Q2 2020 Bandwidth Inc Earnings Call

[music].

Greetings and welcome to bandwidth second quarter 2020 earnings results Conference call.

At this time, all participants will be in listen only mode.

Brief question answer session will follow the formal presentation.

If anyone should acquire operator assistance during the conference. Please press star zero from your telephone keypad.

Please note this conference is being recorded.

At this time I'll turn the conference over to several Wallace swaps you may begin.

Thank you good afternoon, and welcome and my second quarter 2020 earnings call.

They won't be discussing the results and now in our press release issued after market close.

With me on the call. This afternoon it David Moore.

And with Chief Executive Officer, Jeff Hoffman, Chief Financial Officer of bandwidth.

They will begin with prepared remark and then we will open up the call DNA.

During the call we will make statements related to our business that maybe considered forward looking including statements concerning our financial guidance for the third fiscal quarter and full year of 2020 and to the extent provided future period, our plans to execute on our growth strategy.

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

Forward looking statements may often be identified by words, such as we get back we anticipate our upcoming.

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

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

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 could differ materially from our expectation.

For a discussion of material risks and other important factors that could affect our actual result.

Please refer to those contained in our 10-K filing on February 20% 2020.

Updated by other STC filing all of which are available on the Investor Relations section of our web site at bandwidth Dot com and on the Fccs web site at East the Dot got.

During the course of today's call, we will refer to certain non-GAAP financial measures.

A reconciliation of GAAP non-GAAP measures is included in our press release issued after the close of market today, which is located on our web site at bandwidth dotcom.

Finally, and these unprecedented times within our prepared remarks, we have estimated the revenue impact of covert 19 for this quarter.

Methodology attribute significantly elevated platform usage above and beyond expected threshold. The quantify current an estimate any future financial impacts as a result as covidien Nike.

Accordingly, identifying any potential impact and future period may become challenging.

And he increased residual usage and the corresponding revenue impact will be inherent to our business and indistinguishable.

Management makes no assurances that we will make further covidien 19 distinctions in the future.

With that let me turn the call over to David.

Thank you Sarah and thanks to everyone joining us our call today.

And whats purpose in the passion that drives us or both rooted in connection.

We work to connect people.

And now more than ever there's a time for us to connect with and support one another.

My thoughts continue to be with the communities that have endured a multitude of tragedy and R&D pain. We believe there is no place for discrimination anywhere in any form I guess any person.

And whats culture remains committed to celebrating diversity equality and unity unity that means a sincere love for one another in a celebration of the priceless differences that make us each uniquely who we are.

I also continue to pray for all who have suffered great loss in sacrificing the season of pandemic.

I would like to extend my deepest sympathies to those who are sick or unemployed and I'm grateful to all those serving during these challenging times working to navigate a swift shave return to our cherished livelihoods.

Hi, bandwidth, we remain committed to keeping America connected we're making sure that health care systems governments businesses and teachers can stay connected with those indeed.

We provide voice messaging and emergency service to the greatest productivity experiences for workers, who need to connect remotely.

If you dial into most Videoconferences these days and use your phone for audio you are likely using a bandwidth number in the call is likely delivered on our network.

Our team is relentlessly focused on serving our customers and their unprecedented demand for our services.

As a result of our commitment to our mission and each other we achieved our best year over year revenue growth performance ever.

I'd like to take a moment to think all bandmates for their ongoing excellence in execution you are truly uplifting all lost.

Our she passed revenue increased 40% year over year driving total revenue in the quarter of 67.1 million.

The fundamental strength of our business is driving broad based growth across our customer base.

The acceleration in our see pass revenue was clearly amplified in the second quarter by serving elevated demand from our customers, providing meeting solutions and you can't solutions that are keeping Americans connected.

We also saw continued momentum from messaging, which grew 108% in Q2.

Well, achieving a record velocity on revenue growth. We also made progress toward our profitability goals, achieving more than 3 million non-GAAP net income.

