Q2 2022 Bandwidth Inc Earnings Call

August 3, 2022

Okay.

Greetings and welcome to the bandwidth incorporated second quarter 2022 earnings conference call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press star one.

Followed by the four on your telephone.

If at any time during the conference you need to reach an operator, Please press star zero.

Mind you. This conference is being recorded today Wednesday August 3rd 2022, I would now like to turn the conference over to Sarah Wallace VP of Investor Relations. Please go ahead.

Thank you Greg good afternoon, and welcome to bandwidth second quarter 2022 earnings call today, we'll be discussing the results announced in our press release issued after the market close.

Press release and earnings presentation with historical financial highlights can be found on the Investor Relations page at investors <unk> 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 third quarter and full year of 2022.

We caution you not to put undue reliance on these forward looking statements as they may involve risks and uncertainties that may cause actual results to vary materially from any future results or outcomes expressed or implied by the forward looking statements.

Any forward looking statements made on this call and in the presentation slides reflect our analysis as of today and we have no plans or obligation to update them.

For a discussion of material risks and other important factors that could affect our actual results. Please refer to those contained in our latest 10-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 SEC's 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 <unk> bandwidth dot com.

With that let me turn the call over to David.

Okay.

Thank you Sarah and thanks to each of you for joining us.

We're pleased to share that we exceeded expectations on the top and bottom lines for the second quarter with revenue up 13% over last year to $136 million and a non-GAAP net loss are ahead of our guidance of $1 million.

Thank you to all our band mates for another terrific quarter and for your commitment to our customers and to each other.

And I, thank god for watching over us and for giving US our work to do together.

In a few moments I'll share details about the quarter and our strong momentum within the enterprise, but first I'd like to discuss the question looming front and center.

Al will bandwidth business perform during this economic downturn.

The current economic turbulence there is no such thing as business as usual and macroeconomic factors are likely to impact all of US. The only question is magnitude and the answer to that question is that for four key reasons bandwidth is well.

And to do what we said we will do through these uncertain times.

First well.

We power business critical communication for a diverse set of customers across many industries.

Contact centers telehealth hybrid work and emergency calling are just a few examples of how our customers rely on the bandwidth cloud for essential communication.

Early indicators prove that certain categories of.

Spend are more exposed in this season than others. For example, it seems marketing use cases are being impacted more than cloud computing.

By contrast, many of the connections bandwidth enables our mandatory rather than discretionary and history has shown that these are not just less susceptible to cost savings measures, but are actually essential to achieve them.

<unk>.

We believe that enterprises cost cutting efforts will actually lead them to embrace cloud communications solutions.

Businesses everywhere must now do more with less and we enable them to do just that.

We do not expect a sustained downturn, so holt large enterprises unrelenting March to the cloud and all the cost savings and the enhanced productivity that they find there.

So third bill.

Bandwidth position is strengthened by our large enterprise customer base, our enterprise product and our enterprise go to market focus.

Because of the large enterprises, we serve are well funded established businesses. We believe there is less likelihood that theyre ongoing digital transformations, all designed to drive efficiencies will be disrupted.

We enjoy a strong position because our revenue is not heavily concentrated among small and medium businesses, who are likely to be disproportionately impacted in a downturn.

Fourth and finally profitable growth is a first principle for this team.

Bandwidth was largely bootstrap until its IPO in 2017, and we have always been focused on profitability. This enduring commitment to operating bottom line discipline has always served us well our leaders are focused on cost management and effective.

Investment with prudent payback periods directing resources to initiatives that are most certain to reinforce our success. So in summary, we are confident in the profitable of course and speed that we've charted through these troubled times.

Because we provide mission critical cloud communications that reduce costs for large enterprises now I'd like to turn to our Q2 results, which show that our team is executing well and delivering solid outcomes in spite of the isolated customer.

Headwinds we've previously discussed.

We're focused on growing with existing customers.

Winning new large enterprise customers and becoming the global Sea pass platform of choice for scaling digital engagement our wins this quarter demonstrates success on each of those fronts, our global network cloud native mentality and consultative support team established our mission.

Critical role powering all the Gartner magic quadrant leaders in Ucas, and see cash and meeting solutions and these same capabilities are now creating exciting new opportunities within global 2000 enterprises.

Last quarter, we shared news of our new AI integration with 10 dropped a leading voice biometric authentication and anti fraud solutions.

