Bandwidth Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Bandwidth provides a cloud-based communications platform offering voice, messaging and emergency-services APIs to enterprises.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $145.9 million | $136.5 million | $283.7 million | $267.9 million |
| Gross profit / margin | $59.0 million / 40% | $55.4 million / 41% | $114.6 million / 40% | $110.8 million / 41% |
| Operating loss | $7.5 million | $9.1 million | $19.3 million | $15.9 million |
| Net loss | $3.9 million | $6.2 million | $0.3 million | $13.1 million |
| Adjusted EBITDA (non-GAAP) | $10.6 million | $5.1 million | $15.6 million | $13.5 million |
| Free cash flow (non-GAAP) | $(1.2) million | $2.7 million | $(12.1) million | $(9.9) million |
- Q2 revenue increased 7%; first-half revenue increased 6%. Management attributed growth mainly to messaging usage and higher carrier-imposed application-to-person messaging surcharges. Core messaging revenue, excluding pass-through surcharges, grew 11% in Q2 and 10% in the first half; voice revenue declined.
- Pass-through surcharges lifted revenue but also increased cost of revenue, contributing to the one-percentage-point decline in GAAP gross margin. Q2 operating expenses rose 3%, including higher sales personnel costs; first-half operating expenses increased 6%.
- Dollar-based net retention was 106%, down from 112% a year earlier. Recurring sources generated 77% of revenue in both first-half periods.
- At June 30, cash and cash equivalents were $91.8 million and marketable securities were $30.8 million. Current assets were $220.3 million versus current liabilities of $97.8 million.
- Six-month operating cash flow was negative $3.3 million. Cash, cash equivalents and restricted cash declined $22.6 million to $92.0 million, primarily reflecting the $51.3 million cash payment to repurchase convertible notes, partly offset by investment-security maturities and sales.
- Convertible notes had a $417.6 million carrying value and $425 million principal outstanding: $175 million due 2026 and $250 million due 2028. No borrowings were outstanding under the SVB revolver when it was terminated in March.
Material changes, outlook and notable items
- In March, Bandwidth repurchased $65 million principal amount of 2026 notes for approximately $51.3 million, recognizing a $12.8 million gain on extinguishment. Approximately $175 million principal of those notes remained outstanding after the transaction.
- A $4.0 million business-interruption insurance recovery related to a 2021 DDoS attack was recorded in Q2; proceeds were received in July. This benefit, together with the debt-extinguishment gain, materially affected first-half reported results and is excluded from the company’s non-GAAP measures.
- On August 1, 2023, after quarter-end, the company entered a new $50 million revolving credit facility with Bank of America, with a potential $25 million accordion subject to conditions. The filing states management believes cash and operating cash flows will cover anticipated working capital and capital expenditures for at least 12 months, while cautioning that this assessment may prove incorrect.
- The company expected its new Raleigh headquarters lease to commence in Q3 2023. The 20-year lease entails approximately $495.7 million of total base rent; management expected the resulting right-of-use asset and lease liability to be material. Existing office leases and other contractual obligations also remain.
- Management expects operating expenses to increase in absolute dollars as the business grows. The filing provides no specific revenue, earnings or cash-flow guidance for future periods.
- Key risks include competition and pricing pressure, customer usage and retention, carrier fees and network-provider dependence, cybersecurity and service interruptions, regulatory and privacy compliance, foreign-exchange exposure, and access to financing. Pending litigation includes 911 tax-and-surcharge claims in California, Illinois and New York and a patent-infringement action; outcomes are uncertain.
Important facts for investors to verify
- Whether underlying messaging growth and customer retention stabilize, and how much reported growth reflects pass-through carrier surcharges.
- Whether operating cash flow and free cash flow improve, and the company’s liquidity after the headquarters lease commences.
- The terms, availability and covenants of the new revolving credit facility, and the company’s capacity to meet convertible-note obligations.
- The financial effects and status of the 911 tax litigation, patent claim, and any remaining DDoS-related matters.
- Whether the $4.0 million insurance recovery and $12.8 million debt gain are kept distinct from recurring operating performance when assessing results.