Bandwidth Q1 2023 Earnings Call Transcript

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May 2, 2023

Key Takeaways

  • In Q1, Bandwidth reported $138 million in revenue and $5 million adjusted EBITDA, exceeding guidance and reaffirming its full-year outlook of $576–584 million revenue and $43–47 million EBITDA.
  • The direct-to-enterprise segment grew 27% year-over-year, driven by multiple Global 2000 financial services wins across different CCaaS platforms, underscoring strong enterprise demand.
  • Non-GAAP gross margin expanded to 54% (up 1 point YoY), net dollar retention reached 109% overall (111% for >$100k ARR customers), and average annual revenue per customer climbed to $172k.
  • Bandwidth repurchased $65 million of its 2026 convertible notes at a ~22% discount, reducing outstanding debt by 55% and ending the quarter with $124 million in cash and securities.
  • Revenue in the global communications plans market was essentially flat YoY due to UCaaS softness, though CCaaS strength and an 8% YoY rise in programmable messaging helped offset headwinds.
AI Generated. May Contain Errors.
Earnings Conference Call
Bandwidth Q1 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good day, and welcome to the Bandwidth, Inc. First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode for the duration of the call. After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today.

Operator

I would now like to turn the conference over to Sarah Wallace, Vice President of Investor Relations, please go ahead.

Speaker 1

Thank you. Good Good afternoon, and welcome to Bandwidth's Q1 2023 Earnings Call. Today, we'll discuss the results announced in our press Release issued after the market close. The press release and an earnings presentation with historical financial highlights Can be found on the Investor Relations page at investors. Bandwidth.com.

Speaker 1

With me on the call this Afternoon is David Morken, our CEO and Daryl Raiford, our CFO. They will begin with prepared remarks and then we will open up the call During the call, we will make statements related to our business that may be considered forward looking, including statements concerning our financial guidance for the Q2 full year of 2023. We caution you not to put undue reliance on these forward looking statements as they may involve risks and uncertainties that may cause actual results to vary materially from any future results or outcomes expressed or implied by the forward looking statements. Any forward Looking statements made on this call and in the presentation slides reflect our analysis as of today, and we have no plans or obligation to update them. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our latest 10 ks filing As updated by other SEC filings, all of which are available on the Investor Relations section of our website atbandwidth.comandonthesec's website atsec.gov.

Speaker 1

During the course of today's call, we will refer to certain non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our press release issued after the close of market today as well as in the earnings presentation, which are located on our website at investors. Bandwidth.com. With that, let me turn the call over to David.

Speaker 2

Thank you, Sarah, and thanks to everyone for joining us. 2023 is off to a good start. We are making solid progress adding direct to enterprise customers developing innovative award winning products and advancing our strategic initiatives while focusing on profitability. During the Q1 of the year, we exceeded our revenue guidance and are on target to meet our goal of growing I want to thank our customers for continuing to trust us with their mission critical communications. Thank you as well to all our bandmates around the world for supporting our customers and each other in selfless dedication to our mission.

Speaker 2

And I thank God for blessing us with a 24th year of extraordinary opportunities. We serve 3 distinct customer categories: Global communications plans, programmable services and direct to enterprise. This quarter, We highlight our growing momentum in the direct to enterprise market, where we power cloud contact centers and new developments in our software platform. In direct to enterprise, we won several Global 2,000 Financial Services leaders that chose Bandwidth as the voice provider for their contact centers during the quarter. Notably, each one deployed a different CCaaS platform while choosing our bandwidth communications cloud to power their communications stack.

Speaker 2

This shows how we're leveraging our strong relationships with all the Gartner leaders in cloud contact centers and the breadth and depth of our expansion in the enterprise Among existing customers, we expanded our long term relationship with the largest issuer of Visa and Master cards in the United States. Using the Bandwidth Communications Cloud, we helped this customer scale up its contact center capacity Due to a recent acquisition. Additionally, this customer needed new international coverage to connect with employees in the Asia Pacific region. Because we seamlessly connected this customer across global geographies, we were awarded this new business. As these examples show, we're seeing measurable results by directly serving enterprise customers.

Speaker 2

We've grown over 10 fold the number of enterprise contact comes from providing scalability, redundancy, pre integrated conversational AI and native fraud scoring technology And is driving the largest enterprises to come directly to Bandwidth to help build their cloud contact centers. Successful enterprise communication strategy is dynamic and our strong culture of innovation keeps us ahead of and shapes the curve. For example, we integrated AI into our communications cloud over a year ago. That's because we prioritized R and D from our very earliest days. For the last 24 years in fact, innovation has been the foundation for all our growth and profitability.