I'm pleased to share some examples of how that unique integration is helping us win new business, both with existing and with new customers.

We've told you before about a top 10 bank one of the largest issuers of visa and Mastercard credit cards in the U S who chose bandwidth for a new cloud contact center Buildout to support its vast credit card services operation.

With the release of our pin drop AI integration, we secured traffic from an additional business unit in their contact center portfolio. It is another terrific example of how we're expanding the bandwidth platform ecosystem to add more value and more capabilities for car.

Complex contact center migrations.

I'd also like to highlight another bring your own carrier contact center win this time with five nine.

The customer who provides consolidated technology support for state credit Union selected five nine to modernize its contact center.

But they were struggling to integrate the incumbent provider into both five nine and pin drop.

Enter bandwidth and our seamless integrations with both of these partners.

Our platform ecosystem and operational excellence solved what we call the telecom Flexitarian often found in such transformations and dramatically accelerated this customer's journey to the cloud.

Last quarter. We also shared examples of the strong momentum, we're seeing with our new two wet for Genesis partnership.

That momentum is growing with new customers in diverse businesses across retail health care Fortune 500, global manufacturing and call Center outsourcing.

Do what for Genesis allows enterprises to capture the power and feature set of Genesys cloud, while maintaining the flexibility the service and the savings that come from a direct global relationship with bandwidth.

So one of these new wins is the largest duet for Genesys opportunity that we've signed outside of the U S to date.

This customer is one of the fastest growing contact center and customer experience providers in the entire Asia Pacific region with more than 18000 employees across five countries.

As they continue to expand they were facing challenges maintaining five different carrier relationships each with its own contract terms and interconnections.

Solid eating with bandwidth this customer not only solved for complexity, but also benefited from upgraded coal quality reliability and speed of deployment.

So despite the magnitude of their operation this customer was up and running faster than they expected. Thanks to the permanent test environment that bandwidth and genesys maintain as an element of our ongoing partnership.

With big plans to grow outside their home region, including into Europe , and North America. This customer knows that bandwidth can meet even their most ambitious future needs.

Our contacts there summed it up best when they said quote bandwidth is accomplished in weeks what it took other vendors months to do.

These examples show how our duet strategy positions us to unlock the massive opportunity represented by enterprise contact center transformations. Each of these large enterprises recognize bandwidth as the best partner for their journey to the cloud we differentiate by.

Combining a collaborative co creation mentality.

With our enterprise grade C pass platform and our global network.

And that really allows us to power a complex business critical contact center solutions out of the box.

To move at lightning speed compared to legacy carriers, and really to deliver access to the apps and the geographic regions that enterprises need to build a best of breed total customer experience.

Another strategic priority is for bandwidth to be the global Sea pass platform of choice for scaling enterprise digital engagement and today, we are announcing another major new customer win this past quarter.

If you are one of the millions of consumers, who interact with brands over text message to get coupons or shopping assistance than you've most likely use this company. They rapidly become one of the largest and fastest growing players in text messaging commerce with a customer base of over 5000 top.

Retail brands that send billions of text messages annually a.

Our new customers incumbent provider could not adequately support their hyper growth. So they came to bandwidth for our ability to reliably deliver at scale for our ease of use of our API is and for the customer experience that has absolutely wowed them since they on boarded their goal.

Is to achieve no less than 20% of their customers' total online revenue through conversational texting and bandwidth simplifies the complex underlying requirements that are essential to reliable scalable message delivery when they told us quote nobody could've gotten this done but bandwidth it was.

A huge validation of our enterprise grade messaging capabilities and our team.

And when we say we're enterprise grade, it's because we have a long history of serving the largest and most demanding technology companies in the world.

These customers hold us to the highest standards of information security and data privacy in keeping with this commitment we are announcing a significant accomplishment by our team the extension of our ISO 27001 certification from our North American network to our entire global network.

So 27001 is the gold standard for information security management and its highly valued by our customers. Additionally, bandwidth has now completely implemented stir shaken throughout 100% of our IP network congratulations to all our band mates who's.

Hard work allows us to meet our customers exacting standards.

I'll now turn it over to Daryl to walk through the details of our financial results and outlook for the second half of the year Darryl.

Thank you David and good afternoon, everyone.

As a reminder, details related to our second quarter performance are provided in an earnings presentation that may be accessed on our investor Relations website.

Now turning to our second quarter results, we reported revenue and non-GAAP EPS, both coming in above their correspondent got and their corresponding guidance ranges.