We see three strong pillars supporting our success are highly scalable platform a flexible <unk>, our vertically integrated nationwide IP voice network that we build and operate and garden I wouldn't want to capabilities that we believe our unique among see past providers.

Enterprises choose to build on these pillars because of their quality cost benefits and our amazing people, who answered the call to serve our customers and it is because of the strength of these pillars that we are able to significantly raise our annual see past outlook as Jeff will outline momentarily.

Our vertically integrated approach to see pass and overall value proposition or what disproportionately attract and benefit large customers operating at scale.

Many leading technology enterprises or longstanding bandwidth customers Indoorsy pass revenue acceleration has been bolstered by their solutions being heavily used for remote connectivity in the current environment.

At the onset of many more Americans working from home. Our teams worked 24 by seven to scale our platform in network to support the surge driven by our large enterprise customers, who themselves experienced explosive growth among or users. In this season. We have once again demonstrated that are made.

Oh value to the most innovative companies in the world.

Our customer centric approach has yielded relationships with our enterprise customers that are multifaceted deep seated in expanding.

As a result of our ability to serve our largest customers extended their contracts and we are pleased to announce the we signed a multi year extension with one of our largest customers, which retains our position as their primary provider.

We look forward to serving this customer for years to calm in their quest to provide productivity tools and connect knowledge workers.

This season, we also completed a two year extension of an originally executed five year multimillion dollar exclusive agreement with a fortune 500 company that offers communications and technology solutions for residential small business and enterprises across the United States.

We announced the original agreement. This time last year. We are pleased by the early extension of this customers coming into the bandwidth platform. We are eager to continue to exclusively served this customer.

Now I'd like to share a significant customer win from this quarter that marks an evolution of our engagement in serving enterprise customers migrating to the cloud.

We're pleased to announce a five year multimillion dollar agreement to provide see past services to a fortune 100 company that is one of the nations 10 largest banks and one of the largest issuers, a visa and Mastercard credit cards in the U.S.

This customer will exclusively utilize bandwidth to voice services and phone numbers to power their migration to a cloud contact center to support their card services.

Enterprises are increasingly migrating to the cloud, but remain challenged by managing complexity, ensuring operational continuity and maintaining regulatory compliance she <unk> Oh.

As in the case of this customer are challenged by tens of thousands of employees moving from on premise legacy solutions to the cloud.

Unpredictable migration timelines can span days caused to left any issues and disrupt scheduled meeting. Additionally, migrating to a cloud provider can often in tail reliance on mix of incumbent network providers local operators that can result in poor service quality.

As a strategic partner to many leading you see collaboration and contact center providers bandwidth is ideally positioned to directly connect enterprise customers. The cloud solution to do so requires agile software driven the tools capable of provisioning importing numbers in a predictable process where automation.

The only viable solution that scale.

These capabilities our encompassed in our software platform and in the case of this customer most critical to maintaining control and avoiding disruption traditionally encountered in migrating large employee bases from on premise to cloud solution.

Equally important to this customer and large scale customers alike is voice quality and reliability.

Given that we operate our own all IP nationwide voice network, we can predict quickly detect unresolved voice issues in real time.

Enterprises today need a migration partner that can connect them to the cloud and deliver and Onboarding experience. The allows them to continue to focus on their customers I am proud that bandwidth was able to deliver that experience to this customer.

Likewise, we recently announced duet for Microsoft team, which is a comprehensive solution for enterprises deploying teams to accelerate their to left me migration, while meeting complex 911 regulations through a single software centric communications provider.

Bandwidth is currently one of only two providers certified by Microsoft to provide dynamic you 911, calling capabilities for direct routing all built on a reliable software powered network, which has long been the voice standard for leading you cast and see Cas platforms.

We engage with enterprises and connect them on their digital transformation journey.

On the international front, we continue to make progress toward extending our world class network into 13 European countries in the second quarter, we provided new services to both existing and new customers. We continue to pursue our international mission and objectives consistent with our profitability principle as a key part of our long term growth.

