Bandwidth Inc (BAND) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Bandwidth Inc. First Quarter 2018 Earnings Results Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Marc Griffin.

Thank you, good afternoon, and welcome to Bandwidth's First Quarter 2018 Earnings 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 then we will 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 quarter of 2018 and the full year of 2018, our plan is to execute on growth strategy, our ability to maintain and 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 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 10-K filing on February 26, 2018, as updated by other SEC filings all of which are available on the Investor Relations section of our website at bandwidth.com, and on the SEC's website at SEC.gov. 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 on the SEC's website at sec.gov.

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

Thank you, Marc, and thanks to everyone for joining us on the call today. Our 2018 is off to a great start with outstanding first quarter performance. Our success continues to be derived from our deep roots serving our customers. Bandwidth has a tremendous opportunity ahead, and we are well positioned to fulfill our mission to develop and deliver the power to communicate.

Communication between customer and company is at the very heart of how healthy enterprises operate, innovate and drive growth. Today, organizations increasingly embed mission-critical communication functions in their products and services to deliver real time connected experiences. Our market is growing because of enterprise demand for cloud applications and integrated communications experiences within workflows, customer-facing applications and business processes. The rapid progress of consumer and business voice-driven communication experiences is also increasing demand for our software-powered communications platform.

We are honored to serve many of the leading companies, who are ushering in this new era. Our customers choose Bandwidth because we empower them to embed seamless communications within their products and services in a reliable, flexible, scalable and cost-efficient manner.

Enterprises require the versatility of a cloud-based software platform, coupled with the reliability of a network provider to address their end-to-end communication requirements. We are the only software platform that provides complete communication solutions with integrated 9-1-1 services, which connect end users to emergency services with reliable and accurate emergency routing.

To summarize the first quarter results, total revenue came in at $53 million and was highlighted by a 23% year-over-year increase in CPaaS revenue.

This was above our expectations, driven by robust demand and the focused execution of our team. Our accelerated CPaaS revenue growth during the first quarter came primarily from the expansion of our relationships with existing customers, evidenced by our 115% dollar-based net revenue retention rate.

During the first quarter, we struck a chord in the market, as we surpassed the 1,000 total enterprise customer milestone. This represents a 26% year-over-year growth in active CPaaS customers, who on average, spend more than $150,000 with us each year. We continue to see balanced revenue growth from a broad and diverse set of customers across all our services.

Innovative enterprises, both large and medium-size continue to choose Bandwidth because of our communication platform, which makes it easy to build and deploy applications and services. Our intuitive software APIs support launching and scaling from day 1 and require minimal lines of code to build customized applications. Enterprises can massively scale nationwide with us at launch without sacrificing quality. And while enjoying the most stringent service level requirements.

Our ability to co-create with our customers and provide the agility to rapidly innovate with our platform is instrumental and attracting enterprises, seeking to embed powerful communication capabilities in their products and services.

We are committed to building innovative product capabilities to meet our customers' needs. Our team has continued to adapt to a dynamic environment, to grow our business, and we intend to invest in the continued development of our platform and product features to support our enterprise customers as communications technologies evolve.

I also want to briefly note that Bandwidth will be processing all our customer data in compliance with general data protection regulations, or GDPR, when it becomes enforceable on May 25, 2018. To enhance our support to customers in their own GDPR compliance efforts, we are providing a data processing addendum to our existing and future customer agreements.

Additionally, next quarter, we expect to achieve our ISO 27001 certification, which is currently in its final phases.

Last, regarding our international offerings, as we stated previously, 2018 will be a year of discovery. To comprehensibly understand and assess opportunities on how best to serve our existing customers internationally, we welcomed onboard our leader of international expansion during the first quarter.

Many of our existing enterprise customers already operate at scale internationally or have plans to do so. Initially, we plan to follow and fulfill the international demands of our existing customers, rather than building to acquire new customers. As a reminder, our international services currently are limited to outbound international calling and outbound international messaging and our international business is currently immaterial. If we decide to pursue an opportunity, we will take a disciplined approach to capital allocation and biased towards building durable, structural advantages that deliver quality and cost benefits, consistent with our experience here in the United States over the last decade.

