Bandwidth Inc. (BAND) Earnings Call Transcript & Summary

Okay. Good morning, everyone. I'm Mark Murphy, software analyst with JPMorgan. And it is a real pleasure to be on stage here with Marina Carreker, who is the President of Bandwidth as well as Daryl Raiford, who's the CFO. So first off, thank you -- welcome. Thank you very much for making the trip up here.

Thank you. It's a pleasure to be here.

Maybe you could spend just a brief moment or 2 briefly, introducing the company, introducing yourself just for the benefit of anyone in the audience who might not be familiar.

Absolutely. Well, thanks again. It's great to be here. My name is Marina Carreker. And I was just remarking, I think yesterday was my sixth anniversary with Bandwidth. I'm the company's President, and Bandwidth is a cloud communications platform. And what that means is that we really sit at the middle of all of the change that you see unfolding right now in cloud communications. Bandwidth is proud to be serving all of the Magic Quadrant leaders in UCaaS and CCaaS and in meetings. These are names like Teams and Zoom and Genesys and Google Voice and Five9 that you hear all the time. increasingly, we are also serving enterprises directly as they're looking to make their migration to the cloud. It's a really exciting time for us. We think there's enormous opportunity ahead, and we're really excited to be here today talking with you about it.

And good morning. My name's -- excuse me, my name's Daryl Raiford. And I'm the CFO at Bandwidth. I joined in August of this last year. I've been really excited to be with the company. So pleased that you're able to be here with us this morning, and thank you, Mark, for hosting us. I likewise share Marina's excitement about Bandwidth. I spent over a decade in communications and software of public companies before joining Bandwidth. And the momentum that we're experiencing is very exciting for us. So we're happy you are here today.

Great. It's perfect. Maybe you could spend a couple of minutes talking through what you view to be the moat that you built around the business? How defensible is that? That's one of the questions we get from investors, I think, is to try to drill in maybe understand what you would view as the core differentiators of the business, the elements of that, that you think would be difficult for a competitor to try to replicate. And I think what people are always trying to understand, is it the network? Is it the reach that you have? Is it the international now? Is it the customer service? Or is it actually the IP that's kind of embedded in there, the software IP?

Yes. I think our differentiation is really a combination of those things. And it is our global footprint. It's the quality that we can offer as the network owner. Our large customers covet that quality. And it's also our DNA of service and collaboration and innovation that comes with years of working alongside the largest technology companies in the planet. The communications cloud has been built on Bandwidth. And we think that foundation is something that no one else can replicate. And that's really what we expect to drive us, I think, as we look to the next wave of growth, which is as the Global 3000 enterprises get in the game. It's that same combination that we believe is going to make us a compelling CPaaS partner for them.

Okay. So that's where you see the next wave of growth is coming from that Global 3000?

Absolutely.

So let's look back on it. I think you had some news on that front, right, in the recent Q1. That quarter, to us, had a better feel to it than Q4 did, right? You beat and raised, you had very strong growth in the messaging side, right? And I think that was without -- it was without much in terms of the political traffic, right, which is one difference. You've been kind of wrapping up these divestitures and you had, to your point, on the Global 3000, you had 4 of the large enterprise wins. First of all, when you look back on it would you look back on Q1, what stood out to you?

I think it's really a piece there of all of the drivers that we see, that we expect to be driving our growth. And that's global cross-sell. That's also this sort of next wave of the enterprise, and we were able to feature a number of enterprise customers who came to us directly saying the same thing we're hearing over and over again, which is we've been trying to figure this out, this cloud migration, with our incumbent providers, and we just can't do it. We're struggling. It won't work, and they find that it works with Bandwidth. And also on the messaging side as well. I mean, we are seeing really strong growth there. It's proving to be a critical channel for customer engagement and customer experience. And so we think that we were pleased to highlight a really good messaging win there. And that's the sort of thing that we see really continuing to drive that growth.

Do we -- by the way, do we have any sense of the scale, like if we were trying to compare just arithmetically, right, just when you're talking about the global cross-sell and kind of what that adds up to. And then when you talk about 4 large enterprise wins. Do we have much sense of the proportionality of those items for you?