Strategy.

I want to end by thanking all our customers for the opportunity to serve.

By thanking the bandwidth team for their ongoing dedication to achieving our mission and to each other.

With that let me turn it over to Jeff.

Thank you David and good afternoon, everyone.

Second quarter total revenue was 76.8 million up 35% year over year.

Within total revenue see past revenue was 67.1 million up 40% year over year, a new record percentage growth for our business.

Other revenue contributed the remaining 9.7 million, which is up 11% from the same period a year ago.

Revenue growth at this scale is a testament to the power of our vertically integrated platform to serve the increase in communication needs of enterprise customers.

Our stellar second quarter Sea bass revenue performance was driven by two key factors.

First ongoing.

Unexpected broad based growth across our platform from enterprise customers would continue to scale usage in a predictable cadence with their plans to increasing the utilized cloud based communication by embedding voice messaging and emergency services into their products and services.

The second factor driving our outperformance was they increased usage driven by covert 19 related remote work requirement, which peaked in April and thereafter dissipated throughout the quarter, but remained at elevated levels as compared to three pandemic period.

Well it is becoming increasingly difficult to differentiate covidien 19 related usage from organic usage growth, we estimate that covert 19 revenue impact in the second quarter to be in the range of Florida half the 5 million.

As for other revenue the primary driver of our outperformance was due to higher ATP messaging surcharges driven by continued strong customer demand for our messaging offerings.

Moving on to other key metrics, our dollar based net retention rate was 133% in the quarter another new record for our business and strong evidence of our ability to drive deeper and more meaningful relationships with our enterprise customer.

We ended the second quarter with an even 1900 active see past customers up 30% year over year.

Gross margins came in at 48% for the quarter as margins were negatively impacted by SMS surcharges, which we passed through to our customers as well as heavier network investment within cost of revenue in response to the surge demand created by the panned out.

This is expected to normalize overtime and we continue to believe that our gross margins will be in the high fortys for the year.

Consistent with our commitment to balancing growth with profitability. Our non-GAAP net income in the second quarter was 3.1 million or 13 cents per share, which is favorable to our breakeven guide due to gross profit over performance as well as operating expense favorability.

Now I'd like to expand our thoughts regarding our financial outlook for the balance of 2020, we expect the estimated covert 19 related uses to continue to dissipate consistent with observable usage trends to date that show Kobin related usage declines from April's Pete.

Ralph the second quarter as work from home behavior evolves with the reopening of the economy.

Despite less expected contribution from covert 19 in the second half of the year, we're raising our annual 2020, she passed revenue guidance by more than $13 million based on the second quarter over performance and our strong continuing business fundamentals.

In terms of see past revenue, we have raised our full year 2020 guidance to be in the range of 260.3 to 261.8 million or up 32% at the midpoint of the range.

We expect total revenue for 2020 to be in the range of 296.8 to 298 point Threemillion up 28% at the midpoint of the range.

We're estimating our full year non-GAAP earnings per share to be in the range of five to 11 cents per share, assuming 25, and a half million weighted average diluted shares outstanding.

Turning to our guidance for the third quarter 2020, we expect to see past revenue to be in the range of 67.1, the 67.6 million or up 31% year over year at the midpoint of the range.

This contributes to our total revenue guidance of 70, 676, and a half million.

Third quarter non-GAAP earnings per share is expected to be in the range of a loss of three cents to a loss of one cents per share using 24.2 million weighted average shares outstanding.

Finally, I want to thank all our bandmates for their tremendous efforts that led to our exceptional performance this quarter and during these challenging times, one of which everyone strength and hope you and your family remains safe and healthy with that let's open up the call for questions.

Operator.

Thank you at this time will now be conducting the question and answer session.

If you like to ask a question today. Please press star one on your telephone keypad and a confirmation tomo indicate your line is in the question Q.

You mean press star to a few later move your question from the Q.

Participants are using speaker equipment, maybe necessary to pick up your handset before pressing the star keys.

