Bandwidth Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Bandwidth provides a cloud-based communications platform (CPaaS) for voice, messaging and emergency services. This unaudited report covers the quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods unless stated otherwise. The company reports one operating segment.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $148.3 million | $130.6 million | $416.2 million | $364.8 million |
| Gross profit / margin | $63.5 million / 43% | $57.1 million / 44% | $174.3 million / 42% | $161.7 million / 44% |
| Operating income (loss) | $(1.4) million | $0.9 million | $(17.3) million | $1.8 million |
| Net income (loss) | $(0.8) million | $(6.9) million | $(13.9) million | $(19.2) million |
| Adjusted EBITDA (non-GAAP) | $12.8 million | $14.2 million | $26.3 million | $41.3 million |
- Revenue increased 14% in both comparison periods. Carrier-imposed pass-through messaging surcharges contributed $13 million of Q3 growth and $41 million of nine-month growth; these surcharges also increased cost of revenue and add revenue without corresponding gross profit.
- Excluding pass-through surcharges, core messaging revenue grew 50% in Q3 and 40% year to date. Q3 messaging volumes benefited from certain customers’ activity ahead of the U.S. midterm elections. Voice revenue remained affected by the prior-year DDoS incident and divestitures.
- Operating expenses rose 16% in Q3 and 20% year to date. Research and development increased 49% in Q3, primarily from higher personnel and allocated facilities/IT costs. Q3 operating results turned to a loss; year-to-date operating loss widened.
- Q3 active customer accounts were 3,380, up 5%; dollar-based net retention was 109%, down from 125%. Management says the reported KPI methodology changed with the segment reporting update, and prior periods were conformed for comparison.
Cash flow, liquidity and debt
- At September 30, cash and cash equivalents were $166.4 million and marketable securities were $145.2 million, totaling $311.6 million in these balances. Cash, cash equivalents and restricted cash totaled $167.3 million.
- For the first nine months, operating cash flow was $24.3 million, capital investment in property/equipment and internal-use software was $20.8 million, and company-defined free cash flow was $3.6 million, versus negative $4.6 million in 2021. Investing cash outflow of $180.4 million mainly reflected purchases of marketable securities, property/equipment, and headquarters construction deposits.
- Convertible notes had a $637.2 million carrying value and $650 million aggregate principal at quarter-end: $400 million due 2026 and $250 million due 2028. The company had no borrowings on its $50 million revolving credit facility, which matures in 2025, and reported covenant compliance.
- Total liabilities were $813.8 million and stockholders’ equity was $194.6 million. Goodwill was $298.9 million; intangible assets were $170.5 million.
Changes, outlook and notable items
- Revenue growth was offset by a lower GAAP gross margin (43% versus 44% in Q3; 42% versus 44% year to date), as higher pass-through surcharges affected reported revenue and costs. Adjusted EBITDA declined despite higher revenue.
- Cash and cash equivalents fell from $331.5 million at year-end 2021, while marketable securities rose from zero to $145.2 million. Convertible-note carrying value rose from $486.4 million following adoption of ASU 2020-06, which eliminated separate equity accounting for the conversion feature and reduced non-cash interest expense. This accounting change also affected share-dilution calculations.
- Management expects operating expenses to increase in absolute dollars and believes cash, cash flows from operations and available resources will cover working capital and capital expenditure needs for at least 12 months. No specific revenue, earnings or margin guidance is provided in the filing.
- The company’s planned Raleigh headquarters lease is expected to commence in June 2023, run for an initial 20 years and entail approximately $495.7 million of rent over that term. No related right-of-use asset or lease liability had been recognized at quarter-end. It also reported $14.7 million of non-cancellable purchase obligations, mostly due within one year.
- After quarter-end, Bandwidth entered into agreements to repurchase approximately $160 million principal amount of 2026 notes at approximately a 29% discount to par, with cash price partly based on a 15-trading-day share-price measurement period. The transactions were expected to close November 28, subject to customary conditions; about $240 million principal was expected to remain outstanding.
- Material uncertainties include lawsuits alleging failure to collect and remit certain 911 taxes and surcharges, a putative TCPA class action alleging failure to block unsolicited calls, cybersecurity and service-continuity risks, regulatory and tax exposure, competition, inflation/recession risks, and foreign exchange exposure. The company reported a third-quarter interim qualitative goodwill review and no impairment charge. It also stated disclosure controls were effective at a reasonable assurance level.
Most important facts for investors to verify
- How much revenue and gross profit growth comes from underlying usage versus carrier pass-through surcharges, and whether the gross-margin decline persists.
- Whether customer retention and voice usage stabilize, given 109% dollar-based net retention and the continuing effects cited from the DDoS incident and divestitures.
- Cash generation and available liquidity after capital spending, headquarters commitments, and the planned cash repurchase of 2026 notes; confirm final repurchase price and completion.
- The impact of rising personnel and operating costs on operating losses and Adjusted EBITDA, alongside the limitations of the company’s non-GAAP measures.
- Potential financial exposure and developments in 911 tax/surcharge litigation, TCPA litigation, and other regulatory, cybersecurity, and customer-misuse risks.