Bandwidth Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing also reports unaudited fourth-quarter results. Bandwidth provides cloud communications APIs and an owned and managed U.S. IP voice network, with CPaaS and Other reportable segments.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $163.0 million | $152.1 million |
| CPaaS revenue | $131.6 million (+12%) | $117.1 million (+15%) |
| Other revenue | $31.4 million (-10%) | $35.1 million |
| Gross profit / GAAP gross margin | $73.7 million / 45% | $66.9 million / 44% |
| Operating income | $14.6 million | $15.2 million |
| Net income | $6.0 million | $22.4 million |
| Adjusted EBITDA | $22.2 million | $23.5 million |
| Operating cash flow, continuing operations | $14.6 million | $16.9 million |
| Free cash flow | $6.7 million | $10.9 million |
CPaaS gross margin rose to 42% from 39%; non-GAAP CPaaS gross margin was 46%, up from 43%. Annual revenue grew 7%, while operating expenses increased 14% to $59.1 million, including higher R&D and sales and marketing spending.
Q4 2017: Revenue was $42.5 million, versus $38.8 million in Q4 2016. Operating income was $2.2 million and net loss was $0.6 million, compared with net income of $14.5 million a year earlier; the prior-year quarter included a substantial tax benefit.
Liquidity and capital structure
Cash and cash equivalents were $37.6 million at year-end, up from $6.8 million; working capital was $40.7 million, versus a deficit of $2.4 million. Total assets were $104.5 million and stockholders’ equity was $76.7 million. The $40 million term loan was repaid with IPO proceeds, and the revolving facility was also fully repaid. No debt was outstanding at year-end; $25 million remained available under the revolving facility. Management said cash, available credit and operating cash flows should cover anticipated working capital and capital expenditure needs for at least 12 months.
Changes, outlook and notable items
- Active CPaaS customer accounts increased 21% to 965. Dollar-based net retention declined to 107% from 111%, reflecting usage and pricing changes.
- Higher voice and messaging usage added $21.4 million to CPaaS revenue, while lower usage prices reduced revenue by $11.1 million. New CPaaS customers contributed $5.7 million.
- November 2017 IPO of 4.0 million Class A shares generated approximately $69.0 million in net proceeds after underwriting discounts and offering expenses. The company gave no specific numerical forward guidance; it expects operating expenses to rise and plans continued investment in product development, sales and marketing.
- The 2016 Republic Wireless spin-off left no discontinued-operations loss in 2017. The Tax Cuts and Jobs Act resulted in $2.1 million of additional 2017 tax expense from remeasuring deferred tax assets; the tax effect was provisional pending further guidance.
- At year-end, the company had reserved disputed Verizon carrier-access billings and had not recognized revenue on those amounts. A January 2018 settlement produced a $4.4 million payment in February, with bill credits also due for other previously reserved amounts.
Risks and contingencies
- Competition, customer usage variability, pricing pressure and declining retention could constrain revenue growth or margins. Other-segment revenue continues to decline.
- Multiple lawsuits and an investigation concern alleged underbilling or non-remittance of 911 taxes and surcharges across jurisdictions. Management intends to defend the matters; outcomes are uncertain.
- Regulatory exposure includes telecommunications and VoIP requirements, 911 obligations, privacy and data security rules, and the then-upcoming EU GDPR. Network-neutrality rule changes could affect service access or costs.
- Service outages, cybersecurity incidents, dependence on third-party network providers, and the reliability of emergency calling could harm customers and create liability.
- The dual-class structure gives Class B shares ten votes per share; insiders and certain holders controlled 89.6% of voting power at year-end. The company also disclosed potential tax exposure of approximately $50 million if a specified ownership change caused the Republic spin-off to be taxable.
Key facts for investors to verify
- Track CPaaS growth, customer additions and retention alongside the impact of price reductions on revenue and margins.
- Review cash conversion and investment needs: free cash flow declined to $6.7 million, while capital spending and capitalized software costs increased.
- Monitor final resolution and financial impact of 911 tax litigation, the North Carolina investigation, and the Verizon settlement and related bill credits.
- Assess the final tax-reform accounting, potential spin-off-related tax exposure, and continued availability and covenant terms of the credit facility.