Bandwidth(BAND) - 2020 Q3 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section outlines the report's forward-looking statements, which are subject to risks and uncertainties Forward-Looking Statements Disclosure The report contains forward-looking statements regarding future expectations, plans, and intentions - Forward-looking statements cover business aspects including customer retention, revenue, costs, and acquisitions[4][5] - Readers are cautioned that forward-looking statements are subject to risks and actual results may differ materially[7] - The company undertakes no obligation to update forward-looking statements and advises against undue reliance[8] PART I - FINANCIAL INFORMATION This part contains the company's unaudited financial statements and management's analysis of performance Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes Unaudited Condensed Consolidated Balance Sheets Total assets and liabilities increased significantly, driven by investments and convertible senior notes | Metric | Dec 31, 2019 (in thousands) | Sep 30, 2020 (in thousands) | Change (in thousands) | % Change | |:---|:---|:---|:---|:---| | Assets ||||| | Cash and cash equivalents | $184,414 | $300,179 | $115,765 | 62.7% | | Other investments | — | $230,780 | $230,780 | N/A | | Accounts receivable, net | $30,187 | $46,452 | $16,265 | 53.9% | | Total current assets | $226,949 | $590,815 | $363,866 | 160.3% | | Total assets | $341,416 | $670,432 | $329,016 | 96.4% | | Liabilities ||||| | Convertible senior notes | — | $277,483 | $277,483 | N/A | | Total current liabilities | $45,738 | $57,841 | $12,103 | 26.5% | | Total liabilities | $71,326 | $357,293 | $285,967 | 400.9% | | Stockholders' Equity ||||| | Total stockholders' equity | $270,090 | $313,139 | $43,049 | 15.9% | Unaudited Condensed Consolidated Statements of Operations Revenue grew significantly, but net loss widened due to increased costs and income tax provisions Three Months Ended September 30 | Metric (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | YoY Change | % Change | |:---|:---|:---|:---|:---| | Revenue | $60,491 | $84,758 | $24,267 | 40.1% | | Cost of revenue | $33,104 | $45,527 | $12,423 | 37.5% | | Gross profit | $27,387 | $39,231 | $11,844 | 43.2% | | Operating (loss) income | $(4,605) | $1,864 | $6,469 | 140.5% | | Loss before income taxes | $(3,824) | $(2,342) | $1,482 | -38.8% | | Income tax benefit (provision) | $2,810 | $(10) | $(2,820) | -100.4% | | Net (loss) income | $(1,014) | $(2,352) | $(1,338) | 131.9% | | Basic EPS | $(0.04) | $(0.10) | $(0.06) | 150.0% | | Diluted EPS | $(0.04) | $(0.10) | $(0.06) | 150.0% | Nine Months Ended September 30 | Metric (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | YoY Change | % Change | |:---|:---|:---|:---|:---| | Revenue | $170,591 | $230,066 | $59,475 | 34.9% | | Cost of revenue | $91,980 | $123,895 | $31,915 | 34.7% | | Gross profit | $78,611 | $106,171 | $27,560 | 35.1% | | Operating (loss) income | $(14,232) | $(1,288) | $12,944 | -90.9% | | Loss before income taxes | $(12,521) | $(10,268) | $2,253 | -18.0% | | Income tax benefit (provision) | $16,971 | $(13,783) | $(30,754) | -181.2% | | Net (loss) income | $4,450 | $(24,051) | $(28,501) | -640.5% | | Basic EPS | $0.20 | $(1.01) | $(1.21) | -605.0% | | Diluted EPS | $0.19 | $(1.01) | $(1.20) | -631.6% | Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income Total comprehensive loss widened significantly for the nine-month period, driven by the net loss Three Months Ended September 30 | Metric (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | YoY Change | % Change | |:---|:---|:---|:---|:---| | Net (loss) income | $(1,014) | $(2,352) | $(1,338) | 131.9% | | Other comprehensive (loss) income | $(67) | $139 | $206 | -307.5% | | Total comprehensive (loss) income | $(1,081) | $(2,213) | $(1,132) | 104.7% | Nine Months Ended September 30 | Metric (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | YoY Change | % Change | |:---|:---|:---|:---|:---| | Net (loss) income | $4,450 | $(24,051) | $(28,501) | -640.5% | | Other comprehensive (loss) income | $(34) | $20 | $54 | -158.8% | | Total comprehensive (loss) income | $4,416 | $(24,031) | $(28,447) | -644.2% | Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased due to debt conversion options and stock compensation, offset by net losses | Metric (in thousands) | Dec 31, 2019 | Sep 30, 2020 | Change | |:---|:---|:---|:---| | Total stockholders' equity | $270,090 | $313,139 | $43,049 | | Additional paid-in capital | $275,553 | $342,633 | $67,080 | | Accumulated deficit | $(5,528) | $(29,579) | $(24,051) | - Key activities impacting equity in 2020 include: issuance of debt conversion option ($104.55 million), capped call option purchase price ($(43.32) million), and stock-based compensation ($7.31 million)[20] Unaudited Condensed Consolidated Statements of