Speaker 2

Bandwidth Maestro is the latest example Born from our close connection with enterprise CIOs, who now must connect their entire organizations to create better customer experiences while streamlining operations. Maestro integrates the best in class platforms and capabilities that CIOs need Across UCaaS, CCaaS and AI, it's truly a next generation capability and customer experience and it saves months integration work, so enterprises can achieve faster time to revenue. Unlike the proprietary lock in of other providers, Maestro maintains agnostic approach, providing flexibility to CIOs. We believe the value proposition And ROI of Maestro is unique in the CPaaS space. With full availability slated for later this year, The early market reaction to Maestro has been encouraging.

Speaker 2

In recognition of its excellence in technology advancement, innovation and business impact, Maestro won Best of Show at Enterprise Connect. This is a substantial achievement And it is already proving to energize conversations with both existing customers and prospects. Maestro joins Other award level innovations we've launched recently, like our native text messaging app for Microsoft Teams called Send2, Finalist in the prestigious CX awards this past quarter. These are just a few examples of how our innovation engine And breadth of solutions are shaping the future of cloud communications for both new and existing enterprise customers. We're still in the early stage of a long term secular trend of digital transformation that's becoming more and more dynamic by the day, With emerging AI technologies, converging platforms and exciting new use cases, we're focused on maximizing our direct to enterprise momentum, Capitalizing on new innovations like Maestro, increasing product penetration across all three customer categories and exploiting advantage of being the only CPaaS provider with our own global network, all while serving our customers and executing with discipline to grow profitably.

Speaker 2

I'll now turn it over to Daryl to walk through the details of our financial results.

Speaker 3

Thank you, David, and good afternoon, everyone. We started the year with a solid first quarter, Achieving revenue of $138,000,000 and adjusted EBITDA of $5,000,000 Both results position us well to deliver our full year outlook. Revenue compared with last year benefited from monthly recurring charges for phone numbers and emergency services, which combined were up 6% year over year and higher messaging revenue up 8% and representing 15% of total revenue excluding surcharges. Our commercial messaging growth was driven A solid demand across a variety of use cases, including healthcare, retail and e commerce shopping, FinTech and civic engagement. On a sequential basis, excluding surcharges, overall first quarter messaging was lower than in 4Q 'twenty 2, as we had expected.

Speaker 3

But adjusting for the positive effects of political campaign messaging recognized in last Q4, We achieved sequential growth of 16% in our commercial messaging from higher demand in those same verticals. Pass through surcharges associated with messaging were $23,000,000 in the 1st quarter. The combination of these products power the offers that we provide to our 3 target customer markets. In terms of our market results, In our most established market, global communications plans, we met our expectations for revenue that was essentially Flat year over year due to softness primarily in UCaaS customers. In our programmable services and direct enterprise customer categories, Our quarterly growth from messaging and monthly recurring charges is evident as these two customer categories grew 8% And 27%, respectively, year over year.

Speaker 3

Programmable services continue to strengthen from a secular movement to messaging engagement. And although the direct to enterprise category is a small base of revenue for us today, the undeniable market dynamics, Customer wins David highlighted and strong pipeline give us confidence this market will be a key driver in achieving our long term financial targets. Rounding out our Q1 results, non GAAP gross margin was 54%, up 1 percentage point from the prior year's quarter. We continue to benefit from economies of scale, A rich mix of higher margin products, global coverage and operating improvements. In terms of our operating metrics, our first quarter net dollar retention rate was 109% For customers greater than $100,000 annual revenue, our net dollar retention hit 111%, 2 percentage points higher than the total customer metric and clearly demonstrating the benefits from focusing on large customers and direct to enterprise opportunities.

Speaker 3

Active customer count was 3,361, Although the customer count metric has diminished in relevance over time as we focus on larger and more profitable customers, Average annual revenue per customer, which continued to rise, reached $172,000 in the 1st quarter, Another demonstrable result from larger customer opportunities. In the Q1, we further strengthened our balance with another repurchase of 2026 convertible notes, resulting in a reduction of $65,000,000 of convertible debt For approximately $51,000,000 cash or an approximate 22% discount to par value, This latest opportunistic repurchase combined with the $160,000,000 repurchased in November 'twenty two Lowered the outstanding 2026 notes by $225,000,000 or 55% Of the original principal balance, utilizing only $168,000,000 of cash, effectively erasing 50 $7,000,000 of our net debt obligation. The remaining balance of our convertible debt maturity in 2026 Is now $175,000,000 We continuously evaluate our options for the best use of our balance sheet to stay opportunistic In the current capital market environment, with our resolute focus on profitable growth, we create the option to fully repay Our remaining convertible note obligations in full upon their respective maturities with our earnings and available cash, if that is the choice we wish to make. We ended the quarter with a cash and securities balance of $124,000,000 A more than sufficient amount to meet our business needs and sustain a great deal of financial flexibility.

