Bandwidth Inc. (NASDAQ:BAND) Q1 2023 Earnings Convention Name Could 2, 2023 5:00 PM ET
Firm Individuals
Sarah Walas – Vice President of Investor Relations
David Morken – Co-Founder, Chief Govt Officer & Chairman
Daryl Raiford – Govt Vice President & Chief Monetary Officer
Convention Name Individuals
Mike Walkley – Canaccord Genuity
Meta Marshall – Morgan Stanley
James Fish – Piper Sandler & Co.
Ryan Koontz – Needham & Firm
Patrick Walravens – JMP Securities
Operator
Good day. And welcome to the Bandwidth Inc. First Quarter 2023 Earnings Convention Name. [Operator Instructions] Please additionally word that this occasion is being recorded immediately.
I might now like to show the convention over to Sarah Walas, Vice President of Investor Relations. Please go forward.
Sarah Walas
Thanks. Good afternoon, and welcome to Bandwidth’s first quarter 2023 earnings name. Right now, we’ll focus on the outcomes introduced in our press launch issued after the market shut. The press launch and an earnings presentation with historic monetary highlights might be discovered on the Investor Relations web page at traders.bandwidth.com. With me on the decision this afternoon is David Morken, our CEO; and Daryl Raiford, our CFO. They’ll start with ready remarks, after which we’ll open up the decision for Q&A.
Through the name, we’ll make statements associated to our enterprise which may be thought of forward-looking, together with statements regarding our monetary steerage for the second quarter and full yr of 2023. We warning you to not put undue reliance on these forward-looking statements as they could contain dangers and uncertainties which will trigger precise outcomes to fluctuate materially from any future outcomes or outcomes expressed or implied by the forward-looking statements. Any forward-looking statements made on this name and within the presentation slides mirror our evaluation as of immediately, and we now have no plans or obligation to replace them. For a dialogue of fabric dangers and different essential components that would have an effect on our precise outcomes, please confer with these contained in our newest 10-Ok submitting as up to date by different SEC filings, all of which can be found on the Investor Relations part of our web site at bandwidth.com and on the SEC’s web site at sec.gov.
Through the course of immediately’s name, we’ll confer with sure non-GAAP monetary measures. A reconciliation of GAAP to non-GAAP measures is included in our press launch issued after the shut of market immediately in addition to within the earnings presentation, that are positioned on our web site at traders.bandwidth.com.
With that, let me flip the decision over to David.
David Morken
Thanks, Sarah, and due to everybody for becoming a member of us. 2023 is off to a superb begin. We’re making strong progress including direct to enterprise clients growing progressive, award-winning merchandise and advancing our strategic initiatives whereas specializing in profitability.
Through the first quarter of the yr, we exceeded our income steerage and are heading in the right direction to fulfill our aim of rising profitability by 30% this yr. I wish to thank our clients for persevering with to belief us with their mission-critical communications. Thanks as effectively to all our Bandwidths all over the world for supporting our clients and one another in selfless dedication to our mission, and I thank God for blessing us with a twenty fourth yr of extraordinary alternatives. We serve 3 distinct buyer classes: World communications plans, programmable companies and direct-to-enterprise. This quarter, we spotlight our rising momentum within the direct to enterprise market, the place we energy cloud contact facilities and new developments in our software program platform.
In direct-to-enterprise, we received a number of World 2000 monetary companies leaders that selected Bandwidth because the voice supplier for his or her contact facilities throughout the quarter.
Notably, every one deployed a distinct CCaaS platform whereas selecting our Bandwidth communications cloud to energy their communication stack. This reveals how we’re leveraging our sturdy relationships with all of the Gartner leaders in cloud contact facilities, and the breadth and depth of our growth within the enterprise contact heart area. Amongst present clients, we expanded our long-term relationship with the most important issuer of Visa and MasterCard in the US. Utilizing the bandwidth communications cloud, we assist this buyer scale up its contact heart capability because of a latest acquisition.
