Bandwidth Inc (BAND) 2017 Q3 法說會逐字稿

Greetings and welcome to the Bandwidth third-quarter 2017 earnings results conference call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Seth Potter, Investor Relations.

Thank you, and good afternoon and welcome to Bandwidth's third-quarter 2017 earnings call. Today we will 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, the Chief Financial Officer of Bandwidth. They will begin with prepared remarks and then open 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 fourth quarter of 2017 and full year of 2017; our plans to execute 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 view only as of today and should not be considered our views as any substitute subsequent to this 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 a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our financial prospectus filed pursuant to Rule 424(b) on November 13, 2017, as updated by our other SEC filings, all of which are available on the investors section of our website at bandwidth.com and on the SEC's website at sec.gov.

Finally, 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 bandwidth.com and the SEC's website at sec.gov. With that, let me turn the call over to David.

Thanks, Seth, and thank you to everyone joining us today on our first call as a public Company. Our IPO was an exciting milestone, and Jeff and I would like to start by thanking our enterprise customers and our amazing Bandwidth teammates, who have made our success possible.

Given that this is our first earnings call, we thought it would be helpful to provide a brief overview of Bandwidth. I will then summarize the operating results for the third quarter and discuss our strategic growth initiatives before turning it over to Jeff Hoffman, our CFO.

Enterprise customers use our software platform and our all-IP network to provide voice calls, text messages, and 911 services to end users of their applications and devices. You might use Bandwidth today if you use Google Voice, Microsoft Office 365, Skype for Business, RingCentral, or smartphone apps like Ping or GrubHub and ZipRecruiter.

We believe we are entering a golden age of communications, heralded by a new voice user interface, natural language processing, and always-on intelligent devices. We are honored to serve many of the leading companies who are ushering in this new era. Our software platform, nationwide network, and amazing team give our customers the powerful tools they need to deliver the highest quality voice, messaging, and emergency services for any application, website, or device.

Our software platform is uniquely positioned to meet the end-to-end needs of our enterprise customers. At the heart of our communications-platform-as-a-service, or CPaaS, solution is a robust set of application programming interfaces -- known as APIs -- that allow our enterprise customers to seamlessly integrate voice and messaging directly into their products, services, and applications.

The APIs are built atop our nationwide all-IP network that we own and control, which allows us to offer the kind of reliability and quality that an enterprise customer demands. In terms of the market opportunity, according to IDC, the overall CPaaS market is expected to reach $8.2 billion by 2021. We believe this market is being driven by a number of factors, including enterprise demand to embed communications into their applications.

In today's mobile world, collaboration is more important than ever -- and the reason why enterprises are working to make communicating on the go easier and more accessible by incorporating voice and messaging into the applications we use every day where we live, work, and play. Over the last decade, voice calling has migrated toward unified communications as well as integrated solutions within enterprise applications such as Google Suites and Office from Microsoft 365. Enterprise users communicate and collaborate using these applications, which use software-powered communications platforms such as Bandwidth's to carry out the calling and messaging functions.

Another trend driving CPaaS growth is the shift to a voice-driven interface from text. Voice-first user interfaces, built on natural-language processing and AI technology, are becoming a natural extension of existing voice-enabled devices, such as mobile phones.

According to Gartner, by 2018 more than 2 billion people will use conversational AI to interact with virtual personal assistants, known as VPAs; virtual customer assistants; and other AI-enabled smartphones and connected devices on a regular basis. By 2020 more than 50% of cloud interactions will be in homes with VPA speakers.

Looking forward, we expect the rise of voice as an interface to further expand our opportunities. Amazon's Alexa, Google Assistant, Apple's Siri, Microsoft's Cortana, and Facebook M are all examples of voice as the first new user interface since the mouse and touchscreen.

Bandwidth is well positioned to benefit from all these trends as well as power the next wave of communication innovators providing services and devices for our connected homes, cars, and workplaces. In regard to our differentiation in the market, we are the only CPaaS provider that combines both our API platform and our all-IP network, which allows us the ability to offer enterprise customers the control and visibility they demand so they can offer a high quality experience for their end-user customers.