As David said, we are always focused on growing profitably and the uncertain macroeconomic outlook has heightened that focus.

Second quarter revenue was $136 million up 13% from last year.

This result included $21 million of pass through messaging surcharges compared to $6 million in the prior year quarter.

If we exclude the contribution from surcharges are revenue grew 1% year over year.

There were underlying cross currents driving that result.

First we saw 14 points of growth across our broad base of customers.

This 14 points was driven by strong contributions from both usage based and monthly recurring charges for voice API.

Phone numbers and emergency services and by continued demand for messaging, which grew 25% year over year.

As David said, we serve a diverse set of enterprise customers across many verticals and business critical use cases.

And we continue to expect this usage to be durable.

This growth was offset by 13 points from the previously discussed headwinds those being lower usage revenue from the cohort of 40 Ddos impacted customers.

The two large customer dynamics, we referenced at the start of the year and the absence of revenue from legacy businesses that we divested earlier this year.

These revenue headwinds were fully in line with our previously communicated expectations.

More than offsetting those we're very encouraged with the broad based customer growth in our business durability achieved within the current uncertain macroeconomic environment.

Our non-GAAP gross margin was 53% for the second quarter up 200 basis points from the prior year's quarter, driven by a richer mix of higher margin products and continuing efficiencies from scale.

EBITDA for the second quarter was $5 million.

non-GAAP net loss was $1 million and non-GAAP EPS was a loss of <unk>.

Both measures exceeding our guidance.

Combined with our over achievement in the first quarter of this year. We're pleased to have reported non-GAAP earnings per share of nonsense for the first half of 2022.

In terms of our operating metrics in the second quarter, our net retention rate was 112%.

Active customer count was 3362, which is 10 fewer than first quarter.

We added new customers at a higher rate than the first quarter, but these additions were offset by an uptick in non regrettable churn amongst our smallest customers the majority of which spend less than $5000 annually.

The trimming of the smallest customers had no material impact on our revenue as we remain focused on attracting and serving larger enterprises. In fact, our average annual revenue per customer increased from last quarter to $161000.

Yes.

Now turning to our financial outlook for the remainder of 2022.

While we have now over achieved expectations in the first two quarters.

We are maintaining our full year 2022 revenue and profitability guidance.

We believe it is prudent and cautious to do so in light of the uncertain macroeconomic conditions.

In this context, we spoken to our customers we've evaluated our pipeline and we're confident in our operating plan.

In contrast, others our business does not focus on small long tail developers with on again off again trials and usage.

The bulk of our business is not directed towards discretionary advertising spend.

Instead, we believe our business providing mission critical cloud communications represents durable demand as we power Global mission critical cloud communication services for the Internet Giants the entire Gartner magic quadrant in <unk>, <unk> and meeting solutions and.

And serve the large global enterprise market for both their customer facing and internal communications needs.

With a long held balance of growing their business profitably.

Accordingly, we continue to expect full year revenue to be in the range of 551 million to $557 million and non-GAAP earnings per share to be in the range of 10 to.

2014.

Assuming approximately $31 2 million weighted average diluted shares outstanding.

In summary, our financial and operating performance in the first half of this year reflects the growing momentum of our strategic focus on enterprise customers.

While navigating both an uncertain macro environment and isolated customer headwinds.

Our outlook for the second half of the year represents an achievable operating plan that contributes to an improved profitability profile.

The solutions, we provide are mission critical for the enterprise and our business has proven to be resilient in prior economic downturns.

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

Thank you.

If you would like to register for a question. Please press. The one followed by the four on your telephone keypad, you will hear three tone prompt to acknowledge or request for.

If your question has been answered and you would like to withdraw your registration. Please press the one followed by the three one.

One moment please for the first question.

And our first question comes from the line of Ryan Macwilliams with Barclays. Please proceed with your.

Hey, guys. Thanks for taking the question Daryl. Thank you for detail on the moving pieces between voice and SMS growth in some of the onetime items like divestiture and FX headwinds.

Just kind of in that same line of questioning on the FX side, what was the impact to revenues in the quarter and for the full year Guide and then David many any update on the effect of Ddos traffic would be helpful too. Thanks.

In the quarter and the quarters, just over $1 million of of revenue dampening in our full year, assuming the current rate.

Moves forward in our guide, we're expecting something just a little less than $4 million.