Well, I mean, certainly, you're correct to flag that I think our historic growth has been driven by these big software platforms that we've been powering under the hood, and the enterprise wave is just starting to build. So I think the majority of our business is powering the software players themselves and it's a newer trend that we're seeing about the global company -- the global enterprises that are finding us directly.

Okay. That makes sense. So I think one of the ways that we thought about what happened in the back half of last year was there was a kind of a confluence of lightning strikes that was a little unusual, right, for Bandwidth. You had -- so first of all, you've had kind of a meltdown, right, in the cloud communications, certainly in the stocks, that kind of post-pandemic impact. You had the DDoS attack in Q4. You had -- there were some kind of -- there was a one-off like pricing concession that you made to a customer. There were divestitures, right? You've had the political messaging traffic sort of rolling off. It's kind of like when it rains, it pours. Does it feel like those are mostly in the rearview mirror now for you?

I do believe so. You're right. We did -- we had an excellent first quarter. We beat on the top and bottom line. We were able to raise guidance. We felt really good about that. And within that growth that we were experiencing, the headwinds that we had called out and projected were as -- were in line with what we expected, namely we -- there was a DDoS attack. There's a small cohort of customers where their usage is less, and there were some strategic customer decisions that we made, those were very much in line. And if you take that cohort and remove it from our overall top line growth number and kind of adjust for that, along with the divestments of the businesses that we undertook in the first quarter, that year-over-year growth was well nicely into the 20% -- mid-20% range. And we feel that the mass majority of our base should be and will be growing in the 20%, 20-plus percent range. And we think that the results of that large base demonstrated that, notwithstanding the headwinds that we had projected.

So when -- it's great that you mentioned that kind of 20-percent-plus level, right? I think back -- I think all the discussions I've had over the years with David and yourselves, that aspiration has always been there, right? It's to try to keep this 20-percent-plus growth as often as you can right, and it's for as long of a kind of duration as possible. When -- so having said that, when do you think would be the opportunity to kind of return to 20% growth that we would see, right, as in terms of reported revenue and/or what are the drivers that kind of get you back there? Because it sounds like the core of the business essentially is there.

Well, clearly, we have some tough compares this year given the headwinds that we called out. But with the underlying 99% of our customers and our 3,400 customers growing into the mid-20s right now, we feel that beyond those compares next year we will be very well positioned.

Yes. Yes. And I would add, I mean, the growth drivers are the ones we've already been talking about. It's global cross-sell, right? That's really sort of the promise of the Voxbone acquisition, and we've seen a lot of early wins there and cross-sell opportunity, but we know there's a lot more out there. It's the sort of next wave of the enterprise. We talk a lot about how early we are in the digital transformation. And with only about 20% of business phone seats have made it to the cloud. And we know that those 20%, it's really largely limited to small and medium-sized businesses. And so there's -- the large global enterprises because of the complexity involved in migrating to the cloud have really resisted that, but they can't resist anymore. The features are too important, the need to connect a distributed global workforce, the need to win on customer experience, those are the things that are going to drive growth. And I think the messaging piece is another big one, where it's just so many -- yesterday, I was -- my flight got canceled. And at one point, I was messaging with 3 different airlines at the same time to try to get a new flight. And a year ago, I don't think that would have been the case. And so I think anecdotally, we can feel the way that messaging is becoming a really embedded part of a good customer experience. And that's only going to grow, and we think we're really well positioned to meet our customers there and serve them well.

Okay. Yes, many flights were canceled. I'm glad we successfully made here not everyone did.

Yes. Yes. Wait times were long.

Sure. Is it thunderstorms or is it staffing of the airline industry? I don't think we...

They just called it thunderstorms because then they don't have to give you a refund.

Yes, exactly. That's right.

I don't it was some staffing problems.

But it's all driving messaging volumes.

We will take it.

So Daryl, the -- so just to clarify, when I think about mathematically, the tough comps for Bandwidth, the -- they're still there this quarter, which is Q2. They're still there in Q3. They're not really there in Q4 and beyond. I mean is that mathematically kind of a fair way to think about it?

Yes. Mathematically, they are declining. They are winding themselves down. We had guided to a certain revenue range related, for example, to the cohorts for the DDoS loss of usage, and that was much more skewed to the first half versus the second half and is winding itself down.