Voice quality is critical for an enterprise, since a delay could result in a dropped call or losing important parts of the conversation. In addition, we are the only CPaaS provider that offers our own 911 emergency network capabilities, allowing us to provide enterprise customers secure, state-of-the-art 911 provisioning and a real-time geospatial routing platform.

Our third-quarter results are evidence that our strategy is working. Total revenue came in at $41.3 million, driven by a 10% year-over-year increase in CPaaS revenue. In the third quarter our active CPaaS customers increased 18% year over year to 918 customers. We are very proud to have achieved solid revenue growth with limited sales and marketing investment, given our bootstrapped history, and believe our growth inflection point is ahead of us.

Looking forward, our focus will be to accelerate our growth by adding new enterprise customers across a broad range of industries which need enterprise-grade voice and messaging services. We plan to use a portion of the IPO proceeds to ramp our sales and marketing efforts, given the demand we are seeing in the market. We expect our existing enterprise relationships to drive growth with not only increased usage of our platform, but often customers initiate with one of our services and subsequently add other solutions. Additionally, we frequently benefit from the opportunity to provide our services to different lines of business within existing customer organizations, particularly with larger enterprises, where we engage with multiple product leaders across various lines of business.

We also continue to build innovative product capabilities to meet our customers' needs. We intend to invest in the continued development of our platform and product features to support new use cases and help our enterprise customers succeed as communications technologies evolve.

Finally, given that some of our enterprise customers operate globally or have plans to do so, we plan to explore the development and growth of our international offerings. Today our international business is immaterial; and while we do not have specific expansion plans to announce today, we are actively exploring opportunities, including those where we might have a cost or quality advantage in serving our customers.

So in summary, we were very pleased with the strong execution in the third quarter. We remain excited about our future and our ability to grow our CPaaS customer base, expand with existing enterprise customers, and further leverage our unique combination of our API platform and our all-IP network.

With that, let me handed over to Jeff Hoffman, our CFO, to walk through the financials in more detail. Jeff?

Thanks, David. I will provide a more detailed overview of our third-quarter financial performance and then provide our outlook for the fourth quarter and full year 2017. Following my remarks, we will open up the call to your questions. But given that this is our first call as a public company, I wanted to provide some additional color on our business model.

Our CPaaS segment is our focus and represents the majority of our revenue. CPaaS is a usage-based revenue model, meaning we charge our customers per voice minute, per phone number, per text message, and per 911-enabled phone number.

Voice usage from our enterprise customers is driven by voice communication, which consists of inbound, outbound, and toll-free voice minutes, while monthly service fees include the provision and management of phone numbers and 911-enabled phone numbers. Messaging services are driven by the number of messages that go across our platform and network.

Our other segment includes our legacy services, such as SIP trunking, data resale, and hosted voice over IP -- as well as revenue generated from carriers, SMS registration fees, and other miscellaneous products and services. This segment represents a smaller portion of our revenue and going forward is expected to continue to decline as a percentage of our total revenue.

We monitor key metrics that we plan to share each quarter that collectively help us evaluate our business. We believe that the number of active CPaaS customer accounts is an important indicator of the growth of our business, the market acceptance of our platform, and our future revenue trends.

We define an active CPaaS customer account at the end of any period as an individual account for which we have recognized at least $100 of revenue in the last month of the period. Dollar-based net retention rate is another key metric we track to measure our ability to maintain and grow our relationships with our existing customers. Dollar-based net retention rate compares the CPaaS revenue from customers in a quarter to the same quarter in the prior period.

Now let me turn to our third-quarter results. We are pleased with our third performance, which was driven by ongoing enterprise demand, as enterprises continue to embed voice and messaging into software applications. Our results were consistent with the high end of the range provided in the recent development section of our prospectus.

Our total revenue was $41.3 million in the third quarter, up 7% year over year. And within total revenue, CPaaS revenue was $33.4 million, up 10% year over year. Other revenue contributed the remaining $7.9 million of total revenue, down from $8.4 million in the third quarter 2016 due to the expected continued decline in legacy services.

We ended the third quarter with 918 active CPaaS customer accounts, up 18% year over year. In addition, our dollar-based net retention rate was 105% compared to 112% during the third quarter of 2016, which primarily reflects our decision to curtail services to a competitive CPaaS provider, which we expect to only impact the fourth quarter going forward.

