Q3 2019 Earnings Call

Greetings and welcome to the bandwidth third quarter 2019 earnings call. At this time all participants are in listen only mode. Every question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero under telephone keypad. As a reminder, this conference is being recorded it is now my pleasure entered.

Several Wallace. Thank you please again.

Thank you good afternoon, and welcome to <unk> third quarter 2019, earning call today, we'll be discussing the results announced in our press release issued after the market close.

With me on the call. This afternoon, it's David Morken bandwidth, Chief Executive Officer, Jeff Hoffman, Chief Financial Officer of bandwidth.

They will begin with prepared remarks, and then we will open up the call for Q1.

During the call we will make statements related to our business that maybe considered forward looking including statements concerning our financial guidance for the fourth fiscal quarter of 29 team and the full year of 20 night teeth into the extent provided future periods, our plans to execute on our growth strategy.

Our ability to maintain existing and acquired new customers and other statements regarding our plans and prospects.

Forward looking statements may often be identified with words, such as we expect we anticipate for upcoming.

These statements reflect our views only as of today it should not be considered our views as of any subsequent date.

We undertake no obligation to update or revise these forward looking statements.

Forward looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectation.

For a discussion of material risks and other important factors that could affect our actual results. Please refer to those contained in our 10-K filings on February 15th 2019 as updated by other FCC filings all of which are available on the Investor Relations section of our website.

[laughter] bandwidth dot com and on the Fccs website at <unk> 's DC Dot Gov.

Finally 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, which is located on our website at bandwidth dot com and on the Fccs web site at S. East.

Si Dot Gov.

With that let me turn the call over to David.

Thank you Sarah and please allow me to introduce you to everyone on our third quarter earnings call today.

Several Wallace joys bandwidth to lead our Investor Relations efforts. She spent the last seven plus years had red hat here in Raleigh, and various finance roles, including Investor Relations manager. Thank you for joining us Sarah we're all excited to be working with you.

I'm pleased to report that our third quarter results exceeded our expectations on both the top and bottom line.

Our see pass revenue increased 24% year over year driving total revenue in the quarter of 16.5 million.

We saw continued momentum within our sales and marketing teams, adding 143 net see past customers in the quarter, resulting in a record 39% increase from the prior year.

And our ongoing traction with existing customers was demonstrated by our 116% dollar based net retention rate.

These results or evidence that organizations are choosing bandwidth software network and amazing team to deliver the highest quality voice messaging and emergency services for any application web site or device.

Bandwidth has established a reputation as a reliable scalable platform that successfully serves a diverse range of cloud native organization and Hyperscaler providers, who require a robust communications platform.

We continue to gain recognition as a C past provider of choice.

In September we had with was named a leader in I used to use Marketscape worldwide Cloud Communications platform 2019 assessment.

Primary focus of Ibcs study was a platform's ability to facilitate the rapid development of real time communication services that are both easy to create and are scalable.

Bandwidth was identified as a pioneer in establishing the segment and an innovative leader among course, you pass providers across attributes, which included platform capabilities network infrastructure and Echo system integration.

Our team's dedication and commitment to serving our customers or she elements of our continued recognition and ongoing success.

Now, let me share a few highlights the demonstrate our continued traction with our customers.

First on our last earnings call, we announced an agreement in principle with a large fortune 500 company.

We're excited to confirmed that we signed a definitive agreements soon after all last earnings call and that our customer agreed to significant exclusivity provisions regarding the vast majority of services that we provide to them.

This five year agreement is expected to earn bandwidth tens of millions and committed revenue and makes this enterprise one of our largest customers in 2020 .

That said, we will discuss in detail that the depth and breadth of this relationship as well as other side large opportunities are creating a revenue timing issue for the fourth quarter.

Second we see consistent and continued growth in messaging from the introduction of our new messaging products in response to industry changes across the messaging landscape.

Our messaging solutions have resonated with enterprise customers facing challenges on deliverability, and who are seeking the utmost reliability required to deliver a mission critical communications, we recently onboarded a customer with the fastest growing online jobsite.