Speaker 3

Turning to our outlook. We are on track to achieving our full year guidance provided at the start of the year of 576 dollars to $584,000,000 in revenue $43,000,000 to $47,000,000 adjusted EBITDA. Our outlook for the full year is unchanged despite a challenging macro environment. In summary, our financial and operating performance in the Q1 represents a solid start to the year. We'll continue to focus on what we can control, serving and delighting our customers every day, Growing our margin, being disciplined with our cost and becoming more profitable.

Speaker 3

Now I'll turn the call back over to the operator for questions.

Operator

We will now begin the question and answer session. And our first question here will come from Mike Walkley with Canaccord Genuity. Please go ahead with your question.

Speaker 4

Great. Thanks for taking my question. Nice to see the solid start to the year and the updated guidance. I guess, David, for you, just a question on maybe the linearity of the quarter and just post Silicon Valley Bank and some of the macro Have you seen anything slowing in the March, April timeframe or is business really trending as you expected for the year? Thank you.

Speaker 2

Thank you, Mike. Very proud of the team for what we achieved in the Q1. And we certainly, like everyone, are watching things like The issues with banks, but we're executing as expected and guiding forward As you've come to know us well in a way that we believe is accurate and reflects both macro and things that we do see internally, Nothing to call out in particular that would further answer your question on conditions.

Speaker 5

But again, executing the plan that we set for

Speaker 2

ourselves for the year, The plan that we set for ourselves for the year, really delighted that we've started off the year with the performance in the Q1 as expected and believe that we will continue to execute throughout the remainder of this year toward the objectives that we've defined for ourselves.

Speaker 4

Thanks. And just for my follow-up question, Daryl, good job paying down the debt. It certainly seems like you guys had the balance sheet in a good position now given your profitable growth History, just in terms of the Q2 guidance on the slightly higher revenue, but similar adjusted EBITDA, is there any Kind of change in mix or gross margins or you kind of just expect a Q2 similar to Q1? Thank you.

Speaker 3

We're expecting Q2 on the revenue line to grow just modestly over Q1. We're also expecting our EBITDA to be, As we've guided $5,000,000 we believe that we have some real operating flexibility there. Clearly, the macroeconomic conditions that we even witnessed today We give some in the market pause. We're pretty happy that we have derisked our guide for the 2nd quarter and comfortable with it.

Speaker 4

Great. Thanks for taking my questions. I'll pass the line.

Operator

And our next question will come from Meta Marshall with Morgan Stanley. Please go ahead with your questions.

Speaker 6

Great. Thanks. I was noting kind of the win that gave you or where your coverage in APAC was kind of noted. I guess I just wanted to get a sense of do you feel like you have all of the regions that you need at this point? Are there still regions kind of as you do Expand your global footprint that are more meaningful that we should kind of consider you expanding into.

Speaker 6

And then second, Just on the Maestro piece, that was a great product to see at Enterprise Connect. Just when do you think that that could be A meaningful contributor to revenue. Do you think that that could be meaningful in 2024 or it'll take time for that product to ramp? Thanks.

Speaker 2

Thanks, Meta. Regarding your first question related to geographies and markets that we We celebrated opening Turkey and did so really behind a strong business case from an existing customer. And that's the way we've historically built. Instead of trying to To build it and they will come, we follow demand. And so we've got a very good relationship with some of our most aggressive international customers who identify for us markets That are favorable for lots of different user experiences and we'll invest and build in those geographies responsibly.

Speaker 2

Sometimes we'll begin by partnering, But then our unique value proposition that you've followed for a while, Meta, is to have an owned and operated network beneath our software Stroh, so excited that the product has been received the way that it has, winning the best of show at Enterprise Connect. The team continues to have very encouraging and exciting conversations with enterprise customers about the product, And we believe that it will continue to pick up steam and momentum throughout the rest of this year. But your question, the essence of which is When will the revenue arrive for Maestro? We think that it is going to be exciting to see throughout 2024 and beyond as we Head toward our long term growth targets for direct to enterprise business that Maestro is going to really Drive a lot of that growth. That's the reaction we have from the early responses and conversations coming out of the award winning quarter that we've just left.

Speaker 2

And we may not call out directly related Maestro revenue, but it is the leading car on this train that we're on toward the future with direct

Speaker 6

Great. Thanks.

Operator

And our next question come from James Fish with Piper Sandler. Please go ahead with your question.

Speaker 7

Hey guys, thanks for the questions. David, in your prepared remarks, I think it was you, you noticed some softness with the UCaaS side of the business. I guess, can you elaborate on that in terms of what you guys are seeing and also what you're seeing with more so your largest customers in that part of the market as well as on the contact center side where It sounds like things are going pretty well.

