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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 March 31, 2021
or
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)
 
Delaware11-3547680
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
23 Main StreetHolmdel,NJ,07733
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (732528-2600
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001VGNasdaq Global Select Market
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 filero
Non-accelerated filer
o  
  
Smaller reporting companyEmerging 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.
ClassOutstanding atApril 30, 2021
Common Stock, par value $0.001251,388,823 shares


VONAGE HOLDINGS CORP.
INDEX
 
Part 1 - Financial Information
  Page
Item 1.
Item 2.
Item 3.
Item 4
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
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.
2


GLOSSARY OF TERMS

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:
2018 Credit Facility$100 million senior secured term loan and $500 million revolving facility due 2023
Convertible Senior Notes$345 million aggregate principal amount of 1.75% convertible notes due 2024
APIApplication Program Interfaces
ASCThe FASB Accounting Standards Codification, which the FASB established as the source of authoritative GAAP
ASUAccounting Standards Updates - updates to the ASC
CCaaSContact Center as a Service
CPaaSCommunications Platform as a Service
CRMCustomer Relationship Management
Exchange ActThe Securities Exchange Act of 1934, as amended
EPSEarnings Per Share
FASBFinancial Accounting Standards Board
FCCFederal Communications Commission
IPInternet Protocol
LIBORLondon Inter-Bank Offered Rate
MPLSMulti-Protocol Label Switching
NOLsNet Operating Losses
SaaSSoftware as a Service
SABStaff Accounting Bulletin
SD-WANSoftware-Defined Wide Area Network
SECU.S. Securities and Exchange Commission
SIPSession Initiation Protocol
SMBSmall to medium-sized business
SMSShort Message Service
UCaaSUnified Communications as a Service
USFFederal Universal Service Fund
VCPVonage Communications Platform, formerly referred to as Business
VoIPVoice over Internet Protocol
3


PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value) 
March 31,
2021
December 31,
2020
Assets
(Unaudited) 
Current assets:
Cash and cash equivalents$51,623 $43,078 
Accounts receivable, net of allowance of $8,094 and $8,878, respectively
111,584 116,304 
Deferred customer acquisition costs, current portion19,490 18,161 
Prepaid expenses37,133 32,131 
Other current assets3,615 6,230 
Total current assets
223,445 215,904 
Property and equipment, net of accumulated depreciation of $119,646 and $117,761, respectively
29,848 31,621 
Operating lease right-of-use assets35,745 29,330 
Goodwill620,585 624,328 
Software, net of accumulated amortization of $116,855 and $111,642, respectively
88,827 80,638 
Deferred customer acquisition costs68,609 67,529 
Restricted cash2,213 1,919 
Intangible assets, net of accumulated amortization of $283,659 and $275,346, respectively
192,113 204,267 
Deferred tax assets106,594 106,374 
Other assets34,762 33,926 
Total assets
$1,402,741 $1,395,836 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$31,324 $17,464 
Accrued expenses
154,706 158,080 
Deferred revenue, current portion
60,030 65,506 
Operating lease liabilities, current portion
10,562 11,554 
Total current liabilities
256,622 252,604 
Indebtedness under revolving credit facility210,500 215,500 
Convertible senior notes, net294,444 290,784 
Operating lease liabilities38,349 31,019 
Other liabilities3,561 3,155 
Total liabilities
803,476 793,062 
Commitments and Contingencies (Note 9)
Stockholders’ Equity:
Common stock, par value 0.001 per share; 596,950 shares authorized at March 31, 2021, and December 31, 2020
327 324 
Additional paid-in capital1,571,025 1,554,574 
Accumulated deficit(667,597)(667,221)
Treasury stock, at cost(337,532)(320,891)
Accumulated other comprehensive income33,042 35,988 
Total stockholders’ equity
599,265 602,774 
Total liabilities and stockholders’ equity
$1,402,741 $1,395,836 
See accompanying notes to condensed consolidated financial statements.
4



VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
 20212020
Revenues:
Service, access and product revenues
$314,793 $283,077 
USF revenues
18,107 14,380 
Total revenues332,900 297,457 
Operating Expenses:
Service, access and product cost of revenues (excluding depreciation and amortization)
138,680 113,038 
USF cost of revenues
18,107 14,380 
Sales and marketing
81,474 85,621 
Engineering and development
20,360 19,203 
General and administrative
44,933 40,882 
Depreciation and amortization
20,417 20,485 
Total operating expenses
323,971 293,609 
Income from operations8,929 3,848 
Other Income (Expense):
Interest expense
(7,298)(8,082)
Other income (expense), net
174 229 
Total other expense, net
(7,124)(7,853)
Income (Loss) before income tax benefit1,805 (4,005)
Income tax (expense) benefit(2,181)250 
Net loss$(376)$(3,755)
Loss per common share:
Basic and diluted$ $(0.02)
Weighted-average common shares outstanding:
Basic and diluted249,638 243,627 

See accompanying notes to condensed consolidated financial statements.
5


VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
(In thousands)
(Unaudited)
 