Worldwide with 40 million monthly visitors and 50 million Jabil words sand each day.

The company was challenged by blocked messages with no visibility into the underlying causes.

Using bandwidth eight a p. toll free messaging solution. The company was able to improved visibility with delivery feedback and achieve the requisite throughput and volume required to operate messaging at scale, we remain unique in our ability to serve customers with our platform nationwide all IP voice network.

Sure and dedicated customer support teams, our customer support and operation teams are able to proactively mitigate deliverability issues and enabled the company to navigate the rapidly changing messaging environment.

In the case this customer our dedicated support teams collaborated with all network operations and control teams to educate or industry partners on the company's messaging traffic profile in order to all the walk Miss appropriately block messages across definitely network providers.

As a result of switching to ban whats toll free messaging solution. The response rate to the customers job alert messages doubled.

We're also pleased to announce a new customer relationship with a company that provides next generation cloud based residential and business Voip solutions to communications service providers.

And cable companies.

This customer enables many of the top 50, U.S. cable companies to virtualize voice infrastructure and serves more than 300000 end users.

The company selected bandwidth easier to use Apia is to power voice, calling and 911 functionality on their platform because of our outstanding quality and network reliability as well as our relentless focus on their success.

Bandwidth will serve as the exclusive partner to the company on a go forward basis to power voice on their platform for the majority of the company's existing customers.

The company decided our robust <unk> and owner operated IP voice network were ideal to build user experiences and to enable connectivity to the cloud.

We are excited about how this relationship uses our platform in network to open up new opportunities to sort of large communications service providers and the cable company market.

In addition, we're on track to complete deployment in the UK and that you by the end of year as previously reported the build out of our two data centers in Frankfurt and London is complete.

We continue to make great progress to satisfy the regulatory requirements necessary to conduct business and to deliver our communication services internationally as planned.

We have focused our efforts in those countries for which our existing customers have expressed the greatest demand today were authorized to conduct business in 13 European countries. The UK 11 members of the European Union in Switzerland.

We have also obtained regulatory authority to provide telecommunications services in these 13 European countries as well.

In summary, our solid third quarter results demonstrate the fundamental strength of our business that said, we learned important lessons from our largest scaling customers. This includes the fortune 500 company win and a new category of strategic customers were among the largest group we've ever engaged during a single.

Period.

These strategic customers prefer a single source and find value in our proposition to deliver the full capabilities of our platform and underlying network.

Most of these strategic customers are committing to a significant exclusivity provisions or at a minimum for bandwidth to be the primary see past provider.

Such customers are among the broadest users of our platform in network than we've ever seen combining voice 911 messaging numbers, no reporting and toll free simultaneously in order to replace their legacy incumbent providers by contrast, or.

Internet giant customers in the past have often scaled single use cases to recognizable revenue with us faster than views strategics using a single part of our platform before expanding to other use cases.

So instead of taking 60 to 90 days for on boarding we now expect these types of strategics to take up to 180 days to both integrate multiple shipyards and support or move high volumes of mission critical usage and numbers to our platform.

These new kinds of strategic customer opportunities are large and expected or contractually committed to deliver many times more than the average strategic customer in annual revenue.

These new strategic customers are also going long signing new contract term links that are up to two and a half times longer than our average to your term like this bodes well for 2020 and beyond what lowers our Q4 guidance, which Jeff will fully unpack in a moment simply put so.

These new strategic accounts, we were accurate in forecasting when they would close and what their ultimate annual revenue contribution would be but significantly underestimated. The time, it would take to onboard and transition usage from legacy incumbent providers to us.

Looking ahead, we continue to be optimistic about our growth opportunities. Despite these dynamics with our largest scaling customers I want to say our team remains focused on executing our mission and delivering best in class service to our enterprise customers.

With that let me turn the call over to Jeff.

