$	(8,454	)	$	(3,036	)	$	5,418		178	%	$	(24,517	)	$	(9,294	)	$	15,223		164	%
Other income (expense), net	58			347			—			—	%	(505		)	431			(936		)	(217	)%
	$	(8,396	)	$	(2,689	)	$	(5,707	)			$	(25,022	)	$	(8,863	)	$	(16,159	)

Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018

Interest expense. The increase in interest expense of $5,418 , or 178% , was mainly due to interest expense associated with the Convertible Senior Note issued in June 2019 offset by lower principal balances on our 2018 Credit Facility.

Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018

Interest expense. The increase in interest expense of $15,223 , or 164% , was mainly due to interest expense associated with the Convertible Senior Note issued in June 2019 along with higher interest costs on the Company's 2018 Credit Facility due to higher outstanding debt during the first half of the current year.

Income Taxes



(in thousands, except percentages)	Three Months Ended											Nine Months Ended
	September 30,											September 30,
	2019			2018			Dollar Change			Percent Change		2019			2018			Dollar Change			Percent Change
Income tax (expense) benefit	$	(18,248	)	$	(2,570	)	$	(15,678	)	(610	)%	$	5,127		$	5,644		$	(517	)	(9	)%
Effective tax rate	(641		)%	21		%						23		%	(15		)%

Typically, the Company has calculated its provision for income taxes during its interim reporting periods by applying an estimate of the annual effective tax rate for the full year "ordinary" income or loss for the respective reporting period. For the nine months ended September 30, 2019, the Company has computed its provision for income taxes under the discrete method which allows the Company to calculate its tax provision based upon the actual effective tax rate for the year-to-date. In addition, adjustments are recorded for discrete period items and changes to our state effective tax rate which can cause the rate to fluctuate from quarter to quarter.

Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018

During the three months ended September 30, 2019 , the income tax expense includes a discrete tax benefit related to excess tax benefits on equity compensation along with permanent adjustments related to executive compensation deductibility. In addition, the Company’s actual effective tax rate for the current year has reduced the expected annual benefit as a result of permanent adjustments related to limitations on executive compensation deductibility and inclusion of income in the U.S. due to foreign disregarded entities.

During the three months ended September 30, 2018 , we recognized an additional discrete period tax benefit of $1,912 related to excess tax benefits on equity compensation recognized during the quarter.

Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018

During the nine months ended September 30, 2019 , the income tax benefit includes a discrete tax benefit of $6,697 related to excess tax benefits on equity compensation along with permanent adjustments related to executive compensation deductibility. Additionally, the Company’ actual effective tax rate for the year has reduced the expected annual benefit as a result of permanent adjustments related to limitations on executive compensation deductibility and inclusion of income in the U.S. due to foreign disregarded entities.

During the nine months ended September 30, 2018 , we recognized a discrete period tax benefit of $19,228 related to excess tax benefits on equity compensation recognized during the nine months ended September 31, 2018.

Liquidity and Capital Resources

Overview

For the nine months ended September 30, 2019 , we had lower net cash from operations compared to the prior year quarter mainly due to lower net income. We expect to continue to balance efforts to grow our revenue while consistently achieving operating profitability. To grow our revenue, we continue to make investments in growth initiatives, marketing, application development, network quality and expansion, and customer care. Although we believe we will achieve consistent profitability in the future, we ultimately may not be successful and we may not achieve consistent profitability. We believe that cash flow from operations and cash on hand will fund our operations for at least the next twelve months.

The following table sets forth a summary of our cash flows for the periods indicated:



	Nine Months Ended
	September 30,
(in thousands)	2019			2018			Dollar Change
Net cash provided by operating activities	$	59,850		$	94,463		$	(34,613	)
Net cash used in investing activities	(39,262		)	(49,184		)	9,922
Net cash used in financing activities	(6,234		)	(50,130		)	43,896
Effect of exchange rate changes on cash and cash equivalents	(663		)	(757		)	94

Operating Activities

Cash provided by operating activities decreased to $59,850 for the nine months ended September 30, 2019 from $94,463 for the nine months ended September 30, 2018 , primarily due to a decrease in earnings as compared to the prior period due to the continued decline of the higher margin Consumer segment. Changes in working capital include changes in accounts receivable, inventory, prepaid and other assets, accounts payable, accrued and other liabilities, and deferred revenue and costs. Cash used for working capital requirements increased by $1,342 during the nine months ended September 30, 2019 compared to the prior year period primarily due to the timing of payments.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2019 of $39,262 was mainly attributable to the purchase of capital expenditures of $15,426 , development of software assets of $20,836 , and payments for acquired developed technology from Over.ai of $3,000 .

