Bandwidth [BAND] Conference call transcript for 2022 q1
2022-05-04 21:28:05
Fiscal: 2022 q1
Operator: Greetings, and welcome to the Bandwidth Inc.’s First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sarah Walas. Please go ahead.
Sarah Walas: Thank you. Good afternoon, and welcome to Bandwidth first quarter 2022 earnings call. Today, we’ll be discussing the results announced in our press release issued after the market closed. 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 afternoon 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 second quarter and full year of 2022. We could 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 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 after the close of market 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, and thanks to each of you for joining us. Our team is off to a great start in 2022. In the first quarter, we grew revenue to $131 million and reported $3 million non-GAAP net income, both ahead of our expectations. We are pleased to be able to raise guidance for the year and are proud of the team’s strong execution in a challenging operating environment. Thank you to our Band mates for your continued commitment to our customers and to each other. And I thank God for blessing our work together. Today, we will share how the Bandwidth platform enabled innovative organizations around the world to deliver exceptional experiences. Enterprises increasingly rely on the Bandwidth platform to do all their communications in the cloud. We are winning these new customers with our portfolio of voice, messaging, and emergency services APIs, and with our insights and analytics tools, regulatory leadership, and unmatched customer support, our customers tell us they successfully move and scale communications in the cloud with our platform and our people. Earlier this year, I outlined three main priorities for driving our growth and performance in 2022, grow with existing customers, win new large enterprises and become the best global CPaaS platform for scaling digital engagement. We made excellent progress on each during the quarter. Existing customers grew voice and messaging with us across geographies and use cases and in many different verticals, including healthcare, financial services, retail, manufacturing, and even construction. We are amazed by the creativity of developers and product teams building their next indispensable app and experience on the Bandwidth platform. Our momentum is accelerating with enterprise customers. We are well aware that enterprises are migrating their technology stacked to the cloud. Enterprises that began migrating storage and compute and security are now asking how to migrate their communications. They grapple with different service providers, legacy infrastructure, critical integrations, and proprietary technologies, all of which are mission critical and must work together seamlessly. Enter the Bandwidth platform, which enables a seamless cloud migration for UCaaS and CCaaS platforms and other enterprise communications applications. Let me give you four recent examples. In Q1, an iconic top five global investment bank is Bandwidth to be the centerpiece of its new best-in-class cloud contact center buildout. This customer initially considered legacy carriers that could not or would not integrate the bank’s required third-party authentication solution. For years, this customer relied on two different legacy incumbents. They are now consolidating into a single relationship with Bandwidth because our network is cloud native. We route calls and deliver called data in ways a number of competitors simply can’t, integrating third-party applications before the call gets delivered to the contact center platform. Our number management APIs simplify onboarding and allow for increased control over a complex portfolio of telephone numbers for this customer. It is a powerful validation of our cloud platform’s ability to provide call control and flexibility in even the most complex contact center cloud migrations. And it’s another example of how our close relationship with Genesys is continuing to grow our total contact center business. We went live this quarter with a global hospitality company that describes itself as the largest hotel franchisor in the world. This customer recognized that it’s legacy carrier could not support its critical application integrations necessary to make the move to the cloud a success. As a result, this new customer is using our cloud platform as the foundation for its next generation approach to customer service. And importantly, this also represents yet another bring your own carrier implement with Five9, which is a cloud contact center platform. We are increasingly partnering with for new opportunities. We look forward to sharing more success together in the future. Third, internationally, we are steaming ahead winning enterprise customers across our expanded global footprint. The latest example is a premium cruise line based in Europe. This customer’s phones are ringing off the hook with pent-up demand from cruisers who want to get back out and set sale. In an innovative effort to modernize their contact center and also connect and protect their employees, this customer chose Bandwidth to power both their UCaaS and CCaaS needs. We are proud to serve as the foundation for their global cloud communications technology stack. Once again, our Duet for Microsoft Teams offering open the door to a much broader conversation about the full enterprise portfolio and the power of our platform was compelling to this customer. Fourth and last, this final customer win I’ll highlight is a healthcare technology leader for HIPAA-compliant medical text messaging. More than 600,000 caregivers across 4,000 personal care agencies in the U.S. and Canada rely on this customer to care for over 500,000 seniors every year, the largest network of in-home care providers in North America. This