Bandwidth Inc. (NASDAQ:BAND) Q4 2021 Earnings Conference Call February 23, 2022 5:00 PM ET Corporate Participants Sarah Walas - VP of Investor Relations David Morken - Chief Executive Officer Daryl Raiford - Chief Financial Officer Conference Call Participants Halle Mogk - William Blair Mark Murphy - JPMorgan Ryan MacWilliams – Barclays Karan Juvekar - Morgan Stanley George Mohan - KeyBanc Tyler Radke - Citi Catherine Trebnick - Colliers Charlie Erlikh - Baird Joe Goodwin - JMP Securities Quinton Gabrielli ...

Bandwidth Inc. (NASDAQ:BAND) Q3 2021 Earnings Conference Call November 9, 2021 5:00 PM ET Company Participants David Morken – CEO Sarah Walas – VP of Investor Relations Daryl Raiford – CFO Conference Call Participants Matt Stotler – William Blair Mark Murphy – JPMorgan Charlie Erlikh – Baird Klarna – Morgan Stanley George – KeyBanc Tyler Radke – Citi Andrew King – Colliers Securities Ryan Koontz – Needham & Company Quinton – Piper Sandler Pat Walravens – JMP Securities Operator Thank you for standing by and ...

Bandwidth Inc. (NASDAQ:BAND) Q2 2021 Earnings Conference Call August 5, 2021 5:00 PM ET Company Participants Sarah Walas - Vice President of Investor Relations David Morken - Chief Executive Officer Daryl Raiford - Executive Vice President Jeff Hoffman - Chief Financial Officer Conference Call Participants Bhavan Suri - William Blair Charlie Erlikh - Baird Pinjalim Bora - JPMorgan Mike Walkley - Canaccord Genuity Dave Nwokonko - Morgan Stanley Andrew King - Colliers Securities Quinton Gabrielli - Piper Sand ...

[FORM 10-Q Information](index=1&type=section&id=FORM%2010-Q%20Information) [Filing Details](index=1&type=section&id=Filing%20Details) This quarterly report for BANDWIDTH INC. as of March 31, 2021, details its status as a Delaware-registered large accelerated filer and outstanding common stock - BANDWIDTH INC. is a Delaware-registered large accelerated filer[2](index=2&type=chunk)[3](index=3&type=chunk) Outstanding Shares Information (as of April 30, 2021) | Stock Class | Number of Shares Outstanding | | :------------------- | :--------------------------- | | Class A Common Stock | 22,879,349 | | Class B Common Stock | 2,215,170 | [Special Note Regarding Forward-Looking Statements](index=3&type=section&id=Special%20Note%20Regarding%20Forward-Looking%20Statements) [Nature of Forward-Looking Statements](index=3&type=section&id=Nature%20of%20Forward-Looking%20Statements) This report contains forward-looking statements about the company's future expectations, strategies, and plans, which are subject to risks and uncertainties - Forward-looking statements cover various aspects including the company's ability to attract and retain customers, network traffic growth, revenue and cost expectations, business growth and liquidity, employee recruitment and retention, international expansion, product innovation, competition, technological evolution, accounting standard impacts, compliance, intellectual property, litigation, convertible notes, and COVID-19[7](index=7&type=chunk)[8](index=8&type=chunk) - Investors are cautioned not to place undue reliance on forward-looking statements, as actual results may differ materially due to risks, uncertainties, and other factors described in the 'Risk Factors' section[10](index=10&type=chunk)[11](index=11&type=chunk) [PART I - FINANCIAL INFORMATION](index=5&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents the company's unaudited condensed consolidated financial statements for Q1 2021, including balance sheets, statements of operations, comprehensive loss, equity, and cash flows [Unaudited Condensed Consolidated Balance Sheets](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) As of March 31, 2021, total assets increased to **$1,070,349 thousand**, driven by cash and cash equivalents, with total liabilities also rising due to convertible senior notes Condensed Consolidated Balance Sheets Summary (USD thousands) | Metric | December 31, 2020 | March 31, 2021 | | :----------------------------------- | :---------------- | :------------- | | **Assets** | | | | Cash and cash equivalents | 72,163 | 319,731 | | Other investments | 40,000 | 10,000 | | Accounts receivable, net | 55,243 | 51,458 | | Total current assets | 193,599 | 406,674 | | Intangible assets, net | 248,055 | 232,804 | | Goodwill | 372,239 | 356,379 | | **Total Assets** | **890,608** | **1,070,349** | | **Liabilities and Stockholders' Equity** | | | | Accounts payable | 11,665 | 9,360 | | Accrued expenses and other current liabilities | 63,065 | 55,884 | | Total current liabilities | 92,189 | 81,599 | | Convertible senior notes | 282,196 | 464,848 | | **Total Liabilities** | **460,685** | **627,611** | | Common stock | 24 | 25 | | Additional paid-in capital | 451,463 | 492,778 | | Accumulated deficit | (49,505) | (54,821) | | Accumulated other comprehensive income | 27,941 | 4,756 | | **Total Stockholders' Equity** | **429,923** | **442,738** | | **Total Liabilities and Stockholders' Equity** | **890,608** | **1,070,349** | [Unaudited Condensed Consolidated Statements of Operations](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations) For Q1 2021, total revenue grew **65.6%** to **$113,479 thousand**, but net loss expanded to **$5,316 thousand**, mainly due to increased other expenses Condensed Consolidated Statements of Operations Summary (USD thousands, except per share amounts) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | 68,518 | 113,479 | | Cost of revenue | 36,359 | 61,328 | | Gross profit | 32,159 | 52,151 | | Total operating expenses | 35,043 | 52,188 | | Operating loss | (2,884) | (37) | | Other expense, net | (906) | (5,611) | | Loss before income taxes | (3,790) | (5,648) | | Income tax benefit | 2,732 | 332 | | Net loss | (1,058) | (5,316) | | Net loss per share (basic and diluted) | (0.04) | (0.21) | [Unaudited Condensed Consolidated Statements of Comprehensive Loss](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) For Q1 2021, total comprehensive loss increased to **$28,501 thousand**, mainly driven by **$23,185 thousand** in other comprehensive loss from foreign currency translation Condensed Consolidated Statements of Comprehensive Loss Summary (USD thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | (1,058) | (5,316) | | Foreign currency translation (net of tax) | (96) | (23,185) | | Other comprehensive loss | (96) | (23,185) | | **Total Comprehensive Loss** | **(1,154)** | **(28,501)** | [Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity](index=8&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) As of March 31, 2021, total stockholders' equity increased to **$442,738 thousand**, driven by additional paid-in capital from convertible debt and stock option exercises, offset by losses Condensed Consolidated Statements of Changes in Stockholders' Equity Summary (USD thousands, except share amounts) | Metric | December 31, 2020 | March 31, 2021 | | :--------------------------------- | :---------------- | :------------- | | Additional paid-in capital | 451,463 | 492,778 | | Accumulated deficit | (49,505) | (54,821) | | Accumulated other comprehensive income | 27,941 | 4,756 | | **Total Stockholders' Equity** | **429,923** | **442,738** | | Convertible debt issuance option | - | 66,908 | | Stock option exercises | - | 753 | | Foreign currency translation | - | (23,185) | | Stock-based compensation | - | 4,390 | | Net loss | - | (5,316) | [Unaudited Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For Q1 2021, operating cash flow was **$10,009 thousand**, investing cash flow **$22,116 thousand**, and financing cash flow **$215,294 thousand**, driven by convertible senior notes issuance Condensed Consolidated Statements of Cash Flows Summary (USD thousands) | Cash Flow Category | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash flow from operating activities | (7,607) | 10,009 | | Net cash flow from investing activities | (4,428) | 22,116 | | Net cash flow from financing activities | 344,916 | 215,294 | | Effect of exchange rate changes | (25) | 402 | | Net increase in cash and cash equivalents | 332,856 | 247,821 | | Cash and cash equivalents at end of period | 517,860 | 329,258 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed notes to the financial statements, covering organization, accounting policies, fair value, financial components, assets, debt, segments, equity, compensation, and commitments [1. Organization and Description of Business](index=11&type=section&id=1.