Bandwidth Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Bandwidth provides a cloud-based communications platform (CPaaS) for voice, messaging, 911 and phone-number services. Results include Voxbone, acquired in November 2020.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $113.5 million | $68.5 million |
| CPaaS revenue | $100.1 million | $59.1 million |
| Gross profit / margin | $52.2 million / 46% | $32.2 million / 47% |
| Operating loss | $0.04 million | $2.9 million |
| Net loss | $5.3 million | $1.1 million |
| Net loss per share, diluted | $0.21 | $0.04 |
| Adjusted EBITDA* | $13.4 million | $3.1 million |
| Operating cash flow | $10.0 million | $(7.6) million |
| Free cash flow* | $2.1 million | $(12.0) million |
Margins and expenses: CPaaS gross margin was 46% in both periods; total gross margin declined one percentage point. Non-GAAP gross margin was 51% in both periods, while CPaaS non-GAAP gross margin rose from 50% to 52%. Operating expenses increased 49% to $52.2 million, led by general and administrative expense, which rose 67% to $26.9 million. Interest expense, net increased to $5.4 million, substantially reflecting convertible-note discount and issuance-cost amortization.
Liquidity and debt at March 31, 2021: Cash and cash equivalents were $319.7 million, restricted cash $9.5 million, and other investments $10.0 million. The company had no borrowings on its $25 million revolving credit facility and reported the full amount as available. Convertible notes had $650 million aggregate principal outstanding ($400 million due 2026 and $250 million due 2028) and a net balance-sheet carrying amount of $464.8 million. Stockholders’ equity was $442.7 million.
Changes and drivers
- Revenue increased 66%; CPaaS revenue rose 69%. Growth reflected increased voice and messaging usage, phone-number and 911 services, new customers, and $21.1 million of CPaaS revenue attributed to Voxbone. Other revenue grew 42%, partly from Voxbone and higher indirect messaging and voice revenue.
- Active CPaaS customer accounts increased 64% to 2,959. Dollar-based net retention was 125%, compared with 126% a year earlier. New CPaaS customers contributed $5.0 million of Q1 2021 revenue, versus $2.6 million.
- Operating cash flow improved by $17.6 million year over year. Investing cash flow was $22.1 million, including $30.0 million from sales and maturities of investments; capital spending and capitalized software costs totaled $7.9 million.
- Net loss widened despite near break-even operating results, primarily due to higher net interest expense and a much smaller income-tax benefit. The 2021 effective tax rate was 5.9%, versus 72.1%, mainly reflecting a valuation allowance on U.S. deferred tax assets.
Outlook, risks and unusual items
- Management said cash, investments, the credit facility and operating cash flows should be sufficient for working capital and capital expenditures for at least the next 12 months, while cautioning that actual needs could differ. The filing provides no specific revenue or earnings guidance.
- Management reported that COVID-19-related reliance on communications services increased usage, particularly among UCaaS and meeting-solution customers. It expects elevated usage to continue until pandemic effects abate and believes some work-from-home usage may persist; lower usage or delayed customer decisions remain risks.
- Voxbone’s purchase-price accounting was preliminary, with possible measurement-period adjustments during 2021. Management identified integration, realization of synergies, and international operations as areas of uncertainty.
- Convertible notes carry cash-settlement and refinancing risks. The 2026 notes were conditionally convertible during the quarter; capped calls are intended to reduce potential dilution or certain cash obligations, subject to caps and counterparty risk.
- Unresolved litigation includes claims concerning billing, collection and remittance of 911 taxes and surcharges. A separate putative class action alleging failure to block unsolicited calls had the company’s motion to dismiss denied on April 23, 2021. Management says it intends to defend the cases; outcomes are uncertain.
- The company has non-cancellable purchase obligations and lease commitments, and a proposed $30 million purchase of Raleigh-area land subject to customary conditions. The filing does not establish that the land purchase had closed by quarter-end.
- On May 3, 2021, CFO Jeffrey Hoffman announced he would step down effective August 31, 2021; the filing states the departure was not due to a disagreement with the company.
*Adjusted EBITDA and free cash flow are non-GAAP measures defined by the company and may not be comparable with similarly titled measures at other companies.
Investor facts to verify
- How much of reported growth reflects durable customer usage and retention versus Voxbone acquisition contribution and pandemic-related demand?
- Whether CPaaS gross-margin performance holds as network, messaging and international costs evolve.
- Cash needs and potential settlement exposure related to the $650 million principal of convertible notes, including conversion, repurchase and dilution terms.
- Progress integrating Voxbone, final acquisition accounting, and the status and conditions of the proposed land purchase.
- Developments and potential financial exposure in the 911 tax and surcharge litigation and the unsolicited-calls class action.
- Whether cash generation and liquidity remain adequate as investment, contractual commitments and business requirements change.