Bandwidth Inc. (BAND) Earnings Call Transcript & Summary

Okay. Good morning, everyone. I am Mark Murphy, software analyst with JPMorgan. And it is a great pleasure to be here this morning with David Morken, CEO of Bandwidth, as well, Jeff Hoffman, CFO. David and Jeff, thank you so much for joining us today.

Our pleasure, Mark.

Glad to be here.

Excellent. So I want -- before we get started, I just want to mention for the audience that you should be able to access a button that says ask a question and you should see that somewhere below the video feed on your screen. You can do that at any time, but we'll try to get to that question queue somewhere towards the later stages of this presentation, and I'll give you another reminder on that. So why don't we start with just a very brief introduction of yourselves and the company for anyone in the audience who might not be familiar?

You bet, Mark, I'll start. So David Morken, Co-Founder, Chairman and CEO of Bandwidth now for 22 years, having started in a spare bedroom and growing to what we are today, which is a global cloud communications leader for enterprise globally. We have a software platform and a voice network in 65 countries now, 35 of which we provide full stack PSTN replacement. And I'm joined by my colleague and dear friend, Jeff Hoffman, our Chief Financial Officer.

Thanks, David. Yes, just a few words about me. Been with the business about 10 years. I've had to join -- take the business through the IPO and becoming a public company and been in the TMT space for 20-some years now.

It's been quite a journey. And along the way, you have racked up this customer list that is really a who's who of some of the most savvy, sophisticated technology and software providers. You've got names like Microsoft and Google and Zoom and you've got RingCentral and 8x8 and GoDaddy. There -- we think there's been some work with Amazon and Alexa. The -- one of the stats was, I believe, it's each of the 12 recognized providers in UCaaS, and I think 7 of the 9 recognized providers in CCaaS. Maybe, David, you could provide just a few simple examples of how they're using Bandwidth to try to make this tangible for the audience because it's pretty complicated behind the scenes. Maybe you could just explain how we experience that in the real world. And just comment on why they're selecting Bandwidth to power those services?

Yes, Mark. And just to bring you up to the latest, I think we're in 11 of 13 CCaaS Magic Quadrant providers, 11 of 12 UCaaS Magic Quadrant and all the visionaries and leaders in the Meeting Solutions Magic Quadrant. And what they have in common is that they engage with our software platform. So let me give you a couple of examples as Mark was asking. And I think I'll use Microsoft as a good example where we're the primary partner. We have 4 different ways Microsoft rely on Bandwidth to go to market, and that includes using our platform and network for a Teams subscriber, knowledge worker seat if it is voice-enabled that uses Bandwidth. Another way is if an enterprise CIO wants to bring their own carrier relationships, Bandwidth has the Duet product, where we are 1 of only 2 certified E911 providers to bring your own carrier and plug it into a Teams subscription. In addition, Microsoft have Azure Communication Services, which is a cloud-based CPaaS platform that a CIO or a product team may utilize to integrate voice with a call center to a corporate headquarters in any number of ways. That's built on our platform. And then last, the operator Connect product where we are one of several direct partners with Microsoft. In Microsoft's case, they're using one platform and one underlying network. And the other conferencing solutions of which what we're experiencing right now is, one, if you dialed into the audio portion of this conference, not the video, thank you, that's generating revenue for Bandwidth.

Everyone's glad to help in their own small way. Right. So you're referencing the voice dialing in piece of Zoom. That's something -- we have noticed there are many of these large customers where they're using a breadth of Bandwidth services, and it relates to a whole slew of their own product offerings. You get kind of that portfolio effect. But I wanted to ask you about some of the rapid growth that we've been seeing in the business, you've had these growth rates easily in the 30s and 40s the last couple of quarters. We try to kind of estimate that organically. Can you walk us through what is this sequencing of events? And if you go back about a year, I think, in particular, since the pandemic hit, what's that sequencing of events? And what are the dynamics that it basically provided you this growth that is so far above your stated goal, which we think of as being more like low to mid-20s. What has driven this?

Jeff, do you want to take that one?

