Good day, ladies and gentlemen, and welcome to the Vonage First Quarter 2020 Earnings Conference Call. For your information, today's call is being recorded. At this time, I would like to turn the conference over to your host Mr. Hunter Blankenbaker. Please go ahead, sir.

Great. Thank you, Elaine. Good morning and welcome to our first quarter 2020 earnings conference call. Speaking on the call this morning is Alan Masarek, Chief Executive Officer; and Dave Pearson, CFO. Also joining us is Omar Javaid, President of the API Platform; and Rodolpho Cardenuto, President of the Applications Group. Alan will discuss our strategy and first quarter results and Dave will provide a more detailed view on our first quarter and 2020 guidance. Slides that accompany today's discussion are available on the IR website. At the conclusion of our prepared remarks, we'll be happy to take your questions. As referenced on slide 2, I would like to remind everyone that statements made during this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's expectations depend on assumptions that may be incorrect or imprecise and are subject to risks and uncertainties that could cause actual results to differ materially. More information about those risks and uncertainties is highlighted on the second page of the slides and contained in our SEC filings. We caution listeners not to rely unduly on these statements and disclaim any intent or obligation to update them. During this call, we will be referring to non-GAAP financial measures. A reconciliation to GAAP is available in the first quarter earnings press release or the first quarter earnings slides posted on the IR website. Additionally, during prepared remarks today, all comparisons to prior periods are year-over-year, unless otherwise noted as sequential. So with that, I'll turn the call over to Alan.