  Three Months Ended
March 31,
20212020
Net loss$(376)$(3,755)
Other comprehensive loss:
Foreign currency translation adjustment, net of tax expense (benefit) of $1,293 and $(470), respectively
(2,946)(23,627)
Unrealized loss on derivatives, net of tax benefit of $ and $(50), respectively
 (418)
Total other comprehensive loss(2,946)(24,045)
Comprehensive loss$(3,322)$(27,800)


See accompanying notes to condensed consolidated financial statements.
6


VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 

Three Months Ended
March 31,
 20212020
Cash flows from operating activities:
Net loss$(376)$(3,755)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization9,614 6,331 
Amortization of intangibles10,803 14,154 
Deferred income taxes999 1,468 
Amortization of deferred customer acquisition costs4,762 3,661 
Allowances for doubtful accounts 964 1,448 
Amortization of financing costs and debt discount3,863 3,656 
(Gain) Loss on disposal of property and equipment(7)741 
Share-based expense14,566 11,116 
Changes in derivatives (133)
Changes in operating assets and liabilities:
Accounts receivable737 2,361 
Prepaid expenses and other current assets(2,305)(5,387)
Deferred customer acquisition costs(7,187)(9,042)
Accounts payable and accrued expenses16,416 (25,459)
Deferred revenue(4,821)2,934 
Other assets - deferred cloud computing implementation costs(1,017)(669)
Other assets and liabilities307 (922)
Net cash provided by operating activities47,318 2,503 
Cash flows used in investing activities:
Capital expenditures
(2,553)(2,887)
Purchase of intangible assets
(62)(75)
Acquisition and development of software assets
(13,865)(10,273)
Net cash used in investing activities(16,480)(13,235)
Cash flows provided by (used in) financing activities:
Payments for short and long-term debt
(5,000) 
Proceeds from issuance of long-term debt
 45,000 
Employee taxes paid on withholding shares
(16,641)(12,656)
Proceeds from exercise of stock options
622 155 
Net cash (used in) provided by financing activities(21,019)32,499 
Effect of exchange rate changes on cash
(980)(2,290)
Net increase in cash, cash equivalents, and restricted cash8,839 19,477 
Cash, cash equivalents, and restricted cash, beginning of period44,997 25,635 
Cash, cash equivalents, and restricted cash, end of period$53,836 $45,112 
Supplemental disclosures of cash flow information:
Cash paid (received) during the periods for:
Interest
$1,863 $2,866 
Income taxes
$(3,965)$1,249 
Non-cash investing activities:
Acquisition of long-term assets included in accounts payable and accrued expenses
$1,302 $2,119 
   Share-based compensation capitalized in internally developed software costs$1,266 $928 

See accompanying notes to condensed consolidated financial statements.
7


VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Total
Balance at December 31, 2019$316 $1,494,469 $(631,009)$(306,043)$9,329 $567,062 
Stock option exercises4 151 155 
Share-based expense12,044 12,044 
Employee taxes paid on
  withholding shares
(12,748)(12,748)
Foreign currency translation
  adjustment
(23,627)(23,627)
Unrealized gain on derivatives(418)(418)
Net loss(3,755)(3,755)
Balance at March 31, 2020$320 $1,506,664 $(634,764)$(318,791)$(14,716)$538,713 
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Total
Balance at December 31, 2020$324 $1,554,574 $(667,221)$(320,891)$35,988 $602,774 
Stock option exercises3 619 622 
Share-based expense15,832 15,832 
Employee taxes paid on withholding
  shares
(16,641)(16,641)
Foreign currency translation
  adjustment
(2,946)(2,946)
Net loss(376)(376)
Balance at March 31, 2021$327 $1,571,025 $(667,597)$(337,532)$33,042 $599,265 

See accompanying notes to condensed consolidated financial statements.

8



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, our vision is to accelerate the world's ability to connect. We are observing a secular change in the way business is done, with a fundamental shift in how communications technologies are being leveraged in almost every industry. Through the Vonage Communications Platform, our strategy is to deliver a single leading cloud communications platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. We believe that the Vonage Communications Platform's products and services are well positioned to take advantage of emerging trends with sizable, growing total addressable markets as companies look to cloud-based communications solutions and API programming architectures as part of their digital transformation.
Our strategic business is the Vonage Communications Platform which delivers a single leading cloud communications platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. The Vonage Communications Platform brings unique value to businesses by providing multiple communications channels - including video, voice, messaging, email, verification, and artificial intelligence - that integrate into the applications, products and workflows that our customers are already using. We believe this delivers both the power and the flexibility to our customers to address the growing need to transform their communications, connections and experiences for customers and enables the type of business continuity, remote work, and remote delivery of services that are now essential for team members.
For our Consumer customers, we enable users to access and utilize our services and features, via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices. Our Consumer strategy is focused on the continued penetration of our core North American markets, which provide value in international long distance and target under-served segments.
Customers in the United States represented 66% and 69% of our consolidated revenues for the three months ended March 31, 2021 and 2020, 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 three months ended March 31, 2021 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, 2020 filed with the Securities and Exchange Commission on February 19, 2021.
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 of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, including uncertainty in the economic environment due to the ongoing outbreak of the novel coronavirus COVID-19.