Thank you David and good afternoon, everyone. Our team delivered another strong performance in Q3 during the third quarter. Our total revenue was 60.5 million up 20% year over year, and 1.6 million above the high end of our guidance range.

Within total revenue she passed revenue was 51.5 million up 24% year over year and more than half a million above the high end of our guidance range.

Other revenue contributed the remaining 9 million of total revenue, which was 1 million above our implied guidance and inline with the same period last year.

Here are some key metrics in the third quarter that drove these results.

Our expanded go to market team continues to attract new customers to our platform.

We ended the third quarter with 1610 active to see past customers up 39% year over year setting another record percentage increase for business.

We expect these newly onboard customers to scale their usage over future periods as they become increasingly familiar with our platform network and customer support.

Our dollar base net retention rate was 116% in the third quarter 2019, compared to 113% in the previous quarter at 117% a year ago.

Before moving on to profitability metrics I would like to call out that I will be discussing non-GAAP results going forward.

GAAP financial results, along with a full reconciliation between GAAP and non-GAAP results can be found in our earnings release.

Our third quarter 2019, non-GAAP gross profit, which excludes stock based compensation in depreciation was 29.1 million, yielding a gross margin of 48% as compared with the 24.1 million and 48% gross margin we achieved in the third quarter of 2018.

Third quarter 2019, adjusted EBITDA was a loss of 600000 compared to 2.3 million of adjusted EBITDA for the same period last year.

This change was expected and reflects the investments, we're making in sales and marketing as well as research and development to support the expansion of our platform.

On a GAAP basis, we reported a third quarter net loss of $1 million or a loss of four cents per share based on 23.4 million weighted average shares outstanding.

Our non-GAAP net loss in the third quarter was 1.4 million or a loss of six cents per share based on 23.4 million weighted average shares outstanding.

This compares to our guidance for the third quarter of a net loss of 14 to 16 cents per share.

A favorable non-GAAP net loss variance as compared to our guidance was driven by an outperformance in gross profit and operating expense.

During the third quarter net cash from operating activities produced 1.9 million and we utilize 4.4 million in free cash flow, which includes 6.3 million a purchases of property and equipment as well as capitalized software development costs for internal use.

Now I'd like to expand our thoughts regarding our financial outlook as David previewed we've revised our 2019 annual guidance to reflect several strategic customer wins that are now expected to scale. Their platform usage later than previously anticipated. This includes the five year multimillion dollar agreement with.

Fortune 500 company announced as an agreement in principle on last quarters earnings call and executed in full shortly thereafter.

The exclusivity for many services in the breadth of platform engagement required to deliver our full suite of services that scale all at once it's taken longer than expected and will result in a delayed revenue ramp.

Likewise, we are seeing a similar timing impact with extended usage ramps from other sizable wins in this new category of strategic customers, David referenced which in aggregate meaningfully contributed to our 2019 annual guidance revision.

We failed to estimate the Onboarding period for these strategic customers correctly in our last earnings call.

The majority of the guidance revision is a timing issue.

The following detailed annual 2019 guidance revision, we expect to capture nearly half of it or 4 million of signed revenue in the first quarter of 2020, and approximately 2 million of the remainder during the second quarter.

For the full year 2019, we expect to see past revenue to be in the range of 194.8 million to 195.3 million or up 19% at the midpoint of the range.

We expect 2019 total annual revenue to be in the range of 229 million to 229.5 million up 12% at the midpoint of the range.

non-GAAP earnings per share for 2019 is expected to be in the range of a loss of 37 to 39 cents per share. This outlook assumes weighted average shares outstanding of approximately 22.6 million.

Finishing our thoughts on our outlook for the fourth quarter 2019, we expect to see pest revenue to be in the range of 50 point, Threemillion 50.8 million or up 15% year over year at the midpoint of the range at 50.6 million.

This contributes to our total revenue guidance for the fourth quarter of 58.4 million to 58.9 million.

Turning to fourth quarter profitability non-GAAP earnings per share is expected to be a loss in the range of 15 to 17 cents per share.