Thanks, Hunter. Good morning. I'd first like to offer best wishes to everyone. I hope you're safe, healthy and you're taking all necessary precautions and importantly, as we take care of yourself, you remember to support others who might be in need. To our 2,400 employees thank you. Thank you for your commitment during unprecedented times. I'm proud of your response to the crisis. I'm proud of how you've supported the company, one another and our customers. You enabled our own business continuity plans virtually overnight. And our own technology -- our own technology enabled all 2,400 of you across the globe to be working productively in your own Vonage remote office. Just a great job. Thank you so much. Turning to results. The first quarter demonstrated broad-based strength across the company. Business segment revenues totaled $210 million. Within this, API Platform revenues grew 44%, driven by high-value APIs. Application service revenue grew 10%, which was slightly above our own expectations. On a consolidated basis revenues totaled $297 million, including $14 million of USF fees and we delivered adjusted EBITDA of $39 million. Now let me lead off -- I want to highlight that over the long-term, we believe that reactions to COVID are going to accelerate the digital transformation of the global economy, and we believe Vonage is well-positioned to aid in this transformation. We see two long-term trends each favorable to Vonage. The first trend is the increasing use of remotely delivered services. We believe customers’ worldwide will increasingly embrace remotely delivered services such as telehealth, distance learning, remote fitness and many, many others. The second trend is the increase in remote work itself. We believe businesses worldwide will increasingly embrace remote work environments to address employees' demands for remote working as well as to ensure business continuity. Let me highlight, two examples. First, video communications in a more remote world are critical. And Vonage's video API traffic has grown dramatically based on the growth of remotely delivered services. These services again, like telehealth, distance learning and others require that video be programmed into the overall solution as an embedded component. We believe Vonage is the market leader in the embedded video market, which we delivered through our programmable APIs. In telehealth alone in the month of March, video API usage increased more than 700% versus February. Second, in a more remote world where workers are distributed, cloud-based communications are critical. We believe that COVID prioritizes the business continuity concerns of all businesses. And in doing so we'll accelerate the move from premise to cloud-based communications. Importantly, we think this trend will accelerate even for enterprises with large workforces in single locations, because again, business continuity concerns will catalyze decisions to move to the cloud. So while we see long-term benefits coming out of this, we are not immune to short-term COVID headwinds. For example, we saw traffic declines in APAC early in first quarter. And while APAC traffic began to recover somewhat in late March, we saw volume reductions in the U.S. and EMEA at the same time. Also we continue to see softness in impacted verticals such as travel, hospitality and consumer discretionary. Importantly, we have not seen elevated customer churn. In fact, business segment churn in the first quarter improved to 0.8%, which is a record low. So while churn improved, we have had to provide relief to certain customers via onetime credits and extended payment terms to some customers in those impacted verticals. Lastly, our sales pipeline is heavily dependent on in-person events with partners, including over 100 each year with Salesforce. As these events have virtualized, we have seen some softness in the pipeline, which has been exacerbated a bit by the lengthening of some sales cycles and install cycles. So when we take into account these various puts and takes of COVID-related impacts, we nonetheless have very good visibility into anticipated second quarter results. For full year guidance, we're trying to be cautious, not because of any long-term weakness in our business but simply due to uncertainty about second half macroeconomic conditions. Okay. With that let's review first quarter results. The API Platform delivered GAAP revenue growth of 44%, reflecting solid execution of our strategy. I'll highlight the three specific drivers of growth. First, sales of high-value APIs. This includes programmable video, voice and IP messaging and it grew nearly 70%. As mentioned, video and telehealth showed exceptional strength. We won dozens of telehealth customers in the quarter, including the fourth largest non-profit health system in the U.S. and a large publicly traded health care provider. We help existing customers like Doctolib, the largest e-health start-up in Europe and the massive increases in tele-consultations. We enabled Doxy.me, a U.S. telehealth leader to add 139,000 new health care providers in a single week, driving a 7 times increase in their video sessions. A second key driver is strong revenue growth from existing customers. Dollar-based net expansion in the first quarter was 138%, up from 134% in Q4 and it's our highest rate in more than two years. And following the third key driver of growth is our ability to successfully sell to large enterprises because we have the sales, operations and network infrastructure that those enterprises require. For example in the first quarter, we won the world's largest international health and beauty retailer, helping them integrate communications into their online ordering process. We helped one of the world's most influential lifestyle brands roll out a new streaming service. Importantly, this company was already a Vonage contact center customer. And we were chosen because of our ability to integrate our API directly into their sales force system. And then third, we won a significant European government health project and also helped the Spanish National Health Service build an AI-based conversational assistant to reduce calls into health care hotlines. To summarize, API platform results reflect our success as a global, multimodal communications platform. We are winning customers across diverse industries, geographies sizes and use cases. We also ended the quarter with more than 1 million developers registered on our API platform. Now moving to applications. Service revenue growth in the first quarter, GAAP growth was 10%. This growth rate reflects our focus on mid-market and enterprise customers offset by the micro segment. Bookings from mid-market and enterprise customers, which we define as those with greater than $12,000 of ARR, grew 39% versus the year ago quarter and comprised 64% of application bookings in the first quarter. Service revenues from mid-market and enterprise customers grew 14% in the first quarter and service revenues from pure enterprise customers, again defined as those with greater than $120,000 of ARR, grew 21% in the quarter. So with that as a backdrop, let's review three key highlights of our mid-market and enterprise progress. The first is our success with channel partners. In the first quarter, the channel originated 60% of all North American field sales. Also we are expanding our distribution coverage with VARs, disties and systems integrators. In coming quarters, we expect to add 2-tier reseller partners to significantly expand our channel and geographic coverage. The second highlight is the success of our go-to-market and product-embed strategy with Salesforce. In March, we were awarded Summit Status by Salesforce. Summit Status is reserved for the top 25 Salesforce software vendors. And this is out of more than 3,000. So we are one of the top 25 out of more than 3000. And Vonage is the only UCaaS, CCaaS or CPaaS supplier to reach Summit Status, The third element of mid-market and enterprise progress is improvements we continue to make in our platform to enhance its scalability. For example, in March, we saw a 300% increase in mobile app installs an 80% increase in message volume and a 20% increase in call volume. We launched Vonage Meetings, our fully integrated video solution built from our own video API. In March, Vonage Meetings usage increased 450%. And the product was given the 2020 INTERNET TELEPHONY Product of the Year Award. We also launched greater integrations between Vonage Business Cloud, our UCaaS solution and Vonage Contact Center. As it is now integrated, employees and agents share single sign-on, common call control, presence and directory sync. Separately, we launched our AI virtual assistant product, so live agents can focus on specialized customer requests. On the international front, Vonage World Office now supports those U.S.-based multinationals in 15 countries. Recent additions include Denmark, Sweden, Belgium, Italy, Switzerland, Spain, Austria and Portugal. We are excited to announce the integration of Vonage Contact Center Now with ServiceNow, which has been in limited availability and will be commercially available next week. Finally, during the quarter, we closed 41 enterprise deals including 15 seven figure TCV deals, total contract value deals. Let me highlight three of those 15. First, we won a highly strategic UCaaS plus CCaaS deal with one of the largest mortgage servicers in the U.S. This client's competitive positioning is to build uncommonly strong personal relationships with customers. So, for them to move to a new contact center and unified communications solution was a rigorous process. We won against our major competitors due to our deep Salesforce integration. Second, we won another highly competitive deal for the nation's leading online marketplace for investment properties. Initially, a contact center-focused deal the deal turned into CCaaS plus UCaaS based on the strength of our integrated product experience. Third, we renewed a multiyear contract with AB InBev that began as a contact center for care agents only, but has expanded into telesales, IT help desk and field sales with the result in doubling in ARR. So, to close, the first quarter reflects strong performance, highlighting the power of our programmable platform strategy. And while we anticipate some short-term impacts from COVID, we believe Vonage's long-term prospects have never been better. I am confident we will emerge from this crisis in a better positioned company with deeper customer and partner relationships, a stronger product value proposition and an ever more united employee base. Before I hand the call to Dave, I'm pleased to announce that Dave has delayed his retirement through Q2 earnings, while we continue to search for a successor. Thank you for that Dave. I'll now pass the call to you. Thank you.

