Bandwidth(BAND) - 2020 Q4 - Annual Report

PART I Item 1. Business Bandwidth Inc. is a global CPaaS provider offering voice, messaging, and emergency services APIs, operating its own IP voice network and expanding globally through the Voxbone acquisition - Bandwidth is a leading global enterprise cloud communications company, providing software APIs for voice, messaging, and emergency services. It is the only CPaaS provider that owns and operates a nationwide IP voice network in the U.S.[14][15] - In 2020, Bandwidth acquired Voxbone, expanding its global platform to over 60 countries, serving enterprises in regions representing over 90% of global GDP[15] Key Financial and Operational Highlights (2018-2020) | Metric | 2018 | 2019 | 2020 | | :-------------------------- | :------------ | :------------ | :------------ | | Total Revenue | $204.1 million| $232.6 million| $343.1 million| | CPaaS Revenue | $164.4 million| $197.9 million| $298.1 million| | Net Income (Loss) | $17.9 million | $2.5 million | ($44.0) million| | Active CPaaS Customer Accounts | 1,230 | 1,728 | 2,848 | | Dollar-Based Net Retention Rate | 118% | 113% | 131% | - The company's growth strategy focuses on expanding existing enterprise relationships, growing its customer base, continuous platform innovation, cultivating long-term customer satisfaction, expanding international coverage, and selectively pursuing acquisitions[38][39][40][41] Item 1A. Risk Factors The company faces significant risks from growth execution, competitive pressures, COVID-19 impacts, regulatory uncertainties, Voxbone integration, and financial structure - The success of Bandwidth's growth and expansion plans is subject to factors beyond its control, including personnel retention, economic health, competition, pricing structures, technology availability, and regulatory conditions[86][88] - The COVID-19 pandemic has created volatility and economic disruption, potentially leading to slowdowns in customer payments, increased churn, and reduced service usage, despite an initial increase in demand for remote communication solutions[89][335] - The CPaaS market is highly competitive, with larger competitors having greater resources and market recognition. Bandwidth faces risks from pricing pressures, new market entrants, and the potential for customers to develop in-house solutions or use competitors' services[90][91][92] - Regulatory uncertainties in telecommunications, privacy, and data security (e.g., TRACED Act, GDPR, CCPA) pose significant compliance costs and potential liabilities, especially with international expansion[54][57][134][147] - The acquisition of Voxbone in 2020 introduces integration risks, including combining corporate functions, achieving synergies, retaining key employees and customers, and managing unexpected costs[233][234] - The company's dual-class capital structure concentrates voting control with pre-IPO stockholders, including directors and executive officers, potentially limiting the influence of other stockholders on corporate matters[241][243] - Servicing future indebtedness, including $400 million in Convertible Notes issued in 2020, requires significant cash flow, and the company may face liquidity challenges or limitations from credit facilities if unable to generate sufficient cash or refinance debt[261][262][625] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There were no unresolved staff comments[279] Item 2. Properties Bandwidth maintains corporate headquarters in Raleigh, NC, with additional offices and data centers globally, leasing all facilities while planning a new HQ - Corporate headquarters are in Raleigh, NC, with additional offices in Denver, CO, Rochester, NY, Frankfurt, and Madrid[279] - Data centers are located in Raleigh, NC; Los Angeles, CA; Dallas, TX; Atlanta, GA; New York, NY; Frankfurt, Germany; and London, U.K.[279] - Voxbone S.A. adds offices in Brussels, Belgium; Austin, TX; San Francisco, CA; Simi Valley, CA; Dublin, Ireland; Iasi, Romania; Singapore; and London, U.K.[280] - The company leases all facilities and has signed an agreement to purchase land for a new headquarters in Raleigh, NC[280] Item 3. Legal Proceedings Bandwidth is involved in multiple lawsuits concerning 911 service taxes and a class action for unsolicited calls, which management intends to vigorously defend - Bandwidth is a defendant in multiple lawsuits regarding the billing, collection, and remittance of 911 services taxes and surcharges in Illinois, New York, Pennsylvania, and Rhode Island[281][282] - A new lawsuit was filed in February 2021 in California regarding 911 taxes and surcharges[282] - The company is also a defendant in a class action lawsuit (Diana Mey v. All Access Telecom, Inc., et al.) concerning alleged failure to block unsolicited phone calls[283] - Management intends to vigorously defend these lawsuits, but acknowledges that litigation is inherently uncertain and could negatively affect business, results of operations, and financial condition[284] Item 4. Mine Safety Disclosures This item is not applicable to Bandwidth Inc - Not applicable[286] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Bandwidth's Class A common stock trades on NASDAQ, with no cash dividends paid, and the company completed the Voxbone acquisition in 2020 - Bandwidth's Class A common stock trades on the NASDAQ Global Select Market under the symbol 'BAND' since November 10, 