Bandwidth (BAND) 31 Oct 242024 Q3 Earnings call transcript

Good morning, and welcome to Bandwidth's Third Quarter 2024 Earnings Webinar and Happy Halloween. Today, we have a treat for you with a special edition of our earnings call by video, so we can share some highlights from our recent user conference. I'm joined today by 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.

Our earnings press release was issued earlier today. The press release and an earnings presentation with historical financial highlights and a reconciliation of GAAP to non-GAAP 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, including statements concerning our financial guidance for the fourth quarter and full year 2024. 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. With that, let me turn the discussion over to David.

Thank you, Sarah. Welcome to Bandwidth's Third Quarter 2024 Earnings Call. We're pleased to report solid momentum in Q3, carrying us into the end of the year with record revenue and profitability performance, strong conversion to free cash flow and continued operating discipline.

Given the overperformance in the quarter, we are raising our full year outlook on both the top and bottom lines. These results are driven by the trust our customers place in us to deliver their business-critical services, and I'm deeply grateful to our customers and our Bandmates who make this possible. I also want to take a moment to thank God for the opportunities he has provided to us all. In September, we hosted Reverb24, our first-ever user conference at our campus in Raleigh, North Carolina. The event was a huge success as we engaged with over 100 customers and prospects in person and 1,400 more streaming globally. This was truly a milestone moment in our 25-year history and a strong proof point that the world's large enterprises rely on Bandwidth to transform their customer and employee experiences.

As one customer told us afterwards, "I have a much better understanding of bandwidth, your capabilities and your culture. Kudos to your team for a great event and an amazing showcase." Let's take a quick look at the takeaways from Reverb24. [Presentation] At Reverb, we're proud to have announced our plan to develop an industry-first nomadic emergency services solution for markets outside the U.S. as well as progress on a new number reputation management solution for trusted calling and also a new centralized message registration center for faster and easier texting campaign registration. These innovations across all 3 of our key customer categories, global communications plans, programmable services and direct enterprise.

In addition to being true technical milestones achieved by our talented team, they are also business-critical solutions that will drive continued revenue growth and margin expansion.

So let's dig in.

Our new next-generation Bandwidth universal platform is the foundation of everything we do. At Reverb, we unveiled a number of powerful new capabilities to turbocharge the Bandwidth experience, including faster onboarding, automated workflow management, tailored regulatory frameworks and deeper performance monitoring, all managed through convenient software APIs. Bottom line, these enhancements make bandwidth faster to implement, easier to scale and stickier for customer retention.

Just listen to how Docusign's Vipin Kalra described it at Reverb. He consolidated 9 different carriers in 15 geographies down to one with Bandwidth to power Docusign's contact centered operations globally. [Presentation] The Universal Platform is also where we're building the next generation of our renowned emergency services.

For years we have been a leading innovator and provider of E911 in the United States.

Now we intend to make it global. We were excited to announce at Reverb our plans to develop the first-ever nomadic emergency services solution outside the U.S. We call it alternate location routing, and it promises to deliver a similar life-saving potential for on-the-go workers globally as our 911 dynamic location routing services do in the United States.

Our emergency services are frequently a door opener for larger customers to get to know us, and now we want to open that door to the entire world.

So we've completely refreshed and upgraded the bandwidth experience with our next-gen universal platform.

Turning now to the innovation pipeline for our enterprise business. We were excited to announce at Reverb that our award-winning Maestro platform now has the largest ecosystem of bring your own carrier integrations of any provider worldwide. That means enterprise IT teams have the flexibility to choose what works best for them to build custom tech stacks that enhance both customer and employee experiences. This freedom of choice and flexibility are powerful differentiators because our largest customers are now navigating multiple paths to the cloud.

Some are embracing hybrid environments to maintain the best of both worlds, on-prem and cloud, while others are reoptimizing their tech stacks by switching from cloud to cloud. And of course, many are still moving 100% to the cloud for the first time. The power of Maestro is that it supports all 3 of these strategies while reducing development time from months to hours and giving enterprises the control they need to adapt quickly in a constantly changing environment. With new enterprise deals closing every quarter, Maestro's flexibility and integration capabilities are driving steady business growth. The latest example is a large diversified credit union that needed rock-solid reliability to modernize their on-prem contact center with a Webex CCaaS solution. They chose Maestro because they wanted maximum flexibility to build a modern tech stack to easily add new services they envision down the road.

