Bandwidth Inc. (BAND) Q1 2019 Earnings Call Transcript

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Bandwidth Inc. (NASDAQ: BAND)
Q1 2019 Earnings Call
May. 02, 2019, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings. Welcome to Bandwidth's first-quarter 2019 earnings results conference call. [Operator instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Marc Griffin, investor relations.

Mr. Griffin, you may begin. Thank you.

Marc Griffin -- Investor Relations

Thank you, good afternoon, and welcome to Bandwidth's first-quarter 2019earnings call Today, we'll be discussing the results announced in our press release issued after the market close. With me on the call this afternoon is David Morken, Bandwidth's chief executive officer; and Jeff Hoffman, chief financial officer of Bandwidth. They will begin with prepared remarks and we will then 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 second fiscal quarter of 2019 and the full year of 2019, our plans to execute on our growth strategy, our ability to maintain existing and acquire new customers, and other statements regarding our plans and prospects. Forward-looking statements may often be identified 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 these or revise these forward-looking statements.

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Forward-looking statements are not promised or guarantees of future performance and are subject to variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a 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 15, 2019, as updated by our other SEC filings, all of which are available on the investor relations section of our website at and on the SEC's website at Finally, during the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in our press release issued after the close today, which is located on our website at and on the SEC's website at

With that, let me turn the call over to David.

David Morken -- Chief Executive Officer

Thank you, Marc, and thank you to everyone joining us on our first-quarterearnings call We have once again exceeded the high end of our financial outlook this quarter. Our CPaaS revenue increased 16% year over year driving total revenue of $53.3 million. We are beginning to see early indicators of success from investments we are making in our business.

In the first quarter, our expanded sales and marketing teams helped grow new customers a record 31% year over year. This new cohort of enterprise customers represents use cases from all service offerings and are from a diverse set of industry verticals. We are focused on cultivating these relationships as these new customers become more familiar with our platform and service. In addition to growing customers 31%, we are excited about our expanded -- to full productivity throughout 2019.

During the quarter, we onboarded 121 net new customers, beating our previous record set last quarter of 75, an increase of 61%. We continue to be pleased by the fundamental strength in our business. The three pillars supporting our success are our highly scalable platform of flexible APIs, our vertically integrated nationwide IP Voice Network that we built and operate, and our 9-1-1 capabilities that we believe are unique among CPaaS providers. Enterprises choose to build on these Bandwidth pillars because of their clear quality and cost benefits.

They also choose us because of our amazing people who answered the call to serve our customers. We recently completed a follow-on public offering of common stock to be able to reinforce the success we see with our pillars and with our people. The most innovative technology companies continue to choose Bandwidth. During the first quarter, we entered into a new relationship with one of the pioneers of better and easier point of sale solutions for small and medium businesses.

This company operates globally, and in the past year processed almost $85 billion of gross payments generated by approximately 1.8 billion credit card transactions. The customer uses Bandwidth's enterprise-grade, toll-free messaging solution to deliver digital receipts to customers. The company was challenged by customers failing to receive message-based receipts. They solved this problem using Bandwidth's toll-free messaging solution, which provides increased visibility and confirmation of mobile handset delivery.

In addition, this company chose Bandwidth because of our team's incredible focus on the unique needs of the enterprise customer. Our relationship began with their inbound request for a trial account on our API platform. Our sales, product and operations teams engaged with the customer to understand their business-critical, at-scale problem and helped them build a solution on our platform that will help them navigate the rapidly changing messaging environment in the future. We continue to pride ourselves on developing and delivering the power to communicate for our enterprise customers.

During the first quarter, we also onboard the healthcare industry's leading patient-relationship management platform that uses voice calls and text messages to engage with more than 80 million patients and 25,000 medical practices nationwide. The company delivers a high volume of appointment reminders, recalls and preventative care messages annually. The company will now utilize Bandwidth's local A2P messaging API to assist medical practices and delivering these call-back enabled messages to patients. Our solution is a first-of-its-kind API that allows businesses to send wireless carrier sanctioned high-volume messaging using local phone numbers over the newly created 10-digit long code SMS routes.

