Bandwidth Inc.
Q2 2022 Earnings Call Transcript

Published: 3 Aug 2022

[Operator:]

Greetings, and welcome to the Bandwidth Incorporated Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, Wednesday, August 3, 2022. I would now like to turn the conference over to Sarah Walas, VP of Investor Relations. Please go ahead.

[Sarah Walas:]

Thank you, Grant. Good afternoon, and welcome to Bandwidth's Second Quarter 202 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market close. The press release and an earnings presentation with historical financial highlights can be found on the Investor Relations page at investors.bandwidth.com. With me on the call this afternoon is David Morken, our CEO; and Daryl Raiford, our CFO. They will begin with prepared remarks, and then we will open up the call for Q&A. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the third quarter and full year of 2022. We caution you not to put undue reliance on these forward-looking statements as they may involve risks and uncertainties and that may cause actual results to vary materially from any future results or outcomes expressed or implied by the forward-looking statements. Any forward-looking statements made on this call and in the presentation slides reflect our analysis as of today, and we have no plans or obligation to update them. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our latest 10-K filing as updated by other SEC filings, all of which are available on the Investor Relations section of our website at bandwidth.com and on the SEC's website at sec.gov. During the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued after the close of market today as well as in the earnings presentation, which are located on our website at investors.bandwidth.com. With that, let me turn the call over to David.

[David Morken:]

Thank you, Sarah, and thanks to each of you for joining us. We're pleased to share that we exceeded expectations on the top and bottom lines for the second quarter with revenue up 13% over last year to $136 million and a non-GAAP net loss ahead of our guidance of $1 million. Thank you to all our Bandmates for another terrific quarter and for your commitment to our customers and to each other. And I thank God for watching over us and for giving us our work to do together. In a few moments, I'll share details about the quarter and our strong momentum within the enterprise. But first, I'd like to discuss the question looming front and center

[Daryl Raiford:]

Thank you, David, and good afternoon, everyone. As a reminder, details related to our second quarter performance are provided in an earnings presentation that may be accessed on our Investor Relations website. Now turning to our second quarter results. We reported revenue and non-GAAP EPS, both coming in above their corresponding guidance ranges. As David said, we have always focused on growing profitably and the uncertain macroeconomic outlook has heightened that focus. Second quarter revenue was $136 million, up 13% from last year. This result included $21 million of pass-through messaging surcharges compared to $6 million in the prior year quarter. If we exclude the contribution from surcharges, our revenue grew 1% year-over-year. There were underlying cross currents driving that result. First, we saw 14 points of growth across our broad base of customers. This 14 points was driven by strong contributions from both usage-based and monthly recurring charges for voice APIs, phone numbers and emergency services and by continued demand for messaging, which grew 25% year-over-year. As David said, we serve a diverse set of enterprise customers across many verticals and business-critical use cases, and we continue to expect this usage to be durable. This growth was offset by 13 points from the previously discussed headwinds, those being

[Operator:]

[Operator Instructions]. And the first question comes from the line of Ryan MacWilliams with Barclays.

[Ryan MacWilliams:]

Daryl, thank you for the detail on the moving pieces between voice and SMS growth and some of the onetime items like divestiture and FX headwinds. Just kind of in that same line of questioning, on the FX side, what was the impact to revenues in the quarter and for the full year guide? And then, David, any update on the effect that DDoS traffic would be helpful, too.

[Daryl Raiford:]

In the quarter, it's just over $1 million of revenue dampening. Assuming the current rate moves forward in our guide, we're expecting something just a little less than $4 million.

[David Morken:]

And in regard to DDoS, Ryan, we continue to bracket accurately the impact in Q1, Q2 and throughout the remainder of the year, and that issue has been contained.

[Ryan MacWilliams:]

Great. And then just on the spread between the amount of messaging revenues and the amount of pass-through surcharges, it looks like that spread is increasing. And it looks like the surcharges are growing faster sequentially. Is there anything to call out there? Like is more of your traffic now attached to fees with the carriers or any changes in pricing per SMS message?

[Daryl Raiford:]

We did have an increase in some carrier surcharges in the month of March that applied throughout the quarter. So you'll see new surcharges for the first time from some of the carriers, which would explain the divergence.

[Operator:]

And the next question comes from the line of Will Power with Baird.

