Q3 2021 Bandwidth Inc Earnings Call

Thank you for standing by and this is the conference operator welcome to the bandwidth Inc. Third quarter 2021 earnings conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star zero.

I would now like to turn the conference over to Sarah Wallace VP of Investor Relations. Please go ahead.

Thank you good afternoon, and welcome to bandwidth third quarter 2021 earnings call today, we'll be discussing the results announced in our press release issued after the market closed the press release and an earnings presentation with historical financial highlights can be found on the Investor Relations page at Investor.

<unk> dot bandwidth dotcom.

With me on the call. This afternoon is David Morken, our CEO and Daryl Raiford our CFO.

We'll begin with prepared remarks, and then we will open up the call for Q&A.

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 fourth fiscal quarter and full year of 2021 and to the extent provided future periods and our views on the impact of the recent Ddos attacks. We've previously disclosed.

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 forward looking statements as described in our risk factors in our reports filed with the SEC any forward looking statement.

<unk> made on this call and 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-K filing as updated by other SEC filings all of which are available on the Investor Relations section of our website at bandwidth dot.

Com and on the S. E C website at S E C Dot Gov.

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 thought bandwidth dot com.

That let me turn the call over to David.

Thank you Sarah and Hello, everyone. Thank you for joining us today.

This quarter bandwidth continued to play a critical role in the enterprise move to the cloud we celebrated a number of important wins with both new and existing customers. We largely completed the integration of our vast bone acquisition and we withstood an unprecedented cyber attack on our business.

Bandwidth delivered another quarter of solid financial results exceeding our revenue guidance, including 46% C pass revenue year over year growth for both the mountain tops and valleys that we visited during the quarter I was inspired by this team's unwavering commitment to our mission and our customers I have never been more proud.

<unk> of our brave and brilliant team or more thankful for gods faithfulness.

I want to start by talking about the Ddos attack at the end of September.

Like ours have been aimed at a number of companies in our global Voip ecosystem first we were prepared and we weathered the storm well our infrastructure includes specific Ddos mitigation systems that is routinely audited in responding to the attacks in real time, we augmented our ddos defenses to keep pace with.

The attackers evolving methods some customers saw periodic service disruptions and we regret any impact to their business at the same time, we are proud of our team and our partners and the resilience of our platform and avoiding the crippling affects others have seen in similar tax across the industry in fact, the vast majority.

Of our traffic continued to be delivered.

Second.

We serve our customers well and they supported us too we.

We've been moved by our customers Trust, we count many of the world's largest and most sophisticated technology leaders as our customers and a number of them joined us in our situation room in a true demonstration of our long standing partnerships they stood shoulder to shoulder with us in this fight.

Nevertheless, a number of our customers did move services to other options. Our operations team worked around the clock to accommodate these choices consistent with our commitment to always do the next right thing for our customers. Many of those customers have already brought their business back I am confident that others are in the process.

Assess of doing so in the coming days and weeks Daryl will give more details on the estimated financial impact of the Ddos attack.

Third we are now using our lessons learned to help our customers and partners protect themselves against similar attacks are experience puts us at the forefront of understanding how to combat these threats against the Voip Echo system we.

We did not pay a ransom and instead relied on innovative solutions and strategies to confront the threat head on.

To sum up we believe bandwidth is now stronger than ever and we plan to leverage what we've learned to help make the echo system safer for enterprise communications.

With that I want to highlight a few important milestones and wins in the past quarter.

We just celebrated the first anniversary of the close of our acquisition of Vocs bone and I'm excited that the bulk of our international integration is complete.

Even as we continue to chart the course for our single Global platform. We are now fully serving our customers as one global band, we continue to make progress on a huge cross sell opportunities from the box plant acquisition as we expand our long term customer relationships from domestic to global.

Our customers told us they wanted the bandwidth experience enterprise grade quality service and reliability around the world. They are showing us that they meant what they said.

I am very pleased to announce the latest example.

One of our largest and longest tenured customers signed a contract for global service in the third quarter.

This is a customer that was not previously working with box bone and now is going global with bandwidth in short. This is yet another growing relationship that was only made possible by the global reach achieved through the acquisition and it is a takeaway from multiple competing international IP network providers.

In the initial phase of the contract. This customer is testing voice services over our global network in select countries during the fourth quarter.

We expect services and coverage to expand throughout 2022.

Our team is humbled by this customer's desire to build with bandwidth to the ends of the Earth and we look forward to growing this foundational relationships at a global scale.

The platform players and Internet Giants has always been a core strength of ours and this win demonstrates again, how compelling a truly global offering is to these customers.

We also see significant momentum building among global 2000 enterprises executing their digital transformations. The enterprise migration to the cloud is extremely complex and fraught with technical and regulatory challenges, we are nimble and quick and a world of sluggish entrenched legacy carriers.

Today I want to zero in on an area, where we are particularly winning in the enterprise category global contact centers.

Customer service agents are becoming critical to helping brands create a better customer experience in a post COVID-19 world.

But the contact centers in todays large global enterprises can be enormously complex there may be multiple locations with expensive on premise equipment, requiring top tier expertise to manage to connected all most enterprises have been relying on multiple carriers, each with different contracts uncertain redundancy and traffic limitations.

Then they have the need to retain critical call data to power a third party integrations, such as CRM voice authentication fraud detection, AI monitoring and other services essential to a better customer experience.

Bandwidth simplifies this challenge our network is cloud native so it can work seamlessly with the largest cloud contact center platforms for global interoperability scalability and security.

The biggest global contact center players are recognizing our new global capability and potential I'll share what one enterprise customer told US recently after successfully rebuilding their entire contact center architecture on the bandwidth platform quote we built a better architecture, a smarter architecture and we've saved a ton of money.

This migration has been a huge success.

One of the contact center wins, we closed in Q3 as a global leader in electronic signature.

This customer chose bandwidth because with our expanded footprint, we could move their entire 15th country Global contact center stack to the cloud not only were we able to eliminate the complexity of their existing on premise equipment, but we consolidated their nine legacy carrier agreements into one.

The project has propelled this customer forward into the efficiency and scalability of cloud based communications, our customer values bandwidth the ability to integrate with nearly every major communications platform and enterprise needs from Ucas to see cash, which opens the door to more efficiency and savings.

We're also continuing to win with U S. Only enterprises. This is the case for a new deal this past quarter with a $16 billion Fortune 200 managed care provider. This company is on the front lines of patient communication and their contact center is critical to managing customer engagement. They came to us and said no kidding.

They wanted to take all of their legacy communications hardware throw it into a giant dumpster and light it on fire. It was that cumbersome and frustrating to manage they chose bandwidth because we were uniquely able to power their entire communications stack in the cloud both ucas and see Cas. In addition, our tools and automation enabled.

Them to manage their system without specialized telecom expertise they can literally dragging drop using <unk> software to make real time number of changes on the fly.

This customer joins a growing cohort in the health care space, who rely on bandwidth to power their cloud communications needs. In fact health care is one of the markets, where we are seeing particularly strong momentum in both the large enterprise space and also with innovative app developers that are building a better patient experience.

In closing I want to talk about our continued thought leadership in an increasingly complex regulatory landscape, we take seriously our obligation to help our customers navigate issues like fraud, and robo, calling which impact their businesses and their customers.

Bandwidth has been at the forefront of implementing new security standards like stir shaken, which went into effect on June 30 in the United States to reduce fraudulent calling activity.

We will continue to aim to use our seat at the table with a leading standards and rulemaking bodies to provide our customers with critical support and over the horizon insights on important regulatory developments.