Before moving on to profitability metrics, I would like to point 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 non-GAAP gross profit, which excludes stock-based compensation and depreciation, was $19.9 million, yielding a gross margin of 48% for the third quarter -- an increase from $18.3 million and 47%, respectively, for the same period last year. The improvement was driven by our CPaaS segment, where we realized an increase in CPaaS revenue and a decline in unit costs for 911, phone numbers, and voice services.

Third-quarter adjusted EBITDA was $5.2 million compared to $6.2 million for the same period last year, which reflects an increase in operating expenses, primarily driven by headcount-related costs. As David had mentioned earlier, we are very pleased with Bandwidth's ability to achieve solid revenue growth with limited sales and marketing investment throughout our self-funded history. Given the successful IPO, we plan to expand our investments in sales and marketing in order to accelerate our growth going forward.

Non-GAAP net income in the third quarter was $2.2 million or $0.15 per share, based on 15 million weighted average diluted shares outstanding. On a GAAP basis, net income from continuing operations attributable to common stockholders for the third quarter of 2017 was $1.4 million or $0.11 per share, based on 13.3 million weighted average diluted shares outstanding. During the third quarter we generated $4.8 million in net cash from continuing operations and $2.7 million in free cash flow, which includes CapEx and capitalized software development costs for internal use of $2.1 million.

Turning to the balance sheet, as of September 30, 2017, Bandwidth had cash and cash equivalents of $5.4 million and $38.5 million in debt. Subsequent to the end of the third quarter, Bandwidth closed its Initial Public Offering of Class A common stock on November 14, 2017, which generated proceeds net of underwriting discounts and commissions to the Company of approximately $74.4 million, a portion of which was used to pay down all amounts outstanding under our term loan facility.

Now I'd like to finish with some thoughts regarding our financial outlook for 2017, starting with the fourth quarter. We expect fourth-quarter CPaaS revenue to be in the range of $34.2 million to $34.7 million. We expect fourth-quarter total revenue to be in the range of $41.4 million to $41.9 million, which reflects our CPaaS revenue guidance as well as the expected ongoing decrease in other revenue.

Non-GAAP EPS is expected to be in the range of zero to $0.01 per diluted share. This outlook assumes weighted average diluted shares outstanding of approximately 17.8 million, which includes the shares of Class A common stock issued by the Company in the Initial Public Offering as well as the conversion of the Company's convertible preferred stock into shares of common stock.

From a full-year 2017 perspective, we expect CPaaS revenue to be in the range of $130.8 million to $131.3 million. We expect total revenue to be in the range of $161.9 million to $162.4 million.

Non-GAAP EPS is expected to be in the range of $0.50 to $0.51 per diluted share. This outlook assumes weighted average diluted shares of approximately 16.1 million.

So in summary, we are very pleased with our third-quarter execution and remain excited about our ability to accelerate growth and leverage our software platform and all-IP network. Bandwidth is addressing a large and growing marketplace, and we believe we have an opportunity to build a very large business as voice continues to become the new user interface.

With that, I will now hand the call back to the operator for the Q&A session.

(Operator Instructions) Meta Marshall, Morgan Stanley.

Great. Thanks, guys. Congratulations on the quarter.

I wanted to get a sense of -- you know, now being public and trying to ramp your OpEx line items, what you are seeing as far as hiring? Are you able to onboard those people as quickly as possible? Is there any kind of slowdown ahead for the holiday season?

And then just in kind of early reads since the IPO and targeting customers you'd like to go after, are you seeing any difference in sales cycles or conversations before and after being public? Thanks.

Thank you Meta. This is David -- and thanks very much for your question.

In regard to hiring, this morning I spent the bulk of my time interviewing. And our team is hitting all cylinders, as you can imagine, deploying our proceeds, as we outlined, toward our growth going forward. And that involves a focus in marketing and sales and other areas.

We aren't providing specific guidance or numbers around key teams. But to answer your question, we are seeing our people services group execute the way that we've been proud of for quite a while. We anticipate that we will continue to work hard to get the right folks in the right seats to execute our plan in 2018 and beyond.

