Bandwidth Inc. (BAND) Earnings Call Transcript & Summary

Welcome, everybody. I'm Meta Marshall. I cover the communications software space here at Morgan Stanley. We're delighted to have Bandwidth here today. We have David Morken, CEO, Co-founder. I'm going to start with a brief disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. [Operator Instructions]

David, thanks so much for being here today. I just wanted to get a sense of, clearly, some of what has happened in the past couple of years has been what you thought was going to happen, and what you invested to make happen. And some of it has just kind of been maybe beyond your expectations or outside of your control. And so how has your strategy changed over the past couple of years from maybe what it was at the time of the IPO? And maybe how has COVID in some of the areas where you've seen acceleration thought about how you scale the business?

I'll start with our failure and how that really affected our strategy change, Meta. We endeavored to build internationally and spent a good part of 2.5 years learning and building and focusing on serving our customers around the world. And what we learned, and what we adapted to was that when you go internationally to different countries, you basically move at the speed of government. When you're trying to do something regulatorily compliant, like providing inbound and outbound voice with numbers and toll-free numbers, emergency service. And so we ran into sufficient friction that we had to make a change. And that strategy change culminated in the acquisition of the Voxbone team late last year, and that was a seminal moment for us realizing we had to change course. Fortunately, for us, they had been building out around the world for 15 years, and their footprint was so complementary to us that it was an appropriate change, but I would start there. Now certainly, with the advent of work from home and mask with COVID, we have had significant customer growth as reflected by our dollar-based net retention. And we were delighted to be able to keep up with the overwhelming instantaneous demand that we had in the U.S., many of those user experiences and use cases that proliferated during this season will continue. They'll continue to flower and blossom, we think, not just domestically, but around the world. So we've learned, we've benefited in some cases, we failed in others, but we continue to adapt and overcome.

Got it. I think it's more successes. And you're being awfully difficult on yourself. But -- maybe that's how you stay ahead of the pack. Traditionally, we just kind of talked about, you made a big acquisition at the tail end of last year with Voxbone. How much of international expansion is kind of your customers were pulling you to go international? And just how long can it take to get that single pane of glass or seamless experience that your customers are looking to you for?

Bandwidth after the Voxbone acquisition serves now in over 60 countries, 37 of which are full PSTN, full stack replacement. And what that means is, we can serve companies globally, but also locally. And that enterprise focus is really important, Meta. You'll have large enterprise that want service in Germany, in Germany only, and we can help them and work with them with emergency service and full UCaaS, CCaaS capabilities. You also have, as you mentioned, large technology companies who are clamoring to take their UCaaS phone replacement service worldwide as rapidly as possible, displace incumbents, and we've got both kinds of enterprise opportunities now in front of us. Our total addressable market with this acquisition has more than doubled. To the second part of your big question, the "single pane of glass" customer experience we call One Bandwidth, and we're endeavoring to get there throughout the rest of this year and beyond. It will take time to stitch together 2 platforms and 2 networks. We're actively cross-selling. We've got great opportunity. And the customers, frankly, are willing to wait on a single experience if they get the benefit of the footprint and capabilities today, but we're working really hard to provide a One Bandwidth experience.

Got it. There's been a number of acquisitions in the space of late, a number of kind of partnerships even announced earlier this week. How do you continue to differentiate yourself versus kind of -- versus the peer set?

When you look around the world, you won't find another combination like we've made with Voxbone for a large technology company or an in-country enterprise. We will continue to challenge and displace incumbents with our software platform and network. And that means Colt and that means Tata, and that means Verizon, AT&T and Lumen. And we're doing that at scale in a way that no other company can. No one has the footprint. No one has the experience domestically, now internationally, and we're excited about that, and that's why we made that move.

Got it. And with this acquisition activity, a lot of it's been involved at the network layer. We're not really talking about some of the software layer piece. And so how do you think that that's changed the perception amongst customers, amongst investors, just about the value of the network versus maybe the value of the platform?

I think it's important to distinguish between the messaging environment and the voice environment and network. I know that there have been acquisitions related to international messaging companies jumping into voice for largely the first time or CPaaS competitors acquiring or investing in, I should say, messaging infrastructure. And we've made sure to keep our messaging business to a distinct small percentage of our total, and that's been intentional. The value of the voice network has never been greater. Control and quality and cost in terms of scale economics globally is essential to support some of these dynamic rapidly hyperscaling customers. It's not good enough to just resell Telefónica. It's not good enough to just resell and lose visibility. We provide analytics for all of the call flows that we're talking about, and that comes from having end-to-end visibility of the network as well. So I don't know how market perception will change. But in the minds of our customers, our enterprise customers, it continues to be vital.