We are also providing our customers with innovative and unique solutions to enable them to meet evolving 911 compliance requirements bandwidth dynamic location routing solution can deliver enhanced location information to 911 dispatchers and helped to ensure first responders are sent to the right building floor and room.

Our solutions are among the only three that have been certified for use with Microsoft teams direct routing and Repowering zoom phone as well emergency services continued to be a growing and important component of our suite of service offerings often it serves as a unique door opener customers, who come to us for help with emergency services.

And about the broader power of the bandwidth platform driving new cross sell opportunities with that it is my pleasure again to welcome Daryl Raiford, who is joining us for his first earnings call as our new Chief Financial Officer. He has been a great addition to our team, bringing strong leadership and new perspective, I'll now turn.

It over to Daryl to walk through our financial results and outlook.

Thank you David and good afternoon, everyone I'm thrilled to have joined such a remarkable company at a pivotal point in its history as we lead enterprise communications into the cloud on a global scale.

I have enjoyed meeting some of you and look forward to interacting with more of you in the coming months.

And thanks to my team for helping me get a running start.

So let's dive into some of the highlights of Q3.

As Sarah said in her introduction, we've posted an earnings presentation detailing our third quarter and historical financial performance on the Investor Relations section of our website.

I'll now take you through the third quarter financial results and outlook for the fourth quarter.

We provide guidance for C pass revenue total revenue and non-GAAP EPS.

For the third quarter each of these measures exceeded their corresponding guidance ranges.

On a consolidated basis, our third quarter results are as follows.

Third quarter revenue was $131 million up 54% year over year.

Total revenue on our U S platforms, which excludes our international box bone integrated platform increased 22%.

Non-GAAP gross margins came in at 49%.

Unchanged from last year's quarter.

Non-GAAP net income was $6 $5 million stronger than expected due to higher revenue improved mix and operating expense favorability.

Non-GAAP EPS was <unk> 25.

An increase of <unk> year over year.

Turning to our segments.

<unk> revenue was $107 million.

Up 46% year over year.

This solid result is inclusive of the negative impact of approximately three quarter million dollars from the Ddos attack.

In line with our earlier announcement, describing the revenue reduction from loss transaction volume and customer credits in the third quarter.

Our third quarter <unk> revenue outperformance was driven by broad based demand across our products and geographies.

Within the C pass segment in terms of U S and international revenue contribution.

T pads revenue growth on our U S platforms grew 20% when normalized for last year's Covid and political messaging benefits.

As a reminder, in the third quarter of last year.

Our U S platform benefited from $6 million of Covid related and political messaging tailwind.

Our international platform operations contributed approximately $26 million to see pass revenue in the third quarter.

Bandwidth see pads gross margins continued to be strong setting.

Setting another record margin at 54%.

Up four percentage points from last year's quarter enhanced by improved operating leverage and inclusion of higher margin International business.

Turning to our other segment other revenue contributed the remaining $23 million of total revenue, which is up 112% from the same period a year ago.

The growth in other revenue was primarily driven by carriers implementing additional ADP messaging surcharges as well as continued growth of our messaging volumes, which drive more surcharges ADP messaging surcharges in the quarter totaled $14 million.

Turning to our operating metrics, our dollar based net retention rate, which excludes the box bone acquisition until we lap the acquisition closed was 108% in the period.

Our normalized retention rate was 113% when taking into account. The previously described COVID-19 and political messaging benefits from last year.

We ended the third quarter with 3173 active see pads customers.

Representing a net addition of 122 customer accounts in the corner in terms of our balance sheet, our cash and investments balance at the end of September was $331 million an increase over June 2021 in September 2020 of $12 million and $30 million respectively.

Adjusted EBITDA was $14 $2 million in the third quarter or 11% of total revenue.

Now turning to our updated financial outlook for the full year, we've updated our <unk> revenue and total revenue estimates.

As you already know in October we continued to experience the lingering financial effects of the Ddos attack through lower usage demand from certain customers who shifted their traffic.

While we are encouraged by many customers that have already returned their usage traffic to our network.

Along with other customers Express continues to do so.

The result is that we expect lower usage in the fourth quarter than we have previously thought.

Thus our updated outlook for full year <unk> revenue is now between $407 million and $412 million.

Driven by our earlier announced 9 million to $12 million estimate of the full year impact from lower usage and customer credit as a result of the Ddos attack.

We estimate full year total revenue outlook to between $480 million.

And $485 million.

We further estimate our non-GAAP net income to be slightly higher than our previous August outlook and.

And accordingly expect non-GAAP EPS between <unk> 74, and.

78.

Our higher gross margins.

And operating leverage experienced in the first nine months of 2021 gives us confidence to preserve our profitability outlook notwithstanding the ddos impact revenue.

Which is a testament to our business model of sustained profitable growth.

Going forward from here.

Despite the challenges caused by the Ddos attack, we believe our fundamental growth drivers remain unchanged.

Enterprises continue to value our unique combination of software platform and global network.

Many of our largest customers have a greater appreciation for our resiliency and commitment to serving their mission critical communication needs.

We remain well positioned to serve a large and growing global communications market that is benefiting from transformational secular trends.

And we believe we are uniquely positioned to help enterprise customers navigate complexity.

Now with that I'll turn it back to the operator for questions.

Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear account acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any kids to withdraw your question. Please press Star then two.

We will pause for a moment as callers join the queue.

The first question is from Bhavan Suri from William Blair. Please go ahead.

Yes.

Hi, everybody, it's Matt Stotler on for the bond. Thank you for taking the questions.

Just a couple here related to the Ddos attacks I will start with one and then have a quick follow up just in terms of the remediation. Obviously hope that your customers are moving traffic since where they needed to go do you guys have someone come back I guess.

When you look at that $9 million to $12 million hit that you talk about from usage and customer credits or any color. You can provide on how much of that is usage versus kind of customer credits and then as you think about the tail from here and the visibility you have into.

Customers are doing tend to come back and what have you can you just speak to expectations beyond Q4 as to what we should expect when we're thinking about kind of year over year comps.

Beyond just the fourth quarter.

Yes.

Hey, Matt This is David Thanks, much for your question. The vast majority of the financial impact was utilization or usage not credits to answer. The first part of your question, we expect far less of an impact in Q1 than we have seen in Q4 and are predicting for Q4. It's early obviously, we have a lot of Q4 still left.

Ahead of Us and we don't want to get ahead of ourselves in terms of providing guidance for 'twenty two but Q1, we expect will have far less of an impact in Q4.

Okay. That's helpful. And then maybe just one follow up.

Obviously.

Yes, you are still able to close several large deals when you talked about a number of pretty impressive lunch here.

And even in this environment, where youre dealing with Ddos attack.

How is this changing your conversations with customers and what was just kind of dig into.

What's changed no kind of their reaction, both obviously new customers youre, expanding with an azure continuing to sell to and land new customers. How is this factoring into those conversations.

It's pretty remarkable Matt those conversations unexpectedly have become extremely positive regarding bandwidth being the most resilient and best place to go. If you are concerned about a ddos attack and the reason is we have successfully.

Fought back against the latest methods in the Voip space that before now we're unheralded unprecedented.

We essentially.

And so the conversations with customers have gone something like this there is no better place on the planet to go than bandwidth right now.

Regarding ddos attacks worldwide and we're extremely proud of that it comes with scars, but we bear those scars proudly.

Got it thanks again.

The next question is from Mark Murphy from Jpmorgan. Please go ahead.