Moreover, this buyer wanted new worldwide protection to attach with workers within the Asia Pacific area. As a result of we seamlessly related this buyer throughout world geographies, we had been awarded this new enterprise. As these examples present, we’re seeing measurable outcomes by immediately serving enterprise clients. We have grown over tenfold the variety of enterprise contact facilities using the Bandwidth Communications Cloud simply within the final 3 years. Our important experience throughout quite a few business verticals comes from offering scalability, redundancy, pre-integrated conversational AI and native fraud scoring know-how and is driving the most important enterprises to come back on to Bandwidth to assist construct their cloud contact facilities.
Profitable enterprise communication technique is dynamic, and our sturdy tradition of innovation retains us forward of and shapes the curve. For instance, we built-in AI into our communications cloud over a yr in the past. That is as a result of we have prioritized R&D from our very earliest days. For the final 24 years, the truth is, innovation has been the muse for all our progress and profitability.
Bandwidth Maestro is the most recent instance, born from our shut reference to enterprise CIOs who now should join their total organizations to create higher buyer experiences whereas streamlining operations. Maestro integrates the best-in-class platforms and capabilities that CIOs want throughout UCaaS, CCaaS and AI. It is actually a next-generation functionality and buyer expertise, and it saves months of integration work. So enterprises can obtain sooner time to income.
In contrast to the proprietary lock-in of different suppliers, Maestro maintains our platform-agnostic strategy, offering flexibility to CIOs. We consider the worth proposition and ROI of Maestro is exclusive within the CPaaS area with full availability slated for later this yr, the early market response to Maestro has been encouraging in recognition of its excellence in know-how development, innovation and enterprise impression, Maestro received Better of Present at Enterprise Join. This can be a substantial achievement and it’s already proving to energise conversations with each present clients and prospects.
Maestro joins different award stage improvements we have launched lately like our native textual content messaging app for Microsoft Groups referred to as Ship-To, which lately received the Web Telephony Product of the 12 months Award and our backup resolution for toll-free calling named Name Guarantee, which was a finalist within the prestigious CX awards this previous quarter. These are just some examples of how our innovation engine and breadth of options are shaping the way forward for cloud communications for each new and present enterprise clients.
We’re nonetheless within the early stage of a long-term secular pattern of digital transformation that is turning into an increasing number of dynamic by the day with rising AI applied sciences, converging platforms and thrilling new use instances.
We’re targeted on maximizing our direct-to-enterprise momentum, capitalizing on new improvements like Maestro, rising product penetration throughout all 3 buyer classes and exploiting the aggressive benefit of being the one CPaaS supplier with our personal world community, all whereas serving our clients and executing with self-discipline to develop profitably.
I am going to now flip it over to Daryl to stroll by way of the small print of our monetary outcomes.
Daryl Raiford
Thanks, David, and good afternoon, everybody. We began the yr with a strong first quarter, attaining income of $138 million and adjusted EBITDA of $5 million. Each outcomes place us effectively to ship our full yr outlook.
Income in contrast with final yr benefited from month-to-month recurring fees for telephone numbers and emergency companies, which mixed had been up 6% year-over-year and better messaging income, up 8% and representing 15% of whole income, excluding surcharges. Our business messaging progress was pushed by strong demand throughout a wide range of use instances, together with well being care, retail and e-commerce procuring, fintech and civic engagement. On a sequential foundation, excluding surcharges, Total, first quarter messaging was decrease than in 4Q ’22 as we had anticipated. However adjusting for the optimistic results of political marketing campaign messaging acknowledged in final fourth quarter, we achieved sequential progress of 16% in our business messaging from greater demand in those self same verticals.
Cross-through surcharges related to messaging had been $23 million within the first quarter. The mixture of those merchandise energy the presents that we offer to our 3 goal buyer markets. By way of our market leads to our most established market, world communications plans, we met our expectations for income that was primarily flat year-over-year because of softness primarily in UCaaS clients.