9



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates are used for such items as depreciable lives for long-lived assets including intangible assets, tax provisions, uncollectible accounts, and assets and liabilities assumed in business combinations, among others. In addition, estimates are used to test long-lived assets and goodwill for impairment.
COVID-19 has created and may continue to create uncertainty in customer payments, reduced usage, and issuance of customer credits to distressed customers served by certain product lines. As of the date of our condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require us to materially update our estimates or judgments. However, these estimates may change as new events occur and additional information is obtained, which may result in changes being recognized in our condensed consolidated financial statements in future periods. In particular and in light of the COVID-19 pandemic, the assumptions and estimates associated with collectability assessment of revenue and credit losses of accounts receivable may have a material impact our consolidated financial statements in future periods, depending on the continued duration or degree of the impact of the COVID-19 pandemic on the global economy.
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, net assets or cash flows.
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 the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Service, Access, and Product Cost of Revenues
Service, access, and product cost of revenues excludes depreciation and amortization expense of $13,647 and $9,609 for the three months ended March 31, 2021 and 2020, respectively. In addition, costs of goods sold included service, access, and product cost of revenues during the three months ended March 31, 2021 and 2020 were $2,579 and $3,676, respectively.
Sales and Marketing Expenses
We incurred advertising costs, which are included in sales and marketing of $9,657 and $9,460 for the three months ended March 31, 2021 and 2019, respectively.
Fair Value of Financial Instruments
Certain of the Company's other financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable and accounts payable, approximate fair value due to their short-term nature and as such are classified as Level 1. We believe the fair value of our 2018 Credit Facility at March 31, 2021 and December 31, 2020 was approximately the same as its carrying amount as the facility bears interest at a variable rate indexed to current market conditions and is classified as Level 2 within the fair value hierarchy.
As of March 31, 2021 and December 31, 2020, the fair value of the 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) was approximately $361,156 and $373,373, respectively. 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.
10



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.
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 March 31,As of December 31,
2021202020202019
Cash and cash equivalents$51,623 $43,073 $43,078 $23,620 
Restricted cash2,213 2,039 1,919 2,015 
Total cash, cash equivalents and restricted cash$53,836 $45,112 $44,997 $25,635 

The following tables provides supplemental information of intangible assets and accrued expenses within the consolidated balance sheets:

Intangible assets, net
March 31, 2021December 31, 2020
Gross Carrying ValueAccumulated AmortizationNet Carrying ValueGross Carrying ValueAccumulated AmortizationNet Carrying Value
Customer relationships$281,019 $(153,678)$127,341 $284,692 $(150,094)$134,598 
Developed technology173,416 (109,239)64,177 173,572 (104,468)69,104 
Patents and patent licenses20,896 (20,301)595 20,849 (20,284)565 
Trade names441 (441) 500 (500) 
Total intangible assets$475,772 $(283,659)$192,113 $479,613 $(275,346)$204,267 
11



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Accrued expenses
March 31, 2021December 31, 2020
Compensation and related taxes and temporary labor$31,118 $43,580 
Marketing19,849 15,319 
Taxes and fees31,669 25,977 
Telecommunications48,572 52,975 
Severance1,674 3,594 
Interest2,408 847 
Customer credits3,393 4,738 
Professional fees2,754 1,953 
Inventory907 659 
Other accruals12,362 8,438 
Accrued expenses$154,706 $158,080 
In the second half of 2020, the Company initiated a business-wide optimization and alignment project to focus the Company's resources and drive stronger operational execution. In connection with this project, the Company incurred accrued severance costs of $1,294 during the three months ended March 31, 2021, related to further employee exits, which was included in general and administrative expense.
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 Vonage Communications Platform segment. The following table provides a summary of the changes in the carrying amounts of goodwill:
Balance at December 31, 2020$624,328 
Foreign currency translation adjustment(3,743)
Balance at March 31, 2021$620,585 
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity". This ASU simplifies the accounting for certain convertible instruments such that the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASC 815, or that do not result in substantial premiums accounted for as paid-in-capital. As a result, more convertible debt instruments will be accounted for as a single liability measured at its amortized cost. In addition, the ASU requires the use of the if-converted method to be applied to convertible instruments when calculating earnings per share. The ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, using either a modified retrospective or a full retrospective approach. Early adoption is permitted for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this standard on our consolidated financial statements.


12



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

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 and Note 3, Revenue Recognition to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020.
Disaggregation of Revenue
The following tables detail our revenue from customers disaggregated by primary geographical market and source of revenue. The tables also include a reconciliation of the disaggregated revenue for our Vonage Communications Platform, or VCP, and Consumer segments.
Three Months EndedThree Months Ended
March 31, 2021March 31, 2020
VCPConsumerTotalVCPConsumerTotal
Primary geographical markets
Americas$150,072 $74,932 $225,004 $129,379 $84,573 $213,952 
EMEA62,835 2,514 65,349 49,217 2,631 51,848 
APAC42,547  42,547 31,657  31,657 
$255,454 $77,446 $332,900 $210,253 $87,204 $297,457 
Major Sources of Revenue
Service revenues$240,442 $65,697 $306,139 $195,649 $77,243 $272,892 
Access and product revenues8,598 56 8,654 10,122 63 10,185 
USF revenues6,414 11,693 18,107 4,482 9,898 14,380 
$255,454 $77,446 $332,900 $210,253 $87,204 $297,457 

