Bandwidth Inc.

Good day, and welcome to the Bandwidth, Inc. fourth quarter and full year 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Sarah Wallace, Vice President, Investor Relations. Please go ahead.

Good morning. I'm joined today by David Morkin, our CEO, and Daryl Rayford, our CFO. They will begin with prepared remarks, and then we will open up the call for Q&A. Our earnings press release was issued earlier today. The press release in an earnings presentation with historical financial highlights and a reconciliation of gap to non-gap financial results can be found on the Investor Relations page at investors.bandwidth.com. During the call, we will make statements related to our business that may be considered forward-looking. We caution you not to put undue reliance on these forward-looking statements as they may involve risks and uncertainties that could 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. With that, let me turn the discussion over to David.

Thank you, and welcome everyone. We're pleased to report a solid fourth quarter, capping off a year defined by sustained business performance and strengthening fundamentals. Throughout 2025, we delivered steady progress across revenue, profitability, and free cash flow. A primary highlight of the year was our success in the large enterprise space. We closed a record number of million-dollar-plus deals, including two significant wins in the fourth quarter alone. We also continued to invest in high-margin innovation. We are seeing tangible results from our AI voice tools, our trust portfolio, our global communications cloud, and our Maestro orchestration software. Entering 2026, we are confident in the upward trajectory of our business. When we reported 2022 results, we set ambitious four-year goals extending through 2026. a 15% to 20% revenue compound annual growth rate, a 5 percentage point increase in gross margin to 60%, a 20% EBITDA margin, a 15% free cash flow margin, and $125 million in cumulative free cash flow. While market dynamics, particularly in messaging, will almost certainly keep us short of our multi-year revenue CAGR target, our 2026 outlook is fully on track to achieve our goals for gross margin, EBITDA margin, and free cash flow margin. Furthermore, we will significantly exceed our 2026 cumulative free cash flow objective, having already surpassed $125 million by the end of 2025. Daryl will walk through our full 2026 guidance in more detail shortly. But at a high level, our 2026 outlook reflects healthy demand across both voice and messaging, along with continued solid execution, giving us confidence in the direction of our business and our financial model. Earlier today, we also announced the authorization of our inaugural share repurchase program. This reflects our confidence in the durability of our business model and our ability to generate cash while simultaneously investing in our future. I want to thank our customers for their continued trust in bandwidth. I also want to thank our bandmates for their tireless commitment to excellence. And I thank God for the blessing of another year filled with opportunities for our team to learn and grow. Over two years ago, we identified AI voice as the next frontier. Since then, we've helped customers move from AI voice experimentation into real-world production. From an AI voice concierge for a global hospitality brand to an AI-powered voice ordering system for food venues nationwide, enterprises are trusting bandwidth to launch new AI-driven customer experience use cases. our AI investments are paying off. The Bandwidth Communications Cloud and Maestro are purpose-built to integrate and manage AI voice across diverse environments with the quality, reliability, ultra-low latency, and scale that global businesses require to support multi-channel AI-driven customer conversations. Our enterprise momentum validates this network-centric approach. Our role as a foundational platform for AI, deeply embedded in the global communications network, becomes even more critical as enterprises manage constant change across shifting AI models and application platforms. Simply put, Our communications cloud and Maestro orchestration software are essential to enabling AI in enterprise production environments. We're seeing AI-driven voice adoption across both new enterprise wins and expanding deployments within our existing customer base. A good illustration comes from a major household name, US Insurance Group, which selected Bandwidth to replace their legacy provider in a million-dollar-plus deal. They cited our AI-enabling features and seamless integration with their complex Cisco environment. Bandwidth will power a new cloud-based customer experience stack for claims and customer quoting functions. utilizing inbound voice calling alongside Google conversational AI. This is a blueprint for how we serve large global enterprises, achieving rapid value capture for our customers through low-risk cloud adoption while enabling new AI voice capabilities. Our other million-dollar-plus deal in Q4 is with a top 10 U.S. bank serving millions of customers nationwide. They selected Bandwidth's resilient, toll-free solution to modernize and protect their contact center infrastructure to enhance customer experience. This win was driven by our differentiated failover architecture and open integration strategy. A similar dynamic resulted in another win in financial services, the U.S. consumer financing arm for a top five global carmaker. In this case, Bandwidth was selected to launch AI-enabled communications for their Genesys Contact Center. This win came through our channel and reflects our ability to align with partner ecosystems while serving the customer directly. By moving to Bandwidth, the customer gained greater flexibility and freed up cost savings, which supported their investments in new AI services. The transition has been seamless thanks to the long-standing partnership and technical alignment between Bandwidth and Genesys. It's a strong example of our Maestro orchestration platform enabling enterprise customers to modernize on their terms. We also saw momentum in our messaging business, winning an e-commerce platform that supports high-volume, time-sensitive communications for top brands. This customer chose bandwidth over our largest CPaaS competitor, citing our superior deliverability, scalable capacity, and operational support during high-demand retail seasons like Black Friday. A particularly strong example of our progress in RCS messaging is highlighted by a longtime customer that supports hundreds of enterprise brands on their platform. Our customer trusted us to power their first production RCS campaigns for several of their well-known consumer brands across retail, home furnishings, and hospitality. The decision followed a broader evaluation of messaging providers and was driven by bandwidth's ability to ensure consistent deliverability, scalable throughput, and operational reliability as RCS grows from early trials toward broader enterprise use. Taken together, these wins share a common theme. Customers need an open, scalable, reliable global platform to support their most mission critical communications, both for today's customer experience and the AI driven conversations now being deployed. The majority of these wins also follow our broader pattern of large enterprise wins in 2025. Multi-location rollouts, deep integration into existing infrastructure, and clear line of business value realization within the first 90 to 180 days of launch. Perhaps most exciting is the validation we are seeing from the AI developer community. The number of third-party conversational AI developers building on our platform has more than quadrupled over the past six months. While this cohort does not yet contribute materially to revenue, the momentum is a powerful leading indicator. Developers are choosing bandwidth for our low latency, quality, and predictable economics. Bandwidth enters 2026 at the exciting confluence of enterprise communications and AI with the global infrastructure, software platform, and the vibrant ecosystem to lead this next wave of innovation. Now, I'll turn it over to Daryl to walk through the financial details of the last quarter.

