VG
#Again, just to clarify, the CPO, Omar starts actually this coming week, and Pablo started, again, about 10 months ago as CTO.
You're exactly right.
We see the UCaaS features cascading from Business into Consumer.
So that's absolutely a design paradigm in our product development.
In Business today, communications are multi-modal, video, voice, text, and they are device agnostic.
We see very similar things happening in Consumer.
There's also, clearly, mobile initiatives.
And if you look at Omar's specific background, having come from Qualcomm and Motorola Mobility, et cetera, he's a clear expert in mobile.
So the mobilization of what we do is a very key component as well.
And that's another piece of the puzzle as I think about the design paradigm.
The way we've described the changes in the broader Consumer business, is we think about them as two broad levers.
The first lever is to fix the marketing efficiency and churn vector, and we spoke about that today.
That's been very successful in all the things that I spoke about in my prepared comments.
The second lever is product, and we're building the team, led by Omar, to attack that.
Now, it's not just in Consumer, it also extends into the Business side as well.
So we're confident that in 2016, you'll begin to see some interesting changes in our product families that will more specifically address your question.
Thank you.
The situation hasn't changed very much.
We're still seeing a bifurcated market into ---+ which breaks into a small handful of companies that have, call it, more than $50 million of revenues, all on Broadsoft and tend to have different regional and salesforce strengths than what we have.
So very good opportunities there, and then a very long tail of smaller companies in the $10 million to $20 million revenue space.
In every case, what we continue to see are companies that have either founders or relatively tired investors on and are growing at around market rates.
But in order to grow faster, they need significant capital, and in order to compete in this landscape, which I think was referenced before, need capital and (inaudible).
So that opportunity for us and the need for them to ---+ for some ---+ for many of them to consolidate continues to be there.
I'd say the dynamic of us being the best buyer also continues, and essentially, I think the cost of capital advantage, the fact that we are a branded competitor, and that others have a dis-synergy in buying this companies continues to be the case.
Not everybody is realistic on price, but we believe that there are deals to be done that are very compelling and essentially are close to the value of the customer base and between synergies and what you're paying, you're getting some of these other strategic benefits along with the deal.
And in every case, the stuff we're looking at, or the things that we'll execute on will be substantially below where the UCaaS names trade on a revenue multiple basis in the market.
<UNK>, this is <UNK>.
You're right.
The narrative in the market is to de-emphasize the SMB space, and that is clearly not our narrative.
We think ---+ and so, first of all, as I said in my comments, 90% of employer-based firms have 20 employees fewer ---+ they're flipping to the cloud the fastest.
The way to win in the SMB market is to have low acquisition costs, which is what we have, I think, we're uniquely able to do that.
The way I've often thought about it is we have a ---+ we clearly have a terrific (inaudible) sales operation, but I would assume that's a replicable asset by our competitors.
What is not a replicable asset is brand.
And brand feeds the top of the lead gen funnel for us.
And that brand advantage that we have over everyone else in the market is extraordinary, and I think that's resulted in a lower acquisition cost.
So the subscriber economics for us at the low end are terrific, and that's the part of the market, which is the largest and the ---+ growing the fastest.
So while, yes, clearly opportunities are moving up market, and the LTVs there are greater because you've got less business failure, long-term contracts, et cetera.
And we've got ---+ and we're already there.
We have a huge presence with, now, our Vonage Premier family at the upper end of the market.
So our strategy is to serve both ends, and I think we're uniquely positioned to do both ends profitably the way we've addressed the market, as I spoke about in my comments.
Well, the ---+ sure, the ---+ as I mentioned just a few moments ago, there's two broad levers, which is the marketing efficiency and churn vector and then the product side.
The marketing efficiency and churn side is not just a cost play.
Clearly, there's a cost element.
We wanted to get rid of marketing dollars that were being spent unproductively, and we've done so.
But by virtue of reformatting from brand-based, now the direct response and digital in Consumer, the [CACs] are coming down such that you begin to consider putting your foot back on the gas because the ratio of LTV to CAC comes back in line.
Again, a year ago, it was out of line, but it is increasingly coming back in line.
So that's a clear piece of the puzzle.
Remember, we added quarterly, over the last three quarters, pushing towards 100,000 gross line additions each quarter.
So it's not like it's going completely away by any stretch of the imagination, so that's one piece of it.
The other side of it is the product side.
And, as I mentioned before, the reason we reorganized the product group and brought in Omar as Chief Product Officer to help drive it, is because we see opportunities to extend UCaaS products solutions down towards the consumer, other mobile solutions, and a whole variety of things that I'm not comfortable sharing at this moment, that I think could be those green shoots.
We're not going to see the results on the product changes until end of 2016, clearly.
But you're already seeing these green shoots, if you will, on the marketing efficiency and churn vector.
Yes, we don't break that out.
What I can tell you, just to give you a little bit more detail, is that the 38% organic growth rate that we talked about was diluted by the addition of SimpleSignal.
When we acquire a company, in every case, the company is not growing at 40%, it is not growing as fast as it will grow under us.
So when we do an acquisition, you see a lowering of the growth rate and, obviously, an increase in the ---+ of the organic growth rate ---+ and an increase in the revenue.
So without the addition of SimpleSignal, i.
e.
Between Telesphere and the old VBS, growth would have been above 40%, if that gives you a sense of the two products.