To the second part of your question -- and I think there are two parts to the second part of your question -- we have identified target prospects that we are excited about approaching with both our existing strategic account representatives and our hunter team. And while there is a holiday fast approaching, historically we haven't seen a whole lot of seasonality in our business. And so we will continue to sell through the holiday with an appropriate period that reflects the culture we have at the Company, but we are an aggressive team and focused on growth. Does that answer your question?

I guess I just wanted to get a sense of conversations with prospective customers. Have they changed any now that you've gone through -- now that they have seen a little bit more publicity from you guys or a little bit more marketing? Has the conversation changed with prospective customers?

Our customers are, as you know, enterprise customers that do pay attention to the capital markets and to your status as a private versus a public Company. And we have enjoyed inbound interest in our offering from enterprise customers that we don't think historically may have been able to find us, given our bootstrapped approach to marketing historically. So I would describe the public offering as a tailwind in terms of PR, and that's reflected by activity on the sales desk.

Got it. Thanks.

Brent Bracelin, KeyBanc.

Hello, this is Clarke Jeffries on the line for Brent. I just had a question around the announcements made at AWS re:Invent. They talked about Alexa for Business, and one of the partners mentioned was RingCentral. I was just curious whether your partnerships with those communications providers -- does the relationship pull through to a service like that?

I know there are many choices of common or same providers in that service. And so when RingCentral is the chosen provider, do you get economics from that relationship?

Thanks, Clarke. While we do have customers such as RingCentral, we don't -- we respect our enterprise customers, and so I want to make sure that I'm careful in my answer. When we provide our platform and our network as a service to our customers, often they will have far-end users that are using that service, and we will benefit. But without answering the particular customer names of your question, that's a common experience we see across our customer base.

Okay. So it would be fair to say that if RingCentral was plugged into a larger platform, it could be possible that the end user you would see benefit from them choosing that provider?

It could be possible.

And then I guess my second question would be around pricing, specifically within voice, just looking at the providers. How often does pricing come in specifically with voice -- just volume discounting among the major providers? Is that a common occurrence, or is voice something where network quality is sufficiently important that price is not a part of that conversation?

Quality and cost are both important in every conversation with an enterprise customer. And our enterprise customers come to us and sign multiyear contracts. And as they grow their business and increase volumes, we will share the benefit of that with them in a pricing context.

But the baseline, most important characteristic of our service for enterprise customers is the quality of the underlying platform and network that we own and operate. That's our secret sauce. That's our advantage for the enterprise customers that we serve. But as customers scale, they should get some of the benefit of that scale as they grow with us. And historically we have had long-, long-term relationships with our enterprises as they have grown.

All right, great. Thank you very much.

Richard Davis, Canaccord.

Hey, thanks. Hopefully you can hear me. Just on the new business generation side of the house, where do you see -- I know it's a big opportunity and things like that. Where are we in this market in terms of -- when you are signing deals, are these competitive displacements? It feels like there is a bunch of greenfield. Is it 50%/50%? Is it 60%/40%? Those kind of things. Thanks.

Thanks, Richard. So we most often find ourselves in the large enterprise space displacing an incumbent provider. That's the reality we face when we are selling to the enterprise. I can't give you a numeric split in terms of greenfield versus existing, but in the large enterprise they usually have existing service that they provide.

When there is a new product, when there is a new device or a voice-driven experience, then there is a greenfield opportunity. If it's a new application that is being launched, then there is often a brand-new experience within perhaps a different product team in the customer we already serve.

But the way we think about the opportunity right now in voice is that it is very early across the board as we see creative and dynamic product teams at large enterprise engaging with their customers, or engaging with other constituencies, using AI and always-connected devices. So we are excited about the value of our platform and network in the context of enterprises that are embedding voice and messaging, as well as voice as an interface.

Great. Thank you very much.

Pat Walravens, JMP Securities.

Great. Thank you, and congratulations, you guys, on your IPO.

So my first question is pretty big-picture. Dave, why do you have confidence that you can accelerate the growth of this business?

Thank you, Pat, and appreciate your congratulations very much. We are confident -- and I am particularly confident, because we have been able to grow this business with cash that we generated historically out of our own business model, and that cash has supported a very small sales force.