Okay. Got it. You just touched on for a second, but primarily and traditionally, you've been a voice-based company. You've also kind of expanded that messaging business. And so just how do you see that as complementary to your voice business? How do you see that as an extension area? And just -- or I guess, what do you see -- foresee for that messaging piece of the business?

This is such a cliche analogy, but I can't help it. It's hard to imagine selling a burger without fries. And for our large customers, convenience through 1 platform often is a driver for messaging and it will remain about 10% of our business and it has been an important door opener to the remainder of our product portfolio, but working major in voice. Voice is where we have structural advantage. Voice is where we are completely and fundamentally differentiated, but it is a very important handy adjacent product to offer enterprise customers who would like to have a single partner for both communications.

Got it. Nobody wants a burger without fries. I agree with the strategy. A tailwind you saw in 2020 was clearly work from home, you saw boost from your video customers as well as kind of some of your EUC customers. You mentioned on earnings it's kind of increasingly hard to differentiate this impact on your business. Just how does BAND continue to benefit from hybrid work styles or cloud transitions versus kind of the benefit that we saw from kind of a flux to work from home in 2020?

It remains to be seen, but our organic growth broadly ex-COVID still exceeded anything we had guided throughout '20 and that broad growth reflected in our dollar-based net retention in the 130s. It does expand use cases all over the place. Many of those will continue. We think human engagement maxes out all available channels. [indiscernible] some game. We saw that, Meta, with the rise of messaging, voice continued to grow. With the proliferation of video, voice continues to grow. An app like Clubhouse will have dial-in [ federation ] needs and voice will continue to grow. And we think that we're really well positioned to fuel that growth for our customers now worldwide and it was essential to expand that total addressable market from just domestic to around the world.

Got it. And as you expand the customer base, you clearly continue to have kind of pretty incredible customer ads. Does your go-to-market change? Are there different sets within the enterprise that you were previously unable to kind of address or just where do you see yourself as -- kind of what is that target Bandwidth customer and has that changed over time?

It has remained bland and much, much larger than other CPaaS competitors. And our international business, Meta, was interestingly inbound only in demand generation. So, we're exited about cross-selling and outbound demand generation is our go-to-market. We've identified segments where we've been very successful, being able to serve 11 of the 12 Magic Quadrant Leaders in Gartner's UCaaS, CCaaS conferencing spaces reflects that our sales teams and business development teams are very effective in winning that business and then growing it over the course of years. That direct approach will continue to be our approach and now we're able to target non-U.S.-based technology, fast growers and enterprises in financial segments and in health care in ways that we weren't able to when we're just domestic, and this is really important. I think we're going to see a season where large enterprise go from thinking about a domestic multi-sourcing approach to going all-in, and we've achieved that with some of our largest customers over time, but when you're talking worldwide for these large enterprise customers, they are talking more about trusting you everywhere.

Got it. So it's really as opposed to kind of needing different skill sets, it's really about kind of -- advocating kind of your global approach as kind of the sales entry point. Okay. You've had chunks of customer ads over the last couple of years, where they kind of come in these waves. The hyperscalers, then -- you see, then it's video, then it's service providers. Now you're starting to see a little bit more success within contact centers. Just how did those waves kind of evolve, like how much of that is just 1 customer came and then they all look at what everybody else is doing versus kind of intent on your part and just how do you maximize taking advantage of those opportunities?

There really have been sets of waves in our history, and some of it is simply awareness. Other aspects that drive cohorts to join us include the complexity of migrating from legacy analog premise base to the cloud. The more complex and difficult the environment, it seems the longer it will have taken that cohort to find us, join us and move to the cloud. In all cases, however, Meta, what the season of 2020 did do was accelerate radically decision-maker mentalities for abandoning Verizon, AT&T and Lumen domestically or international incumbents and moving how they build product, how they build customer experience, how they engage with employees to the cloud. And I think that's the biggest takeaway is while we've seen sets of waves in the past by a vertical or a segment, financial or communications based, more broadly now, all industry is recognizing that they must get cloud base and that the incumbent providers of communications everywhere have really failed to keep up.

Got it. You noted on your Q4 call, seeing a lot of interest in the marketplace for your Duet product, not just Microsoft but other people looking at that model. How do you think about that opportunity scaling and kind of creating a broader ecosystem around that?

