Voxbone SA/NV (BAND) Earnings Call Transcript & Summary

Greetings. Welcome to the Bandwidth Business Update Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I'll turn the conference over to Sarah Walas. Ms. Walas, you may begin.

Welcome, everyone, and thanks for joining us on such short notice. We've announced the signing today of a definitive agreement to acquire Voxbone. Joining me today to discuss the transaction are David Morken, Bandwidth's Chief Executive Officer; and Jeff Hoffman, Bandwidth's, Chief Financial Officer. Please note that Bandwidth is still in the quiet period post the third quarter and will report earnings on October 29. We will not be discussing third quarter results for either company at this time beyond the commentary provided in the announcement press release issued earlier today. In addition, since the acquisition is not expected to close until October 31, we will not be providing guidance for the combined entity at this point. On our website, investors.bandwidth.com, is a slide deck, which follows today's presentation. As a reminder, today's call is being webcast live and recorded. You can replay the call on the Bandwidth Investor Relations website until October 7, 2021. Some of our discussion and responses to your questions may contain forward-looking statements, including, but not limited to, statements regarding our future performance, including our market opportunity and market trends; the anticipated benefits from the proposed combination; our ability to integrate the companies; customer adoption of our products; the benefits from our business model; our delivery of new products or product features; and our ability to execute on our combined vision. Forward-looking statements may contain words such as believes, anticipates, estimates, expects, intends, aims, potential, will, would, could, considered, likely and words in terms of similar substance used in connection with any discussion of future plans, actions or events identifying forward-looking statements. All statements other than historical facts, including statements regarding the expected timing of the closing of the proposed transaction and the expected benefits of the proposed transaction, are forward-looking statements. These statements are based on management's current expectations, assumptions, estimates and beliefs. While Bandwidth believes these expectations, assumptions, estimates and beliefs are reasonable, such forward-looking statements are only predictions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. And with that, I'll turn the call over to David.

Thank you, Sarah, and welcome, everyone. For 21 years, Bandwidth has transformed enterprise communications across the United States. In 2019, we started serving customers in Europe using our software-powered network. And today, we are delighted to share that we will soon be serving our customers around the globe. International cloud communications leader, Voxbone, will be joining our band. This combination of 2 CPaaS leaders accelerates Bandwidth's international expansion by several years and will create a true best-in-class global communications software platform. Our customers will benefit from a unified software platform and network for the rapid launch and hyperscale of communications, applications and experiences. We will offer enterprise-grade global connectivity for cloud platforms, mobile applications and Fortune 1000 enterprises. Our software platform and network will reach more than 60 countries, covering 93% of the global economy, and it is purpose-built to deploy tens of billions of voice minutes, text messages and emergency calls. We are so excited for the opportunity to join forces with Voxbone to create a global platform, unlike any other. Our mission to develop and deliver the power to communicate meshes perfectly with Voxbone's vision to transform communications and connect the world. I couldn't be more excited to combine forces to solve even more problems for our customers. The opportunities for collaboration across our product lines are tremendous as are the opportunities to cross-sell through our customer bases. This combination will allow us to fulfill our vision significantly faster than we could have accomplished by ourselves. Each company brings to the table a focus on the enterprise with voice and emergency services capabilities as our source of sustainable competitive advantage. Those enterprise customers greatly value our software-centric approach, our industry knowledge and our influence. And just as importantly, both Bandwidth and Voxbone bring a common set of principles. We are mission first while committed to serving others. That's how we achieve audacious goals. As we were talking with the Voxbone team early on, it became obvious that we were singing from the same sheet of music. We both offer software development platforms powered by a modern network backbone, which gives our customers unparalleled quality, control and scale. We are both driven to simplify communications for our customers. We believe this combination will create one of the strongest global voice networks on the planet, supporting a wave of innovation for our customers. Businesses around the world will be able to rapidly launch and scale communications, applications and experiences. Bandwidth has been primarily focused on serving the U.S. market, which makes up less than half of the total addressable market and our expansion into the European and U.K. markets was early. Adding Voxbone now will accelerate our ability to take share across 100% of the forecasted $18 billion CPaaS market. You can see by looking at the map on Slide 10 the broad coverage that we will have across the globe, with the ability to address 93% of global GDP. Together, we will transform enterprise communication. I will share 2 examples with you. First, the combination of Bandwidth and Voxbone will provide global connectivity to virtually every single leader in the cloud communications space. Together, we will serve 11 of the 12 leaders across UCaaS or Unified Communications as a Service, Contact Center as a Service and Meeting Solutions Gartner Magic Quadrants, and will be the backbone behind 100% of the UCaaS Magic Quadrant. These segments are some of the most dynamic, innovative and fast-growing companies today. As they succeed, we will succeed. Additionally, the joining of Bandwidth and Voxbone will help accelerate cloud migrations for the largest enterprises in the world. The combination of Bandwidth's robust API platform and network will enable enterprises to embark on their digital transformations with less friction and more focus. Regardless of which communication software platforms a customer may choose, Teams, Genesys, et cetera, we will be able to offer the automation and control required. The addition of Voxbone's phone numbers, network and integration capabilities significantly expands the reach we can give our customers for their cloud migrations. I am excited for our customers and our employees to join us as we supercharge enterprise communications around the world. Our CFO, Jeff Hoffman, will now share the transaction details. Following that, we'll open it up for questions. Jeff?

