Bandwidth(BAND) - 2020 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Bandwidth Inc. for the three months ended March 31, 2020, accompanied by notes detailing significant accounting policies and financial events Condensed Consolidated Balance Sheets As of March 31, 2020, total assets increased to $665.3 million from $341.4 million at year-end 2019, primarily due to a significant rise in cash and cash equivalents, driven by the issuance of convertible senior notes, which also caused total liabilities to increase to $337.1 million from $71.3 million over the same period Balance Sheet Summary (in thousands) | Metric | Dec 31, 2019 | Mar 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $226,949 | $566,873 | | Total Assets | $341,416 | $665,276 | | Total Current Liabilities | $45,738 | $43,976 | | Total Liabilities | $71,326 | $337,117 | | Total Stockholders' Equity | $270,090 | $328,159 | - The significant increase in assets and liabilities is primarily attributable to the issuance of $400 million in convertible senior notes in February 2020[11][78] Condensed Consolidated Statements of Operations For the first quarter of 2020, revenue grew 28.5% year-over-year to $68.5 million, and despite a 31.0% increase in gross profit to $32.2 million, the company reported a net loss of $1.1 million, a shift from a net income of $2.0 million in the prior-year period, driven by higher operating and debt-related expenses Q1 Statement of Operations (in thousands, except per share data) | Metric | Q1 2019 | Q1 2020 | | :--- | :--- | :--- | | Revenue | $53,321 | $68,518 | | Gross Profit | $24,555 | $32,159 | | Operating Loss | $(5,844) | $(2,884) | | Net Income (Loss) | $1,992 | $(1,058) | | Diluted EPS | $0.09 | $(0.04) | Condensed Consolidated Statements of Cash Flows In Q1 2020, net cash used in operating activities was $7.6 million, while financing activities provided $344.9 million in cash, primarily from the issuance of convertible senior notes, resulting in a net increase in cash, cash equivalents, and restricted cash of $332.9 million for the quarter Q1 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2019 | Q1 2020 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(9,035) | $(7,607) | | Net Cash Used in Investing Activities | $(43,824) | $(4,428) | | Net Cash Provided by Financing Activities | $150,453 | $344,916 | | Net Increase in Cash | $97,594 | $332,856 | - Financing activities in Q1 2020 were dominated by $400 million in proceeds from convertible senior notes, offset by a $43.3 million purchase of capped calls and $11.0 million in debt issuance costs[21] Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures on the company's business structure, accounting policies, segment information, debt instruments, and other significant financial events - The company operates two reportable segments: CPaaS, which derives revenue from Voice, Messaging, 911, and Phone Numbers solutions via APIs, and Other, which includes legacy services like SIP trunking and data resale[26] - On February 28, 2020, the company issued $400 million in aggregate principal amount of 0.25% Convertible Senior Notes due 2026, and in connection with this, it entered into capped call transactions to reduce potential dilution[78][91] Segment Gross Profit (in thousands) | Segment | Q1 2019 | Q1 2020 | | :--- | :--- | :--- | | CPaaS | $19,713 | $27,229 | | Other | $4,842 | $4,930 | | Consolidated | $24,555 | $32,159 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's Q1 2020 financial performance, highlighting CPaaS revenue growth driven by customer expansion and increased usage, alongside an analysis of operations, liquidity, and non-GAAP measures Overview and COVID-19 Update Bandwidth, a leading CPaaS provider, saw total revenue grow to $68.5 million in Q1 2020, with CPaaS revenue up 31% to $59.1 million, noting increased service usage due to the COVID-19 pandemic and the shift to remote work Q1 Performance Highlights | Metric | Q1 2019 | Q1 2020 | YoY Growth | | :--- | :--- | :--- | :--- | | Total Revenue | $53.3M | $68.5M | 28.5% | | CPaaS Revenue | $45.0M | $59.1M | 31.3% | | Active CPaaS Customers | 1,351 | 1,808 | 33.8% | - The COVID-19 pandemic resulted in increased use of services during Q1 2020, driven by reliance on connectivity for physical distancing and work-from-home environments, particularly from UCaaS and meeting solutions customers[140][141] Key Performance Indicators The company's key performance indicators showed strong growth in Q1 2020, with active CPaaS customers increasing by 34% to 1,808, the dollar-based net retention rate improving significantly to 126%, and Adjusted EBITDA turning positive at $3.1 million Key Performance Indicators (in thousands, except rate) | Metric | Q1 2019 | Q1 2020 | | :--- | :--- | :--- | | Number of active CPaaS customers | 1,351 | 1,808 | | Dollar-based net retention rate | 111% | 126% | | Adjusted EBITDA | $(1,663) | $3,099 | | Free cash flow | $(10,869) | $(12,035) | Results of Operations In Q1 2020, total revenue increased 29% year-over-year to $68.5 million, primarily driven by a 31% increase in CPaaS revenue from higher usage and a 34% increase