Thanks, Alan and good morning everyone. Let's begin with a review of the first quarter on slide 7. First quarter Vonage business total revenue was $210 million or $206 million ex-USF, which was ahead of guidance and represents 71% of total revenue and a 20% increase. I would note that beginning in this first quarter, we began reporting USF as a separate line item on our income statement in order to highlight our operating performance. USF revenues continue to be a pure pass-through that generate no gross margin. These pass-through revenues did decline in Q1, but for positive reasons as we concluded a study that determined that our offering is mostly software, meaning lower USF fees charged to our customers. From Slide 8, business service revenue increased 23%. Service revenue growth is our focus as we deemphasize access circuits and sell fewer desk phones. API Platform revenue, all of which is service was $86 million in the first quarter, up 44% GAAP. First quarter total revenue from applications was $124 million or $120 million ex-USF. Of this, $110 million was service revenue, which increased 10% GAAP. Moving to slide 9. Vonage business segment revenue churn was 0.8% positive versus 1.2% in the prior year and year ago quarters and monthly service revenue per customer was up 16% to $475. These KPIs are consistent in demonstrating our move upmarket. On slide 10, business service margin in the first quarter was 53%, down 3% year-over-year, but flat sequentially. This was the fourth straight quarter of flat or better business service margin, reflecting the move to our own higher-margin products. Moving to slide 11. Consumer revenue was $87 million or $77 million excluding USF. Churn of 1.8% was favorable year-over-year despite targeted price increases implemented in the first quarter, which increased average monthly revenues per line by $0.92 from the prior year. We ended the quarter with approximately one million consumer subscriber lines, two-year plus tenured customers now represent 92% of our consumer base and five-year plus customers are 74%. Turning to slide 13. Consolidated revenues for the first quarter were $297 million, representing a 9% increase ex-USF. Now moving to income statement cost items on Slide 14. Consolidated sales and marketing expense for the first quarter was $86 million, down $10 million. This is primarily due to moving brand spend to later in the year and the cancellation of in-person events both due to COVID. Engineering and development costs were $19 million, up $3 million. E&D expense, plus capitalized software totaled $29 million, which represented 15% of business service revenue. General and administrative expense for the first quarter was $41 million, up $5 million. These increases primarily reflect the impact of a full quarter of noncash stock compensation associated with new voice media employees. Turning ahead to slide 15. GAAP net loss was $4 million, lower than the $1 million in the prior year. And adjusted net income for the quarter was $12 million or $0.05 per diluted share, down $3 million. The decreases were primarily due to a stock compensation-related tax benefit in the prior year quarter. First quarter adjusted EBITDA was $39 million, up $8 million year-over-year. Moving to slide 16. CapEx for the quarter was $13 million, up $2 million, due primarily to the aforementioned development of new functionality on the Vonage Communications Platform, resulting in adjusted EBITDA minus CapEx of $26 million. On slide 17, we ended the quarter with $567 million of net debt, up sequentially due to our customary annual bonus and equity award tax settlement payments, all of which are made in the first quarter. As of March 31, our cash balance was $43 million, resulting in net debt of 3.4 times LTM-adjusted EBITDA, leaving us approximately $150 million of liquidity under our borrowing covenant. We intend to reduce net debt as the year progresses. Moving on to guidance on slide 19. As Alan noted, we are updating 2020 guidance to reflect the estimated impact of the COVID-19 crisis. We are seeing positive catalysts from growth in remotely delivered services and remote work. Our high product utility is evidenced by exploding video usage, and lower logo churn, offset by elevated levels of payment deferrals and credits, and temporary demand declines in hospitality and travel-related sectors. We are seeing some customers accelerate their move to the cloud and others put their decision to shift to the cloud on hold focused on their own operations. With the visibility we have today, we project the net effect of these dynamics to result in 2020 GAAP business revenues in the range of $855 million to $880 million. Within this number, we expect business USF of $17 million. For consumer, our outlook has increased slightly as we project 2020 revenue in the $325 million area with USF fees of $34 million included. As with the business segment, we are not currently seeing a churn impact in the consumer segment and home phone minute usage has gone up during COVID. We expect full year 2020 adjusted EBITDA of between $150 million and $155 million. We can maintain this high level of adjusted EBITDA, because the provision to overall revenue is a modest 3%, and our costs are highly variable, particularly with controllable expenses like T&E. With regard to the second quarter, we expect business segment revenues in the range of $213 million to $216 million, including USF of $4 million. Consumer revenues in the $82 million area, including USF of $8 million and adjusted EBITDA in the $36 million area. To be clear, our earnings guidance reflects continued investment in long-life assets like engineering and sales capacity, with the necessary marketing to ensure we can quickly rebound from macroeconomic weakness caused by COVID. In the short term, we have shared with you the visibility we have, including the benefits of a significant subscription base and experience with the impacts of COVID in Q1. Long term, I'm confident that our strategic positioning is stronger as we emerge from this crisis. I'll now turn the call over to Hunter to initiate the Q&A.

Okay. Great. Thank you, Dave. Elaine, if we could please turn to the first question.

Thank you. [Operator Instructions] We will take our first question today from Tim Horan of Oppenheimer. Please go ahead.

Thanks guys and thanks for the call and the guidance. Maybe I missed this, but can you talk a little bit more about the mix or percentage of revenue you think that's at risk maybe the restaurant business or travel business? And secondly, the API business is really strong. Can you just talk about how those trends have progressed here and at this growth rate is it anywhere near sustainable? And then, lastly, it sounds like Alan, obviously you think it's a very positive longer term and some of the negative impacts you're seeing here will actually be major tailwinds in 18 months or so when we're through this. Can you talk about longer-term in next maybe two three years from now where you hope business service revenues get to? Thank you.

