Bandwidth Inc. (BAND) Earnings Call Transcript & Summary

So thank you for joining us today at the Barclays TMT conference. With me today from Bandwidth is CEO, David Morken, along with Head of Investor Relations, Sarah Walas. David, how are things going on at your end, man? Give us a reason to go to North Carolina? My associates from North Carolina, like would be happy to do it in person some time.

We'd be happy to host you, Ryan. We're in [ Bergsten ], if you'd like to come join us. A little bit rainy today in Raleigh, but it's been a beautiful fall and ACC basketball that's happening so life is good.

Yes. Going back in person and like, I'm always okay to avoid some of the New York weather. So I mean it's got to be a little easier down there in Raleigh. So look, go ahead, sorry.

Come on down.

Yes, I'm definitely looking forward to that. I mean, Duke is playing pretty well this year. So for those investors who are on the line or if you're dialling in after the fact, please feel free to e-mail me at [email protected] if you do have questions. We'll be taking questions from the line. But if you e-mail me them in, we can get them into the management team.

So David, obviously I have been following you guys for a long time, I know you pretty well. But for those new to the story, would you mind just sharing some details about Bandwidth's core business and maybe some of the tailwinds behind enterprise voice API?

You bet, Ryan. Bandwidth is a global communication software company connecting enterprises with people using voice calls, SMS messages, or emergency services. We have a global network on which a global software platform resides to deliver a service. And for the CPaaS space, the communications platform-as-a-service space that's utterly unique and very, very important and valued by enterprise customers because of the quality, the savings, the flexibility that, that combination of the global network and a global platform provides. We power, among others, 12 out of 12 of the Gartner Magic Quadrant leaders in CCaaS, which is contact centers of space, UCaaS as well as meetings. And what's happening now in the enterprise is pretty exciting, Ryan. There's really been a Cambrian explosion in the enterprise contact center with emerging AI use cases for calls, whether it's authentication, fraud prevention. There are many, many new dynamic use cases where audio plays a vital role, and we're excited about serving enterprises globally in the contact center space. I should also share some of the growth tailwinds that we think are important to understand. You're just getting us to who we are and what we're about. First and foremost, being a global company has really expanded our total addressable market beyond the United States, where we grew up and that continuing market growth is central to our strategy. In addition, our existing customers that I just talked about in those 3 sectors, their ongoing growth is really important to powering our success. The enterprise; and then last, messaging. Messaging is only about 12% of our revenue, but in terms of growth is outpacing as a percentage where we're growing in voice.

Excellent. And I just want to make clear out of the gate like for Bandwidth, it's not really a bet on cloud voice versus messaging versus video. This is more cloud voice first like legacy voice providers. Is that a fair way to think about it?

It is. And it's something that many people don't understand about us. We are taking business away from Tata, Colt, Verizon, AT&T and the way that we take business away from them is because of our software platform. That software platform allows large enterprise to really approach new use cases flexibly, dynamically, much more rapidly. And so often, what misunderstood is teaming up or competing with other CPaaS providers most of the time when that's not the case. We focus on enterprise. We focus on global and we focus on voice, and that's an entirely different cohort of competitors.

And just for investors newer to the story, you talked about how you service many in the Gartner Magic Quadrant for both UCaaS and CCaaS. So think about things like Zoom Phone, 8x8, Fuse, RingCentral, like you're providing the enterprise voice APIs to provide connectivity for those voice services. So you almost get to play on the growth of these UCaaS platforms itself. Can you just like help investors with what services you provide some of those UCaaS providers?

You bet. We do indeed provide APIs that allow those UCaaS providers in real-time to activate and assign a phone number in any one of 37 plus countries in addition to that phone number, inbound and outbound voice calls are enabled in real-time as well as emergency service. Now up to 60 countries, it will allow use cases that are one way calls or non emergency, but it's really important to understand that, that API is something that the UCaaS team can code to and code once and globally activate service in all these different countries. And that's a really high value. This last quarter, we announced that our longest tenured large enterprise customer, actually, for the first time, began using that platform, those API outside the United States in many, many of those countries. And we're excited about that opportunity, cross-selling the global footprint to what was a domestic internet giant customer.

