Bandwidth Inc.

fiscal quarter and full year of 2020 and to the extent provided future periods, statements regarding the expected timing of the closing of the proposed box phone transaction and the expected benefits of the proposed transaction, and our expectations around the impact of the COVID-19 pandemic on our business. Forward-looking statements may often be identified with words such as we expect, we anticipate, or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our 10-K filing on February 21, 2020, as updated by other SEC filings, all of which are available on the Investor Relations section of our website at bandwidth.com and on the SEC's website at sec.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, which is located on our website at investors.bandwidth.com. With that, let me turn the call over to David.

Thank you, Sarah. Welcome, everyone. With so much good news to share, I need to begin by thanking God for the strength to seize the opportunities he has provided us. Together, our team delivered record results in the quarter. We are raising our annual revenue guidance substantially, and we are acquiring VoxBone, expanding into over 60 countries worldwide. To my bandmates, thank you for your stamina and resilience. during this season when enterprise communication is more vital than ever before. To our soon-to-be bandmates at VoxBone, welcome aboard. We are ecstatic that you are joining us on our mission to develop and deliver the power to communicate now around the globe. During this quarter, enterprise demand for our software platform and network was higher than ever before. our CPaaS revenue increased a record 43% year over year. This accelerating growth was driven by a diverse cross-section of customers expanding their usage of all our services. Our unique combination of software platform, network, and enterprise customer support resonates with enterprises operating at scale. Our extraordinary growth was also driven by messaging, which grew 164% year over year. This increase was powered by an unprecedented amount of political messaging traffic in the run up to next week's US presidential election. We proved to be an ideal choice for this group of customers to achieve industry sanctioned, high volume deliverability. Our messaging results were also bolstered by an expanding relationship from an innovative customer well-known for point-of-sale solutions. This customer's fast-growing division, which gives users the ability to send, spend, and store money, is driving increased messaging usage on our platform. The company utilizes our enterprise-grade toll-free messaging solution for application-to-person use cases requiring high-volume delivery of customer receipts and mobile delivery confirmation. In addition to expanding existing relationships, we continue to attract new enterprise customers to our platform. This quarter, we surpassed another milestone as we now serve more than 2,000 CPaaS customers, an increase of 25% year over year. Our sales and marketing teams have executed well onboarding 115 net new customers in the quarter. While achieving record revenue growth and attracting new customers to our platform, we also continued to exceed our profitability goals. For more than two decades, Bandwidth has transformed enterprise communications across the United States. Last year, we started serving customers in Europe using our software-powered voice network. Earlier this month, We share that we will soon be serving our customers around the globe with international cloud communications leader VoxBone joining our band. We believe that this combination of two CPaaS leaders accelerates our international expansion by at least several years. And together, we will serve global enterprises across 60 plus countries representing 93% of the world's GDP. The two companies complement each other brilliantly. We share the same values and can now describe them in different languages. We are mission first while committed to serving others. A shared set of values and an incredible chemistry between the teams is the basis of the strong cultural fit we will harness to serve customers worldwide. We both offer cloud communications platforms powered by a modern network, giving customers quality, control, and scale. Over the past 15 years, Voxbone has consistently added country coverage and prided itself on a compliance-first infrastructure strategy to serve a large and innovative customer base. Both teams are excited for the opportunity to deliver the same experiences our customers have enjoyed and expanding footprints. Our customers will benefit from a unified software platform and network for the rapid launch and hyperscale of communications, applications, and experiences. We will offer enterprise-grade global connectivity for cloud platforms, mobile applications, and Fortune 1000 enterprises. The reaction from customers and team members on the acquisition announcement has given us total conviction that Bandwidth will be more uniquely positioned than ever before. This quarter, our team delivered greater results than ever before in our history, while we are acquiring one of the most impressive teams and businesses in and around the world. I am proud of all my amazing Bandmates who with me remain humbled and grateful for the many opportunities afforded us during this season. With that, I will turn it over to Jeff.

