Bandwidth Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone Q4 report; quarterly figures below are for the three months ended December 31, 2020. Amounts are in U.S. dollars.
Business context
Bandwidth provides cloud communications software APIs and network services for voice, messaging and emergency calling. Its reportable segments are CPaaS and Other. The November 2, 2020 acquisition of Voxbone expanded international operations and contributed two months of results to FY2020.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $343.1 million | $232.6 million |
| CPaaS revenue | $298.1 million | $197.9 million |
| Gross profit / gross margin | $157.9 million / 46% | $107.6 million / 46% |
| Operating income (loss) | $(13.5) million | $(17.7) million |
| Net income (loss) | $(44.0) million | $2.5 million |
| Adjusted EBITDA (non-GAAP) | $26.2 million | $(1.1) million |
| Cash from operating activities | $4.5 million | $(1.3) million |
| Free cash flow (non-GAAP) | $(10.1) million | $(27.0) million |
FY2020 CPaaS gross margin rose to 46% from 44%; Other segment gross margin fell to 45% from 58%. Non-GAAP net income was $14.2 million, compared with a $5.3 million loss in FY2019. These non-GAAP measures are company-defined and should be read alongside GAAP results.
Q4 2020: Revenue was $113.0 million, versus $62.0 million in Q4 2019. Operating loss was $12.2 million and net loss was $19.9 million, compared with operating loss of $3.5 million and net loss of $2.0 million in Q4 2019.
Liquidity, debt and other balance-sheet items
- At year-end, cash and cash equivalents were $72.2 million, restricted cash $9.3 million, and other investments $40.0 million. Working capital was $101.4 million, down from $181.2 million.
- The company reported $400 million principal amount of 0.25% convertible notes due March 2026; their year-end carrying amount was $282.2 million after unamortized discount and issuance costs. The notes generated $16.4 million of interest expense in 2020, including non-cash discount and issuance-cost amortization.
- No borrowings were outstanding under the $25 million revolving credit facility; the full $25 million capacity was available at year-end. Management said available liquidity and operating cash flows were expected to meet needs for at least 12 months.
- Total assets were $890.6 million, including $372.2 million of goodwill and $248.1 million of net intangible assets, substantially increased by the Voxbone acquisition.
Material changes and unusual items
- Revenue grew 48% year over year; CPaaS revenue grew 51%. Management attributed growth to higher voice and messaging usage, COVID-related remote work and communications demand, political campaign messaging, pricing/product mix, new customers, and $16.6 million of Voxbone revenue after acquisition.
- Active CPaaS customer accounts increased 65% to 2,848; dollar-based net retention was 131%, compared with 113% in 2019.
- Net loss included $14.5 million of Voxbone acquisition-related costs, $16.4 million of convertible-note interest expense, and a $15.0 million income-tax provision. The tax provision reflected a valuation allowance on U.S. and U.K. deferred tax assets; the year-end balance sheet showed a $61.0 million net deferred tax liability.
- Other comprehensive income included a $27.9 million foreign-currency translation gain, largely associated with international operations and the acquisition; it did not eliminate the GAAP net loss.
- Cash used in investing activities was $455.1 million, chiefly reflecting $400.5 million net cash paid for Voxbone and investment purchases, partly offset by investment maturities. Financing cash flow included $400 million of convertible-note proceeds and $43.3 million spent on capped calls.
- Management changed the estimated customer-benefit period for upfront fees from three to four years and the useful life for internal-use software from three to four years. The filing reports these estimates reduced 2020 revenue by about $1.6 million and cost of revenue by about $0.9 million, respectively, for the upfront-fee change; the software-life change reduced cost of revenue by $0.3 million and G&A expense by $0.1 million.
Outlook, risks and contingencies
The filing gives no specific numerical FY2021 revenue or earnings guidance. Management expected elevated usage of some remote-work and communications services to continue, while cautioning that demand could fall as pandemic effects abate. It also expected continued investment in research and development, sales and marketing, and international coverage, with operating expenses expected to increase in absolute dollars.
- Key risks include dependence on usage and a limited number of enterprise customers, competition and pricing pressure, network or cybersecurity disruptions, customer misuse and regulatory obligations for telecommunications, privacy and emergency calling.
- Bandwidth faced lawsuits alleging failure to bill, collect and remit certain 911 taxes and surcharges in several jurisdictions, and a putative TCPA class action alleging failure to block unsolicited calls. Management intended to defend the cases and said it believed the 911 matters would not materially affect financial position or results, but litigation outcomes remain uncertain.
- The company recorded $9.1 million for non-income-based taxes and fees at year-end. It also disclosed potential tax and indemnity exposure of approximately $50 million if its 2016 Republic Wireless spin-off were determined taxable under specified circumstances; the estimate is not assured.
- Voxbone purchase-price accounting was preliminary and subject to measurement-period adjustments. The auditor issued unqualified opinions on the financial statements and internal control; management and the auditor excluded Voxbone from the 2020 internal-control assessment.
Important facts for investors to verify
- How much FY2020 growth reflects sustainable customer usage versus pandemic-related demand, political messaging and the acquired Voxbone business.
- Whether CPaaS margin improvement and positive Adjusted EBITDA convert into durable operating cash flow and free cash flow.
- The final Voxbone purchase-price allocation, integration costs, expected synergies, and performance of acquired customer relationships and technology.
- The terms, conversion and cash-settlement implications of the $400 million notes, including the effect of capped-call limits and future liquidity needs.
- Developments and potential financial exposure in the 911 tax/surcharge litigation, TCPA case, and disclosed tax contingencies.