Our solution enables messaging from local phone numbers and instant replies or immediate call back capability to a specific business location. Bandwidth's local A2P messaging solution offers a wireless carrier sanctioned route, resulting in predictable delivery, measurable results and a better voice and text customer experience for end users. During the first quarter, we also entered into a new relationship with a sales enablement and marketing platform that leverages artificial intelligence to improve lead-to-call conversion for enterprises. The company uses Bandwidth's voice platform to connect prospects with businesses and also uses our A2P toll-free messaging platform to deliver AI generated conversational text messages to their clients' prospective customers.

The company handles millions of messages for its clients each day, and was seeking a partner that could offer a complete solution with proven deliverability and superior customer support. These and other customer wins illustrate the recent impact of our expanded software development and engineering teams. These teams have launched new A2P messaging and voice services for our enterprise customers who are using both methods within their customer-engagement strategy. In regard to our international expansion, we continue to make progress to meet existing customer demand abroad.

We have begun deploying infrastructure to the U.K. and the EU. We intend to build in a capital-efficient manner, consistent with our network and platform in the U.S. to support the applications and experiences that make a difference in the way enterprises communicate.

We expect to complete our deployment in the U.K. and EU by the end of the year. Additionally, we continue to make progress to satisfy the regulatory requirements necessary to conduct business and deliver our services internationally. We are excited to be expanding our footprint overseas and look forward to serving our customers in new geographies.

In summary, we are pleased with our start to the new fiscal year and excited about the opportunities ahead. We will continue to reinforce success with our excellent products and our amazing Band mates. With that, let me turn the call over to Jeff.

Jeff Hoffman -- Chief Financial Officer

Thank you, David, and good afternoon to everyone on the call. We had a solid start to 2019 with all of our key financial metrics outperforming the high end of our guidance. Our first-quarter performance was driven by strong demand from a variety of enterprise customers with use cases across many verticals that are embedding mission-critical communications into their products and services. During the first quarter, our total revenue was $53.3 million, $1.8 million above the high end of our guidance range.

Total revenue was up 0.6% or 14% year over year excluding the $6.3 million onetime Verizon legal settlement reported in the first quarter of 2018. Within total revenue, CPaaS revenue was $45 million, up 16% year-over-year and $1 million above the high end of our guidance range. Other revenue contributed the remaining $8.3 million of total revenue, which was $0.8 million above our implied guidance. Other revenue was $14.1 million in the same period last year and included the $6.3 million legal settlement.

Our go-to-market investments continue to build momentum. We ended the first quarter with 1,351 active CPaaS customers, up 31% year over year. Sequentially, we achieved a record 121 customer net additions in the first quarter. Consistent with previous cohorts, we expect these newly onboarded customers to scale their platform usage over future periods as they become increasingly familiar with our platform, network and customer support.

Our dollar-based net retention was 111% in the first quarter of 2019 as compared to 115% a year ago. Before moving on to profitability metrics, I would like to call out that I will be discussing non-GAAP results going forward. Our GAAP financial results, along with the full reconciliation between GAAP and non-GAAP results, can be found in our earnings release. Our first-quarter 2019 non-GAAP gross profit, which excludes stock-based compensation and depreciation, was $25.9 million, yielding a gross margin of 49%.

This compares favorably to the $22.5 million and the 48% gross margin we achieved in the first quarter of 2018 if we exclude the Verizon legal settlement in the first quarter of 2018. First-quarter 2019 adjusted EBITDA was a loss of $1.7 million as compared to $4.4 million of adjusted EBITDA for the same period last year excluding the legal settlement. This again reflects the increased investment we are making in sales and marketing as well as research and development to support the expansion of our platform. On a GAAP basis, we reported net income of $2 million or $0.09 per share based on 22 million weighted average diluted shares outstanding during the first-quarter 2019.