Finally, I want to take a moment to welcome our new Band mates who joined us during the first quarter. Thank you also to our current team for conducting our hiring plans and for harmonizing with so many folks in so little time. It is exciting to hear our vibrant office culture resonating with the addition of these new colleagues. Altogether, we are excited about developing and delivering the power to communicate to our enterprise customers in the years ahead.

With that, let me turn it over to my colleague, Jeff Hoffman, to provide more details on our financials. Jeff?

Thanks, David, and good afternoon, everyone. On the call today, I would provide a more detailed overview of our first quarter financial performance and then provide our outlook for the second quarter and full year 2018. Following my remarks, we will open up the call to your questions.

First quarter was an exceptional performance for Bandwidth, highlighted by accelerated revenue growth and better-than-expected results across all guided metrics. This was primarily driven by existing customers, but also from new customers, which combined, drove higher usage levels across many of the offerings on our platform. We enjoyed strong ongoing demand, as enterprises continue to embed voice, messaging and 9-1-1 into their products and services.

During the first quarter, our total revenue was $53 million, up 34% year-over-year and $5.5 million above the high-end of our guidance range.

Within total revenue, CPaaS revenue was $38.9 million, up 23% year-over-year and $2.4 million above the high-end of our guidance range. The remainder of the revenue upside came from other revenue, which contributed the remaining $14.1 million of total revenue, up from $8 million in the first quarter of 2017.

Other revenue included a onetime benefit of $6.3 million, related to the Verizon legal settlement in the first quarter, which was greater than the $4.4 million we had assumed on the guidance on our last call. This was due to the fact that we were able to reconcile and provide bill credits from amounts previously billed faster than anticipated, and therefore, recognize the full settlement amount in the first quarter.

Excluding this settlement, our year-over-year total revenue growth would've been 18% in the first quarter of 2018. We ended the first quarter with 1,028 active CPaaS customer accounts, up 26% year-over-year. In addition, our dollar-based net retention rate was 115% compared to 109% during the first quarter of 2017.

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 $28.7 million, yielding a gross margin of 54% for the first quarter 2018, up from the $19.1 million and 48% gross margin, we achieved in the first quarter of 2017.

Excluding the impact of the legal settlement, our non-GAAP gross profit would've been $22.5 million, yielding a gross margin of 48%.

First quarter adjusted EBITDA was $10.7 million compared to $6.8 million for the same period last year, which reflects our strong CPaaS performance as well as the settlement benefit, partially offset by an increase in operating expenses primarily driven by higher personnel-related costs to support our growth. On a GAAP basis, we reported net income of $6.2 million or $0.30 per share, based on $20.5 million weighted average diluted shares outstanding during the first quarter of 2018.

Our non-GAAP net income in the first quarter was $6.7 million or $0.33 per share based on $20.5 million weighted average diluted shares outstanding.

Our first quarter non-GAAP earnings per share guidance of $0.07 to $0.10, included the tax adjusted benefit of a portion of the settlement in the amount of $4.4 million. If we normalize for the balance of the settlement of $1.9 million, our non-GAAP net income would've been $5.4 million or $0.26 per diluted share, which is still well above our guidance for the first quarter, primarily due to the strong CPaaS performance in addition to the lower-than-expected general and administrative expense in the quarter.

During the first quarter, we generated $11.2 million in net cash from operations and $9.8 million in free cash flow, which includes purchases of property and equipment as well as capitalized software development costs for internal use. I want to remind everyone that 2018 is an investment year for us, and we plan to use our IPO proceeds to more aggressively invest in extending our CPaaS platform to better serve our customers and to support our growth.

Accordingly, we anticipate our 2018 annual consolidated non-GAAP gross margins to be consistent with our annual 2017 results of 48%.

Now I'd like to finish with some thoughts regarding our financial outlook beginning with the full year 2018. In terms of CPaaS revenue, we are increasing our full year guidance to $159 million to $160.5 million, or a growth of 21% at the midpoint of the range. We are increasing our total revenue for 2018 to be in the range of $193.1 million to $194.6 million. As a result, non-GAAP earnings per share is expected to be in the range of approximately breakeven to a loss of $0.11 per share. This outlook assumes weighted average basic shares outstanding of approximately $17.7 million.

