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Presentation

Bandwidth Inc. beats earnings expectations. Reported EPS is $0.38, expectations were $0.24. 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: Hello and welcome to the Bandwidth Inc. Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to hand the call to Sarah Walas. Please go ahead.

Sarah Walas: Thank you. Good morning and welcome to Bandwidth’s fourth quarter 2023 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 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. 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 first 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 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 this morning 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 Q4 2023 earnings call. We’re pleased to report we exceeded our guidance for the fourth quarter, capping off a full year of solid execution. We grew and diversified our revenue by adding a number of significant customers across our commercial messaging and direct to large enterprise categories. We invested in our business and introduced new products like our next generation Maestro platform and AIBridge, and we grew profitability 39% year-over-year delivering record adjusted EBITDA in the fourth quarter and yielding record second half free cash flow. The team is grateful and honored by our customers’ trust in Bandwidth to provide their business critical communication services around the world.

Thank you to our band mates for serving our customers, executing our mission and delivering these strong results, and I thank God as we charge into our 25 year as a company. Last year, during our Investor Day, we laid out a four year plan and said we were more confident about our mission to develop and deliver the power to communicate than when we started the company or at any time since. After exceeding our plans for the first year, we are even more confident today. That’s because Bandwidth is leading in the front ranks of the worldwide cloud communications revolution, which is a secular trend still in its early stages. Automating voice, text messaging and emergency calling through cloud software is the fastest way for enterprises to build a better brand experience, reduce operating costs, leverage emerging AI technologies and simplify and derisk digital transformation company-wide.

And they’re doing it with Bandwidth because we are the only provider in our space with a unique combination of global owned and operated cloud network, AI ready capabilities, programmable software APIs and deep regulatory insight. Today we are the only CPassS provider with our own global communications cloud. The depth and breadth of our competitive moat is evidenced by the fact that we serve all the world’s leading power platforms in cloud communications, as recognized by Gartner Research, whether it’s iconic hyperscalers like Microsoft, Google or Zoom for hybrid work, customer experience, pioneers like AWS, Genesys and Five9 for cloud contact centers or the many innovative SaaS and application companies building text messaging into everything from healthcare to conversational e-commerce, Bandwidth is their communications cloud.

All these players count on us for global reach, scale, reliability, security, leading edge innovation and incredible customer support that is always available 24/7. During the past year, we continued to expand our investment in innovation with a launch of many new features and capabilities. In our global communications plans category we improved our already best-in-class customer experience with expansive new self-service capabilities. That’s why TNS a provider serving 27,000 separate businesses switched to Bandwidth from a key competitor placing their trust in us as the sole provider for their mission critical toll-free calling and other programmable voice services. In our enterprise category, we launched 10 new products, including Bandwidth Maestro, our AI ready next gen software platform, which was judged by our peers to be such a game changer that it won best of show at Enterprise Connect.

In fact, industry recognition for Maestro continues as it won a product of the year award from internet Lefty just last week. These new offerings, each substantial in their own right, drove our opportunity pipeline to new highs, accelerated our enterprise revenue growth 21% year-over-year and led to new customer wins like Ally Financial, Western Union, Children’s Health, Fabletics and so many others. All chose Bandwidth to improve their customer experiences and to adopt conversational AI. In our programmable services category, we are adding new global two-way messaging capabilities in more markets around the world, which we expect to continue to fuel our growth. Last year we grew commercial messaging 32% year-over-year. The most demanding high volume senders are using our global messaging API for diverse commercial use cases across fintech, healthcare, patient engagement, civic engagement, conversational e-commerce and more, like WellSky, for example, a premier health and community care technology provider in North America, which in Q4 moved the rest of its HIPAA-compliant messaging and voice to Bandwidth from a competitor trusting us to deliver vital communications between their more than 600,000 caregivers and 4,000 personal care agencies across the U.S. and Canada.