To my point on different decision-makers moving more quickly or less quickly, it's okay and wonderful to be able to take a UCaaS SKU and replace all your desktop telephony for your team. But if you have a complex call flow or if you have a history of configuring your SBCs, what the Duet product does is it lets you have a path for that complex call flow where you get to bring your own provider. And this is really important. Not all enterprises migrate to the cloud in the same way. If you've ever seen video from up above the African savanna, the wildebeest migrating, some are moving really fast in the middle, some are going really slow at the edge. And what Duet does is it helps a Microsoft Teams company migrate in a different way. Duet also, we expect, will provide that same value to other UCaaS platforms. And so you can bring Bandwidth and E911 service as your provider, but still enjoy the knowledge worker experience of a UCaaS solution at their desktop, at their laptop.

Got it. Recently, customers of yours, like Microsoft have introduced kind of their own CPaaS platform. How do you participate in this opportunity and make sure that you're extracting value as kind of your own CPaaS platform, but allowing customers to kind of build additional functionality on top of that?

We are excited about Azure Communication Services. We're excited about providing a platform and network that other CPaaS offers to enterprises are built on. We think that our role is vital as the underlying platform and network for those approaches. And the economics that we enjoy, Meta, from that approach are analogous or identical to when we power a UCaaS or a CCaaS environment. And that's important to your good question. It's not cannibalistic. It's very complementary to supporting all of the migration and the use case expansion that's going on.

Got it. I mean in terms of -- clearly, you just talked about certain customers or maybe they just want service in Germany or maybe they just want service in France. I guess we've talked a lot about how long it takes from a technology standpoint to kind of get to that single pane of glass. But how do we get there from a sales approach? You've mentioned that there's a lot of complementary nature between kind of your culture and Voxbone's culture. But just how long does it take for that sales approach to kind of become the same across both enterprises -- both companies?

It is a primary focus for our integration effort to sell globally and locally in an effective way. We've never had as many large customer opportunities in our pipeline as a company as we have today, and we are cross-selling and are actively doing so. But what's really important to reflect on is that what they have to sell in 60 countries is unique. You can declare that you are going to begin to expand internationally as we did 2.5 years ago. But again, the path, the journey to expand and open up places like Germany, France, Asia is extremely challenging. And so it's an advantage and a head start that we are leveraging right now with these large customer opportunities.

Got it. And in terms of -- you've hired a lot of people. There's a lot of great talent, obviously, in Raleigh that you guys have focused on over time. Just as you have larger customer opportunities, does that change kind of who is that Bandwidth target higher? Or is it just different opportunities that you're giving kind of the same hires that you had?

Similar to having a pipeline filled with more large opportunities than ever, we have more enterprise salespeople and business development people than we've ever had. We have more specific enterprise teams focused on different segments, different solutions and platforms than we ever had. So we've grown that capability. It's taken us time since coming public to do so, but the timing couldn't be better as we now have the underlying global solution to offer.

Got it. And another -- another challenge of very strong culture-based companies like yourselves over the last year has been how do you keep a culture the same as not only you're ramping maybe faster than expected, but you're having to do a lot of it remote or is not having as many kind of that in-person events that you would have in the past to kind of build that culture? Just how have you kind of maintained or looked to maintain that over the last year? And as you scale, how do you keep that across the Voxbone population as well?

We're an essential business, and we've remained open as a 911 provider throughout this entire season here in the office in Raleigh. We've been so blessed by the quality of the Voxbone team, and the chemistry that they had coming into this season. They've been so resilient. And yes, we've done things like virtual wine tastings and sending swag across the Atlantic, and they have outperformed in the last part of last year, as we said, and it's a great tribute to the leadership of both teams that we've maintained the chemistry to the best of our ability. I'd be misleading everyone if I didn't say that morale absolutely suffers during a season when we can't all be together. But we've done our best to really grow through this with our new colleagues across the Atlantic and everyone here in Raleigh, but I cannot wait for everyone to be back in person all the time, as I think all of us can agree.

I think you used to have in-person team workouts at lunch. So I imagine there's probably a Peloton group of Bandwidth team.

You said it, there is.

I figured so. One of your higher level of goals in 2020 was to reach breakeven profitability, which you did. Do you have any higher level expectations on how 2021 will play out just given there's a lot of opportunity to pursue. There's a lot of integration to do with Voxbone. Just how do you see kind of the OpEx line or kind of getting OpEx leverage over time versus investment? What's that calculation like?

It was a core principle of ours to be profitable, and we did so a year earlier than planned, as you mentioned in 2020. It's a stake in the ground principle. It is a declaration that we will have profitability. Even if it's a penny of profitability or a dollar, it is the core principle to have that discipline on your bottom line that allows you to be nimble and agile through all seasons. And we don't know what's coming next, but we always want to be right there at profitability, so that our optionality as an operating team can be maxed out. So you'll see us commit to non-GAAP net income profitabilities we had -- have for '21. But that won't stop us from investing in the growth of the business, but we do have just a fundamental philosophical discipline of staying at the line of profitability.

