Bandwidth Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Bandwidth's Fourth Quarter 2020 Earnings Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Sarah Walas, Vice President of Investor Relations. Please go ahead.

[Sarah Walas:]

Thank you. Good afternoon and welcome to Bandwidth's fourth quarter 2020 earnings call. Today we'll be discussing the results announced in our press release issued after the market close. With me on the call this afternoon is David Morken, Bandwidth's Chief Executive Officer; and Jeff Hoffman, Chief Financial Officer of Bandwidth. They will begin with prepared remarks and then we will open up the call for Q&A.

[David Morken:]

Thank you, Sarah. And thank you to everyone joining us today. We are thrilled to share our 2020 results and talk about what's ahead. As we reflect on the past year, I thank God for leading us through so many storms and pray for our team, their families and for all those whose lives are impacted by the global pandemic. Before we discuss our 2020 results, I want to take a minute to remember where we were nearly one year ago. As the world was shutting down around us, our team gathered for what remains the last time we were all together in one room. None of us knew what the next weeks or months would bring, only that it would be unlike anything we'd lived through before. We resolved that no matter what unfolded, we would be steadfast and resolute in serving our customers and loving each other. This team delivered on that charge, over and over and over again. I am humbled by our BANDmates' commitment to our mission, especially as so many of them and their families navigated great personal adversity. To all the BANDmates listening today, thank you. Your work fueled the success, I now have the honor to share. And that success includes a record 51% annual CPaaS revenue growth year-over-year and 84% CPaaS revenue growth in Q4, both demonstrating accelerating broad-based demand for our software-powered solutions.

[Jeff Hoffman:]

Thank you, David and good afternoon, everyone. We are humbled that our mission is rooted in connecting one another during these challenging times. And I couldn't be more proud of our team for delivering extraordinary results in the fourth quarter that capped off an exceptional 2020 performance. As we discuss our financial results, I want to remind everyone that we closed the Voxbone acquisition during the quarter. So we have two months of Voxbone contribution in the fourth quarter and full year 2020 results. Fourth quarter total revenue was $113 million, up at 82% year-over-year. Within total revenue, CPaaS revenue was $98.1 million, up 84% year-over-year. Other revenue contributed the remaining $14.9 million of total revenue, which was up 74% from the same period a year ago. Voxbone contributed approximately $17 million to CPaaS revenue in the quarter, which was $4 million better than anticipated. The positive variance was primarily driven by a large customer testing a new offering at scale that contributed to our fourth quarter results and is expected to return to a more normal spending pattern in Q1.

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question is from Patrick Walravens with JMP. Please go ahead.

[Patrick Walravens:]

Great. Thank you and congratulations. Wow. So, Dave can I ask you a question about sort of your philosophy about returning to work and working from home and maintaining your culture as hopefully the pandemic eases here. And then also what you're seeing from all the companies you're talking to, and how you think that plays out for your business?

[David Morken:]

Hey, Pat, great to hear from you. I look forward to being together in-person sometime hopefully soon. To your question, I - yeah, hopefully praying for that. Here's our philosophy and my view on work in general and leading, you can follow from home all the time. Leading is an in-person dynamic. And culture is an in-person dynamic. So we're convinced and focused on a full return to an in-person culture. I know that's quite different from some Silicon Valley companies who are declaring that folks never will return. I think that flies in the face of millennia of human experience.

[Patrick Walravens:]

I actually feel like people are walking that back for what it's worth. And are you, I'm curious what's you're hearing from customers on that topic?

[David Morken:]

You bet. I think from our customers, what we understand is the new methods of engagement learned during this season are instrumental going forward, even as folks either return or choose not to return. What won't happen is the new arrows in everyone's quiver to engage customers and cultivate relationships, those are going to be continued and continued to be used in the future. We learned lots of new use cases. And many of those will continue, even as many of us return to in-person.

[Patrick Walravens:]

Okay. And then Jeff, just, you know, on that subject, how should investors think about it in terms of what's in your guidance?