Yes. I definitely want to touch on the international box one opportunity. But just to level set, investors might be newer to the story. When it comes to like as you compete first like the UCaaS opportunity or like those older or legacy network providers. Do they have these same type of software APIs to do some of these capabilities?

They don't. And in some cases, I kid you not. They still ask for a fax if you're trying to transfer a toll-free inbound member to a contact center from a contact center in Arizona. And if you want to move it to a contact center in Puerto Rico, some of these incumbents like Verizon are still asking for things like a fax. And I'm not making that up, it's an API call, in our case, in real-time. And so we really enable the dynamic new use cases in contact center and in UCaaS in a way that the incumbents simply do not.

Yes. I think that's an important distinction, right? Like growing up as a software company, right, and then instead of trying to like add software capabilities as a part of your product offering. One thing I think that's interesting as well is your ability to help like individual large enterprises, not just large enterprise customers like RingCentral or 8x8 with their own call routing, right, and dictating calls through like third parties to do like voice transcription and things like that. Are you seeing more enterprises really try to get a more customized approach to handling their call inbounds and workflows?

We are, and they have to because the customer experience bar is going up and up and up. And so you want your contact center rep to be empowered by all kinds of third-party data sources in addition to, for example, sentiment analysis that lets the rep handling the call know what you expect by the time they pick up. You're also routing calls through different services for different purposes during the experience, and it ends up yielding a much more rich informed resolution path for the customer journey involved in the finance sector and elsewhere and so the fidelity of the audio, the reliability, as I just mentioned, the ability to flexibly move the medium, the audio stream between and involving different applications is vital and the incumbents simply aren't prepared to engage with, again, this Cambrian explosion of different applications and capabilities, particularly in the contact center right now but also in UCaaS.

Yes. And that's why I think on my side, like I probably do a better job of educating investors about how, like there's a lot of nuances when it comes to connectivity or when it comes to call routing or it comes to like customizing your enterprise call flows, like -- in many cases, investors say, oh, telephony is commoditized. And what you just described, it sounds a little more intricate than that.

It's incredibly complex, and it can only be orchestrated by a software layer. And so the incumbents are really getting left behind in this regard. And the migration away from incumbents in a contact center is well underway. The ability to take a phone call, divide the signal in front of the media for 2 different purposes and transferring real-time with almost no millisecond delay through third-party apps for ultimately great handling by a rep and resolution, it's a big deal. And the importance of voice in certain segments has never been more important because the customer expectation is, again, the bar stands at higher and higher.

Yes. And that's a really good point, too, right? Like your requirements for uptime is very high. Like you can't -- these are mission-critical solutions. But just on your Voxbone acquisition, I thought this was interesting because now it helps Bandwidth move international with the U.S.-based customer. So can you describe how Voxbone helps like add a new leg to Bandwidth's growth opportunity?

You bet. Voxbone spend 15 years building out 37, now 38 countries where they established full PSTN dial tone replacement service. And to do that, Ryan, you have to be patient enough to move at the speed of government because each jurisdiction, whether it's Turkey or Latvia or Israel, the regulator moves at whatever speed they're inclined to, and you have to get approval to do this right and to do it in a regulatorily and tax compliant way. Voxbone over 15 years established really universal leadership in doing this. We tried ourselves to follow for 2 years before realizing we were really going to never catch up, and we welcome Voxbone on board, excited about them joining us because of the time to market advantage they provided. When you intake the Voxbone platform and network and combine it with Bandwidth and integrated now 1 year later with Bandwidth, you enable the team to be able to code to our platform once and light up 60-plus countries, that is a big deal.

Yes. I remember when I was diving into like international service coverage last year. I was going over APAC specifically, but it's like some countries just take 2 years. Now it's like, well, there's something you can do. It's like, no, it just takes 2 years. So -- and to cover Europe, it's like 6 months per country and like hundreds of thousands of dollars to get these licenses. So no, it makes a lot of sense. And we're seeing some of those customers you described in the cloud voice side move over to international deployments as well. So I guess how are they bringing Bandwidth with them? And I guess how are you differentiated now with this Voxbone acquisition?

