Bandwidth Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; amounts below are in U.S. dollars unless stated otherwise.
Business context and results
Bandwidth provides a cloud-based communications platform (CPaaS) for enterprise voice, messaging, 911 and phone-number services, alongside legacy and other services. CPaaS accounted for 85% of Q3 and nine-month revenue.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $60.5m | $50.5m | $170.6m | $151.8m |
| Gross profit / margin | $27.4m / 45% | $23.0m / 46% | $78.6m / 46% | $72.4m / 48% |
| Operating income (loss) | ($4.6m) | $0.1m | ($14.2m) | $10.0m |
| Net income (loss) | ($1.0m) | $2.5m | $4.5m | $19.2m |
| Adjusted EBITDA (non-GAAP) | ($0.6m) | $2.3m | ($2.3m) | $16.2m |
| Free cash flow (non-GAAP) | ($4.4m) | $3.1m | ($19.3m) | $15.6m |
Q3 CPaaS revenue grew 24% to $51.5m; Other revenue was $9.0m, up 1%. Nine-month CPaaS revenue rose 20% to $144.5m, while Other revenue fell 17% to $26.1m. The nine-month comparison is affected by $6.3m of revenue from a 2018 legal settlement; excluding that settlement, management reported total revenue growth of 17%.
Liquidity, cash flow and debt
- Cash and cash equivalents were $192.4m at September 30, 2019, versus $41.3m at year-end 2018; no marketable securities remained at quarter-end. Current assets were $233.3m and current liabilities $41.1m.
- Nine-month operating cash flow was negative $3.5m, versus positive $24.0m a year earlier. Capital spending and capitalized software costs totaled $15.8m, resulting in free cash flow of negative $19.3m.
- Financing cash flow was $152.5m, principally reflecting $147.4m of proceeds from the March follow-on offering. The offering issued 2.875m Class A shares; net proceeds after offering expenses were approximately $146.6m.
- No revolving debt was outstanding. The company had $25.0m available under its revolver, maturing March 2022, and reported compliance with its covenants. The filing reports no other debt balance.
Material changes and management commentary
- Active CPaaS customer accounts increased 39% year over year to 1,610. Dollar-based net retention was 116% in Q3 versus 117% a year earlier; the nine-month measure was 113% versus 117%.
- Management attributed CPaaS growth mainly to higher voice, messaging, phone-number and 911 usage, partly offset by lower usage prices. Q3 new-customer revenue was $3.4m; pricing reductions offset $1.8m of Q3 CPaaS revenue growth.
- Operating expenses rose 40% in Q3 and 49% for the nine-month period, reflecting increased personnel and investment in research and development, sales and marketing, and administration. Management expects operating expenses to increase in absolute dollars and plans continued product, sales and international investment.
- CPaaS gross margin improved year over year, while consolidated margin declined. The nine-month consolidated comparison was weighed down by the 2018 settlement revenue; management said margin was 45% in the comparable 2018 period excluding that settlement, versus 46% in 2019.
- The company adopted ASC 606 on January 1, 2019, recording a $0.174m adjustment to opening accumulated deficit. It expects adoption of the new lease standard to materially increase balance-sheet right-of-use assets and lease liabilities; the effect was not yet determined.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided. Management stated cash, investments, the credit facility and expected operating cash flows should meet anticipated working-capital and capital-expenditure needs for at least the next 12 months, while cautioning that additional financing could be needed.
- Material risks include competition and pricing pressure, customer usage or churn, reliance on third-party network providers, service and cybersecurity disruptions, regulatory requirements for communications and 911 services, and the costs and execution risks of growth and international expansion.
- The company faces lawsuits and investigations alleging underbilling or failure to collect and remit 911 taxes and surcharges. Georgia damages claims were dismissed on appeal and Pennsylvania cases were being dismissed, but Illinois litigation and other matters remained unresolved. Management said outcomes are uncertain; it believes resolution will not materially harm financial position or results, but adverse judgments or settlements could do so.
- The filing discusses potential tax liabilities related to the 2016 Republic Wireless spin-off. It estimates exposure could be approximately $50m if the transaction were deemed taxable under relevant rules, while noting the estimate is uncertain. A North Carolina investigation into 911 taxes and surcharges had not resulted in a complaint.
- Operating lease commitments totaled $29.8m and purchase obligations $8.2m as of September 30, 2019. The company also has a minimum monthly payment commitment to a 911 services provider and reported $6.7m of other non-cancellable purchase obligations in the notes.
Most important facts for investors to verify
- Whether CPaaS growth and customer expansion can continue while retention softens and pricing reductions persist.
- Drivers of negative operating cash flow and free cash flow, including the impact of deferred taxes, receivables, and elevated investment spending.
- How quickly operating expenses and network costs grow relative to revenue, and whether consolidated margins recover.
- Developments and potential financial exposure from 911-related litigation, tax disputes, and the Republic spin-off tax risk.
- The eventual balance-sheet impact of lease accounting adoption and the company’s ongoing liquidity and covenant position.