Bandwidth Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also presents unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Bandwidth provides cloud communications software APIs for voice, messaging and 911 services, supported by its owned and managed U.S. IP voice network. It reports two segments: CPaaS and Other. CPaaS represented 81% of annual revenue. The company serves enterprise customers and reports usage-based revenue growth alongside price reductions intended to expand platform reach.
Key financial results
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $204.1 million | $163.0 million | +25% |
| CPaaS revenue | $164.4 million | $131.6 million | +25% |
| Gross profit / gross margin | $96.0 million / 47% | $73.7 million / 45% | +30% gross profit |
| Operating expenses | $89.2 million | $59.1 million | +51% |
| Operating income | $6.8 million | $14.6 million | Down |
| Net income | $17.9 million | $6.0 million | Up |
| Operating cash flow | $24.6 million | $14.6 million | Up |
| Free cash flow | $10.2 million | $6.7 million | Up |
Net income included a $10.9 million income tax benefit; the effective tax rate was reported as (154.1)%. Adjusted EBITDA, a non-GAAP measure, was $16.1 million, down from $22.2 million. Non-GAAP gross margin was 49%, versus 48%; CPaaS non-GAAP gross margin was 45%, versus 46%.
At December 31, 2018, cash and cash equivalents were $41.3 million, marketable securities were $17.4 million, working capital was $58.7 million and total assets were $150.4 million. No debt was outstanding; the company had $25.0 million available under its revolving credit facility and reported covenant compliance.
Fourth-quarter results and changes
Q4 revenue was $52.3 million, compared with $42.5 million a year earlier. CPaaS revenue was $44.1 million. Operating expenses were $26.9 million, resulting in an operating loss of $3.3 million; net loss was $1.3 million, compared with net loss of $0.6 million in Q4 2017. Quarterly figures are unaudited.
Annual CPaaS growth reflected higher usage, particularly voice and messaging, and more active customer accounts (1,230, up 27%). Management cited $11.6 million of pricing reductions that partially offset usage growth. Dollar-based net retention was 118%, versus 107% in 2017. R&D and sales and marketing spending each rose sharply as the company invested in personnel and growth; total operating expenses increased faster than revenue, reducing operating income.
Outlook, commentary and risks
- Management said cash, securities, the credit facility and operating cash flows were expected to cover working-capital and capital-expenditure needs for at least 12 months. No specific revenue or earnings guidance was provided; the company expected operating expenses to rise in absolute dollars and planned continued investment in R&D, sales and marketing.
- Other-segment revenue rose 26%, partly because of a dispute settlement and unusually high indirect revenue; legacy-service revenue continued to decline.
- A January 2018 Verizon CABS settlement produced $4.4 million in cash and $6.3 million of revenue recognition, including amounts previously reserved. The company issued $25.0 million in credits against previously billed amounts.
- Multiple lawsuits and an investigation concern alleged underbilling, collection or remittance of 911 taxes and surcharges. Management said it believed the matters would not materially adversely affect financial position or results, but outcomes remain uncertain. Separately, the filing describes a potential approximately $50 million tax and indemnity exposure if the 2016 Republic Wireless spin-off is determined taxable.
- Other material risks include intense competition and usage-price pressure, customer concentration, cybersecurity and service interruptions, regulatory uncertainty (including 911 and TCPA obligations), and dependence on third-party network suppliers. The company reported 99.9% network uptime in 2018 and no material system failures in the prior three years.
Investor verification priorities
- Assess whether usage growth and customer expansion can offset pricing reductions while sustaining margins; verify the trajectory of retention and active CPaaS accounts.
- Review the drivers of rising operating expenses and the gap between annual net income and Adjusted EBITDA, including the tax benefit and stock-based compensation.
- Track cash generation against capital spending, securities purchases and planned investment; confirm liquidity and revolver availability.
- Monitor developments in 911 tax litigation and the Republic spin-off tax exposure, and evaluate the assumptions behind management’s contingencies.
- Check the recurring versus unusual contribution of the Verizon settlement and indirect revenue to reported growth.