And I think <UNK> did say that the lower end of the market is adopting cloud faster.
It's also a much shorter lead time to add a customer at the lower end of the market or on the Essentials product.
Thanks, <UNK>, it's <UNK> again.
We have challenges every day.
Integration is a lot of work, and I always refer to it as the sausage making.
And what people don't see behind the curtain is think about some of the detail things you have to do when you bring these businesses together, particularly to think about VBS, Telesphere, and SimpleSignal.
Each had a separate contract [what made these master agents].
They paid their salespeople differently, they commissioned the channels differently, they sold each of their products under a company brand that were each themselves a bit different.
They might have had different billing systems, different lead-generation systems, on down the list.
So we are organized.
We have been very effective, and it's under <UNK>'s leadership to drive out the differences and to create commonality in what is now Vonage Business.
So when I spoke about in my comments whether all that foundational work that we've done in the quarter is just essential.
It is essential in order for us to be able to continue organically, but it also is necessary and essential in order to do yet again another acquisition because we have to have a stable base to bring it into.
We're getting there very quickly, but it's something that we attack at every day.
Sure, I would try to address that.
So the seat net additions we report in Business are the net organic additions of the business.
So the absolute count of seats includes, at the end of the quarter, includes SimpleSignal.
But the net additions do not include that.
So that, you can get the exact number on how many actual seats were added that way.
We talked about SimpleSignal adding about $12 million of revenue in the three quarters of this year, so its contribution in the second quarter was slightly less than a third of that, just given that it is growing.
And I did give you the math of how we would have grown in the 40s without the dilution of SimpleSignal, which, again, we believe, over time, with capital and our strategy we can re-accelerate.
Your second question, which was the burn on EBITDA for Business.
I would tell you that the margins for the Consumer business are in the 20s ---+ in the 20% range, which we think speaks to the long-term margin capability of that business.
So EBITDA in Business continues to be slightly negative.
We also have the brand spend, which we believe will actually benefit our entire business, although it is more focused on the business side.
But that's something that we're looking at more from a corporate perspective in terms of the spend.
Yes, so seats, if you look at what we report externally, seats, net additions, were 20,000 in Q4, 26,000 in Q1, and 29,000 in Q2.
That's all organic.
There's been no price actions taken at this point.
We don't have any price actions anticipated in the second half.
Generally, no.
I think that fundamentally the cloud and the UCaaS business has the potential, the capability, to have a higher margin, higher gross margin, than the Consumer business.
The only caveat to that is the fact that there is an element of access in our revenue.
But for Business this year, we talked about access being low teens percent of the revenue and, by definition, when you offer access, you get a three-year contract and quantitatively and qualitatively you get a very, very sticky low-churn customer.
So that continues to be a good trade.
That is with the access fees would be the only kind of structural difference there.
Otherwise, it ought to be able to be higher.
I would note that today we think we're very good at provisioning access because of the POPs we have, and the relationships we have with a number of carriers.
That being said, I think we've only scratched the surface on the synergy potential there as it relates to Vonage as a consolidated entity and our overall relationships with these carriers and what we can do on the access side versus what others can do.
Sure, and sitting here today is speculation because, as you said, we are in the land grab, and we're monitoring subscriber economics and costs per add very closely.
As long as we continue to see even close to what we're seeing today in terms of attractiveness, that means we're still in the land grab, and it's still very attractive, and we've got the capital to fund that.
And we will, clearly, give guidance for 2016 in early 2016.
All that being said, I'm sitting here today, I would say that we're not expecting any EBITDA contribution out of the Business business next year.
I'd look at that as a breakeven-ish type proposition because we're going to continue foot on the gas.
Because of our size, we're naturally going to have a better margin than we have today.
So we're going to have some natural benefit in there that ought to have, again, sitting here today, have us in the breakeven area.
And then we believe, in 2017, again, primarily based on size and scale, not so much the market slowing down, that we will be producing EBITDA out of our Business business, and have a significantly sized business.
I would also note, just thinking about scale, you've got to think about M&A, where we expect that we'll be participating in M&A in the near to medium term.
And so you have your organic growth, which has us on a certain trajectory but, scale-wise, you should expect that there would be some more revenue, have therefore some margin opportunity being added as well.
This is <UNK>.
There are different platforms, so not from a specific product point of view.
<UNK>, do you have anything to add there.
Well, I just think it's more of a ---+ as <UNK> addressed earlier, it's really that product mix.
We really sell them as a complete solution, and we are seeing, even at a single customer level, most have multiple locations and want both the Essential products at smaller offices and want the Premier products at larger offices.
So we really look at them as a single product, both utilizing the legacy Telesphere platform that was created as well as the legacy platform of Vocalocity.
Let me grab that.
Generally, no.
The key thing to understand is that we think that each platform is purpose-built for the market it serves.
So rather than having ---+ trying to have one size fits all, which we don't think is appropriate.
We've attacked the market with two platforms at scale.
Where we get great efficiencies is in distribution.
<UNK> owns all the direct sales and all the regional channel managers supporting all the master agents.
In those respective salespeople's ---+ in their sales bag is both Essentials and Premier because they're calling on customers regardless of size.
Okay, great.
Thank you, Liz, and that does conclude our call for today, and we look forward to speaking with everyone next quarter.