And in regard to Ddos, Ryan we continue to bracket accurately the impact in Q1 Q2 and throughout the remainder of the year and that issue has been contained.

Great.

And then just on the spread between the amount of messaging revenues and the amount of pass through surcharges. It looks like that spread is increasing and it looks like the surcharges are growing faster sequentially.

Is there anything to call out there like as more of your traffic now attached to fees with the carriers or any changes in pricing per SMS messaging. Thanks.

We did have an increase in some carrier surcharges in the month of March that applied throughout the quarter. So you'll see new surcharges for the first time from some of the carriers, which would explain the divergence.

Perfect. Thanks for the color I appreciate that.

Thank you Ryan.

And the next question comes from the line of will power with Baird. Please proceed with your question.

Oh, great. Thanks, Yeah, I guess, a couple of questions maybe just to start on some of the macro comments I mean, it feels like you feel good about your position had been resilient, thus far but.

Just to just to clarify I Wonder if you know as you move through the quarter or any change in linearity that you could speak to slower sales cycles, perhaps some June exiting the quarter or any reduced usage across any of your customers just trying to understand if you've seen any macro impacts yet, whereas if the <unk>.

Guidance for the year, it's just.

Sure really anticipating you might see something on the margin.

Hey will this is David I'll begin by just highlighting that the.

Really non regrettable churn in the small customer segment also is consistent with some usage among smaller customers, but by and large maintained that we are going to execute the way. We thought we did throughout the balance of the year.

And don't see significant changes in pipeline and the large customers that we serve.

That said, we are maintaining guidance out of an abundance of caution for the rest of the year, but as to the actual characteristics of the customer base they remain sound.

Those you're right, whether it's Microsoft zoom.

Bringing central dialed pad on and on.

What are the trends look like there in terms of traffic pricing overall growth.

So certainly you see in the Ucas space some share transfer across different platforms, whether it's teams related or the emergence of zooms.

Phone service, but we support all of the Gartner Magic quadrant providers in Ucas, and so those share transfers or conquests across platforms.

Usually nets out for us being a provider for all of them.

Got you Okay. Thank you al.

Thank you.

Yes.

And the next question is from the line of James Fish with Piper Sandler. Please proceed with your question.

Hey, guys. Thanks for the questions. What are you guys seeing on pricing in the space between <unk>.

Voice and messaging as it did seem like messaging outbound pricing I think you guys changed around at least on a year to year basis.

For the outbound piece.

Overall, Hey, Jim This is Daryl overall pricing in the second quarter had a favorable impact on us it wasn't as much from.

Per unit price increases as much as it was driven by a richer mix of higher priced products like messaging and toll free.

Growing disproportionately with that said Youre right. If you looked at our pricing grid. There were some for new customers. There were some modest price increases, but that didn't really have much of effect on the quarter.

Okay, and then if I could follow up on that.

The net new customer additions here is there any way to think about how much work quote non regret Ron regrettable customers that churned off really just trying to understand what the normalized number here for net additions as you know.

We obviously are used to seeing bandwidth grow the installed base.

But that was again just sub 100.

New gross additions just sub 100.

Churning offset that and lowered it by 10 overall, we did note that our.

The average revenue per customer did improve to $161000 and use that was a a outcome of just disproportionately.

Turning the lowest the smallest dark blue customers and some of Thats by design on the lower end of our customer base. As these are not efficient customers to serve and support versus acquire on a cost basis, we call that architected in terms of the longer end of our customer tail and I'd also just highlight that when it comes to the new.

New customer adds Theres really a power law that applies and you can have a very small number of our new customers driving the preponderance of the growth from that cohort of customers over their lifetimes. So it's not a terrific metric to look at to index accurately for our growth because theres such large contribution inevitably from a small.

More larger set of customers within that.

That's helpful. Thanks, David Thanks, Sarah.

Thank you.

Okay.

And the next question comes from the line of Ryan <unk> with Needham. Please proceed with your question.

Thanks for the question you guys have been great about kind of transparency around election impacts.

Wondering if you could characterize for us within your second half guide how much of a tailwind from election, you might anticipate in second half that's not recurring thank you.

Within messaging civic engagement is a term that captures a broad set of use cases that are much more than just seasonal political elections and the recent Supreme Court decision cycle really illustrated that for US we are at a.

And increasing active civic engagement.

Di.

Dialog across the country and so we haven't called out specifically what in the second half of the year will accrue to our messaging contribution to revenue from specific campaigns or elections, but civic engagement broadly, whether it's interest groups or.