Yes. Thank you. Thank you David just kind of continuing along that thread I was wondering if you could clarify you said you were prepared for the Ddos attacks and you've been regularly audited.

Those preparations that you have the service was impacted you have revenue impact what was it that was unique about this attack that it kind of.

Sort of overcame the full capability to.

Prevent any impact.

Hey, Mark if the attack had occurred in July it would've set a world record for Ddos volumes of any kind.

This attack was unique and not only was it massive.

Size. It was specifically on a dimension using UDP packets and fragmented GDP packets, which had never been seen before we're only seeing very recently in our space with voice, while you need signaling and media and UTP fragments, we can't just block wholesale in the way that you can with an http attack. So we <unk>.

A very good robust.

Solution for attacks that had been seen in the past.

We rallied during this attack and used vendors like cloud flare and taught them how to address this issue for the first time and collaborated with them in a way that they then we're able to go to the whole industry and and.

Sure. So it was an unprecedented size and in a very unique way.

We experienced this attack for what was really the first time.

The way that we have adjusted our defenses that we can withstand this and other.

Similar tax going forward.

Okay.

What percentage of your overall traffic do you think will move to other options in the wake of that attack and.

I'm wondering how much has reached.

What's your loss how much those returns.

How much of it if any do you think could be permanently lost.

So we had some of our most important customers that we said you need to move quickly. We're experiencing this and we were around the clock 24, seven middle of the night all hours all hands on deck to.

Have our customers evacuate during the early stages and we are delighted that those customers watched us communicate well with them watched us restore service so quickly and most of them returned.

Okay. One other question for you just at a high level, how is usage trending into reopening of the economy and with people.

Starting to return to the office starting to travel a bit more versus what you.

Might have expected six or nine months ago.

We're global now so it does depend on the theater that you are talking about and things do change we've got some sectors of our customer base like hospitality and rideshare that benefit from the return and indeed, even the travel industry customers that we have so those numbers are obviously, improving and we're excited about reopening.

Quarters.

And then we've got a cross section of all of our Ucas see Cas and conferencing customers.

So it's a blend in terms of the current dynamic with usage, but overall, we're excited about the reopening that are occurring that benefit our enterprise customers everywhere.

Thank you very much.

Thanks Mark.

The next question is from will power from Baird. Please go ahead.

Hey, this is Charlie on for will thanks for taking the question.

Just wanted to ask one about that.

The Ddos attack and.

Pulling off of that last question, so for those customers, especially the large ones that have not brought their traffic back to bandwidth.

Is there any sort of common theme or Tom.

Common thread between them in terms of the main reasons why they say why they haven't come back to the bandwidth.

Large.

<unk> move slower.

It's that simple I think administratively you've got.

Different procedural steps to take for large customers.

Those that have.

Continue to believe in us are moving back at the speed that's appropriate for their operating team I think it's that simple.

Okay got it and then I also wanted to ask about box, but I think the C pass through revenue from box on $26 million in the quarter was about flat sequentially is there anything specific to call out there. It sounds like things are going pretty well from the customer anecdotes, but I'm just wondering if there's anything to call out there.

Okay.

Youre right Charlie this is Daryl.

Things have gone pretty well from the customer side.

The $26 million is essentially flat too.

The second quarter, it's a bit of a half glass full we were gratified in the second quarter that we were able to accelerate some timing and bring customers on early.

Versus in terms of scaling and of course, we operate a global platform. So have an exact predictability.

<unk> across all of our through all of our 60 countries and where the usage is going to be and the like.

Is not.

Not 100% perfect, but in the second quarter and in the third quarter, our aggregate platform beat our expectations. So we're happy about that.

Got it alright, thanks, guys.

Okay.

The next question is from meta Marshall from Morgan Stanley. Please go ahead.

Hi. This is for me to thank you for the question. So I. Appreciate that you guys are having a pretty positive conversations with customers sort of rerouting revenue back to your platform I guess, just if there's any more detail you can give on how long of a process. It is based on the customer size of bringing their rerouted revenue back to the platform and timing around that that'd be helpful.

But I have a quick follow up.

You bet crime. This is David I shared earlier this evening on one of the calls that we expect in Q1 of 'twenty two that the shortfall from the Ddos attack will be far less than what we're projecting for Q4, so thats very encouraging and reflects the pace of the return.

And I would hope that that pace accelerates, but that's what we're thinking at this moment in time as we continue to finish out Q4.

Okay got it that's helpful. And then just a quick follow up in terms of the cross sell opportunity between box phone and bandwidth I guess just has there been interest and has there been more interest one way or another and then just any detail around that opportunity would be helpful. In terms of whether youre seeing it accelerate.

Celebrate one way or another thank you.

Thank you the cross sell opportunities that we've been most excited about and open and talking about are among the U S. Based large technology customers that we serve and their desire to go globally with bandwidth we have shared that we for example.

Closed a global leader in the electronic signature space, who are consolidating nine different providers across 15 countries because of our singular global footprint. That's an example of a strong technology leader that uses our combined U S and international platform.

We will see more of that.

Got it thank you.

The next question is from Steve Enders from Keybanc. Please go ahead.

Hi, guys. Thanks for taking my question. This is George on for Steve.

Two questions first one on gross margins are really nice quarter on quarter step up can.

Can you give a sense or kind of unpacking I think you've mentioned international mix, it's about scale and if you could rank order the effects.

Or should we expect that number to go.

And then second question on.

The linearity of customer adds also a fairly healthy metric I'm wondering if you saw any slowdown in October.

Tied to the Ddos attacks.

How do you see that trending thank you.

Hey, there. This is daryl thanks for the question in terms of unpacking the record 54% margin in Q3 for <unk>.

Revenue did exceed our expectations. So certainly revenue does help in that scale across the fixed cost base. We also.

Experienced just better improved.

Operating leverage, which is which is which means costs favorable costs as well as the mix you alluded to our international platform margins are higher than our U S margins and so we were able to improve through mix as well that's essentially how we've looked at it.

And.

In terms of in terms of customer adds.

We're pleased with the customer adds but really nothing to call out that would say, it's an outlier in terms of.

So sort of customer mix issue.

Okay.

Great. Thank you again.

Okay.

The next question is from Tyler Radke of Citi. Please go ahead.

Hey, good afternoon, Thanks for taking my question.

Wanted to just ask.

Excluding the Ddos attack, which understandably.

Theres a lot to talk about there, but just kind of how did you see.

Seasonality in overall usage trends play out through the through the third quarter.

Obviously theres been a lot of.

Talk in the industry just around a summer slowdown. So it was just kind of wondering to see what you saw on that front.

And just anything to call out in terms of the overall usage and seasonality trends that you've seen here thus far in Q4.

Well clearly we did say the third quarter was impacted by the three quarter million dollars switches, which over those five days is a little less significant than the our estimate of the full year impact.

<unk>.

The third quarter the international platform on a normalized basis grew 20%, we're happy about that in terms of <unk> revenue.

That's right, where that's right pretty.

Pretty much where we'd like it to be and we normalized for the last years $6 million.

A political messaging and COVID-19, but that in.

In terms of 20% to 25% growth that seems kind of in our ZIP code. So.

We just feel like the market is.

Expanding at the pace, we'd estimate the digital transformation is underway and we think thats a kind of a long term.

Long term rate for US yes. Thanks, Darryl this is David I agree, but we did not see some slowdown.

Was isolated to within a specific sector or something that was seasonal we were on track based on our understanding of how the year would go so we haven't seen that.