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 months ended March 31, 2021, the Company recognized $150,453 related to subscription services, $133,652 related to usage, and $48,795 related to other revenues such as USF, other regulatory fees, and credits. During the three months ended March 31, 2020, the Company recognized $156,455 related to subscription services, $93,047 related to usage, and $47,955 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:
March 31, 2021December 31, 2020
Receivables (1)
$111,584 $116,304 
Contract liabilities (2)
60,030 65,506 
(1) Amounts included in accounts receivables on our condensed consolidated balance sheets.
(2) Amounts included in deferred revenues 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 month as transfer of control occurs. During the three months ended March 31, 2021 and March 31, 2020, the Company recognized revenue of $106,037 and $108,875, respectively, related to its contract liabilities. We expect to recognize $60,030 into revenue over the next twelve months related to our deferred revenue as of March 31, 2021.
13



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Remaining Performance Obligation
Transaction price allocated to the remaining performance obligation represents contracted revenue that has not yet been recognized. The typical subscription term may range from 1 month to 3 years. Contracted revenue as of March 31, 2021 that has not yet been recognized was approximately $0.4 billion. This excludes contracts with an original expected length of less than one year. The Company expects to recognize the majority of its remaining performance obligation over the next 18 months.
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 a commission on sales of services and products to customers. We expect that these commission fees are recoverable and, therefore, we have capitalized $88,099 and $85,690 as contract costs, net of accumulated amortization, as of March 31, 2021 and December 31, 2020, respectively, included within deferred customer acquisitions costs, current portion and deferred customer acquisition costs on our condensed consolidated balance sheets. Capitalized commission fees are amortized to sales and marketing expense over estimated customer life, which is 7 years for Vonage Communications Platform customers. The amounts amortized to sales and marketing expense were $4,762 and $3,661, respectively, for the three months ended March 31, 2021 and March 31, 2020, respectively. There were no impairment losses recognized in relation to the costs capitalized during the three months ended March 31, 2021 and 2020. In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year and for residuals and renewals.
14



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 4.    Earnings Per Share
The following table sets forth the computation for basic and diluted loss per share for the three months ended March 31, 2021 and 2020:
 
 Three Months Ended
March 31,
 20212020
Numerator
Net loss$(376)$(3,755)
Denominator
Weighted average common shares outstanding for basic and diluted net loss per share249,638 243,627 
Basic and diluted loss per share
Basic and diluted loss per share$ $(0.02)

For the three months ended March 31, 2021 and 2020, the following were excluded from the calculation of diluted loss per common share because of their anti-dilutive effects: 
 Three Months Ended
March 31,
 20212020
Restricted stock units15,795 13,894 
Stock options1,387 4,878 
17,182 18,772 

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 6, Long-Term Debt.

15



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Note 5. Income Taxes

The income tax consisted of the following:
Three Months Ended
March 31,
 20212020
Income (loss) before income taxes$1,805 $(4,005)
Income tax (expense) benefit(2,181)250 
Effective tax rate120.8 %6.2 %

Generally, provisions for income taxes during interim reporting periods apply an estimate of the annual effective tax rate for the full year. The provision for income taxes will vary with levels of pre-tax income (loss) and non-deductible expenses, NOL valuation allowances and other permanent non-deductible charges which can cause the rate to fluctuate from quarter to quarter. An alternative approach may be recorded under a discrete method which applies actual adjustments for the period including specific permanent adjustments and geographic distribution of our pre-tax income (loss). The discrete method was determined to be the appropriate method for calculating the interim tax provision as using the estimated annual effective tax rate method would have produced an unreliable rate stemming from a marginal loss and large permanent adjustments.
For the three months ended March 31, 2021, our effective tax rate was different than the statutory rate primarily due to an increase in permanent items related to limitations on executive compensation, the inclusion of foreign income in the U.S. due to foreign disregarded entities, and limitation on foreign losses.
For the three months ended March 31, 2020, our effective tax rate was different than the statutory rate primarily due to the recognition of discrete period tax benefit of $2,115, which was 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.
Uncertain Tax Positions
The Company had uncertain tax benefits of $1,001 and $632 as of March 31, 2021 and December 31, 2020, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company incurred interest expense or penalties of $2 and $0, respectively, during the three months ended March 31, 2021 and March 31, 2020. The following table reconciles the total amounts of uncertain tax benefits:
 March 31, 2021December 31, 2020
Balance as of January 1$632 $914 
Increase due to current year positions375 114 
Increase due to prior year positions4  
Decrease due to settlements and payments (173)
Decrease due to lapse of applicable statute of limitations (238)
(Decrease) increase due to foreign currency fluctuation(10)15 
Uncertain tax benefits as of the end of the period$1,001 $632 
Net Operating Loss Carry Forwards
As of March 31, 2021, the Company has U.S. Federal and state NOL carryforwards of $410,731 and $207,769, respectively, which expire at various times through 2037. We have Non-US NOLs of $159,152 primarily related to the United Kingdom which has no expiration date.
16