In 2024, we expect our growth in commercial messaging to be joined by further benefit from the U.S. election season, where our capabilities uniquely serve many longstanding customers. Each one of these examples demonstrates the growth and rapid innovative capabilities of the Bandwidth communications cloud. As we reflect on the past year, we are pleased with our execution and forward momentum through any crosswinds in the current macro environment. For example, we hosted more in-person visits in 2023 from large Global 2000 enterprise customers and prospects than in any other year by far. We launched Maestro and AIBridge our biggest innovations ever, and as you would expect from a durable franchise, our profitability has shown remarkable growth significantly outpacing our revenue increases as we deliver on our promise to grow revenue profitably.

As we enter our milestone 25 year as a company, we are more confident in our mission and our opportunity than ever before. I’ll now turn it over to Daryl to walk through the details of our financial results and outlook.

Daryl Raiford : Thank you, David, and good morning, everyone. Our team performed exceptionally well in the fourth quarter, rounding out a solid year of consistent performance and positioning us to reach our 2026 medium-term targets. We’re proud of what we’ve accomplished and confident that our dedication, hard work and unwavering commitment to excellence will continue to drive us forward. The team is laser focus on accelerating sustainable, profitable growth is evident in our results once again with fourth quarter and full year revenue and adjusted EBITDA, both exceeding high-end of guidance ranges as we benefited from strong usage in commercial messaging and operating discipline. Fourth quarter total revenue of $165 million, increased 5% year-over-year.

Cloud communications revenue, which is total revenue excluding pass-through messaging surcharges was $126 million, up 12% when excluding the year-over-year effect of $11 million of cyclical political campaign messaging revenue in 2022. Our full year 2023 revenue was $601 million, up 5% year-over-year, cloud communications revenue was $479 million, also up 5% year-over-year when excluding last year’s political campaign messaging benefit. Messaging continues to be a valuable tool businesses use to engage with customers and differentiate themselves in the market. The strong demand for messaging and Bandwidth’s software automated ability to deliver at scale drove 32% revenue growth year-over-year in commercial messaging, driven by increasing usage in conversational e-commerce, conversational marketing and financial services sectors.

Total messaging for the full year reached 18% of cloud communication revenue. At Investor Day, one year ago, we provided a new view of our revenue by market offer and shared our expectations and market growth rates for those three categories. In our global communications plans category, revenue growth for 2023 was roughly flat as expected due to usage patterns in the macro environment last year. In 2023, our programmable services category, which primarily utilizes our messaging portfolio, delivered commercial revenue growth of 31% year-over-year. This growth in our programmable services category far outpaced the expected market growth CAGR of 21%. We cited at our Investor Day one year ago. We’re very pleased with this performance, which provides meaningful support towards our 2026 medium-term revenue and gross margin targets.

Last year in our direct to enterprise customer category, we grew 21% year-over-year, handily exceeding the estimated market growth CAGR of 14% shared at Investor Day. Our customers love Bandwidth software automation. Our capabilities to simplify global communications, facilitate migration to the cloud, enable conversational AI experiences and orchestrate call flows between best in brief platforms aligns perfectly with the goals and objectives of the global 2000. I’d also like to remind you that programmable services and direct to enterprise enjoys gross margins in excess of our aggregate company gross margin of 55%. We’re thrilled with the trajectory of the programmable and enterprise categories and expect them to be consistent contributors to achieving our 2026 medium-term gross margin target of greater than 60%.

Now turning to operating metrics, average annual revenue per customer continued to climb reaching $178,000 in the fourth quarter, reflecting our continued focus on and ability to serve large customer opportunities. Our customer name retention rate once again remained at excess of 99%, a result that speaks to the loyalty and durability of our customer base. Our 2023 net retention rate, which understandably reflected downward pressure from the absence of 2022 campaign revenue not present in 2023 was 101%. Adjusting for that absence, our net retention rate achieved 109%, an excellent growth result from our commercial customers for a year characterized by macro cross wins. I’m especially proud of our outstanding progress in accelerating profitability and generating cash.