Cash used in investing activities for the nine months ended September 30, 2018 of $49,184 was mainly attributable to cash used for the acquisition of TokBox on August 1, 2018 of $32,299 . Additionally, the Company has incurred higher spending related to capital expenditures of $10,687 and development of software assets of $6,198 during the current year.

Financing Activities

Cash used in financing activities for the nine months ended September 30, 2019 of $6,234 was primarily attributable to $418,500 of repayments under the 2018 credit facility, $10,000 common stock repurchase as well as $28,325 payment for capped call transactions and costs in connection of the issuance of convertible senior notes, $20,372 in employee taxes paid on withholding shares and $9,715 related to payments for financing costs. offset by $345,000 in proceeds received from the issuance of convertible senior notes, $134,000 in proceeds received from draws on the 2018 credit facility, and $1,678 in proceeds received from the exercise of stock options.

Cash used in financing activities for the nine months ended September 30, 2018 of $50,130 was primarily attributable to $293,688 of payments made to retire the 2016 credit facility along with additional repayments under the 2018 credit facility in the third quarter of 2018, payments for deferred financing costs of $3,376, $119 in capital lease payments, and $31,064 in employee taxes paid on withholding shares, offset by $272,000 in proceeds received from draws on the 2016 credit facility and the execution of the 2018 credit facility and $6,117 in proceeds received from the exercise of stock options.

Sources of Liquidity

The principal sources of liquidity are derived from available borrowings under our existing financing arrangements, existing cash on hand, and cash flows from operations. As described in Note 7, Long-Term Debt and Revolving Credit Facility, to the Consolidated Financial Statements, the Company's financing arrangements consist of its Convertible Senior Notes and the 2018 Credit Facility which is comprised of a $100,000 term note and a $500,000 revolving credit facility.

Available Borrowings Under the 2018 Credit Facility

We maintain significant availability under our lines of credit to meet our short-term liquidity requirements. As of September 30, 2019 , amounts available under the 2018 Credit Facility totaled $364.5 million .

State and Local Sales Taxes

We have contingent liabilities for state and local sales taxes. As of September 30, 2019 , we had a reserve of $4,547 . If our ultimate liability exceeds this amount, it could affect our liquidity unfavorably. However, we do not believe it will significantly impair our liquidity.

Capital Expenditures

Our capital expenditures for the nine months ended September 30, 2019 were $36,262 , of which $20,836 was for software acquisition and development. The majority of these expenditures are comprised of investments in information technology and systems infrastructure, including an electronic data warehouse, online customer service, and customer management platforms. For 2019, we believe our capital and software expenditures will be $45,000 to $50,000.

Off-Balance Sheet Arrangements

Obligations under Certain Guarantee Contracts

We enter guarantee arrangements in the normal course of business to facilitate transactions with third parties. These arrangements include financial and performance guarantees, stand-by letters of credit, debt guarantees and indemnifications. As of September 30, 2019 and December 31, 2018 we had stand-by letters of credit totaling $1,526 and $1,516 , respectively.

Contractual Obligations and Commitments

Except as set forth below and in Note 10. Commitments and Contingencies included in Part 1, Item 1 of this Form 10-Q, there were no significant changes in our commitments under contractual obligations as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 .

Contingencies

There has been and may be in the future substantial litigation in the areas in which we operate regarding alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. We recognize a loss when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. Such legal proceedings are inherently unpredictable and subject to further uncertainties. Should any of these estimates and assumptions change it is possible that the resolution of the matters described in Note 10, Commitments and Contingencies included in Part 1, Item 1 of this Form 10-Q could have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Critical Accounting Policies

Our consolidated statements and accompanying notes are prepared in accordance with U.S. GAAP. Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. The preparation of financial statements and related disclosures in compliance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. The application of these policies involves judgment regarding future events and these judgments could materially affect the financial statements and disclosures based on varying assumptions, which may be appropriate to use.