Thank you, David, and thanks to everyone for joining us on this call, including our friends at VoxBone. We had an exceptional quarter, which drove both top and bottom line results, far exceeding our expectations. Third quarter total revenue was $84.8 million, up 40% year over year. Within total revenue, CPAS revenue was $73.8 million, up 43% year over year, which is another new record percentage growth for our business. Other revenue contributed the remaining $11 million of total revenue in the period, which is up 22% from the same period a year ago. The majority of our revenue growth continues to come from the core drivers of the business. However, we did have two factors that amplified our results in the quarter. First, we experienced elevated usage in messaging driven by the upcoming US elections. Second, we continue to benefit from the work from anywhere dynamic caused by the ongoing pandemic. And as we have previewed, this COVID impact continues to decline quarter over quarter. Combine these two factors added approximately 12% to our third quarter year over year CPAS revenue growth, with 7% coming from political messaging volumes and 5% from COVID-related usage. In addition, I want to highlight our strong new logo growth contribution in the quarter, and we continue to expand our existing customer relationships as evidenced by our solid dollar-based net retention rate of 131% in the quarter, as compared to 116% a year ago. The primary driver of our other revenue outperformance with higher A to P messaging surcharges associated with serving strong messaging demand. On September 1st, carriers implemented an additional toll-free messaging surcharge, and accordingly, we expect these fees to continue going forward. Despite these increasing messaging surcharge pass-throughs, our non-GAAP gross margins came in at 49% for the quarter, and we remain on track to achieve gross margins in the high 40s for full year 2020. We continue to balance strong top-line growth with profitability, as evidenced by our non-GAAP net income in the third quarter of $6.5 million, or $0.24 per share. This result is favorable to our guide and driven by gross profit overperformance, as well as operating expense favorability. Now I'd like to share our thoughts regarding our financial outlook. We are raising our annual 2020 total revenue guidance by more than $29 million to reflect, one, the overperformance in the third quarter, two, the continued strong demand for services, as well as, three, the expected contribution from the pending VoxBone acquisition. The fundamental strength in our standalone business accounts for more than $15 million of the raise, with $8.5 million coming from our third quarter overperformance and approximately $7 million from the increase in our fourth quarter total revenue guide. The VoxBone acquisition is on track to close on October 31st, and we anticipate receiving two months of contribution from VoxBone in the fourth quarter of 2020. This equates to approximately $14 million of anticipated total revenue contribution from VoxBone to our fourth quarter and annual guidance, of which $13 million will be CPAS revenues and the remaining $1 million of revenue will be included in our other segment. This contribution assumes current business conditions and current foreign currency exchange rates. In terms of CPAS revenue, we have raised our full-year 2020 guidance to be in the range of $284.3 to $284.8 million. We expect total revenue for 2020 to be in the range of $326.6 to 327.1 million. We're estimating our full year non-GAAP earnings per share to be in the range of 44 to 46 cents per share, assuming 25.8 million weighted average diluted shares outstanding. I want to highlight that this share count includes adjustments for convertible debt conversions and shares to be issued related to the pending VoxBone acquisition. Turning to our guidance for the fourth quarter of 2020, We expect CPAS revenue to be in the range of $84.3 to $84.8 million. This contributes to our total revenue guidance of $96.5 to $97 million. Fourth quarter non-GAAP earnings per share is expected to be in the range of $0.03 to $0.05 per share, using 27.5 million weighted average diluted shares outstanding. In summary, our third quarter was an outstanding quarter for our businesses. and we look forward to driving this positive momentum into the fourth quarter and beyond. With that, let me turn the call back to the operator for Q&A.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up the 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. Your first question comes from Mark Murphy with JP Morgan.

Yes, thank you and congratulations on a very nice quarter. First of all, I'm wondering, does the flow up in COVID cases and the reinstatement of lockdowns in Europe affect your thinking at all that April was the peak of the usage spike, or does that kind of remain your thought process?

Hey, Mark, this is David. It currently remains our conclusion that April was the peak. We'll keep watching it, but that's how we think right now.

Okay. David, as a follow-up, do you have any thoughts on the announcement of Microsoft Azure Communication Services and We also noticed RingCentral's announcement of a bulk SMS API. Part of the reason I'm asking is just given that both are customers of bandwidth, I'm curious how you view those offerings. Do you see the industry benefiting? Do you see bandwidth perhaps benefiting from that?