Thank you, David, and good morning, everyone. I'll begin with a brief update on the fourth quarter, then touch on the full year 2025, before spending the majority of my time on our outlook for 2026 and the fundamentals of bandwidth business model. In the fourth quarter of 2025, strong execution drove solid revenue and record levels of profitability and free cash flow. Total revenue saw a 12% year-over-year increase on an organic basis. This organic growth metric excludes the cyclical revenue generated from political campaign messaging in 2024. providing a clearer view of our core business strength. Both our voice and messaging segments were key contributors, each achieving healthy double-digit growth. In voice, our 11% year-over-year growth was fueled by increased voice usage, rising adoption of voice-based AI applications, and growing contributions from software services revenue. Messaging organic growth of 12% year-over-year was driven by robust holiday messaging demand. EBITDA margin reached 17%, reflecting improved pricing and mix and continued progress on profitability, providing a strong close to the year. Looking at the full year 2025, we delivered another year of disciplined performance where we generated total revenue of $754 million, up 10% organically year-over-year, non-GAAP gross margin of 58%, adjusted EBITDA of $93 million, and free cash flow of $57 million. Durable customer relationships drove accelerated growth in our largest voice customer category, global voice plans, where 8% revenue growth more than doubled compared to 2024. Our enterprise voice customer category also delivered strong full-year results, growing 21%, supported by a record number of million dollar plus deals. While large enterprise customers typically have extended onboarding cycles, these customers are experiencing a faster time to value realization after launching on bandwidth communications cloud. In fact, the enterprise cohort of customers added in 2025 already represents 15% of total enterprise revenue, making it the second highest contributing annual cohort in our history. Notably, more than 40% of 2025 enterprise voice growth came from accounts added in the past three years, one of the strongest proof points that our enterprise cohort expansion continues to compound over time. Programmable messaging achieved 7% organic year-over-year growth in line with our expectations. Beyond the numbers, 2025 reinforced critical themes, the durability of our customer relationships, growing deal sizes and improving profitability driven by operating leverage and an expanding mix of higher value software services. As we look ahead, we expect 2026 to be a year of continued growth and margin expansion. First, we expect continued accelerating revenue growth in voice. supported by higher usage demand, including usage influenced by AI-driven call flows, large deal activity, increasing software services contribution, and geographic expansion. Second, we remain focused on operating leverage and platform investments, which we expect will continue to support margin expansion and profit growth. Based on these factors, our 2026 full-year guidance shows total revenue growth of approximately 16% year-over-year, including cloud communications growth of approximately 10%, adjusted EBITDA improvement of nearly 30% year-over-year, in line with our aim to achieve a 20% full-year adjusted EBITDA margin and non-GAAP earnings per share of approximately $1.66 to $1.74. representing growth of approximately 19%. We're excited that our execution and investments position us now to achieve our three-year goals around gross margin, adjusted EBITDA margin, and cash flow goals. And beyond 2026, we anticipate delivering sustained double-digit growth in cloud communications revenue, independent of the political campaign cycle, while driving further growth in gross margin, EBITDA, and free cash flow. Now, I want to spend time on what we believe is the most important point, the quality of bandwidth's business model. Our view is simple. Bandwidth is a durable cloud communications platform with software-like expansion economics. There are five principal reasons we believe this is true. First, our customer relationships are highly durable. We set the industry standard for customer satisfaction rates. We see the direct outcome of that with ultra-low customer churn and strong retention across customer categories. Our customer name retention rate remains above 99%, and our organic net retention of 107% reflects ongoing expansion as customers grow their usage with us over time. Our top 20 accounts have a median tenure of 12 