customer chose our cloud platform to deliver SMS and MMS messaging containing protected health information to engage with patients, provide appointment reminders and notifications to deliver care management as well. This customer seeks to use messaging to close communications gaps with their customers and told us Bandwidth stood out as the clear platform of choice for the reliability, delivery insights and future scalability they need to deliver that vision. This customer had outgrown their prior CPaaS provider and needed enterprise grade CPaaS to scale. We continue to position Bandwidth’s cloud platform to power the front lines of digital healthcare transformation. With our suite of communication solutions, Bandwidth can provide the tools to deliver a better, more engaging patient experience. Our financial results and these four customer highlights demonstrate that we are executing on all three growth priorities we outlined for 2022. Finally, I want to recognize that we recently divested another heritage business at Bandwidth that supported infrastructure for legacy SIP trunking. I’d like to thank our customers and Bandmates that made this business a success through the years. We wish this business well as it charts its new independent course. And before I wrap up, I want to welcome Sandy Preizler as our new Chief Revenue Officer. Sandy joined us April 18 and has already hit the ground running. He is a true hands on leader, who teams have consistently exceeded sales goals for $1 billion cloud and software portfolios. Sandy joins our new Chief Operating Officer, Anthony Bartolo in bringing fresh perspectives and deep experience to shape Bandwidth’s next exciting chapter. I’ll now turn it over to Daryl to walk through our financial results.
Daryl Raiford: Thank you, David, and good afternoon, everyone. As a reminder, details related to our quarter performance are provided in an earnings presentation that may be accessed on our Investor Relations website. Before getting into the first quarter financial performance, I’d like to highlight a couple of reporting changes, namely segment reporting and cost reporting. In terms of segment reporting, as I noted last quarter, we’ve updated our segment reporting to reflect our business, following the divestment of three smaller business units, two last quarter, and as David just mentioned as of April 1, our legacy infrastructure for SIP line connectivity. And in terms of cost reporting, beginning now with the first quarter, we’ve aligned certain costs and operating expenses on our income statement to better describe our cost structure in a more common way. Note that adopting updated segment reporting and benchmarking our expense categories did not change our previously reported company revenue or net income nor have any meaningful change to go gross profit. To assist in preparing your models, we provided an explanation of our cost categories and reconciled to conform the last three years of historical reporting in our first quarter earnings presentation. Now turning to our quarterly results, we’ve launched into 2022 posting a strong start for the first quarter with first quarter revenue and non-GAAP EPS both coming in above their correspondent guidance ranges. First quarter revenue was $131 million, up 16% year-over-year. Revenue growth in the quarter was driven by demand for digital engagement with continued momentum in messaging, which grew 35% year-over-year and strong contributions from monthly recurring charges for phone numbers and emergency services. Revenue we recorded from pass-through messaging surcharges was $17 million in line with our expectations. The headwinds we described last quarter, all landed in line with our expectations and were pleased that underlying broad customer demand and new customer acquisition led to our overperformance. Non-GAAP gross margins of 53% for the first quarter, we’re up 1 percentage point from the prior year’s quarter, driven by improved pricing and product mix as well as continued excellent execution within our cloud operations and services groups. Note that our non-GAAP gross margins continue to exclude pass-through messaging surcharges. Our first quarter results demonstrate our progress towards our long-term goals of greater than 60% gross margins and reinforces our confidence that we will achieve them. EBITDA for the first quarter was $8 million and non-GAAP net income came in at $3 million with non-GAAP EPS of $0.09, both measures exceeding our expectations and delivering on our commitment to grow profitably. In terms of our operating metrics, our net retention rate has been aligned to one reporting segment and presents as a four quarter moving average. Accordingly in the first quarter, our net retention rate was 114%, an active customer count reached 3,372. Now turning to our financial outlook, we are raising our full year 2022 revenue and profitability guidance to reflect our business overperformance in the first quarter, partially offset by the necessary removal of the expected results from the recently divested SIP line business. Taking both of these into account, we expect higher full year revenue to be in the range of $551 million to $557 million. Likewise, we’re raising our estimated full year non-GAAP earnings per share to be in the range of $0.10 to $0.14, assuming approximately $31.2 million weighted average diluted shares outstanding. For the second quarter, we expect revenue to be in the range of $133 million to $135 million, second quarter non-GAAP earnings per share is expected to be a loss in the range of $0.09 to $0.05 using 25.3 million weighted average shares outstanding. In summary, our financial and operating performance in the first quarter represents a strong start to the year and drives our confidence in our higher full year outlook, demonstrating good progress towards achieving our long-term financial goals. Now I’d like to turn the call back over to the operator for questions.