Speaker 2

Yes. I'll start in reverse. The CCaaS momentum with The direct enterprise wins has been fantastic and as expected. Lots of high interest in bring your own carrier model For consuming CCaaS, every single deal win that we highlighted on this call was related to contact centers in the enterprise and bringing your Carrier, so that's exciting. We think regarding UCaaS that it's purely a function of the macro And fewer seats that may result from the macro.

Speaker 2

Usage patterns for UCaaS are largely attributable to the economic conditions. Are you adding heads? Usage was healthy And growing prior to the pandemic. And so we think that return to the office is not the primary factor. And again, I think it's most important to recognize that within the overall guide and results, the physicians in UCaaS Haven't changed either our expectation or our results for the quarter.

Speaker 2

So it's something that we've easily accounted for in the period And don't think that it takes us off track at all for the remainder of the year.

Speaker 7

Helpful. And then on the customer count, I know you guys are focused in on larger and higher quality customers, but it was another quarter where it was down Sequentially, again, and somebody's got to ask it here, how much of this was kind of continued rationalization versus I think in the past, Daryl, you've given what the gross additions were this quarter. Can you help us kind of bridge the Rationalization versus kind of gross additions and or is this kind of a clean customer count to think of going forward?

Speaker 2

It is continuing rationalization as we Architect, the churn of small unprofitable customers, those customers on average are $2,000 a month customers. Compare that to the average ARPU We have I'm sorry, dollars 2,000 a year, not month, excuse me. Our average customer is $172,000 a year. So again, the customer count is not as germane To yield a forward projection on revenues and that's just continuing as your question stated what we've been doing for a while now, which is A focus on profitable growth from larger enterprise customers. We actually have average customer revenue this quarter Increasing, as I said, 172,000, that's up from 158,000 a year ago.

Speaker 2

So that aggressive climb of our average annual customer Spend is really good and is what we want. So we're not at all concerned about the absolute customer count number.

Speaker 7

Thanks guys.

Operator

And our next question will come from Ryan Koonce with Needham and Company. Please go ahead with your question.

Speaker 5

Thanks for the question. Nice progress on the messaging front, really good to see that business motoring along. On the voice side, you mentioned softening in UCaaS and strength in CCaaS, which is familiar tone. I wonder And comment on the pricing environment in general for either those segments and how we should think about that impact relative to kind of the seat counts and usage within those two segments. Thanks.

Speaker 3

Hey, Ryan, this is Daryl. Pricing had a favorable impact in the Q1. It was driven by a richer mix of higher priced products like messaging and phone numbers. When we look at pricing and volume, pricing did increase Again, as it has been for many quarters, it wasn't necessarily a SKU by SKU price increase, but we have enjoyed improved aggregate pricing.

Speaker 5

That's helpful, Daryl. Thanks. That's all I had. Thanks.

Operator

Our next question here will come from Patrick Walravens with JMP Securities. Please go ahead with your question.

Speaker 4

Great. Thank you. Hey, so David, let's talk about Chat GPT a little bit here. So all these studies of the jobs that are going to be eliminated like the top of the list is the customer service rep. So what is that going to do for the total number of seats out there in call centers?

Speaker 4

And how will that impact you guys? You don't really charge proceed, right? You're sort of you're more consumption based?

Speaker 2

That's exactly right, Pat. We're usage based and we're excited about providing high fidelity, reliable audio for Conversational AI customer support and all its robust parameters. Chat GPT is Understood and experienced today as a text based prompt. We were present at the dawn of products like Alexa, Which were voice driven conversations and believe that conversational AI will migrate rapidly to voice and that we have an incredible role to play orchestrating those very intelligent and effective conversations among those reps that are really empowered by AI tools As well as potentially stand alone reps as well. Our role is usage based in our model and so we're excited about the dawn of this new era.

Speaker 4

Okay. But the pressure on seats is going to happen, right?

Speaker 2

If I don't know. I don't while I can't predict the future, what I do anticipate are the incredible teams that we work with in the CCaaS space, Understand how to adapt and overcome and actually utilize some of the most powerful developing AI tools that are out there. And So their business models may change, but the value that they add within the contact center environment, I expect to continue. Precisely how I think is unclear, which is why your question is a very good one, but the teams that are at the forefront of the contact center digital transformation are all over this.

Speaker 4

Okay. And one more, just I think as a reminder for myself and everyone else. So I mean 5% growth this quarter, down from 24 But there's this bizarre dynamic about elections, right? So, how do you guys feel about next year in terms of what growth you can do and has that changed?

Speaker 2

We firmly believe that the long term trajectory that we put out on our Investor Day is well within reach, having finished 1 quarter since we talked about that, and we're on track and on plan. And reiterating our guidance for the rest of this year, everything about executing in the last 90 days supports the longer term thesis that we socialized on Investor Day.

Speaker 4

Okay. Thank you.

Operator

This concludes our question and answer session and also concludes the call.

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