Great and if I could just ask you around the the customers that you did.

Help migrate to another platform.

I guess just.

Where did those.

Customers goes is it kind of the main components.

<unk>.

And I'm curious as you look to restore that traffic.

Have you had to make any more kind of aggressive price concessions that I would imagine that whoever kind of benefited from that traffic would do a lot of things to hold onto their those customers, but just curious.

Some of the dynamics as you try to get back that traffic.

You bet. So when we moved some of our largest customers they move too.

Depending upon the nature of their service they move to large incumbents as quickly as they were able to so Verizon and AT&T lumen.

That they might move to overnight when they came back it was under the terms of our service that they left with.

So there is not a discount that is not a discount season to return it is.

All clear you have trusted us for years welcome back.

Great Super helpful. Thank you.

You bet.

The next question is from Andrew King from Colliers Securities. Please go ahead.

Yeah.

Hi, there thanks for taking my question.

Moving on from the Ddos attacks.

Questions on that I wanted to dive a little bit in Iowa opportunities, specifically next quarter as we start as we see.

The next.

The Gray bar Gerry law.

Q1, how much of.

Back from that.

Where is your primary competition.

Is it more.

In house developed or is there another player out there that youre seeing a lot.

Thanks for calling in from the upper deck or a stadium somewhere.

But in all seriousness I do love the question about the 911 special service that we do provide for example, Microsoft teams were one of only three certified providers and we do dynamic location routing that satisfies the latest requirements for both fixed nomadic lines.

Our huge door openers for conversations within the large enterprise and we're excited about the season that we're in where emergency service is featuring so importantly in the minds of decision makers that are going through a digital transformation move to the cloud and Microsoft is just one example, we have other duet products with other providers, we're proud of where the.

911 service is a leading conversational piece.

Great great.

Yeah.

The next question is from Ryan Koontz from Needham and company. Please go ahead.

Hi, Thanks for the question.

Drill down on your commentary around the contact center market.

How you are tapping into that is this a different go to market motion you are finding traction with or are these strategic relationships with these partners that they are referencing you straight in without much effort on the sales side.

And I have a follow up.

What can you that's a good question, but I want make sure I understand it the two differences that youre asking about in our sales motion I thought I understood. The first part, but then your comment about a strategic partner I didn't follow.

Well just as you partner with these contact center players are they referencing you win or is it more of a proactive effort to penetrate their incumbent base there.

Our installed base.

Got it. Thank you. So we have an aggressive active outbound enterprise sales motion, where we are focused on the C suite decision maker of the SVP decision maker in the contact Center leader and certainly there is word of mouth in the industry. When you solve a problem for a financial you might get a reference into another large.

<unk> financial but it is an individual effort. We don't have a channel we've got a dynamic group of enterprise salespeople that are making great inroads in this quarter, we announced.

Great win among the Fortune 200 managed care provider $16 billion company and that was a direct win into the senior decision maker and.

It's an example of that sales motion that we have but the contact center is filled with enormous complexity theyre trying to take call flows and route calls for authentication for using AI, whether it's.

To prevent fraud or for sentiment analysis, there are lots of very creative intelligent things happening in the contact center and because we are a network and platform owner, we're able to have both the signaling an immediate route those calls very very flexibly literally a contact center executive can drag and drop call flows for different reasons to different places in real time.

<unk> compare that to what you can get from a large domestic or international incumbent and it's night and day. So when you.

Think about all the emerging exciting technological change in the contact center, you've got to have a flexible partner like bandwidth in order to have the actual audio transit all of these solution providers elegantly and so that merit based value prop is resonating audibly in the contact center.

Super interesting, thanks, and a quick follow up David.

Mentioned the box bone integration, mostly complete can you give us any color there in terms of.

Is this mostly customer systems head count I mean, any other color you can give us there on the box down would be great.

You bet.

The customers that we serve.

Are primarily focused on having one point of contact one resolution path for issues. They are okay. If they have more than one bill right now we've achieved integration with all of the personnel on both sides of the companies, which is vital for our large customers. So a single point of contact single individual is the first 0.2nd point is all of the <unk>.

Compliance all of the it controls all of the ERP all that hard heavy lifting work is largely behind us where we're headed next as a single pane of glass experience, where a customer has a universal journey through the bandwidth.

Service during their lifetime that will take some longer time, but the team has done an extraordinary job during a time when we could not be together physically for the vast majority to do the vast majority of the integration.

Okay, that's great and as we think about the opex impact of that going forward.

It does it stand out much at all in terms of what remains or is it kind of just.

Small stuff.

It's going to be this year, we have clearly experienced integration cost that was embedded in our in our opex cost structure going forward to next year, we would expect that to be much less.

Become more business as usual continuous improvement as we as we innovate and serve our customers.

That's really great. Thanks, Pat.

The next question is from James Fish from Piper Sandler. Please go ahead.

Hey, guys. This is quintin on for Jim Thanks for taking our question.

Maybe just to beat one more time on the dead horse.

Attack, but is the majority of the cyber security investment now behind us given the rapid response in quarter or.

Should we expect some additional investments as we move into Q4 beyond just to stay ahead of these attacks.

Yeah. Thanks, Jim This is Daryl again, the bulk of it the bulk of it is behind us.

The incremental investment was less than $1 billion.

In terms of what we've experienced and theres going to be some maintenance.

As software as a service this is some maintenance and things like that that would go on but it won't be it won't be noticeable in our cost structure.

Yes.

Got it Super helpful. Thank you.

The next question is from Pat Walraven from JMP Securities. Please go ahead.

Oh, great. Thank you.

Congratulations for getting it all under control.

I suspect Dave that everyone. On this call has had the experience now when they navigate to bandwidth site. There is a little pop up from cloud flare that says.

Hold on a second while we check your browser.

And then the little dots go buy in and then you get to your website.

So you didn't have that before.

You do know did cloud player not work for some reason.

For your kind of a network before and it does now what's going on there.

So.

When the attacks started Pat we had a.

Network based best of breed.

Awesome solution by a great vendor.

In the industry and it worked well for the first 48 hours of the running gun battle.

After that there was a different dimension to the attack.

On a different protocol different ports different origins and youre talking about attacks originating in a different nation state transiting through a partner that doesn't know any better and then hitting.

All your IP ranges with different flavors of traffic in different ways and so we migrated from the original defense that we have stood up that was working and used cloud flare thereafter, they were superlative and working with us rallying with US we shared in real time aspects of the vector of attack or the.

Changing dimension and they would adjust with us their solution in real time, and it was a combined effort and one that should be celebrated in I think resulted in many others in the voice industry, probably be telling cloud to our customers. It is a small price to pay right now as a prophylactic security to have that additional nominal step at the beginning of the user experience we're not.

We're not a consumer service so that brief interruption and we don't think detours prospects or those who know us from a user experience right now thats appropriate, but we will work that out of the user experience here shortly.

Great. Thank you and my follow up is just I noticed the same thing pop up on a completely.

Different.

Vendors site. So is this something that you're sharing with.

Others in the industry, who might have a similar.

Our risk profile than you had before it.

Yes, we immediately reached out to our top competitors and shared everything we knew we told them get ready, it's probably going to hit you next here's what we did here's how we did it here's the playbook and shared openly.

And in the vitality and the quality of our ecosystem is essential for enterprises around the world and so we wanted to protect it with those that we happen to compete with and did so openly right out of the gate.

Got it alright, thank you.

Thank you Pat.