In addition, our all-IP solution made it easy to integrate the customer's payment solution right into the call flow. Many of our customers are seeing significant operational efficiencies and cost savings by implementing Maestro. This creates additional upsell opportunities for advanced services such as conversational AI integrations.

Our AI Bridge product available with Maestro enables contact center operators to easily plug in best-in-class conversational AI providers like Google Dialogflow and Cognigy. At Reverb, we announced partnerships with 2 more leaders in the space, Kore.ai and Amelia, which will expand our AI ecosystem as enterprise adoption increases. Conversational AI enables enterprises to reduce operational costs by automating routine inquiries, which improves both the customer and the agent experience. The key financial benefit for Bandwidth is that AI interactions continue generating voice minutes on our network.

Additionally, we can monetize the extra data streams needed to support AI integrations in the call flow. Customer experience works in 2 ways. Besides inbound communications, many of our customers also rely on outbound outreach, such as an in-home services provider scheduling an installation or a healthcare provider discussing test results. The challenge is that a rise in spam and fraudulent calls has eaten away at consumer trust, making it difficult for legitimate companies to connect with end users and get them to answer the phone. It's costing them a lot in wasted time and missed revenue. Bandwidth is now tackling this problem head on with Number Reputation Management, which is a new solution coming soon to help enterprises take back control and protect their outbound calling campaigns.

As a cloud platform owner and operator, we have access to critical call data that can be analyzed to lead to remediation solutions. By ensuring that more calls are answered and fewer are mislabeled, we are enabling our customers to achieve higher conversion rates and maximize their revenue potential. This solution has already garnered significant interest with a waiting list of companies ready to come on board for our beta version.

You've heard just some of the many ways we are elevating voice services with Maestro, AI Bridge and Number Reputation Management.

As customer experience evolves, more and more consumers want to be communicated with in their channel of choice. To that end, at Reverb, we announced a comprehensive vision for multichannel messaging.

With the announcement that we are now a directly connected aggregator, Bandwidth has enhanced our leadership position in the messaging market, improved our cloud owner economics and strengthened our ability to deliver high-volume mission-critical messaging solutions. This not only boosts our margin profile, but it's the reason partners like Attentive Mobile, one of the largest conversational commerce platforms in the world chose Bandwidth. [Presentation] Another key pillar of our messaging vision is RCS or Rich Communication Services. With Apple's support for RCS and mobile network operators now on board, we are among the first to develop a proof of concept for business grade RCS, which is known as Rich Business Messaging or RBM. This is a game changer for business messaging, and we're positioning ourselves to be the go-to partner for enterprises as they implement RBM across all our key markets, just like we do with SMS. Navigating the global messaging landscape is highly complex, but Bandwidth is uniquely positioned to lead. With constantly evolving registration and verification requirements, our new Bandwidth registration center simplifies the process for our customers. This centralized hub streamlines compliance for high-volume messaging, making it easier for enterprises to stay in line with industry regulations while meeting high standards for trust that are set by carriers. Registration centers should reduce friction and drive usage for high-volume senders like a new patient engagement platform that chose Bandwidth in Q3. This customer specializes in appointment verification for healthcare and dental providers as well. Knowing that missed appointments mean a loss of revenue for the provider, the customer came to us wanting a better way to verify messages were being delivered to patients. They also wanted better customer support after having deliverability issues with their previous provider. Bandwidth deployed a dedicated onboarding team to help them get up and running in just days, while our Universal Platform provides them with an unprecedented level of delivery insights to ensure timely patient communications. It is a great example of our messaging leadership in action.

As we approach the end of 2024, we are excited by the momentum of our strong R&D road map and a clear focus on what the world's largest enterprises need and want. We're proud of the breakthrough innovations that we launched at Reverb, which come from listening to our customers and anticipating the market.

Our vendor-agnostic approach gives CIOs freedom of choice, helping us win their trust in long-term business. With continued leadership in Maestro, AI and multichannel messaging, along with our next-gen universal platform, we are confident that we are well positioned to continue building our durable franchise as the most trusted provider in enterprise cloud communications. I'll now turn it over to Daryl to walk through the details of our financial results and our outlook.

Thank you, David, and thanks, everyone, for joining us today for this very special episode of Bandwidth's earnings announcement. Building on our overperformance for the first half of the year, Bandwidth delivered a record third quarter. Total revenue reached $194 million, marking a 28% increase, and adjusted EBITDA grew to $24 million, representing a 74% increase year-over-year. Both metrics surpassed the upper range of our guidance. Drilling down into our third quarter results, again, total revenue rose to $194 million with cloud communications revenue of $139 million, up 15% from last year.