Turning to our guidance for the second quarter of 2018. We expect CPaaS revenue to be in the range of $38.5 million to $39 million, or up 23% year-over-year at the midpoint of the range. This is consistent with our performance in the first quarter of 2018, which is a function of 2 primary contributors: First and foremost, our better-than-expected first quarter performance; second, we expect one of our large enterprise customers will grow their usage with us in the second quarter to a higher volume pricing tier, as defined at the beginning of our long-term agreement. As this customer continues to expand their usage, along with our overall customer base, we expect sequential revenue growth to resume in the third quarter as our full year guidance indicates. We expect total revenue to be in the range of $45.1 million to $45.6 million for the second quarter. And looking at total revenue, it is important to keep in mind that we previously expected to recognize the remainder of the Verizon settlement during the second quarter. However, as discussed a moment ago, that occurred earlier than anticipated in the first quarter of 2018.

Non-GAAP earnings per share is expected to be a loss in the range of $0.11 to $0.14 per share. This outlook assumes weighted average basic shares outstanding of approximately $17.7 million.

So in summary, we're very pleased with our first quarter execution, and we continue to believe we are well positioned to take advantage of our growing multibillion-dollar market opportunity. With that, I will now hand the call back to the operator for the questions and answer portion of the call.

(Operator Instructions) Our first question is with Meta Marshall with Morgan Stanley.

First question, just kind of digging into gross margin and your guidance that it would be kind of similar to full year '17. And just given the upside in Q1, just wanted to kind of dive into that. Is it due to investments internationally? Is that due to kind of the customer you mentioned moving into the next tier? And that's the first question. And then the second question was just, if you could give, kind of, a source of upside that you mentioned, usage being the source of upside to CPaaS in Q1, Is that more concentrated with a couple of customers, is that concentrated with your larger customers? Or just give a sense of, is that kind of evenly distributed throughout the customers?

Thanks, Meta. This is Jeff. I'll take the first crack at this one. So regarding your gross margin question, there are a few moving parts in here. As you know, historically, we've grown our overall gross margins about 80 or 90 basis points each year throughout our history. This year, we'll be flattening a little bit, and we certainly have in the other revenue segment, Verizon with a positive there, but what's offsetting that to flatten the margins in '18 is further investment. And that is us putting the IPO proceeds to work to invest in the business for long-term growth. And we're doing that on the voice side, the 9-1-1 side as well as messaging. As to your second question, as far as the Q1 growth, it was really strong demand across the board. And as David has said in his prepared remarks, the vast majority of our growth continues to come from our existing customers and that was reflected in our dollar-based net retention rate of 115%. I will note that we did see a uptick in the quarter as well in new customer demand. And we saw that in both new customer revenue growth as well as the number of -- the growth in the active CPaaS accounts as well.

Our next question is with Richard Davis with Canaccord.

Two quick questions. One's more just a background. So I'm over in London right now. So GDPR is a pretty big issue. And one of the things that we've heard from software companies over here is that they think GDPR is going to be a bigger deal for B2B contacts rather than B2C, because the buying behavior the acquisition of list and stuff like that, et cetera, was, I guess, more according to GDPR from B2B than to B2C. Does that make -- so the question is, does that make -- I think the answer is no, but does that make any difference at all in terms of mix, B2C or B2B? And then the second question is, I saw that you guys introduced, I think, it's enterprise A2P messaging system, could you just kind of talk about that kind of matriculated down the pipeline and what you'd see for that?

Certainly, Richard. Thank you, this is David. So regarding GDPR, and your question relative to the degree of the difficulty for B2B company like ourselves versus B2C, what I can certainly share is, we have a sales team that operates off of a curated database of medium-size customers that we've built over the last decade and a very strategic sales team that is outbounding on the fortune 1000. So our prospects targets and lists are something we worked with for some time. So I don't foresee any particular or novel GDPR challenges for us as a B2B. I'm just -- I'm not able to speak to the degree of difficulty difference between us and a B2C company. If that answers that question?