This concludes the question and answer session as well as today's conference call. You may disconnect. Your lines at this time. Thank you for your participating and have a pleasant day.

Okay.

Sure.

Yes.

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Yes.

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Yes.

Okay.

Yeah.

[music].

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[music].

Thank you for standing by and this is the conference operator welcome to the bandwidth Inc. Third quarter 2021 earnings conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero.

I would now like to turn the conference over to Sarah Wallace VP of Investor Relations. Please go ahead.

Thank you good afternoon, and welcome to bandwidth third quarter 2021 earnings call.

Today, we'll be discussing 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 Dot bandwidth dotcom.

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 for Q&A.

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 fourth fiscal quarter and full year of 2021 and to the extent provided future periods and our views on the impact of the recent Ddos attacks. We've previously disclosed.

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 forward looking statements as described in our risk factors in our reports filed with the SEC any forward looking statements.

Made on this call and 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-K filing as updated by other SEC filings all of which are available on the Investor Relations section of our website at bandwidth dot.

Com and on the S E T S website at SEC Dot Gov.

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 thought bandwidth dot com.

With that let me turn the call over to David.

Thank you Sarah and Hello, everyone. Thank you for joining us today.

This quarter bandwidth continued to play a critical role in the enterprise move to the cloud we celebrated a number of important wins with both new and existing customers. We largely completed the integration of our <unk> acquisition, and we withstood an unprecedented cyber attack on our business.

Bandwidth delivered another quarter of solid financial results exceeding our revenue guidance, including 46% C pass revenue year over year growth for both the mountain tops and valleys that we visited during the quarter I was inspired by this team's unwavering commitment to our mission and our customers I have never been more proud.

Good of our brave and brilliant team or more thankful for gods faithfulness.

I want to start by talking about the Ddos attack at the end of September attacks like ours have been aimed at a number of companies in our global Voip ecosystem.

We were prepared and we weathered the storm well our infrastructure includes specific Ddos mitigation systems that is routinely audited and responding to the attacks in real time, we augmented our ddos defenses to keep pace with the attackers evolving methods. Some customers saw periodic service disruptions than we were.

Brett any impact to their business at the same time, we are proud of our team and our partners and the resilience of our platform and avoiding the crippling affects others have seen in similar attacks across the industry. In fact, the vast majority of our traffic continued to be delivered.

Second.

We serve our customers well and they supported us too.

We've been moved by our customers Trust, we count many of the world's largest and most sophisticated technology leaders as our customers and a number of them joined us in our situation room.

A true demonstration of our long standing partnerships, they stood shoulder to shoulder with us in this fight.

Nevertheless, a number of our customers did move services to other options. Our operations team worked around the clock to accommodate these choices consistent with our commitment to always do the next right thing for our customers. Many of those customers have already brought their business back I am confident that others are in the process.

<unk> is doing so in the coming days and weeks Daryl will give more details on the estimated financial impact of the Ddos attack.

Third we are now using our lessons learned to help our customers and partners protect themselves against similar attacks.

Our experience puts us at the forefront of understanding how to combat these threats against the Voip Echo system.

We did not pay a ransom and instead relied on innovative solutions and strategies to confront the threat head on.

To sum up we believe bandwidth is now stronger than ever and we plan to leverage what we've learned to help make the ecosystem safer for enterprise communications.

With that I want to highlight a few important milestones and wins in the past quarter.

We just celebrated the first anniversary of the close of our acquisition of box bone and I'm excited that the bulk of our international integration is complete.

Even as we continue to chart the course for our single Global platform. We are now fully serving our customers as one global band, we continue to make progress on a huge cross sell opportunities from the <unk> acquisition as we expand our long term customer relationships from domestic to global.

Our customers told us they wanted the bandwidth experience enterprise grade quality service and reliability around the world. They are showing us that they meant what they said.

I am very pleased to announce the latest example.

One of our largest and longest tenured customers signed a contract for global service in the third quarter.

This is a customer that was not previously working with box bone and now is going global with bandwidth in short. This is yet another growing relationship that was only made possible by the global reach achieved through the acquisition and it is a takeaway from multiple competing international IP network providers.

In the initial phase of the contract. This customer is testing voice services over our global network in select countries during the fourth quarter.

We expect services and coverage to expand throughout 2022.

Our team is humbled by this customer's desire to build with bandwidth to the ends of the Earth and we look forward to growing this foundational relationship at a global scale.

During the platform players and Internet Giants has always been a core strength of ours and this win demonstrates again, how compelling a truly global offering is to these customers.

We also see significant momentum building among global 2000 enterprises executing their digital transformations. The enterprise migration to the cloud is extremely complex and fraught with technical and regulatory challenges, we are nimble and quick and a world of sluggish entrenched legacy carriers.

Today I want to zero in on an area, where we are particularly winning in the enterprise category global contact centers.

Customer service agents are becoming critical to helping brands create a better customer experience in a post COVID-19 world.

But the contact centers in todays large global enterprises can be enormously complex there may be multiple locations with expensive on premise equipment, requiring top tier expertise to manage to connected all most enterprises have been relying on multiple carriers, each with different contracts uncertain redundancy and traffic limitations.

Then they have the need to retain critical call data to power a third party integrations, such as CRM voice authentication fraud detection, AI monitoring and other services essential to a better customer experience.

Bandwidth simplifies this challenge our network is cloud native so it can work seamlessly with our largest cloud contact center platforms for global interoperability scalability and security.

The biggest global contact center players are recognizing our new global capability and potential I'll share one enterprise customer told US recently after successfully rebuilding their entire contact center architecture on the bandwidth platform quote we built a better architecture, a smarter architecture and we've saved a ton of money.

This migration has been a huge success.

One of the contact center wins, we closed in Q3 as a global leader in electronic signature this customer chose bandwidth because with our expanded footprint, we could move their entire 15 country Global contact center stack to the cloud not only were we able to eliminate the complexity of their existing on premise equipment, but we consolidated there.

Nine legacy carrier agreements into one.

The project has propelled this customer forward into the efficiency and scalability of cloud based communications, our customer values bandwidth <unk> ability to integrate with nearly every major communications platform and enterprise needs from Ucas to see cast which opens the door to more efficiency and savings.

We're also continuing to win with U S. Only enterprises. This was the case for a new deal this past quarter with a $16 billion Fortune 200 managed care provider. This company is on the front lines of patient communication and their contact center is critical to managing customer engagement. They came to us and said no kidding that.

They wanted to take all of their legacy communications hardware throw it into a giant dumpster and light it on fire. It was that cumbersome and frustrating to manage they chose bandwidth because we were uniquely able to power their entire communications stack in the cloud both ucas and see Cas. In addition, our tools and automation enabled.

To manage their system without specialized telecom expertise, they can literally drag and drop using <unk> software to make real time number changes on the fly.

This customer joins a growing cohort in the health care space, who rely on bandwidth to power their cloud communications needs. In fact healthcare is one of the markets, where we are seeing particularly strong momentum in both the large enterprise space and also with innovative app developers that are building a better patient experience and.

In closing I want to talk about our continued thought leadership in an increasingly complex regulatory landscape, we take seriously our obligation to help our customers navigate issues like fraud, and robo, calling which impact their businesses and their customers.

Bandwidth has been at the forefront of implementing new security standards like stir shaken, which went into effect on June 30 in the United States to reduce fraudulent calling activity.

We will continue to aim to use our seat at the table with a leading standards and rulemaking bodies to provide our customers with critical support and over the horizon insights on important regulatory developments.