[Jeff Hoffman:]

So I think we have, Pat, built in to the extent we can distinguish it a COVID benefit. But as we had said in our prepared remarks, it's getting harder to distinguish from organic growth now, almost a year into the pandemic, and so it is built in, we won't be separating it out going forward. But, you know, I agree with what David said, I think there to some extent, the hybrid work environment is the new norm, and our business will benefit from that.

[Patrick Walravens:]

Great, thank you both.

[David Morken:]

Thanks, Pat.

[Operator:]

Our next question is from Bhavan Suri with William Blair. Please go ahead.

[Bhavan Suri:]

Hey, gentlemen, good to even hear your voices and Aleko patches, great results. You know, I just want to touch first on the competitive landscape a little bit, because obviously great results out there. But we've heard sort of network owners like Telmex and Telequince are targeting, you know, multi-sourcing opportunities from your customers, you know, overall claim just seem to be gaining market share. I guess the question I have is, have you seen any change in behavior or market presence from these types of providers at all? And sort of even with that some of the consolidation or acquisition stuff like since you announced their intention to buy in the space, any change of competitive behavior or anything from these sorts of providers?

[David Morken:]

Hey, Bhavan, great to talk to you as well. We are very familiar with our competitors and don't see any fundamental change or shift in the marketplace, other than the fact that we singularly and uniquely have now been able to address the entire world on behalf of US headquartered companies, enterprises, large tech, no one else on the competitive field has that worldwide footprint of network and platform in the way that we do. And that is a distinguishing characteristic of our strategy and addresses a much larger marketplace. And so that's been the real change. It's a change that we initiated.

[Bhavan Suri:]

Got you, got you, got you. And then, I do want to drill a little bit into Voxbone. And maybe there's a question for both of you here. But obviously, really nice upside there. I guess how is cross-sell going? You touched a little bit on the sort of broader context, but how's it going vis-a-vis your expectations, and then really on gross margin, you know, Voxbone had nice sort of much nice or nicer gross margin I know that, and how do you think that plays out, given sort of, you know, what seems to be at least better growth that maybe we had anticipated, and how about this on gross margin through 2021? Let's give it to my expectations as opposed to anybody else's, but help us walk through those two pieces. But both the cross-sell vis-a-vis expectations, the expansion that which you seem to be seeing, and then the gross margin flow through an impact through 2021.

[David Morken:]

You bet, Bhavan. Only about 5 of the top 20 customers of each company were shared. And that's important because the cross-sell opportunity is robust. The chance to go into the customer bases of each company and provide the portfolio of product in new jurisdictions or a new capabilities is rich. And so we've got great integration, leadership, identifying sales leaders who are on point with each of the largest customers, broader than just the top 20. So the cross-sell opportunity is manifest to us. And we're attacking it, I think, with good vigilance. And then I'll ask Jeff to answer the other part of your question.

[Jeff Hoffman:]

Sure, glad to. So I think a lot of the dynamics that we saw in fourth quarter are going to play in '21 as well. What I mean by that is, we expect CPaaS margins continue to grow, they will be aided, as you pointed out, by Voxbone, who comes in with accretive gross margins. But there's interplay still with, as you know, we've had a lot of success with messaging. And with messaging, oftentimes comes more SMS surcharges, which we're passing through to our customers, which actually compresses our margin. So I think net-net, we should see an uptick in our margins in '21, as we continue our climb to our long-term goal of 60%. But there's some interplay there that I want to make sure everyone understands.

[Bhavan Suri:]

Great. You know, I think that's helpful. Thanks for the candor and the color, gents. I'll jump back in queue. Thank you.

[David Morken:]

Thanks, Bhavan.

[Operator:]

Our next question is from Alex Kurtz with KeyBanc Capital Markets. Please go ahead.

[Alex Kurtz:]

Yeah, good to hear from you, guys. And thanks for taking a couple of questions. Just on that last question on the last statement, Jeff, on gross margin. Is it fair to say that Voxbone is growing faster than your messaging business? Just so when we think about the longer-term driver, right, that's a higher margin outcome should be additive to you know, blended gross margins should be, you know, increasing over time. Just so the interplay between messaging growth versus Voxbone growth?