One moment, please hold the poll for questions.

Thank you first question is from the line of Mohan sorry, with William Blair. Please proceed with your question.

[noise] Hey, guys. Thank for taking my question and congratulation does not agreed that a result there.

Let's talk a little bit about progression.

It's from the platform usage and got a deal flow.

Mark you're able to May June et cetera.

For the what or any sort of notable behavioral changes over the last couple of months bread <unk> early on and the public walk down that we've talked about in the top.

Some of the how that played out what do you feel you talked to customers and obviously they used to just give a platform.

Glad to provide high this is Jeff.

In terms of the progression that we saw it could get to take it in two pieces. So let's first talk about the Covidien pack and obviously, we're doing our best to try to carve that out for you. All we saw a peak in April that peak was higher than March but thereafter, it began to decline in may.

Hey, further declined in June and we've seen that further decline even in July obviously, we're almost at the ended the month and we've seen that as well and so what's you're going to see when we get to guidance is that we followed that trend that we expected to continue to come down in our belief as people have.

Going back to work to some degree.

But we can clearly see the usage is down we've seen other data points externally that have been been similar to this in terms of the organic business, meaning everything else other than Kobe related usage, we're seeing great fundamental strength in the business and were frankly, just clicking on a number of cylinder.

And so the business is very strong and will carry that with us in the second after the year.

Yeah. That's that's the problem. Thank you it sounds brown from your as always.

Very clear about the puts and takes.

A broader question you know the mats business is growing but there's a whole both uncertainties messaging I forget about their globally some of them or just sort of no I just don't invest minute.

Almost what have you know discounting heavily with no gross margin yeah, well, you've got some kind of environmental you're probably maybe you want to pricing peripheral pricing power. How do you think about how that business.

But over the next few quarters, but over the last five years well from a growth perspective in a pricing perspective I'll be really helpful. Thank you.

Sure I'd be glad to start I'd start with the messaging business is performing very well you heard and David's prepared remarks year over year, we grew 108% a lot of what's driving that its toll free messaging and messaging is actually a accretive to.

Our overall gross margins and that so that's actually helping and as additive to our.

Our margins right now so I don't know David if there's anything you want to add there, but that's why I would start. Thank you Jeff move on I would only add that 89% of our revenue remains voice and we've got structural advantages in voice related to quality and cost that we believe over a five year time horizon will be very stable.

And favorable messaging, we think has a different profile over that kind of time horizon, but we are growing that business as well, but it remains to remains a small minority.

Got it got into trouble I got to focus on boy you for differentiation going well actually my question guys and obviously very nice job right.

Thanks, Bill on [noise].

The next question is Fineline of Willpower with Robert W. Baird. Please proceed with your question.

Okay, great. Thanks, Josh.

So.

Great quarter results.

Maybe just come back to the messaging strength up over 100% you called out you know toll free message.

The other kind of drivers within that and how do we think about yeah. The sustainability of that and what's in the pipeline ahead on that front.

Well. This is David there are broad set of use cases during the current season that were in where engagements in communication among different constituencies remains vital where face to face contact is not allowed or is really impaired. In addition, you've got political activity isn't an election season that also contribute so.

Broad based in terms of use cases and also pulp political.

Okay and I just would have maybe just come back to the Q3 guidance and thinking about you know the different puts and takes there I think yeah. If I look last year, you had a nice increase sequentially into Q3, how do we think about what the normal seasonality you know would look like there and I'm just kind of curious Olympic cobot impact.

Yes people go back to work, presumably there'd be a little less meetings usage, but it seemed like the core you Cascade is it's a big big part of your customer base would actually be continuing to grow at a nice pacemakers still pretty early early innings. There. So anyway to kind of just aggregate the different pieces are related to the cobot impacts that that you've seen trend over the.

Last couple of months.

Okay well this is Jeff I'll start then it David like like to chime in as well that there was there would be great I think the whether you look at as we go into third quarter, you've got some netting going on again, what I would start with is the fundamental strength of the business.