We are also providing our customers with innovative and unique solutions to enable them to meet the evolving nine-one-one compliance requirements bandwidth dynamic location routing solution can deliver enhanced location information to 901 dispatchers and help to ensure first responders are sent to the right building floor and room.

Our solutions are among the only three that have been certified for use with Microsoft teams direct routing and Repowering zoom phone as well emergency services continued to be a growing and important component of our suite of service offerings often it serves as a unique door opener customers, who come to us for help with emergency services.

And about the broader power of the bandwidth platform driving new cross sell opportunities with that it is my pleasure again to welcome Daryl Raiford, who is joining us for his first earnings call as our new Chief Financial Officer. He has been a great addition to our team, bringing strong leadership and new perspective, I'll now turn.

It over to Daryl to walk through our financial results and outlook.

Thank you David and good afternoon, everyone I'm thrilled to have joined such a remarkable company at a pivotal point in its history as we lead enterprise communications into the cloud on a global scale of.

I have enjoyed meeting some of you and look forward to interacting with more of you in the coming months.

And thanks to my team for helping me get a running start.

So let's dive into some of the highlights of Q3.

As Sarah said in her introduction, we've posted an earnings presentation detailing our third quarter and historical financial performance on the Investor Relations section of our website.

I'll now take you through the third quarter financial results and outlook for the fourth quarter.

We provide guidance for <unk> revenue total revenue and non-GAAP EPS.

For the third quarter each of these measures exceeded their corresponding guidance ranges.

On a consolidated basis, our third quarter results are as follows.

Third quarter revenue was $131 million.

Up 54% year over year.

Total revenue on our U S platforms, which excludes our international box bone integrated platform increased 22%.

Non-GAAP gross margins came in at 49%.

Unchanged from last year's quarter.

Non-GAAP net income was $6 5 million.

Stronger than expected due to higher revenue improved mix and operating expense favorability.

And non-GAAP EPS was <unk> 25.

An increase of <unk> <unk> year over year.

Turning to our segments <unk> revenue was $107 million.

Up 46% year over year.

This solid result is inclusive of the negative impact of approximately three quarter million dollars.

From the Ddos attack.

In line with our earlier announcement, describing the revenue reduction from loss transaction volume and customer credits in the third quarter.

Our third quarter <unk> revenue outperformance was driven by broad based demand across our products and geographies.

Within the <unk> segment in terms of U S and international revenue contribution.

<unk> revenue growth on our U S platforms grew 20% when normalized for last year's Covid and political messaging benefits.

As a reminder, in the third quarter of last year.

Our U S platform benefited from $6 million of Covid related and political messaging tailwind.

Our international platform operations contributed approximately $26 million to see pass revenue in the third quarter.

Bandwidth see pads gross margins continued to be strong setting.

Setting another record margin at 54%.

Up four percentage points from last year's quarter enhanced by improved operating leverage and inclusion of higher margin International business.

Turning to our other segments. Other revenue contributed the remaining $23 million of total revenue, which is up 112% from the same period a year ago.

The growth in other revenue was primarily driven by carriers implementing additional ADP messaging surcharges as well as continued growth of our messaging volumes, which drive more surcharges ADP messaging surcharges in the quarter totaled $14 million.

Turning to our operating metrics, our dollar based net retention rate, which excludes the box bone acquisition until we lap the acquisition closed was 108% in the period.

Our normalized retention rate was 113% when taking into account. The previously described COVID-19 and political messaging benefits from last year.

We ended the third quarter with 3173 active see pads customers.

Representing a net addition of 122 customer accounts in the corner in terms of our balance sheet, our cash and investments balance at the end of September was $331 million.

An increase over June 2021 in September 2020 of $12 million and $30 million respectively.

Adjusted EBITDA was $14 2 million in the third quarter or 11% of total revenue.

Now turning to our updated financial outlook for the full year, we've updated our <unk> revenue and total revenue estimates.

As you already know in October we continued to experience the lingering financial effects of the Ddos attack through lower usage demand from certain customers who shifted their traffic.

While we are encouraged by many customers that have already returned their usage traffic to our network.

Along with other customers Express continues to do so.

The result is that we expect lower usage in the fourth quarter than we had previously thought.

Thus our updated outlook for full year <unk> revenue is now between $407 million and $412 million drill.

Driven by our earlier announced 9 million to $12 million estimate of the full year impact from lower usage and customer credit as a result of the ddos attacks.

We estimate full year total revenue outlook to be between $480 million.

$485 million.

We further estimate our non-GAAP net income to be slightly higher than our previous August outlook.

And accordingly expect non-GAAP EPS between <unk> 74, and.

78.

Our higher gross margins.

And operating leverage experienced in the first nine months of 2021 gives us confidence to preserve our profitability outlook notwithstanding the ddos impact revenue.

Which is a testament to our business model of sustained profitable growth.

Going forward from here.

Despite the challenges caused by the Ddos attack, we believe our fundamental growth drivers remain unchanged.

Enterprises continue to value our unique combination of software platform and global network.

Many of our largest customers have a greater appreciation for our resiliency and commitment to serving their mission critical communication needs.

We remain well positioned to serve a large and growing global communications market that is benefiting from transformational secular trends.

And we believe we are uniquely positioned to help enterprise customers navigate complexity.

Now with that I'll turn it back to the operator for questions.

Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request.

Youre using a speakerphone please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

We will pause for a moment as callers join the queue.

The first question is from Bhavan Suri from William Blair. Please go ahead.

Okay.

Hi, everybody, it's Matt Stotler on for <unk>. Thank you for taking the questions.

Just a couple here related to the Ddos attacks I will start with one and then have a quick follow up just in terms of the remediation obviously helped out your customers.

Moving traffic since where they needed to get you guys. Some will come back I guess.

When you look at that $9 million to $12 million hit that you talk about from usage and customer credits any color you can provide on how much of that is usage versus kind of customer credits and then as you think about the tail from here and the visibility you have into cut.

Customers do intend to come back and what have you can you just speak to expectations beyond Q4 as to what we should expect when we're thinking about.

On a year over year comps.

Beyond just the fourth quarter.

Hey, Matt This is David Thanks, so much for your question. The vast majority of the financial impact was utilization or usage not credits to answer. The first part of your question, we expect far less of an impact in Q1.

Then we have seen in Q4 and are predicting for Q4. It's early obviously, we have a lot of Q4 still left ahead of us and we don't want to get ahead of ourselves in terms of providing guidance for 'twenty two but Q1, we expect will have far less of an impact in Q4.

Okay. That's helpful. And then maybe just one follow up.

Obviously.

Youre still able to close several large deals when you talked about a number of pretty impressive ones here.

And even in this environment, where youre dealing with Ddos attacks.

How is this changing your conversations with customers and what was just kind of dig into.

What's changed kind of their reaction, both obviously with new customers Youre, expanding with and as you are continuing to sell to and land new customers. How is this factoring into those conversations.

Yes, it's pretty remarkable Matt those conversations unexpectedly have become extremely positive regarding bandwidth being the most resilient and best place to go. If you are concerned about a ddos attack and the reason is we have successfully.

Fought back against the latest methods in the Voip space that before now we're unheralded unprecedented.

We essentially.

And so the conversations with customers have gone something like this there is no better place on the planet to go than bandwidth right now.

Regarding ddos attacks worldwide and we're extremely proud of that it comes with scars, but we bear those scars proudly.

Got it thanks again.

The next question is from Mark Murphy from Jpmorgan. Please go ahead.

Yes. Thank you. Thank you, David just kind of continuing along that thread.