[Jeff Hoffman:]

Sure, so I think that's right, net-net, I think the positive factors of the expansion in CPaaS margins, and the addition of Voxbone, the tire margin, will overplay that what we're seeing on the on the SMS surcharge side, so I think you've got that right.

[Alex Kurtz:]

Okay. And then just on this plan of, I appreciate all the detail about what you think the COVID impact is to your business. But and I'm sure we were all pushing for it at the time, including myself back in back in the spring, but how can you really understand what the baseline is above what your customers were doing right? I mean, it's kind of a, you know, you're adding - your end customers are adding new UCaaS customers, your customers are adding new CCaaS customers. So, you know, is it - this concept that you had $11 million of COVID, tailwind. You know, how strongly do you feel that number is really, you know, the right estimate, because one could argue that there's a lot of other factors that, you know, there could be expansion on top of the customers that you were added in 2020.

[Jeff Hoffman:]

I think that's a fair point, Alex and that's part of the way. You're right when the pandemic hit, and everyone sort of rushed to work from home outside the office. It was pretty clear to us what the COVID impact was, because you saw our growth trends spike and that spike is how we knew that was COVID related. But as we've advanced on each quarter using sort of that same methodology, we saw a peak in second quarter and then become - start to come down. And it has each sequential quarter. So it's become one

[Alex Kurtz:]

Okay, that makes sense. Thank you.

[Operator:]

Our next question is from Meta Marshall with Morgan Stanley. Please go ahead.

[Meta Marshall:]

Great, thanks and congrats. Just a couple of questions, maybe just an update on kind of the Microsoft Teams' direct routing and 911 opportunity and kind of what you're seeing there? And then just maybe an updated split of the business. So maybe how much of you know messaging composes of the business at this point, versus maybe voice versus a 911. And if you could just break out what the ADP charges like - surcharges were more specifically this quarter? Thanks.

[David Morken:]

Meta, the Microsoft Teams Duet product was something that we launched as really a pioneer in the space, among the very first to do direct routing with the UCaaS solution like Microsoft Teams. What's been incredibly gratifying since is the interest and the progress among other UCaaS platforms that are eager to integrate with Bandwidth to do Duet product. And while we don't have any specific announcements that we're making now, to your point on what has been the direct routing response in the space, what's been the progress, it is exciting to see that there are other platforms that are doing collaboration, that are wanting to utilize our Duet product, when we launched it with Teams, we weren't certain that would be the case. But we believe that the direct routing future and the platform that we have that powers Microsoft Teams today that power others in the future.

[Jeff Hoffman:]

And then I'll take the part on kind of the split of the business, as you were asking, Meta. Just to recall Voxbone is a 100% voice. So despite all the success we've had in COVID, fourth quarter with political messaging, messaging was 18% of CPaaS revenue. If you normalize for political messaging, we'd be at 9%, which is probably a better way to sort of think about it going forward. In terms of the A2P charges, they were approximately $6 million in the quarter and $11 million for the year. What - the reason that we saw it higher in the fourth quarter was related to the spike we saw in political messaging usage in particular as we ran up to the November US elections.

[Meta Marshall:]

Got it. Thanks so much, guys.

[Operator:]

Our next question is from Will Power with Baird. Please go ahead.

[Charlie Erlikh:]

Hey, guys, thanks for taking the question. This is actually Charlie Erlikh on for Will. Congrats on the strong results. I was hoping just for some more information on maybe some upside drivers in the quarter. I mean, you had such a strong quarter. So just wondering, you know, sounds like contact center was a nice driver. But is there anything else that you would call out that was maybe you know, better than expected going into the quarter?

[Jeff Hoffman:]

So I'll start and then David's welcome to come in. It was really a strong performance across the Board. We posted a $1 base net retention of 133%. So obviously, our existing customers are trusting us and growing more and we're deepening those relations, but we're also continuing to attract and scale new customers. Now the things that really amplified the results that we called out in our prepared remarks. The political messaging volumes were much higher. COVID contributed about $2 million, as we said, based on the methodology, but across the Board, just a great performance.