We do cheer both Microsoft and RingCentral for those announcements. Big fans of both for their customers and think that it does bode well for bandwidth.

Okay. The final one is I'm wondering, Jeff, or David, can you walk us through where exactly is VoxBone located internationally? In other words, where are the data center locations and where Where is the voice traffic originating from? Is there anything there that would be counterintuitive?

I don't think anything would be counterintuitive. You can think about the largest country contribution coming demographically from the largest GDP countries. The networks are complementary in the protocols and the stack that each use. The data centers are located where you find important carrier meet-me points and where there's good aggregation of traffic. So I think intuitively the architecture has made great sense to our team as we've diligenced the company, and we're very excited about finishing the transaction, closing, and really growing the business together.

Excellent. Thank you for taking my questions.

Thank you, Mark.

Your next question comes from Bob Ansari with William Blair.

Hey, gents, congratulations. Let me echo that. And I mean, just phenomenal numbers. I guess I just want to follow up on that question a little bit, David, just to get your thought process strategically. So let's say you now get embedded, and you've been sort of the armzilla to all these guys, RingCentral, Microsoft, et cetera. How do you think about drawing the line about where you start to provide more value? Do you think about moving up the stack and providing some sort of more application-like technology built in the core of the platform the bandwidth is today? Or do you think that at least for the foreseeable future, you'll remain sort of the underlying infrastructure provider and guys sort of leverage that technology? Because again, you don't want to get too competitive, but there's got to be gaps that you see in the space that you could fill with an application, very specific application, maybe a political messaging application or something that would make sense. I'd love to understand how you think about that philosophically, strategically with the team.

Thanks for the good question. We're thinking horizontally more than vertically. 60% of the total addressable market in CPaaS was outside of our home territory here in North America. The VoxBone acquisition gives us immediate access to 93% of world GDP, 60 plus countries. And so horizontally, we think the most important next chapter for us to write with the terrific VoxBone team is one that addresses the full market for many of the customers that we already serve in North America. That's where our focus is right now, really addressing the entire market with what we do so well. I think that there will be seasons going forward because as a CPaaS provider, you're really part of the central nervous system for your enterprise customers. There will be great opportunities to serve and add more value, but right now the impetus is And the emphasis from our customers is please do for us around the world what you've done for us so well here.

What you do so well.

Yeah. Yep.

Totally. Awesome. Thank you. And I have a quick follow-up here. You know, you were obviously very bullish. I appreciate it. But one of the things you've given us color in the past is sort of this, sort of the pipeline of some of these new type of customers, some of these large communication service providers. Just how is that pipeline going? How do you see developing forward? And has COVID had any impact in the cadence of those, either acceleration, deceleration? How should we think about the cadence of these very, very large kind of platform class type deals you've talked about in the past? Thank you.

You bet. The cohort that we onboarded really toward the end of last year has progressed very nicely this year in turning up service as we expected. As you'll recall, we caught up and accelerated that cohort of customer onto our network and nothing new to report there regarding COVID impact to that projected group of service provider customers utilizing the platform broadly. We've, in fact, been happy about outperforming our own internal estimates of those customers coming on board. And going forward, I don't think that COVID is a negative regarding the value that we offer to that type of customer. And so the pipeline, we think, is as we expected at the beginning of the year.

Super. Thanks for taking my questions, guys. Congrats again. And I'll jump back into the queue. Thank you. Thanks, Bhavan.

Your next question comes from Will Power with Baird.

Okay, great. Yeah, a couple of questions. Yeah, thanks, you know, for the color on the political messaging contribution and work from anywhere contribution, I guess, for Q3. Any way to get some flavor for what you're assuming on those fronts in the Q4 guidance? And I'm sorry if I missed that. I'll start with that, then I have a second question.

Hi, Will. This is Jeff. I'd be glad to take that question. So in terms of political messaging, we continue at the beginning of the fourth quarter to see, you know, strong volumes from political messaging. We expect that to carry through next week in the election. but thereafter dissipate materially as they've done in previous election cycles. On the COVID front, you know, each quarter we've seen that elevated demand tick down and we expect that to continue in the fourth quarter as compared to the third quarter.