Cash Flows Operating cash flow improved, while investing outflow increased and financing inflow was boosted by notes | Metric (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | YoY Change | |:---|:---|:---|:---| | Net cash (used in) provided by operating activities | $(3,480) | $11,331 | $14,811 | | Net cash provided by (used in) investing activities | $2,270 | $(242,162) | $(244,432) | | Net cash provided by financing activities | $152,529 | $347,102 | $194,573 | | Net increase in cash, cash equivalents, and restricted cash | $151,300 | $116,319 | $(34,981) | - Operating cash flow improved due to non-cash adjustments like deferred tax benefit, amortization of debt discount, depreciation, and stock-based compensation[235] - Investing cash outflow was primarily driven by $230.78 million in other investments in 2020[237][238] - Financing cash inflow was significantly boosted by $400 million from convertible senior notes issuance in 2020[239][240] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide essential context and detail for the unaudited financial statements 1. Organization and Description of Business The company is a cloud-based CPaaS provider with two reportable segments, CPaaS and Other - Bandwidth Inc is a cloud-based, software-powered CPaaS provider[27] - The company has two operating segments: CPaaS (Voice, Messaging, 911, Phone Numbers solutions) and Other (SIP trunking, data resale, hosted VoIP, traffic from other carriers, SMS registration fees)[28] 2. Summary of Significant Accounting Policies This section details accounting policies, use of estimates, and adoption of new standards - Financial statements are prepared in accordance with GAAP and SEC rules for interim reporting[29] - The company updated its estimated period of benefit for nonrefundable upfront fees from 3 to 4 years, effective January 1, 2020[36] - Unbilled receivables were $16.2 million as of December 31, 2019, and $25.78 million as of September 30, 2020[41] - As of September 30, 2020, one individual customer represented approximately 13% of the Company's accounts receivable[43] - The company adopted several new accounting standards in 2020, none of which had a material impact on financial statements[47][48][50][51] - The company is evaluating ASU 2020-06 (debt with conversion options) and ASU 2019-12 (income taxes) for future adoption[52][53] 3. Fair Value Measurements Financial assets measured at fair value totaled $468.24 million, primarily in money market accounts | Financial Assets (in thousands) | Dec 31, 2019 | Sep 30, 2020 | |:---|:---|:---| | Money market account | $25,000 | $237,459 | | Time deposits | $75,250 | $230,780 | | Total financial assets | $100,250 | $468,239 | - The fair value of Convertible Notes was approximately $798.5 million as of September 30, 2020, classified as Level 2[57] - Interest earned on marketable securities was $0 for the three and nine months ended September 30, 2020[59] 4. Financial Statement Components This section details the composition of accounts receivable and accrued expenses | Accounts Receivable (in thousands) | Dec 31, 2019 | Sep 30, 2020 | |:---|:---|:---| | Trade accounts receivable | $14,692 | $20,980 | | Unbilled accounts receivable | $16,200 | $25,784 | | Allowance for doubtful accounts and reserve for expected credit losses | $(769) | $(889) | | Other accounts receivable | $64 | $577 | | Total accounts receivable, net | $30,187 | $46,452 | | Accrued Expenses (in thousands) | Dec 31, 2019 | Sep 30, 2020 | |:---|:---|:---| | Accrued expense | $12,701 | $18,437 | | Accrued compensation and benefits | $8,284 | $9,764 | | Accrued sales, use, and telecom related taxes | $5,439 | $5,922 | | Other accrued expenses | $904 | $237 | | Total accrued expenses and other current liabilities | $27,328 | $34,360 | 5. Right-of-Use Asset and Lease Liabilities The company recognized right-of-use assets and lease liabilities for its operating leases - Company adopted ASU 2016-02 (Leases) as of January 1, 2019, recognizing ROU assets and lease liabilities[64] | Lease Metric (in thousands) | Dec 31, 2019 | Sep 30, 2020 | |:---|:---|:---| | Operating ROU asset, net | $21,031 | $17,509 | | Operating lease liability, current | $4,876 | $5,162 | | Operating lease liability, non-current | $19,868 | $15,638 | | Total lease liabilities | $24,744 | $20,800 | - Future minimum sub-lease receipts from Republic Wireless, Inc are $819 thousand as of September 30, 2020[66] | Lease Payments (in thousands) | As of Sep 30, 2020 | |:---|:---| | 2020 (remaining) | $1,083 | | 2021 | $6,587 | | 2022 | $6,302 | | 2023 | $5,926 | | 2024 | $1,987 | | 2025 | $949 | | Total lease payments | $22,834 | | Less: imputed interest | $(2,034) | | Total lease obligations | $20,800 | 6. Property and Equipment Property and equipment, net, increased due to additions in telecommunications equipment and software | Property and Equipment (in thousands) | Dec 31, 2019 | Sep 30, 2020 | |:---|:---|:---| | Total cost | $76,567 | $88,367 | | Less—accumulated depreciation | $(34,913) | $(44,441) | | Total property and equipment, net | $41,654 | $43,926 | - Capitalized software development costs were $1.85 million for the nine months ended September 30, 2020[71] | Depreciation Expense (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---| | Cost of revenue | $4,523 | $6,958 | | Research and development | $197 | $441 | | Sales and marketing | $79 | $90 | | General and administrative | $1,439 | $2,048 | | Total depreciation expense | $6,238 | $9,537 | 7. Intangible Assets Intangible assets, net, decreased slightly due to ongoing amortization of definite-lived assets | Intangible Assets (in thousands) | Dec 31, 2019 Net Carrying Value | Sep 30, 2020 Net Carrying Value | |:---|:---|:---| | Customer relationships | $5,805 | $5,415 | | Other, definite lived | — | — | | Licenses, indefinite lived | $764 | $764 | | Total intangible assets, net | $6,569 | $6,179 | - Amortization expense for definite-lived intangible assets was $390 thousand for the nine months ended September 30, 2020[76] | Future Estimated Amortization (in thousands) | As of Sep 30, 2020 | |:---|:---| | 2020 (remaining) | $130 | | 2021 | $520 | | 2022 | $520 | | 2023 | $520 | | 2024 | $520 | | Thereafter | $3,205 | | Total | $5,415 | 8. Debt The company issued $400 million in 0.25% Convertible Senior Notes and entered into capped call transactions - Issued $400 million aggregate principal amount of 0.25% Convertible Notes due March 1, 2026, in February 2020[82] - Net proceeds from Convertible Notes were approximately $344.7 million after deducting discounts and costs[83] - Initial conversion price for Convertible Notes is approximately $91.03 per share[84] - The conditional conversion feature of the Convertible Notes was triggered during the three months ended September 30, 2020[89] - The company intends to settle the principal amount of the Convertible Notes with cash upon conversion[90] | Convertible Notes Interest Expense (in thousands) | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---| | Contractual interest expense | $246 | $591 | | Amortization of debt discount | $4,292 | $10,183 | | Amortization of debt issuance costs | $283 | $669 | | Total interest expense | $4,821 | $11,443 | - Entered into Capped Call transactions with an initial strike price of $91.03 per share and cap prices of $137.40 per share[97] - As of September 30, 2020, the company had $0 outstanding on its $25 million revolving Credit Facility[81] 9. Segment and Geographic Information CPaaS segment revenue grew 43% in Q3 2020, with significant growth in international revenue Three and Nine Months Ended September 30 | Segment (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | YoY Change | % Change | |:---|:---|:---|:---|:---| | CPaaS Revenue | $51,499 | $73,762 | $22,263 | 43.2% | | CPaaS Gross Profit | $22,202 | $34,416 | $12,214 | 55.0% | | Other Revenue | $8,992 | $10,996 | $2,004 | 22.3% | | Other Gross Profit | $5,185 | $4,815 | $(370) | -7.1% | | Consolidated Revenue | $60,491 | $84,758 | $24,267 | 40.1% | | Consolidated Gross Profit | $27,387 | $39,231 | $11,844 | 43.2% | | Segment (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | YoY Change | % Change | |:---|:---|:---|:---|:---| | CPaaS Revenue | $144,501 | $199,959 | $55,458 | 38.4% | | CPaaS Gross Profit | $63,431 | $91,492 | $28,061 | 44.2% | | Other Revenue | $26,090 | $30,107 | $4,017 | 15.4% | | Other Gross Profit | $15,180 | $14,679 | $(501) | -3.3% | | Consolidated Revenue | $170,591 | $230,066 | $59,475 | 34.9% | | Consolidated Gross Profit | $78,611 | $106,171 | $27,560 | 35.1% | Geographic Revenue | Geographic Revenue (CPaaS, in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | YoY Change | % Change | |:---|:---|:---|:---|:---| | United States | $142,999 | $194,414 | $51,415 | 36.0% | | International | $1,502 | $5,545 | $4,043 | 269.2% | | Total CPaaS | $144,501 | $199,959 | $55,458 | 38.4% | 10. Stockholders' Equity The company had 21.2 million Class A and 3.0 million Class B common stock shares outstanding - As of September 30, 2020, 21,222,929 shares of Class A common stock and 2,993,136 shares of Class B common stock were outstanding[103] - Class B common stock is convertible into Class A common stock[104] | Reserved Shares (in thousands) | Dec 31, 2019 | Sep 30, 2020 | |:---|:---|:---| | Stock options issued and outstanding | 853,399 | 269,108 | | Nonvested restricted stock units issued and outstanding | 392,351 | 447,449 | | Stock-based awards available for grant under the 2017 Plan | 1,310,354 | 2,040,931 | | Total | 2,556,104 | 2,757,488 | 11. Stock Based Compensation Stock-based compensation expense increased to $7.31 million for the nine-month period | Stock-Based Compensation