So, thanks Tim. Dave, why don't you take the first? And then I think Omar you can speak to the API strength and I'll finish off in sort of the long-term view.

Yeah, absolutely. So, the difference in API revenue relative to how we saw the year baked into the guidance we just gave is in the mid-teens millions of dollars. And that is primarily comprised of customers in the travel and hospitality industry. What we have seen is a drop-off in usage from those companies offset by two things. And that is almost entirely SMS usage, and that's been offset by the exploding video usage that we saw, and higher usage from primarily U.S. customers of the SMS product to interact with their customers. And those happen to be global digital leaders just not in the travel and leisure space. As it relates to apps just to expand the concept on exposure, we haven't given many credits and the ones that we have given do tend to be concentrated in the hospitality and restaurant space. But those are customers that we're in very close touch with and we baked into our guidance, the request that they've made, and the request that we think we're going to get for credits.

And Omar, why don't you sort of reference the – in Tim's question on sort of ongoing API strength and I guess the sustainability of these types of growth rates.

Yes. Thank you, Alan. Hi, everyone. I hope you're all well. As to the long-term sustainability, I think what we're seeing, if you just refer to Alan's opening remarks that what this crisis has it's really accelerated a lot of digital transformation spending, and I think what you're seeing for a lot of companies and we're seeing this all over the world. Obviously, the industry that were affected the most like travel hospitality, let's sort of set them aside for a second, but we're seeing a ton of interest and a ton of activity and real activity. Basically, these projects the way that we've seen them even with say long-term prospects this was on their list. Now, this is on the top of their list, these digital transformation initiatives. And so we're – on the API side particularly, we're seeing a lot of that. So I think that bodes well for the long term.

Thanks, Omar. And Tim to the final point about the long term, the way to think about this in my view is the trends that we highlighted, we believe are permanent meaning that remote work is here to stay. Does not mean people are not going to return to offices, but the trend of virtualizing your workforce will accelerate permanently. The exact same thing exists on remotely delivered services, telehealth, distance learning. It does not mean people are not going to go physically back to the doctor or physically back-to-school, but those trends are going to be permanently changed positively. They're going to continue faster growth than before COVID. So we see a permanent side and then we see the temporary. And so on the temporary side, clearly, impacted industries are going to rebound. The challenge for all of us is we don't have specific clarity as to when, but they're going to rebound into normalcy in those impacted verticals: travel, hospitality, consumer discretionary. So when you think about long-term growth, we are simply -- we're going to be the beneficiary of those trends on the one hand, where you see continued strength as Omar was talking about particularly in API around digital transformation, but really on both sides. And then we are going to continue to beat out what I referred to as this U-shaped recovery as we reposition on the applications side are the base of our revenues from downmarket to upmarket. So here in the quarter bookings 64% of bookings were mid-market and enterprise bookings. That's up versus 62% in the previous quarter in Q4. The growth itself was 39%. So the composition of our revenues will change as the shape of our bookings is changing going forward. That will also be an accelerant to the business going forward. So thanks for those questions. Let's move on.

Thank you. Our next question comes from Catharine Trebnick of Dougherty. Please go ahead.

Nice presentation. Thank you for taking my question. So mine is, could you parse a little bit the entire sales cycle? We're in Q2 right now, and I'm trying to get a good understanding of -- you did say in the prepared remarks that things were -- the cycle slowed down. It was -- you still had a lot of in-person calls, but with your new video meeting application, it seems to me that you would have a better opportunity to close sales with that and do more proof-of-concepts online. So can you parse that up for us and kind of help me out understand that that -- is it going to be a permanent thing that you can adapt to this new world? Thanks.

Let me start and then I'll turn it to Rodolpho. Our go-to-market traditionally, as I mentioned in my remarks, have been dependent on in-person events. I commented on 100-or-so sales force events, but there's several hundred beyond that in other partner events that we participate in. All of that is obviously virtualized. And so in our world that has maybe a bit more challenging. Now our products work really well in this environment, but that sales process has created some softness on the front end. We think that the softness is not that great on the one hand, our tools and the need for digital transformation we benefit by on the other. And over some period of time obviously post COVID, these events are going to be restored. But let me turn it over to Rodolpho. He can give you more color on this.

Yes. Thank you, Alan. So what we saw in the very beginning post COVID was of course a lot of the companies were shopping around and I'm trying to understand how to really engage with us, and how to regauge the sales cycle. So, and also how to manage the sales yield in terms of contracts, signatures, et cetera. So we had an innovation of the sales cycles in the beginning helped by our own technology, and actually demonstrating our own technology to engage with our customers. We approved the concept of the technology due to the concept of their unified communication the call center -- the contact center with our customers. And now I think of the sales cycle and of course as Alan said, we move it from face-to-face engagements or face-to-face events to digital events. And now we are almost normalized, I would say, from a sales cycle perspective after a bump in terms of delaying the sales cycle.

Thanks Rodolpho. Let's go to the next question.

Yes. One more. So, your consumer strategic review, where are you on that?