We announced in the third quarter, the largest electronic signature company took 8 providers that they can cobbled together across 15 countries and consolidated those relationships to just Bandwidth and just our platform and got rid of all of the knitting required to coordinate across those multi-country, multi-provider engagements. They're going worldwide with us as their partner precisely because of the combination of our U.S. platform network and what we've added with Voxbone.

Excellent. And just like on the financial side, Voxbone had a really strong second quarter this year. And then third quarter, I think investors might have thought the growth would have been a little stronger. Anything to call out between revenue between the 2 quarters for that segment?

We expect that the growth rate of Voxbone will mirror or be very close to what we have seen at Bandwidth. That has been the case historically, it can ebb and flow, but the way investors should think about the business model and the go-to-market is that the Voxbone contribution today going forward may have been slow, but it will resemble Bandwidth quite closely over time.

Excellent. So just to touch on, like in the last quarter, like, we had our own technicological problems with our -- the system yesterday that investors struggled with. But you unfortunately had the DDoS attack that towards the end of last quarter. Would you mind just for investors who are new the story briefly explain that situation? And then how it impacted the results?

You bet. I'm really excited that we haven't had any customer impact of any kind since October 4. And so we believe while the new normal is you always must be vigilant, we're excited that we've mitigated the effect and haven't seen any impact since October 4, but backing up for a second, the distributed denial-of-service attack is where attackers source compromised Botnets of devices to request kind of -- to request large or small or fragmented media or packets and have it all land on your devices, your endpoints, your points of presence. The size of the attack that we faced at the end of September if it had occurred, Ryan, in July, it would set a world record. And it was very novel. We were prepared. We had a network-based DDoS mitigation technology that we had actually deployed a couple of years prior, and it's doing terrific for the first couple of days of the attack. The factor and dimension of the attack changed to stage 3. We added a new partner in Cloudflare, who is really excellent in mitigating the attack. And in the course of 4 days, we had intermittent, but not absolute outages, but it did require us to tell our customers in the middle of it. We weren't sure how it would resolve. And so we encouraged them to move off and indeed intentionally and thoughtfully ported them to other providers to mitigate any exposure they had during the attack. Those customers have almost entirely returned. We expected far less impact in Q1 than we saw in Q3 and what we've modelled for Q4. And again, we think that it's the new normal. You got to ready for asymmetric [indiscernible] attack. You got to be built right and the nature of the attacks can change. But where we are right now is incredibly vigilant and resilient and confident that our customers who have returned are smart to do so, and we're very grateful for their faithfulness in returning.

Yes, you have long-standing relationships with a lot of these customers so at least in our checks, and we highlight this in research. It sounds like, obviously, if it becomes a trend, that's one thing, but the fact that you're able to ride traffic in meantime to other vendors, I think, really went a long way. Are there any customers that are still holdouts that have yet to bring any traffic back or in general, have you seen like the majority of -- like the traffic come back from these customers?

I don't believe we're going to lose a single customer. Traffic may take more time to come back during holiday moratoriums on moving numbers. But I think by and large, the way we think about that traffic returning is in the normal course through engineering windows for moves. And it isn't anything that -- it's too early certainly to project all of '22 for any reason, but excited about the customers that returned and don't believe that we will lose any customers absolutely. And then it's the course of time that we'll bring all the traffic back. But let me just highlight one of the things that's kind of fun that comes to mind, Ryan. During the attack, we were able in real-time because of our software platform to port large inbound toll-free numbers, for example, that were in jeopardy, to a different incumbent provider. That provider later that same week had a global complete outage. And when those same customers went to move back to Bandwidth when we had declared all clear, the word they got from the incumbent was, it will take us 3 weeks to move this back. So the difference between an incumbent solution built a 100 years ago at our platform and network combination was really made manifest during this period.