[William Power:]

I guess a couple of questions. Maybe just to start on some of the macro comments, I mean, it feels like you feel good about your position and have been resilient thus far. But just to clarify, I wondered, as you move through the quarter, any change when the -- average that you could speak to slower sales cycles perhaps in June, exiting the quarter reduced usage across any of your customers. Just trying to understand if you've seen any macro impacts yet or if the guidance for the year is just conservatively anticipating you might see something on the margin?

[David Morken:]

Will, this is David. I'll begin by just highlighting, really non-regrettable churn in the small customer segment also is consistent with some usage among smaller customers but, by and large, maintain that we are going to execute the way we thought we did throughout the balance of the year and don't see significant changes in pipeline and the large customers that we serve. That said, we are maintaining guidance out of an abundance of caution for the rest of the year. But as to the actual characteristics of the customer base, they remain sound.

[William Power:]

Okay. That's great. Okay. And then just maybe as you think about the unified communications space and the cohort of customers you have there, it sounds like you're seeing a lot of strength in contact center and broad-based, which is great. I wonder if you could just update us on the UCaaS side where I know you still have exposure, right, whether it's Microsoft, Zoom, RingCentral, Dialpad on and on. What do the trends look like there in terms of traffic, pricing, overall growth?

[David Morken:]

So certainly, you see in the UCaaS space some share transfer across different platforms, whether it's Teams related or the emergence of Zoom's phone service. But we support all of the Gartner Magic Quadrant providers in UCaaS. And so those share transfers or conquest across platforms usually nets out for us being a provider for all of them.

[Operator:]

The next question is from the line of James Fish with Piper Sandler.

[James Fish:]

What are you guys seeing on pricing in the space between voice and messaging? It did seem like messaging outbound pricing, I think you guys changed around at least on a year-to-year basis for the outbound piece.

[Daryl Raiford:]

Overall -- Jim, this is Daryl. Overall, pricing in the second quarter had a favorable impact on us. It wasn't as much from per unit price increases as much as it was driven by a richer mix of higher-priced products like messaging and toll-free growing disproportionately. With that said, you're right, if you looked at our pricing grid, for new customers, there were some modest price increases, but that didn't really have much of an effect on the quarter.

[James Fish:]

Okay. And then if I could follow up on the net new customer additions here. Is there any way to think about how much more "non-regret -- unregrettable" customers that churned off? Really just trying to understand what the normalized number here for net additions as we obviously are used to seeing Bandwidth grow the installed base.

[Daryl Raiford:]

That was, again, just sub-100, new gross additions, just sub-100. The churning offset that and lowered it by 10 overall. We did note that the average revenue per customer did improve to $161,000, and that was an outcome of just disproportionately churning the lowest, the smallest ARPU customers.

[David Morken:]

And some of that's by design on the lower end of our customer base as these are not efficient customers to serve and support versus acquire on a cost basis. We call that architected in terms of the longer end of our customer tail. And I'd also just highlight that when it comes to the new customer adds, there's really a power law that applies. And you can have a very small number of our new customers driving the preponderance of the growth from that cohort of customers over their lifetime. So it's not a terrific metric to look at, to index accurately for our growth because there's such large contribution inevitably from a small, larger set of customers within that.

[Operator:]

And the next question comes from the line of Ryan Koontz with Needham.

[Ryan Koontz:]

You guys have been great about kind of the transparency around election impacts. And I wonder if you could characterize for us within your second half guide, how much of a tailwind from election you might anticipate in the second half that's not recurring.

[David Morken:]

Within messaging, specific engagement is a term that captures a broad set of use cases that are much more than just seasonal political elections. And the recent Supreme Court decision cycle really illustrated that for us. We are at an increasing active civic engagement dialogue across the country. And so we haven't called out specifically what in the second half of the year will accrue to our messaging contribution to revenue from specific campaigns or elections. But civic engagement broadly, whether it's interest groups or all kinds of civic-minded endeavors that are going on has become something way bigger than just campaigns.

[Ryan Koontz:]

That's fair, David. And on the comments around share shifts toward Teams, which we're all hearing about is a real land slide out there. Can you characterize your attach rate to Teams? It sounds like it's pretty consistent with the rest of the industry as opposed to something where you feel like you have an outsized share in the Teams ecosystem?

[David Morken:]

What I've shared in the past, Ryan, is that we are Microsoft's primary partner when the phone capability is activated within a Teams seat, and we have additional really tight integrations with Microsoft product in their enterprise offers. But when you see a Microsoft Teams with phone service enabled, you can assume that within that attach rate, we enjoy the preponderance of the revenue from the voice part of that seat. Does that help?