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 6.    Long-Term Debt
This footnote should be read in conjunction with the complete description of our financing arrangements under Note 8, Long-Term Debt, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.
The following table summarizes the Company's long-term debt as of March 31, 2021 and December 31, 2020:
March 31, 2021December 31, 2020
Revolving credit facility - due 2023210,500 215,500 
Convertible senior notes - due 2024345,000 345,000 
Long-term debt including current maturities555,500 560,500 
Less unamortized discount45,441 48,702 
Less debt issuance costs5,115 5,514 
Total long-term debt$504,944 $506,284 
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 will mature on June 1, 2024, unless earlier redeemed, repurchased or converted. We may not redeem the notes prior to June 5, 2022.
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.
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. During the three months ended March 31, 2021, the conditions allowing holders of the Convertible Senior Notes to convert were not met.
The net carrying amount of the liability component of the Convertible Senior Notes was as follows:
March 31, 2021
Principal$345,000 
Unamortized discount(45,441)
Unamortized issuance cost(5,115)
Net carrying amount$294,444 
17



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

The following table sets forth the interest expense recognized related to the Convertible Senior Notes:
Three Months Ended
March 31,
20212020
Contractual interest expense$1,509 $1,509 
Amortization of debt discount3,261 3,054 
Amortization of debt issuance costs399 399 
Total interest expense related to the Convertible Senior Notes$5,169 $4,962 
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.
2018 Term Note and Revolving Credit Facility
On July 31, 2018, the Company entered into 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 three months ended March 31, 2021, we repaid $5 million under the revolving facility. In addition, the effective interest rate was 2.88% as of March 31, 2021. During the three months ended March 31, 2020, we borrowed $45 million under the revolving credit facility. As of March 31, 2021, we were in compliance with all covenants, including financial covenants, for the 2018 Credit Facility.
Note 7.  Leases
    
The Company entered into various non-cancelable operating lease arrangements 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 2028, some of which provide the Company options to extend the lease for terms up to 5 years beyond the original term. We are committed to pay a portion of the buildings’ operating expenses as required under the arrangements which we will separate as a non-lease component when readily determinable. The Company did not have any finance leases as of March 31, 2021 and December 31, 2020.

The Company incurred operating lease expense of $2,558 and $2,965, respectively, during the three months ended March 31, 2021 and March 31, 2020, related to its operating leases. In addition, the Company received sub-lease income of $284 and $319, respectively, during the three months ended March 31, 2021 and March 31, 2020. Additionally, the remaining weighted average lease term for our operating leases was 5.03 years and the weighted average discount rate utilized to measure the Company's operating leases was 4.35% as of March 31, 2021.
    
18



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Supplemental cash flow related to the Company's operating leases is as follows:
Three Months Ended
March 31, 2021March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities$2,628 $4,139 
Right-of-use assets obtained in exchange for lease obligations$8,431 $1,261 

Maturities of operating lease liabilities as of March 31, 2021 and December 31, 2020 are as follows:
March 31, 2021December 31, 2020
2021 (1)
$9,407 13,134 
202210,975 9,645 
202310,735 8,401 
20246,817 4,148 
20256,917 4,248 
Thereafter9,525 7,522 
Total lease payments54,376 47,098 
Less imputed interest(5,465)(4,525)
Total$48,911 $42,573 

(1) Excluding three months ended March 31, 2021 for the period ended March 31, 2021.

During the first quarter of 2020, the Company amended one of its office leases to remove a renewal period of 5 years beyond the initial lease term.  In the Company's adoption of ASC 842, the Company had included the available renewal term within the transition asset and liability as the renewal was highly probable at the time of adoption.  As a result, the Company's operating lease liability was reduced by $15,825 with a corresponding reduction in the Company's operating lease right-of-use assets as of March 31, 2020. During the third and fourth quarters of 2020, the Company abandoned a few of its office leases and as such, the Company reduced its operating lease right-of-use asset by $9,503 as of December 31, 2020 by accelerating the amortization of the right-of-use asset through the cease use date which is included in general and administrative expense.
19



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 8.    Common Stock
As of March 31, 2021 and December 31, 2020, the Company had 596,950 shares of common stock authorized and had 9,782 shares available for grants under our share-based compensation programs as of March 31, 2021. For a detailed description of our share-based compensation programs refer to Note 11, Employee Stock Benefit Plans in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. The following table reflects the changes in the Company's common stock issued and outstanding:
For the Three Months Ended
(in thousands)IssuedTreasuryOutstanding
Balance at December 31, 2019315,808 (72,959)242,849 
Shares issued under the 2015 Equity Incentive Plan4,072  4,072 
Employee taxes paid on withholding shares (1,675)(1,675)
Balance at March 31, 2020319,880 (74,634)245,246 
Balance at December 31, 2020323,815 (74,841)248,974 
Shares issued under the 2015 Equity Incentive Plan3,612  3,612 
Employee taxes paid on withholding shares (1,316)(1,316)
Balance at March 31, 2021327,427 (76,157)251,270 
Note 9.    Commitments and Contingencies
Litigation
From time to time we are subject to legal proceedings, claims and investigations relating to our business, including claims of alleged infringement of commercial, employment, intellectual property rights, and other matters. From time to time, we receive letters or other communications from third parties inviting us to obtain patent licenses that might be relevant to our business or alleging that our services infringe upon third-party patents or other intellectual property. In accordance with generally accepted accounting principles, we make a provision for a 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 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.  
20



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

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 $8,648 and $8,560 as of March 31, 2021 and December 31, 2020, respectively, as our best estimate of the potential tax exposure for any retroactive assessment.