Dave, why don't you take that?

Yes. Absolutely. That is going according to the plan that we laid out in February. There's no COVID-related delay to the process nor the hypothesis behind it. So the phase we're in right now is the one that we outlined, which is working intensively with our consultants and advisers to understand what the asset actually would be to divest of. Should we decide to confirm that path and exactly what the options are for how to do that? So, it's a lot of operational items and that is going according to plan and we'll update as we go.

Okay. Thank you. Keep the good work. Appreciate it.

Thanks, Catharine. Thanks, Dave.

Thank you.

Thank you. Our next question comes from Samad Samana of Jefferies. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Hope everyone is doing well. Maybe one just on -- you mentioned that there's puts and takes in terms of vertical exposure. Could you maybe just help us understand maybe what percentage of exposure you have to industries like hospitality, retail, consumer travel, et cetera? Just for us to think about it on a go-forward basis.

Dave, why don't you take that?

Yes, absolutely. So on, the API side, it's normal course. It's about 20% exposure to travel and hospitality, and I think that's pretty standard in the API business. Remember that there were offsets even to that, for instance, ride-sharing companies. Obviously, based on their own statements doing less ride-sharing, but they're also doing more food delivery. So, that's the exposure there. We do see that as a temporary -- their offsets. And then we also have we believe that the softness there is temporary. It's hard to say exactly when it comes in. And I'd say that we took a cautious approach to how it does come in. On the API side, I would just remind people that we are very geographically diverse. And in terms of the timing of how COVID has affected different regions we have been -- that diversification has helped us. Obviously, it's affected every geography, but it's affecting it at different times. On the applications side, our exposure to those industries is lower. We clearly do have customers in retail. We have customers in the restaurant business. And that's where -- and those types of customers tend to be bigger. So, we know exactly where they stand in terms of likely credits or credit requests, but it is a smaller percentage of what we do on the application side relative to the number that I gave on API.

Great. That's really helpful. And then Alan I think I heard you mentioned a new integration with ServiceNow. Clearly, they're one of the best owned companies in enterprise software. I'm curious if you could maybe double-click on that and just help us understand what the relationship there is and if there will be any joint go-to-market efforts, et cetera?

Thanks Samad. Let me ask Rodolpho to take that.

Yes. The short answer is yes we will have a go-to-market engagement with them. The relationship that we are developing with ServiceNow is very similar to the relationship that we have with the Salesforce.com now with the CRM now. So, we have developed the integration. We have deep integration into ServiceNow CSM now and as you know some of the customers -- some of the CRM customers they are also CSM customers that are from ServiceNow and we intended to engage deeply with them. We do have a go-to-market and we have more announcements coming next week and I'll follow-up on that.

Great, that's exciting. Thanks for taking the questions and congrats on the good quarter.

Thanks Samad. Thanks.

Our next question comes from Rich Valera of Needham & Company. Please go ahead.

Thank you. Good morning and congratulations on a nice sprint in a challenging environment to say the least. I was hoping you could provide a little more color on the percentage of total API business that comes from the kind of high-value applications kind of where that is today and if you could give any sense of where you think that could go over time since it's clearly a faster-growing cohort of that business.

Let me ask Dave to answer that.

Yes, absolutely. Omar can certainly provide some color. So, high-value right now is in the mid-teens percent of our API revenue base. And again, that's growing dramatically faster than SMS and most any other product that we have. The other thing I'd point out is that is high-value is a much more U.S.-oriented product. It works everywhere but the success we're having is disproportionately in the U.S. whereas our SMS base has historically been disproportionately in APAC. So, if you think about our strategy of moving to more high-value products and being more geographically diverse which includes a bigger base in the U.S. this trend that we're seeing right now is helping us execute on both parameters of that strategy.

Got it, that's very helpful. And just in terms of the near-term headwinds you guys are seeing I wonder if you could in any way try to quantify a little more what you're seeing in terms of bookings or pipeline changes as you've entered the second quarter in the month of April relative to entering the first quarter of the year just to give us any sense of how those business conditions have changed over the last quarter.

Dave let me ask you to take that as well?

Yes. So, Rodolpho can give more color, but I just -- I talked about a mid-teen. If you think about the quarters two through four I talked about a mid-teens kind of difference on API versus where we saw the year which is quite modest in the non-subscription business. On the applications side, embedded in our guidance is a kind of high teens difference from what we saw at the start of the year. And that difference is basically in two buckets. One bucket is install and bookings simply being lower. And the other bucket is churn which I would call down -- which is primarily down-sell churn. So, we're not seeing elevated logo churn. We are seeing some people say okay I planned on adding five seats, but I'm not going to do that or take five seats I'm still a customer but take five seats away temporarily and credits. And so the two buckets of installs and bookings on the one hand down-sell churn and credits on the other account. Roughly equally for that high teens difference that's embedded in our guidance. Rodolpho can comment kind of on the bookings environment specifically.

Yes. Yes. My comment is just like you said. We bake it in everything in our guidance now. But what we see is a challenged environment in Q2 due to the business closures and business that are not open up for us to do business. So, there is discharge of business in Q2. But we are benefiting from Q1 because we are actually harvesting in Q2 what we see that in Q1. But 2Q is going to be a challenged one. So, then we recover in Q3 and then we'll recover even better in Q4. There is this slope in Q2 due to the COVID social distancing policies.