Okay. And just to be clear, so, I mean, have you seen that continue through Q3 and into the first part of Q4? And I guess the reason I ask is kind of per one of the earlier questions, with lockdowns being reinstituted, does that start to change your thinking or perhaps not yet at this point?

We did see it come down in the third quarter. That's as far as we're going to go on the comments related to COVID at this point. And so that's what we can tell you.

Okay, and then I guess then as you look at the broader kind of core strength in Q3, I guess I'd just be interested in, you know, kind of the breadth of that strength. You know, you've got your unified communications cohort, meetings, UCAS providers, which you know have been strong. Maybe, you know, trying to help us qualitatively understand the growth there versus, you know, your other broader set of enterprise customers where based on the customer growth, you clearly continue to see, you know, contraction.

Hey, Will, this is David. The growth outside of the political call-out and the COVID tailwind was indeed diverse and did come from a cross-section of good enterprise customers. We called out a point-of-sale customer that was scaling nicely. I mentioned one of the service provider cohort that onboarded. There's a financial services company doing well. So it's broad. It's not just UCAS, CCAS. It's really... the overarching customer base performing well and Dubner is diversified.

Great, thank you.

Your next question comes from Rich Valera with Needham & Company.

Thank you. Jeff, we're getting pretty close to 2021, so I'm sure folks will be trying to polish up their models here. Is there anything, any kind of commentary you're willing to give at this point on 21, and maybe framing it in terms of how much, if you look at the 2020 baseline, how much of that you think was sort of effectively non-recurring, either directly COVID-driven, political, or obviously the $14 million that you're going to get from VoxBone, but any initial thoughts you're willing to give on 21 at this point?

Yeah, hi, Rich. Obviously, we'll have a lot more to say on our next call and detail the 2021 outlook. But I think for now, you know, the things that I would consider and think about, one, just the underlying strong business fundamentals, but also thinking about some of the macro economic uncertainty that's out there. And then you should think about some of the things that we may and likely will encounter in terms of the hard comps of political messaging and COVID as those tail off. So that's kind of what I'd have you think about.

Fair enough. And then are you willing to say anything about the expected growth in VoxPone at this point? I think it said 85 million kind of annualized for 2020. Any thoughts on how we should think about the growth there?

Yeah, nothing to share for 2021, but you're right. In 2020, we said that we expect them to achieve at least $85 million in 2020 for total revenue, and that would represent 25% or more growth. So at this point, we're focused on closing the transaction, beginning integration, and again, we'll have more to say in the next call.

Fair enough. Thanks for the color there, and congratulations on the strong numbers.

Thank you.

Our next question comes from Pat Walravens with JMP Securities.

Oh, great. Thank you, and let me add my congratulations. So, Dave, what's sort of on your to-do list in terms of making sure that Voxphone goes as smoothly as possible?

The Hippocratic Oath comes first. Pat, that's first, do no harm. And that's the first operating principle as we plan the integration. The second is really create a one bandwidth experience for the customer and for how we lead the team. And those are the two principles that the integration team is utilizing as a heuristic or guide as they're thinking about the integration. Both teams on either side are excited about how complementary our services are how the combination value of the customer bases is so accretive. There's very familiar technology on both sides, but the leadership that we're excited about working with at VoxBone are very impressive, and the obligation we have is first to do no harm, and then let's get to a one-bandwidth customer experience.

Great. And then if I can add a separate one. Can you just quickly remind us of the history with Microsoft and then provide a little more color around this latest evolution in the relationship in terms of Azure communication services?

In reverse order, Pat, the Azure communication services announcement included that the same high quality and experience that Microsoft customers of Microsoft Teams enjoy will be available through their platform. We are delighted to be a long-term Microsoft and Microsoft Teams primary partner, and so we believe that we've got a really important role, and we're proud and excited about continuing to work together with them.

All right, great. Thank you.

Your next question comes from Alex Kurtz with KeyBank Capital Markets. Mr. Kurtz, your line is open.

Hi, sorry, I was double-muted. This is actually George in for Alex. Thanks for taking the question. Going back to the VoxBone acquisition, what do you expect this will mean for our longer-term gross margin outlook? Do you expect the increased overall network traffic to have any effects? Thank you.