Sure. I'd be glad to. So yes, 2020 was an incredible performance for our business. What we're always focused on is serving our customers well and expanding those relationships. And you see that in our dollar-based net retention, that's how we measure. And we had some very strong results in the year there. Our results were amplified. And what I think Mark is alluding to was, one, when the pandemic hit, particularly here in the U.S. in March of last year, as everyone sort of grabbed their laptop and rushed home, they were utilizing more of our customers. And therefore, when they succeed, we succeed. And so in particular, UCaaS, so they're doing their calling out of there or as well as the meeting solutions. And so that hit in March and continue to accelerate through the second quarter of last year where we saw really the COVID impact peaked to the best that we can measure it. It's declined a bit since then, but that's all incorporated in our results. But I think what's key here is I think the world has changed, and we won't go back to pre-pandemic place. I think there'll be a more flexible working arrangements for many businesses. And Bandwidth will benefit as they utilize more of these UCaaS and meeting solution things. So that was one of the things that amplified the results. The other was we happened to be in a U.S. presidential election year. And so political messaging was very strong for us as well and carried through the election in November. And so that produced, on the CPaaS revenue, which is our focus, 51% results. If you normalize for all those things in the 2 months of contribution from Voxbone, we still grew well over 30% in the year. So very strong performance.

So I'm intrigued by this comment of that the world has changed. I think certainly, we agree. One of the questions that will come up, and I think it's common across most of the software companies that we're hosting at these conferences, so what is going to happen into the economic reopening and the winding down of the pandemic, we're going to have this return to office has begun. Obviously, we've got -- David, we can see the letter B on the wall behind you. We know you're in the office. We can kind of make out the word Bandwidth behind you, Jeff. So how do you sort of play that out? You're going to have some return to school. What do you think it would take for this say, 20% to 25% growth, your more normal glide path to continue even into the reopening?

Our Voxbone expansion, Mark, immediately exposes us to global conversations and addressable markets we didn't serve. And if your specific question is, how does the company grow north of that pull start principle that we've had to our history, it would have to start with the global addressable market and the conversations we're having with existing customers because that growth was extraordinary. The overlap of Blackstone's top 20 customers on our own, there are only 5 overlapping customers, so there's great cross-sell and upsell potential. In addition to just the market expansion internationally, becoming a global partner mitigates multi-sourcing. If you are uniquely able to go with enterprise customers around the world, they tend to talk about going all in with you or as primary in a different way. And then third, to accelerate our growth beyond our normal 20% to 25% post-COVID as we reopen, we have customers now, like hospitality and rideshare, who are negatively impacted by the previous season. And as things reopen, it really does benefit them. And so that will be a third intervener.

Okay. I didn't realize the customer overlap was that incredibly low at Voxbone. So David, that's -- it's very helpful, and I think the notion of what will happen with hospitality and rideshare there. Clearly, that will be helpful this year. What -- how about longer term, right? So looking beyond 2021, let's look at 2022 and 2023, do you think some of that surge in activity that you saw last year could persist a little longer term just because of this, I think what Jeff was calling is the world has changed. Is there a bit of a new normal? And I'm thinking about, can you have an ongoing tailwind just from maybe more people working from home? Maybe it's hybridized. Maybe they're doing a couple few days a week in the office and a couple from home. Maybe this trend of telemedicine sticks with us a bit. Can you help us just maybe think through this longer-term picture?

I can try to clarify it. I do think that there are particular use cases you're doing a terrific job highlighting that it may last longer as we emerge. But the broader context is the transformation to the cloud for what we do. We're winning against incumbents. And so I would like to say, Mark, that there is some brand-new mousetrap on our platform that would propel us beyond our 20% to 25% declaration. When, in fact, instead, it's the fact that AT&T, Verizon, Lumen and incumbents overseas don't have what we offer even as enterprise customers are demanding it. And so the broader really paradigm shifting decade-long migration away from premise-based and away from legacy solutions, that may very well accelerate because as we emerge, there's going to be a need for abandoning those prior insufficient solutions even faster than before. But that said, while we can spend more on faster growth and certainly augment sales and marketing beyond what we currently do, we've got this profitability principle we hold near and dear. And so I'm the next -- I'm probably inordinately proud of the 20% to 25% principle.

Okay. So this comment, David, about you're winning against incumbents, they don't have what you offer, even though the marketplace is asking for it, right? It's an intriguing dynamic. Maybe you can talk a bit about the moats and the core differentiators that Bandwidth has so we can understand how defensible it is. So what are the pieces of what you built that you think would be pretty difficult for someone else to replicate? Is it the network that you have? Is it this global reach with Voxbone? Is it the customer service level? Is it the software IP itself, right? The APIs and what you've done for some of the developers? How do you see this defensible moat?