Great, that's very helpful color. Just one more if I could for you Dave. Can you say how much access and product revenue is baked into the 2Q business guidance and the full year?

It is a -- I'm not going to give a specific number, but it is going down ratably. So, first of all, those numbers as I talked about in my prepared comments would be going down anyway and they're simply going to go down at this their decline rate will be a little bit greater than it would have been anyway because of the impact on overall service revenues and customers. But we don't see any sort of massive shift there or disproportionate shift. For instance, we're not seeing people say, hey take down five seats and then also take my access away something like that. So, it's very closely tied on the access side. On the product side, I think it will decline a bit faster because of COVID because many of the installs we're doing at this point do not involve desk phones. And so that dynamic is baked into our guidance as well.

Okay. Thanks for the clarification. Thanks guys.

Thank you.

Thank you. [Operator Instructions] We take our next question from Alex Kurtz of KeyBanc.

Thanks guys. So I guess no three or four questions for me. I just hope that you're all safe and healthy.

Thanks, Alex.

So the full year guidance why provide that? I mean, I think pretty clear that a lot of your peers all of your competitors are pulling full year, so maybe a little bit of context around that. And then on the API side, just pricing in the marketplace. It's always been a discussion point about your platform relative to your largest competitor and how you're thinking about margin and pricing going forward through rest of the year? Thank you.

Dave why don't I ask you to take that?

Yes, absolutely. I know Omar can take the API pricing one. As it relates to giving full year guidance, our guiding principles going into this we're number one. We think we do have decent visibility on our business. We've got a subscription business on the application side. And we're living in the eye of the storm as it relates to bookings. And a lot of the effects that occur in the second quarter affect the rest of the year. And a lot of the sales things that you do in the latter part of the year affect 2021, so good visibility there because of the subscription nature of the business. On the API side -- and by the way our comparables at least the ones that have reported have also given guidance, the ones who are in subscription UC and CC businesses. On the API side, we note that one of our comparables pulled annual guidance and this is not a subscription business. But for us, we feel like we do have appropriate visibility to give a range and it was a fairly wide range reflecting the fact that there is uncertainty in the world. But given the geographic diversity that we're seeing and the fact that we're now -- we now have four months under our belt, we felt comfortable putting that number out. And as a guiding principle, we also felt like conveying what we're seeing and our best view was the right thing to do in this situation.

Dave, let me elaborate a bit on the API side. So I think your question was how we're thinking about margins and pricing through the remainder of the year. What we have seen so far I think even -- let's use Asia Pacific as an example. So we feel pretty good. Let's just make the general statement. We feel pretty good about not only margins, but pricing throughout the remainder of the year. And part of what gives us that confidence -- gives me that confidence on the API side is sort of going through what we saw in Asia Pacific. And if that kind of tracks to what we see happening in the rest of the world, we didn't see for example pressure on margins or pressure on pricing there. And we're not seeing it so far here either. That's currently our view for this year and for the rest of the year.

Okay. Thanks, Omar.

Thank you. Our next question comes from Sterling Auty of JPMorgan. Please go ahead. Q –Unidentified Analyst: Hi, guys. This is Matt on for Sterling. Thanks for taking the question. In terms of the possible implementation delays, what parts of the product portfolio do you see having the greatest risk? And what is happening on the average implementation time frames? Thanks.

So Rodolpho, why don't you take that? Your question really is limited just to the applications side because similar for the install issues don't exist on the API side. Rodolpho?

Yes, sure. What we see now is a delay there is this lagging, especially the CCaaS world that our companies are committing to us. So we are signing the contracts, but they are waiting for their business to actually recover or to reopen to start the installation. So while we see now, the lagging of the installation, it's different than the lagging that we saw before, which was more of a professional service or implementation side of the business. Now it is more of a recovery or reopening of the business. That's also baked into our outlook and our guidance. Q –Unidentified Analyst: Got it. That makes sense. And then just one follow-up for me. In terms of headcount, where are you guys trending in terms of your plan for the next couple of quarters? Has that changed relative to what you had previously? Thanks.

I'm glad you asked that question, because the simple answer is our headcount is -- our headcount plans are virtually unchanged. So to be very specific we're making no COVID-related layoffs. There is no furloughing of our employees anticipated. We have at last count some -- I think it's around 225 open positions that we continue to recruit for and these are spread across the organization. And the key point here is that embedded in our -- in the EBITDA guidance that Dave provided is a continued investment in what I refer to as long-life assets, which is product engineering and sales capacity. And at the same time investing in the marketing side, much of which is working in media, but it's people as well so that we can slingshot out of COVID. And that's exactly how we've set this up and that's reflected in that EBITDA guidance. Q –Unidentified Analyst: Great. Thanks so much guys. Appreciate the color.

Thank you.

Thank you. Our next question is from Meta Marshall of Morgan Stanley. Please go ahead Q –Unidentified Analyst: Hi. This is Erik on for Meta. Thanks for taking our questions. Maybe just going back to the strength we saw in applications in the quarter. Was that largely more contact center functionality, or were there other drivers that were more impactful there?