We achieved a record 39% growth in adjusted EBITDA in 2023 and reached an inflection point in free cash flow, generating a record $31 million in the second half of the year. We ended the year with a cash and securities balance of $153 million far exceeding our business needs and providing us with a great deal of financial flexibility. We’re excited as we look ahead to 2024, where we’re expecting continued accelerating growth in commercial revenue and a tailwind from cyclical political campaign messaging related to the U.S. election season. Revenue in 2024 is expected to grow 16% to approximately $700 million and assumes a projected $40 million contribution from political campaign messaging and associated surcharges from the U.S. election season.

We expect to continue our acceleration in profitability with adjusted EBITDA growth of 50% year-over-year, accomplish through a combination of higher revenue and continued operating and spending discipline. We also expect 2024 free cash flow margins to make further progress towards our medium-term target of 15% margin and provide the flexibility to address our 2026 convertible notes and fully fund our business needs. I’d like to put a fine point on our healthy balance sheet. As I said, we ended 2023 with $153 million in cash and securities. Our March 2026 debt maturity has an outstanding face value of $175 million. With our adjusted EBITDA projection of approximately $72 million in 2024, a relatively light capital expenditures outlook of 3% of revenue and modest working capital, it’s reasonable to project we could generate approximately $50 million of cash yielding a year in cash and securities balance clearly in excess of our 2026 debt requirements, a full 14 months in advance of that maturity.

All of this gives us confidence in reiterating our 2026 medium-term targets of 15% to 20% revenue CAGR, greater than 60% non-GAAP gross margins, greater than 20% adjusted EBITDA margins and greater than 15% free cash flow margins. In closing, I want to emphasize the remarkable journey Bandwidth has embarked upon this past year. Our record-breaking performance in profitibility and free cash flow, alongside the successful launch of our groundbreaking Maestro platform, underscore our unwavering commitment to innovation and excellence. The trust and partnership of our global customer base, powered by our unique blend of software automation, global network, AI-ready capabilities and regulatory expertise solidify our leadership in the cloud communications revolution.

Looking ahead, we remain focused on leveraging our competitive strengths to drive sustainable growth, enhance customer experiences and deliver long-term value to our shareholders. I am incredibly proud of our team’s hard work and dedication, confident in our clear and focused strategic direction and excited about how we are executing the vision we outlined at Investor Day one year ago. Thank you again for your continued support to Bandwidth. I’d now like to turn the call over to the operator to begin the question-and-answer portion.

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Operator: [Operator Instructions] Today’s first question comes from Arjun Bhatia with William Blair.

Arjun Bhatia : Congrats on the strong results here and the positive outlook for ’24. I wanted to start maybe just on some of the traction that you’re seeing both in the enterprise and programmable services, but I certainly wanted to maybe think about it a little bit from a new customer perspective. I know you mentioned there was a pretty strong pipeline going into Q4, and it sounds like you’re executing on that. But if we kind of calibrate the net retention rate versus the top line growth that you’re delivering, it seems like there was kind of a bit of traction. Maybe can you just talk a little bit about what you’re seeing on that front and whether you’re seeing more opportunities from competitors come in into Q4 and going into ’24 here?

David Morken : This is David. We are enjoying strong success in both enterprise and programmable services. The success is across different verticals and from different competitors as well as greenfield opportunities. So the pipeline is — it’s deep in large opportunities. And so we’re benefiting from that. We called out a number of different specific customer cases. And in those, again, we’re winning across competitors and across verticals based on the efficiency and the uniqueness of the platforms that we offer in the global network. So the pipeline has been not just successfully ending ’23, but it looks robust going into ’24.

Arjun Bhatia : And then just when you’re thinking about Maestro and AIBridge, can you give us a sense of where you are in adoption because it certainly seems like potential game-changing products? And is that still kind of a little bit in the exploratory phase with customers? Or are we seeing — starting to see real adoption of those solutions yet?

