Bandwidth Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Bandwidth provides a cloud-based communications platform-as-a-service, including voice, messaging and emergency-services APIs. This unaudited filing covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $137.8 million | $131.4 million; up 5% |
| Gross profit / margin | $55.7 million / 40% | $55.4 million / 42% |
| Operating loss | $(11.8) million | $(6.9) million |
| Net income (loss) | $3.6 million | $(6.8) million |
| Basic / diluted GAAP EPS | $0.14 / $(0.28) | $(0.27) / $(0.27) |
| Adjusted EBITDA (non-GAAP) | $5.1 million | $8.4 million |
| Operating cash flow | $(6.4) million | $(6.7) million |
| Free cash flow (non-GAAP) | $(10.9) million | $(12.6) million |
| Cash and cash equivalents | $85.3 million | $113.6 million at Dec. 31, 2022 |
| Marketable securities | $38.2 million | $71.2 million at Dec. 31, 2022 |
| Convertible notes, net carrying amount | $417.1 million | $480.5 million at Dec. 31, 2022 |
Basic EPS reflects reported net income; diluted EPS was $(0.28) because the diluted calculation adjusts the numerator for the debt-extinguishment gain and interest and includes assumed note conversion. The filing reports a $12.8 million gain from repurchasing 2026 notes and a $3.1 million income-tax benefit, which materially affected reported net income. Non-GAAP measures are company-defined and should be considered alongside GAAP results.
Material changes and operating performance
- Revenue growth was primarily driven by higher core messaging usage and higher carrier pass-through messaging surcharges. Core messaging revenue excluding those surcharges grew 8%; voice revenue declined. Messaging pass-through surcharges were $23 million versus $17 million.
- Cost of revenue rose 8%, broadly tracking the increase in pass-through surcharges. Gross profit was nearly flat, while gross margin fell two percentage points to 40%, partly because pass-through surcharges increased their share of revenue.
- Operating expenses increased 8% to $67.4 million. Research and development rose 14%, primarily from personnel costs; sales and marketing rose 8%, also primarily from personnel costs.
- Dollar-based net retention was 109%, down from 114%. Management says active customer count has become less relevant as the company focuses on larger customers.
- Operating cash use was $6.4 million. Investing activities provided $29.0 million, largely from marketable-security maturities and sales; financing activities used $52.1 million, primarily for the 2026-note repurchase. Cash, cash equivalents and restricted cash declined $29.1 million during the quarter.
- In March, Bandwidth repurchased $65 million principal amount of 2026 notes for approximately $51 million in cash. Approximately $175 million principal remains outstanding on the 2026 notes; the 2028 notes have $250 million principal outstanding. Total principal outstanding was $425 million at quarter-end.
Liquidity, outlook, risks and unusual items
- Management believes cash and cash equivalents and operating cash flows will be sufficient for working capital and capital expenditures for at least the next 12 months, but warns that this assessment could prove incorrect and external financing may not be available on acceptable terms.
- Following Silicon Valley Bank’s closure, Bandwidth terminated its $50 million revolving credit facility effective March 15, 2023. There were no borrowings under it when terminated; the filing does not disclose a replacement revolving facility.
- Bandwidth anticipates its new headquarters lease will commence in mid-2023. The initial 20-year lease has approximately $495.7 million in total payments. The company also disclosed $15.5 million of non-cancellable purchase obligations, primarily network and software contracts, and $14.9 million of future minimum rent for existing offices.
- The filing provides no specific revenue, earnings or cash-flow guidance. Management describes long-term growth priorities as expanding existing-customer usage, targeting large enterprises and serving SaaS platforms. It expects operating expenses to increase in absolute dollars as the business grows.
- Material risks include competition and pricing pressure, customer usage and retention, carrier fees and network-provider dependence, cybersecurity and service continuity, evolving telecommunications and privacy regulation, foreign-exchange exposure, and macroeconomic conditions. A hypothetical 10% adverse currency-rate change would have reduced Q1 net income by approximately $0.9 million, according to the filing.
- Unresolved litigation includes claims alleging failure to bill, collect and remit certain 911 taxes and surcharges in jurisdictions including California, Illinois and New York, plus a patent-infringement action filed in January 2023. The company intends to defend the matters; outcomes and potential financial effects are uncertain.
- The company maintains a valuation allowance for U.S. federal and state deferred tax assets. The unusually large effective tax rate reflects near-break-even pretax income and foreign operating losses that generated tax benefits.
- Disclosure controls and procedures were assessed as effective at a reasonable-assurance level; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth excluding carrier pass-through surcharges, and the 109% net retention rate, stabilize or improve.
- Whether gross-margin pressure and higher operating costs affect future operating losses, Adjusted EBITDA and cash generation.
- Cash and liquid-investment levels after the note repurchase, and the company’s liquidity plans following termination of its revolving facility.
- Repayment, conversion and potential cash-settlement requirements for the remaining $425 million principal amount of convertible notes.
- Timing and financial impact of the new headquarters lease, including commencement and the substantial long-term payment commitment.
- Developments in 911 tax and surcharge litigation, the patent case, and any related accruals, settlements or assessments.
- That reported net income included a debt-extinguishment gain and tax benefit, while Adjusted EBITDA declined year over year.