Hi, George. This is Jeff. So in terms of long-term gross margin, We expect the VoxBone acquisition to be accretive, and that will be right out of the gates. And then additionally, having a larger business, we expect to continue to benefit from economies of scale as well as network effects.

Great. Thank you very much. Thank you, George.

Your next question comes from Mike Walkley with Canaccord Genuity.

Great, thank you. Congrats on the strong results. Just another follow-up question on VoxBone. Now that the deal has been announced and you've gone back and forth to some larger customers, can you maybe share some customer feedback for the one experience and if it's leading to any cross-sell or up-sell opportunities to create more of a global footprint for some of your North American customers?

This is David. Enthusiasm, confidence, Anecdotally, some of the comments, what took you so long? Just overall excitement about the two teams coming together to provide a unified offering around the world. The customer response universally has been positive. That's really been encouraging to us. You always hope and expect you'll be embraced by your customers for doing new things for them, and certainly that's been the case in our experience so far. In terms of cross-sell and up-sell, we think there's tremendous opportunity as we begin to look forward.

Great. And just my follow-up question, with the over 130% dollar-based net retention, were there any special large deals closed in the quarter or any customers renewing deals early like you talked about last quarter?

No, nothing special to call out. Again, very broad-based. driven by higher usage, both on the voice and messaging side. We also found favorable contribution from pricing, as well as on our monthly recurring charges. So across the board, just a great performance. Great. Thank you. Thank you.

Your next question comes from Meta Marshall with Morgan Stanley. Great.

Thanks. On your new customer ads, that was an uptick that we've seen kind of from some of the slowdown earlier in the year. Just wanted to get a sense of what you're seeing as far as sales processes for bringing on enterprise customers. Are your sales reps traveling yet? Are people getting used to kind of a new normal of selling virtually? Just any color there would be helpful.

We only travel where the customer welcomes us to do so and have done some. And continue to really be proud of the sales team for their execution. Getting over 2,000 total customers is a great milestone. And it's just been a really rewarding year to watch sales leadership really fight through the friction of not being able to do business at shows and with enterprise connections so important in person. Often couldn't be prouder of the marketing team for the demand generation, the sales team for their their morale, their camaraderie, and the results are really showing that and show through. So appreciate your kind words.

And then just in terms of on VoxBone, you know, clearly a good opportunity or great opportunity there to expand some of your relationships more globally. Just in terms of timing of when you could start utilizing or expanding some of your contracts more globally and utilizing VoxBone's network.

Great. We're excited about closing the transaction on time and in full and really believe that the complementary nature of the networks will yield both quality for customers worldwide, but also, as Jeff mentioned, the bedrock of the gross margin progress that we've inexorably and unequivocally made period over period over period over period will continue with this addition as we march around the world together. Network effects and economies of scale just compound. And so we're really excited.

Thanks. So our next question comes from Andrew King with Collier Securities.

Hi. Thanks for taking my question. First off, I just wanted to get a deeper dive into your channel strategy among COVID. Are you seeing a bigger uptake in your digital events and digital marketing? How do you change that strategy? And then just second for Jeff, going forward with the acquisition of Boxstone, can you give us any insight into the long-term operating margin trend? Thank you.

You bet. The marketing team, as I was just mentioning, has rallied and pivoted away from going to shows like Enterprise Connect and hosting events and introducing who we are at bandwidth to enterprise prospects. to really engaging digitally and sometimes arranging for contemporaneous physical world deliveries of whether it's wine and cheese for a conference call or a seminar or a webinar. They've been so creative in continuing to drive great pipeline contribution to the sales team. It takes a lot of creativity and energy in this kind of a season, and the flexibility that they've demonstrated has contributed significantly to our great performance in this latest quarter. This is Jeff.

As far as the acquisition, we not only think that VoxBone will be accretive to our gross margins, but also to our non-GAAP net income. They've been a profitable business throughout their history. And in addition to the strategic merits, the financial profile was one of the things that was really attractive to us in acquiring the company.

This concludes the question and answer session. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day. We'll be right back. We'll be right back. © transcript Emily Beynon © transcript Emily Beynon Thank you. © transcript Emily Beynon Thank you. Thank you. Thank you. Thank you. Thank you. you you