Operator: Thank you. We will now be conducting a question-and-answer session. Your first question comes from Matt Stotler with William Blair. Please go ahead.
Matt Stotler: Hey there, Hey, thanks for taking the questions. Maybe I’ll start with one maybe more strategic question. David, really appreciate the examples of the enterprise wins that you’re having there. It sounds like there’s some good traction in that kind of segment and developing part of the customer base. Would love to just maybe dive into that a little bit more in terms of what specific types of companies or businesses you’re seeing in terms of particularly strong adoption outside of the traditional customer cohorts that you guys have served for the last decade or so. And in terms of the customer profile there, I mean, obviously, the large complex deployments makes sense. But how small can you go? I mean, are there any customers that you think maybe aren’t -- don’t make sense within that category? And then how meaningful can this be as a contributor to revenue over time as a whole?
David Morken: Thanks, Matt. This is David. So in the announcement tonight, we did talk about a top five global investment bank and that illustrates the continuing success that we’ve seen in the financial category. And we think that not only can we serve top five, but as we’ve said in the past, we’re really focused on a global 3,000 enterprise target and in financial, there are quite a few. So we expect to continue to reinforce the success in this category, particularly given the complex nature of the third party applications that our cloud native solution can support so well, well before the call is actually delivered into the contact center. In addition, we talked about hospitality tonight and have in the past similarly cited success cases where we’ve served well in an area in a category that’s really focused on delighting customers while they travel, if they have stay or extended stay. And in both these cases, whether it’s financial or hospitality. We’ve got both an incredible ability to serve the very largest, but also can go down market and serve the mid-market as well. But again, large enterprise has been our focus. We did mention the cruise line and I would describe that as travel and hospitality as well. And then healthcare, last but not least, tonight, illustrates yet again, that in addition to retail and in addition to finance and elsewhere, healthcare represents a huge opportunity for us and we continue to attract and close some of the largest – in this case, largest in-home care provider in North America, some of the most storied brands in the space and serve them well. And that’s really a tribute to not just the capabilities on the network, but the extraordinary focus that we have here at the company on customer success and serving large customers.
Matt Stotler: Got it. Very helpful. And then maybe one for Daryl. Just in terms of, obviously, some nice upside in Q1 and Q2, but a little bit less in terms of what was flowed through the full year. I’m assuming maybe the divestiture has something to do that, but if you could just update some of the dynamics that are embedded in 2022 guidance, that would be helpful.
Daryl Raiford: Sure. Thanks. We did raise our top and bottom line to pass through the beat from the first quarter, as you said. And we did partially offset that by our guidance – in the guidance for to remove the remaining legacy business that has about less than – just less than $5 million effect in terms of the offset for our overall net raise in terms of revenue.
Matt Stotler: Got you. It’s helpful. Thanks again, guys.
David Morken: Thank you, Matt.
Operator: Next question Ryan MacWilliams with Barclays.
Ryan MacWilliams: Hey guys. Thanks for taking the question. Just to follow-up on some of the commentary we heard from last quarter, just around customers potentially, like, renegotiating on pricing. Just with the overall sentiment on Wall Street more focused on the bottom line at this point. Have you seen any more customers come to you and kind of ask for concessions there? Or just given like the longer term nature of your contracts and maybe differentiate with Voxbone. Have you not seen that yet at this point?