Yes, yes, and yes. So since 2008, we've spent 14 years extending the platform and deepening and broadening the network. And that's why we have won so many of the UCaaS, CCaaS and conferencing Magic Quadrant leaders domestically. That's taken 14 years. Voxbone spent 15 years in places like Japan where it took 3, talking to regulators, receiving licenses, interconnecting with carriers and expanding their software platform that sits on top. That moat is a moat that can only be crossed at the speed of government, and that's glacial. And so we love the regulated 65-plus markets now that we can serve in the same similar way that have terrific quality and cost benefits for our customers.

Okay. Speed of government as a moat, I like that. And we see that all the time, that glacial pace. So one of the questions that we will always get is why would AT&T, Verizon or another telecom player not at least try, right, to get into the space themselves? Their competency is voice communications. Is it -- is there anything else in this, right, other than -- because they have the ability to work with regulators and work with governments. Obviously, it would take some time. But what else about this prohibits them from being competitive with you?

It's not in their DNA to do software or user experience via software platform. But an analogy I'll use is really vehicle electrification. Why doesn't a Detroit automaker respond much earlier to something like Tesla. It's so interesting how organizations that have a core competency or DNA in one area can't easily just change the power plant of the vehicle. You would think that it wouldn't be all that hard. Similarly, we have seen nothing that would suggest the large worldwide incumbent providers have any interest or ability to follow us to serve enterprise customers this way.

Yes. We've actually seen it in the cloud arena, right, where so many of the legacy on-premise application providers, they saw Salesforce coming and Workday coming and ServiceNow coming a long, long time ago, and were unable to respond. So I think that's very relatable. Can you help us to understand that. I think going back to the beginning, you were talking about how Microsoft is working with Bandwidth. You alluded to how Zoom is working with Bandwidth, right? You've mentioned you have so many others. You have Google. You have RingCentral. What is it that -- so walk us through their decision tree and what is causing them here to work with Bandwidth versus the incumbent? And for the occasional customer that doesn't want to -- doesn't decide to work with Bandwidth, what drives that?

Software drives it. A need for a product team to simply code to an API, to turn on dial tone to an endpoint for a Google Adwords customer. Being able to, by simply an API call, turn a toll-free number or a Microsoft seat. Verizon don't have a software layer that can support any of that. So a product team at a tech company like Zoom, a product team has nothing to work with a Verizon, and that's what drives the conversation. After that capability conversation, we then start talking about footprint globally, and it gets exciting. And that's where the opportunity for these domestic U.S. technology companies to go all in with Bandwidth. That's unique and exciting for us, but it all starts, Mark, with software.

Okay. Can you -- so then, since you're speaking to the software differentiation, can you give us a little compare and contrast against Twilio? Because I think for many people, they'll hear the word, CPaaS, they will also be thinking of Twilio. And obviously another company that's growing and doing pretty well. How do you compare and contrast Bandwidth from Twilio?

Twilio focus on messaging and recently e-mail and other engagement up-stacked from us, represented by their segment acquisition. But Twilio are focused on engagement primarily with messaging. And to the extent that they include voice, they do so with a software platform like ours, but they are reselling underneath that platform, Verizon, AT&T and Lumen, and that's the key difference. We own and operate our own vertically integrated infrastructure, so we can provide a large technology company at a QBR, we can show them that we are one hop with full visibility into the entire call flow, and we have both quality and cost advantages. So we go head-to-head with Twilio only on a small minority of the time. That's really important to understand that people don't -- they have a hard time remembering this, which is we are voice and we win against incumbents. Twilio are messaging primarily, and they only compete against us a minority at the time.

So you while you said they were messaging, a question came in that looks like it's about messaging, so let me bounce this off you. My window just shut. Let me reopen that. This says, how big do you see messaging as a percentage of revenue in the next 3 years? For instance, can go from 10% to 20%? I actually -- I think -- I want to say recently, it had already hit 12%. But then it says, do you need network capabilities or reseller aggregator partnerships in East Asia to supplement North America and Europe to be a truly global offering? There's a lot going on there. What do you think of that question, David?

I think it's a great question. I think we'll keep messaging to 10% or approximately, you're right, Mark, it was 12% in the most recent period. But we'll grow voice and outpace the growth, or at least keep up and intentionally keep our go-to-market for messaging relegated to a nice-to-have but not core, for lots of good reasons in terms of what we offer. We don't think we have to become a ubiquitous international messaging company to have success with enterprise voice with our CPaaS platform. That's not what we're seeing when we do our cross-sell and upsell conversations. We're displacing Colt and Tata and Telefonica and Deutsche and others just with our voice offering globally. And excited about that.

Okay. So the displacement is not just a U.S. telephony phenomenon. That's happening against global carriers as well.

It is very much so.