All kinds of civic minded endeavors that are going on has become something way bigger than just campaigns.

That's fair David.

And on the comments around.

Share shifts toward teams, which we're all hearing about as a real land slide out there.

Can you characterize your attach rate to teams it sounds like it's pretty consistent with the rest of the industry as opposed to something where you feel like you have an outsized share in the in the teams ecosystem.

What I've shared in the past Ryan is that we are Microsoft's primary partner when the phone capability is activated within a team's seat and we have additional really tight integrations with Microsoft product in their enterprise offers but when you see Microsoft team with.

Phone service enabled you can assume that within that attach rate. We enjoyed the preponderance of the revenue from the voice part of that <unk> does that help.

Alright, Thank you very much.

Thank you Ron.

And as a reminder to register for a question press. The one followed by the four on your telephone keypad right now.

And the next question comes from the line of Matt Stotler with William Blair. Please proceed with your question.

Hey, there and thanks for taking the questions.

I think the first one here just on the on the partner ecosystem. I mean, you mentioned a number of integrations duet.

Genesys and integration with Ping drop.

I guess a couple of months ago now you also announced a partnership with all of the Monza. So clearly an effort to kind of expand the.

The number and the character of the relationships you have in your partner ecosystem, well, if we get an update on I guess your efforts and opportunities that you see here and continue to broaden the ecosystem as well as how meaningful that could be the business over time.

Yep.

So we haven't announced any specific channel.

Program, yet and you heard me in the past talk about how we are direct in our go to market motion for enterprise, but with the addition of.

Senior leadership from Anthony Bartolo, and Sandy price or we have an opportunity to bring to bear and our go to market for large enterprise a wealth of experience and knowledge and success with various designed partner opportunities and so you'll probably hear us talk about that some more later this year.

That's super helpful. Thank you and then.

Just one more on the on the international side, we'd love to get I guess, an update there now that box bone.

<unk> fully integrated.

Is that ramp going in terms of cross sell opportunities and then kind of expected contribution in terms of revenue and bookings in that front.

One of the custom.

Customer wins that we announced for the quarter was three.

Thrilling because it covers the broader Asia Pacific region, and illustrates I think beautifully the power of the Weizmann bandwidth combination and the underlying footprint then it opens up for our.

Our platform and our ecosystem and this was a massive.

International contact center that we talked about that has you.

They have 18000 employees and they were working with five different global carriers and they have.

Consolidated that.

Lately to come with us and so that I think is just a powerful illustration of the combination.

There are more opportunities like that but you can't do a deal like that unless you've got the back office squared away and you have the teams unified and working well together and so we're really happy about the progress and I think that there will be more like that in the future.

Great. Thanks again.

And the next question comes from the line of.

Patrick Wall Ravens with JMP Securities. Please proceed with your question.

Awesome. Thank you.

So Gerald my model your.

Q3 guidance combined with the annual guidance implies something like 8% growth in Q3, and then like 16 in Q4.

It was a pretty good ramp there do you mind, just reminding us why.

We do expect we do expect a higher messaging in the second half of the year.

And in particular in the fourth quarter. So there is some there is some of that as well.

Yeah.

And a much easier comp right.

And how much you will thank you for that Pat I appreciate that yeah. That's right. That's a big point I am trying to find there is a much needed have reasonable comps yeah.

It's been it seems like it's been quarter after quarter after quarter of difficult comps that is true by the time, we went in the fourth quarter of last year, we did experience.

The lower usage from the event that we had previously discussed and so that does provide us some some lifting under our wings in terms of a favorable comp for that quarter.

Okay, and then just one you're probably gonna.

Dance around a little bit and that's okay, but I mean generally what ive been doing in this recession is I've been taking companies implied Q4 guidance and I've been saying, okay, I'm going to use that.

For next year right for most companies that actually sort of.

Lowers the bar right, but is that a reasonable way to think about.

Bandwidth business.

Well, we do we have not.

Notwithstanding the fourth quarter of last year, we have enjoyed a history of sequential quarterly growth and so it's.

And reasonable to assume that but let me do.

David probably has some remarks to but let me also caveat that.

It's a long five months before we get to January and February would be talking about 2023. So I don't want to really read anything into my comments on that and Pat. This is David hope you're doing well.

I would just focus leaving this year.

For us.

Q2 2022 Bandwidth Inc Earnings Call

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