Okay. So, so far at this conference, the big topic, unfortunately, is a potential of a slowdown or a recession, right? So the R word is kind of flying around all over the place. What impact do you think you would have on your business if we happened to go into a recession, unlike the last one, which was pandemic-driven, and was kind of an extra stimulant on cloud-based communications, right, because of the remote work and hybrid work trend. If we go into a recession that is instead driven by kind of a business cycle recession on inflation, interest rates, tapering, et cetera, how do you think the business would perform in that type of an environment?

Several thoughts on that. One, it's very difficult to actually predict the macros. So speaking hypothetically and the like, we're not sure what that recession might look like if it were to occur at all. But maybe history is a good indication of future performance or maybe not. In 2008, Bandwidth did very well in the recession. You've got to -- please recall that what we do is we power mission-critical communication services that are necessary in all seasons. And so as we think about a recession, as we think about what history showed us, at least for our company in the past and if the possibility of recession, we are also very cognizant of the fact that we are -- versus the incumbents, we are the lower cost provider of more features when it comes to cloud communications. When a company is looking in a recession if -- internally, if a company is looking to reduce their cost footprint, bandwidth is actually the solution in communication services to reduce the enterprise's cost footprint and to deliver increased features. So we think that we're pretty well positioned there.

Okay. When you look at -- it's great to kind of have a good reminder of what happened in the last kind of financial-driven recession and to kind of think about your value prop. When -- I would think you would have an opportunity today, right, to be -- just to be observing the kind of the traffic patterns, the volumes, right, that you're seeing across the customer base and probably kind of having some of your selling teams, right, interfacing with those customers and just taking their pulse. What are they planning for? How is their business confidence? Is -- does any of that behavior suggest to you that they are hunkering down or thinking recession at this point?

The business dialogue and momentum is tracking exactly what we would expect and is in line with our expectations. We're not seeing any abatement in enthusiasm or momentum when it comes to cloud communication services.

Okay. Good to hear. So let's talk for a moment about enterprise. You've had that traction, right? As we mentioned, you had it in Q1. You had it in several of the quarters last year. I think the one that stood out with us recently was a top 5 global investment bank. And then you had also said the largest in-home care provider in North America. How should we think about -- and Marina, you had kind of mentioned that, that is earlier, right, although it is a promising growth vector. Well, how do you think about the durability of opportunity to kind of be -- to be moving beyond the business that you're doing in UCaaS and CCaaS?

Well, we think there's an enormously promising business there. And that one of the things that's interesting as we go through the motion of selling into these large enterprises, it's often the case that before we have even signed the contract with them for whatever service it was that brought them to us, whether that's messaging or voice or emergency services, they're already talking to us about what else they can use on the Bandwidth platform. And again, I think that goes back to the dramatic difference that they see between the power of a cloud-native network like Bandwidth versus an on-prem legacy incumbent who just doesn't have those software chops. So we think it's an enormous opportunity ahead. And if there's a giant sort of flashing light that we're seeing, it's that there's this moment upon us right now where we're seeing large enterprises willing to abandon relationships that they've been in with carriers for decades. And again, I think it is the cloud is sort of forcing these breakups of really durable relationships and once these large enterprises have rebuilt their cloud communication stack on top of the Bandwidth network, we think we'll be there to stay for a long time.

Okay. Well, breaking up is hard to do, but they're...

It's good for us.

So can you give us maybe a bit of a window into how that happens in the trenches competitively because you -- in those discussions, you have AT&T, you have Verizon, right? You are frequently now winning business against them. Maybe could you click just a little deeper into what is happening or what is the math, what is the experience, what is the differential that's causing someone to say, okay, we're going to go with Bandwidth and kind of break up with that incumbent carrier?

Yes. Well, it's that we're cloud native, and we were born in the cloud, and we were built for cloud communications. I mean those incumbents you just named were built for telegraphs, right? We still are onboarding large enterprise customers who are shocked when they find out that they can provision numbers and manage their services with us via API instead of having to fax in a spreadsheet, which is what they've been doing for years. And so the power of that cloud native network and our software layer is really compelling, and it's transforming the way they're able to build their workflows within their distributed workforces around the world, but also how they're able to compete and win on customer experience.

Okay. The -- it is crazy to think back that telegraph is one of those letter T words in there. It puts it in a good perspective. You had mentioned a bit on pricing as well. That had -- that actually had a favorable impact to the business in Q1, right? So I think it would have been, to some extent or in a narrow way, it would have been a little unfavorable, I think, in Q4 and then favorable in Q1?