In our programmable companies and direct-to-enterprise buyer classes, our quarterly progress from messaging and month-to-month recurring fees is obvious as these 2 buyer classes grew 8% and 27%, respectively, year-over-year. Programmable companies proceed to strengthen from a secular motion to messaging engagement. And though the direct-to-enterprise class is a small base of income for us immediately, the simple market dynamics, buyer wins David highlighted and robust pipeline give us confidence this market will likely be a key driver in attaining our long-term monetary targets. Rounding out our first quarter outcomes, non-GAAP gross margin was 54%, up 1 share level from the prior yr’s quarter.
We proceed to profit from economies of scale, a wealthy mixture of higher-margin merchandise, world protection and working enhancements. By way of our working metrics, our first quarter internet greenback retention charge was 109%. For patrons higher than $100,000 annual income, our internet greenback retention hit 111%, 2 share factors greater than the entire buyer metric and clearly demonstrating the advantages from specializing in massive clients and direct-to-enterprise alternatives. Energetic buyer rely was 3,361although the client rely metric has diminished in relevance over time as we give attention to bigger and extra worthwhile clients. Common annual income per buyer, which continued to rise reached $172,000 within the first quarter, one other demonstrable outcome from bigger buyer alternatives.
Within the first quarter, we additional strengthened our stability sheet with one other repurchase of 2026 convertible notes, leading to a discount of $65 million of convertible debt for about $51 million money or an approximate 22% low cost to par worth. This newest opportunistic repurchase mixed with the $160 million repurchased in November 22, lowered the excellent 2026 notes by $225 million or 55% of the unique principal stability, using solely $168 million of money, successfully erasing $57 million of our internet debt obligation. The remaining stability of our convertible debt maturity in 2026 is now $175 million. We repeatedly consider our choices for the very best use of our stability sheet to remain opportunistic within the present capital market setting.
With our resolute give attention to worthwhile progress, we create the choice to completely repay our remaining convertible word obligations in full upon their respective maturities with our earnings and out there money, if that’s the selection we want to make. We ended the quarter with a money and securities stability of $124 million, a greater than enough quantity to fulfill our enterprise wants and maintain a substantial amount of monetary flexibility.
Turning to our outlook; we’re on-track to attaining our full yr steerage supplied at the beginning of the yr of $576 million to $584 million in income, and $43 million to $47 million adjusted EBITDA. Our outlook for the complete yr is unchanged regardless of a difficult macro setting.
In abstract, our monetary and working efficiency within the first quarter represents a strong begin to the yr. We’ll proceed to give attention to what we are able to management, serving and delighting our clients daily, rising our margin, being disciplined with our price and turning into extra worthwhile.
Now, I am going to flip the decision again over to the operator for questions.
Query-and-Reply Session
Operator
[Operator Instructions] Our first query right here will come from Mike Walkley with Canaccord Genuity.
Mike Walkley
Good to see the strong begin to the yr, and the up to date steerage. I suppose, David, for you, only a query on perhaps the linearity of the quarter and simply put up Silicon Valley Financial institution and a few of the macro points, have you ever seen something slowing within the March, April time-frame? Or is enterprise actually trending as you anticipated for the yr?
David Morken
Thanks, Mike. Very pleased with the workforce for what we achieved within the first quarter. And we actually, like everybody, are watching issues like the problems with banks. However we’re executing as anticipated and guiding ahead as you’ve got come to know us effectively in a approach that we consider is correct and displays each macro and issues that we do see internally. Nothing to name out, specifically, that will additional reply your query on situations. However once more, executing the plan that we set for ourselves for the yr, actually delighted that we have began off the yr with the efficiency within the first quarter as anticipated and consider that we’ll proceed to execute all through the rest of this yr towards the goals that we now have outlined for ourselves.
Mike Walkley
And only for my follow-up query, Daryl, good job paying down the debt. It actually looks as if you guys have the stability sheet in a superb place now given your worthwhile progress historical past. Simply when it comes to the Q2 steerage on the marginally greater income, however related adjusted EBITDA. Is there any sort of change in combine or gross margins? Otherwise you sort of simply anticipated Q2 just like Q1?
