Bandwidth Inc. — Q2 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2022. Bandwidth provides a cloud communications platform with voice, messaging and emergency-services APIs. The company now reports one operating segment; prior-period expense categories and key performance indicators were conformed to the updated presentation.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $136.5m | $120.7m | $267.9m | $234.1m |
| Gross profit / margin | $55.4m / 41% | $53.5m / 44% | $110.8m / 41% | $104.6m / 45% |
| Operating income (loss) | $(9.1)m | $0.9m | $(15.9)m | $0.9m |
| Net loss | $(6.2)m | $(6.9)m | $(13.1)m | $(12.2)m |
| Adjusted EBITDA | $5.1m | $13.8m | $13.5m | $27.2m |
| Operating cash flow | $7.0m | $(1.2)m | $0.3m | $8.8m |
| Free cash flow | $2.7m | $(18.9)m | $(9.9)m | $(16.8)m |
- Q2 diluted loss per share was $0.25, versus $0.28 a year earlier; six-month loss per share was $0.52, versus $0.49.
- Cash and cash equivalents were $165.3m and marketable securities were $137.6m at June 30, for $302.9m combined. Cash, cash equivalents and restricted cash fell $166.1m during the first half, largely reflecting $137.8m invested in marketable securities and $14.5m of headquarters construction deposits.
- Convertible senior notes had a $636.5m carrying value and $650m aggregate principal. A new $50m revolving facility, maturing in June 2025, was undrawn; the company reported covenant compliance and $50m available capacity.
- Current assets were $404.6m and current liabilities $101.7m at quarter-end. Management said cash and operating cash flows should meet anticipated working-capital and capital-expenditure needs for at least 12 months, while cautioning that this could prove incorrect.
Material changes versus prior periods
- Revenue rose 13% in Q2 and 14% in the first half. Management attributed much of the increase to pass-through messaging surcharges: $15m in Q2 and $28m for the first half versus the comparable 2021 periods.
- Core messaging revenue grew 25% year over year in both Q2 and the first half. Phone-number and 911-enabled services also contributed, while voice revenue was lower, affected by reduced usage following the 2021 DDoS incident and the absence of divested businesses.
- Higher pass-through surcharges increased both revenue and cost of revenue, compressing reported gross margin. Gross profit growth came from revenue and costs excluding those surcharges. Active customer accounts increased 9% to 3,362, but dollar-based net retention declined to 112% from 128%.
- Operating expenses increased 23% in Q2 and 22% in the first half, principally from higher staffing and related facilities and IT costs. Research and development rose 48% in Q2 and 41% year to date.
- Adoption of ASU 2020-06 on January 1, 2022 increased the carrying value of convertible debt and eliminated the prior debt/equity separation. It reduced reported convertible-note interest expense, including by $6.8m in Q2 and $13.4m in the first half compared with the prior accounting treatment.
Outlook, risks and unusual items
- The filing provides no quantified full-year revenue, profit or cash-flow guidance. Management expects operating expenses to increase in absolute dollars and said it believes available liquidity is sufficient for at least the next 12 months.
- The future Raleigh headquarters lease is expected to commence in June 2023. Its initial term includes approximately $495.7m of total lease payments over 20 years; initial rent is expected to be about $21m annually, with 1.85% annual increases.
- The company reported a $3.8m first-half gain on sale of business, included as an adjustment in its non-GAAP reconciliations. Non-GAAP measures exclude various items and should be considered alongside GAAP results.
- A DDoS attack beginning in September 2021 caused intermittent service disruption. Management said the network had been largely stable at normal service levels since September 29, 2021, but some intermittent disruptions continued.
- Management identified uncertainty from COVID-19, inflation and recessionary pressures, competition, customer usage and retention, talent costs, cybersecurity, network-provider charges, foreign exchange, and evolving telecommunications and privacy regulation. The company is terminating service offerings in Russia and Belarus amid the Russia-Ukraine conflict.
- Unresolved litigation includes claims concerning billing and remittance of 911 taxes and surcharges and a putative class action alleging failure to block unsolicited calls. Management said it believes it has meritorious defenses; litigation outcomes remain uncertain.
- The company completed an interim goodwill assessment in Q2 and concluded no quantitative test was required; no goodwill impairment was recorded. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- How much reported growth and margin movement reflects pass-through messaging surcharges versus underlying usage and service economics.
- Whether customer retention, voice usage and cash generation stabilize, given the 112% retention rate and sharply lower first-half operating cash flow versus 2021.
- Liquidity needs and debt-servicing capacity, including the $650m notes, their cash-settlement terms, and the timing and cost of the headquarters lease.
- Progress in resolving 911 tax and unsolicited-call litigation, and any resulting liabilities or regulatory actions.
- Continuing cybersecurity and service-continuity exposure following the DDoS incident, alongside the potential effects of inflation, provider fees and international operations.