That's exactly right. Overall, throughout 2021, we benefited from a favorable pricing dynamic. We felt very good about that as our usage volumes also increased. In the first quarter, pricing likewise increased for us, and that is taking into account the strategic decision that we made with our customer and netting that against the overall pricing improvements that have occurred in the business, we were pleased that pricing improved. We believe that we have -- we believe that the value that the network brings to our enterprise customers gives us the opportunity to upsell and to cross-sell other services as Marina said. And like -- and as we do that with the scale and the like margins and pricing will generally improve.

So philosophically, how do you think about pricing, especially in -- we're an inflationary environment, right, in this country for the first time in 30 or 40 years. And so you would think -- I would think that your customers, their own cost inputs are rising, right, and they're aware of it, whether it's wages or equipment or something else. Are they -- do you think it's reasonable for them to maybe do expect to start seeing some higher prices, whether it's from Bandwidth, or elsewhere, or the software industry? Because we've had -- part of the reason I ask that is I think we -- it is -- we are becoming aware that some percentage of the software companies that we cover are, in fact, raising prices now.

I think it is perhaps reasonable to expect that in an inflationary environment, prices will rise across the board. That's just a very generic statement. We're not necessarily seeing that. We're not necessarily -- I understand what you're speaking to about competitors. We're not -- we haven't taken any necessary actions. We believe the value that we offer stands on its own, and we're able to command a good price for those services as it exists. One of the things that also informs pricing decisions within a firm is the underlying cost structure of that firm and the inputs. In terms of our inputs, we're -- we don't have a supply chain. We don't manufacture. We don't fulfill. We don't operate diesel trucks, distributing. So our inputs have been relatively steady. And importantly, we own and operate our own cloud network across the globe, where other competitors may be subject to rising inputs because they essentially resell or lease that platform.

I see. Okay. On -- since we're talking about inflation and rates, it makes me think a little bit about kind of the debt, the converts that you have on the balance sheet. There's a little more attention being paid to debt levels. Any thoughts that you have specifically around the convertible notes, if you were trying to sketch that out going a few years forward?

We do have convertible notes. We have $400 million in 2026 and another $250 million in 2028. We think that, that time horizon is -- 4 years and 6 years is well suited for the company. We have a very strong balance sheet with over $300 million in cash. We don't think that we're under any pressure to refinance or to take action on our convertible notes for the next several years.

Okay. The DDoS attack. I've touched on it, I think, in the first or second question, but I think it's worth double-clicking on that because it had a material negative impact. If I were to just say at a high level, how do you expect the impact from that attack to linger because we've been -- we're trying to monitor, right, the rate at which your customers are going to be kind of migrating traffic back over to Bandwidth. Do you think -- I think we're probably trying to sketch that out, right, across the course of the rest of this year. And we're sort of wondering if you have any thoughts on the timing? Is it weighted toward a particular quarter?

Well, we guided to an impact of $16 million to $24 million for the full year, with more of that being in the first half and less of it being in the second half. We tracked right in line with our expectation in the first quarter, and we're tracking right now for the second quarter. We would expect that to decline over time.

So is traffic is generally kind of trickling back your way kind of week-over-week and month-over-month?

Correct. Yes.

It is. Okay. And do you expect that, that pace will sort of pick up in the back half?

Yes, it has -- well, yes, it has a compounding effect essentially in terms of just a SaaS company and the way in which our revenue model works.

Okay. The -- and so -- and again, I think you had a one-off pricing concession rate that occurred in Q4. Is there any other thought or discussion or pressures along those lines?

No. When we -- we wanted to be transparent about that onetime event with that customer. At the time, we were very clear that we didn't expect that to be followed by other similar requests, and that's exactly what's played out, which is it hasn't led to any other conversations with other customers.

Yes.

This customer was uniquely situated with -- uniquely situated in their relationship with Bandwidth that's not necessarily replicated by other customers.

Okay. Understood. The -- I think that company had some good news on the margin front. So maybe those pressures will ease. The longer term, can you maybe talk us through the steps that you're taking to -- how do you go through an experience like that, I guess, with the DDoS attack and then step back and say, well, we have certainty or we have clarity that, that won't happen again? Or what steps can you take to prevent that from occurring again?