%20Organization%20and%20Description%20of%20Business) Bandwidth Inc. is an international cloud-based CPaaS provider, enabling enterprise communication services, and expanded globally through the Voxbone acquisition in November 2020 - Bandwidth Inc. is an international cloud-based, software-driven Communications Platform as a Service (CPaaS) provider, enabling enterprises to create, scale, and operate voice or messaging communication services[34](index=34&type=chunk) - The company has two operating and reportable segments: CPaaS (primary revenue source, including voice, messaging, 911, and phone number solutions) and Other (including SIP trunking, data resale, hosted VoIP, etc.)[35](index=35&type=chunk) - The company acquired Voxbone on November 2, 2020, for **446 million EUR**, involving approximately **$400 million** in cash and approximately **$128 million** in Class A common stock, to expand its global operations[36](index=36&type=chunk) [2. Summary of Significant Accounting Policies](index=11&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This section outlines the basis of financial statement preparation, key accounting estimates, cash classifications, credit risk, debt costs, and recent accounting standard adoptions - Financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and SEC interim financial reporting rules, including normal recurring adjustments deemed necessary by management[37](index=37&type=chunk)[38](index=38&type=chunk) - The company makes estimates and judgments in preparing financial statements, including allowances for doubtful accounts, recoverability of long-lived and intangible assets, fair value of acquired intangible assets and goodwill, and fair value of debt and equity components of convertible notes[41](index=41&type=chunk) - The company adopted ASU 2019-12 for fiscal years and interim periods beginning after December 15, 2020, with no material impact, and is evaluating ASU 2020-06 but does not intend to early adopt[50](index=50&type=chunk)[51](index=51&type=chunk) [3. Fair Value Measurements](index=14&type=section&id=3.%20Fair%20Value%20Measurements) This section discloses Level 1 fair value measurements for financial assets like money market accounts and time deposits, and Level 2 for the 2026 and 2028 convertible notes Summary of Financial Asset Fair Values (as of March 31, 2021, USD thousands) | Financial Asset Category | Level 1 | Level 2 | Level 3 | Total | | :----------------------- | :-------- | :------ | :------ | :---------- | | Cash and cash equivalents: | | | | | | Money market accounts | 283,504 | — | — | 283,504 | | Time deposits | 15,000 | — | — | 15,000 | | Other investments: | | | | | | Time deposits | 10,000 | — | — | 10,000 | | **Total Financial Assets** | **308,504** | **—** | **—** | **308,504** | - As of March 31, 2021, the fair value of the 2026 and 2028 convertible notes was approximately **$609,698 thousand** and **$245,206 thousand**, respectively, classified as Level 2 fair value measurements[55](index=55&type=chunk) [4. Financial Statement Components](index=15&type=section&id=4.%20Financial%20Statement%20Components) This section details the composition of net accounts receivable, including trade and unbilled receivables, allowances, and the breakdown of accrued expenses and other current liabilities Composition of Net Accounts Receivable (USD thousands) | Item | December 31, 2020 | March 31, 2021 | | :--------------------------------- | :---------------- | :------------- | | Trade accounts receivable | 26,504 | 22,591 | | Unbilled accounts receivable | 27,692 | 28,490 | | Allowance for doubtful accounts and allowance for expected credit losses | (1,203) | (1,218) | | Other accounts receivable | 2,250 | 1,595 | | **Total Net Accounts Receivable** | **55,243** | **51,458** | Composition of Accrued Expenses and Other Current Liabilities (USD thousands) | Item | December 31, 2020 | March 31, 2021 | | :--------------------------------- | :---------------- | :------------- | | Accrued expenses | 31,549 | 32,476 | | Accrued compensation and benefits | 19,534 | 11,531 | | Accrued sales, use, value-added, and telecom-related taxes | 9,142 | 9,114 | | Other accrued expenses | 2,657 | 2,588 | | Current portion of finance lease liabilities | 183 | 175 | | **Total Accrued Expenses and Other Current Liabilities** | **63,065** | **55,884** | [5. Right-of-Use Asset and Lease Liabilities](index=15&type=section&id=5.%20Right-of-Use%20Asset%20and%20Lease%20Liabilities) The company recognizes right-of-use assets and lease liabilities, with net operating lease assets at **$18,008 thousand** and total lease liabilities at **$21,636 thousand** as of March 31, 2021 - The company recognizes right-of-use assets and lease liabilities based on the present value of lease payments over the lease term, with operating lease expenses recognized on a straight-line basis and finance leases recognizing depreciation and interest expense[63](index=63&type=chunk) Lease-Related Assets and Liabilities (USD thousands) | Item | December 31, 2020 | March 31, 2021 | | :--------------------------------- | :---------------- | :------------- | | Operating lease right-of-use assets, net | 19,491 | 18,008 | | Finance lease assets | 464 | 428 | | **Total Lease Assets** | **19,955** | **18,436** | | Operating lease liabilities (current) | 5,515 | 5,594 | | Finance lease liabilities (current) | 183 | 175 | | Operating lease liabilities (non-current) | 17,202 | 15,609 | | Finance lease liabilities (non-current) | 282 | 258 | | **Total Lease Liabilities** | **23,182** | **21,636** | Lease Liability Maturities (as of March 31, 2021, USD thousands) | Year | Operating Lease Liabilities | Finance Lease Liabilities | | :------------------ | :-------------------------- | :------------------------ | | 2021 (remaining) | 4,756 | 147 | | 2022 | 6,736 | 148 | | 2023 | 6,593 | 97 | | 2024 | 2,670 | 61 | | 2025 | 1,648 | 4 | | Thereafter | 718 | - | | **Total Lease Payments** | **23,121** | **457** | | Less: Imputed interest | (1,918) | (24) | | **Total Lease Obligations** | **21,203** | **433** | [6. Property and Equipment](index=20&type=section&id=6.%20Property%20and%20Equipment) As of March 31, 2021, net property and equipment was **$50,660 thousand**, with telecommunications equipment as the largest component, and **$1,103 thousand** in software development costs capitalized in Q1 2021 Composition of Net Property and Equipment (USD thousands) | Item | December 31, 2020 | March 31, 2021 | | :--------------------------------- | :---------------- | :------------- | | Furniture and fixtures | 2,341 | 2,348 | | Computer and office equipment | 4,077 | 4,190 | | Telecommunications equipment | 60,651 | 61,753 | | Leasehold improvements | 6,285 | 6,280 | | Software | 3,901 | 4,877 | | Internally developed software | 19,968 | 20,884 | | Vehicles | 502 | 512 | | **Total Cost** | **97,725** | **100,844** | | Less: Accumulated depreciation | (46,080) | (50,184) | | **Total Property and Equipment, Net** | **51,645** | **50,660** | - For the three months ended March 31, 2021, the company capitalized **$1,103 thousand** in software development costs, and total depreciation expense was **$4,176 thousand**[79](index=79&type=chunk)[81](index=81&type=chunk) [7. Intangible Assets](index=21&type=section&id=7.%20Intangible%20Assets) As of March 31, 2021, net intangible assets were **$232,804 thousand**, mainly from Voxbone acquisition, with **$4,867 thousand** amortization expense and a 13-year remaining amortization period Composition of Net Intangible Assets (as of March 31, 2021, USD thousands) | Item | Gross Carrying Amount | Accumulated Amortization | Net Book Value | Amortization Period (Years) | | :--------------------------------- | :-------------------- | :----------------------- | :------------- | :-------------------------- | | Dash Acquisition and other intangible assets: | | | | | | Customer relationships | 10,396 | (5,241) | 5,155 | 20 | | Other, finite-lived | 3,933 | (3,933) | — | 2 - 7 | | Licenses, indefinite-lived | 764 | — | 764 | Indefinite | | Voxbone Acquisition: | | | | | | Customer relationships | 149,764 | (4,161) | 145,603 | 15 | | Developed technology | 84,816 | (3,534) | 81,282 | 10 | | **Total Net Intangible Assets** | **249,673** | **(16,869)** | **232,804** | | - For the three months ended March 31, 2021, amortization expense for finite-lived intangible assets was **$4,867 thousand**, with a remaining weighted-average amortization period of **13 years**[86](index=86&type=chunk) Future Amortization Expense for Finite-Lived Intangible Assets (USD thousands) | Year | Amortization Expense | | :--------------- | :------------------- | | 2021 (remaining) | 14,239 | | 2022 | 18,986 | | 2023 | 18,986 | | 2024 | 18,986 | | 2025 | 18,986 | | Thereafter | 141,857 | | **Total** | **232,040** | [8. Debt](index=22&type=section&id=8.