in active customers, while operating loss narrowed to $2.9 million - The increase in CPaaS revenue was attributed to higher usage of voice and messaging services ($10.7 million), phone number and 911 services ($2.1 million), and a 34% increase in active CPaaS customer accounts[190] - CPaaS gross margin increased from 44% in Q1 2019 to 46% in Q1 2020, with non-GAAP CPaaS gross margin increasing from 47% to 50% (excluding depreciation and stock-based compensation)[194] - Operating expenses increased by $4.6 million (15%), primarily due to higher personnel costs in R&D ($1.7 million) and Sales & Marketing ($1.7 million)[195][196][197] Liquidity and Capital Resources The company's liquidity position strengthened significantly, with cash and cash equivalents reaching $492.0 million at the end of Q1 2020, primarily due to $344.8 million in net proceeds from convertible notes, ensuring sufficient funds for the next 12 months - Principal sources of liquidity include proceeds from public offerings and the February 2020 issuance of Convertible Notes, which provided approximately $344.8 million in net proceeds[200] - As of March 31, 2020, the company had $0 outstanding on its $25.0 million revolving credit facility and was in compliance with all covenants[210] Contractual Obligations as of March 31, 2020 (in thousands) | Obligation Type | Total | Less than 1 year | 1 to 3 Years | 3 to 5 Years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | $26,070 | $4,320 | $12,889 | $8,861 | $— | | Convertible Notes | $400,000 | $— | $— | $— | $400,000 | | Purchase obligations | $10,620 | $6,304 | $3,639 | $674 | $3 | | Total | $436,690 | $10,624 | $16,528 | $9,535 | $400,003 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk exposure relates to interest rate changes affecting its $492.0 million in cash and cash equivalents, with foreign currency risk currently minimal but expected to grow with international expansion - The primary market risk is interest rate risk on the company's cash and cash equivalents, which totaled $492.0 million as of March 31, 2020[223] - The $400.0 million in Convertible Notes have a fixed annual interest rate, so there is no direct economic interest exposure from rate changes, though their fair value will fluctuate[226] - Foreign currency risk is minimal as of March 31, 2020, with revenue and expenses primarily denominated in U.S. dollars, but this exposure is expected to grow with international expansion[227] Item 4. Controls and Procedures As of March 31, 2020, management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting identified during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[232] - No material changes to the company's internal control over financial reporting were identified during the first quarter of 2020[233] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in multiple lawsuits and a civil investigation concerning its alleged failure to properly bill, collect, and remit certain taxes and surcharges related to 911 services, pending in several jurisdictions - The company is a defendant in multiple lawsuits alleging failure to bill, collect, and remit taxes and surcharges for 911 services in jurisdictions including Cook County (IL), New York State, and Allegheny County (PA)[236][237] - The company received a Civil Investigative Demand from the North Carolina Department of Justice in August 2016 regarding the same 911 tax and surcharge issues[239] Item 1A. Risk Factors This section outlines significant risks to the company's business, including intense market competition, operational challenges, regulatory uncertainties, and financial risks related to its capital structure and debt obligations - The cloud communications market is highly competitive and fragmented, with competitors ranging from other CPaaS companies to large network service providers[246] - The business is subject to complex and evolving regulations regarding data privacy (e.g., CCPA, GDPR), 911 services, and telecommunications, which could increase costs and liability[300][315][322] - The dual-class stock structure concentrates approximately 70.1% of voting power with pre-IPO stockholders, limiting the influence of Class A common stockholders on corporate matters[432][433] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In February 2020, the company issued $400 million in aggregate principal amount of Convertible Senior Notes due 2026, sold to qualified institutional buyers in a private placement relying on exemptions from registration under the Securities Act of 1933 - In February 2020, the company issued $400 million of Convertible Notes due 2026, with the sale made to initial purchasers in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act[475][476] Item 6. Exhibits This section provides an index of exhibits filed with the Form 10-Q, including corporate governance documents, debt instrument agreements, and required certifications - The exhibits include the Indenture for the Convertible Notes issued in February 2020 and the associated Capped Call Transaction confirmations[478] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed with the report[480]