Bandwidth(US:BAND)2020-07-31 13:11PART I - FINANCIAL INFORMATION Item 1. Financial Statements The company's unaudited statements show asset growth from convertible notes, increased revenue, and a net loss due to a tax provision Condensed Consolidated Balance Sheets Total assets and liabilities grew significantly due to cash and debt from a convertible senior notes issuance Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | June 30, 2020 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $341,416 | $657,957 | +$316,541 | | Cash and cash equivalents | $184,414 | $290,979 | +$106,565 | | Other investments | $0 | $230,780 | +$230,780 | | Total Liabilities | $71,326 | $345,023 | +$273,697 | | Convertible senior notes | $0 | $272,901 | +$272,901 | | Total Stockholders' Equity | $270,090 | $312,934 | +$42,844 | Condensed Consolidated Statements of Operations Revenue and gross profit increased, but a large income tax provision drove a significant net loss for the quarter Statement of Operations Summary (in thousands) | Metric | Q2 2019 | Q2 2020 | YoY Change | H1 2019 | H1 2020 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $56,779 | $76,790 | +35.2% | $110,100 | $145,308 | +32.0% | | Gross Profit | $26,669 | $34,781 | +30.4% | $51,224 | $66,940 | +30.7% | | Operating Loss | ($3,783) | ($268) | +92.9% | ($9,627) | ($3,152) | +67.3% | | Net Income (Loss) | $3,472 | ($20,641) | -694.5% | $5,464 | ($21,699) | -497.1% | Condensed Consolidated Statements of Cash Flows Financing activities provided significant cash from notes issuance, funding investments and increasing overall cash reserves Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | ($5,412) | ($316) | | Net cash used in investing activities | ($47,452) | ($239,828) | | Net cash provided by financing activities | $151,947 | $347,057 | | Net increase in cash | $99,082 | $106,905 | Notes to Condensed Consolidated Financial Statements Notes detail the CPaaS business, a $400 million convertible notes issuance, and a large tax valuation allowance - The company operates through two reportable segments: CPaaS (Communications Platform-as-a-Service) and Other27 - In February 2020, the company issued $400 million in 0.25% Convertible Senior Notes due 2026, with net proceeds of approximately $344.8 million7980 - A valuation allowance of $14.2 million was recorded against U.S. deferred tax assets, significantly impacting the net loss for the period126172 - The company entered into an agreement to acquire land in Raleigh, NC, for $30 million to construct its new office headquarters119 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong revenue growth driven by CPaaS customer usage, offset by a net loss from a tax allowance Overview and COVID-19 Update The company's CPaaS business saw increased usage due to COVID-19, though long-term impacts remain uncertain - The company is a CPaaS provider with its own nationwide IP voice network, which it considers a significant competitive advantage141143 - The COVID-19 pandemic resulted in increased service usage during the quarter, driven by large enterprise customers in a work-from-home environment146147 Key Performance Indicators Key metrics show strong growth in active CPaaS customers, dollar-based net retention rate, and Adjusted EBITDA Key Performance Indicators | KPI | Q2 2019 | Q2 2020 | H1 2019 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Number of active CPaaS customers | 1,467 | 1,900 | 1,467 | 1,900 | | Dollar-based net retention rate | 113% | 133% | 112% | 130% | | Adjusted EBITDA (in thousands) | $24 | $5,522 | ($1,639) | $8,621 | | Free cash flow (in thousands) | ($4,062) | $2,671 | ($14,931) | ($9,364) | Results of Operations CPaaS revenue grew 40% year-over-year, driving total revenue growth and a significantly reduced operating loss Revenue Comparison for Three Months Ended June 30 (in thousands) | Revenue Type | 2019 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | CPaaS revenue | $47,989 | $67,076 | +$19,087 | +40% | | Other revenue | $8,790 | $9,714 | +$924 | +11% | | Total revenue | $56,779 | $76,790 | +$20,011 | +35% | - The increase in Q2 CPaaS revenue was primarily driven by increased usage, reflecting a dollar-based net retention rate of 133%198 - Total operating expenses for Q2 2020 increased by 15% YoY to $35.0 million, with R&D up 25%, Sales & Marketing up 2%, and G&A up 18%203 Liquidity and Capital Resources The company's liquidity was significantly strengthened by a $400 million convertible notes issuance - Primary liquidity sources include proceeds from public offerings and the recent $344.8 million net proceeds from the February 2020 convertible notes issuance220 - For the first six months of 2020, financing activities provided $347.1 million in cash, primarily from the convertible notes issuance221224226 - As of June 30, 2020, the company had $25 million of available borrowing capacity under its revolving credit facility with no amount outstanding230 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate changes affecting its cash investments and convertible notes' fair value - Primary market risk is from interest rate changes on cash and investments totaling $521.8 million as of June 30, 2020242 - The $400 million in convertible notes carry a fixed annual interest rate, but their fair value fluctuates with interest rates and the company's stock price245 - Foreign currency risk is minimal as of June 30, 2020, with revenue and expenses primarily in U.S. dollars246247 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in internal controls - The CEO and CFO concluded that as of June 30, 2020, the company's disclosure controls and procedures are effective at a reasonable assurance level251 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls252 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in several lawsuits and a regulatory inquiry concerning 911 service taxes and surcharges - The company is a defendant in several lawsuits alleging failure to bill, collect, and remit 911 service taxes and surcharges in multiple jurisdictions255256 - In August 2016, the company received a Civil Investigative Demand from the North Carolina Department of Justice concerning the same 911 tax and surcharge issues258 Item 1A. Risk Factors Key risks include intense market competition, regulatory uncertainty, a dual-class stock structure, and debt service obligations - The CPaaS market is highly competitive, with rivals ranging from other CPaaS companies to large network service providers with greater resources266268 - The business faces significant regulatory uncertainty, including litigation over 911 taxes and evolving data privacy laws like CCPA and GDPR312314331338 - The dual-class stock structure concentrates 61.9% of voting power with pre-IPO stockholders, limiting the influence of Class A stockholders449450 - Financial risks include the ability to service debt, including the convertible notes, and potential limitations on paying cash upon conversion475479