Thanks, David. I share your enthusiasm for this unique combination that accelerates our international road map and transforms our ability to serve our enterprise customers on a global scale. Under the terms of the definitive agreement, we've agreed to acquire Voxbone for EUR 446 million. Bandwidth will pay cash in the amount of USD 400 million or approximately EUR 338 million and the remainder in Bandwidth Class A common stock. We expect the transaction to close on October 31, 2020. Again, we will not be providing updated guidance at this point. We will discuss additional details of the acquisition and the anticipated financial impact on the business during our third quarter earnings conference call on October 29 after market close. Together, our 2 companies have a strong financial profile. Voxbone's 2020 revenue is expected to be more than USD 85 million and up more than 25% year-over-year and upon close is expected to be accretive to Bandwidth's non-GAAP gross margin and non-GAAP net income. This acquisition is overwhelmingly complementary, and we expect to benefit from revenue synergies from cross-selling across both customer bases. Finally, I want to highlight that our business remains very healthy. As part of the announcement today, we communicated that we have exceeded the third quarter guidance provided on July 30. Going forward, you should expect our principles to remain the same. We plan to continue to drive top line growth while staying committed to profitability. With that, I'd like to open up the call for questions. Operator?

[Operator Instructions] And our first question will be coming from the line of Bhavan Suri with William Blair.

Congratulations. It's such a great acquisition. Let me wish you all -- hope you're all healthy given the environment. I just want to touch a couple of high-level questions. The first is, there's a number of CPaaS players out in Europe. Some are part of larger telcos, your opportunity to carve about, whatever. I guess what specifically stood out that made Voxbone kind of the best acquisition opportunity to accelerate your entry into that market? As you think about it, what is the most important piece of differentiation that this asset provides vis-à-vis potential other players in those markets?

Thank you very much. We're excited this morning to talk with you and everyone about Voxbone. And to your question, what is most valuable, exciting and differentiated about Voxbone relative to any other company on the planet are the people. They're a tremendous group, a tremendous team for 15 years. They've methodically marched around the world into 60-plus countries and have deployed software and a platform on top of an IP voice network like nobody else. We've known of them and have visited them as far back as 2011 and have admired their growth, their steadfast approach to a compliance-first, infrastructure-focused service for enterprise customers worldwide. There is absolutely very valuable technology and network involved, but the people were the driver.

Got it. Got it. And a quick follow-up here. And I know you're not talking about numbers, but obviously, you've mentioned it to be accretive to gross margins. I guess, can you walk through the difference in the cost structure between the 2 entities that make that the case? I guess, what have they built that you could leverage to sort of drive that gross margin, something unique there, that can help BAND's core gross margins tick up? Or is that just a function of where they operate or something on those lines? Just help to understand sort of the technology drivers behind the gross margin difference that could be accretive.

When the 2 -- yes, you bet, Bhavan. When the 2 technology teams looked across the table at the technology stacks of both companies, they were impressed with how much similarity there was. They have an IP voice network. They have a single software platform that focuses on enterprise needs uniquely. And so we're excited about how the seamless integration that we expect to happen, we're excited about the potential for that. So complementary infrastructure approaches, complementary culture, all those things combined to make this a compelling opportunity for both teams.

The next question is from the line of Alex Kurtz with KeyBanc Capital Markets.

Congrats again on the deal. Just on the gross margin question that was just asked. I suppose there was going to be a fair amount of overlap with some of your UCaaS and CCaaS customer. What is combining the 2 companies mean for longer-term leverage with some of your bigger customers, right, the ability to get better pricing and maybe shift the framework around your gross margin upwards over a longer period of time?

Thanks, Alex. With today's announcement, we're excited that among the Gartner Magic Quadrant Leaders, we're going to be serving 11 of 12 in the UCaaS, CCaaS and conferencing and actually 12 of 12 in UCaaS. That said, our very largest customers are going to enjoy this combination and the value of it for the first time. There is some overlap with 900 Voxbone customers, but many of our largest customers that have asked us to work with them around the world are not Voxbone customers today. And so we're excited about the value prop for them, and we're also excited about supporting 11 of 12 leaders that are rapidly growing and transforming enterprise communications everywhere.

The next question is from the line of Rich Valera with Needham & Company.

Let me add my congratulations. Looks like a nice transaction for you folks. I was hoping to get a little bit more color on their business split, particularly between voice and messaging. And if there was any other color you could provide in terms of their geographic diversity. Where they're getting their major chunks of revenue on a geographic basis?

You bet. So Voxbone uniquely are focused on the enterprise and on voice. So you're talking about a near exclusive focus on voice for worldwide enterprise. Their footprint addresses 93% of worldwide GDP in over 60 countries. And you can imagine, based upon GDP and population density, where revenue is largely derived, if you want to try to stack rank.