Daryl Raiford
We’re anticipating Q2 on the income line to develop simply modestly over Q1. We’re additionally anticipating our EBITDA to be as we have guided $5 million. We consider that we now have some actual working flexibility there. Clearly, the macroeconomic situations that we even witnessed immediately would give some out there pause, we’re fairly comfortable that we now have derisked our information for the second quarter and cozy with it.
Operator
And our subsequent query will come from Meta Marshall with Morgan Stanley.
Meta Marshall
I used to be noting sort of the win that gave you — or the place your protection in APAC was sort of famous. I suppose I simply needed to get a way of, do you’re feeling like you might have the entire areas that you just want at this level? Are there nonetheless areas sort of as you do broaden your world footprint which might be extra significant that we should always sort of contemplate you increasing into? After which second, simply on the Maestro piece, that was an incredible product to see at Enterprise Join. Simply when do you suppose that, that may very well be sort of a significant contributor to income? Do you suppose that, that may very well be significant in 2024? Or it can take time for that product to ramp?
David Morken
Concerning your first query associated to geographies and markets that we opened, we celebrated opening Turkey and did so actually behind a powerful enterprise case from an present buyer. And that is the best way we have traditionally constructed as an alternative of making an attempt to construct it and they’re going to come, we comply with demand. And so we have got an excellent relationship with a few of our most aggressive worldwide clients who establish for us markets which might be favorable for many totally different consumer experiences, and we’ll make investments and construct in these geographies responsibly. Typically, we’ll start by partnering, however then our distinctive worth proposition that you’ve got adopted for some time, Meta, is to have an owned and operated community beneath our software program platform, and we’ll proceed to execute in opposition to that technique globally following our clients all over the world.
In regard to Maestro, so excited that the product has been acquired the best way that it has successful the Better of Present at Enterprise Join. The workforce continues to have very encouraging and thrilling conversations with enterprise clients concerning the product. And we consider that it’s going to proceed to select up steam and momentum all through the remainder of this yr, however your query, the essence of which is when will the income arrive for Maestro, we expect that it’ll be thrilling to see all through ’24 and past as we head towards our long-term progress targets for direct-to-enterprise enterprise that Maestro goes to actually drive loads of that progress. That is the response we now have from the early responses and conversations popping out of the award-winning quarter that we have simply left. And we might not name out immediately associated Maestro income, however it’s the main automobile on this prepare that we’re on in the direction of the longer term with direct-to-enterprise.
Operator
And our subsequent query will come from James Fish with Piper Sandler.
James Fish
David, in your ready remarks, I believe it was you, you famous some softness with the UCaaS aspect of the enterprise. I suppose, are you able to elaborate on that when it comes to what you guys are seeing? And likewise what you are seeing with additionally your largest clients in that a part of the market in addition to on the contact heart aspect the place it appears like issues are going fairly effectively?
David Morken
Sure. I am going to begin in reverse. The CCaaS momentum with the direct enterprise wins has been incredible and as anticipated. A lot of excessive curiosity in carry your individual provider mannequin for consuming CCaaS. Each single deal win that we highlighted on this name was associated to contact facilities within the enterprise and bringing your individual carriers. In order that’s thrilling. We predict relating to UCaaS, that it is purely a operate of the macro and fewer seats which will outcome from the macro. Utilization patterns for UCaaS are largely attributable to the financial situations, are you including heads, utilization was wholesome and rising previous to the pandemic. And so we expect that return to the workplace is just not the first issue.
And once more, I believe it is most essential to acknowledge that inside the general information and outcomes, the physicians in UCaaS have not modified both our expectation or our outcomes for the quarter. So it is one thing that we have simply accounted for within the interval, and do not suppose that it takes us off observe in any respect for the rest of the yr.
James Fish
Useful. After which on the client rely, I do know you guys are targeted in on bigger and higher-quality clients. Nevertheless it was one other quarter the place it was down sequentially once more and any individual’s obtained to ask it right here. How a lot of this was sort of continued rationalization versus, I believe up to now yr the place you’ve got given what the gross additions had been this quarter? Are you able to assist us sort of bridge the rationalization versus sort of gross additions? Or is this type of a clear buyer rely to think about going ahead?