Erik, thanks for the question. Let me ask Rodolpho to take that.

In terms of the strength of the quarter in contracts?

In Q1 I think.

In Q1 both of them Erik both of them. We had a very good quarter in a contact center, especially in some of the -- we closed 41 enterprise deals and 15 of those are larger than $1 million TCV. And of course, the strength of our portfolio is when we play the portfolio. It is -- when we have UC plus CC or when we offer CC contact center and we pull CC that's the strength of solution. And I should say then both of them when we play the portfolio gain there. Q –Unidentified Analyst: Okay. That's helpful. Thank you. And then maybe just on some of the areas where you have kind of managed costs. I know you noted that a large number of those has been largely just due to variable cost in nature, but have there been any areas where you can maybe made more permanent changes and kind of efficiencies that we should be mindful of?

Let me comment on that as well. Our adjusted EBITDA guidance reflects what I just shared before with Matt on continued hiring. You see -- but the structure of our organization is, our cost structure is highly variable. So, for instance, we are unique among particularly the application providers that our infrastructure is all-public cloud-based much, much less extent on private cloud. So what happens is that cost, that infrastructural cost becomes entirely variablized. And that sort of enables -- that's just one example, that has enabled us to preserve profitability in the midst of, again, in our guidance some softness in the back end revenues. Obviously, we're seeing a good benefit in T&E, simply because people are just not able to travel and the like. But it's a combination of a variablized cost structure and reductions in, I would say, sort of lower calorie areas like T&E that have enabled us. Now just -- I'll make the point again is that, COVID is going to be a short-term lived blip. The long-term trends for our business are undeniably positive. So we do not want to pull our foot off the accelerator, relative to investments in long-life assets, which, again, is investments in engineering and product and sales capacity and the marketing required to slingshot out of COVID. That's sort of the organizing principle that we've had as we've gone through and we budgeted ourselves, where we sort of created this new outlook for the year. Q –Unidentified Analyst: Helpful. Great. Thank you.

Thank you. We take our next question from Ryan MacWilliams of Stephens Inc.

Thanks for taking the questions. Just one for me today. Alan, impressive to see business churn declined in the quarter and I like your comments on the long-term pull forward of cloud adoption across communications. From your point of view, how do you see this increased demand playing out for customers who have so far have been hesitant to move to the cloud? Would UCaaS maybe see stronger initial adoption versus contact center? And would you expect this pull forward to happen quicker with SMB customers compared to in large enterprises? Thanks.

Ryan, thanks. Great question. The long-term trends that I cited are really very positive for cloud communications in general and Vonage specifically, because those two trends are, again, remote work and remotely delivered services. In my view, the remote work side, clearly, there's going to be greater demand from employees for the opportunity to work remotely. This crisis is going to sort of undeniably accelerate that trend, which existed pre-COVID, but it's going to accelerate that trend. But I think the business continuity concerns are what are going to be really interesting, particularly among the large enterprises and I mentioned this in my comments. As those in cloud communications, as we played with large enterprises, cloud has been the most successful in large enterprises that have very distributed workforces or distributed locations. So take for example a 5,000-person company, but it's a retailer. And so maybe those 5,000 people are spread across 500 retail stores. In that scenario, cloud is absolutely necessary and a far lower cost of ownership than prem. Now, if those 5,000 employees were sitting under a single roof in one location, that's been really where the premise-based competitors have focused. And my view is COVID is going to be a tipping point for even those concentrated large enterprises, because of business continuity concerns. You can just imagine the audit committees, particularly at public companies, looking to their management teams and saying, are you prepared, God forbid, this ever happen again, whether it be pandemic or natural disaster like a hurricane? I think we've hit that tipping point where things are going to move to the cloud. And again, I think, the broader topic about remotely-delivered services, I think, that's a tipping point as well, where you're going to see, again, the need to program in communications. I've cited examples around video and I leaned in hard to telehealth, but we see this in the education market, tutoring, just everywhere. I mean, I see it globally. We think this trend is going to be an ongoing permanent trend as well. So we fundamentally believe the world is going to be a changed place and the way we're structured as a company, as this cloud communications platform able to address both trends. I think, we're uniquely set up to benefit from it.

Appreciate the color. Congrats on the quarter. Thanks.

Thank you.

Thank you. We take our next question from Will Power of Baird. Please go --

Okay. Great. Yes. Just a couple of quick follow-up questions. I think, Al and Dave, probably both of you, as you reference on the customer credits, deferred payments, is that principally allocated or related to the Applications Services segment, or are you seeing that on the API side as well? So I just want to get a little more color there to start.

Dave why don't you take that?

Yes, absolutely. When we refer to credit, that is specifically on the applications side. And typically a customer will say, okay, can I -- my restaurant is closed for this month. Can I have a credit? And it's pretty much that simple. And again, we baked in, not only the known, but also what we believe could come down the pipe. In addition, we also took a $1 million bad debt charge in the quarter, which is across the complex. We, obviously, carry a bad debt accrual at all times. We increased that accrual by $1 million and that is to cover both apps and API bad debt, above and beyond what we already have in the accrual.

