Bandwidth Inc. — Q1 2022 Form 10-Q
Business context and reporting period
Reports the three months ended March 31, 2022, compared with Q1 2021. Bandwidth provides cloud communications software and network services for enterprise voice, messaging and emergency services. Management says 76% of quarterly revenue came from recurring sources.
Financial and operating results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $131.4 million | $113.5 million |
| Gross profit / margin | $55.4 million / 42% | $51.2 million / 45% |
| Operating loss | $6.9 million | $0.04 million |
| Net loss | $6.8 million; $0.27 per share | $5.3 million; $0.21 per share |
| Adjusted EBITDA | $8.4 million | $13.4 million |
| Operating cash flow / free cash flow | $(6.7) million / $(12.6) million | $10.0 million / $2.1 million |
Revenue increased 16%, driven primarily by voice and messaging growth of approximately $15 million and phone-number and 911-enabled services growth of approximately $3 million. Active customer accounts rose 12% to 3,372, while dollar-based net retention declined to 114% from 131%.
Cost of revenue rose 22%, faster than revenue, largely because messaging costs increased approximately $14 million amid higher per-message costs and volume. Operating expenses increased 22%, including R&D up 34% and sales and marketing up 21%. Cash and cash equivalents were $316.0 million at quarter-end; current assets were $413.3 million versus current liabilities of $94.7 million. Convertible notes had a $635.7 million carrying value, against $650 million principal, and mature in 2026 and 2028.
Material changes and unusual items
Revenue grew, but gross margin compressed and operating results and cash generation weakened versus Q1 2021. Management reorganized reporting into one operating segment and recast prior-period presentation. It also reclassified certain costs among cost of revenue, R&D, sales and marketing, and G&A; this changed expense categories but not revenue or net income.
Adoption of ASU 2020-06 on January 1, 2022 eliminated separate equity accounting for the convertible notes and increased their carrying amount by $148.4 million at adoption. The change also reduced reported noncash interest expense; management says Q1 interest expense was $6.6 million lower than it otherwise would have been. A $0.9 million gain on sale of a business was included in Q1 non-GAAP reconciliations.
Outlook, commentary and risks
Management expects cash and cash flows to cover anticipated working capital and capital expenditures for at least 12 months, while cautioning that actual funding needs may differ and additional financing may be required. The filing provides no specific revenue or earnings guidance. Management expects operating expenses to increase in absolute dollars.
Key exposures include competition and pricing pressure, messaging and network-provider costs, customer usage and retention, international and foreign-exchange risks, inflation, evolving telecommunications and privacy regulation, and cybersecurity. A DDoS attack beginning in September 2021 caused intermittent service disruptions; management reported the network was largely stable at normal levels after September 29, though intermittent disruptions continued. COVID-19 demand effects remained uncertain. The company is terminating services in Russia and Belarus amid the Russia-Ukraine conflict.
Contingencies include unresolved lawsuits alleging failure to bill, collect and remit 911-related taxes and surcharges in several jurisdictions, and a putative class action concerning alleged failure to block unsolicited calls. Management intends to defend the cases; outcomes are uncertain. The future headquarters lease is expected to begin around June 2023, with approximately $495.7 million of payments over its 20-year initial term and estimated excess construction costs of approximately $13 million.
Important facts for investors to verify
- Whether revenue growth can translate into improved gross margin, particularly as messaging costs and pass-through surcharges change.
- Whether retention, customer usage and cash conversion stabilize after the declines in retention and free cash flow.
- Cash requirements and refinancing or settlement capacity for $650 million principal of convertible notes, alongside the headquarters lease and other commitments.
- Progress and any financial, customer or regulatory effects from the DDoS incident and the 911-tax and unsolicited-call litigation.
- How the new segment and cost classifications affect comparisons with future periods; prior periods were recast, and management notes KPI methodology changed.