%20Debt) As of March 31, 2021, the company had no outstanding revolving credit, and convertible senior notes had a net carrying value of **$464,848 thousand**, with the 2028 issuance increasing debt and including capped call options - As of March 31, 2021, the company's revolving credit facility had no outstanding balance, with **$25,000 thousand** available for borrowing, and the company was in compliance with all financial and non-financial covenants[90](index=90&type=chunk) - The 2026 convertible notes were issued on February 28, 2020, with a total principal of **$400,000 thousand**, a 0.25% interest rate, due March 1, 2026, and an initial conversion price of approximately **$91.03 per share**[92](index=92&type=chunk)[94](index=94&type=chunk)[95](index=95&type=chunk) - The 2028 convertible notes were issued on March 16, 2021, with a total principal of **$250,000 thousand**, a 0.50% interest rate, due April 1, 2028, and an initial conversion price of approximately **$179.27 per share**[102](index=102&type=chunk)[103](index=103&type=chunk) Net Carrying Value of Convertible Senior Notes Liability Components (USD thousands) | Item | December 31, 2020 | March 31, 2021 | | :--------------------------------- | :---------------- | :------------- | | **2026 Convertible Notes:** | | | | Principal | 400,000 | 400,000 | | Unamortized discount | (110,546) | (106,036) | | Unamortized debt issuance costs | - | (6,962) | | **2026 Convertible Notes Net Carrying Value** | **282,196** | **287,002** | | **2028 Convertible Notes:** | | | | Principal | - | 250,000 | | Unamortized discount | - | (66,575) | | Unamortized debt issuance costs | - | (5,579) | | **2028 Convertible Notes Net Carrying Value** | **-** | **177,846** | | **Total Net Carrying Value** | **282,196** | **464,848** | Convertible Senior Notes Interest Expense (USD thousands) | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | **2026 Convertible Notes:** | | | | Contractual interest expense | 96 | 250 | | Amortization of debt discount | 1,629 | 4,510 | | Amortization of debt issuance costs | 106 | 296 | | **Total Interest Expense Related to 2026 Convertible Notes** | **1,831** | **5,056** | | **2028 Convertible Notes:** | | | | Contractual interest expense | — | 52 | | Amortization of debt discount | — | 333 | | Amortization of debt issuance costs | — | 28 | | **Total Interest Expense Related to 2028 Convertible Notes** | **—** | **413** | | **Total Interest Expense** | **1,831** | **5,469** | [9. Segment and Geographic Information](index=29&type=section&id=9.%20Segment%20and%20Geographic%20Information) The CPaaS segment generated **$100,146 thousand** revenue and **$46,465 thousand** gross profit in Q1 2021, with most revenue from the U.S. and significant international growth Segment Operating Results (as of March 31, 2021, USD thousands) | Segment | Revenue | Cost of Revenue | Gross Profit | | :------- | :-------- | :-------------- | :----------- | | CPaaS | 100,146 | 53,681 | 46,465 | | Other | 13,333 | 7,647 | 5,686 | | **Total** | **113,479** | **61,328** | **52,151** | Revenue by Geographic Area (as of March 31, 2021, USD thousands) | Segment | United States | International | Total | | :------- | :------------ | :------------ | :---------- | | CPaaS | 88,862 | 11,284 | 100,146 | | Other | 11,936 | 1,397 | 13,333 | | **Total** | **100,798** | **12,681** | **113,479** | - As of March 31, 2021, the company's long-lived assets were primarily located in the United States, with **$10,537 thousand** in long-lived assets outside the U.S.[117](index=117&type=chunk) [10. Stockholders' Equity](index=30&type=section&id=10.%20Stockholders'%20Equity) As of March 31, 2021, the company had authorized preferred, Class A (one vote), and Class B (ten votes) common stock, with **22,873,604** Class A and **2,215,170** Class B shares outstanding - The company has authorized **10,000,000** shares of undesignated preferred stock, with none issued or outstanding[120](index=120&type=chunk) Common Stock Authorization and Outstanding Shares (as of March 31, 2021) | Stock Class | Authorized Shares | Outstanding Shares | Votes Per Share | | :------------------- | :---------------- | :----------------- | :-------------- | | Class A Common Stock | 100,000,000 | 22,873,604 | 1 | | Class B Common Stock | 20,000,000 | 2,215,170 | 10 | Class A Common Stock Reserved for Equity Incentive Plans (shares) | Item | December 31, 2020 | March 31, 2021 | | :--------------------------------- | :---------------- | :------------- | | Stock options issued and outstanding | 255,000 | 196,433 | | Unvested restricted stock units issued and outstanding | 450,614 | 405,875 | | Equity incentives available for grant under 2017 Plan | 2,020,342 | 3,044,024 | | **Total** | **2,725,956** | **3,646,332** | [11. Stock Based Compensation](index=32&type=section&id=11.%20Stock%20Based%20Compensation) The company grants equity incentives via its 2017 plan; as of March 31, 2021, unrecognized RSU compensation cost was **$31,023 thousand** (3.10-year amortization), with total compensation expense at **$4,390 thousand** - The 2017 Incentive Award Plan allows for the grant of stock options, restricted stock units, and other awards, with an automatic annual increase in available shares on January 1[126](index=126&type=chunk) Summary of Stock Option Activity (as of March 31, 2021) | Item | Number of Shares | Weighted-Average Exercise Price (per share) | | :------------------------------ | :--------------- | :------------------------------------------ | | Balance at December 31, 2020 | 255,000 | 10.82 | | Exercised | (57,817) | 13.02 | | Canceled | (750) | 9.57 | | **Balance at March 31, 2021** | **196,433** | **10.18** | Summary of Restricted Stock Unit (RSU) Activity (as of March 31, 2021) | Item | Number of Shares Granted | Weighted-Average Fair Value (per share) | | :--------------------------------- | :----------------------- | :-------------------------------------- | | Unvested RSUs at December 31, 2020 | 450,614 | 51.58 | | Granted | 113,664 | 153.90 | | Vested | (141,707) | 48.45 | | Forfeited or canceled | (16,696) | 63.36 | | **Unvested RSUs at March 31, 2021** | **405,875** | **82.33** | Stock-Based Compensation Expense (USD thousands) | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------- | :-------------------------------- | :-------------------------------- | | Cost of revenue | 175 | 72 | | Research and development | 453 | 768 | | Sales and marketing | 395 | 614 | | General and administrative | 1,476 | 2,936 | | **Total** | **2,499** | **4,390** | [12. Commitments and Contingencies](index=35&type=section&id=12.%20Commitments%20and%20Contingencies) The company has commitments including operating leases and **$14,386 thousand** in non-cancelable purchase obligations, and faces legal lawsuits primarily related to 911 service taxes - The company leases office space, with operating lease agreements maturing over the next **5.75 years**[138](index=138&type=chunk) - As of March 31, 2021, the company had **$14,386 thousand** in other non-cancelable purchase obligations, primarily for network equipment maintenance and software license contracts, with **$8,519 thousand** due within one year[139](index=139&type=chunk) - The company is involved in multiple legal lawsuits, primarily alleging failure to bill, collect, and remit certain taxes and surcharges for 911 services across various jurisdictions including Illinois, New York, Pennsylvania, and Rhode Island[143](index=143&type=chunk) - The company is actively defending these lawsuits, believes it has strong defenses, and management believes their ultimate resolution will not have a material adverse effect on the company's financial condition or results of operations[143](index=143&type=chunk) [13. Employee Benefit Plans](index=36&type=section&id=13.%20Employee%20Benefit%20Plans) The company offers 401(k) and defined contribution plans, with **$912 thousand** in matching contributions and **$104 thousand** net periodic benefit cost for non-U.S. defined benefit plans in Q1 2021 - The company offers a 401(k) plan for U.S. employees and defined contribution plans for non-U.S. employees[144](index=144&type=chunk) - For the three months ended March 31, 2021, the company made matching contributions of **$912 thousand** to defined contribution plans[144](index=144&type=chunk) Pre-Tax Net Periodic Benefit Cost for Non-U.S. Defined Benefit Pension Plans (as of March 31, 2021, USD thousands) | Item | Amount | | :----------------------- | :----- | | Service cost | 103 | | Interest cost | 5 | | Return on plan assets | (4) | | **Net Periodic Pension Cost** | **104** | [14. Income Taxes](index=36&type=section&id=14.