Well, we're really proud of the way our team and our network withstood that attack. It was really unprecedented at the time, and we were able to partner with some of the biggest technology companies in the world who we've been serving as customers for years and really go on the offensive in a lot of ways, and we're very proud of how we came out of that attack, and we didn't pay a ransom. And as we said, the customers are coming back. So we really believe that after having been through that, having been battle tested, that we have the -- we are the strongest network around, right, because we've seen the worst of it. So we feel very confident in the multiple layers of protection that we now have in place. We're also continuing to create some new models of redundancy that haven't been seen before in the industry. That's something we hope to be talking about more in quarters to come, but that was a direct result of our learnings from the DDoS attack and why we ended up coming out stronger than ever.

Okay. And that was -- it had something to do with your partnership and how you were working with one of the sort of cloud platform security providers it was Cloudflare from a...

Yes, in the midst of it, we implemented Cloudflare, but that was -- again, that was really just one -- there were multiple -- there are multiple levels of defense to protect our network and our platform from something like that. And Cloudflare was an important one. And we worked very collaboratively with Cloudflare to sort of build those defenses on the fly because the types of attack we were seeing were unlike anything they'd seen either. So yes, that remains in place, but the work continues every week, every month to make sure that our network is the safest place in the industry.

Okay. So if we step back and think about, again, I think this bigger picture, longer-term trend that you had been describing, I think you said less than 10% of business phones are in the cloud. I think at some other juncture you might have said it's 4% or 5%. And I think 15% of the global contact center seats are in the cloud currently. So it gives us a feeling that there should be -- there ought to be, in theory, a pretty long runway ahead. I mean probably over time, they all end up in the cloud versus kind of what we think. Is there anything that you see developing? When you think about inflection points, the -- do you look back and think that the pandemic was a bit of an inflection point? Do you think that kind of reopening is going to be an inflection point? Or what is it that you think could kind of catalyze that to sort of move you to a point where we would maybe cross through 50% and kind of get it to a majority being in the cloud?

Yes. Well, I think it's a good characterization when we talk about how early it is. I read just yesterday, a report that characterized the enterprise contact center migration as being in the bottom of the first inning. So there's a lot ahead. And when you ask about an inflection point, I don't -- I think the pandemic it -- like I said, there had been a pretty significant migration of small and medium business -- small and medium-sized businesses to the cloud, but the enterprises had hung back. What the pandemic did was it forced those large enterprises to sort of push them into the cloud. They had to be there so that their teams could speak to each other, so that they could reach their customers. What we're seeing now is because they've sort of gotten over the hurdles and the concerns around security and other things that were holding them back from the cloud, now they're looking to optimize. And what you see is that with the digital transformation, it's profoundly important in 2 ways. First, for the way businesses work and talk to each other and communicate and how work streams flow through an enterprise. And then there's also the customer experience piece. And I don't see either of those things as being pandemic-related, right? That is just the way we're living and working now. And so for enterprises, to succeed in modern workflows for distributed workforces, and also for a really compelling customer experience, what they need is a strong CPaaS partner, and that's what they're able to find and being in Bandwidth.

Okay. And I want to come back to that in just a moment because I think we haven't really spoken about Voxbone yet. But before I do that, let's do a quick check for questions from the audience. Just raise your hand if there's anything on your mind out there.

Quick question. Can you -- I'm newer to the story. Can you just talk about how developer-friendly your platform is versus some of the other CPaaS providers out there? And also your characterization of the market. On the enterprise tier, I'm assuming it's more of an out-of-the-box solution, but you mentioned SMB linking back to the question on developer community, how customized? How modular? Is there essentially kind of 2 phases of the market that you need to attack?