Expense (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Cost of revenue | $52 | $46 | $158 | $161 | | Research and development | $371 | $508 | $1,101 | $1,581 | | Sales and marketing | $280 | $369 | $892 | $1,140 | | General and administrative | $951 | $1,459 | $2,809 | $4,424 | | Total | $1,654 | $2,382 | $4,960 | $7,306 | - As of September 30, 2020, total unrecognized compensation cost related to non-vested stock options was $223 thousand[113] - As of September 30, 2020, total unrecognized compensation cost related to non-vested RSUs was $17.41 million[114] 12. Commitments and Contingencies The company has purchase obligations of $10.67 million and is involved in 911 tax-related lawsuits - Non-cancellable purchase obligations totaled $10.67 million as of September 30, 2020[118] - The company entered into an indemnity agreement for predevelopment work on land for its office headquarters[119] - Signed a Purchase and Sale Agreement for approximately 40 acres of land in Raleigh, NC, for $30 million[120] - Involved in multiple lawsuits alleging failure to bill, collect, and remit 911 taxes and surcharges; management believes the resolution will not have a material adverse effect[121][122] 13. Employee Benefit Plan The company sponsors a 401(k) plan and made matching contributions of $1.58 million in 2020 | 401(k) Matching Contributions (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Matching contributions | $415 | $474 | $1,301 | $1,583 | 14. Income Taxes The effective tax rate decreased significantly due to a valuation allowance on deferred tax assets | Effective Tax Rate | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | |:---|:---|:---| | Effective tax rate | 73.5% | (0.4)% | | Effective Tax Rate | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---| | Effective tax rate | 135.5% | (134.2)% | - The change in tax rate is primarily due to a change in judgment related to the realizability of certain deferred tax assets and the resulting valuation allowance[125] - The company continues to maintain a valuation allowance for its U.S. federal and state net deferred tax assets[125] - The company has accounted for the estimated impact of the Coronavirus Aid, Relief, and Economic Security (CARES) Act[128] 15. Related Parties The company has ongoing service and facility sharing arrangements with Republic Wireless, Inc - Republic Wireless, Inc is considered a related party and a variable interest entity (VIE)[129][131] | Related Party Transactions (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Reduction of rent expense (Facilities Sharing Agreement) | $(96) | $(96) | $(547) | $(288) | | Revenue from telecommunication services to Republic | $524 | $541 | $2,093 | $1,657 | | Withholding tax remitted to Republic | $442 | $747 | $1,769 | $1,295 | | Net compensation for legal services from Republic | — | $16 | — | $63 | - As of September 30, 2020, the company had a receivable of $183 thousand from Republic and a payable of $10 thousand to Republic[134][136] 16. Basic and Diluted (Loss) Income per Common Share Net loss per share was $(1.01) for the nine-month period, a decline from net income per share in 2019 | EPS Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Basic Net (Loss) Income per Share | $(0.04) | $(0.10) | $0.20 | $(1.01) | | Diluted Net (Loss) Income per Share | $(0.04) | $(0.10) | $0.19 | $(1.01) | | Weighted Average Basic Shares Outstanding | 23,426,455 | 24,175,762 | 22,353,097 | 23,905,322 | | Weighted Average Diluted Shares Outstanding | 23,426,455 | 24,175,762 | 23,692,571 | 23,905,322 | - For the nine months ended September 30, 2020, common share equivalents with anti-dilutive effects were excluded from the diluted EPS calculation[140] 17. Subsequent Events The company entered into an agreement to acquire Voice Topco Limited (Voxbone) for €446 million - On October 12, 2020, the company entered into a Share Purchase Agreement to acquire Voice Topco Limited (indirectly Voxbone S.A.) for €446 million[141][142] - Consideration for the acquisition includes approximately $400 million in cash and approximately €108 million (or $128 million) in Class A common stock[142] - The acquisition is subject to customary conditions and approvals, with an expected closing in the fourth quarter of 2020[143][154] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition and results of operations Overview The company is a leading cloud-based CPaaS provider with a proprietary IP voice network - Bandwidth is a leading cloud-based communications platform for enterprises in the United States[147][149] | Metric (in millions) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | YoY Change | % Change | |:---|:---|:---|:---|:---| | Total Revenue | $60.5 | $84.8 | $24.3 | 40.2% | | CPaaS Revenue | $51.5 | $73.8 | $22.3 | 43.3% | | Net Loss | $1.0 | $2.4 | $1.4 | 140.0% | - The number of active