Our cloud communications revenue benefited from growth across all our products and customer categories. And as a reminder, we go to market serving 3 customer categories within cloud communications revenue, direct enterprise customers, programmable customers and global communications plans customers. We grew revenue 30% year-over-year in our direct enterprise customer category. The flexibility and control to build custom communications environments that enhance both customer and employee experiences using the Maestro platform continues to resonate with enterprises.

Our programmable services category grew 55% year-over-year. We experienced strong demand for messaging, which represented 24% of cloud communications revenue and was driven by commercial customers in e-commerce, financial services and healthcare, as well as $8 million recognized from political campaign messaging.

In fact, for the last 12 months ended September 30, compared to the same period last year, our commercial messaging revenue grew 32%, a very tangible demonstration of our ability to acquire new customers and take market share.

For global communications plans, our third quarter revenue grew 5% year-over-year, slightly ahead of our expectations, reflecting stable momentum.

In terms of operating metrics, our third quarter net retention rate was 117%, an increase of 6 percentage points from last quarter. Political campaign revenue contributed approximately 2 percentage points.

Our ARPU climbed to a record $212,000, reflecting our success in attracting and serving large enterprises for their business-critical communications and modest benefit from political campaigns. Adjusting for political campaign benefit, the third quarter ARPU grew to a record $201,000.

Our third quarter non-GAAP gross margin was a record of 58%, up approximately 3 percentage points from the prior year's quarter as we continue to benefit from our 4 gross margin expansion pillars. We generated free cash flow of $14 million, showing strong flow-through from adjusted EBITDA. We remain on track to achieve greater than $50 million free cash flow in 2024.

Before I turn to the full year outlook, let me summarize our third quarter business model achievement. When compared to last year, revenue grew 28%. Within total revenue, cloud communications revenue grew 15%. The conversion to gross profit was very strong with gross profit growing 22% on our 15% cloud revenue growth, setting a record quarterly gross margin of 58%. Operating expenses grew 7%, with half of that coming from increased investment in R&D innovation, as David outlined from Reverb, all adding up to a remarkable profit growth of 74%.

Now turning to our outlook.

We are raising our full year guidance. We now expect revenue to be $742 million at the midpoint of our range, reflecting a $27 million raise to our previous guidance and year-over-year growth of 23%.

We expect adjusted EBITDA to be $79 million at the midpoint, representing a 65% profitability growth over last year. Embedded in our updated full year projections, we're now estimating a $25 million cloud communications revenue contribution from political campaign messaging customers, which notably represents less than 5% of cloud communications revenue. In closing, our priorities remain consistent: serving and delighting our customers, executing with precision and staying committed to long-term profitable growth. These priorities were clearly reflected in the innovation on display at the Reverb event, a testament to the emerging market opportunities captured by the ingenuity and hard work of our Bandmates. We believe our culture of innovation will propel us forward through the next several years as leaders in the market.

Now I'd like to turn it back to Sarah to begin the question-and-answer portion.

Thank you, Daryl. And as he said, we will now move into the question-and-answer session. We'll be joined by our Chief Product Officer, John Bell, to provide additional insight on your innovation road map questions. [Operator Instructions] All right.

Let's jump in.

Our first question will be from Ryan Koontz with Needham. Ryan, you can go ahead with your question. [Operator Instructions] Ryan, are you ready? I don't hear you. We're going to take another question, and we'll come back to you, Ryan, okay? All right.

Our next will be Jim Fish with Piper Sandler. Jim, we can't hear you.

Can you hear me now?

Yes.

Awesome. Well, I'm happy that I get to be the first one on this. Nice quarter, guys, especially even when normalizing everything, and I appreciate all that color, Daryl. Maybe just to dive into on the RCS side of things, which is kind of a hot topic here in the space. Relatively kind of, I'll say, not new, but a big sign-up with Google here. I guess what do you guys see playing out with RCS versus SMS volumes on the messaging side and how that could impact your gross margins moving forward?

Thanks, Jim, and good to see you. I'm joined today by my Bandmate, John Bell, with whom I've had the pleasure of working for 13 years. He's our Chief Product Officer, and I'd like to ask him to handle your good question about RCS and what we've talked about today.

Yes. Great question, Jim. I'd say it's still early days for RCS and RBM, which use cases will work best for which technologies still early along with the economic impact of it.

So we're still navigating it, but I think there's still a lot of uncertainty about how all the different channels will balance out over time as we move forward.

Makes sense. And then you guys talked about the driver -- or I'm sorry, voice coming in a little bit higher than you guys were expecting.

