Bandwidth: Strong FCF Generation And Promising Growth Prospects Ahead

Investment Thesis - Bandwidth has faced challenges post-pandemic, including a DDoS attack, leading to a decline in platform usage and a drop in share price below its 2017 IPO price of $20, despite revenue growth tripling [1] - The company is expected to achieve double-digit revenue growth this year and improve its debt situation through strong free cash flow generation [1] Company Overview - Bandwidth operates a B2B Communications Platform as a Service (CPaaS) on its own IP voice network, providing APIs for voice calling, text messaging, and emergency services [2] - The company serves major clients like Microsoft, Google, Uber, and Zoom, and has a global presence in over 65 countries following the acquisition of Voxbone [2] - Bandwidth has a gross retention rate of 99% and a net retention rate of 107% in its latest quarter, indicating strong customer loyalty [2] Revenue Growth Drivers - Revenue growth stagnated in 2022 and 2023, but recent quarters have shown signs of recovery with a 12% revenue increase in the latest quarter [3][4] - Messaging revenue grew by 50% year-over-year, contributing 21% of cloud communications revenue, with further growth expected from election-related messaging [4] - The Direct Enterprise solution also saw a 20% growth, indicating strong demand for Bandwidth's services [4] Profitability and Margins - Bandwidth's non-GAAP gross margin increased from approximately 52% in 2021 to nearly 57% in Q1 2024, with expectations to exceed 60% in the coming years [5] - The company generated $18 million of adjusted EBITDA in Q1 2024, with a margin of 12%, and forecasts a full-year adjusted EBITDA of $74 million, implying a margin close to 14% [7] Debt Management - Bandwidth's debt includes $400 million and $250 million in convertible notes due in 2028, with a previous net debt to adjusted EBITDA ratio peaking at 8 [6] - Recent improvements in EBITDA profitability and debt repayment have reduced the remaining debt due by 2026 to $35 million [6] - The company expects to generate over $50 million in free cash flow, leading to a healthier balance sheet by year-end with a projected net debt of around $230 million [7] Growth Prospects and Valuation - Management's medium-term targets suggest revenue growth rates of 15-20%, driven by segments like Programmable messaging and Direct Enterprises, which are expected to grow at CAGRs of 21% and 14% respectively until 2026 [8] - Bandwidth's current valuation at an EV to adjusted EBITDA of 10.8 and a Price to FCF ratio of 11.3 is considered attractive compared to competitors like Twilio, which has lower growth rates [8]