Another question came in while we were talking there, and it says, someone is asking for a compare and contrast versus Inteliquent, right, which might be one where you perhaps have a little more overlap on the voice side?

So we used to. Sinch, the international messaging company, has acquired Inteliquent, the domestic U.S. voice company. Bandwidth has gone on offense, expanding our TAM to 65 countries. And so a side-by-side conversation where a technology company is choosing a primary partner worldwide for voice is an apples-to-oranges conversation now relative to Sinch. Sinch have international messaging, but are 10 to 15 years behind in international voice. And so it's not a good comparison for the global enterprise conversations that we have.

Okay. What -- David, and I know messaging, as you're saying, is probably going to remain a relatively small piece of the business. So let me ask you one more, and then we'll kind of move on from that topic. What do you think when you've seen just some of the activity around some of those messaging, like some of these SMS gateways. There's been some activity there involving Syniverse, you've had some of those kind of providers getting gobbled up by others. What is the thought process that runs through your mind as you see that kind of activity?

Excellent, smart defense. And by that, I mean, secure your supply chain desperately if you have to. Because messaging is not overseen by the SEC, and surcharges can go up. Super smarter defense to secure messaging and supply chain.

Okay. Okay. defensive play. Very clear on that. Let's talk about -- let's go back to Microsoft because you had an announcement several months ago that really piqued our interest, and this was on Azure Communication Services. And so our understanding, which maybe you can help to further along a bit, is that you will be powering Azure Communication Services under the hood. And we're wondering how that is working, especially economically speaking, how significant is that development for Bandwidth? How should we think about that opportunity from that one particular partnership, the Azure Communication Services? And then also, if you could just touch on the traction that you're seeing with that service so far, understanding it's early days there.

You can think of it as critical in the future for an enterprise to be able to not just have a UCaaS seat and not just have a CCaaS platform, but to be able to incredibly creatively intertwine the 2 and other customer experiences however the enterprise needs, for the customer life cycle, for employee benefit. Azure Communication Services as a platform gives an enterprise CIO and her team the ability to tie in third-party integrations, add AI in real-time to any number of call flows, move call flows seamlessly anywhere in the world or between any app. So it is the essential layer to orchestrate all kinds of comms channels. And that orchestration layer has been missing. You've had UCaaS in a silo. You've had CCaaS as an experience. You had conferencing as a stand-alone. And as a CIO of a large enterprise globally, you need an orchestration layer. And the API from Azure Communication Services does that within the Microsoft universe but can also be leveraged for third-party integrations hanging off or dialing into a call center. It's essential, it's vital, and we think it's very powerful and positive for Bandwidth, for the reasons you mentioned. We've never talked specifically about Teams traction or ACS traction or Operator Connect. And so need to demur in highlighting that customer's progress. But early on, I think people are kind of chuckling at Teams, and I don't think anybody is laughing anymore. And I think that's same thing about ACS.

Okay. Okay. So you're using these terms, essential, vital, powerful. I understand it is difficult to prognosticate on exactly where that's going to be a few years down the road. But is there any way to think about just the potential, in the fullness of time, to think about maybe what portion of the telephony business that is -- that ultimately will flow through Microsoft, right, Office 365 and Teams. Because that is something that is picking up for Microsoft very noticeably. Any sense of just what portion of it could be powered by Bandwidth? Or I don't know, what kinds of milestones we should be watching for there?

I can't remember the precise number that Satya shared for Teams seats of users, it's like 155 million or something, really big. And that's a global number. So our ability, to your question, Mark, to serve Microsoft as primary provider worldwide has everything to do with the Voxbone acquisition and the ability to serve in 65 countries immediately and full stack PSTN replacements in 35. If it's going to be a primary contributor to our growth in the future equal to their own growth, it has to be worldwide, and we are the only partner that can do that.

Okay. Maybe we can pivot a bit then and talk about -- that's actually a pretty good lead in to think about this concept of the in-network calls. So where calls that stay within your network, both ends of the call, seems to have kind of a gross margin implication for the company and there's a favorable dynamic there. Can you explain to us in layman's terms how that works? Why that is? And any kind of sense of where that proportion of calls on your network is going that would be in-network calls?

Jeff, do you want to begin, and then I'll finish up on that one.