So on the developer-friendly part, historically, we have served into these large enterprise-grade platforms. We have not targeted the long-tail developers. And so I do think there is room for improvement for us to continue to improve our developer experience. And that's a major initiative within the company to make sure that in addition to the sort of enterprise grade owned and operated global network that we also have that developer-friendly piece that makes it fast and seamless to add voice and messaging and emergency services into your software applications. So that's a large focus internally, and we're going to keep working on that. I think the second part of your question was about enterprises and are they using out-of-the-box solutions. And what we're finding really is that those -- they want all the goodness and all the features and the richness of these cloud solutions, but they're not willing to give up that direct relationship with the underlying provider that controls the call flow and that controls the phone numbers. And so they're unwilling to accept in -- they're unwilling to accept a complete bundle that has that dial tone, that connectivity built into it. So they're decoupling those things. And that's what you often here refer to as the BYOC or bring your own carrier model. And what that means is that they will buy Genesys or buy Teams, but then form directly a relationship with Bandwidth. And so we talk a lot about our DUET offerings, and that's what that is. It's the BYOC, and we've got DUET for Teams. So you can implement Teams across your workforce. But in the middle of the night, if there's a network problem, you're going to get Bandwidth. And we own and operate the network, and we're going to be able to answer your calls without having to call anybody else. That BYOC movement is really gaining traction and our integrations that form those DUETs and also integrations with really critical third-party applications for authentication, AI, the sort of best-in-breed tools. We're going to continue to build a lot more integrations to those because we don't aspire to build all those things. We aspire to be the place where they all come together for the enterprise, and that's what our platform does. Does that answer your question? Thank you.

Great. Thank you. Great question. Anything else out there? Okay. So we have a few minutes remaining, and I wanted to try to cover Voxbone and maybe a quick question on messaging. The -- if I just said at a high level, how is the cross-selling momentum going with Voxbone? You've had the company for about 2 years, close to 2 years. What is the trend that you're seeing? And I think we're wondering, is it more -- is it like cloud-scale giants that you worked with in the U.S. and North America that are expanding there? Or is it broad-based?

Yes. It's both. We are thrilled about the Voxbone acquisition. For years, our customers have been clamoring for the Bandwidth experience, but they wanted it globally. And so with Voxbone's footprint over more than 60 countries, we were able to give them that. We have seen a lot of early wins there. But again, we know there's more out there. And I think, Mark, your question was, where is it? Is it with the big platforms, cross-sell? Yes. But it's also really compelling to the enterprise. A couple of quarters ago, we highlighted a large electronic signature software provider. And they entered into a deal with Bandwidth and they were able to replace relationships with 9 different carriers and go and bring all that business to Bandwidth. And for them, that's not their core business. They don't want to be spending their time managing 9 relationships with CPaaS providers or carriers. What they want is to have a single contract and a single platform and a single source of support. And so the global footprint works both with our large hyperscalers and also with the enterprises who want someone to just make this hard cloud communications easier for them.

Okay. So it's well rounded and diversified.

Absolutely.

Are you seeing -- and I think -- I want to just check and ask again because that brings you this European footprint, right? And that's what so many investors are worried about right now. They're worried about like a European-driven recession. We've had a handful plus of companies in the last day or 2 kind of talk about some weakness in Europe. That's something -- well, not to put words into your mouth. So I'll just ask you, what are you observing in terms of the European Voxbone trend?

So, so far, of course, we're closely watching the macro and we can't predict it, but at this point, we're not seeing pipeline softness that's caused by the geopolitical events. I don't know if there is anything...

That would be correct, yes.

Okay. Messaging. Can you talk to us about -- we have about 1.5 minutes remaining, so we'll have to move cotton quickly? But carrier surcharges, has it impacted, right, kind of it raises the sort of pricing profile that the customer will experience? Does it impact demand? Does it impact messaging volumes? It didn't seem like it did...

So far, we're not seeing those surcharges impact demand. I think messaging is such a compelling channel that what we're seeing -- there are certain price -- certain use cases that are a bit more sensitive to the pricing. But by and large, those who are really embracing messaging for the benefits it brings to CX, they're not as price-sensitive across health care, across retail, some of those other verticals, we are not seeing it suppress demand. One of the things we are seeing, I think, is that Bandwidth has years of history navigating the regulatory complexity on the voice side. That's what we've been doing well for decades. The more complicated messaging gets with navigation of the carrier surcharge landscape, we are actually seeing that our ability to sort of flex that muscle that we grew on the voice business and help our customers figure out the complexity is helping us win a number of large deals and is proving to be a bit of an unexpected differentiator.

Okay. Well, perfect note to end on with an unexpected differentiator and perfect sense of timing as well as we're right at the end. So Marina, Daryl, can't thank you enough for...

Thank you so much.

Thank you.

Thank you, Mark.