2017[288] - As of February 19, 2021, there were 24 holders of record for Class A and Class B common stock[289] - The company has never declared or paid cash dividends and plans to retain all future earnings for business development[290][258] - On October 12, 2020, Bandwidth acquired Voice Topco Limited (Voxbone) for approximately $413 million in cash and $106 million in Class A common stock[296][297] Item 6. Selected Financial Data Selected financial data for 2018-2020 highlights significant revenue growth, a shift to net loss in 2020, and key non-GAAP performance metrics Consolidated Statements of Operations Data (2018-2020, in thousands) | Metric | 2018 | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | :---------- | | CPaaS Revenue | $164,415 | $197,944 | $298,090 | | Other Revenue | $39,698 | $34,650 | $45,023 | | Total Revenue | $204,113| $232,594| $343,113| | Total Cost of Revenue | $108,145 | $124,959 | $185,252 | | Gross Profit | $95,968 | $107,635| $157,861| | Total Operating Expenses | $89,216 | $125,328 | $171,366 | | Operating Income (Loss) | $6,752 | ($17,693) | ($13,505) | | Income Tax Benefit (Provision)| $10,870 | $17,718 | ($15,005) | | Net Income (Loss) | $17,923 | $2,494 | ($43,977)| | Basic EPS | $0.96 | $0.11 | ($1.83) | | Diluted EPS | $0.85 | $0.10 | ($1.83) | Consolidated Balance Sheets Data (as of December 31, in thousands) | Metric | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | | Cash, Cash Equivalents & Restricted Cash | $185,004 | $81,437 | | Working Capital | $181,211 | $101,410 | | Total Assets | $341,416| $890,608| | Convertible Senior Notes | — | $282,196 | | Total Liabilities | $71,326 | $460,685| | Total Stockholders' Equity | $270,090| $429,923| Non-GAAP Financial Measures (2018-2020, in thousands) | Metric | 2018 | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | :---------- | | Non-GAAP Gross Profit | $100,572| $114,429| $169,050| | Non-GAAP Gross Margin % | 49% | 49% | 49% | | Non-GAAP Net Income (Loss) | $9,048 | ($5,302)| $14,193 | | Adjusted EBITDA | $16,106 | ($1,050)| $26,176 | | Free Cash Flow | $10,186 | ($27,012)| ($10,074)| Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Bandwidth saw significant 2020 revenue growth, driven by CPaaS and Voxbone, but reported a net loss due to increased expenses and interest, with liquidity supported by cash and credit - Total revenue increased by $110.5 million (48%) in 2020 compared to 2019, reaching $343.1 million. CPaaS revenue grew by $100.1 million (51%) to $298.1 million[364] - The increase in CPaaS revenue was driven by higher voice and messaging usage ($58.6 million), phone number services ($13.2 million), higher usage pricing due to product mix ($11.8 million), and the Voxbone acquisition ($16.6 million)[364] - Net loss in 2020 was $44.0 million, compared to net income of $2.5 million in 2019, primarily due to increased operating expenses, interest expense from Convertible Notes, and a valuation allowance on deferred tax assets[331][353][374][375] Key Performance Indicators (2018-2020) | Metric | 2018 | 2019 | 2020 | | :-------------------------------- | :---------- | :---------- | :---------- | | Number of Active CPaaS Customers | 1,230 | 1,728 | 2,848 | | Dollar-Based Net Retention Rate | 118% | 113% | 131% | | Adjusted EBITDA | $16,106 | ($1,050)| $26,176 | | Free Cash Flow | $10,186 | ($27,012)| ($10,074)| - Cash provided by operating activities was $4.5 million in 2020, a significant improvement from cash used of $1.3 million in 2019[393] - Cash used in investing activities was $455.1 million in 2020, mainly due to the Voxbone acquisition ($400.5 million) and purchase of other investments ($230.8 million), partially offset by proceeds from sales and maturities of investments ($190.8 million)[398] - Cash provided by financing activities was $346.9 million in 2020, primarily from $400.0 million in proceeds from Convertible Notes, offset by capped call purchases and debt issuance costs[400] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's market risks primarily involve interest rate changes and foreign currency fluctuations, with limited inflation impact and no current hedging program - Primary market risk exposure is to interest rate changes, with cash and cash equivalents of $72.2 million and other investments of $40.0 million as of December 31, 2020[432] - The Credit Facility had no outstanding amount as of December 31, 2020, and loans bear variable interest rates[434] - The $400.0 million Convertible Notes issued in February 2020 have a fixed annual interest rate, limiting exposure to interest rate changes for this debt[435] - Foreign currency risk is increasing due to international expansion, with approximately 5% of 2020 total revenue generated outside the U.S. The company does not currently hedge transactional exposures[436] - Inflation has not had a material effect on the business, but the company monitors it to minimize effects through pricing, productivity, and cost reductions[437] Item 8. Financial Statements and Supplementary Data This section provides Bandwidth's audited consolidated financial statements for 2018-2020, with an unqualified audit opinion from Ernst & Young LLP, and details key accounting policies - Ernst & Young LLP issued an unqualified opinion on Bandwidth's consolidated financial statements for the three years ended December 31, 2020, and on the effectiveness of internal control over financial