This outlook assumes weighted average shares outstanding of approximately 23.5 million.

While we historically haven't provided forward year guidance on our third quarter calls we believe it's prudent at this time to provide our initial thoughts on fiscal 2020 see pass revenue gross.

Our team is proud of meeting or exceeding our quarterly guidance for top and bottom line growth for nine straight quarters since becoming a public company.

We are deeply committed to accurately managing investor expectations and are disappointed in the timing issues we discussed.

Previewing, our 2020 see past revenue growth now rather than waiting until February is consistent with that commitment.

We believe our annual 2020 see past revenue will reaccelerate to approximately 22% and are committed to making strides in 2020 toward our goal of returning to profitability in 2021.

As a final note there's never been a period, where we've had so many large customers trusting our capabilities to deliver their communication needs.

We are excited for team to win more of these broad relationships, we now better understand the onboarding timelines that accompany these types of large customer opportunities and remain focused on executing on our plant.

With that I will turn the call back over to the operator for your questions.

Thank you well now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

A combination tonal indicate your line is in the question Q.

Press Star too if you will that trend move your question from the Q.

For participants using speaker equipment and made the necessary to pick up your hands that before passing the starkey.

One on Atlanta, Raleigh poll for questions.

And thank you.

Our first question comes from a line of Richard Davis with Canaccord. Please proceed.

Hi, Thanks, very much a quick question so.

Thank you for at least giving out the detailed themselves.

Rob back from about 2020, I mean, I know this hard question to ask or answer or whatever but to what extent.

What degree of confidence and I know this again, we're not saying, but it's Mike I'm still one day and like I use my guess is like we're setting the bar and like the level of the pads or do you have to clear seven I don't bar you know how do you I just trying to because I know that's the question and it's like well how confident are you guys and then we can obviously titrated ourselves on that but just help us.

[noise] understand how this plays out kind of confidence level. Thanks.

Thanks, Richard This is David So our forecast for Q4 was based on estimates or understanding and confidence about 4 million that we recapture in Q1 and 2 million in Q2, and our 2020 guide is based on evidence. So this handful of new strategic customers that represent.

Characteristics and attributes that are new to us.

Our signed and they're not just signed.

In several cases, there integrated and we have revenue that is flowing so instead of estimates were dealing with evidence and I like your analogy is probably somewhere between the blue pad and the high bar, but we are extremely confident not just about this revenue only being a timing issue, but about achieving the 20.

20 number that we put out there.

And then just real quickly.

Hey, and deployment was that that upset years customers at all or where they go ahead with that or or or is there any friction with regard to that and then I'll turn it over the next person. Thank you.

No friction whatsoever, our team moves extremely quickly is agile. So the timetable is that we said we called it too and that was pretty quick.

Not understanding that these customers who have the largest.

Installed customer base is that we've ever ported over to our platform simultaneously move slower than we do.

Great. Thank you.

Thank you. Our next question comes from line of Mark Murphy with JP Morgan. Please proceed.

Yes, thank you what type of messaging or you're receiving from some of the higher gross software and internet customers that companies like examined Ringcentral slack, Google, Microsoft Amazon et cetera, or do you feel like they are leaning in and using your network more aggressively or or any of them, indicating that there.

There are less confident or would be pulling back at all.

Mark I growing very well and our Dubner of 116 is.

The evidence of that but overall, both you cash and the business Voip segment is growing well.

Okay.

Is there any way to just help us verify and size up.

The value of that new business you booked in Q3, I think you're talking about.

About half a dozen.

The strategic customers, who are signing of the the longer contracts in other words. They can you comment on maybe how bookings grew year over year or is there is there something but is there something that's visible to you in a in a backlog trend or anything else you can speak too.

So mark this is Jeff. It's it's it's a usage based revenue business, you're not going to see it in a booking or deferred revenue number that being said, we've quantified that the timing.

Issue is a 6 million dollar issue of which we have a high degree of conference that we will realize its 4 million of that in first quarter 2020, and to 2 million in second quarter of 2020 and that confidence comes from the progression. We've made on the integration over the last 90 days and what we're seeing.

