Bandwidth(BAND) - 2021 Q1 - Quarterly Report

FORM 10-Q Information Filing Details 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][3] 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 Nature of Forward-Looking Statements 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][8] - 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][11] PART I - FINANCIAL INFORMATION Item 1. Financial Statements 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 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 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 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 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 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 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 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] - 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] - 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] 2. Summary of Significant Accounting Policies 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][38] - 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] - 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][51] 3. Fair Value Measurements 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] 4. Financial Statement Components 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 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] 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 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][81] 7. Intangible Assets 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] 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 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] - 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][94][95] - 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][103] 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 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] 10. Stockholders' Equity 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] 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 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] 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 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] - 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] - 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] - 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] 13. Employee Benefit Plans 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] - For the three months ended March 31, 2021, the company made matching contributions of $912 thousand to defined contribution plans[144] 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 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] - The change in tax rate is primarily attributable to a valuation allowance against U.S. deferred tax assets[150] - 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] 15. Related Parties 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] - For the three months ended March 31, 2021, the company reduced rent expense by $96 thousand under the facility sharing agreement[153] - 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] 16. Basic and Diluted Loss per Common Share 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] 17. Subsequent Events 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] 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 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][171] - The acquisition consideration included approximately $400 million in cash and approximately $128 million in Class A common stock[171] COVID-19 Update 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] - The company expects high usage levels for these services to continue post-pandemic due to the widespread adoption of remote work models[173] - 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] Key Performance Indicators 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] - 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] Key Components of Statements of Operations 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 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] - 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] - Revenue from the Other segment, comprising traditional services and indirect revenue, is expected to decrease as a percentage of total revenue over time[183] Cost of Revenue and Gross Margin 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] - Other cost of revenue includes leased line costs, internet connectivity fees, per-minute usage fees, regulatory fees, and software and hardware maintenance fees[185] - 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] Operating Expenses 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] - 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] - 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][190] - 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] Income Taxes 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] - 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] - The company continues to maintain a valuation allowance against its U.S. federal and state, as well as UK, net deferred tax assets[192] Non-GAAP Financial Measures 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 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] 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 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] 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 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] 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 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] 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 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 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 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 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] - Active CPaaS customer accounts increased by 64% from 1,808 as of March 31, 2020, to 2,959 as of March 31, 2021[219] Cost of Revenue and Gross Margin 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] - 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] Operating Expenses 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] - 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] Net Interest Expense 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] Income Tax Benefit 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] - 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] Liquidity and Capital Resources 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 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] - 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] - 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] Debt 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