David Morken : We went GA and are experiencing real genuine adoption and scaling across enterprise customers. Again, our AI strategy is one that we embarked upon long ago. And we have a very strong conviction that it’s early days in terms of picking winners in AI and what’s more vital to the enterprise global customer is having a platform that allows them to integrate leading AI opportunities as they emerge into their existing environments and to do so easily, to do so quickly with integrations that are already done on Maestro. And so both of our product initiatives in the AI space are bearing fruit already, even though we only went general release mid-year.

Operator: The next question is from Ryan MacWilliams with Barclays.

Ryan MacWilliams : David, how are your enterprise customers talking about 2024 at this point? Do they feel better? Do they expect to grow of 2023? And for Daryl, how should we think about some of the drivers of the solid 4Q revenue growth you saw in the quarter?

David Morken : So when we think about our enterprise customers that we work with today and how they’re talking about their business, of course, it varies widely. We have tremendous customers in hyperscaler examples among our internet giants. We’ve got financial enterprise customers. Everyone is experiencing a different variable depending upon the vertical that they’re in. Certainly, your — we have always tuned into and projected in an usage-based model, how our customers are doing in real time and factoring that into our guide. So as we think about the broader macro, we’ve executed and navigated across front choppier occurrence in ’23 and think that as our strong guide indicates is filled with even more promise than last year.

Daryl Raiford : Thanks, David. And Ryan, to your question, you’re right, we did finish 2023 very strong in the fourth quarter. We grew cloud communications revenue sequentially $6 million. Part of that is related to we grew our commercial messaging, commercial meaning not with the political campaign effect. We grew commercial messaging 32% for the year and we grew at 66% in the fourth quarter, off of a 51% growth in the third quarter. So that — of course, that helped. We also have the seasonal benefit of Black Friday, Cyber Monday, which we had included in our guide. But the overachievement of Black Friday, Cyber Monday also shines through in these results.

Ryan MacWilliams : And last one for me. I’m really impressed by the profitability improvement versus in the year prior and especially with the guide going forward. How can we see Bandwidth achieve better leverage? Like besides revenue growth, like what are some of the line items? Or what are the things that you’re doing to just be able to put through these better set EBITDA free cash flow numbers?

Daryl Raiford : Well, that points to our medium-term targets where we’ve set out through 2026, the 15% to 20% revenue CAGR growing to above 60% gross margin and growing to above 20% EBITDA margin, yielding an above 15% free cash flow margin. So how are we doing that? Well, yes, revenue growth. We have the four drivers for gross margin, which includes scale, product mix, our international growth and operating efficiencies, and we’re on track to do that. And we are — and we said at Investor Day, and we’re continuing to focus on that. As a percent of cloud communications revenue, our operating expense last year was above — was down from 2022 as a percent, but still above 40%. We’re going to be scaling to something at 40% or slightly less.

And so we don’t — while we do expect our operating expenses to continue to increase led primarily by our innovation investments. We expect to get scale out of our operating expense and we have been doing that, and that will yield us above 20% and above 15% free cash flow.

Operator: The next question comes from Meta Marshall with Morgan Stanley.

Meta Marshall : Maybe a couple of questions. So you guys laid out the political messaging would be about $40 million in 2024. What would be the biggest contributor to the rest of kind of the growth that you’re expecting considering that will only be about half of the growth? So is it kind of continued growth in commercial messaging? Is it some of Maestro? Is it some of the other products kicking in? Just a sense of where you’re seeing the rest of that growth come from. And then maybe just a second, any update on kind of the CCaaS relationships that you’ve joined or kind of that channel as a driver of growth?

David Morken : To answer the first part of your question, we are seeing our strongest growth among enterprise customers in our enterprise segment that’s growing fastest. Commercial messaging turns out to be quite durable, even among customers that do participate in cyclical campaign-related activities. And they’re diversifying their practice and their business. So yes, commercial messaging is going to continue to be buoyant. And as we look for the medium-term targets to be achieved in ’25 and ’26, both enterprise, commercial messaging, global messaging, which we just launched will all contribute significantly towards us doing what we’ve consistently done, which has achieved the guidance that we lay out.

