Bandwidth Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Bandwidth provides a cloud-based communications platform, including voice, messaging and emergency-services APIs.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $152.0 | $148.3 | $435.7 | $416.2 |
| Gross profit / margin | $59.5 / 39% | $63.5 / 43% | $174.1 / 40% | $174.3 / 42% |
| Operating loss | $(6.1) | $(1.4) | $(25.4) | $(17.3) |
| Net loss | $(5.1) | $(0.8) | $(5.4) | $(13.9) |
| Adjusted EBITDA | $13.8 | $12.8 | $29.4 | $26.3 |
| Free cash flow | $18.2 | $13.5 | $6.1 | $3.6 |
Q3 revenue increased 2.5% year over year; nine-month revenue rose 4.7%. Messaging growth and carrier surcharges contributed to revenue growth. Higher network costs and pass-through messaging surcharges compressed gross margin. Q3 cost of revenue rose 9%, faster than revenue, and the operating loss widened. Adjusted EBITDA and free cash flow are non-GAAP measures; free cash flow is operating cash flow less purchases of property and equipment and capitalized software.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $107.4 and marketable securities were $31.7, totaling $139.1 in cash and short-term investments. Cash and equivalents plus marketable securities were $184.9 at year-end 2022.
- Nine-month operating cash flow was $19.7, compared with $24.3 in 2022. Investing activities provided $26.9, chiefly reflecting net marketable-security maturities and sales; financing activities used $52.7, primarily for convertible-note repurchases. Cash, cash equivalents and restricted cash decreased $7.0 to $107.6.
- Convertible notes had a net carrying amount of $418.0: $175.0 principal due 2026 and $250.0 due 2028. In March, the company repurchased $65.0 principal of the 2026 notes for $51.3 cash, recognizing a $12.8 gain on extinguishment. No revolver borrowings were outstanding.
- A new $50.0 revolving credit facility was entered into in August 2023. Management said cash, investments and operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months, while noting financing might be needed if requirements exceed expectations.
Material changes and management commentary
- Dollar-based net retention was 104%, down from 109% a year earlier. Management said commercial messaging growth was broad-based and more than offset the absence of cyclical campaign messaging in the prior-year period.
- Pass-through messaging surcharges increased $6.0 in Q3 and $18.0 for the first nine months year over year. Management said these surcharges increase revenue and cost of revenue and can mathematically reduce gross margin.
- Nine-month GAAP net loss improved year over year, but included a $12.8 debt-extinguishment gain and $4.0 of business-interruption insurance recoveries. The insurance settlement related to a DDoS attack beginning in 2021; proceeds were received in July. These gains are not recurring operating revenue.
- The company commenced a 20-year Raleigh headquarters lease in August. It recognized $156.0 of right-of-use assets and $223.1 of lease liabilities at commencement. Lease liabilities were $227.5 at quarter-end; disclosed future minimum rent payments were approximately $501.1.
- No numerical full-year revenue, profit or cash-flow guidance is provided in the supplied filing text. Management expects operating expenses to rise in absolute dollars as the business grows.
Risks, contingencies and unusual items
- Unresolved lawsuits in California, Illinois and New York allege failures to bill, collect and remit certain 911 taxes and surcharges. The company says it intends to defend them; outcomes and potential exposure are uncertain.
- Key risks include competition and pricing pressure, customer usage and churn, higher network-provider costs, cybersecurity and service disruption, regulatory and privacy requirements, and foreign-exchange exposure. The company reported a prior DDoS attack and continues to identify cyberattacks as a risk.
- Approximately 15% of nine-month revenue came from outside North America. The company does not currently hedge currency exposure; it estimated a hypothetical 10% adverse exchange-rate move would have reduced nine-month net income by approximately $1.9.
- The company maintains a valuation allowance against U.S. federal and state net deferred tax assets. It reported disclosure controls and procedures effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Check whether revenue growth can translate into improved GAAP gross margin and operating performance as carrier surcharges and network costs evolve.
- Track dollar-based net retention, customer usage and messaging growth for signs of stabilization or further deterioration.
- Assess liquidity against the $425.0 of convertible-note principal, the new headquarters lease commitments and ongoing capital needs; the revolving facility was undrawn at quarter-end.
- Review developments in the 911 tax-and-surcharge lawsuits and any resulting accruals, settlements or cash exposure.
- Separate recurring operating performance from the debt-repurchase and insurance gains when evaluating nine-month results and non-GAAP measures.