Our use of proceeds with this public offering is directed at scaling the product and service that we have been able to sell into large enterprise over the course of our history. And we are focused on simply reaching more of those folks within the Fortune 1000 and beyond with an expanded sales force. So we have stuck to our knitting. We know how to train and make salespeople productive at a small scale, and with this capital we should easily be able to continue to do what we do quite well.

Thank you. And then secondly, just to help us sort of fit the right pieces into place -- this is a really big market, right? Who do you compete against the most often? Is it more traditional carriers, or is it more like the Twilio and Nexmos of the world? And where do you feel like you are best suited, and where are situations where maybe you are not as well suited?

Our average CPaaS customer is spending over $150,000 annually with us, which is orders of magnitude higher -- 10, 20 times more -- than other CPaaS average customer revenues. So most of the time when we are talking about enterprises spending that much money with us, numerically, to answer your question, most of the time our scorecard is measured against the incumbent Verizon, AT&Ts, CenturyLinks of the world.

That's the business that we are winning away when we are winning new accounts most of the time. As we come downmarket to smaller, newer teams that we are serving, we will encounter other CPaaS providers. But the lion's share of our new business going forward is squarely focused on winning against the incumbents.

Okay, that's super helpful. Thank you.

Will Power, Baird.

Great, yes, thank you. And again, I would echo the previous comments; congratulations on nice results, Dave and Jeff, out of the gate here.

I guess a couple of questions. David, you referenced the opportunity with voice-first devices, and of course you look at some of the early holiday sales results -- those speaker voice-first devices have been hot sellers. I wonder if there are early anecdotes you are able to share with respect to what you are either seeing with respect to calling trends from those devices, usage generally? And any thoughts with respect to maybe a pickup in marketing around some of those communications capabilities from those types of devices?

If we were still a private Company, Will, I would love to share some of that detail and color and anecdote. But I am learning as fast as I can, and I can simply say that generally speaking, we are excited about voice as an interface and what it means to be able to call through devices and applications that allow you to just speak to an ambient microphone in your living room or in your office -- but can't share anything specifically.

Okay. And then I want to follow up on the comments with respect to looking at potential international expansion. I wonder if there is any other color you can provide with respect to looking at organic opportunities. Is that something you could do from your own investment? Is that something that would require M&A?

And just trying to get a sense for geographies, too. It does certainly seem like a bigger push in Canada, in particular, could make sense and probably would be more limited investment versus Europe or AsiaPac. So any color there would be great.

Fair question, Will. So we -- as I said in my opening remarks, international is a growth opportunity for us. Our business right now is immaterial in the international base. So it is early days, but our DNA and our history has consistently reflected a focus on having a structural advantage when we are disciplined about capital allocation. That is how we have grown our business.

And so we will be opportunistic, and believe just philosophically that it's important to follow demand into a new country rather than to try to create it. So you should expect us to reflect the same discipline that we've had historically growing the Company. But where we have both demand from an existing customer and a favorable environment to add value and quality and cost advantage, you should expect us to exploit that opportunity readily.

Okay. Maybe if I could just get one question for Jeff, just to bring him in: looking at the CPaaS gross margins -- nice to see some improvement there year over year. I think you referenced some of the cost improvements. Maybe just give us a sense for how we should think about the cadence of additional cost improvements and expansion opportunities for that CPaaS gross margin line moving forward?

Sure, thanks, Will. Appreciate the question and the interest in Bandwidth.

So as you sort of pointed out, our gross margins have continued to grow, and that's something we are excited about and I think shows the health of the business. Historically we've grown the business at the rate that we can, being self-funded, and most of our gross margin expansion has come from either a favorable revenue mix and/or opportunities to take cost out of the business.

As we invest more in sales and marketing, we think we will be able to demonstrate more operating leverage by spreading the fixed cost of our own IP network over that larger revenue base. And we will see additional pickup in margin there as well -- and again, this is one of the big advantages of having an owned network there. And so we are excited about that opportunity as well.

Great. Thank you all.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to David Morken for closing remarks.

Thank you, Omar, and thank you to everyone on the call today for following us. And to all our investors who might be listening in, welcome to the Band, and we look forward to talking to you again in the future. And that concludes our first earnings call as a public Company. Thank you.

This concludes today's conference. You may disconnect our lines at this time. Thank you for your participation.