We identify our most critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and results of operations, and those that require the most difficult, subjective or complex judgments by management regarding estimates. Our critical accounting policies include revenue recognition, valuation of goodwill and intangible assets, income taxes and capitalized software. Effective January 1, 2019, the Company adopted ASC Topic 842. Refer to Note 2, Summary of Significant Accounting Policies for changes to our critical accounting policy with respect to recognition of leasing arrangements as a result of the adoption. As of September 30, 2019 , our goodwill is attributable to our Business operating segment. We perform our annual test of goodwill on October 1st. Additionally, we will assess our goodwill for impairment between annual tests when specific circumstances dictate.



Item 3.	Quantitative and Qualitative Disclosures about Market Risk

We are exposed to financial market risks, including changes in currency exchange rates and interest rates.

Foreign Exchange Risk

We sell our products and services primarily in the United States, Canada, the European Union, and Asia. A portion of our sales denominated in Euros, the Canadian Dollar, and the British Pound Sterling, which are affected by changes in currency exchange rates. Our financial results could be affected by changes in foreign currency exchange rates, although foreign exchange risks have not been material to our financial position or results of operations to date. Volatility in the British Pound Sterling exchange rate is expected to continue in the short term as the United Kingdom negotiates its exit from the European Union which has been extended through January 31, 2020. If the United Kingdom and the European Union are unable to reach an agreement and the United Kingdom exits the European Union without an agreement in place, it will likely create further short-term uncertainty and currency volatility. In the longer term, any impact from the United Kingdom exiting the European Union on the Company's operations will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations.

Interest Rate and Debt Risk

Our exposure to market risk for changes in interest rates primarily relates to our long-term debt. In order to hedge the variability of expected future cash interest payments related to our credit facilities we have entered into three interest rate swap agreements which were executed on July 14, 2017. The swaps have an aggregate notional amount of $150 million and are effective on July 31, 2017 through June 3, 2020. Under the swaps our interest rate is fixed at 4.7%. The interest rate swaps will be accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging .

As of September 30, 2019 , if the interest rate on our variable rate debt changed by 1% on our 2018 revolving credit facility, our annual debt service payment would change by approximately $850 .

As of September 30, 2019 , we had $345.0 million outstanding on our 1.75% convertible senior notes due 2024. The Notes have 1.75% percent fixed annual interest rates and, therefore, our economic interest rate exposure on our Notes is fixed. However, the values of the Notes are exposed to interest rate risk. Generally, the fair market value of our fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair values of the Notes are affected by our stock price. The fair value of the Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines in value. Additionally, we carry the Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only.



Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Controls. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II—Other Information



Item 1.	Legal Proceedings

We are subject to a number of lawsuits, government investigations and claims arising out of the conduct of our business. See a discussion of our litigation matters in Note 10 of Notes to our Condensed Consolidated Financial Statements, which is incorporated herein by reference.



Item 1A.	Risk Factors

Other than the risk factors set forth below, there have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 .

We may not have the ability to raise the funds necessary to settle conversions of the convertible senior notes due 2024 in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the notes.

Holders of our 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) have the right to require us to repurchase their Convertible Senior Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the aggregate principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Convertible Senior Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Senior Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Senior Notes surrendered therefor or Convertible Senior Notes being converted. In addition, our ability to repurchase the Convertible Senior Notes or to pay cash upon conversions of the Convertible Senior Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Convertible Senior Notes at a time when the repurchase is required by the indenture setting forth the terms of the Convertible Senior Notes or to pay any cash payable on future conversions of the Convertible Senior Notes as required by the indenture would constitute a default under the indenture. A default under the indenture setting forth the terms of the Convertible Senior Notes or the occurrence of the fundamental change itself may lead to a default under our 2018 Credit Facility or other agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Senior Notes or make cash payments upon conversions thereof. The increase in the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption may not adequately compensate holders for any lost value of such holders’ Convertible Senior Notes as a result of such transaction.