years. Within Enterprise Voice, we again in 2025 realized a 100% customer name retention, which means zero churn. In fact, we recognized a 98% customer retention rate from our enterprise voice customer cohort of three years ago, a remarkable demonstration of outstanding customer durability. In addition, our average annual revenue per customer continues to increase, driven by larger deployments, deeper integrations, and expanding use cases. We ended 2025 with average annual customer revenue of $232,000, a record, and up from $171,000 three years ago. All these metrics underscore the long-term value of our customer base and the mission-critical role our platform plays. Second, Bandwidth owns and operates a scaled infrastructure-based global cloud communications platform. In contrast to others, we do not market a thin application layer underpinned by reselling commodity third-party carrier access. Bandwidth's ownership model supports structurally higher margins that expand with usage and create durable operating leverage over time. Our margin performance is fueled by scale, voice AI adoption, growing software services contribution, global coverage, and operational efficiencies. Our incremental gross profit yield of 82% in 2025 demonstrates that each incremental cloud communications revenue dollar converts at highly attractive economics. This is the foundation of our operating leverage, driving long-term profitability and creating a meaningful competitive advantage for large enterprises that require consistent quality at scale. Third, we continue to see strong traction in large deals. In 2025, we closed a record number of $1 million plus deals. These larger deals not only contribute to near-term growth, but also create long-term expansion opportunities as customers increase usage and adopt additional services. Fourth, we see a growing opportunity to expand relationships through upsell and cross-sell. Software services are becoming a more meaningful part of our value proposition and our financial model. These solutions complement our communications cloud, deepen customer engagement, increase platform stickiness, and support continued progress toward margin expansion over time. We exited fourth quarter of 2025 with software services revenue at an approximate $15 million annualized run rate, driven by solutions that are increasingly attached to core voice usage such as Maestro, Call Assure, and our trust services offerings. Our year-end annualized run rate was meaningfully ahead of the $10 million expectation that we expressed a few months ago. Notably, software is now attached to all million dollar plus deals. These solutions are embedded into customers' communication stacks, producing recurring high margin revenue streams that scale with usage. Finally, our model is designed to grow profitably. We are focused on scaling the business in a disciplined way, balancing growth with operating leverage margin expansion, and cash generation. As we continue to execute, we believe bandwidth is positioned to deliver sustainable revenue growth, expanding margins, and increasing long-term value creation. Regarding capital allocation, our business is strong and set to generate continued meaningful free cash flow. After focusing since 2023 on reaching the 2026 margin metrics we previously outlined, we are pleased to announce, as David mentioned, that our board of directors has authorized an inaugural share repurchase program of up to $80 million in common stock. Our balanced capital strategy involves both this new share repurchase program and our largest investment in research and development in company history this year to accelerate innovation across our AI portfolio. This dual approach gives bandwidth the flexibility to capitalize on market opportunities when they arise while actively managing dilution to enhance shareholder value. In closing, we believe our performance in 2025 and our outlook for 2026 demonstrate the strength and durability of bandwidth's business. We are encouraged by continued voice growth, the incremental usage driven by AI-enabled applications, and the expanding contribution from software and services. all supported by the strength of our business model and sustained operational performance. We're also proud of how we're embracing AI across our business. Recently, Bandwidth was honored to be recognized by Gartner as a first mover in the deployment of AI for investor relations. We believe this mindset, combining innovation with operational excellence, positions Bandwidth well for the future. With that, I'll turn the call back to the operator for questions.

