Bandwidth(BAND) - 2022 Q3 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section outlines the company's forward-looking statements, which are subject to risks and uncertainties and should not be considered predictions of future events - This report contains forward-looking statements concerning the company's expectations, strategy, plans, and intentions, which are subject to risks and uncertainties and are based on current expectations[7][8] - The company cautions readers not to rely on these forward-looking statements as actual results could differ materially, and it does not undertake any obligation to update them except as required by law[10][11] PART I - FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements The unaudited condensed consolidated financial statements for the period ended September 30, 2022, show a decrease in total assets to $1.01 billion from $1.07 billion at year-end 2021, primarily due to a reduction in cash and goodwill. Total liabilities increased to $813.8 million from $652.9 million, driven by an increase in convertible senior notes. For the third quarter of 2022, the company reported revenue of $148.3 million, up from $130.6 million in Q3 2021, and significantly narrowed its net loss to $0.8 million from $6.9 million in the prior-year period. For the nine-month period, revenue grew to $416.2 million, and net loss was reduced to $13.9 million from $19.2 million year-over-year Unaudited Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets to $1.01 billion and an increase in total liabilities to $813.8 million as of September 30, 2022 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $166,384 | $331,453 | | Total current assets | $417,115 | $412,885 | | Goodwill | $298,892 | $344,423 | | Total assets | $1,008,399 | $1,065,539 | | Liabilities & Equity | | | | Total current liabilities | $117,158 | $93,498 | | Convertible senior notes | $637,248 | $486,440 | | Total liabilities | $813,803 | $652,944 | | Total stockholders' equity | $194,596 | $412,595 | Unaudited Condensed Consolidated Statements of Operations The statements of operations show Q3 2022 revenue of $148.3 million and a net loss of $0.8 million, significantly reduced from the prior year Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $148,325 | $130,638 | $416,178 | $364,775 | | Gross profit | $63,464 | $57,065 | $174,282 | $161,704 | | Operating (loss) income | $(1,387) | $938 | $(17,307) | $1,835 | | Net loss | $(802) | $(6,944) | $(13,864) | $(19,188) | | Net loss per share | $(0.03) | $(0.28) | $(0.55) | $(0.77) | Unaudited Condensed Consolidated Statements of Cash Flows The cash flow statements indicate a net decrease in cash of $165.0 million for the nine months ended September 30, 2022, primarily due to investing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $24,340 | $23,688 | | Net cash (used in) provided by investing activities | $(180,386) | $11,681 | | Net cash (used in) provided by financing activities | $(2,600) | $213,961 | | Net (decrease) increase in cash | $(164,987) | $249,621 | - The significant cash used in investing activities for the nine months ended Sep 30, 2022, was primarily due to the purchase of marketable securities ($178.2 million)[29] - In the prior year period, financing activities provided significant cash due to the issuance of convertible senior notes ($250.0 million)[29] Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's accounting policies, financial statement components, and significant events. Key disclosures include the re-evaluation to a single reporting segment in Q1 2022, the adoption of ASU 2020-06 which impacted the accounting for convertible notes, details on the company's debt structure including $650 million in convertible senior notes, commitments for a new corporate headquarters lease, and a subsequent event in November 2022 involving the repurchase of $160 million of its 2026 Convertible Notes - In Q1 2022, the company re-evaluated its segment reporting and determined that one segment was appropriate, rather than the previously reported "CPaaS" and "Other" segments, driven by strategic alignment and the sale of legacy assets[36] - The company adopted ASU 2020-06 on January 1, 2022, which simplified the accounting for convertible instruments, increasing the convertible notes balance by $148.4 million and decreasing non-cash interest expense[59] - On November 1, 2022, the company entered into agreements to repurchase approximately $160.0 million of its 2026 Convertible Notes at a 29% discount to par value, with approximately $240.0 million remaining outstanding after the expected closing[166][167] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's performance, highlighting a 14% revenue increase to $148.3 million for Q3 2022, driven primarily by growth in pass-through messaging surcharge revenue. The number of active customer accounts grew 5% year-over-year to 3,380. The dollar-based net retention rate was 109%. Operating expenses increased, led by a 49% rise in