Bandwidth Inc. (NASDAQ:BAND) Q1 2024 Earnings Call Transcript

Bandwidth Inc. (NASDAQ:BAND) Q1 2024 Earnings Call Transcript May 7, 2024

Bandwidth Inc. misses on earnings expectations. Reported EPS is $-0.3485 EPS, expectations were $0.21. Bandwidth Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Bandwidth Inc. First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be opportunity to ask questions. [Operator Instruction] Please note this event is being recorded. And now I would like to turn the conference over to Sarah Wallace, Vice President of Investor Relations. Please go ahead.

Sarah Walas: Thank you. Good morning, and welcome to Bandwidth’s first quarter 2024 earnings call. Today, we’ll discuss the results announced in our press release issued earlier this morning. The press release and an earnings presentation with historical financial highlights can be found on the Investor Relations page at investors.bandwidth.com. With me on the call this morning is David Morgan, our CEO; and Daryl Raiford, our CFO. 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 and full year of 2024. We caution you not to put undue reliance on these forward-looking statements as they may involve risks and uncertainties and 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, 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. 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 earlier today as well as in the earnings presentation, which are located on our website at investors.bandwidth.com.

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

David Morken: Thank you, Sarah. Welcome to Bandwidth’s first quarter 2024 earnings call. We had an impressive start to the year, exceeding first quarter guidance with record quarterly revenue and our highest ever adjusted EBITDA result for a first quarter. Given the overperformance, we are raising our full year outlook on top and bottom lines. The team is grateful for the trust of our customers place in us every day and for our Bandmates who go the extra mile to support them, and I thank God for the opportunities he’s given us. This morning, I’ve asked Darryl to first walk through our quarterly results and our updated outlook for 2024, along with our recent capital structure achievements. I’ll then use the rest of the call to provide a broader perspective highlighting our fast-growing customer category, direct to enterprise, where we are seeing very encouraging progress. Darryl?

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Q&A Session

Daryl Raiford: Thank you, David, and good morning, everyone. We’re off to a solid start in 2024, feeding guidance for the first quarter, raising our full year outlook and dramatically strengthening our capital structure. First quarter revenue of $171 million grew 24% year-over-year, exceeding the midpoint of guidance by $6 million. Within that result, cloud communications revenue grew 12% year-over-year. Adjusted EBITDA of $16 million was up 215% year-over-year exceeding the midpoint of our guidance by $4 million, reflecting the top line beat and good cost control. Just a few days ago, we strengthened our capital structure by expanding our existing undrawn revolving credit facility to $100 million with a new 5-year term. This facility led by Bank of America and Wells Fargo improves our flexibility by doubling the previous available revolver amount from that established last August with our banking partners.

Yesterday, we entered into agreements with certain convertible noteholders to repurchase $140 million of our 2026 convertible notes at a discount to their face value. This leverage reducing yield accretive repurchase exercise reduced the outstanding balance of these notes to just $35 million from an initial issued principal balance of $400 million. I’d like to take a moment and talk about our capital structure strategy. We’re proud to deliver growth, profit and to be judicial with our capital structure. In November 2022, we repurchased $160 million of these notes at a very large discount, recognizing a $40 million gain. We then repurchased an additional amount in March 2023 at a discount and recognizing another gain. And now in early 2024, we have essentially eliminated the subject of the maturity of these notes through yesterday’s repurchase exercise.

We estimate our third gain from yesterday’s repurchase will be roughly $12 million. Going forward, our on-hand cash and securities balances, our revolver access to undrawn liquidity and our cash flow generating potential positions us very well to seize the market opportunities that are before us while growing our business profitably. Rounding out our first quarter results, as I noted, cloud communications revenue of $128 million was up 12% from last year. From a product standpoint, messaging continued to be a strong driver, growing 50% year-over-year and resulting in messaging now reaching 21% of cloud communications revenue. Within that result, commercial messaging grew 34%. While it is difficult to differentiate cyclical political campaign-related usage from the ongoing commercial civic engagement usage derived from the same cohort of customers, we estimate that political campaign messaging revenue from the U.S. primary elections contributed approximately $3 million in the first quarter.

Customer demand from political campaigns did appear earlier than we had expected attributed to presidential primary spend. Turning to our 3 market categories. First quarter global communications plans revenue growth was 4% year-over-year as we expected reflecting an improvement from last year’s usage trends. Our programmable services category grew 49% year-over-year, reflecting the strong demand for messaging driven by continued healthy demand from commercial customers in e-commerce, financial services and health care as well as the previously mentioned $3 million tailwind from cyclical political campaign messaging. In our direct-to-enterprise customer category, we grew revenue 20% year-over-year, reflecting Bandwidth’s ability to solve the complex communications challenges of global enterprises and the continued execution of our enterprise go-to-market strategy.