%20Income%20Taxes) For Q1 2021, the effective tax rate decreased from **72.1%** to **5.9%**, mainly due to a valuation allowance against U.S. deferred tax assets, which the company continues to maintain - For the three months ended March 31, 2021, the company's effective tax rate decreased from **72.1%** in the prior year period to **5.9%**[150](index=150&type=chunk) - The change in tax rate is primarily attributable to a valuation allowance against U.S. deferred tax assets[150](index=150&type=chunk) - As of March 31, 2021, the company continues to maintain a valuation allowance against its U.S. federal and state net deferred tax assets[150](index=150&type=chunk) [15. Related Parties](index=38&type=section&id=15.%20Related%20Parties) The company has related party agreements with Republic Wireless, Inc., recognizing **$487 thousand** in telecom service revenue and **$153 thousand** in accounts receivable from them in Q1 2021 - The company has related party relationships with Republic Wireless, Inc. (a former subsidiary) and has entered into transition services, facility sharing, tax sharing, and master services agreements[152](index=152&type=chunk) - For the three months ended March 31, 2021, the company reduced rent expense by **$96 thousand** under the facility sharing agreement[153](index=153&type=chunk) - For the three months ended March 31, 2021, the company recognized **$487 thousand** in revenue from telecommunications services provided to Republic Wireless and had **$153 thousand** in accounts receivable[154](index=154&type=chunk) [16. Basic and Diluted Loss per Common Share](index=39&type=section&id=16.%20Basic%20and%20Diluted%20Loss%20per%20Common%20Share) For Q1 2021, basic and diluted net loss per share was **$0.21**, with **25,015,948** weighted-average shares outstanding, as diluted shares equal basic shares due to net loss Basic and Diluted Loss per Common Share (USD thousands, except per share amounts) | Metric | 2020 | 2021 | | :----------------------------------- | :---------- | :---------- | | Net loss | (1,058) | (5,316) | | Net loss attributable to common stockholders | (1,058) | (5,316) | | Net loss per share: | | | | Basic | (0.04) | (0.21) | | Diluted | (0.04) | (0.21) | | Weighted-average common shares outstanding: | | | | Basic | 23,563,569 | 25,015,948 | | Diluted | 23,563,569 | 25,015,948 | - As of March 31, 2021, common stock equivalents with an anti-dilutive effect (including stock options, unvested restricted stock units, and convertible debt conversion) totaling **2,414,442 shares** were excluded from the diluted net loss per share calculation[158](index=158&type=chunk) [17. Subsequent Events](index=40&type=section&id=17.%20Subsequent%20Events) CFO Jeffrey A. Hoffman notified the company on May 3, 2021, of his departure on August 31, 2021, and will assist with the transition - Chief Financial Officer Jeffrey A. Hoffman will depart on **August 31, 2021**, and will assist the company with an orderly transition[161](index=161&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses the company's Q1 2021 financial condition and operating results, including business overview, Voxbone acquisition, COVID-19 impact, KPIs, financial statement components, non-GAAP metrics, and liquidity [Overview](index=41&type=section&id=Overview) Bandwidth is a leading global enterprise cloud communications company, expanding its platform to over 60 countries, with Q1 2021 total revenue at **$113.5 million** and CPaaS revenue growing **69%** - Bandwidth is a leading global enterprise cloud communications company, providing voice, messaging, and emergency services software APIs to enhance enterprise products and services[164](index=164&type=chunk) - The company owns and operates a nationwide IP voice network in the U.S. and expanded its global platform to over **60 countries**, covering over **90%** of global GDP, through the Voxbone acquisition[165](index=165&type=chunk) Key Financial and Operating Data (as of March 31, 2021) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | Year-over-Year Growth | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | | Total Revenue (USD millions) | 68.5 | 113.5 | 66% | | CPaaS Revenue (USD millions) | 59.1 | 100.1 | 69% | | Net Loss (USD millions) | 1.1 | 5.3 | 382% | | Active CPaaS Customer Accounts | 1,808 | 2,959 | 64% | [Acquisition of Voxbone](index=41&type=section&id=Acquisition%20of%20Voxbone) The company acquired Voice Topco (Voxbone) on November 2, 2020, for **446 million EUR**, comprising **$400 million** cash and **$128 million** Class A common stock, to expand global communication platform capabilities - The company acquired Voice Topco, the parent company of Voxbone S.A., on November 2, 2020, for **446 million EUR**[169](index=169&type=chunk)[171](index=171&type=chunk) - The acquisition consideration included approximately **$400 million** in cash and approximately **$128 million** in Class A common stock[171](index=171&type=chunk) [COVID-19 Update](index=42&type=section&id=COVID-19%20Update) The COVID-19 pandemic increased service usage, especially UCaaS and conferencing, a trend expected to continue, though long-term impacts on operations and financial performance remain uncertain - The COVID-19 pandemic led to increased usage of the company's services, primarily driven by large enterprise customers' UCaaS and conferencing solutions[173](index=173&type=chunk) - The company expects high usage levels for these services to continue post-pandemic due to the widespread adoption of remote work models[173](index=173&type=chunk) - The broader impact of the pandemic on the company's future operating results and financial performance remains uncertain, potentially leading to reduced customer demand or delayed service implementation[173](index=173&type=chunk) [Key Performance Indicators](index=42&type=section&id=Key%20Performance%20Indicators) The company assesses performance using active CPaaS customer accounts (**2,959**), dollar-based net retention rate (**125%**), Adjusted EBITDA, and free cash flow, all showing significant growth as of March 31, 2021 Key Performance Indicators (USD thousands, except percentages) | Metric | 2020 | 2021 | | :--------------------------------- | :------ | :----- | | Active CPaaS Customer Accounts (end of period) | 1,808 | 2,959 | | Dollar-Based Net Retention Rate | 126% | 125% | | Adjusted EBITDA | 3,099 | 13,397 | | Free Cash Flow | (12,035) | 2,125 | - Active CPaaS customer accounts are defined as unique accounts generating at least **$100** in revenue in the last month of the period, serving as a key indicator of business growth and future revenue trends[177](index=177&type=chunk) - Dollar-based net retention rate measures revenue growth from existing CPaaS customers, assessing increased customer usage or adoption of new products by comparing revenue over comparable periods[179](index=179&type=chunk) [Key Components of Statements of Operations](index=43&type=section&id=Key%20Components%20of%20Statements%20of%20Operations) This section analyzes key components of the statements of operations, including revenue sources, cost of revenue, gross margin, operating expenses (R&D, sales, marketing, G&A), and income tax changes [Revenue](index=43&type=section&id=Revenue) Most revenue is from the CPaaS segment, primarily usage-based fees (**73%** of CPaaS revenue), while the Other segment's revenue proportion is expected to decline - CPaaS revenue primarily derives from voice usage, phone number services, 911 phone number services, and messaging services[181](index=181&type=chunk) - For the three months ended March 31, 2021, **73%** of CPaaS revenue came from usage-based fees, **25%** from monthly unit fees, and the remaining **2%** from other miscellaneous services[181](index=181&type=chunk) - Revenue from the Other segment, comprising traditional services and indirect revenue, is expected to decrease as a percentage of total revenue over time[183](index=183&type=chunk) [Cost of Revenue and Gross Margin](index=44&type=section&id=Cost%20of%20Revenue%20and%20Gross%20Margin) CPaaS cost of revenue includes network provider fees, operations support, personnel, and D&A; gross margin is influenced by network investment, cost management, product mix, and