21



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 10.  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 reportable operating segments within the Company for making operating decisions and assessing financial performance. Our chief operating decision-maker reviews revenue and Adjusted EBITDA for each of our reportable operating segments. Beginning as of December 31, 2020, the Company includes Adjusted EBITDA as this is the measure management uses to evaluate the profitability of our reportable operating segments. The items excluded from Adjusted EBITDA are not separately evaluated for each reportable operating segment. The Company has recast data from prior years to reflect the change how the Company evaluates the profitability of its reportable operating segments to conform to the current year presentation. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable operating segments as this information is not utilized by management to allocate resources or capital.
Vonage Communications Platform
The Vonage Communications Platform is our single enterprise cloud communications platform, offering our wide range of enterprise communications services and solutions including Communications APIs, Unified Communications, and Contact Center Communications. The Vonage Communications Platform brings unique value to businesses by providing multiple communications channels - video, voice, messaging, email and verification - that integrate into applications, products and workflows. This delivers both the power and the flexibility our customers need to disrupt their industries, and enables the type of business continuity, remote work, and remote delivery of services that are now essential for companies to work and serve customers from anywhere. Vonage products and services enable our business customers to fundamentally change how they engage with their customers and team members. We have a robust set of solutions and services that meet the needs of businesses of all sizes, from micro, to SMB through mid-market and enterprise. We provide customers with multiple deployment options designed to provide the reliability and quality of service they demand. Vonage solutions also integrate with today's leading business applications, CRM and productivity tools,, including Google’s G Suite, Zendesk, Salesforce’s Sales and Service Clouds, Microsoft Dynamics, ServiceNow, Oracle, and Clio among others, to drive internal communications and collaboration among team members and external engagement with customers.
Consumer
For our Consumer customers, we enable users to access and utilize our UCaaS 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.
Information about our segment results for the three months ended March 31, 2021 and March 31, 2020 were as follows:

Three Months EndedService RevenueRevenueAdjusted EBITDADepreciation and Amortization
March 31, 2021
Vonage Communications Platform$240,442 $255,454 $(1,846)$20,080 
Consumer65,697 77,446 50,013 337 
Total Vonage$306,139 $332,900 $48,167 $20,417 
March 31, 2020
Vonage Communications Platform$195,649 $210,253 $(21,088)$19,198 
Consumer77,243 87,204 59,925 1,287 
Total Vonage$272,892 $297,457 $38,837 $20,485 

22



VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

The Company uses Adjusted EBITDA as the measure of profit or loss for the evaluation of performance and allocation of resources of our reportable operating segments. Adjusted EBITDA is defined as net income or net loss attributable to Vonage before income tax expense or benefit, interest expense, depreciation and amortization, stock-based expense, amortization of costs to implement cloud computing arrangements, acquisition related transaction and integration costs, organizational transformation costs, restructuring activities, and other non-recurring items. Organizational transformation includes employee related exits including CEO succession, system change management, facility exit costs, and rebranding. Restructuring activities relate to the Company's business-wide optimization and alignment project initiated in 2020 which included employee related exits and further facility exit costs executed upon as part of the overall project. Other non-recurring items principally include certain litigation charges including defense costs and other non-recurring project costs such as the review of the Consumer business review and the business optimization project, both of which were initiated in 2020. This is also consistent with the measure used under our bank credit assessment. Our reconciliation of the aggregate amount of Adjusted EBITDA for our reportable segments to consolidated income before taxes is presented below:
Three Months Ended
March 31,
20212020
Adjusted EBITDA$48,167 $38,837 
Interest expense(7,298)(8,082)
Depreciation and amortization(20,417)(20,485)
Amortization of costs to implement cloud computing arrangements(896)(609)
Share-based expense(14,566)(11,116)
Organizational transformation (1,194)
Restructuring activities(1,294) 
Other non-recurring items(1,891)(1,356)
Income (Loss) before taxes$1,805 $(4,005)

Information about our operations by geographic location is as follows:
  March 31, 2021December 31, 2020
Long-lived assets:
United States$635,595 $646,072 
United Kingdom294,600 293,457 
Israel1,178 1,325 
$931,373 $940,854 
 