Meta Marshall : Then the update on the contact center.

David Morken : I think — and just to make sure, can you repeat the question, so I understand what part of the contact center dynamic you’re focusing on?

Meta Marshall : I think you had done some relationships with Five9 and others. So I just kind of wanted to get a sense on that as a channel of growth.

David Morken : I think what I would call out is the customer case that we mentioned for the quarter. Contact center is healthy, and we with Fabletics were chosen to power their Genesys cloud experience and did that by winning away that business from an incumbent. So we’re hand in glove with Genesys in that contact center with that customer, which is a tremendous opportunity that we took away from an incumbent. And so we’re seeing more and more conquest opportunities against incumbents in our pipeline in contact center. So for us, as a challenger we’re seeing great success that may separate us and distinguish us from others in CCaaS and those of us powering the contact center and enterprise.

Operator: The next question comes from James Fish with Piper Sandler.

James Fish : Nice end of the year here, and I appreciate the morning call, actually. Like it. Just going back to a question a little bit ago. What are you guys seeing for Maestro attach? Or how should we think about Maestro sizing at this point? And I know we’ve talked about different monetization strategies with it, which strategy is kind of gaining the most traction at this point.

David Morken : So in terms of attach James, it’s the catalyst or the inflection for enterprise conversations regarding how they’re doing voice and messaging for their constituencies even with their employees, because it’s a platform that allows them to orchestrate voice and messaging elegantly across different solutions, it is the catalyst conversation. You have to have a vision and an execution path forward regarding AI. And if you don’t have when that’s both effective and takes into account how fluid things are, you’re not going to win. Right now, what we are seeing across incumbents, we compete with and win from is a complete lack of vision for supporting any of the creative emerging opportunities for enterprises using voice and messaging with AI.

And so our orchestration tool, Maestro was generally released for availability mid-year. It is already being engaged by dozens of enterprise customers successfully at GA. And the monetization strategy to address the second part of your question, what is getting the most traction is what we’ve consistently maintained, which in addition to the usage-based model that we have. This, for us, is a very real new opportunity to serve customers in a software platform model that monetizes as you would expect SaaS software to happen. So a platform fee and gross margins that you would expect from SaaS software.

James Fish : And Daryl, for you. On the guide can you help frame it up a little bit more in terms of what you’re expecting for expansion rates and back in 2022? I appreciate the political messaging color there. But back in ’22, you guys had just about $40 million, if the numbers are right here and it wasn’t really the major election cycle. So why wouldn’t it be higher given it’s kind of a bigger stage at this point? And any way to think about the three product segments for the year-end? I know a lot of question, appreciate the details.

Daryl Raiford : No, I love 18-part questions. Thank you, Jam. I appreciate you — appreciate all that. Let me start with walking through just a breakdown of the guidance. I think that will be helpful. We’re projecting – we’re called in our outlook, essentially $100 million of revenue growth in ’24 over ’23. You can think of that breaking into $50 million in cloud communications revenue and $50 million in surcharges. Of the $50 million increase in cloud communications revenue that’s essentially 2/3 coming from in our view in our outlook, 2/3 coming from our commercial which means non-political, our commercial revenue growth and third coming from political. We did experience taken altogether around $37 million of revenue off the ’22 election cycle.

We’re calling in our guide around $40 million for this. So you’re right. About what is the outlook? A little less about 10%, something little less than in end up. We — it is possible, it is certainly possible it could be higher. But we’re calling for it to be around $40 million right now. Now in terms of the second part of the question, which was related to the categories and the categories, I believe, driving our ’24 view. We are calling for each one of the categories. It’s embedded in our guide to have a revenue increase. Our largest revenue category is global communications plans, it will likewise the increased revenue will probably be more muted because of its large base. We just experienced 32% revenue growth for commercial messaging in the 2023 full year.