pricing - CPaaS cost of revenue primarily includes fees paid to other network service providers (e.g., per-minute usage, phone numbers, messaging), IP voice network support costs, personnel costs, and depreciation and amortization[184](index=184&type=chunk) - Other cost of revenue includes leased line costs, internet connectivity fees, per-minute usage fees, regulatory fees, and software and hardware maintenance fees[185](index=185&type=chunk) - Gross margin is affected by the timing and extent of network investments, ability to manage off-network per-minute usage and messaging costs, revenue product mix, timing of capitalized software development cost amortization, and ability to pass costs to customers[185](index=185&type=chunk) [Operating Expenses](index=44&type=section&id=Operating%20Expenses) Operating expenses, primarily personnel costs, are expected to increase, with R&D for product development, sales and marketing for customer acquisition, and G&A for support and headquarters operations - Operating expenses primarily include personnel costs (salaries, benefits, bonuses, and stock-based compensation) and non-personnel costs such as facilities, software licenses, network services, and depreciation and amortization[186](index=186&type=chunk) - Research and development expenses are mainly for personnel costs, outsourced software development, and engineering services, with the company planning continued investment to enhance existing products and develop new services[187](index=187&type=chunk) - Sales and marketing expenses primarily include sales personnel costs (including commissions and stock-based compensation), as well as advertising, marketing, and brand-building activities[188](index=188&type=chunk)[190](index=190&type=chunk) - General and administrative expenses cover personnel costs for accounting, finance, legal, human resources, and administrative support, as well as product management, customer billing, information services, professional service fees, and rent[191](index=191&type=chunk) [Income Taxes](index=45&type=section&id=Income%20Taxes) For Q1 2021, the effective tax rate decreased to **5.9%**, mainly due to a change in judgment on deferred tax asset realizability and a valuation allowance, which the company continues to maintain - For the three months ended March 31, 2021, the company's effective tax rate decreased from **72.1%** in the prior year period to **5.9%**[192](index=192&type=chunk) - The decrease in tax rate is primarily attributable to a change in judgment regarding the realizability of certain deferred tax assets and the corresponding valuation allowance[192](index=192&type=chunk) - The company continues to maintain a valuation allowance against its U.S. federal and state, as well as UK, net deferred tax assets[192](index=192&type=chunk) [Non-GAAP Financial Measures](index=46&type=section&id=Non-GAAP%20Financial%20Measures) The company uses non-GAAP gross profit, net income, Adjusted EBITDA, and free cash flow to assess core operating performance by adjusting for non-cash and non-comparable items [Non-GAAP Gross Profit and Non-GAAP Gross Margin](index=46&type=section&id=Non-GAAP%20Gross%20Profit%20and%20Non-GAAP%20Gross%20Margin) Non-GAAP gross profit is GAAP gross profit adjusted for D&A and stock-based compensation; as of March 31, 2021, it was **$57,432 thousand**, with a non-GAAP gross margin of **51%** - Non-GAAP gross profit is calculated by adding back depreciation and amortization, amortization of acquired intangible assets, and stock-based compensation expense to GAAP gross profit[195](index=195&type=chunk) Consolidated Non-GAAP Gross Profit and Gross Margin (USD thousands, except percentages) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Consolidated gross profit | 32,159 | 52,151 | | Consolidated gross margin % | 47% | 46% | | Depreciation | 2,334 | 3,033 | | Amortization of acquired intangible assets | — | 2,176 | | Stock-based compensation | 175 | 72 | | **Non-GAAP Gross Profit** | **34,668** | **57,432** | | **Non-GAAP Gross Margin %** | **51%** | **51%** | CPaaS Segment Non-GAAP Gross Profit and Gross Margin (USD thousands, except percentages) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | CPaaS gross profit | 27,229 | 46,465 | | CPaaS gross margin % | 46% | 46% | | Depreciation | 2,334 | 3,033 | | Amortization of acquired intangible assets | — | 2,176 | | Stock-based compensation | 175 | 72 | | **Non-GAAP CPaaS Gross Profit** | **29,738** | **51,746** | | **Non-GAAP CPaaS Gross Margin %** | **50%** | **52%** | [Non-GAAP Net Income](index=47&type=section&id=Non-GAAP%20Net%20Income) Non-GAAP net income is adjusted for various non-cash items; as of March 31, 2021, it was **$8,303 thousand**, with non-GAAP diluted net income per share at **$0.30** - Non-GAAP net income is calculated by excluding stock-based compensation, amortization of acquired intangible assets, convertible debt discount and issuance cost amortization, acquisition-related expenses, intangible asset impairment, gain/loss on disposal of property and equipment, estimated tax impact of these adjustments, and excess tax benefits from stock-based compensation[202](index=202&type=chunk) Non-GAAP Net Income and Earnings Per Share (USD thousands, except per share amounts) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | (1,058) | (5,316) | | Stock-based compensation | 2,499 | 4,390 | | Amortization of acquired intangible assets | 130 | 4,868 | | Amortization of convertible debt discount and issuance costs | 1,735 | 5,167 | | Gain/loss on disposal of property and equipment | 233 | 201 | | Estimated tax impact of adjustments | (1,160) | (1,068) | | Valuation allowance | — | 61 | | Income tax benefit from stock-based compensation | (1,292) | — | | **Non-GAAP Net Income** | **1,087** | **8,303** | | Non-GAAP diluted net income per share | 0.04 | 0.30 | | Non-GAAP weighted-average diluted shares | 24,520,208 | 27,295,143 | [Adjusted EBITDA](index=49&type=section&id=Adjusted%20EBITDA) Adjusted EBITDA, a key management metric, is calculated by adjusting net income/loss for taxes, interest, D&A, acquisition costs, stock compensation, and asset disposal; it was **$13,397 thousand** as of March 31, 2021 - Adjusted EBITDA is calculated by adjusting for income taxes, net interest expense, depreciation and amortization, acquisition-related expenses, stock-based compensation, intangible asset impairment, and gain/loss on disposal of property and equipment[207](index=207&type=chunk) Adjusted EBITDA (USD thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | (1,058) | (5,316) | | Income tax benefit | (2,732) | (332) | | Net interest expense | 859 | 5,410 | | Depreciation | 3,168 | 4,176 | | Amortization | 130 | 4,868 | | Stock-based compensation | 2,499 | 4,390 | | Gain/loss on disposal of property and equipment | 233 | 201 | | **Adjusted EBITDA** | **3,099** | **13,397** | [Free Cash Flow](index=49&type=section&id=Free%20Cash%20Flow) Free cash flow, representing operating cash less capital expenditures and capitalized software, was **$2,125 thousand** as of March 31, 2021, indicating improved liquidity - Free cash flow is defined as net cash provided by operating activities less purchases of property and equipment and capitalized internally developed software costs[209](index=209&type=chunk) Free Cash Flow (USD thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | (7,607) | 10,009 | | Net cash used in capital asset investments | (4,428) | (7,884) | | **Free Cash Flow** | **(12,035)** | **2,125** | [Results of Operations](index=50&type=section&id=Results%20of%20Operations) This section analyzes the company's Q1 2021 consolidated statements of operations, comparing revenue, cost of revenue, gross margin, operating expenses, interest expense, and income tax benefit for 2020 and 2021 [Consolidated Results of Operations](index=50&type=section&id=Consolidated%20Results%20of%20Operations) For Q1 2021, total revenue grew **65.6%** to **$113,479 thousand**, CPaaS revenue share increased, total gross margin slightly decreased to **46%**, and operating loss narrowed to **$37 thousand** Consolidated Statements of Operations Summary (USD thousands) | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Total revenue | 68,518 | 113,479 | | Total cost of revenue | 36,359 | 61,328 | | Total gross profit | 32,159 | 52,151 | | Total operating expenses | 35,043 | 52,188 | | Operating loss | (2,884) | (37) | | Other expense, net | (906) | (5,611) | | Loss before income taxes | (3,790) | (5,648) | | Income tax benefit | 2,732 | 332 | | Net loss | (1,058) | (5,316) | Operating Results as a Percentage of Total Revenue | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | CPaaS revenue | 86% | 88% | | Other revenue | 14% | 12% | | Total revenue | 100% | 100% | | Total cost of revenue | 54% | 54% | | Total gross profit | 47% | 46% | | Research and development | 14% | 12% | | Sales and marketing | 14% | 11% | | General and administrative | 23% | 24% | | Total operating expenses | 51% | 46% | | Operating loss | (4)% | —% | | Net interest expense | (1)% | (5)% | | Loss before income taxes | (6)% | (5)% | | Income tax benefit | 4% | —% | | Net loss | (2)% | (5)% | [Comparison of the three months ended March 31, 2020 and 2021](index=52&type=section&id=Comparison%20of%20the%20three%20months%20ended%20March%2031,%202020%20and%202021) This section compares Q1 2020 and Q1 2021 financial performance, highlighting **66%** total revenue growth, **62%** gross profit increase, **49%** operating expense growth, increased net interest expense, and decreased income tax benefit [Revenue](index=52&type=section&id=Revenue_comparison) As of March 31, 2021, total revenue grew **66%** to **$113,479 thousand**, with CPaaS revenue up **69%** to **$100,146 thousand**, driven by usage and the Voxbone acquisition Revenue Comparison (USD thousands) | Revenue Category | March 31, 2020 | March 31, 2021 | Change Amount | Change Percentage | | :--------------- | :------------- | :------------- | :------------ | :---------------- | | CPaaS revenue | 59,121 | 100,146 | 41,025 | 69% | | Other revenue | 9,397 | 13,333 | 3,936 | 42% | | **Total Revenue** | **68,518** | **113,479** | **44,961** | **66%** | - CPaaS revenue growth is primarily attributed to increased voice and messaging usage (**$14.1 million**) and the Voxbone acquisition (**$21.1 million**)[219](index=219&type=chunk) - Active CPaaS customer accounts increased by **64%** from **1,808** as of March 31, 2020, to **2,959** as of March 31, 2021[219](index=219&type=chunk) [Cost of Revenue and Gross Margin](index=52&type=section&id=Cost_of_Revenue_and_Gross_Margin_comparison) As of March 31, 2021, total gross profit grew **62%** to **$52,151 thousand**, but total gross margin decreased to **46%**, with CPaaS cost of revenue up **68%** due to increased usage and network costs Cost of Revenue and Gross Margin Comparison (USD thousands, except percentages) | Item | March 31, 2020 | March 31, 2021 | Change Amount | Change Percentage | | :--------------------- | :------------- | :------------- | :------------ | :---------------- | | CPaaS cost of revenue | 31,892 | 53,680 | 21,788 | 68% | | Other cost of revenue | 4,467 | 7,648 | 3,181 | 71% | | **Total Cost of Revenue** | **36,359** | **61,328** | **24,969** | **69%** | | **Gross Profit** | **32,159** | **52,151** | **19,992** | **62%** | | CPaaS gross margin % | 46% | 46% | | | | Other gross margin % | 52% | 43% | | | | **Total Gross Margin %** | **47%** | **46%** | | | - The increase in CPaaS cost of revenue is primarily due to a **$10.2 million** increase in voice usage costs, a **$2.7 million** increase in messaging costs, and a **$6.4 million** increase in network costs and amortization expenses[223](index=223&type=chunk) - Excluding depreciation, amortization, and stock-based compensation, CPaaS non-GAAP gross margin increased from **50%** to **52%**, while total non-GAAP gross margin remained **51%** for both years[223](index=223&type=chunk) [Operating Expenses](index=53&type=section&id=Operating_Expenses_comparison) As of March 31, 2021, total operating expenses grew **49%** to **$52,188 thousand**, with R&D up **40%**, sales and marketing up **27%**, and G&A up **67%**, driven by personnel costs and the Voxbone acquisition Operating Expenses Comparison (USD thousands) | Item | March 31, 2020 | March 31, 2021 | Change Amount | Change Percentage | | :--------------------- | :------------- | :------------- | :------------ | :---------------- | | Research and development | 9,530 | 13,333 | 3,803 | 40% | | Sales and marketing | 9,417 | 11,992 | 2,575 | 27% | | General and administrative | 16,096 | 26,863 | 10,767 | 67% | | **Total Operating Expenses** | **35,043** | **52,188** | **17,145** | **49%** | - The increase in research and development expenses is primarily due to a **$3.4 million** increase in personnel costs, including personnel growth from the Voxbone acquisition[225](index=225&type=chunk) - The increase in general and administrative expenses is primarily due to a **$5.4 million** increase in personnel costs, a **$2.7 million** increase in depreciation and amortization costs, and a **$1.7 million** increase in professional service costs[226](index=226&type=chunk) [Net Interest Expense](index=53&type=section&id=Interest_Expense_Net_comparison) As of March 31, 2021, net interest expense increased by **$4.6 million**, primarily due to a **$3.7 million** increase in interest expense related to convertible notes - As of March 31, 2021, net interest expense increased by **$4.6 million**, primarily due to a **$3.7 million** increase in interest expense related to convertible notes[228](index=228&type=chunk) [Income Tax Benefit](index=54&type=section&id=Income_Tax_Benefit_comparison) As of March 31, 2021, income tax benefit decreased by **$2.4 million**, with the effective tax rate falling from **72.1%** to **5.9%**, due to deferred tax asset judgment changes and valuation allowance - As of March 31, 2021, income tax benefit decreased by **$2.4 million**, and the effective tax rate decreased from **72.1%** to **5.9%**[229](index=229&type=chunk) - The decrease in the effective tax rate is primarily attributable to a change in judgment regarding the realizability of certain deferred tax assets and the corresponding valuation allowance[229](index=229&type=chunk) [Liquidity and Capital Resources](index=54&type=section&id=Liquidity%20and%20Capital%20Resources) The company secures liquidity via IPOs, offerings, convertible notes, and operations; in Q1 2021, operating activities provided **$10.0 million**, investing **$22.1 million**, and financing **$215.3 million**, largely from 2028 convertible notes [Statement of Cash Flows](index=54&type=section&id=Statement%20of%20Cash%20Flows) As of March 31, 2021, operating cash flow was **$10.0 million**, investing **$22.1 million**, and financing **$215.3 million**, leading to a **$247.8 million** net increase in cash and cash equivalents Cash Flow Summary (USD thousands) | Cash Flow Category | 2020 | 2021 | | :--------------------------------- | :---------- | :---------- | | Net cash flow from operating activities (used in) | (7,607) | 10,009 | | Net cash flow from investing activities | (4,428) | 22,116 | | Net cash flow from financing activities | 344,916 | 215,294 | | Effect of exchange rate changes | (25) | 402 | | **Net Increase in Cash and Cash Equivalents** | **332,856** | **247,821** | - In Q1 2021, operating cash flow turned positive, primarily due to adjustments for non-cash items (e.g., depreciation and amortization, debt discount amortization, stock-based compensation) and changes in working capital[233](index=233&type=chunk) - In Q1 2021, investing cash flow primarily resulted from the sale and maturity of other investments (**$30.0 million**), partially offset by purchases of property and equipment (**$6.8 million**) and capitalized software development costs (**$1.1 million**)[236](index=236&type=chunk) - In Q1 2021, financing cash flow primarily resulted from the issuance of 2028 convertible notes (**$250.0 million**), partially offset by the purchase of capped call options (**$25.5 million**) and payment of debt issuance costs (**$7.0 million**)[237](index=237&type=chunk) [Debt](index=55&type=section&id=Debt_liquidity) As of March 31, 2021, the company had no outstanding revolving credit, with **$25.0 million** available, and issued **$250.0 million** in 2028 convertible senior notes in March 2021 to boost liquidity - As of March 31, 2021, the company's revolving credit facility had no outstanding balance, with **$25.0 million** available for borrow

Bandwidth, Inc. (NASDAQ:BAND) Q1 2021 Earnings Conference Call May 5, 2021 5:00 PM ET Company Participants Sarah Walas – Vice President of Investor Relations David Morken – Chief Executive Officer Jeff Hoffman – Chief Financial Officer Conference Call Participants Bhavan Suri – William Blair Charlie Erlikh – Baird Pat Walravens – JMP Securities Steve Enders – KeyBanc Daniel Park – Canaccord Genuity Operator Welcome to the Bandwidth First Quarter 2021 Earnings Conference Call. As a reminder, all participants ...