R&D due to higher personnel costs. The company's liquidity is supported by cash from operations and financing activities, with sufficient cash expected for the next 12 months despite significant future commitments, including convertible notes and a new headquarters lease Overview This section provides an overview of Bandwidth's business as a global CPaaS provider and highlights key performance metrics for Q3 2022 - Bandwidth is a global enterprise cloud communications (CPaaS) provider offering software APIs for voice, messaging, and emergency services, operating its own nationwide IP voice network in the U.S. and a global platform across more than 60 countries due to the 2020 acquisition of Voxbone[169][170] Q3 2022 Performance Highlights | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $148.3M | $131.0M | +14% | | Net Loss | $(1.0)M | $(7.0)M | N/A | | Active Customer Accounts | 3,380 | 3,220 | +5% | Key Performance Indicators Key performance indicators show 3,380 active customer accounts and a dollar-based net retention rate of 109% for Q3 2022 Key Performance Indicators (Q3 2022 vs Q3 2021) | KPI | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Number of active customers | 3,380 | 3,220 | | Dollar-based net retention rate | 109% | 125% | - An active customer account is defined as an account with at least $100 of revenue in the last month of the period[181] - The dollar-based net retention rate is calculated by comparing revenue from a cohort of customers in the current quarter to the same quarter in the prior year, averaged over four quarters[182] Results of Operations For Q3 2022, revenue grew 14% YoY to $148.3 million, largely due to a $13 million increase in pass-through messaging surcharges. Gross margin slightly decreased to 43% from 44%. Operating expenses rose 16%, driven by a 49% increase in R&D. For the nine-month period, revenue also grew 14% to $416.2 million, with gross margin declining to 42% from 44%. The company's effective tax rate was favorable due to operating losses outside the U.S. not offset by a valuation allowance Comparison of Three Months Ended September 30 (in thousands) | Metric | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $148,325 | $130,638 | $17,687 | 14% | | Cost of Revenue | $84,861 | $73,573 | $11,288 | 15% | | Gross Profit | $63,464 | $57,065 | $6,399 | 11% | | Total Operating Expenses | $64,851 | $56,127 | $8,724 | 16% | - The Q3 2022 revenue increase was primarily driven by $13 million in pass-through messaging surcharge revenue, with core messaging offerings growing 50% aided by higher volumes leading up to the U.S. midterm elections, while voice revenue was lower due to the prior year's DDoS incident and divested businesses[200] Comparison of Nine Months Ended September 30 (in thousands) | Metric | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $416,178 | $364,775 | $51,403 | 14% | | Cost of Revenue | $241,896 | $203,071 | $38,825 | 19% | | Gross Profit | $174,282 | $161,704 | $12,578 | 8% | | Total Operating Expenses | $191,589 | $159,869 | $31,720 | 20% | Liquidity and Capital Resources The company's liquidity is supported by cash from operations and financing, with significant future commitments including $650 million in Convertible Notes and a $496 million lease - The company's liquidity is provided by free cash flow and financing activities, with no borrowings under the $50 million revolving credit facility as of September 30, 2022[229][230] - Principal future commitments include $650 million in Convertible Notes, a $496 million non-cancelable lease for a new headquarters commencing in June 2023, $15 million in purchase obligations, and $13 million in current office rent[232] Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Cash Flow | 2022 | 2021 | | :--- | :--- | :--- | | From Operating Activities | $24,340 | $23,688 | | From Investing Activities | $(180,386) | $11,681 | | From Financing Activities | $(2,600) | $213,961 | | Net Change in Cash | $(164,987) | $249,621 | Non-GAAP Financial Measures This section reconciles GAAP net loss to non-GAAP measures, reporting Adjusted EBITDA of $12.8 million and Non-GAAP net income of $8.0 million for Q3 2022 Adjusted EBITDA Reconciliation (in thousands) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(802) | $(6,944) | $(13,864) | $(19,188) | | Adjustments... | ... | ... | ... | ... | | Adjusted EBITDA | $12,784 | $14,165 | $26,274 | $41,318 | Non-GAAP Net Income (in thousands) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(802) | $(6,944) | $(13,864) | $(19,188) | | Adjustments... | ... | ... | ... | ... | | Non-GAAP net income | $7,998 | $6,486 | $9,650 | $23,362 | Free Cash Flow (in thousands) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $24,016 | $14,843 | $24,340 | $23,688 | | Net cash used in investing in capital assets | $(10,524) | $(2,657) | $(20,790) | $(28,319) | | Free cash flow | $13,492 | $12,186 | $3,550 | $(4,631) | Item 3. Quantitative and Qualitative Disclosure About Market Risk The