But again, that was 51% in Q3 and 66% in Q4. So we see accelerated growth in terms of our commercial messaging, which is driving principally the programmable services growth. Those are the commercial use cases that are not political and are related to the one — the cases that David and I had called out on the call. And in enterprise, we did grow 21% enterprise for the year. Our pipeline looks really good. Enterprise is a very profitable growth for us, given the dynamic. And of course, there’s also a major — it’s once adopted, a very sticky and very loyal, very durable customer base. And so we are expecting that to well outgrow the 16% overall guide that we’ve given on the $100 million increase to $700 million for ’24. Does that help, Jim?

James Fish : Yes. Apologies for the loaded question. Just had a lot of details there that we need to understand.

Operator: The next question comes from Mike Walkley with Canaccord Genuity.

Michael Walkley : Congrats on the strong results. I guess first question for me, it’s just going back to the political messaging. I live in a state that’s already had primaries and received a lot of political messaging. So for that $40 million. Is it still kind of a Q3, Q4 heavy weighted? Or how does that kind of ramp throughout the year?

David Morken : Mike, I think that it’s rational to expect increased activity throughout the year. Super Tuesday is actually an inflection point earlier than the back half. But yes, I think post primary with the candidate selected for both sides, you’ll see accelerated growth throughout the back half.

Michael Walkley : And then just in terms of the success you’re having with your larger enterprise customers, are you still in the process of churning some lower spend customers? And how are you seeing ARPU trends building with the large customer base?

Daryl Raiford : We are. Our customer base remained relatively right at steady, like exactly steady at the 3,300 figure and change. We removed or churned 80 customers in that figure, and nearly right at the exact same number, we added customers, so it remained flat. I’m really excited about the edience. I’m excited about the fact that our ARR per customer once again increased now reaching $178,000 because it’s exactly on strategy to where we wanted to be with our Global 2000 and our larger customer opportunities. And the [ 80 ] that we churned are something around $2,500 annual revenue and so that’s just really not a concern for us. It’s right on strategy to where we think we need to be.

Operator: The next question comes from Ryan Koontz with Needham & Company.

Ryan Koontz : Nice to see the voice business returning to growth. Can you walk us through maybe, David, how your go-to-market is developing for enterprise? Any metrics that you could share in terms of headcount, where you’ve been and where you’re going in terms of that team?

David Morken : Unlike so many of our competitors, our go-to-market team is as large or larger going into ’24 than it was going into ’23. So we have only continued to put the fuel in the fire that we have consistently used going forward. So many — in so many different spaces have eviscerated go-to-market teams in sales, marketing, sales ops and we haven’t done any layoffs. And so we are fully loaded for bear in the enterprise space going out and prospecting new customers, and we’re also fully staffed supporting existing customers. So again, unlike so many other company profiles, we’ve held the line on growing our team and the benefits are manifest in the ’23 report and also in the ’24 guide.

Operator: The next question comes from Patrick Walravens with Citizens JMP.

Q – Patrick Walravens : Congratulations. Dave, can we go back in time a little bit and talk about how internationals worked out? So you acquired Voxbone in 2020. And I remember, originally, you had lighthouse customers that we’re pushing Bandwidth to provide a kind of great communication services in Europe as they had in the U.S. And then COVID made the integration really challenging. So how has that all worked out? How is international versus the U.S.?

David Morken : It is 18% of our total business, but much more meaningful than that reflects. Every conversation with a Global 2000 customer includes our 65 countries where we have full PSTN replacement, emergency service inbound outbound and now just recently includes international messaging. So it has been vital for our customers that they can use us as a single partner globally and that role is essential in a world that’s become very fragmented where regulatory pace of approvals have, if anything, slowed down. So international strategically was an essential component. You’re right, it was slow for us during COVID, during the integration. But heroic efforts by the teams to unify. And indeed, we are coming to the end of having a single global platform and experience for our customers post Voxbone acquisition.

We’re thrilled about it. Our team has worked long to get there. But back the crux of your question, 18% of our business and growing, and we expect it to continue to grow with the addition of global messaging right now but vital for every single enterprise conversation.

Operator: Thank you. This concludes our question-and-answer session, and the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.