Bandwidth Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Dollar amounts are in millions unless otherwise stated. Bandwidth provides a cloud communications platform (CPaaS) for voice, messaging, 911 and phone-number services.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $76.8 | $56.8 | $145.3 | $110.1 |
| Gross profit / GAAP gross margin | $34.8 / 45% | $26.7 / 47% | $66.9 / 46% | $51.2 / 47% |
| Operating loss | $(0.3) | $(3.8) | $(3.2) | $(9.6) |
| Net income (loss) | $(20.6) | $3.5 | $(21.7) | $5.5 |
| Adjusted EBITDA | $5.5 | $0.0 | $8.6 | $(1.6) |
- Q2 revenue grew 35% year over year; CPaaS revenue grew 40% to $67.1 million. For the first half, revenue grew 32% and CPaaS grew 36%.
- Q2 active CPaaS accounts rose 30% to 1,900; dollar-based net retention was 133% for Q2 and 130% for the first half.
- Q2 GAAP gross margin fell to 45% from 47%, reflecting network and usage costs, geographic mix and messaging surcharges. First-half margin was 46%, versus 47%; CPaaS first-half margin improved to 45% from 44%.
- Operating expenses increased 15% in both the quarter and first half, mainly from personnel and investment in product development and operations.
- Net loss included a $14.2 million charge for a valuation allowance on U.S. deferred tax assets and higher convertible-note interest expense. Q2 non-GAAP net income was $3.1 million; first-half non-GAAP net income was $4.2 million.
Cash flow, liquidity and debt
- First-half operating cash flow was $(0.3) million, compared with $(5.4) million in 2019. Free cash flow, as defined by the company, was $(9.4) million versus $(14.9) million. Capital spending and capitalized software costs totaled $9.0 million.
- Cash and cash equivalents were $291.0 million at June 30, 2020; additional time-deposit investments were $230.8 million. Restricted cash was $0.9 million. Current assets were $577.3 million and current liabilities $48.7 million.
- In February, the company issued $400 million of 0.25% convertible senior notes due 2026. Net proceeds after related costs were approximately $344.8 million. The notes’ balance-sheet carrying amount was $272.9 million after unamortized discount and issuance costs; disclosed fair value was approximately $598.5 million. The company said it currently intends to settle principal in cash.
- The company purchased capped calls for $43.3 million, designed to reduce potential dilution or cash settlement exposure up to a cap. The $25 million revolving facility had no borrowings outstanding and was available at June 30; the company reported covenant compliance.
Material changes, outlook and risks
- Management attributed increased 2020 usage primarily to COVID-19-related reliance on communications services, especially among large UCaaS and meeting-platform customers. It expected elevated usage to continue until pandemic effects abate and believed some work-from-home usage could persist, while cautioning that broader effects remain uncertain.
- No quantified revenue, earnings or cash-flow guidance is provided in the filing. Management stated that cash, investments, the credit facility and operating cash flows should cover anticipated working capital and capital expenditure needs for at least 12 months, subject to risks and uncertainty.
- A change in the estimated benefit period for nonrefundable upfront fees, from three to four years, reduced first-half revenue by approximately $0.9 million and cost of revenue by $0.6 million.
- The company signed a conditional agreement to buy approximately 40 acres in Raleigh for $30 million, subject to due diligence, approvals and customary closing conditions. It also had $10.6 million of disclosed purchase obligations, including the relevant telecommunications commitment.
- Several lawsuits and an investigation concern billing, collection and remittance of 911 taxes and surcharges. Management intends to defend the cases; outcomes are uncertain. Other significant risks include pandemic-related demand or payment changes, customer concentration and usage variability, competition and margin pressure, telecom regulation, privacy and cybersecurity, and the ability to service or cash-settle convertible notes.
- Disclosure controls were assessed as effective at a reasonable-assurance level; the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pandemic-related usage and strong retention persist, and how much growth depends on a small number of enterprise customers.
- Whether gross margins can stabilize as network, messaging and geographic-mix costs change.
- The effect of the $14.2 million deferred-tax valuation allowance and the assumptions supporting deferred-tax-asset realizability.
- Convertible-note cash settlement, potential conversion dilution, capped-call effectiveness and any limits imposed by credit-facility covenants.
- Progress and final cost of the proposed $30 million land purchase, alongside other contractual commitments.
- Developments and potential financial exposure from 911 tax and surcharge litigation and related regulatory matters.