That makes sense. And can you just talk about how this might dovetail with your nascent international operations? What the synergies might be? How they might -- you might have more than the sum of those parts as you look to merge these 2 operations?

I am so grateful to our international team, whose execution over the last 3 years was a very real fulcrum to putting these 2 teams together. Without that execution, we would not be joining forces today, and I'm very grateful to Tom Steffens, Jeff Slater, Ashley Brodzinski, Crystal and many of the folks on our international team. This is not an opportunity today that has anything to do with synergies related to overlapping staff. Instead, frankly, it is all about opportunity going forward. So we look forward to both teams combining and executing against a massive increase in our total addressable market. Over half of the CPaaS worldwide addressable market is outside of our domestic territory. So both teams are going to have their hands full.

Our next question is from the line of Will Power with Robert W. Baird.

This is Charlie Erlikh on for Will. And I'll echo my congrats on the acquisition. Could you talk a little bit more about the cross-sell opportunity? You mentioned in the prepared remarks, it sounds like a really nice opportunity. Is that mainly offering some BAND products like messaging, for example, to Voxbone customers? Or what's the general cross-sell opportunity and strategy there?

I think both cross-selling and up-selling in both customer bases represents a significant opportunity. But I don't want to lose sight of the fundamental movement that this represents for worldwide enterprise. Enterprise customers are going into the digital transformation with a huge amount of momentum coming from the COVID, work-from-home experience. So this combination today is fundamentally focused on enterprises worldwide who need to go to a single platform to enable experiences and applications, everywhere all at once. That opportunity in the enterprise space is very manifest and large when you look at folks like IDC who talk about CPaaS growing to $18 billion approximately by 2024, growing at a 33% compound annual growth rate. Near-term cross-sell and up-sell are attractive, but don't lose sight of what this represents longer term, which is a supercharging of worldwide opportunity for large enterprise who are undergoing digital transformation.

The next question is from the line of Pat Walravens with JMP Group.

Great. Congratulations, David.

Thank you, Pat.

So why is this happening now?

Two reasons. Time has become more valuable than money. And what I mean by that, Pat, is both -- I think the COVID work-from-home was the fuse that lit the enterprise race to the cloud rocket. And we can't afford to wait and work through the build friction and found the Voxbone opportunity compelling because time has become more valuable than money.

Super interesting. And then, so Twilio announced something this morning, too, right? And I'm just wondering, did the elections play some role in the timing of these deals?

They did not for us. I don't know about them.

Yes. Okay. And then this company is based in Brussels?

They are.

Yes. And have you been?

I have.

Yes. And how is your Flemish?

Not great, but I can ride a bicycle really well.

Okay. So you're going to keep -- the headquarters are going to stay there? Is that -- for Europe? Or what are you planning on doing sort of people wise and location wise?

They are based in Belgium. They have a terrific team in London. And we'll determine during the integration process the right thing for the Voxbone team.

[Operator Instructions] Our next question is from the line of Catharine Trebnick with Colliers.

Yes. Congratulations on the transaction. A quick question. You -- how does this change the go-to sales motion between your hunters and strategics and their organization? That's first question.

Thank you, Catharine, and good first question. We have folks on both teams who will be coordinating how we integrate and approach the customer bases on both sides. We are excited about these customers having 1 source going forward for worldwide service. And so aligning relationships at both companies to serve these enterprise customers in an elegantly simple way where they don't have to worry about multiple people, as your -- that's the implication of your question. That is vital, and it will take time to do right. But we have great people on both teams focused on that integration so that, that motion improves for our enterprise customers as well as Voxbone's.

And then how does this -- you view the competitive landscape change now that you 2 have such a strong global presence?

We think it represents for our enterprise customer bases a best of breed, absolutely unique, strong solution for any enterprise that needs to write code to embed voice and messaging experiences or applications. So we're thrilled about how well we're going to be able to serve our enterprise customers. They've been asking us to do this. And by this announcement today, Catharine, we accelerate our opportunity that we have been focused on by at least several years.

The next question is from the line of Meta Marshall with Morgan Stanley.

This is Erik on for Meta. Maybe just a quick one. With the number of large customers that Voxbone has, are there any 10% or greater customers that you'd be getting extra exposure into? Or is it pretty diverse?

Erik, this is Jeff. No, there aren't any 10% of total revenue customers. And in fact, this combination will further diversify our customer base, which was one of the many benefits we had from this combination.

And then maybe just a quick follow-up. Are the international voice minute rates that they generally take in somewhat higher than domestic? Or is that not the right way to be thinking about it? It just looks like, I guess, from a number of numbers and minutes versus maybe when you IPO'd, the relative rate looks like it could be higher?

Yes. So I think it varies by jurisdiction, but one of the things that we had pointed out in our press release and in some of David's comments earlier is that this is going to be accretive to our non-GAAP gross margins as well as non-GAAP net income. So it's a great fact -- another great fact for our business, the strong profile, financial profile of Voxbone.

At this time, I'll turn the floor back to management for additional remarks.

Thank you, everyone, for joining us on this call. Thank you to everyone at Bandwidth and at Voxbone and all of our partners for making this monumental day a reality. Onward. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.