Thank you. We'll now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Our first question today comes from Arjun Bhatia with William Blair. Please go ahead.

Yes, perfect. Good morning and thank you. Maybe if I can start off first, I want to touch on the enterprise voice segment. It seems like you're clearly signaling you're getting good enterprise demand there and software services as a part of that is also taking up. I was hoping you could just touch a little bit on what you saw in terms of Q4 trends and the growth rate. I think if I'm backing into some sort of an implied Q4 growth rate, for Enterprise Voice. Specifically, there was a little bit of a tick down. So I was hoping you could address that and then talk about Outlook in 2026 as well, especially with those large deals starting to contribute. How much of a bump and tailwind could that be next year?

Good morning, Arjun. This is Daryl. Thanks for joining the call. We appreciate the question. There was about 10 questions in there, so let me start with, and I'm grateful for that, let me start with the growth rates in terms of enterprise for the fourth quarter. We did have acceleration last year with some deployments of customers, so we had a little bit of a lapping and tougher compare for a quarter. We are real pleased with the annual rate of 21%. We, again, with record number of million-plus deals, you know, we see that deployment and ramping into 2026 driving the growth that we've called for for enterprise. So we're projecting a very healthy growth, again, in enterprise going forward into the new year. In terms of software services contribution, absolutely. As We said each of the $1 million plus deals, and really nearly every deal, includes software services now as an upsell, cross-sell, add-in feature. We think that it's becoming critical for the customer in terms of the value that it provides. The value proposition is just dramatically clear to them. The benefits that we accrue as a company are, as I articulated previously, which is around stickiness as well, durability, and as well as allowing us to continue to expand and cross-sell and up-sell. So did I capture the bulk of your questions, Arjun? Is there something that I might have missed?

Yeah, no, that's super helpful. You touched on all of it. Thank you. And actually, Daryl, a follow-up for you, just in terms of 2026, can you just help us understand how you're thinking through political contribution? Should we comp that to 2022, or what's the kind of right cadence?

Yeah, I'm glad you asked. We've guided to 15% revenue growth, 10% cloud communications growth. The midterm elections are different from the presidential elections in the sense that the presidential elections, the caucuses and the early primaries would have already started two years ago, and we would have more visibility. The midterms are more state-local. They don't really have the presidential primaries. They start later in the season, say, summer-ish time frame. is where we may see benefit. Based on what we're seeing and speaking and hearing from our customers, we think that the political campaign contribution this year will be roughly 2.5% of cloud communications revenue, and we will keep monitoring that. We don't plan to experience anything in the first half of the year, but we'll keep monitoring that. You know, it's good to say that four years ago, we were making the remark that our political campaign customers were beginning to diversify, that they weren't really just appearing for like a cicada and then going back into the ground, that they were beginning to diversify their business models. Four years on, they truly have. So these customers are really durable for us in terms of civic engagement and other commercial types of messaging business, as well as they scale up and down for the political content So we're really happy with that. And we'll see maybe about 2.5%. But we'll update you again next quarter as we get better visibility into the year.

All right. Perfect. Very helpful. Thank you.

Thank you. And our next question comes from Eric Suppenger with B-Rally Securities. Please go ahead.

Yeah, thanks for taking the question. First, could you just discuss or give us some context around the dynamics between the The cloud communication growth outlook for 10% and the total revenue growth of 15%. Why is there a significant difference between those two?

Well, that would be the difference is surcharge growth rate from carrier messaging surcharges. Last year, you will have noticed in our reported results that surcharge growth was relatively tame. very moderate. It was dampened by the carrier pricing environment where there was really only one noticeable price increase by a carrier on surcharges last year. So, surcharge growth last year for us on a reported basis was simply due to our continued messaging volume growth.

This year, And just one note, I think this is David. Sorry to interrupt, Daryl. I think you mentioned top line total growth at 15. It's actually 16%. Yeah.

Oh, okay. Sorry. Sorry. Yeah, correct that. 16 and 10. 16 and 10. This year, preceding our guide that we just released, we've all – two carriers – I won't go to the effort to name them, but two major carriers have already – announced price increases that have gone into effect and will be going into effect in the next month or so. So we've taken those price increases into account in our guide.

And just critically, those are pass-through surcharges, so they aren't margin important at all for us. And cloud comms, importantly, has become, as Daryl mentioned, so durable that we're projecting forward to achieve double-digit cloud communications growth irrespective of political seasons altogether.

Okay. Second question, Twilio had noted a significant increase in their voice traffic. I'm wondering if you're seeing evidence of them getting more competitive on the voice side of the CPaaS market.

You know, we're not. The customer examples we cited in our script were win-aways from Verizon in two of the cases, from AT&T in one of the cases, and from a smaller carrier in the final case, and none of those was Twilio relevant.

Very good. Thank you.

Thank you. And our next question today comes from Patrick Walravens at Citizens. Please go ahead.