Just trying to understand what was the cause of that.

Thank you, Jim. We've had broad usage in voice across the different enterprise verticals and categories that we serve. Contact center certainly continues to be a focus for us, both in that period and going forward. But very pleased both domestically and internationally with the usage of voice as a driver that we pointed out.

Thank you, Jim.

Our next question will be from Arjun Bhatia with William Blair. We don't hear you. No, we don't hear you. Did you approve the use of your microphone? All right.

Okay. We'll come back. We'll come back to you, Arjun. All right.

Our next question will be Will Power with Baird. [Operator Instructions]

Okay. Can you hear me?

Yes. Good job.

All right. Awesome. Maybe just come back to -- I'm sorry, Universal Platform. Great to hear some of the highlights. It sounds like a real success. Maybe for John, who's on stage, I'd just love to kind of hear what kind of feedback you're getting from customers. And I guess if you kind of break it down, I mean, David went through a lot. I mean, you've rolled out a lot at Reverb. Are there a couple of things that we should really be focused on as investors that can be bigger drivers over the next couple of years? And I guess coupled with that, again, what's kind of resonating with customers as you get feedback?

Thanks, Will. John?

Yes, great question.

I think when you look in totality of what we rolled out, it really represents Bandwidth's open approach towards the market.

Our integrations to all the major UCaaS, CCaaS, AI platforms, really important. And then I'd also point out our programmable voice API that we've rolled out globally as well being really important.

As we see more and more new entrants into our market, many of them are coming from different technical backgrounds.

And so having that programmable voice platform helps us serve those new entrants with the technologies they're familiar with.

And so I think looking at the integrations and the technical breadth that we're taking globally, really important to us for the long term.

Okay. And then maybe -- for maybe David or Daryl, just thinking about the messaging growth, excluding political, just be great to get any other color you could distill down from us in terms of key drivers and how those kind of core trends trended versus recent periods here?

So in one of the customer examples that we cited in the period, Will, we talked about how use of our Universal Platform API for messaging was a key driver in winning them away from their incumbent deliverability and demonstrating that the messages sent, received on time and accurately is a huge insights product that we offer that differentiates us for the commercial customers. And I think that, that value will continue to resonate in the next year as we think about messaging used through the Universal Platform.

In terms of the financial contributions of messaging, net political, we'll pause and ask Daryl if you'd like to add to anything.

No, no. Thank you, David. And certainly, Will, it's so nice to say hello to you. We're really pleased with the performance of our commercial messaging in the third quarter. It again performed off the second quarter very well. If we take commercial messaging ex surcharges, ex political, it grew 18% in the third quarter off of 18% in the second quarter. We're really happy with that figure. That's more than double our nearest competitor in the space, and that nearest competitor includes surcharges.

So we're happy with the growth there. And the healthcare company that David highlighted, the healthcare platform, where they had deliverability issues with that competitor, and we were able to onboard as just a customer highlight, onboard them successfully in the third quarter. It's the attraction of the platform and our customer service and operations that seems to resonate really well with our commercial messaging customers.

Thanks, Will.

Our next question will be from Eamon Coughlin with Barclays. [Operator Instructions] He was there and he's gone. All right. We're going to move on to Meta Marshall with Morgan Stanley. [Operator Instructions] All right. Meta, we're going to move on. We're going to try Austin Cole at -- no, we're going to go to Arjun Bhatia with William Blair. We're going to give this one another shot. Arjun? We still don't hear you. Why don't you send me your question, I'll read it.

Okay. All right. We'll go to Austin Cole with JMP Securities. [Operator Instructions] We'll try Pat Walravens with JMP.

And how is the volume? And the volume is working too. Sweet. It's not that hard.

So I'm not sure what's going on.

Okay.

So congratulations. It's awesome.

So Dave, I mean, you have all these product announcements.

You've got the Nomadic Global, you've got Number Reputation Management, the AI Bridge, I mean, it's incredible how much product you guys are delivering, but which of these is most likely to move the needle soonest, so from an investor's point of view?

Thanks, Pat. That's a very insightful question. And I would welcome that opportunity to speculate actually because I think it's anybody's best guess. But removing friction from things like porting and doing things in a single universal user experience across expanding country footprint are very tangible, very immediate and very relevant to the decision-makers we talk to today. Those are actionable. They're gritty. And that's where I -- that's what I would guess.

Okay. And then, Daryl, you addressed this already a little bit, but it's already coming up.