PART I [Item 1. Business](index=6&type=section&id=Item%201.%20Business) Bandwidth Inc. is a global CPaaS provider offering voice, messaging, and emergency services APIs, operating its own IP voice network and expanding globally through the Voxbone acquisition - Bandwidth is a leading global enterprise cloud communications company, providing software APIs for voice, messaging, and emergency services. It is the only CPaaS provider that owns and operates a **nationwide IP voice network** in the U.S.[14](index=14&type=chunk)[15](index=15&type=chunk) - In 2020, Bandwidth acquired Voxbone, expanding its global platform to over **60 countries**, serving enterprises in regions representing over **90% of global GDP**[15](index=15&type=chunk) Key Financial and Operational Highlights (2018-2020) | Metric | 2018 | 2019 | 2020 | | :-------------------------- | :------------ | :------------ | :------------ | | **Total Revenue** | **$204.1 million**| **$232.6 million**| **$343.1 million**| | CPaaS Revenue | $164.4 million| $197.9 million| $298.1 million| | **Net Income (Loss)** | **$17.9 million** | **$2.5 million** | **($44.0) million**| | Active CPaaS Customer Accounts | 1,230 | 1,728 | 2,848 | | Dollar-Based Net Retention Rate | 118% | 113% | 131% | - The company's growth strategy focuses on expanding existing enterprise relationships, growing its customer base, continuous platform innovation, cultivating long-term customer satisfaction, expanding international coverage, and selectively pursuing acquisitions[38](index=38&type=chunk)[39](index=39&type=chunk)[40](index=40&type=chunk)[41](index=41&type=chunk) [Item 1A. Risk Factors](index=18&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from growth execution, competitive pressures, COVID-19 impacts, regulatory uncertainties, Voxbone integration, and financial structure - The success of Bandwidth's growth and expansion plans is subject to factors beyond its control, including personnel retention, economic health, competition, pricing structures, technology availability, and regulatory conditions[86](index=86&type=chunk)[88](index=88&type=chunk) - The COVID-19 pandemic has created volatility and economic disruption, potentially leading to slowdowns in customer payments, increased churn, and reduced service usage, despite an initial increase in demand for remote communication solutions[89](index=89&type=chunk)[335](index=335&type=chunk) - The CPaaS market is highly competitive, with larger competitors having greater resources and market recognition. Bandwidth faces risks from pricing pressures, new market entrants, and the potential for customers to develop in-house solutions or use competitors' services[90](index=90&type=chunk)[91](index=91&type=chunk)[92](index=92&type=chunk) - Regulatory uncertainties in telecommunications, privacy, and data security (e.g., TRACED Act, GDPR, CCPA) pose significant compliance costs and potential liabilities, especially with international expansion[54](index=54&type=chunk)[57](index=57&type=chunk)[134](index=134&type=chunk)[147](index=147&type=chunk) - The acquisition of Voxbone in 2020 introduces integration risks, including combining corporate functions, achieving synergies, retaining key employees and customers, and managing unexpected costs[233](index=233&type=chunk)[234](index=234&type=chunk) - The company's **dual-class capital structure** concentrates voting control with pre-IPO stockholders, including directors and executive officers, potentially limiting the influence of other stockholders on corporate matters[241](index=241&type=chunk)[243](index=243&type=chunk) - Servicing future indebtedness, including **$400 million in Convertible Notes** issued in 2020, requires significant cash flow, and the company may face liquidity challenges or limitations from credit facilities if unable to generate sufficient cash or refinance debt[261](index=261&type=chunk)[262](index=262&type=chunk)[625](index=625&type=chunk) [Item 1B. Unresolved Staff Comments](index=57&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reported no unresolved staff comments from the SEC - There were no unresolved staff comments[279](index=279&type=chunk) [Item 2. Properties](index=57&type=section&id=Item%202.%20Properties) Bandwidth maintains corporate headquarters in Raleigh, NC, with additional offices and data centers globally, leasing all facilities while planning a new HQ - Corporate headquarters are in **Raleigh, NC**, with additional offices in Denver, CO, Rochester, NY, Frankfurt, and Madrid[279](index=279&type=chunk) - Data centers are located in Raleigh, NC; Los Angeles, CA; Dallas, TX; Atlanta, GA; New York, NY; Frankfurt, Germany; and London, U.K.[279](index=279&type=chunk) - Voxbone S.A. adds offices in Brussels, Belgium; Austin, TX; San Francisco, CA; Simi Valley, CA; Dublin, Ireland; Iasi, Romania; Singapore; and London, U.K.[280](index=280&type=chunk) - The company leases all facilities and has signed an agreement to purchase land for a new headquarters in Raleigh, NC[280](index=280&type=chunk) [Item 3. Legal Proceedings](index=57&type=section&id=Item%203.%20Legal%20Proceedings) Bandwidth is involved in multiple lawsuits concerning 911 service taxes and a class action for unsolicited calls, which management intends to vigorously defend - Bandwidth is a defendant in multiple lawsuits regarding the billing, collection, and remittance of **911 services taxes and surcharges** in Illinois, New York, Pennsylvania, and Rhode Island[281](index=281&type=chunk)[282](index=282&type=chunk) - A new lawsuit was filed in February 2021 in California regarding **911 taxes and surcharges**[282](index=282&type=chunk) - The company is also a defendant in a **class action lawsuit** (Diana Mey v. All Access Telecom, Inc., et al.) concerning alleged failure to block unsolicited phone calls[283](index=283&type=chunk) - Management intends to vigorously defend these lawsuits, but acknowledges that litigation is inherently uncertain and could negatively affect business, results of operations, and financial condition[284](index=284&type=chunk) [Item 4. Mine Safety Disclosures](index=58&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Bandwidth Inc - Not applicable[286](index=286&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=59&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Bandwidth's Class A common stock trades on NASDAQ, with no cash dividends paid, and the company completed the Voxbone acquisition in 2020 - Bandwidth's Class A common stock trades on the **NASDAQ Global Select Market** under the symbol 'BAND' since November 10, 2017[288](index=288&type=chunk) - As of February 19, 2021, there were **24 holders of record** for Class A and Class B common stock[289](index=289&type=chunk) - The company has never declared or paid cash dividends and plans to retain all future earnings for business development[290](index=290&type=chunk)[258](index=258&type=chunk) - On October 12, 2020, Bandwidth acquired Voice Topco Limited (Voxbone) for approximately **$413 million in cash** and **$106 million in Class A common stock**[296](index=296&type=chunk)[297](index=297&type=chunk) [Item 6. Selected Financial Data](index=61&type=section&id=Item%206.%20Selected%20Financial%20Data) Selected financial data for 2018-2020 highlights significant revenue growth, a shift to net loss in 2020, and key non-GAAP performance metrics Consolidated Statements of Operations Data (2018-2020, in thousands) | Metric | 2018 | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | :---------- | | CPaaS Revenue | $164,415 | $197,944 | $298,090 | | Other Revenue | $39,698 | $34,650 | $45,023 | | **Total Revenue** | **$204,113**| **$232,594**| **$343,113**| | Total Cost of Revenue | $108,145 | $124,959 | $185,252 | | **Gross Profit** | **$95,968** | **$107,635**| **$157,861**| | Total Operating Expenses | $89,216 | $125,328 | $171,366 | | Operating Income (Loss) | $6,752 | ($17,693) | ($13,505) | | Income Tax Benefit (Provision)| $10,870 | $17,718 | ($15,005) | | **Net Income (Loss)** | **$17,923** | **$2,494** | **($43,977)**| | Basic EPS | $0.96 | $0.11 | ($1.83) | | Diluted EPS | $0.85 | $0.10 | ($1.83) | Consolidated Balance Sheets Data (as of December 31, in thousands) | Metric | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | | Cash, Cash Equivalents & Restricted Cash | $185,004 | $81,437 | | Working Capital | $181,211 | $101,410 | | **Total Assets** | **$341,416**| **$890,608**| | Convertible Senior Notes | — | $282,196 | | **Total Liabilities** | **$71,326** | **$460,685**| | **Total Stockholders' Equity** | **$270,090**| **$429,923**| Non-GAAP Financial Measures (2018-2020, in thousands) | Metric | 2018 | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | :---------- | | **Non-GAAP Gross Profit** | **$100,572**| **$114,429**| **$169,050**| | Non-GAAP Gross Margin % | 49% | 49% | 49% | | **Non-GAAP Net Income (Loss)** | **$9,048** | **($5,302)**| **$14,193** | | **Adjusted EBITDA** | **$16,106** | **($1,050)**| **$26,176** | | **Free Cash Flow** | **$10,186** | **($27,012)**| **($10,074)**| [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=69&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Bandwidth saw significant 2020 revenue growth, driven by CPaaS and Voxbone, but reported a net loss due to increased expenses and interest, with liquidity supported by cash and credit - Total revenue increased by **$110.5 million (48%)** in 2020 compared to 2019, reaching **$343.1 million**. CPaaS revenue grew by **$100.1 million (51%)** to **$298.1 million**[364](index=364&type=chunk) - The increase in CPaaS revenue was driven by higher voice and messaging usage (**$58.6 million**), phone number services (**$13.2 million**), higher usage pricing due to product mix (**$11.8 million**), and the Voxbone acquisition (**$16.6 million**)[364](index=364&type=chunk) - **Net loss in 2020 was $44.0 million**, compared