With these these customers as well as what David attributed to these are signed agreements with existing volumes today, and you need to get through a integration and testing period, that's where we're at now and once you get through that that's when the volumes come in.

I would only add mark to answer your question as well that.

Large fortune 500 customer that we talked about we did describe in 2020 is becoming among our very largest customers.

Okay. So okay, well understanding it's not it's not gonna be you can't speak to it from a standpoint of bookings are deferred revenue.

Is that I mean, do you feel as though you signed a much higher volume of kind of new potential business in Q3 than it did Q3, Europe a year ago.

By far.

My far okay.

Then just as well I think we already had you pass revenue growing 22%.

Next year, and so where's that coming down a bit on the b, if you're a a 19 I guess I'm trying to understand if the deployments are slipping from from 2019 into 2020, why why would that maybe not be just growing a bit faster there and the out here.

So mark this is David I'll go first and then hand, it over to Jeff very it's a logical and intuitive question. We've had a timing issue in the fourth quarter of 19 pushed to 20, we're guiding 22% in in 2020 out of principal word team that values meeting and exceeding expectations as we have for.

Our first nine straight quarters as a public company and were also a team that is operating against the principle of returning to profitability in 2021 and that remains something we've talked about from day, one as a team in a company and we are committed to that is the primary guiding principle, leading us into 2021 and so this guidance reflects both a pretty keen.

Yeah, I on the top and bottom lines.

And the fact that we value very highly managing expectations across all the constituents wheat constituencies that we serve including investors.

Both those principles informed how we approach 2020 , but let me let me ask Jeff to also add thanks, David Yeah, whatever to add is that we always endeavor to provide you the best forecast at the time, it's provided and we definitely had a learning here.

In in this quarter and we own that.

Short term. This is a lot of pain long term I think this is a fantastic thing for the business because we have large customers who are bringing high volumes and.

Stronger ways of being single sourced and primary provider terms in contracts with longer term lengths trying to integrate and turn up multiple products at once and I think thats a favorable thing for our business.

Thank you.

Thank you.

Our next question coming from a line of willpower with Robert W. Baird <unk> co. Please proceed.

Okay, great. Thanks, Yeah, I'll, maybe first just a clarification. So thanks for the the color on the numbers.

It impacts here I guess, you talk talk about the $4 million moved into Q1 2 million into Q2 of next year is the majority of that from a fortune 500, <unk> a company. So maybe any other color on timelines for the other cohort of like companies that you're expecting to grab just trying to go.

Comfort that those companies are on track as well.

Sure well.

Yes, so we haven't sized exactly that particular fortune 500 customer what I can tell you is that related to the timing issue that was the biggest factor in the annual guidance revision.

And given that it was an existing customer will impact our dollar based net retention going forward in a positive way but.

As far as the rest of the business outside these new strategic sewer sort of behaving.

In a different way and that's very favorable once again long term, our new customer metrics remained strong and.

We feel really good about about the business and a lot of things that we accomplished in the third quarter.

So let me maybe just a second question then I guess, maybe partly answered it given it was existing customers I don't have impact on your no retention rate I guess in Q4, I know one of the one of the elements you expected to help with the Q4 ramp was growing usage among your existing customers I think broadly so.

What are you seeing across the base generally in terms of snow retention rate and how do we think about them that 116 number into Q4 without now decline because of that big customer.

What's kind of the trajectory there.

It will so the way I would think about it will is.

The midpoint of our guidance for fourth quarter see pass revenue was 15% I think you can take a look at our trend on new logo growth, which was about 8% in third quarter and you can kind of back into what the dollar based net retention will be in fourth quarter and get to a number there isn't it's certainly going to be lower than it was.

Yes, and in third quarter to explain some of that fourth quarters are always challenging for us because we have some headwinds and it relates being once again in a usage based revenue business were driven by effective business days in the fact that we have more holidays in the fourth quarter Theres always on a square.