CPaaS customer accounts increased by 25% year-over-year, from 1,610 in 2019 to 2,015 in 2020[150] Proposed Acquisition of Voxbone The company announced an agreement to acquire Voxbone for €446 million, expected to close in Q4 2020 - On October 12, 2020, Bandwidth entered into a Share Purchase Agreement to acquire Voice Topco Limited (Voxbone) for €446 million[151][152] - Consideration includes approximately $400 million in cash and approximately €108 million (or $128 million) in Class A common stock[152] - The proposed transaction is expected to close in Q4 2020, subject to customary conditions and approvals[154] - Incurred $1.7 million in expenses related to the proposed acquisition during the nine months ended September 30, 2020[154] COVID-19 Update The COVID-19 pandemic led to increased use of the company's services due to remote work trends - COVID-19 resulted in increased use of services during Q3 and the nine months ended September 30, 2020[156] - Increased usage was primarily from large enterprise customers offering unified communications as a service (UCaaS) and meeting solutions[156] - Future financial performance remains uncertain, with potential for curtailed customer demand or delayed service implementation[156] Key Performance Indicators The company monitors KPIs including active customers, net retention rate, and non-GAAP measures | KPI | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Number of active CPaaS customers (as of period end) | 1,610 | 2,015 | 1,610 | 2,015 | | Dollar-based net retention rate | 116% | 131% | 113% | 130% | | Adjusted EBITDA (in thousands) | $(638) | $9,275 | $(2,277) | $17,896 | | Free cash flow (in thousands) | $(4,386) | $9,313 | $(19,317) | $(51) | - Active CPaaS customer accounts are defined as individual accounts with at least $100 of revenue in the last month of the period[159][160] - Dollar-based net retention rate measures CPaaS revenue growth from existing customers[161] Key Components of Statements of Operations This section details revenue, cost of revenue, and operating expense components - CPaaS revenue is primarily derived from usage-based fees, accounting for 75% of CPaaS revenue for Q3 2020[163][164][165] - Monthly fees from phone number services and 911 access service accounted for 23% of CPaaS revenue for Q3 2020[164][165] - Other revenue is expected to continue to decline as a percentage of total revenue[166] - Unbilled revenue constituted 56% of outstanding accounts receivable, net, as of September 30, 2020[167] - Cost of revenue for CPaaS includes fees to network service providers, network support, and personnel costs[168][169] - Operating expenses are expected to increase in absolute dollars due to investments in growth and public company compliance[172][173][174][175][176] - The effective tax rate decreased significantly due to a valuation allowance on deferred tax assets[177][178][179] Non-GAAP Financial Measures The company uses non-GAAP measures to evaluate performance and facilitate period-to-period comparisons - Non-GAAP gross profit and gross margin exclude depreciation, amortization, and stock-based compensation[184][185] Non-GAAP Gross Profit | Non-GAAP Gross Profit (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Consolidated Gross Profit | $27,387 | $39,231 | $78,611 | $106,171 | | Depreciation | $1,700 | $2,284 | $4,523 | $6,958 | | Stock-based compensation | $52 | $46 | $158 | $161 | | Non-GAAP Gross Profit | $29,139 | $41,561 | $83,292 | $113,290 | | Consolidated Gross Profit Margin % | 45% | 46% | 46% | 46% | | Non-GAAP Gross Margin % | 48% | 49% | 49% | 49% | Non-GAAP CPaaS Gross Profit | Non-GAAP CPaaS Gross Profit (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | CPaaS Gross Profit | $22,202 | $34,416 | $63,431 | $91,492 | | Depreciation | $1,700 | $2,284 | $4,523 | $6,958 | | Stock-based compensation | $52 | $46 | $158 | $161 | | Non-GAAP CPaaS Gross Profit | $23,954 | $36,746 | $68,112 | $98,611 | | CPaaS Gross Profit Margin % | 43% | 47% | 44% | 46% | | Non-GAAP CPaaS Gross Margin % | 47% | 50% | 47% | 49% | - Non-GAAP net (loss) income excludes items like stock-based compensation and acquisition-related expenses[190] Non-GAAP Net (Loss) Income | Non-GAAP Net (Loss) Income (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Net (loss) income | $(1,014) | $(2,352) | $4,450 | $(24,051) | | Non-GAAP net (loss) income | $(1,427) | $6,483 | $(4,774) | $10,678 | | Non-GAAP diluted shares | 23,426,455 | 26,509,779 | 22,353,097 | 25,454,254 | | Non-GAAP diluted EPS | $(0.06) | $0.24 | $(0.21) | $0.42 | - Adjusted EBITDA excludes items like income tax, interest, depreciation, and amortization[195][196] Adjusted EBITDA | Adjusted EBITDA (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Net (loss) income | $(1,014) | $(2,352) | $4,450 | $(24,051) | | Adjusted EBITDA | $(638) | $9,275 | $(2,277) | $17,896 | - Free cash flow is net cash from operating activities less capital expenditures[199] Free Cash Flow | Free Cash Flow (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Net cash provided by (used in) operating activities | $1,932 | $11,647 | $(3,480) | $11,331 | | Net cash used in investing in capital assets | $(6,318) | $(2,334) | $(15,837) | $(11,382) | | Free cash flow | $(4,386) | $9,313 | $(19,317) | $(51) | Results of Operations This section provides a detailed comparison of consolidated results for 2019 and 2020 periods Consolidated Results of Operations Total revenue grew 35% for the nine-month period, but net loss increased due to a tax provision | Metric (in thousands) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | Total Revenue | $60,491 | $84,758 | $170,591 | $230,066 | | Total Cost of Revenue | $33,104 | $45,527 | $91,980 | $123,895 | | Total Gross Profit | $27,387 | $39,231 | $78,611 | $106,171 | | Total Operating Expenses | $31,992 | $37,367 | $92,843 | $107,459 | | Operating (Loss) Gain | $(4,605) | $1,864 | $(14,232) | $(1,288) | | Total Other Income (Expense), Net | $781 | $(4,206) | $1,711 | $(8,980) | | Loss Before Income Taxes | $(3,824) | $(2,342) | $(12,521) | $(10,268) | | Income Tax Benefit (Provision) | $2,810 | $(10) | $16,971 | $(13,783) | | Net (Loss) Income | $(1,014) | $(2,352) | $4,450 | $(24,051) | | Metric (% of Total Revenue) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---|:---|:---| | CPaaS Revenue | 85% | 87% | 85% | 87% | | Other Revenue | 15% | 13% | 15% | 13% | | Total Cost of Revenue | 54% | 53% | 54% | 54% | | Total Gross Profit | 45% | 46% | 46% | 46% | | Total Operating Expenses | 53% | 44% | 54% | 47% | | Operating (Loss) Gain | (8)% | 2% | (8)% | (1)% | | Net (Loss) Income | (2)% | (3)% | 3% | (10)% | Comparison of the three months ended September 30, 2019 and 2020 Total revenue increased 40% in Q3 2020, driven by a 43% increase in CPaaS revenue | Revenue (in thousands) | Sep 30, 2019 | Sep 30, 2020 | Change | % Change | |:---|:---|:---|:---|:---| | CPaaS revenue | $51,499 | $73,762 | $22,263 | 43% | | Other revenue | $8,992 | $10,996 | $2,004 | 22% | | Total revenue | $60,491 | $84,758 | $24,267 | 40% | - CPaaS revenue increase driven by $15.2 million from voice and messaging usage and $4.6 million from higher usage pricing[208] - Dollar-based net retention rate was 131%, and active CPaaS customer accounts increased 25% to 2,015[208] | Cost of Revenue & Gross Margin (in thousands) | Sep 30, 2019 | Sep 30, 2020 | Change | % Change | |:---|:---|:---|:---|:---| | CPaaS cost of revenue | $29,297 | $39,346 | $10,049 | 34% | | Other cost of revenue | $3,807 | $6,181 | $2,374 | 62% | | Total cost of revenue | $33,104 | $45,527 | $12,423 | 38% | | Total gross profit | $27,387 | $39,231 | $11,844 | 43% | | CPaaS gross margin | 43% | 47% | 4%pt | | | Total gross margin | 45% | 46% | 1%pt | | - CPaaS cost of revenue increased due to $4.9 million in voice usage costs and $3.2 million in messaging costs[212] | Operating Expenses (in thousands) | Sep 30, 2019 | Sep 30, 2020 | Change | % Change | |:---|:---|:---|:---|:---| | Research and development | $7,939 | $10,232 | $2,293 | 29% | | Sales and marketing | $8,784 | $9,001 | $217 | 2% | | General and administrative | $15,269 | $18,134 | $2,865 | 19% | | Total operating expenses | $31,992 | $37,367 | $5,375 | 17% | - G&A expenses include $1.7 million for legal and accounting consulting related to the Voxbone acquisition[216] - Interest expense, net, increased by $5.0 million, primarily due to $4.8 million from Convertible Notes[218] - Income tax benefit decreased by $2.8 million, with the effective tax rate changing from 73.5% to (0.4)%[219] Comparison of the nine months ended September 30, 2019 and 2020 Total revenue increased 35% for the nine-month period, driven by a 38% increase in CPaaS revenue | Revenue (in thousands) | Sep 30, 2019 | Sep 30, 2020 | Change | % Change | |:---|:---|:---|:---|:---| | CPaaS revenue | $144,501 | $199,959 | $55,458 | 38% | | Other revenue | $26,090 | $30,107 | $4,017 | 15% | | Total revenue | $170,591 | $230,066 | $59,475 | 35% | - CPaaS revenue increase driven by $41.7 million from voice and messaging usage[220] - Dollar-based net retention rate was 130%, and active CPaaS customer accounts increased 25% to 2,015[220] | Cost of Revenue & Gross Margin (in thousands) | Sep 30, 2019 | Sep 30, 2020 | Change | % Change | |:---|:---|:---|:---|:---| | CPaaS cost of revenue | $81,070 | $108,467 | $27,397 | 34% | | Other cost of revenue | $10,910 | $15,428 | $4,518 | 41% | | Total cost of revenue | $91,980 | $123,895 | $31,915 | 35% | | Total gross profit | $78,611 | $106,171 | $27,560 | 35% | | CPaaS gross margin | 44% | 46% | 2%pt | | | Total gross margin | 46% | 46% | 0%pt | | - CPaaS cost of revenue increased due to $14.1 million in voice usage costs and $7.4 million