Our pipeline remains full of new opportunities across verticals and geographies. In terms of operating metrics, our first quarter net retention rate was 107%, an improvement of 6 percentage points from the fourth quarter of 2023. Our customer name retention rate once again remained in excess of 99%. Evidence of the reliability and breadth of our global communications cloud paired with our unwavering focus on customer success and continuous innovation. Our average annual revenue per customer climbed to a record $190,000, reflecting our continued focus on attracting and serving large enterprises. Our non-GAAP gross margin was 57% for the first quarter, up 300 basis points from the prior year’s quarter. This is a really great gross margin result for the company.

And it’s worth reminding that gross margin can fluctuate a small amount quarter-to-quarter. We continue to expect our full year 2024 gross margin to grow roughly 100 basis points in line with our previously provided expectations. The first quarter free cash flow result reflects a $4 million use of cash due to seasonal timing of working capital. We remain on track to achieve greater than $50 million free cash flow in 2024, which draws us closer to our 15% free cash flow margin medium-term target. We’re raising our full year guidance to pass through the first quarter beat on top and bottom lines. For the full year 2024, we expect revenue to now be $715 million at the midpoint of our range, reflecting a $15 million raise to our previous guidance, and adjusted EBITDA to be $74 million at the midpoint, also reflecting the beat and raise.

Importantly, while the timing of campaign revenue has somewhat accelerated, our full year outlook for 2024 continues to project a $40 million contribution from political campaign messaging and associated surcharges. That means, at this point, our full year guidance raise is driven by our commercial customers as opposed to our political campaign customers. In terms of sequencing political campaign revenue across the remaining 3 quarters of the year, while it’s difficult to discern and predict. Based on conversations with our customers, we expect the second quarter to reflect a relative low in political campaign messages with activity ramping in the third quarter and peaking in the fourth quarter with the election concluding in November. In closing, our excitement about 2024 remains high.

We’re pleased that we’re able to raise our full year guidance on the top and bottom lines while improving our balance sheet and capital structure flexibility. Two years ago, we told you of our plans to grow our business profitably, and we are delivering. These results and our recent capital structure achievements give us comfort in achieving both our near-term and medium-term targets. Now I’d like to turn the call back to David.

David Morken: Thank you, Darryl. A little over a month ago at Enterprise Connect, we met with a number of customers, partners, prospects and investors. These conversations show the strength of our direct-to-enterprise strategy. The enterprise category with year-over-year revenue growth of 20% in the first quarter following a year of 21% growth in 2023 is driven by innovations we have brought to market and the opportunity that our award-winning Maestro platform provides. Global 2000 organizations know that moving their communications to the cloud is the fastest way to leverage relevant new AI technologies and deliver the rich new customer and employee experiences that are key to staying competitive. At the same time, these enterprises are dealing with enormous complexity from past implementations and legacy tech debt that have built up over time.

Maestro solves this complexity and provides a smooth enterprise route to the cloud. It is software automation, and it’s central to our portfolio of offerings that are aligned with what Global 2000 customers tell us they need and value most: Interoperability, freedom of choice and solutions to their global communications challenges. Formally announced at last year’s Enterprise Connect, where at 1 Best of Show, Maestro was quickly welcomed with significant client and industry excitement. As the name suggests, Maestro is an orchestration software platform, complementing the offerings of our cloud communications customers to facilitate seamless integration capability for enterprises to deploy and manage best-in-class real-time voice apps across unified communications, cloud contact centers and AI platforms.

Our Global 2000 customers are finding Maestro can dramatically reduce the complexity of moving to the cloud while optimizing costs and increasing control of contact center and employee communications in the cloud. These capabilities enable enterprises to achieve faster time to value and a better customer and employee experience across a wide range of industry verticals. For example, in financial services, Maestro serves as the foundational element for vendor-agnostic cloud communications for both cloud-first fintechs and mature giants both looking to modernize. They can unlock the power of teams Genesis, Five9 and more along with best-in-class fraud and AI tools while simultaneously lowering costs and simplifying vendor management. And they view Bandwidth as a partner with established expertise to help them navigate a competitive and highly regulated global landscape.

As another Maestro example, in the hospitality and retail verticals, a customer may have a complex global system of independent franchises and want to add new customer experience applications and AI. Now they can build once with Maestro, integrating all their locations to deliver a unified customer experience everywhere in the world. Some enterprises are choosing to use system integrators and managed service providers to map and build their new cloud-based communications. Our growing channel strategy creates partnerships with the largest players doing these enterprise transformations. For example, we recently worked with NWN-Carousel, a leading managed service provider to transform the customer experience platform for the largest U.S. domestic airline.

Bandwidth replaced a legacy telecom carrier to power the airline’s new cloud-based high-capacity customer call center as well as integrate their customer and employee communications platforms. The airline is also rolling out Bandwidth’s text messaging API to enable its service representatives to easily send text to customers as part of its multichannel communication strategy. We completed the project with NWN in a short time frame and are pleased to report flawless performance during peak holiday season. In examples like all of these Maestro can be a real differentiator and valuable addition to our enterprise customers’ communications deployments. Its software automation, interoperability and AI enablement capabilities uniquely distinguished Bandwidth as a leader in cloud communications.