Daryl Raiford: Thanks Ryan. This is Daryl. Let me take that. The short answer would be, no. We were very encouraged by what we saw in the first quarter. Pricing had an overall favorable impact in the first quarter, along with our volume improvements. We had mentioned the headwind, the one customer you’re speaking to and the strategic decisions we took in the first quarter to strengthen that relationship over the long-term. That’s gone very well for us as well. Across the base pricing has improved and we’ve – we said that that would be an isolated occurrence was our belief and that continues to be our belief.
Ryan MacWilliams: No, that’s really great to hear, especially in line with today’s results. And then just to double click on, there was a recent filing from Bandwidth that indicated that Telmex took 6% stake in Bandwidth. Is Telmex like a competitor or a partner? It seems like they’re also in this API space. And have you communicated with the company on any reasoning behind them taking this position. Thanks.
David Morken: No, we’re here tonight to talk about the overachievement during the quarter and historically have never commented about our investors.
Ryan MacWilliams: I appreciate that and congrats with the results. Thanks guys.
David Morken: Thanks, Ryan.
Operator: Next question Meta Marshall with Morgan Stanley.
Unidentified Analyst: Hi team. This is Erik on for Meta. Thanks for taking our question. You talked about a number of wins in the contact center market that were pretty interesting. I guess, maybe the first part of the question, just being – as you’re seeing the traction there, is that a result of more internal focus you’ve put on opportunities and it becoming more of a core market you’re focusing on in partnerships. And then if so – or is it more the market kind of its seeing very strong growth. And then if so, are there areas that you could be looking to invest more and to enhance your offering for contact center.
David Morken: Tonight, we announced Sandy Preizler’s joining us as our Chief Revenue Officer. And obviously with these examples, he’s inheriting a terrific strong team. That’s had solid traction focusing on complex contact center environments. It’s going to make it tough for Sandy to perform well with that kind of pressure, but it’s really a hat tip to excellent execution, targeting key brands in vibrant verticals that are growing strong. And addressing really the shortcomings of the incumbents in these areas where you have contact centers with complex call flows. In the example tonight, there were multiple legacy incumbents that are slow moving, do not have a software platform, don’t have a global footprint, and those are key differentiators us. And so the results that we announced tonight with these brands and these contact centers is a direct result of good hard work in sales. And we’re excited about what Sandy’s going to do to improve that even more.
Unidentified Analyst: Got it. Thank you. And if I could sneak one more in, you also talked a bit about the international side. And can I be curious, if you could just give us an update on where you are on getting some synergies out of Voxbone, whether it be on the revenue or cost side.
David Morken: It is still early days with our international opportunity. Cross-selling has really just begun and the fundamental supporting the thesis for Voxbone joining Bandwidth are not just intact. We think they’re growing strong. And so we expect that we’ll continue to add significant customers that value a global footprint. The Global 3000 include many of those that we target. And so it’s early, what’s important is that we’ve got many years ahead serving global enterprises and the team is side, as motivated, and we think you’ll see more in the future.
Unidentified Analyst: Got it. Well, thank you and congrats on the quarter.
David Morken: Thank you.
Operator: Next question Tyler Radke with Citi.
Tyler Radke: Hey, thanks for taking the question. So obviously there’s – you announced Sandy joining the company, leading the sales initiatives. Maybe talk about some of the changes and augmentations that are going to be put in place. And just how you’re thinking about growing the direct sales force today, especially given what seems to be pretty good enterprise momentum that you saw on the quarter. Thanks.
David Morken: You bet, Tyler. Sandy brings a lifetime of perfecting his sales craft at complex global scale and technology companies responsible for billion plus P&L delivery. His mastery of relationship selling is what we value most scaling across a growing enterprise sales team. He’s a complete professional. He’s proven in the past, and I fully believe he’ll prove in the future to be a phenomenal team builder and coach. And I think that it’s a great credit to Anthony Bartolo, our COO, that Sandy has come to join him on the mission here at Bandwidth. And we’re excited as we grow the sales team about what he’s going to do.