[Ryan Koontz:]

It does.

[Operator:]

[Operator Instructions]. And the next question comes from the line of Matt Stotler with William Blair.

[Matthew Stotler:]

I think the first one here just on the partner ecosystem. I mean you mentioned a number of integrations, Duet with Genesvs and the integration with Pindrop. I guess, a couple of months ago now, you also announced a partnership with Alianza. And so clearly, an effort to kind of expand the number and the character of the relationships you have in your partner ecosystem. I'd love to get an update on, I guess, your efforts and opportunities that you see here and continue to broaden the ecosystem as well as how meaningful that could be to the business over time.

[David Morken:]

So we haven't announced any specific channel program yet and you've heard me in the past talk about how we are direct in our go-to-market motion for enterprise. But with the addition of senior leadership, from Anthony Bartolo and Sandy Preizler, we have an opportunity to bring to bear in our go-to-market for a large enterprise a wealth of experience and knowledge and success with various designed partner opportunities. And so you'll probably hear us talk about that some more later this year.

[Matthew Stotler:]

That's super helpful. And then maybe just one more on the international side. We'd love to get, I guess, an update there. Now that Voxbone is fully integrated, how is that ramp going in terms of cross opportunities and then kind of expect the contribution in terms of revenue and bookings on that front?

[David Morken:]

One of the customer wins that we announced for the quarter was thrilling because it covers the broader Asia Pacific region and illustrates, I think, beautifully the power of the Voxbone-Bandwidth combination and the underlying footprint that it opens up for our platform and our ecosystem. And this was a massive international contact center that we talked about. They have 18,000 employees, and they were working with 5 different global carriers, and they have consolidated that completely to come with us. And so that, I think, is just a powerful illustration of the combination. And there are more opportunities like that. But you can't do a deal like that unless you've got the back office squared away and you have the teams unified and working well together. And so we're really happy about the progress and I think that there will be more like that in the future.

[Operator:]

And the next question comes from the line of Patrick Walravens with JMP Securities.

[Patrick Walravens:]

Awesome. So Daryl, on my model, your Q3 guidance, combined with the annual guidance, implies something like 8% growth in Q3 and then like 16% in Q4. So there's a pretty good ramp there. Do you mind just reminding us why?

[Daryl Raiford:]

We do expect higher messaging in the second half of the year and in particular in the fourth quarter. So there is some of that as well.

[Patrick Walravens:]

Yes, in a much easier comp, right?

[Daryl Raiford:]

In a much -- Well, thank you for that, Pat. I appreciate that.

[Patrick Walravens:]

That's the big point I'm trying to get...

[Daryl Raiford:]

It seems like it's been quarter-after-quarter-after-quarter of difficult comps. That is true. By the time we went in the fourth quarter of last year, we did experience the lower usage from the event that we had previously discussed. And so that does provide us some lifting under our wings in terms of a favorable comp for that quarter.

[Patrick Walravens:]

Okay. And then this one, you're probably going to answer around a little bit, and that's okay. But I mean, generally, what I've been doing in this recession is I've been taking company's implied Q4 guidance. And I've been saying, okay, I'm going to use that for next year, right? And for most companies, that actually sort of lowers the bar, right? But is that a reasonable way to think about Bandwidth's business?

[Daryl Raiford:]

Well, we do -- we have. Notwithstanding the fourth quarter last year, we have enjoyed a history of sequential quarterly growth. And so it's not unreasonable to assume that. But let me do -- Dave will probably have some remarks too, but let me also caveat that it's a long 5 months till before we get to January and February and be talking about 2023. So I don't want to really read anything into my comments on that.

[David Morken:]

And Pat, this is David. Hope you've been well. I would just focus leading this year for us more on profitability than we've done in the past. We've always been focused on profitability, and we've had years in the past where we've done $49 million of EBITDA. We understand quite well the environment that we're going to be operating through, we think, and that top line revenue growth that you've seen from us in the past has always come with a reconciliation of the tension between that and the bottom line. And we think we're headed into a season where profitability is a big deal. And so I wouldn't just think about the top line growth and how you factor our fourth quarter into '23. I would also be remiss if I didn't say that we're operating with a pretty keen eye on the bottom line as well.

[Operator:]

There are no further questions at this time. I will now turn the presentation back to the host.

[David Morken:]

Thank you, and I appreciate everybody joining us on the call this evening. God bless, and God bless America.

[Operator:]

That does conclude today's conference. We thank you for your participation and ask that you please disconnect your lines.