As the largest enterprises come to us to help them navigate complexity, we’re also investing in our legendary customer support offering. This includes new predictive AI enhanced analytics to identify and solve potential incidents before they escalate. We believe this is a significant differentiator and it was honored last month with a gold Stevie award for customer service innovation. Congratulations to everyone on our operations team for this achievement. At a time when many of our competitors have made it harder to get help, much less to talk to a real person, we are distinguished by our customer support, and it remains a true competitive advantage for Bandwidth. So again, very encouraging progress in our fast-growing category of direct-to-enterprise.

At the same time, our other two market categories are also performing very well, as you heard just now from Darryl. In our programmable services business, we saw earlier than expected demand in political messaging related to the U.S. election season. Meanwhile, we are consistently expanding our customer base in commercial messaging with notable contract wins such as a premier digital vehicle presentation provider in the automotive industry. This customer transitioned to Bandwidth’s toll-free messaging solution, our specialized support and deep expertise were instrumental in helping them navigate the intricate and evolving messaging landscape significantly enhancing the deliverability of their communications. In our global communication plans category, we benefit from expanding wallet share with existing customers as well as new customer additions.

For example, in Q1, a leader in health care engagement and payment solutions selected Bandwidth as the sole provider for their inbound voice traffic, valuing our exceptional customer support, network reliability and automated number provisioning and porting processes. Before we wrap up, I want to remark on the leadership change we announced today. Anthony Bartolo, our Chief Operating Officer, is leaving to pursue other opportunities. He will stay until later this year to ensure a smooth transition. Anthony joined us a little over 2 years ago to scale our global growth and his accomplishments are clearly evident in our strong operating results. He radically improved our strategic planning process, overhauled our product segmentation, brought in excellent new leadership and executed with outstanding day-to-day rigor and discipline.

We were fortunate to have Anthony with us at a time important in Bandwidth’s evolution, and we’re a much better company as a result. He is a world-class global leader and I’m confident that someday soon, you’ll see him leading a company that’s fortunate to have him on point. I will always count him as a friend. I know all Bandmate’s worldwide join me in thanking Anthony for his excellent leadership and in wishing him all the best in the future, fair wins and following sees to the entire Bartolo family. In closing, as we reflect on a quarter marked by strategic achievements and solid growth, I want to reiterate our unwavering commitment to innovation and customer excellence. The advancements we’ve made with our Maestro platform, our expanding partnerships, our award-winning customer service and our disciplined operating team are all pivotal elements in our mission to lead the worldwide cloud communications revolution.

Our team has demonstrated the ability to deliver on our core operating principles of profitable growth, operating leverage and cash flow generation from the foundation of a durable franchise as a leader in our space. I’m incredibly proud of what we have accomplished together this quarter and I am even more excited about the opportunities that lie ahead. I’ll now turn the call over to the operator to begin the question-and-answer portion of our call. Thank you.

Operator: [Operator Instructions] And at this time, we’ll start with a question from Ryan MacWilliams from Barclays. Ryan, please go ahead.

Ryan MacWilliams: I want to say that while I’m sad to see Anthony Bartolo moving on. I know we did a lot to include the business. And to use a Bandwidth expression, I’m glad he’s on a high note. So for David, looks like 1Q saw improving net retention and stronger average annual customer spend. Are your customers feeling better from a macro standpoint? And how are upsells like Maestro helping support these metrics?

David Morken: Thanks, Ryan. I just want to reiterate what you said at the outset. Indeed, Anthony, is a master conductor and has left us — and is leaving us on a very high note. And we are sorry to see him go and so grateful for the 10 quarters during which he executed flawlessly. So thanks for mentioning that. In terms of the macro, we talked to customers in all of our segments consistently about their plans and outlooks and we do factor that into the guide and the results from the first quarter, notwithstanding, there are always concerns in these days that we live in about macro and policy and international events. But all that said, we increased our guide on the top and bottom, according to the overarching sentiment that we pick up across all segments with our customer base. So we’re excited about executing throughout the rest of this year.

Ryan MacWilliams: And then for Daryl, Glad to see continued debt pay down. How are you thinking about the full year guide here after a stronger raise in the top line compared to the bottom line? Is this mostly you just pass through the commentary around the strength that you’re seeing in your commercial messaging business? Just a little more detail there.

Daryl Raiford: Yes. Ryan. We raised our revenue guidance by $15 million at the 2 midpoints. Roughly two-thirds of that is related to surcharges and one-third is related to commercial cloud communications revenue. And so that roughly one-third is falling through at margin is the — represents the increase in — the approximate increase in the EBITDA raise to the full year once.