Got it. And I mean, how do you see -- clearly, Voxbone was a large acquisition for you guys. But how do you see other opportunities, either inorganic opportunities and the opportunity to either grow further internationally or add additional skill sets?

Our focus will be on continuing to execute the strategy that we've announced since being public, and that will be to expand the footprint even further. So there are key areas where we know there's demand for service that already exists, where we'll continue to build and extend the lead that we already have. In terms of product platform and capabilities, we're doing great work in R&D. We'll continue to be opportunistic and evaluate inorganic opportunities as they come. But as you know, historically, we've only done 2 acquisitions, Voxbone being, by far, the most significant. So we're builders. But when we come up against difficulty like we did internationally, then we look to adapt and overcome, and if we need to do that again, we will.

Got it. And I mean, from a customer standpoint, clearly, your large customers were asking you to go international. I'm sure your smaller customers were as well. But just in terms of maybe that enterprise customer set, are there different functionalities that they're asking you to add -- that you're thinking from a platform standpoint? You mentioned burger without fries, but what's the catch-up in that equation, I guess, they're also asking you for?

The footprint was a fundamental differentiator that we had to offer. You got to get your restaurant chain outside of the country. We did announce in the earnings call that one of the new things that we had done was support a contact center that was based in the U.S., but mobile-first and providing service in 20 other countries. And for us, that's really important. That's a new thing that's fueled by the capabilities we've added. The platform supports it. We'll continue to extend the capabilities in platform to follow the customer demand that we identify, but reach and footprint has been the focus to more than double the total addressable market for what we do for customers.

Got it. Maybe in terms of just other investments that you need to make, I mean, clearly, Voxbone integration is #1. But in terms of other things you would like to invest in either R&D wise, I guess, just trying to get a sense of what are the R&D priorities? Or is it simply just kind of Voxbone integration at this point?

We will continue to spend on R&D, and we have some key use cases that are in limited availability, including a WebRTC-based video solution. However, the fundamental focus right now is in execution. We have a sales and marketing efficiency ratio that supports growing as we expand footprint, as we integrate. We will continue to grow and invest in success, both on the sales and marketing front and in product. But it's an execution season. It's an expansion season, and we'll continue to explore new capabilities and collaborate with customers and be creative with them, but we're focused on integration.

And just how do you see this -- we've kind of talked about there's been a lot of consolidation in this space. Just what -- particularly at the network layer, how do you see the space evolving kind of over time? Do you think that there will -- like, I guess, do you see that consolidation continuing on the network layer? Do you think there will be kind of a voice specialist, message specialist? Like I guess, I'm just curious how you see the CPaaS space evolving over the next couple of years?

I think that the incumbents will continue to advocate their role for serving enterprises. And I think that's the real opportunity that all of us are pursuing, and that's both domestic and worldwide. In order to displace incumbents around the world, you've got to have a full stack solution for PSTN replacement and a platform that is a software layer that companies can plug into. Nobody can do that like we can around the world. I think if you play it forward 3 to 5 years, the net massive share losers will continue to be incumbents. And this cohort of challenging dynamic teams, both domestically and internationally, will have displaced them. And I think that's the much more interesting dimension than how the emerging Vanguard of innovators contest with each other. It's much more a story about 100-year-old ancient slow-moving advocating incumbents continuing to fail around the world. And those of us who understand how to both build and support large enterprise customers, medium customers succeed. And I don't think that changes.

Yes. I mean a question that we often get from investors kind of to that point, and I have my own answer for it. But a big question we get is, like, well, why don't service providers start writing just a little bit of the software. Why don't they offer this themselves? And I have my answer, which is just like there's a lot of things they could be doing that they don't do. But just from your perspective, having kind of just such intimate knowledge of kind of working with them, displacing them, why do you think that they just can't quite adapt to offering some of the functionality that you can?

I think that they are large monopolies. And by definition, do not have either the DNA, the vision, the creativity, the flexibility to do it. I think that they can slap surcharges on messaging, and that's about it.

Yes. That's one way of going about it. All right. Well, David, it's been a pleasure. It's -- as always, one of these days, we'll do this again in person. But I'm delighted that I've seen kind of people walking around the office. That makes me hopeful for the future. So thank you so much for being here today. And if anybody has any questions, just feed them through myself or Sarah Walas, and we'll get you an answer. So, great, thank you.

Thank you, Meta.