Tyler Radke: Great. And I can’t help, but ask a kind of a macro question. I know obviously you’re not have huge exposure outside the U.S., but just as you’re talking to the customers and getting their appetite for spending over the next year, are you taking into account any conservatism in your outlook or just any increased deal cycle timing, just given everything out there.
David Morken: We factor input from prospects and customers into our pipeline review and our bottoms up approach to guidance and all of that input and Intel is factored into how we feel about next quarter in the year.
Tyler Radke: Great. Thanks for the color.
Operator: Next question, Will Power with Baird.
Charlie Erlikh: Yes. Hey guys, this is Charlie Erlikh on for Will. Thanks for taking the question and congrats on the strong results too. I just wanted to ask how would you characterize any potential lingering impacts from the DDOS attack? I know last quarter, you talked about 40 customers that were still ramping up. So how are those 40 customers now? Could you talk a little bit about how they’ve been ramping up their traffic in the last three months?
David Morken: We described the impact last quarter on the last earnings call, nothing new. It is a team that’s executing exactly like we thought it would addressing that cohort and very proud of the results as we expected and we’re in line.
Charlie Erlikh: Great. No, that’s great to hear. If I can ask one more too, messaging growth has been really strong, so I’m – I guess I’m wondering, is there any change in kind of your thought or philosophy or strategy around messaging maybe to focus more on that or how are you thinking about at that internally?
David Morken: Messaging is growing well, 35% year-over-year in Q1, and it’s driven by broad use cases and that includes customer engagement that you would see in retail and healthcare. It’s also not just broad, but as you say, it’s something that’s growing that we feel is important to offer customers that want to have our service and our support. It’s scaling well, and we expect it to continue to grow. I think importantly political was not a material driver in Q1 messaging revenue. We’ve got broad customer use cases, enjoying our platform’s ability to scale messaging accurately and massively for high deliverability and quality. And so we’re attracting larger and larger customers to messaging. And so while we’ve been late to the messaging game, I think we play catch up quite well.
Charlie Erlikh: Great. Thanks very much and congrats again.
David Morken: Thank you.
Operator: Next question, Pat Walravens with JMP.
Pat Walravens: Great. Thank you. So Dave, I’d love to hear just what are the two or three most important things you feel like you need to get done in the balance of this year. And if there’s any other changes in sort of leadership positions or governance that, that you would include in that?
David Morken: Hey Pat, the three most important that I consistently outlined to answer your question, number one, we have got to grow with existing customers. That’s not just Dubner, but also use cases and utility of the platform. Number two, we do need to win new large enterprises and we’re demonstrating our ability to do that in this quarter yet again, and would prefer to have large customers that grow longer and higher with us. And then third, we’ve got to have a platform that results in us being the best global CPaaS provider for digital engagement globally and that means getting to a user experience and a user journey that is uniform. And those are the three strategic priorities that the whole team is focused on. And I’m really excited by the examples that we cited tonight that illustrate all three of those in terms of other folks, joining the team nothing material to announce nor do I feel like we have any deficiency at all on the team that’s glaring that we need to fill. We’ve got a very strong team here. So neither anything that is obvious to me that’s missing nor anything to announce Pat, if that answers your question.
Pat Walravens: Yes. And then Daryl, if I can just ask you one. So I love that you bought the stock last quarter. You’re still below where you…
Daryl Raiford: Is that a question? Is that a question?
Pat Walravens: So we’re still below where you bought it. So just remind us why you bought it and how you feel about it today?
Daryl Raiford: I feel that the company is in a – the company is very well-positioned and of growing market is growing profitably, gross margins have consistently been growing. We – everyone knows what we’ve set out to be our gross margin targets of greater than 60%. Our bottom line is profitable. The company produces free cash flow. I feel very good about how we operate with our customers and how we serve them with passion. And I have a great belief in the in the execution of the company and its valuation going forward.
Pat Walravens: Right. Great. Thank you.
David Morken: Thank you, Pat.
Operator: Thank you, gentlemen. This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.