Actual basis more pressure on fourth quarter now in previous years. This has been masked by other favorable factors driving higher usage like last year, where we had election year related platform usage as well as another large customer that drove higher usage that mass this kind of headwind from the effective business day.

We don't see that this year happening and that's why the numbers look like they do.

Okay, maybe just one quick just a follow up just on the that the new customers that are ramping is that and given some of the time installations that requiring more investments from you all should we expect.

Commensurate increase in cost because the first half of next year to kind of support those efforts.

No. This is this is all part of our plan.

Again, we knew these these customers and these opportunities have been identified its really just the onboarding thats been delayed so I wouldn't make any any changes along that way. This is really sort of in many ways normal course, maybe just a confluence of more larger opportunities at one time and behaving in a way where they want to integrate with us.

More in our trusting our capabilities more than ever.

Okay. Thank you.

Thank you.

Our next question comes from the line.

One other please.

One moment please.

Thank you if you like to ask your question. Please press star one on your telephone keypad confirmation total indicate your line is in the question Q1 moment. Please.

Yes.

Thank you.

Our next question comes from the line of Andrew King with Dougherty <unk> co. Please proceed.

Hi, guys. Thanks for taking my question just two quick ones first with air National Okay, just give us a little bit more color into when you see those revenues starting to ramp and come into play and then also a since you did mention that you're seeing a longer process of on boarding from the time of closing the sale a about how long.

When you say.

You're now seeing these new logos take for revenue recognition. Thank you.

You bet. So our international deployment is on track and our 2020 guide includes our international revenue forecast for the year. Its revenue that will come throughout 2020, but its captured within our first 2020 view that we gave tonight.

In response to your second question.

These large customers are different from those who are in our base, averaging 60 to 90 days to onboard integrate and begin generating recognizable revenue and we are including the lessons learned to forecast these as up to 180 days.

To generate recognizable revenue given the breadth of the platform that they embrace right at the gate for their large existing customer basis.

And thank you all our next line comes our next question comes from line of matter Marshall with Morgan Stanley . Please proceed.

Great. Thanks, maybe just focusing on first second that the new international or kind of bogey account on international is not part of the six strategic accounts or is it and just how we should expect international revenue to kind of ramped throughout the year and then maybe the second question you know you guys.

I did a a number of customers throughout the quarter I know we've spent a lot of time on the strategic and kind of larger customers, but just what you're seeing and the make up or kind of sales effectiveness around I'm, just kind of the smaller customer base. Thanks.

Thanks me that the.

The international customer you mentioned is within this cohort that we described as our new category and the international revenues throughout 2020.

We havent talked about sequencing by quarter, how that revenue comes in what is consistent and that you'll.

Remember is how we are following demand in those markets, where we are authorized to do business and that demand is from our existing customers. So those jurisdictions come online and we are working with our existing customers as the initial initial revenue contributors for international but haven't provided more detail about the quarter.

Over quarter slope of that revenue throughout 2020.

And then on the kind of just the normal course every day [laughter] customers that you're bringing on just what you're seeing there may be as far as ARPU is versus expected or sales effectiveness versus expected.

Yes, we've set a new record for new logos coming onboard in Q3, and it's a tribute to the sales leadership of our greatly expanded sales teams and our marketing team and those two teams are as efficient as we've ever seen in the past and so.

We've maintained that very very efficient spend on marketing and sales to generate those logos and I think that's important because returning to profitability depends upon that continued efficiency as to the ARPU we are tracking ARPU.

Across the base, including this new cohort of customers. There is no fundamental change either with the base of customers that we have today are what we anticipate as we forecast 2020.

Okay. Thanks, guys.

Thank you.

We have reached the end of our question answer session allow me to hand, the floor back over for closing remarks.

Thank you and thanks to everyone on the call.

Any proud of the entire team and looking forward to closing out this year strong and to 2020 and beyond thank you.

Thank you. This concludes today's conference you may disconnect. Your lines at this time then thank you for your participation.