Wondering if you could clarify you said you were prepared for the Ddos attacks and you've been regularly audited.

Those preparations that you have the service was impacted you have revenue impact what was it that was unique about this attack that it kind of.

Sort of overcame the full capability to prevent.

Prevent any impact.

Hey, Mark if the attack had occurred in July it would've set a world record for Ddos volumes of any kind.

This attack was unique and not only was it massive.

The size it was specifically on a dimension using UDP packets and fragmented GDP packets, which had never been seen before we're only seeing very recently in our space with voice, while you need signaling and media and UTP fragrance, we can't just block wholesale in the way that you can with an http attack. So we.

A very good robust.

Solution for attacks that had been seen in the past week.

We rallied during this attack and used vendors like cloud flare and taught them how to address this issue for the first time and collaborated with them in a way that they then we're able to go to the whole industry and.

Sure. So it was an unprecedented size and in a very unique way.

We experienced this attack for what was really the first time.

Confident the way that we've adjusted our defenses that we can withstand this and other <unk>.

Similar tax going forward.

Okay.

What percentage of your overall traffic do you think will move to other options in the wake of that attack and I'm wondering how much has reached.

How much is returns.

How much of it if any do you think could be permanently lost.

So we had some of our most important customers that we said you need to move quickly. We're experiencing this and we were around the clock 24, seven middle of the night all hours all hands on deck to.

Have our customers evacuate during the early stages and we're delighted that those customers watched us communicate well with them watched us restore service so quickly and most of them returned.

Okay.

One other question for you just at a high level, how is <unk> trending into reopening of the economy and with people.

Starting to return to the office starting to travel a bit more versus what you.

Might have expected six or nine months ago.

Yes.

We're global now so it does depend on the theater that you are talking about and things do change we've got some sectors of our customer base like hospitality and ride share that benefit from the return and indeed, even the travel industry customers that we have so those numbers are obviously, improving and we're excited about reopening of quarters.

And then we've got a cross section of all of our Ucas D cash and conferencing customers.

So it's a blend in terms of the current dynamic with usage, but overall, we're excited about the re openings that are occurring that benefit our enterprise customers everywhere.

Thank you very much.

Thanks Mark.

The next question is from will power from Baird. Please go ahead.

Hey, this is Charlie on for will thanks for taking the question.

Just wanted to ask one about the C.

The ddos attack and pull.

Pulling off of that last question, so for those customers, especially the large ones that have not brought their traffic back to bandwidth.

Is there any sort of common theme or Tom.

Common thread between them in terms of the main reasons why they say why they haven't come back to bandwidth.

Large customers move slower.

It's that simple I think administratively you've got.

Different procedural steps to take for large customers.

<unk>.

Those that have.

Continue to believe in us are moving back at the speed that's appropriate for their operating team I think it's that simple.

Okay got it and then I also wanted to ask about box, but I think the C pass through revenue from box on $26 million in the quarter was about flat sequentially is there anything specific to call out there. It sounds like things are going pretty well from the customer anecdotes, but I'm just wondering if there's anything to call out there.

Okay.

Youre right Charlie this is Daryl.

Things have gone pretty well from the customer side.

The $26 million is essentially flat too.

The second quarter, it's a bit of a half glass full we were gratified in the second quarter that we were able to accelerate some timing and bring customers on early.

Versus in terms of scaling and of course, we operate a global platform. So have an exact predictability.

Predictability across all of our through all of our 60 countries and where the usage is going to be and the like.

Is not.

Not 100% perfect, but in the second quarter and in the third quarter, our aggregate platform beat our expectations. So we're happy about that.

Got it alright, thanks, guys.

Okay.

The next question is from meta Marshall from Morgan Stanley. Please go ahead.

Hi, This is <unk> for me to thank you for the question. So I. Appreciate that you guys are having a pretty positive conversations with customers sort of rerouting revenue back to your platform I guess, just if theres any more detail you can give on how long of a process. It is based on the customer size of bringing their rerouted revenue back to the platform and timing around that that'd be helpful.

And I have a quick follow up.

You bet crime. This is David I shared earlier this evening on one of the calls that we expect in Q1 of 'twenty two that the shortfall from the Ddos attack will be far less than what we're projecting for Q4, so thats very encouraging and reflects the pace of the return.

And I would hope that that pace accelerates, but that's what we're thinking at this moment in time as we continue to finish out Q4.

Okay got it that's helpful. And then just a quick follow up in terms of the cross sell opportunity between box phone and bandwidth I guess just has there been interest and has there been more interest one way or another.

Just any detail around that opportunity would be helpful. In terms of whether youre seeing it.

Accelerate one way or another thank you.

Thank you the cross sell opportunities that we've been most excited about and open in talking about our among the U S. Based large technology customers that we serve and their desire to go globally with bandwidth we have shared that we for example.

Closed a global leader in the electronic signature space, who are consolidating nine different providers across 15 countries because of our singular global footprint. That's an example of a strong technology leader that uses our combined U S and international platform.

We think we will see more of that.

Got it thank you.

The next question is from Steve Enders from Keybanc. Please go ahead.

Hi, guys. Thanks for taking my question. This is George on for Steve.

Two questions first one on gross margins are really nice quarter on quarter step up.

Can you give a sense or kind of unpacking I think you've mentioned international mix, both scale and if you could rank order the effects or should we expect that number to go.

And then second question on.

The linearity of customer adds also a fairly healthy metric I'm wondering if you saw any slowdown in October.

Tied to the Ddos attacks.

How do you see that trending thank you.

Hey, there. This is daryl thanks for the question in terms of unpacking the record 54% margin in Q3 for <unk>.

Revenue did exceed our expectations. So certainly revenue does help in that scale across our fixed cost base. We also.

Experienced just.

Improved.

Operating leverage, which is which is which means costs favorable costs as well as the mix you alluded to our international platform margins are higher than our U S margins and so we were able to improve through mix as well that's essentially how we've looked at it.

And.

In terms of in terms of customer adds.

We're pleased with the customer adds but really nothing to call out that would say, it's an outlier in terms of.

So sort of customer mix issue.

Great. Thank you again.

Okay.

The next question is from Tyler Radke of Citi. Please go ahead.

Sure.

Hey, good afternoon, Thanks for taking my question.

Wanted to just ask.

Excluding the Ddos attack, which understandably.

Theres a lot to talk about there, but just how did you see.

Seasonality in overall usage trends play out through the through the third quarter.

Obviously theres been a lot of.

Talking to the industry just around our summer.

Slowdown. So it was just kind of wondering to see what you saw on that front.

And just anything to call out in terms of the overall usage and seasonality trends that you've seen here.

Thus far in Q4.

Well clearly we did say the third quarter was impacted by the three quarter million dollars switches, which over those five days is a little less significant than the our estimate of the full year impact the.

Third quarter, the international platform on a normalized basis grew 20%, we're happy about that in terms of <unk> revenue.

That's right, where that's right pretty.

Pretty much where we'd like it to be and we normalized for the last years $6 million of political messaging and COVID-19, but that and.

In terms of 20% to 25% growth that seems kind of in our ZIP code. So.

We just feel like the market is.

Expanding at the pace, we'd estimate the digital transformation is underway and we think thats a kind of a long term.

Long term rate for US yes. Thanks, Darryl This is David I agree we did not see some.

Slowdown.

It was isolated to within a specific sector or something that was seasonal we were on track based on our understanding of how the year would go so we haven't seen that.

Great and if I could just ask you around the the customers that you did.