to net income of $2.5 million in 2019, primarily due to increased operating expenses, interest expense from Convertible Notes, and a valuation allowance on deferred tax assets[331](index=331&type=chunk)[353](index=353&type=chunk)[374](index=374&type=chunk)[375](index=375&type=chunk) Key Performance Indicators (2018-2020) | Metric | 2018 | 2019 | 2020 | | :-------------------------------- | :---------- | :---------- | :---------- | | Number of Active CPaaS Customers | 1,230 | 1,728 | 2,848 | | Dollar-Based Net Retention Rate | 118% | 113% | 131% | | **Adjusted EBITDA** | **$16,106** | **($1,050)**| **$26,176** | | **Free Cash Flow** | **$10,186** | **($27,012)**| **($10,074)**| - Cash provided by operating activities was **$4.5 million** in 2020, a significant improvement from cash used of $1.3 million in 2019[393](index=393&type=chunk) - Cash used in investing activities was **$455.1 million** in 2020, mainly due to the Voxbone acquisition (**$400.5 million**) and purchase of other investments (**$230.8 million**), partially offset by proceeds from sales and maturities of investments (**$190.8 million**)[398](index=398&type=chunk) - Cash provided by financing activities was **$346.9 million** in 2020, primarily from **$400.0 million** in proceeds from Convertible Notes, offset by capped call purchases and debt issuance costs[400](index=400&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=88&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's market risks primarily involve interest rate changes and foreign currency fluctuations, with limited inflation impact and no current hedging program - Primary market risk exposure is to interest rate changes, with cash and cash equivalents of **$72.2 million** and other investments of **$40.0 million** as of December 31, 2020[432](index=432&type=chunk) - The Credit Facility had no outstanding amount as of December 31, 2020, and loans bear variable interest rates[434](index=434&type=chunk) - The **$400.0 million Convertible Notes** issued in February 2020 have a fixed annual interest rate, limiting exposure to interest rate changes for this debt[435](index=435&type=chunk) - Foreign currency risk is increasing due to international expansion, with approximately **5% of 2020 total revenue** generated outside the U.S. The company does not currently hedge transactional exposures[436](index=436&type=chunk) - Inflation has not had a material effect on the business, but the company monitors it to minimize effects through pricing, productivity, and cost reductions[437](index=437&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=90&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section provides Bandwidth's audited consolidated financial statements for 2018-2020, with an unqualified audit opinion from Ernst & Young LLP, and details key accounting policies - Ernst & Young LLP issued an **unqualified opinion** on Bandwidth's consolidated financial statements for the three years ended December 31, 2020, and on the effectiveness of internal control over financial reporting as of December 31, 2020[443](index=443&type=chunk)[444](index=444&type=chunk)[461](index=461&type=chunk) - The audit of internal control over financial reporting excluded the internal controls of Voxbone, which was acquired on November 2, 2020, and constituted **3% of total assets** and **5% of total revenue** for the year ended December 31, 2020[462](index=462&type=chunk)[717](index=717&type=chunk) - **Critical audit matters** included revenue recognition, due to complex automated systems for capturing and pricing high volumes of voice and messaging data, and the accounting for the Voxbone acquisition, due to significant estimation uncertainty in valuing intangible assets[449](index=449&type=chunk)[450](index=450&type=chunk)[454](index=454&type=chunk)[455](index=455&type=chunk) Consolidated Balance Sheets (as of December 31, in thousands) | Asset/Liability | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | | Cash and cash equivalents | $184,414 | $72,163 | | Restricted cash | $590 | $9,274 | | Other investments | — | $40,000 | | Accounts receivable, net | $30,187 | $55,243 | | Total current assets | $226,949 | $193,599 | | Property and equipment, net | $41,654 | $51,645 | | Intangible assets, net | $6,569 | $248,055 | | Goodwill | $6,867 | $372,239 | | Deferred tax asset, net | $34,861 | — | | **Total Assets** | **$341,416**| **$890,608**| | Accounts payable | $4,190 | $11,665 | | Accrued expenses & other current liabilities | $27,328 | $63,065 | | Total current liabilities | $45,738 | $92,189 | | Convertible senior notes | — | $282,196 | | **Total Liabilities** | **$71,326** | **$460,685**| | Total Stockholders' Equity | **$270,090**| **$429,923**| Consolidated Statements of Operations (Years Ended December 31, in thousands) | Metric | 2018 | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | :---------- | | Total Revenue | $204,113 | $232,594 | $343,113 | | Total Cost of Revenue | $108,145 | $124,959 | $185,252 | | Gross Profit | $95,968 | $107,635 | $157,861 | | Total Operating Expenses | $89,216 | $125,328 | $171,366 | | Operating Income (Loss) | $6,752 | ($17,693) | ($13,505) | | Interest income (expense), net | $301 | $2,446 | ($13,672) | | Income (loss) before income taxes | $7,053 | ($15,224) | ($28,972) | | Income tax benefit (provision) | $10,870 | $17,718 | ($15,005) | | Net Income (Loss) | $17,923 | $2,494 | ($43,977) | Consolidated Statements of Cash Flows (Years Ended December 31, in thousands) | Cash Flow Activity | 2018 | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | :---------- | | **Net cash provided by (used in) operating activities** | **$24,633** | **($1,253)** | **$4,518** | | **Net cash used in investing activities** | **($31,683)** | **($7,653)** | **($455,085)** | | **Net cash provided by financing activities** | **$10,681** | **$152,418** | **$346,891** | | **Net increase (decrease) in cash, cash equivalents, and restricted cash** | **$3,631** | **$143,503** | **($103,567)** | | **Cash, cash equivalents, and restricted cash, end of period** | **$41,501** | **$185,004** | **$81,437** | [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=153&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reported no changes in or disagreements with accountants on accounting and financial disclosure matters - There were no changes in or disagreements with accountants on accounting and financial disclosure[713](index=713&type=chunk) [Item 9A. Controls and Procedures](index=154&type=section&id=Item%209A.%20Controls%20and%20Procedures) Bandwidth's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2020 - Management concluded that disclosure controls and procedures were **effective at a reasonable assurance level** as of December 31, 2020[715](index=715&type=chunk) - Internal control over financial reporting was **effective** as of December 31, 2020, based on the COSO criteria, excluding the internal controls of Voxbone[716](index=716&type=chunk)[717](index=717&type=chunk) - No material changes in internal control over financial reporting were identified during the quarter ended December 31, 2020[718](index=718&type=chunk) [Item 9B. Other Information](index=155&type=section&id=Item%209B.%20Other%20Information) The company reported no other information required by this item - Not applicable[720](index=720&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=155&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance, including the Code of Business Conduct and Ethics, is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the **2021 Annual Meeting of Stockholders Proxy Statement**[721](index=721&type=chunk) - The company has adopted a **Code of Business Conduct and Ethics** applicable to all officers, directors, and employees, available on its website[722](index=722&type=chunk) [Item 11. Executive Compensation](index=155&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - Information on executive compensation is incorporated by reference from the **2021 Annual Meeting of Stockholders Proxy Statement**[723](index=723&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=155&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - Information on security ownership of certain beneficial owners and management is incorporated by reference from the **2021 Annual Meeting of Stockholders Proxy Statement**[723](index=723&type=chunk) [Item 13. Certain Relationships and Related Transactions and Director Independence](index=155&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%20and%20Director%20Independence) Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - Information on certain relationships and related transactions and director independence is incorporated by reference from the **2021 Annual Meeting of Stockholders Proxy Statement**[724](index=724&type=chunk) [Item 14. Principal Accountant Fees and Services](index=155&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the **2021 Annual Meeting of Stockholders Proxy Statement**[725](index=725&type=chunk) PART IV [Item 15. Exhibits and Financial Statement Schedules](index=156&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed as part of the 10-K report, including an index of various agreements and certifications - The report includes financial statements and schedules as part of this item[726](index=726&type=chunk) - A comprehensive Exhibit Index is provided, detailing various agreements (e.g., Share Purchase Agreement, Credit and Security Agreement), corporate documents (e.g., Certificate of Incorporation, Bylaws), and certifications (e.g., CEO/CFO certifications)[727](index=727&type=chunk)[729](index=729&type=chunk)[731](index=731&type=chunk) [Item 16. Form 10-K Summary](index=159&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company stated that there is no Form 10-K Summary - No Form 10-K Summary is provided[733](index=733&type=chunk)