in network costs[224] | Operating Expenses (in thousands) | Sep 30, 2019 | Sep 30, 2020 | Change | % Change | |:---|:---|:---|:---|:---| | Research and development | $23,312 | $29,316 | $6,004 | 26% | | Sales and marketing | $25,647 | $27,073 | $1,426 | 6% | | General and administrative | $43,884 | $51,070 | $7,186 | 16% | | Total operating expenses | $92,843 | $107,459 | $14,616 | 16% | - G&A expenses include $1.7 million for legal and accounting consulting related to the Voxbone acquisition[228] - Interest expense, net, increased by $10.6 million, primarily due to $11.2 million from Convertible Notes[230] - Income tax benefit decreased by $30.8 million, with the effective tax rate changing from 135.5% to (134.2)%[231] Liquidity and Capital Resources Primary liquidity sources include public offerings, convertible notes, and operating cash flow - Principal liquidity sources include proceeds from initial public offering ($74.4 million), follow-on public offering ($147.4 million), and convertible notes ($344.7 million)[232] | Cash Flows (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | |:---|:---|:---| | Net cash (used in) provided by operating activities | $(3,480) | $11,331 | | Net cash provided by (used in) investing activities | $2,270 | $(242,162) | | Net cash provided by financing activities | $152,529 | $347,102 | | Net increase in cash, cash equivalents, and restricted cash | $151,300 | $116,319 | - Cash provided by operating activities in 2020 was $11.3 million, driven by non-cash adjustments[235] - Cash used in investing activities in 2020 was $242.2 million, primarily due to $230.8 million in other investments[237] - Cash provided by financing activities in 2020 was $347.1 million, mainly from $400 million in convertible notes proceeds[239] - As of September 30, 2020, the company had $0 outstanding on its $25 million Credit Facility[243] | Contractual Obligations (in thousands) | Total | Less than 1 year | 1 to 3 Years | 3 to 5 Years | More than 5 years | |:---|:---|:---|:---|:---|:---| | Operating leases | $22,834 | $6,009 | $12,406 | $4,419 | — | | Convertible Notes | $400,000 | — | — | — | $400,000 | | Purchase obligations | $10,673 | $5,818 | $4,456 | $397 | $2 | | Total | $433,507 | $11,827 | $16,862 | $4,816 | $400,002 | - The company has not entered into any off-balance sheet arrangements[249] Critical Accounting Policies and Significant Judgments and Estimates Management makes significant estimates, particularly for revenue recognition and income taxes - Critical accounting policies and estimates include revenue recognition, stock-based compensation, and income taxes[251] - No material changes to critical accounting policies since the Annual Report on Form 10-K filed on February 21, 2020[252] Recently Issued Accounting Guidance This section refers to Note 2 for details on recently adopted and unadopted accounting standards - Refer to Note 2, 'Summary of Significant Accounting Policies,' for details on recently adopted accounting standards[253] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to market risks from interest rate fluctuations - Primary market risk exposure is to interest rate changes, with minimal exposure to foreign currency rates and inflation[255] - Cash and cash equivalents ($300.2 million) and other investments ($230.8 million) are in short-term instruments, limiting interest rate risk[256][257] - A hypothetical 10% change in interest rates would not materially impact consolidated financial statements[258] - Convertible Notes have a fixed annual interest rate, eliminating financial exposure to interest rate changes for this debt[259] - Foreign currency risk is minimal as revenue and expenses are primarily in U.S dollars[260][261] - Inflation has not had a material effect on the business[263] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020 - Disclosure controls and procedures were evaluated as effective at a reasonable assurance level as of September 30, 2020[265] - No material changes in internal control over financial reporting were identified during the quarter[266] - The effectiveness of internal control systems is subject to inherent limitations[267] PART II - OTHER INFORMATION This part contains information on legal proceedings, risk factors, and other required disclosures Item 1. Legal Proceedings The company is a defendant in multiple lawsuits related to 911 taxes and surcharges - Bandwidth Inc is a defendant in multiple lawsuits alleging failure to bill, collect, and remit 911 taxes and surcharges[269][270] - The company intends to vigorously defend these lawsuits and believes the ultimate resolution will not have a material adverse effect[271][122] - The company may also be subject to other legal actions in the ordinary course of business[272] Item 1A. Risk Factors This section outlines significant risks that could adversely affect