So I'm getting the, oh, but this political messaging is a onetime benefit, right? What's the response to investors who are skeptical who or saying you're having a onetime benefit? Just give us the top 2 or 3 points.

Well, look, no one should dismiss the political campaign customer because they also participate in both market engagement, which is commercial and civic engagement.

So we grow across all of those 3 forks. We're really pleased with that. No one should dismiss our commercial revenue growth at now 2 quarters in a row, twice our nearest competitor. We're really pleased with the profit growth for the year. We're really pleased to have raised our guidance, our revenue guidance $27 million, $7 million in cloud communications with several million dollars of that coming from commercial revenue. And we're looking forward to continuing that momentum. I don't think that there's a -- honestly, I don't think that there's a criticism in there growing twice the nearest competitor.

I would only add to that, Pat. We'll certainly have to wait to guide '25 later. But I don't think I'm speaking out of turn, Daryl, when I suggest that we'll continue to grow profit next year.

So despite anyone talking about onetime political contribution, we'll continue to grow profit next year.

So over the last several years, everyone has seen high-quality profit growth out of our business model. And indeed, the model taking just this last quarter, growing gross profit 22% on 15% revenue growth, growing our EBITDA to the extent that we did, we intend to keep extending that profit growth, whether there's a cyclical political campaign headwind or not. That is -- that's the nature of our commercial business. It is taking market share, and we're very pleased with that.

All right.

We are going to try Eamon Coughlin with Barclays.

Can you guys can hear me?

Yes.

Sorry, I'm on for Ryan Mac. Congrats on a great quarter.

We are hearing more interest from customers on generative AI use cases.

Given the complexity and uptime requirements for these use cases, could Bandwidth have an edge for enterprises looking to activate around these voice AI use cases?

Thanks, Eamon. I'll begin and then invite John Bell to pile on. It's certainly the case being vertically integrated and having a universal footprint all our own that we have the ability to see quality, to promise quality and to deliver it in vital media and signaling use cases for voice, handing it off, sending and receiving it across important jurisdictions and doing that in a regulatorily compliant way.

So yes, if you're doing AI use cases, you want to work with a provider that is responsible for the entire tech stack. But let me pass it over to John.

Yes, I agree. And we're watching a number of different AI models being used by enterprises.

And so providing them the flexibility and the freedom of choice of which platforms they're choosing to use, making sure they can easily integrate into the communications stack is what's really important.

And so we believe the foundational investments we've made in the Universal Platform are really applicable to this future.

Got it. And then just trying to get a better understanding for political expectations for 4Q. Should we expect similar results to 3Q or a little more or...

We recognized $8 million of political campaign revenue in cloud communications in the third quarter. And inherent in our guide of around $25 million now after experiencing [ 338 ], the remainder of $11 million we're expecting in the fourth quarter.

So we are expecting a bit of a growth in terms of this last quarter.

And our last question will come from Meta Marshall at Morgan Stanley.

Okay. I don't know if we're going to get Meta, but I do -- I'm going to give her one more second, and I'm going to read Arjun's question while we're waiting for Meta to come up.

So Arjun at William Blair asked, on messaging, the growth is exceptional. Where is the incremental share in usage coming from? Is that new customers, from competitors or existing customers expanding? Or are these net new use cases that are coming live that didn't exist previously?

So it certainly is a combination of existing and new customers with existing customers always out contributing just based upon the base of business we have with some stellar enterprise brands. Use cases always are evolving into creative and exciting new ways for end users, but there's nothing fundamentally different or unexpected about the way in which our customers are going to market with messaging, using our platform, both domestically and now also internationally.

I'd like to echo David's comments. They're on the mark, and I want to punctuate them with our net retention rate.

Our net retention rate without the political tailwind is 115% for the quarter. And we're very, very pleased with that. That demonstrates -- Arjun, that demonstrates a combination of new customer -- with our revenue growth, a new customer and a very nice growth rate among the existing customer cohort from last year.

So we're seeing it's very broad.

All right. Arjun did have one additional question.

With the strong growth in global communications, are we already seeing AI drive more volume in voice? Or is that still to come?

It is already launched, adopted and growing part of our Maestro platform.

Our AI Bridge product now offers 5 partner integrations that are exciting.

So yes, it has begun.

Okay. And that -- yes, I don't think we're going to be able to hear Meta.

So sorry, Meta, we will talk to you very shortly.

We have a call with you scheduled, so we'll follow up there. And this concludes our question-and-answer session. Thank you all for joining today's presentation.

You may now disconnect, and have a wonderful day.