Yes. I think that's an important point because attacks like these can happen to anyone, right? And it's more just about having a backup plan and having a more flexible solution with those options makes a whole lot of sense. Okay. So I mean, no promises, obviously at this point for next year, but at least sounds like things will get back on track. A lot of investors when they first go to the store, they're like, oh, why can't Twilio do this? And I know you get that question all the time, and I'm happy to also share my view on that. But I guess at a high level, can you just talk about how like that's generally not the competitor that you see in this enterprise voice market?

They are not the competitor, we generally see for a number of important reasons. Perhaps the first is Twilio have more than half of their business, I think, in messaging and in e-mail and in other aspects of what their solution provides, 88% of our revenues are squarely focused on enterprise voice. And that's the second really important distinction, which is we don't go-to-market for small, medium business or individual developers. We're focused on the enterprise Global 3,000, and our competitors are Colt, TATA, Telefonica, VT, Verizon, AT&T, Lumen, that who we compete against in the enterprise space globally the vast majority at the time.

Classic still on mute. Would you mind helping investors with your relationship with Microsoft? I know you power a few of those services and just kind of how you play throughout their ecosystem, like a SoftTeam voice, ACS, Azure Communication Services, things like that.

Microsoft have been and continue to be, and we believe will be an amazing partner, and they have been for over 10 years now, Ryan. We had the really great fortunate of working with them early in our history back when Skype went on board at Microsoft that companies like GroupMe. And from that early beginning, have proven to be a great partner with Microsoft powering and helping to fuel solutions like Teams directly within the enterprise, Azure Communication Services, where enterprises can really configure in a unique way, communications call flows of all kinds in a powerful way, bring your own provider, direct routing through partners like 8x8 and Ring and others as well as our own direct product for bringing your own carrier. Our direct product allows an integrated solution at the enterprise to work directly with Bandwidth. And then last, operator connect will support in the future, but it's less configurable or customizable by the large enterprise compared to direct routing. Direct routing is much more feature rich, powerful way for an enterprise to migrate to the cloud and move from premise-based to cloud based. But in all avenues of Microsoft's communications strategy we find ourselves fortunate to be a great partner with them.

How do some of your E911 capabilities help you like position yourself as a partner for the Microsoft ecosystem?

We were 1 of 2 authorized E911 providers for direct routing and bring your own carrier. And it's precisely because we were -- some of these space 911 solution that's compliant with all the latest regulatory that we can help an enterprise bring a solution and frankly, Ryan, get rid of Verizon or get rid of AT&T or stop working with Lumen, and they can use Bandwidth for all aspects to replace those carriers, including emergency service. And so it's really valuable to a CIO to know they can work with Bandwidth, and they are in full regulatory compliance with [indiscernible] and everything else.

And that's one of those things where as -- I talk a lot about in my like UCaaS conversations, it's like after COVID, a lot of businesses realize, okay, maybe I can use a softphone as my go to phone. I can work from home or I can work across the country from my office. But when you make that 911 call through your cellphone you still want to make sure you reach the 911 department by where you are, not where your office is. So I think that's a good -- as we move towards like this work from home world. Fuze, 8x8, they are 2 of the leaders in the UCaaS Magic Quadrant. They just -- that acquisition was announced. Do you think that will impact you at all or?

No. We are a part of that wedding party with both being customers. So we would be right there in the front row as a witness blessing that union.

Yes, I thought so. And you mentioned upfront the messaging opportunity, I mean, 11%, 12% of revenues today, but growing pretty fast. What's kind of spurring that growth rate? And how is Bandwidth doing more for its customers in terms of messaging?

What's spreading that growth rate are really important use cases, whether it's point of sale, receipts or confirmation of willingness. In this season we're in, often remote, those messaging use cases are really dynamic and proliferating. And what we're doing to help our customers grow messaging includes expanding our platform for higher volumes required for direct-to-consumer messaging, in addition, if you are a national drugstore pharmacy chain and you're doing prescription confirmation and you want to have a picture, that's an MMS message in a confirmation of the label on the model with the instructions, we're supporting MMS and MMS at high volumes for retail use cases. And we see those use cases proliferating and growing rapidly, and we'll continue to support that.