Okay. Got you. And then I wanted to just come back on Applications Services, the guidance for the second half of the year and the challenges you expected. I'm wondering if you could just help us unpack or break that down between what you're seeing or expecting in SMB versus enterprise. Because you referenced some of the SMB-related pressures, but you also referenced lengthening sales cycles, which I suspect is more enterprise-centric. So I just wanted to try to get a little more color there as to how that breaks down between those two segments.

Dave, let me ask you to start on that.

Yes. So, as it relates to the split between upmarket and downmarket, Rodolpho, should, which I think is what you're asking -- Rodolpho should comment on that, as well. It's really -- you've got -- you will have some elevated churn amongst the SMBs. But that is being offset, by this amount. I'm talking logo churn. That's being offset by better logo churn upmarket. The dilution that we talked about which is non-logo churn. But kind of services churn. We're seeing more in the upmarket. And so the effects of that are -- we're not projecting -- and many of the credits are also in the upmarket at least the larger ones. So everything -- we're being affected relatively proportionally between the upmarket and downmarket, while we're in the eye of the storm of COVID. Our strategy obviously continues to be -- to continue to feed the upmarket. And we think that's where the higher utility, the business continuity, and the working-from-home benefits are greater.

Yeah. Okay. That makes sense. Thank you all.

Thanks Will.

Thank you. We'll take our next question from James Breen of William Blair. Please go ahead.

Hi. Thanks taking my questions. Just a couple, on the discussions that you're having with the channel partners one, is there any noticeable difference in terms of the competitive environment given what's happening right now? Are enterprises focusing on certain providers that have scale and size? And then, do you see sort of a pent-up demand where there are enterprises currently dealing with the pandemic saying we should have switched to a Vonage product earlier and we didn't. We'll be back there in the fall or whenever this sort of alleviates. They give you sort of confidence that, there is a little bit of a bubble built there that they will be back to guys once things normalize a bit. Thanks.

Rodolpho, why don't you take that on, both the competitive environment and the likelihood of being, their pent-up demand.

Yeah, perfect. Yeah, we didn't see much change on the competitive environment. It's about the same. What we see as I said before we see a slope in Q2, because of the business closure and social distancing processes now. But we see as Alan said a slingshot hopefully in Q3 maybe in Q4. But we are prepared for -- or we are trying to be prepared for doing the slingshot once the business recovery. And that's what we have been talking to customers and channels overall is that everyone is being prepared for these partial and full recovery by the end of this year. And we are prepared for that especially with our channels and especially now that we are expanding our TAM with ServiceNow, on top of our Salesforce. So it's an additional, TAM that we can offer in the market and their channels are very pleased with that.

Okay. Thank you.

Welcome. Next question.

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

Thank you. Having not been more than a few miles from my house for weeks, and having no haircut et cetera I'm reeling a bit from your permanence comments, Alan, but I get your point, so relative to the channel one of the issues that we always have is getting clients to understand the differences, amongst all the providers. And we've picked up, a couple that we thought were important. I just want to see if you could address them and that's smart number capability. And some of your security protocols seem to be differentiators in the market. And I wondered if you could elaborate on that?

Yeah. Look, I think that, -- and I'll start and I'll turn it to Rodolpho. The -- we ask particularly the telco to the master agent channel we always say, "If you see Salesforce think Vonage" because it's differentiated. Because it's very difficult for a channel partner to differentiate a simple kind of an UCaaS install let's say to 100 employees. Because if it's pure UCaaS again it's more undifferentiated, but we have a substantial differentiator in contact center particularly in a sales force environment and we find increasingly that is pulling UCaaS. And that's why, I talked about the release that integrated UCaaS and CCaaS solution so that you have common call control common sign-up sign-on presence and directory sync. So it doesn't matter whether you're an agent or an employee you can operate in the same system. Those are differentiations that we push through the channel. And based upon close rates seem to work in terms of a better close rate. I'm sorry I talked too long, but Rodolpho, anything to add to that?

Yeah. Not much, but you said it, all. I think a big differentiator is of course, the embedded almost-native solution of the Salesforce. We are doing the same with ServiceNow, as we launch now with ServiceNow. So you're going to see CRM and CSM with embedded almost-native integration in the system. The channels appreciated that the market appreciated that. And of course the customers appreciated that. And of course our own integrated our UC, CC as we noted before. This is a big differentiation for us. There are three -- we call it the 3Cs. Its continuity, contingency and compliance, because you mentioned, security this is continuity contingency work. Those are the two big things that we are focused. And of course, everything packaged with a compliance or data privacy and security, to our customers. It is very important in the enterprise. And that's why we see a great adoption of enterprises.

Thanks Alan and thanks Rodolpho.

Thank you. And now I'd like to turn the call back over to, Mr. Hunter Blankenbaker for any additional or closing remarks.

Okay. Great, that wraps up the Q&A portion of today's call. And we look forward to visiting many of you in the coming months at several virtual investor conferences which will be webcast. You can follow our comments on the Vonage Investor Relations website. Please contact us if you need any additional details and thank you again for joining today.

Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.