reporting as of December 31, 2020[443][444][461] - The audit of internal control over financial reporting excluded the internal controls of Voxbone, which was acquired on November 2, 2020, and constituted 3% of total assets and 5% of total revenue for the year ended December 31, 2020[462][717] - Critical audit matters included revenue recognition, due to complex automated systems for capturing and pricing high volumes of voice and messaging data, and the accounting for the Voxbone acquisition, due to significant estimation uncertainty in valuing intangible assets[449][450][454][455] Consolidated Balance Sheets (as of December 31, in thousands) | Asset/Liability | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | | Cash and cash equivalents | $184,414 | $72,163 | | Restricted cash | $590 | $9,274 | | Other investments | — | $40,000 | | Accounts receivable, net | $30,187 | $55,243 | | Total current assets | $226,949 | $193,599 | | Property and equipment, net | $41,654 | $51,645 | | Intangible assets, net | $6,569 | $248,055 | | Goodwill | $6,867 | $372,239 | | Deferred tax asset, net | $34,861 | — | | Total Assets | $341,416| $890,608| | Accounts payable | $4,190 | $11,665 | | Accrued expenses & other current liabilities | $27,328 | $63,065 | | Total current liabilities | $45,738 | $92,189 | | Convertible senior notes | — | $282,196 | | Total Liabilities | $71,326 | $460,685| | Total Stockholders' Equity | $270,090| $429,923| Consolidated Statements of Operations (Years Ended December 31, in thousands) | Metric | 2018 | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | :---------- | | Total Revenue | $204,113 | $232,594 | $343,113 | | Total Cost of Revenue | $108,145 | $124,959 | $185,252 | | Gross Profit | $95,968 | $107,635 | $157,861 | | Total Operating Expenses | $89,216 | $125,328 | $171,366 | | Operating Income (Loss) | $6,752 | ($17,693) | ($13,505) | | Interest income (expense), net | $301 | $2,446 | ($13,672) | | Income (loss) before income taxes | $7,053 | ($15,224) | ($28,972) | | Income tax benefit (provision) | $10,870 | $17,718 | ($15,005) | | Net Income (Loss) | $17,923 | $2,494 | ($43,977) | Consolidated Statements of Cash Flows (Years Ended December 31, in thousands) | Cash Flow Activity | 2018 | 2019 | 2020 | | :-------------------------- | :---------- | :---------- | :---------- | | Net cash provided by (used in) operating activities | $24,633 | ($1,253) | $4,518 | | Net cash used in investing activities | ($31,683) | ($7,653) | ($455,085) | | Net cash provided by financing activities | $10,681 | $152,418 | $346,891 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $3,631 | $143,503 | ($103,567) | | Cash, cash equivalents, and restricted cash, end of period | $41,501 | $185,004 | $81,437 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with accountants on accounting and financial disclosure matters - There were no changes in or disagreements with accountants on accounting and financial disclosure[713] Item 9A. Controls and Procedures Bandwidth's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2020 - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2020[715] - Internal control over financial reporting was effective as of December 31, 2020, based on the COSO criteria, excluding the internal controls of Voxbone[716][717] - No material changes in internal control over financial reporting were identified during the quarter ended December 31, 2020[718] Item 9B. Other Information The company reported no other information required by this item - Not applicable[720] PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance, including the Code of Business Conduct and Ethics, is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Annual Meeting of Stockholders Proxy Statement[721] - The company has adopted a Code of Business Conduct and Ethics applicable to all officers, directors, and employees, available on its website[722] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - Information on executive compensation is incorporated by reference from the 2021 Annual Meeting of Stockholders Proxy Statement[723] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - Information on security ownership of certain beneficial owners and management is incorporated by reference from the 2021 Annual Meeting of Stockholders Proxy Statement[723] Item 13. Certain Relationships and Related Transactions and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - Information on certain relationships and related transactions and director independence is incorporated by reference from the 2021 Annual Meeting of Stockholders Proxy Statement[724] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2021 Annual Meeting of Stockholders Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2021 Annual Meeting of Stockholders Proxy Statement[725] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the 10-K report, including an index of various agreements and certifications - The report includes financial statements and schedules as part of this item[726] - A comprehensive Exhibit Index is provided, detailing various agreements (e.g., Share Purchase Agreement, Credit and Security Agreement), corporate documents (e.g., Certificate of Incorporation, Bylaws), and certifications (e.g., CEO/CFO certifications)[727][729][731] Item 16. Form 10-K Summary The company stated that there is no Form 10-K Summary - No Form 10-K Summary is provided[733]