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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: realizing the benefits of optimization and cost-saving initiatives; the impact of the COVID-19 pandemic; the competition we face; the expansion of competition in the cloud communications market; risks related to the acquisition or integration of businesses we have acquired; our ability to adapt to rapid changes in the cloud communications market; the nascent state of the cloud communications for business market; our ability to retain customers and attract new customers cost-effectively; the risk associated with developing and maintaining effective internal sales teams and effective distribution channels; security breaches and other compromises of information security; risks associated with sales of our services to medium-sized and enterprise customers; our reliance on third-party hardware and software; our dependence on third-party facilities, equipment, systems and services; system disruptions or flaws in our technology and systems; our ability to comply with data privacy and related regulatory matters; our ability to scale our business and grow efficiently; our dependence on third party vendors; the impact of fluctuations in economic conditions, particularly on our small and medium business customers; our ability to obtain or maintain relevant intellectual property licenses or to protect our trademarks and internally developed software; restrictions in our debt agreements that may limit our operating flexibility; our ability to obtain additional financing if required; our ability to raise funds necessary to settle conversion of the 2024 convertible senior notes; conditional conversion features of the convertible senior notes; the cash settlement of the convertible senior notes; the effects of the capped call transactions in connection with the convertible senior notes; fraudulent use of our name or services; intellectual property and other litigation that have been and may be brought against us; reliance on third parties for our 911 services; uncertainties relating to regulation of business services; risks associated with legislative, regulatory or judicial actions regarding our business products; risks associated with operating abroad; risks associated with the taxation of our business; governmental regulation and taxes in our international operations; liability under anti-corruption laws or from governmental export controls or economic sanctions; our dependence on our customers' unimpeded access to broadband connections; foreign currency exchange risk; our history of net losses and ability to achieve consistent profitability in the future; our ability to fully realize the benefits of our net operating loss carry-forwards if an ownership change occurs; certain provisions of our charter documents; and other factors that are set forth under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to the date this Form 10-Q is filed with the Securities and Exchange Commission.
Financial Information Presentation
Management's discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read in connection with, the consolidated financial statements and related notes thereof. For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted. All trademarks are the property of their owners.
Overview
At Vonage, our vision is to accelerate the world's ability to connect. We are observing a secular change in the way business is done, with a fundamental shift in how communications technologies are being leveraged in almost every industry. Through the Vonage Communications Platform, our strategy is to deliver a single leading cloud communications platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. We believe that the Vonage Communications Platform's products and services are well positioned to take advantage of emerging trends with sizable, growing total addressable markets as companies look to cloud-based communications solutions and API programming architectures as part of their digital transformation.
Our business is organized under two reportable operating segments: Vonage Communications Platform and Consumer. The Vonage Communications Platform includes our Unified Communications, Contact Center Communications, and APIs service offerings and represents the Company’s strategic business as the source of future growth. Our Consumer segment includes our communications solutions for residential customers based on our roots in providing VoIP communication services.
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Vonage Communications Platform
Our strategic business is the Vonage Communications Platform which delivers a single leading cloud communications platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. The Vonage Communications Platform brings unique value to businesses by providing multiple communications channels - including video, voice, messaging, email, verification, and artificial intelligence - that integrate into the applications, products and workflows that our customers are already using. We believe this delivers both the power and the flexibility to our customers to address the growing need to transform their communications, connections and experiences for customers and enables the type of business continuity, remote work, and remote delivery of services that are now essential for team members.
Consumer
For our Consumer customers, we enable users to access and utilize our services and features, via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices. Our Consumer strategy is focused on the continued penetration of our core North American markets, which provide value in international long distance and target under-served segments.
Services Outside of the United States
We have operations in the United States, United Kingdom, Canada, Israel, Hong Kong, and Singapore, and provide a wide range of communications solutions to our customers located in many countries around the world.
Impact of COVID-19
A novel strain of coronavirus, or COVID-19, was first identified in China in December 2019 and subsequently declared a pandemic on March 11, 2020, by the World Health Organization. To date, COVID-19 has impacted nearly all regions around the world and resulted in travel restrictions and business slowdowns worldwide. The full impact of the pandemic on our business, operations and financial results has and will depend on various factors that continue to evolve, which we may not accurately predict. In response to the COVID-19 pandemic, governments across the world have enacted measures aimed at containing the spread of the virus, including ordering the closure of all businesses not deemed "essential," restricting residents to their homes, and the practice of social distancing when engaging in authorized activities. While some of these restrictions have been lifted on a global scale, many regions, including the United States where Vonage is headquartered, are experiencing a resurgence of COVID-19. As a result of the COVID-19 pandemic, all travel has been reduced to protect the health of our employees and to comply with local guidelines, and we have also modified the usage of Vonage offices worldwide to comply with social distancing (including our corporate headquarters), both of which disrupt how we typically operate our business.
COVID-19 has impacted some of our customers more than others, including customers in the travel, hospitality, retail, and other industries where physical interaction is critical. We have experienced and expect that we will continue to experience slowdowns in bookings and customer payments, customer churn and reduced usage, and issuance of customer credits to distressed customers served by certain product lines in the Vonage Communications Platform. In addition, COVID-19 may have impacts on many additional aspects of our operations, directly and indirectly, including with respect to its impacts on customer behaviors, our business and our employees, and the market generally, and the scope and nature of these impacts continue to evolve each day.
Trends in Our Industry
A number of trends in our industry have a significant effect on our results of operations and are important to an understanding of our financial statements.
Competitive landscape. The business cloud communications markets and consumer services market in which we participate are highly competitive. We face competition from a broad set of companies, including (i) SaaS companies, CCaaS companies, other alternative communication providers, other providers of cloud communication services and (ii) traditional telephone, wireless service providers, cable companies, and alternative communications providers with consumer offerings. As the cloud communications market evolves, and the convergence of voice, video, messaging, mobility and data networking technologies accelerates, we may face competition in the future from companies that do not currently compete in the market, including companies that currently compete in other sectors, companies that serve consumers rather than business customers, or companies which expand their market presence to include cloud communications. Moreover, as businesses and educational institutions are quickly pivoting to cloud-based communications in light the increased need for remote work and remote learning due to the COVID-19 pandemic, we are experiencing intense competition from our existing competitors, and also emerging competitors, seeking to capitalize on the growing needs for businesses and educators to transform their operations.
Regulation. Our business has developed in a relatively lightly regulated environment. See the discussion under "Regulation" in Note 9 to our condensed consolidated financial statements for a discussion of regulatory issues that impact us.
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Key Operating Data