[Charlie Erlikh:]

Great, thanks very much.

[Operator:]

Our next question is from Rich Valera with Needham. Please go ahead.

[Rich Valera:]

Thank you and let me add my congrats on the strong results. And the DBNR very strong for the quarter, 133% just wondering if you can frame out how we should think about that going forward. I know you don't guide to it, but if you think that was sort of affected by any temporary factors and just, again how we should maybe think about that number going forward? Thanks.

[Jeff Hoffman:]

Yeah, so it's certainly, Rich was impacted if you normalize for that political messaging increase in COVID, the 133% dollar-based net retention would normalize to 125%, it gets a little bit more tricky in 21 days, because as you know, how we've always guided our analysts and investors is look at our CPaaS gross percentage, to make an assumption on new logo growth based on what we've you know, trended in the past and kind of back into $1 based net retention, since the DVNR will only be for the Bandwidth's standalone business, that won't work quite as well in 2021. Until we lap the anniversary of the Voxbone close.

[Rich Valera:]

Got it. That's helpful, Jeff, thanks. And then for just the year in general, are you willing to say what percentage you think is going to come from Voxbone any sense of the relative contribution of Voxbone versus the original business?

[Jeff Hoffman:]

We're not going to break out guidance in between the two business, we're actively trying to take those two businesses and turn them into one. However, just like we did in fourth quarter, each quarter for the next year, will give you that Voxbone contribution so that you have that when we report our results.

[Rich Valera:]

That's great. And just final one on contact center. It seems like you had you know, a nice amount of activity and kind of new contact center activity. Any anything to that. I'm curious if there's a trend there or you know what you're seeing behind that? Thanks.

[David Morken:]

You bet. It has been a segment that we have focused on in the past and a pipeline that we are building and have been clear about that in the future and are as excited as ever with these most recently announced results, providing some of the evidence of what's possible in that segment for the platform and network that we have, especially now that we're international and around the world. It just opens up an entirely new set of customers that have international contact center requirements.

[Rich Valera:]

Sure, makes sense. Thanks, gentlemen.

[David Morken:]

Thank you. Our next question is from Mike Walkley with Canaccord Genuity. Please go ahead.

[Mike Walkley:]

Great. Thanks for taking my question. Mike, congrats also on the great results and hope everybody's healthy on the call. Just wanted to focus a little more on Voxbone in the cross-sell opportunities, you know taking some of your North American customers onto their network, especially with those 15 large customers that don't overlap. You know how long does it take maybe to roll them out internationally, and how much cross-sell attendees included in your guidance are that is that potential upside driver as the year plays out?

[David Morken:]

So we have factored aspects like cross-sell, up-sell into our guidance. Some of these opportunities take longer than others to integrate and roll out into jurisdictions. But that said, our original international thesis was entirely driven by existing customers who, at the time that we began building internationally had significant spend for existing product and service outside of the United States. Voxbone accelerated our ability to serve those existing customers tremendously. And we are focused on serving those customers in these new markets, and are identifying where the Voxbone platform can do that more quickly for some than others, but haven't guided specifically an average on ramp or onboarding timeframe during '21 within which we would expect those 15 to come on.

[Mike Walkley:]

Great now that's helpful. And then just on the investments. How is the hiring opportunity out there? And, you know, what's kind of maybe the pace of adding new headcount to plan for '21? Thank you.

[David Morken:]

You bet. We're focused on reinforcing success in marketing and in sales domestically and globally. And we'll continue to invest responsibly balancing again, the top line growth with a real bottom line sensibility on non-GAAP net income, but keenly focused on where we see opportunity, and where we have good new product initiatives that we think yield in line with our long-term strategy. We'll continue to invest.

[Mike Walkley:]

Right. Best of luck for a successful year.

[David Morken:]

Thank you very much, you as well.

[Operator:]

This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.