Excellent. And you mentioned your RingCentral Rise product. Would you mind just talking about that partnership and what Bandwidth and RingCentral together can do?

Well, Duet.

Duet, sorry.

That's okay. That's all right, Ryan. It's just a powerful way for an enterprise to use RingCentral and to have a compatible voice partner in Bandwidth that has already done the heavy lifting with RingCentral for rapid migration and moving away from an incumbent and using rate. And so it's a great partnership for an enterprise to take advantage of to move away from a legacy premise-based solution.

Excellent. No, I appreciate that. Yes. When you get to fireside number 7 on the Bay, sometimes some of these partnerships mix together. But that's -- we're getting close to the questions that I have for Bandwidth. So if you're an investor in the line is if anything you want to touch on, please email me at [email protected]. But David, just on the CCaaS side, like from the contact center, we started talking about that at the beginning, but have you ever laid out what, like a percentage of Bandwidth revenue is accounted for by the CCaaS vendors? I would just like to hear a little more about the growth you're seeing in that segment and why it's becoming more important to those providers?

Well, we haven't broken out that segment specifically, Ryan. The Voxbone acquisition did give us exposure broadly to global contact center opportunities and the advantage of working with Bandwidth for a contact center that's moving away from an incumbent includes the flexible platform that supports porting, high volume, toll-free inbound numbers in a reliable way. If you are onboarding, for example, great new software partner for the contact center like Genesys, you might spend a week with Genesys ProServe if you were using Verizon or AT&T. With Bandwidth, in several weeks of ProServe to integrate with that carrier, literally, it will be less than an hour on the phone with Bandwidth and Genesys to make that move in that integration. It's not just saving a week. You're doing it reliably, and you're allowing that call flow to get designed with particularity based upon geography, time of day, rep assignment. And so the work that we've done with partners like Genesys, contact centers can now take advantage of globally with Bandwidth, and that's really exciting. So you have really 2 things going on simultaneously. You've got global capabilities for Bandwidth in the contact center, and you have this garden of blossoming incredible third-party applications for contact centers that really require a nimble software platform that handles the voice in the environment in order to take maximum advantage of it.

Again, part and parcel of that, can you talk about the data opportunity, like how Bandwidth can help organizations that use it like get more data on the calls and its customers there?

So well providing the voice, media and signalling, those streams can be analyzed in myriad ways. They can be routed in so many different ways. They can be sliced and diced analytically based upon sentiments that can be compared to prior seasons or calls from the same number or person. And so there is a huge trove of valuable data to derive meaning during a contact center engagement for the rep. And ultimately, you're looking at -- you're hoping to delight the customer or resolve the problem. And so you're trying to inform the rep as much as possible during the time. And so these third-party applications are amazing in how they're driving forward resolving problems predictably. And as a voice partner, we're able to hold a call open or hand it off or store it or send it or route in so many different ways, they're essential for the data mining opportunities inherent in the call flow.

Excellent. And I've been asking everyone here at the Barclays TMT Conference. We had some companies that were clear COVID beneficiaries, some companies that now as things reopen they're better positioned for. But either way, as investors try to kind of figure out what's next, right, what are some of the things that excites you for next year? What are some of the tailwinds that we talked about today that investors should really focus on as they're diving into the Bandwidth story?

We're an execution seasoned at Bandwidth -- last year was an integration season after our acquisition. And an execution season means welcoming aboard people into all of our global offices, hopefully again soon and executing against our mission, which is to be a phenomenal partner and global leader for enterprise voice at the contact center in their UCaaS needs, and that's a global mission. And so executing on that mission is a multiyear endeavour. I'm in year 22 now, having been on more since the inception and look forward to another 22 ahead of us and think that there has never been a better time to be in Bandwidth.

David, just kind of know, I think every year for you is execution season.

That's fair.

I don't know that any different, but no, that's a great line. And look, I just want to say, thanks again for walking us through the Bandwidth story today. For investors who are maybe viewing this after the fact, if you have questions for David or Sarah, please just try to email me at [email protected]. And we can get those in. David thanks again for the time.

Ryan, thank you very much. Have a great conference.

Appreciate it.