company's primary market risks are related to interest rate and foreign currency exchange rate fluctuations. Interest rate risk stems from its cash equivalents, marketable securities, and variable-rate credit facility. The fixed-rate convertible notes are not subject to economic interest rate risk, but their fair value fluctuates with rate changes. Foreign currency risk arises from international operations, primarily in Euros and British Pounds, which accounted for approximately 11% of total revenue for the nine months ended September 30, 2022. The company does not currently use hedging instruments for these risks - As of September 30, 2022, the company held $166.4 million in cash and cash equivalents and $145.2 million in marketable securities, which are exposed to interest rate risk, though a hypothetical 10% change is not expected to have a material impact due to their short-term nature[259][260] - The company's $50.0 million revolving credit facility has a variable interest rate tied to SOFR or a base rate, exposing it to interest rate risk if drawn upon, though there were no outstanding borrowings as of September 30, 2022[261] - Foreign currency risk is present as approximately 11% of total revenue for the first nine months of 2022 was generated outside the U.S., primarily in Euros and British Pounds, and the company does not currently engage in hedging[264] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of September 30, 2022. They concluded that these controls are effective at a reasonable assurance level to ensure timely and accurate reporting as required by the SEC. No material changes to internal control over financial reporting were identified during the quarter - The CEO and CFO concluded that as of the end of the quarter, the company's disclosure controls and procedures were effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported in a timely manner[266] - There were no changes in internal control over financial reporting during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[267] PART II - OTHER INFORMATION This section details the company's legal proceedings and outlines significant risk factors affecting its business operations and financial condition Item 1. Legal Proceedings The company is involved in multiple lawsuits alleging failure to properly bill, collect, and remit 911 service taxes and surcharges in jurisdictions including California, Illinois, and New York. Additionally, it is a defendant in a putative class action related to the alleged failure to block unsolicited phone calls under the Telephone Consumer Protection Act (TCPA). The company intends to vigorously defend these lawsuits but acknowledges that litigation is inherently uncertain - The company faces multiple lawsuits from various jurisdictions, including San Francisco, CA; Cook and Kane Counties, IL; Chicago, IL; and the State of New York, alleging failure to bill, collect, and remit 911-related taxes and surcharges[270][271] - Bandwidth is a defendant in a putative class action lawsuit (Mey v. All Access Telecom, Inc., et al.) under the TCPA for allegedly failing to block unsolicited phone calls[271] Item 1A. Risk Factors The company outlines significant risks to its business, operations, and financial condition. Key risks include intense competition in the CPaaS market, dependence on economic conditions and customer usage growth, and potential impacts from inflation. Operational risks involve cybersecurity threats, such as the DDoS attack experienced in September 2021, reliance on third-party suppliers, and the complexities of regulatory compliance in the telecommunications industry, both domestically and internationally. Financial risks are associated with servicing its convertible notes, potential tax liabilities, and foreign currency fluctuations. The company also notes risks related to its dual-class stock structure, which concentrates voting control - The business faces significant competition from other CPaaS companies and network service providers, some of whom are larger and have greater resources, leading to pricing pressure and challenges in attracting new customers cost-effectively[285][290] - Cybersecurity is a major risk, highlighted by the Distributed Denial of Service (DDoS) attack in September 2021, which caused service disruptions and can result in service degradation, data loss, and reputational harm[327] - The company is subject to significant and complex regulatory uncertainties in the communications industry, including rules related to 911 services, IP-based services (like STIR/SHAKEN for robocall mitigation), and data privacy laws, which could increase costs and impact operations[340][344][353] - Servicing the Convertible Notes requires significant cash, and the company may not have the ability to raise funds for cash settlement upon conversion or repurchase, while the dual-class stock structure concentrates voting control with early stockholders, potentially limiting the influence of other shareholders[445][464]