the company's business Risks Related to Our Business The company faces risks related to growth, competition, regulations, and cybersecurity - The COVID-19 pandemic may harm business through slowdowns in customer payments, increased churn, and reduced usage[277][278] - The market is highly competitive with larger competitors, and failure to compete effectively could harm the business[279][280][281][282][283] - Dependence on customers increasing use of services; loss of customers or decline in usage could materially harm the business[292][293] - Rapid growth strains corporate culture, operational infrastructure, and management[301][302][303][304] - Expanding international operations exposes the company to significant regulatory, economic, and political risks[317][319][320][321] - Concentration of revenue in a limited number of enterprise customers poses a risk if top customers are lost[322] - Breaches of networks or systems could degrade business, result in data losses, and damage reputation[323][324][326] - Litigation related to 911 services taxes and charges could adversely affect results[327][328] - The communications industry faces significant regulatory uncertainties, including FCC proceedings and network neutrality changes[333][334][335][336][341][342][344] - Subject to privacy and data security obligations (e.g., CCPA, GDPR); failure to comply could result in fines and loss of business[345][346][347][348][349][350][352][353][354][355][356][376][377][378][379] - Termination of relationships with key suppliers could cause delay and additional costs[400][401][402] - Dependence on continued services of senior management and key employees; loss could adversely affect business[414][415] - Acquisitions or investments may divert management's attention and result in integration difficulties[444][445][446][447][448][449][450][451] Risks Related to Ownership of Our Class A Common Stock Ownership of Class A common stock carries risks including price volatility and concentrated voting control - The trading price of Class A common stock may be volatile due to market conditions and company performance[455][456][457][458][459][460] - Dual-class common stock structure concentrates voting control (57.1% as of Sep 30, 2020) with pre-IPO stockholders[461][462][463] - David A Morken, Co-Founder and CEO, may control approximately 42.0% of voting power[466][467] - Anti-takeover provisions in corporate documents and Delaware law could impair or prevent takeover attempts[470][471][472][473][474] - The company does not intend to pay dividends for the foreseeable future[481] Risks Related to the Convertible Notes and Our Indebtedness The company's debt poses risks related to servicing, potential defaults, and liquidity - Servicing future indebtedness requires significant cash, and insufficient cash flow could force asset sales or restructuring[484][485] - The Credit Facility may limit cash payments upon conversion or repurchase of Convertible Notes, potentially leading to default[486][488] - Triggering of the conditional conversion feature of Convertible Notes could adversely affect liquidity[492][494] - The accounting method for convertible debt results in non-cash interest expense, potentially lowering reported net income[495][496][497] - Capped call transactions may affect the value of Convertible Notes and Class A common stock[498][499][500][501][502] - Subject to counterparty risk with respect to the Capped Calls[503] Risks Related to the Acquisition of Voxbone The proposed acquisition of Voxbone presents risks including business disruption and integration challenges - The proposed acquisition of Voxbone may cause disruptions to business or business relationships[504][505][506] - Significant costs, expenses, and fees are incurred, many payable regardless of acquisition consummation[507] - Failure to complete the acquisition could negatively impact stock price and business operations[508][509][510] - No assurance that anticipated synergies and other benefits from the acquisition will be realized due to integration difficulties[511][512][514][515] - Due diligence may fail to discover all risks or liabilities associated with acquisitions[451] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states there were no unregistered sales of equity securities during the period - No unregistered sales of equity securities[516] Item 6. Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Quarterly Report on Form 10-Q - Includes Share Purchase Agreement for Voxbone, corporate organizational documents, and various certifications[517] - Includes CEO and CFO certifications and XBRL Instance, Schema, and Linkbase Documents[517] Signatures This section contains the required signatures for the Quarterly Report on Form 10-Q - The report is signed by the Chief Executive Officer and Chief Financial Officer on October 30, 2020[519][520]