Our non-GAAP net loss in the first quarter was $2.5 million or a loss of $0.12 per share based on 20.5 million weighted average shares outstanding. This is well above our guidance for the first quarter of a net loss of $0.27 to $0.30 per share. The favorable non-GAAP net loss variance as compared to our guidance was driven by gross profit and operating expenses out performance. During the first quarter, we utilized $9 million in net cash from operations and utilized $10.9 million in free cash flow, which includes $1.2 million of purchases of property and equipment as well as $0.6 million of capitalized software development cost for internal use.

Now I'd like to finish with some thoughts regarding our financial outlook. For the second-quarter 2019, we expect CPaaS revenue to be in the range of $46.8 million to $47.3 million or up 18% year over year at the midpoint of the range at $47.1 million. This contributes to our total revenue guidance of $54.8 million to $55.3 million. Turning to the second-quarter profitability.

Non-GAAP earnings per share is expected to be a loss in the range of $0.17 to $0.19 per share. This outlook assumes weighted average shares outstanding of approximately 23 million. For the full-year 2019, we expect CPaaS revenue to be in the range of $201.5 million to $203 million or up 23% at the midpoint of the range. We expect 2019 total annual revenue to be in the range of $233.5 million to $235 million, up 15% at the midpoint of the range.

Non-GAAP earnings per share for 2019 is expected to be in the range of approximately a loss of $0.44 to $0.51 per share. This outlook assumes weighted average shares outstanding of approximately 22.4 million. In summary, we are excited about the direction we are headed and pleased with our strong results to start the year. I will now turn it back to the operator for Q&A.

Questions & Answers:


[Operator instructions] Our first question comes from the line of Pat Walravens from JMP Securities. Our next question comes from the line of Richard Davis from Canaccord. Please proceed with your question.

David Hynes -- Canaccord Genuity -- Analyst

Hey thanks guys. It's DJ on the line for Richard this evening. I wanted to ask about the linearity of CPaaS revenues. It's kind of what's implied in the guide here.

I mean if we look at first half to second half weighting, obviously, we're -- it sounds like you're expecting some pretty material acceleration. And by my math it looks like we could cross 30% CPaaS growth in Q4. Just help me understand what's driving that? Is it just the success of the onboarding of customers that we're seeing now with those customers ramping over the course of the year? Or is that large customer, existing customers ramping? Just help me understand the impacted drivers of that accelerating growth.

Jeff Hoffman -- Chief Financial Officer

Hi DJ, this is Jeff. Definitely you're seeing it right. The business is set up for a stronger second half of the year, and there's really two primary reasons for that. One is based on our close collaboration with our existing enterprise customers who give us insight into their go-forward usage growth on the platform, we see more opportunity there to grow those revenues and these relationships in the second half of the year.

Secondly, we expect the strong go-to-market investments that we made in 2018 will increasingly provide revenue growth contribution from new customers as our larger sales force reaches full productivity in the second half of the year. So it's both of those factors that are setting up our year this way, and we like some of the early signals that we're seeing out of the sales force like the 121 net additions that we referenced in our prepared remarks.

David Hynes -- Canaccord Genuity -- Analyst

Yes. Got it. And then second question just in terms of mix. I mean it sounds like maybe messaging, you called out a couple of deals, right? You had -- A2P was called out as a new product in the press release and then you talked about the retail point of sale win, which is also a messaging win.

Are you seeing more interest or traction there? And can you kind of qualify -- obviously, messaging's coming off of a smaller base, but is it growing as a percent of the business mix? And what are the implications on margins there.

David Morken -- Chief Executive Officer

Hi DJ, this is David. So historically, our voice revenues have been approximately 94% messaging, right now at around 96%. And we see the trajectories of those percentages being relatively consistent. So there is interest for sure, given the fluidity of the messaging space, but we're having great success with voice simultaneous.