Oh, great. And congratulations, you guys. Hey, Dave, can you... Hi. I actually have two questions. But the first one is, can you talk a little bit more about the insurance example that you gave us? And you said that you were working with Google Conversational AI on that. Can you just explain what exactly they were doing, what you do, and what the potential is to do more of those kinds of deals with Google?

So absolutely. The most important aspect of that customer case is the complex pre-existing Cisco environment for their contact center and the need that this very large household name insurance company had to integrate Google's AI solution within that environment. And so orchestration among chosen best of breed AI solutions is vital, was vital for them and maestro from us is perfect. And that's what facilitated that opportunity. And in the other cases, if some of our other customers chose differently to go with Google or to go with someone else, again, Maestro is ideally situated to give flexibility at scale for these enterprise customers to navigate what is the most fluid and dynamic changing AI environment imaginable.

All right, great. Thank you. And my second question is, for every stock that we cover, really it's become all about is the incredibly rapid increases in AI good or bad for this business? And what are the moats that the business has to prevent larger new AI companies from coming in and somehow disrupting their business? How would you explain that to shareholders? What are your moats?

So the first part of your question is as interesting, and I will get to moats. As to the relevance of AI for bandwidth as a tailwind, we are deeply convicted that the need for intelligent voice agents to communicate across every imaginable channel with the empathy and intelligence to answer questions of all kinds means that for us, and we're already seeing this in our voice growth and acceleration for us, It's an amazing moment. It may not manifest as fast as the work from home dynamic that occurred back in the early 2020s, but it will ultimately be far more durable and persistent as the next billion users of the global PSTN that we have a footprint for are voice agents acting on our behalf in wonderful, delightful ways. What kind of a moat do we have? We have a moat that is a mile wide, filled with oil, and lit on fire. very difficult to cross because you have to cross it at the speed of government across 80 plus countries. We have interconnections with all the global incumbents necessary to provide immediate footprint, again, to the next billion voice agents. We own and operate this infrastructure. It's across the globe. That gives us a structural margin and cost advantage, which is why we've grown gross margins from 47% to now 60% during the time that we've been a public company. Our ARPU per customer is exploding because of their adoption of our different software services. And again, we're focused on the enterprise and the agents that are lining up to be able to engage globally in use cases that are awesome.

Fantastic. Thank you.

Thank you, Pat. Thank you. And our next question comes from Joshua Riley in Edom. Please go ahead.

Yeah, thanks for taking my questions. How should we think about the pipeline for voice AI relative to other voice opportunities here heading into 26? And does that remain a relatively low overall mix of voice revenue today? And is 2026 maybe kind of the inflection point where voice AI use cases are ramping in the marketplace and your overall revenue base?

That's a really good question, Josh. It's AI is a component of all enterprise conversations with Maestro attaching to almost, actually to every enterprise deal. So it's really a degree question. It's not whether or not AI is germane to these enterprise conversations. It's to what extent does the revenue of that motion manifest? And your primary question is, when is the inflection point in voice growth driven by AI disproportionately or more heavily? And what we believe, having for two years been focused on this moment, what we believe is that we are seeing, whether it's the developer channel that's quadrupled, as we talked about on our script, or the enterprise use cases that are proliferating, this year is a vital year to watch and observe and see the results from AI adoption and voice hit the top and bottom line. That's the year that we're in. We've captured that in our projection for 16% top line growth and 10% cloud communications growth. And again, we're disciplined as a team, so 20% EBITDA margins render our overall business plan, I think, very strong. But we think this is a vital year for AI adoption to go from experimenting to real scale and deployment.

Got it, very helpful. And then you mentioned reaching a record number of million plus deals. I think that was for the year of 2025. not the quarter. Correct me if I'm wrong there. Could you just share a bit more about the composition of some of these newer Global 2000 deals? Is there functionality that they're asking for today that they weren't a couple of years ago? And maybe is that one of the key reasons that's helping you win against some of the legacy telcos?

Terrific question. We closed more million-dollar-plus deals in all of 25 than we did in 23 and 24 combined, precisely for the reason that you're asking about. The product portfolio has expanded to really answer the key questions on value prop, and we've got here with us our Chief Product Officer, John Bell, and I'll just invite him to add to my answer.

Yeah, Maestro has had a strong enterprise value proposition around integration, supporting move to the cloud, in all of these conversations we have with enterprises, it is really about now the move to AI. And so the move to AI is reinforcing the value proposition and showing up in these customer conversations.

Awesome. Thank you, guys. Thank you.

And that concludes today's question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.