If a make-whole fundamental change occurs prior to the maturity date or if we issue a notice of redemption with respect to the Convertible Senior Notes, under certain circumstances, we will increase the conversion rate by a number of additional shares of our common stock for Convertible Senior Notes converted in connection with such make-whole fundamental change or notice of redemption, as the case may be. The increase in the conversion rate will be determined based on the date on which the specified corporate transaction becomes effective, or the date of the notice of redemption, as the case may be and the price paid (or deemed to be paid) per share of our common stock in such transaction or with respect to such redemption, as the case may be. The increase in the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption may not adequately compensate holders for any lost value of such holders’ Convertible Senior Notes as a result of such transaction or redemption. In addition, if the price per share of our common stock paid (or deemed paid) in the transaction is greater than $60.00 per share or less than $11.73 per share (in each case, subject to adjustment), no additional shares will be added to the conversion rate. Moreover, in no event will the conversion rate per $1,000 aggregate principal amount of Convertible Senior Notes as a result of this adjustment exceed 85.2514 shares of common stock, subject to adjustment in the same manner as the conversion rate.

Our obligation to increase the conversion rate for Convertible Senior Notes converted in connection with a make-whole fundamental change or notice of redemption could be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness and equitable remedies.

The conditional conversion feature of the Convertible Senior Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the Convertible Senior Notes is triggered, holders of Convertible Senior Notes will be entitled to convert the Convertible Senior Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Senior Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders of Convertible Senior Notes do not elect to convert their Convertible Senior Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Senior Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

Convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, could have a material effect on our reported financial results.

Under certain circumstances, convertible debt instruments (such as the Convertible Senior Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Convertible Senior Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Convertible Senior Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Senior Notes, then our diluted earnings per share could be adversely affected.

The capped call transactions entered into in connection with the pricing of the Convertible Senior Notes may affect the value of the Convertible Senior Notes and our common stock.

In connection with the pricing of the Convertible Senior Notes and subsequently in connection with the exercise of the initial purchasers’ exercise of their option to purchase additional Convertible Senior Notes, we entered into capped call transactions (the “Capped Calls”) with certain option counterparties. The Capped Calls are expected generally to reduce the potential dilution upon conversion of the Convertible Senior Notes and/or offset any cash payments we are required to make in excess of the aggregate principal amount of converted Convertible Senior Notes, as the case may be, with such reduction and/or offset subject to a cap.

In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of the Convertible Senior Notes and prior to the maturity of the Convertible Senior Notes (and are likely to do so during any observation period related to a conversion of the Convertible Senior Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Convertible Senior Notes, which could affect holders’ ability to convert the Convertible Senior Notes and, to the extent the activity occurs during any observation period related to a conversion of Convertible Senior Notes, it could affect the number of shares and value of the consideration that holders will receive upon conversion of the Convertible Senior Notes.

In addition, if any such Capped Call fails to become effective, the option counterparty party thereto may unwind its hedge positions with respect to our common stock, which could adversely affect the value of our common stock and, if the Convertible Senior Notes have been issued, the value of the Convertible Senior Notes.



Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.



Item 3.	Defaults Upon Senior Securities

None.



Item 4.	Mine Safety Disclosures

Not applicable.



Item 5.	Other Information

None.



Item 6.	Exhibits

See accompanying Exhibit Index for a list of the exhibits filed or furnished with this Quarterly Report on Form 10-Q.

EXHIBIT INDEX




31.1		Certification of the Company’s Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

31.2		Certification of the Company’s Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

32.1		Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		VONAGE HOLDINGS CORP.

Dated:	November 6, 2019	By:	/s/ David T. Pearson
			David T. Pearson Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

TABLE OF CONTENTS

Part 1 - Financial Information Item 1 - Condensed Consolidated Financial Statements and Notes Note 1. Nature Of Business Note 2. Summary Of Significant Accounting Policies Note 3. Revenue Recognition Note 4. Acquisitions and Dispositions Note 5. Earnings Per Share Note 6. Income Taxes Note 7. Long-term Debt Note 8. Leases Note 9. Common Stock Note 10. Commitments and Contingencies Note 11. Industry Segment and Geographic Information Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

31.1 Certification of the Companys Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 31.2 Certification of the Companys Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 32.1 Certification of the Companys Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

September 30, 2019

December 31, 2018

Receivables ⁽¹⁾

Contract liabilities ⁽²⁾