So I don't think they'll be a substantial or material change to that mix.

David Hynes -- Canaccord Genuity -- Analyst

OK. Perfect. Maybe one last one if I could slip it in. Enterprise Connect, you guys had a much bigger presence this year.

I think it was down to -- attendee name badges were labeled Bandwidth. Any discernible yield from that in terms of pipeline? Or any other measure that you're tracking?

David Morken -- Chief Executive Officer

As you know, we focus a great deal on sales and marketing efficiency and the conversion off of our spend historically in terms of gross profit payback period, and we were pleased with Enterprise Connect historically before this year. And so we invested accordingly, and we're proud of our marketing team and Noreen Allen, and our Chief Marketing Officer, had a great experience. And we think that, that investment will pay off over time.

David Hynes -- Canaccord Genuity -- Analyst

Excellent. Thanks guys.


Our next question comes from the line of Meta Marshall from Morgan Stanley. Please proceed with your question.

Stefan Schwarz -- Morgan Stanley -- Analyst

This is Stefan dialing in for Meta. Could you talk about how you're prioritizing the interest you're getting from international? Do you have an obligation to meet an anchor customer first? So you -- will you be able to service all immediately?

David Morken -- Chief Executive Officer

Hey Stefan, this is David. We have an obligation to our flagship anchor customer. However, that singular obligation does not prevent us from serving other customer demand from existing relationships that we have in either the U.K., EU or elsewhere. We announced that and don't have any material new update.

But to the crux of your question, the fact that we're obligated to support the U.K. anchor tenant does not prevent us from fast-follow or parallel opportunities.

Stefan Schwarz -- Morgan Stanley -- Analyst

OK. Thank you. One last question. As far as the net extension rate contracting, is this just a matter of difficult compares? Or is there an explanation for the contraction?

Jeff Hoffman -- Chief Financial Officer

Yes. Thanks for the question. This is Jeff, I'll take that one. We continue to expand our customer relationships and in turn, our platform usage continues to grow.

But to your point, yes, existing customer revenue as reflected in the dollar-base net retention didn't grow as fast in the first quarter as compared to a year ago. And as you pointed out, our first quarter CPaaS revenue comparison to the prior year's challenging, and we outlined on our last call that our strong first -quarter 2018 performance had a bunching up of customer growth that resulted in more than double the sequential CPaaS revenue growth we had realized in the previous eight quarters, which had created a much harder comp for us this time. And so I think that's something that we'll overcome and that's implicit in our annual guidance. So the last thing that I'll say on that is it's very common absent this hard comp that there can be fluctuations in our business and it's very normal for a usage-based business.

So if the numbers go up a little bit or down as they did in 2018, very normal for our business.


Our next question comes from the line of Will Power from Baird.

Will Power -- Baird -- Analyst

Thanks for taking my question. Maybe just a follow-up on the dollar-based net retention rate. Jeff, appreciate the -- further color there. How should we think about that going forward? Is that something then that you would expect as you kind of flat that tough comp to accelerate? Can it get back to more recent trends? Any further color on that front?

Jeffrey Hoffman -- Chief Financial Officer

Hi Will. So you know and others that we don't specifically guide on dollar-based net retention. But implicitly, I think you can see that we expect an acceleration in our CPaaS revenue growth rate in the second half of the year. And I think it's fair to assume that some of this growth will come from an improving dollar-based net retention as we overcome that hard comp that we incurred in the first quarter.

And we still feel really good about the business, we like the relationships and how we're expanding them with our existing customers. And we have really good visibility and what that usage will be going forward. And so we'd expect an uptick there as we go throughout the year.

Will Power -- Baird -- Analyst

OK. And then just maybe to come back to international. I know, David, you had noted the investments that are being made in the U.K. and across Europe.

How should we think about the cadence of revenue growth there? And was there any -- I'm assuming there wasn't contribution in Q1? Will there be at least some contribution in Q2? Or when will that start to kick in and become more meaningful?