David Morken
It’s persevering with rationalization as we architect the churn of small unprofitable clients. These clients, on common, are $2,000 a month clients evaluate that to the typical ARPU that we now have — I am sorry, 2,000 a yr, not month, excuse me, our common buyer is 172,000 a yr. So once more, the client rely is just not as germane to yield a ahead projection on revenues, and that is simply persevering with, as your query said, what we have been doing for some time now, which is a give attention to worthwhile progress from bigger enterprise clients. We even have common buyer income this quarter rising, as I mentioned, 170,000. That is up from 158,000 a yr in the past. In order that aggressive climb of our common annual buyer spend is de facto good. and is what we would like. So we’re in no way involved concerning the absolute buyer rely quantity.
Operator
And our subsequent query will come from Ryan Koontz with Needham & Firm.
Ryan Koontz
Good progress on the messaging entrance. Actually good to see that enterprise [indiscernible] alongside. On the voice aspect, you talked about softening in UCaaS and energy in CCaaS, which is acquainted tone. I’m wondering when you can touch upon the pricing setting usually for both of these segments and the way we should always take into consideration that impression relative to sort of the seat counts and utilization inside these 2 segments?
Daryl Raiford
Ryan, that is Daryl. Pricing had a good impression within the first quarter, it was pushed by a richer mixture of higher-priced merchandise like messaging and telephone numbers. After we take a look at pricing and quantity, pricing did improve once more because it has been for a lot of quarters. It wasn’t essentially a SKU by SKU worth improve however we now have loved improved combination pricing.
Operator
[Operator Instructions] Our subsequent query right here will come from Patrick Walravens with JMP Securities.
Patrick Walravens
Nice. So David, let’s discuss ChatGPT just a little bit right here. So all these research of the roles which might be going to be eradicated, like the highest of the listing is the customer support rep. So what’s that going to do for the entire variety of seats on the market in name facilities. And the way will that impression you guys? Since you do not actually cost for seat, proper? You are form of — you are extra consumption-based.
David Morken
That is precisely proper, Pat. We’re usage-based, and we’re enthusiastic about offering excessive constancy, dependable audio for conversational AI buyer help in all its strong parameters. ChatGPT is known and skilled immediately as a text-based immediate. We had been current on the daybreak of merchandise like Alexa, which had been voice-driven conversations and consider that conversational AI will migrate quickly to voice and that we now have an unbelievable function to play, orchestrating these very clever and efficient conversations amongst these reps which might be actually empowered by AI instruments in addition to doubtlessly stand-alone reps as effectively. Our function is usage-based in our mannequin, and so we’re excited concerning the daybreak of this new period.
Patrick Walravens
Okay. However the stress on seats goes to occur, proper?
David Morken
If I do not know, I do not — whereas I can not predict the longer term, what I do anticipate are the unbelievable groups that we work with within the CCaaS area, perceive the way to adapt and overcome and really make the most of a few of the strongest growing AI instruments which might be on the market. And so their enterprise fashions might change, however the worth that they add inside the contact heart setting, I anticipate to proceed, exactly how, I believe, is unclear, which is why your query is an excellent one. However the groups which might be on the forefront of the contact heart digital transformation are throughout this.
Patrick Walravens
Okay. And another, simply I believe as a reminder for myself and everybody else. So I imply 5% progress this quarter, down from 24% [ph] subsequent yr, however there’s this weird dynamic about elections, proper? So how do you guys really feel about subsequent yr when it comes to what progress you are able to do and has that modified?
David Morken
We firmly consider that the long-term trajectory that we put out on our Investor Day is effectively inside attain, having completed one quarter since we talked about that, and we’re on observe and on plan and reiterating our steerage for the remainder of this yr, every little thing about executing within the final 90 days helps the longer-term thesis that we socialized on Investor Day.
Operator
This concludes our question-and-answer session and likewise concludes the decision. Thanks very a lot for attending immediately’s presentation. Chances are you’ll now disconnect your traces.