Sure. Happy to. So we've talked about publicly, and it's a little dated, maybe a year or 2 ago, that the percentage of calls over our network that are all in-network, and I'll explain a little bit more what that means, is in the mid-teens as a percentage. What we're talking about here is there's different types of calls. So sometimes, one of our customers, and you've used Microsoft as an example, obviously, there's many others, they may call someone else and say they're calling a Verizon Wireless customer. That would be off-net, going off the Bandwidth network to complete that call. But there's other times where maybe they're calling from a Microsoft Teams, to use that same example, and they're calling into a RingCentral or a Zoom phone, that would be all likely on network because Bandwidth would handle that call from start to finish, and there's a very different gross margin profile. So you know our margins are in the low 50s now overall, and that represents sort of what voice calling is in the blend that we have today. But the calls that are on network are much higher. Think of them as the highest software margins you've ever seen. And so as we continue to expand our customer base and do so globally, now almost 3,000 enterprise customers, as they call each other more, we'll benefit from that. And that's one of the key drivers that will help us achieve getting to our terminal gross margins of 60%.

On-network calls, you're saying would -- think of the highest software margins we've seen?

Correct. Yes. Very high margins on that end, and that's why we love that when our customers collaborate and are calling one another using those same things. So the more customers we get, the more opportunities we'll have to do that.

Is it sort of inevitable as the company grows, that mix of on-network calls is going to be upticking?

Yes. I think that's an up and to the right progression.

Okay. I'm sorry, David, I didn't mean to interrupt.

Well, thank you, Mark. I think that clarification was right on. And that benefit to us, if you're just reselling a carrier, you might get a volume discount, you don't get the economies of scale and network effects. And that's a huge difference.

Okay. Okay. So why don't we pivot -- I actually had a couple of questions. I wanted to come back to Voxbone because you've mentioned it a couple of times. And we think that this was a very -- there was a lot of wisdom, we think, in this decision. It was something that was executed well. Pretty balanced profile of this transaction. We want to know -- so this has catapulted you forward in terms of the international expansion. But rewinding back to that kind of route-level decision, why did you decide to acquire rather than build? Because I think in the early days, you had -- there was some action, right, that you had of building some data centers over in Europe. And then can you just remind us again how much geographic coverage does that acquisition provide? Are there any holes in that? And I'll have another question after that.

There were 2 drivers at a route level to the acquisition. One was back to that speed of government that we were experiencing firsthand in European jurisdictions with regulators and with providers. We were running headlong into the friction that Voxbone had overcome for 15 years. Our customers, Mark, are demanding, high-tech partner customers. Simultaneously, we're getting more and more aggressive about wanting progress. So that combination of realizing that government -- you cannot pay more for an expedite within bureaucracy in a faraway jurisdiction. You must be patient and execute the way they expect and you have no choice. Meanwhile, the paradigm shift to the cloud that so many of our Magic Quadrant partners in these different areas are supporting is only accelerating. And so that demand-side, supply-side equation just made it obvious, even to me, that we needed to think about accelerating into what you asked about. 65 countries worldwide, 35 of which right now are full PSTN, which means a phone number, that's for an advertiser. Like if the world's leading electric car company needs a Poland local and toll-free number to call into a dealer equivalent over there, who can do that in both Poland and then Romania and elsewhere. That's us. And we are in 35 countries where it's inbound and outbound calling, which we service toll-free. And I think the Olympics had about 200 countries, and so we've got a long way to go, and we are well underway in expanding that footprint so that we will be the #1 world's partner for technology companies that need immediate coverage for an app or an experience or engaging a customer.

Okay. So David, we have probably about 1.5 minutes, 2 minutes left. I wanted to ask you, you have this interesting development on the enterprise side. What I mean by that is some of the, I guess, I mean, non-cloud-native companies. So you had a recent win with a banking institution. You had one in the health care space. You had a 5-year multimillion-dollar relationship with a Fortune 500 company. So how do you think about the durability of that opportunity to expand beyond kind of the cloud natives? And I want to ask you as well, I guess, as a comment, just on the demand environment that you see here coming off of a healthy quarter, how is the pipeline of new opportunities overall for Bandwidth?

We've never had a larger pipeline. We've never had a pipeline with larger enterprise opportunities this big, and we've never had as many fully ramped quota-carrying sales reps attacking that pipeline. We think the enterprise space really represents the winner-take-all opportunity worldwide. And we think it takes worldwide footprint to do it. But make no mistake about it, this is a role that Verizon and enterprise played for our grandparents' generation of businesses going on in the world, and they don't do it anymore. And that's where we come in.

Okay. That's a strong note to end on. I think that's a perfect finish to this session. So David and Jeff, can't thank you enough for carving out a little time to be with us today. And hope to see you again next year at this event.

God bless, Mark. Thank you.

Thank you, Mark. Take care.