Help migrate to another platform.

I guess just.

Where did those.

Customers goes is it kind of the main components.

<unk>.

And I'm curious as you look to restore that traffic.

Have you had to make any more kind of aggressive price concessions I would imagine that whoever kind of benefited from that traffic would do a lot of things to hold onto those customers, but just curious.

Some of the dynamics as you try to get back to that traffic.

You bet. So when we moved some of our largest customers they move too.

Depending upon the nature of their service they moved two large incumbents as quickly as they were able to so Verizon AT&T lumen.

Others that they might move to overnight when they came back it was under the terms of our service that they left with.

So there is not a discount there.

There is not a discount season to return it is.

All clear you have trusted us for years welcome back.

Great Super helpful. Thank you.

You bet.

The next question is from Andrew King from Colliers Securities. Please go ahead.

Hey, there thanks for taking my question.

Moving on from the Ddos attacks.

So on that one.

Well.

<unk> been opportunities specifically for the second quarter as we.

The next.

The Gray bar Gerry law.

Q1, how much of the fleet.

Back from that.

<unk> primary competition.

Is it more.

In house developed or is there other player out there.

A lot.

Thanks for calling in from the upper deck or a stadium somewhere.

But in all seriousness I do love the question about the 911 special service that we do provide for example at Microsoft teams were one of only three certified providers and we do dynamic location routing that satisfies the latest requirements for both fixed nomadic lines those are huge door openers for Tom.

<unk> within the large enterprise and we're excited about the season that we're in where emergency service is featuring so importantly in the minds of decision makers that are going through a digital transformation move to the cloud and Microsoft is just one example, we have other products with other providers, we're proud of where the 911 service is a leading cause.

<unk> piece.

Great. Thanks.

The next question is from Ryan Koontz from Needham and company. Please go ahead.

Hi, Thanks for the question with the drill.

Drill down on your commentary around the contact center market.

How you are tapping into that.

Different go to market motion you are finding traction with or are these strictly.

Strategic relationships with these partners that they are referencing you straight in without much effort on the sales side.

I have a follow up.

What can you just a good question, but I want to make sure I understand it the two differences that youre asking about in our sales motion I thought I understood. The first part, but then your comment about a strategic partner I didn't follow up.

Well just as you partner with these contact center players are they referencing you win or is it more of a proactive effort to penetrate alright their incumbent base.

Their installed base.

Got it. Thank you. So we have an aggressive active outbound enterprise sales motion, where we are focused on the C suite decision maker of the SVP decision maker in the contact Center leader and certainly there is word of mouth in the industry. When you solve a problem for a financial you might get a reference into another large.

<unk> financial but it is an individual effort. We don't have a channel we've got a dynamic group of enterprise salespeople that are making great inroads in this quarter, we announced.

A great win among the Fortune 200 managed care provider $16 billion company and that was a direct win into the senior decision maker and.

It's an example of that sales motion that we have but the contact center is filled with enormous complexity theyre trying to take call flows and route calls for authentication for using AI, whether it's.

To prevent fraud or for sentiment analysis, there are lots of very creative intelligent things happening in the contact center and because we are a network and platform owner, we're able to have both the signaling an immediate a route those calls very very flexibly literally a contact center executive can drag and drop call flows for different reasons to different places in real time.

Compare that to what you can get from a large domestic or international incumbent and it's night and day. So when you.

Think about all the emerging exciting technological change in the contact center, you've got to have a flexible partner like bandwidth in order to have the actual audio transit all of these solution providers elegantly and so that merit based value prop is resonating oddly in the contact center.

Super interesting, thanks, and a quick follow up David you mentioned the box bone integration, mostly complete can you give us any color there in terms of.

This is mostly customer systems head count I mean, any other color you can give us there on the box bone would be great.

You bet.

The customers that we serve.

Are primarily focused on having one point of contact one resolution path for issues. They are okay. If they have more than one bill right now we've achieved integration with all of the personnel on both sides of the companies, which is vital for our large customers. So single point of contact single individual is the first 0.2nd point is all of the songs.

Compliance all of the controls all of the ERP all that hard heavy lifting work is largely behind us where we're headed next as a single pane of glass experience, where a customer has a universal journey through the bandwidth.

Service during their lifetime that will take some longer time, but the team has done an extraordinary job during a time when we could not be together physically for the vast majority to do the vast majority of the integration.

Okay. That's great as we think about the opex impact of that going forward.

It does it stand out much at all in terms of what remains or is it kind of just some.

Small stuff.

It's going to be this year, we clearly experienced integration cost that was embedded in our in our opex cost structure going forward to next year, we would expect that to be much less and become more business as usual continuous improvement as we as we innovate and serve our customers.

That's really great. Thanks, Pat.

The next question is from James Fish from Piper Sandler. Please go ahead.

Hey, guys. This is <unk> on for Jim Thanks for taking our question.

Maybe just one more time on the dead horse.

Attack, but is the majority of the cyber security investment now behind us given the rapid response in quarter.

Or should we expect some additional investments as we move into Q4 beyond just stay ahead of these tax thank you.

Yeah. Thanks, Jim This is Gerald again, the bulk of it the bulk of it is behind us.

Incremental investment was less than a $1 billion.

In terms of what we've experienced and theres going to be some maintenance.

Is software. This is a service this is some maintenance and things like that that would go on but it won't be it won't be noticeable in our cost structure.

Yes.

Got it Super helpful. Thank you.

The next question is from Pat Walraven from JMP Securities. Please go ahead.

Oh, great. Thank you.

Congratulations for getting it all under control.

I suspect Dave that everyone. On this call has had the experience now when they navigate to bandwidth site. There is a little top up from cloud flare that says please hold on a second while we check your browser.

And then the little dots go buy in and then you get to your website. So you didn't have that before.

You do know did cloud player not work for some reason.

For your kind of a network before and it does now what's going on there.

So.

When they get tax started Pat we had a.

Network based best of breed.

Awesome solution by a great vendor.

In the industry and it worked well for the first 48 hours of the running gun battle.

After that there was a different dimension to the attack.

On a different protocol and different parts different origins and youre talking about attacks originating in a different nation state transiting through a partner that doesn't know any better and then hitting.

All your IP ranges with different flavors of traffic in different ways and so we migrated from the original defense that we have stood up that was working and used cloud flare thereafter, they were superlative and working with us rallying with US we shared in real time aspects of the vector of attack that.

Changing dimension and they would adjust with us their solution in real time, and it was a combined effort and one that should be celebrated in I think resulted in many others in the voice industry, probably been Kevin and cloud to our customers. It is a small price to pay right now as a prophylactic security to have that additional nominal step at the beginning of the user experience we're not.

We're not a consumer service so that brief interruption and we don't think detours prospects or those who know us from a user experience right now thats appropriate, but we will work that out of the user experience here shortly.

Great. Thank you and my follow up is just I noticed the same thing pop up on a completely different.

Vendors site. So is this something that you're sharing with.

Others in the industry, who might have a similar.

Our risk profile than you had before it.

Yes, we immediately reached out to our top competitors and shared everything we know we told them get ready, it's probably going to hit your next here's what we did here is how we did it here's the playbook and shared openly.

And in the vitality and the quality of our ecosystem is essential for enterprises around the world and so we wanted to protect it with those that we happen to compete with.

And did so openly right out of the gate.

Got it alright, thank you.

Thank you Pat.

This concludes the question and answer session as well as today's conference call. You may disconnect. Your lines at this time. Thank you for your participating and have a pleasant day.