Yes. No, that's helpful.

Great. And then regarding SMS A2P when you're messaging outbound to people, there are rules and there are very important protocols to follow to allow you to go to market effectively and respect the entire echo system that supports messaging. We've implemented the appropriate technology for us to be able to make that offer and feel good about the product market fit. So that -- that's how it's come about, it's through rigorous understanding of what the messaging ecosystem demands, as we all endeavored to make sure messaging remains the very rich signal carrying media that it is today.

Our next question is with Brent Bracelin with KeyBanc Capital Markets.

This is Alyssa on from Brent today. I am going to have a follow-up on the CPaaS revenue upside. Kind of within your existing customer base, is there anything to think about regarding upside in top-10 customers versus broad-based and anything to think about versus seasonality versus sustainability of, kind of, that growth that you're seeing there?

And I'll go first, this is David. And then Jeff can respond as well. Our growth, as Jeff indicated earlier, has come from a broad and diverse set of customers. There's no concentration in a way that we find particularly notable for upside among a singular customer or a segment. So we've been watching usage and enjoying the tide rising across the board. But I'll ask Jeff if he has additional color.

Yes. The only thing I would add on seasonality, is we really don't have any, if there's any, factor that I would look at or a number of effective business days on the quarter. And when I say that, sometimes in fourth quarter, around the holidays, whether it's an official national holiday or it's just one next to one, we'll see some usage impact there. But overall, not much seasonality quarter-to-quarter.

And then kind of on your new CPaaS customer adds. Is there anything to think about, kind of stand out to really see their verticals or big new customers? Or any other color around that new customer adds.

Yes. I think we said, it's was really a strong performance across the board. Verticals that we've mentioned in the past that we continue to do well in conferencing is a great space for us. Mobile has been very good for us. And we have a number of Internet giant customers that have had performed very well for us. So it's -- remains very diverse and the growth is coming from all areas product wise as well as size of customer.

Our next question is with Will Power with Robert W. Baird.

Couple of questions. I guess, first, looking at the profitability guidance for Q2, it implies an uptick in investments. I wondered if you could just give us any more color. How much of that is related to sales versus products, some of the work that you're doing on 9-1-1, messaging and enhancing that. And then I guess the second question is, maybe just an update on where you are on the sales hiring process? Is that on track, any numbers, parameters you can provide around that?

Will, this is David. During the quarter, we did invest our proceeds in areas of the company that we're excited about and much of that investment takes the form of hiring. And as I mentioned in my comments, extremely proud of the team's ability to harmonize so many people in so shorter period of time across the company. And those folks are in sales, as the second part of your question indicates, and we feel as if we are executing or hiring on plan and are proud of our team and are excited about that. Yes, we are developing messaging as a product, as we've talked about and that progress and that investment is ongoing also according to plan. And on international, as we've mentioned, we've onboarded our leader in that space and this is a learning year. But we are investing broadly in terms of hiring across the company and doing so in a way that we think is on plan.

Our next question is with Catharine Trebnick with Dougherty.

I have a housekeeping question, quickly. Do you break out your stock-based compensation against the line items on the income statement?

We will. That will be in our 10-Q, which we expect to file in the very near future. So we will have that for you shortly.

Okay, great. Then just more -- with the IPO money, you are investing more and I am been jumping between 3 phone calls, so I am -- I appreciate if I hope I'm not asking the question again. But one of them was, where are you in hiring for sales and marketing? And if there's also more emphasis on an indirect channel than a direct channel and your go-forward marketing strategy?

So thanks, Catharine. No worries, we are on plan and are hiring, both in sales and across the company. And our strategy is all direct. So we have an inside sales team and strategic sales representatives that approach enterprises direct. And we really value the customer relationship directly and have over the years. So we won't be pivoting or adding an indirect sales team that's not part of our plan.

And then the other question is there more clarity or color around the large customer base. Has there been -- you have 4 very big products, obviously, and is there more -- how can we analyze or quantify if there are new use cases within each of these larger players internet giant players that you have?