The table below includes key operating data that our management uses to measure the growth and operating performance of the Vonage Communications Platform segment:
 Vonage Communications Platform
Three Months Ended
March 31,
 20212020
Service revenue per customer$582 $475 
Vonage Communications Platform service revenue churn0.5 %0.8 %
Service Revenue per Customer. Service revenues per customer for a particular period is calculated by dividing the average monthly service revenues for the period by the average number of customers over the number of months in the period. The average number of customers is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Service revenues excludes revenues from trading and auction customers. Service revenue per customer increased from $475 for the three months ended March 31, 2020 to $582 for the three months ended March 31, 2021 primarily driven by the Company's successful efforts to attract larger VCP customers and to expand services provided to our existing VCP customers.
Vonage Communications Platform Service Revenue Churn. Vonage Communications Platform service revenue churn is calculated by dividing the service revenue from customers or customer locations that have been confirmed to be foregone during a period by the simple average of the total service revenue from all customers in that period. Service revenue for purposes of determining VCP revenue churn is service revenue excluding revenue from our trading and auction customers, and usage in excess of a customer’s contracted service plan, regulatory fees charged to customers, and credits. The simple average of total service revenue from all customers during the period is the total service revenue as defined herein on the first day of the period, plus the total service revenue as defined herein on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate service revenue churn differently, and their service revenue churn data may not be directly comparable to ours. Vonage Communications Platform revenue churn decreased from 0.8% for the three months ended March 31, 2020 to 0.5% for the three months ended March 31, 2021.  Our service revenue churn may fluctuate over time due to economic conditions, seasonality in certain customer's operations, loss of customers who are acquired, and competitive pressures including promotional pricing. We are continuing to invest in our overall quality of service which includes customer care headcount and systems, billing systems, on-boarding processes and self-service options to ensure we scale our processes to our growth and continue to improve the overall customer experience.
The table below includes key operating data that our management uses to measure the growth and operating performance of the Consumer segment:
ConsumerThree Months Ended
March 31,
 20212020
Average monthly revenues per subscriber line$29.05 $27.35 
Subscriber lines (at period end)867,243 1,037,794 
Customer churn1.9 %1.8 %
Average Monthly Revenues per Subscriber Line. Average monthly revenues per subscriber line for a particular period is calculated by dividing our revenues for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. The simple average number of subscriber lines for the period is the number of subscriber lines on the first day of the period, plus the number of subscriber lines on the last day of the period, divided by two. Our average monthly revenues per subscriber line increased from $27.35 for the three months ended March 31, 2020 to $29.05 for the three months ended March 31, 2021 due primarily to the Company's ability to retain its more tenured customers.
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Subscriber Lines. Our subscriber lines include, as of a particular date, all paid subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines, including fax lines bundled with subscriber lines in our small office home office calling plans and soft phones, but do not include our virtual phone numbers and toll free numbers, which only allow inbound telephone calls to customers. Subscriber lines decreased from 1,037,794 as of March 31, 2020 to 867,243 as of March 31, 2021, reflecting planned actions to enhance the profitability of the assisted sales channel by eliminating lower performing locations and restructuring the pricing offers, and to shift investment to our business market.
Customer Churn. Customer churn is calculated by dividing the number of customers that have terminated during a period by the simple average of number of customers in a given period. The simple average number of customers during the period is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate customer churn differently, and their customer churn data may not be directly comparable to ours. Customer churn increased to 1.9% for the three months ended March 31, 2021 from 1.8% for the three months ended March 31, 2020, respectively. We maximize customer value by focusing marketing spend on higher return channels and away from assisted selling channels which had higher early life churn. We monitor customer churn on a daily basis and use it as an indicator of the level of customer satisfaction. Customers who have been with us for a year or more tend to have a lower churn rate than customers who have not. In addition, our customers who are international callers generally churn at a lower rate than customers who are domestic callers. Our customer churn will fluctuate over time due to economic conditions, competitive pressures including promotional pricing targeting international long distance callers, marketplace perception of our services, and our ability to provide high quality customer care and network quality and add future innovative products and services. See the discussion above for detail regarding churn impacting our business customers.

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

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

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