David Morken -- Chief Executive Officer

Thanks, Will. We've guided specifically about international '19 being nominal in overall contribution relative to the goals that we've guided overall, and that's consistent and we don't have any change to that guidance. So we are executing well and on track for our plans. But nothing new to change in terms of how we're guiding revenue impact in '19, and then expect there to be meaningful and material growth in '20 and beyond.


Our next question comes from the line of Pat Walravens of JMP. Please proceed with your question.

Pat Walravens -- JMP Securities -- Analyst

Great. Thank you. Sorry about that. Trying and trying again here.

Jeff, can we start with your comment about having really good visibility. So I think it's interesting when you guys guide, can you just talk a little bit about what the inputs are into that? Because most software companies as we have a big pipeline and we assume a close rate, and I get the sense that yours is different because your clients tell you what they need.

Jeff Hoffman -- Chief Financial Officer

Hi Pat. Yes, I think that's right. We do just sort of as I explained, we worked very closely with our top customers, and we know sort of what their growth plans are and we incorporate that data into our forecasting process. Obviously, in addition to that there is other inputs to our forecast like sales pipeline and understanding to the best of our ability how newly onboarded customers will grow.

And I think, thus far, as a public company, we've had a pretty good track record of guiding there. But also want to call out that as our larger sales force comes to fruition and full productivity this year, we'll have a richer mix of revenue and customers we don't know quite as well. And so that's something that we're assimilating into our process. And I think like all things with more time, data and experience, we'll nail that down as well.

But just want to identify that risk factor within our process are different.

Pat Walravens -- JMP Securities -- Analyst

All right. Great. Thanks. And then Dave, how are the regulatory requirements, let's say, in the U.K.

different than they are in the U.S.? So my recollection is in the U.S., you and someone else basically had to go stand up in front of every public utility commission to be able to issue phone numbers. But how does that work in the U.K.? What do you need to do?

David Morken -- Chief Executive Officer

That's true. Yes. The number authority legs are different in the U.K. compared to the U.S.

because of 50 states relative to Ofcom. There is also a very real difference in terms of tonality. But I would describe the U.K. process for acquiring numbers as less rigorous in terms of -- in places you have to go stand tall in front of, but there are important differences about how you relate to BT and Vodafone and others, and how Ofcom works with all of us over there when it comes to things like emergency service, 9-1-1 equivalent innovation.

And so there is a very real relationship and dialogue that goes into the work that we're doing there. What we believe and have firm conviction on is that the path is clear for us to innovate with our largest customers in the U.S. as they enter those markets and do what they do so well creatively. And the environment is healthy, and Ireland is different than the U.K.

and the EU has been different again. But so far we have line of sight to the calendar that we've set for finishing our build-out in the U.K. and EU by the end of this year to support the calling and the services that our large customers are asking for.

Pat Walravens -- JMP Securities -- Analyst

OK. Great. And then just sort of a fine point on that. Is the EU -- are there more regulatory hurdles in the EU than there are in the U.K.

or the same or less?

David Morken -- Chief Executive Officer

EU is heavier. You've got French differences compared to German differences relative to privacy and how long you keep call day records or what fields you must validate for addresses to receive phone numbers. So there are heavier burdens I would describe in EU than the U.K.

Pat Walravens -- JMP Securities -- Analyst

OK. Great. Thank you. Thank you.


[Operator signoff]

Duration: 30 minutes

Call participants:

Marc Griffin -- Investor Relations

David Morken -- Chief Executive Officer

Jeff Hoffman -- Chief Financial Officer

David Hynes -- Canaccord Genuity -- Analyst

Stefan Schwarz -- Morgan Stanley -- Analyst

Will Power -- Baird -- Analyst

Jeffrey Hoffman -- Chief Financial Officer

Pat Walravens -- JMP Securities -- Analyst

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