Our large enterprise customers, as you can imagine, are very proprietary about how they work with us and in what products and many of them compete with each other. And so we need to be respectful about how we work with our enterprise customers. So it's hard for me to give you a clean guide on how you can understand when we're even more deeply embedded within these large enterprise customer accounts. But it is consistent that over time we have continued to add products that we support within each of our largest enterprise customers, certainly, within the top 10 and beyond. And we don't see that trend, either going flat or reversing anytime soon.

Our next question is with Pat Walravens with JMP Securities.

So I -- Dave, maybe to start. How do you think about the international opportunity, like, how -- what regions are most attractive? And what makes the region attractive?

Thanks, Pat. Here's how I think about international. It is attractive based upon, if you're our current customer, and I was talking to as our primary relationship path at the company, I would understand what your spend is in a particular jurisdiction, and that's what it would make most interesting relative to others who are spending less or on a service that is more difficult to provide in that jurisdiction. So I would describe that approach as opportunistic, or, if you will, not build it and they will come, but instead, follow demand. And where that may not appear to be overly ambitious. We have historically taken a very responsible and prudent approach to how we grow and invest. And so we're being -- we're focusing on '18 as a learning year, where we prioritize jurisdictions for entrants based upon our current customer base and what they're serving in that place today. Does that answer your question?

Yes. But I got more. So where -- the net dollar expansion rate. Yes, no. I think I'm probably the last one, so I'm going to put in a couple of here if it's all right. So the net dollar expansion rate that's great, right? What a great move. How should investors think about where that goes from here?

So hey Pat, this is Jeff. How I would think about it is, we're now in a range, where I think investors could -- would be in that -- it could move a little bit, depending any given quarter that would be in there. One of the things that we had -- was talked about -- was we did have 1 large customer that had reached a higher-volume pricing tier within there. And so there might be a little bit pressure in the next quarter or 2. But I think the 115% is right about right.

Okay. And then similarly, how should we think about the CPaaS growth longer term, like not sure how you want to answer that, but is it something that you keep accelerating? Is this about the right point? How do you guys think about it?

I do think that, that is a -- that's a billion dollar question. It really is exciting to see across the board how voice is growing and how messaging remains a creative canvas on which lots of teams are painting, and we're supporting those. And we think the market is dynamic, and is fluid, and it won't coalesce to a fixed rate of growth or to winners and losers for quite some time. So it is a wonderful opportunity to have resource and to be investing and to be building. But we really don't know what the terminal growth percentage, 18, 24, 36, 48 months out really is.

(Operator Instructions) Our next question is with Josh Goldberg with G2.

Just a question about the reinvestment of the IPO proceeds. Based on your guidance of the second quarter, just so I get it right, if you're assuming gross margins similar to last year's second quarter around 44%, you would have to spend an additional $5 million on operating expenses. Is that the right way to look at that and I have a follow-up.

Hey Josh, this is Jeff. Yes, I think there -- I think that is the right way to look at it. I think how you can think about that expense is additional hiring and sales and marketing as well as R&D into the extent that we need to support our growth within G&A. There is some timing of projects that are more onetime in nature, that I would describe as IT and finance related that could fill that up in second quarter.

So is that second quarter number kind of high water mark for the year? Or you expect it to trend upward from there on expenses?

I would say that's in the range of the high water mark, but certain, fourth quarter would be in a similar range, plus or minus.

A little level of conservative based on the spending that you're doing. Regarding the CPaaS revenue, obviously, 23% in the net retention rate, really strong. Maybe talk a little bit about what you're seeing that's getting you to this much faster growth rate. And obviously the confidence in the back half of the year is based on your large customers increasing, but it would seem like, you're just adding a lot of customers having a higher amount per customer and getting more retention, it just seems like's a lots is going your way right now in the first 3 months of the year.

I think that's -- this is David. That's a fair overview. Our customers on average are spending $150,000 with us. And that's consistent with our past. So there's no significant change in that. And we are adding more customers as we noted. So I think you're generally and directionally correct.

Or is there something related to usage that helped you in the quarter? Or you thought this was more of like a recurring revenue stream that you feel comfortable with?

Well, we are adjusting usage-based business. So that's the primary driver for an increase.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would now like to close the conference. Thank you for your participation today. You may now disconnect your lines.