Bandwidth Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Bandwidth provides cloud-based communications APIs for voice, messaging, emergency services and phone numbers. Results include Voxbone, acquired in November 2020; comparisons with 2020 are therefore affected by the acquisition.
Financial performance
Amounts are in millions of dollars except per-share data, percentages and customer counts.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $120.7 | $76.8 | $234.1 | $145.3 |
| Gross profit / margin | $54.6 / 45% | $34.8 / 45% | $106.8 / 46% | $66.9 / 46% |
| Operating income (loss) | $0.9 | $(0.3) | $0.9 | $(3.2) |
| Net loss | $(6.9) | $(20.6) | $(12.2) | $(21.7) |
| Adjusted EBITDA | $13.8 | $5.5 | $27.2 | $8.6 |
| Operating cash flow | $(1.2) | $7.3 | $8.8 | $(0.3) |
| Free cash flow | $(18.9) | $2.7 | $(16.8) | $(9.4) |
- Q2 revenue grew 57% year over year; CPaaS revenue rose 57% to $105.0 million. For the first half, total revenue rose 61% and CPaaS revenue rose 63% to $205.2 million.
- Voxbone contributed $26.9 million of Q2 revenue growth and $49.2 million of first-half growth. Excluding acquisition contributions, management cited growth in usage, phone-number and 911 services, and voice and messaging.
- Q2 CPaaS gross margin improved to 47% from 44%; consolidated gross margin remained 45%. Management attributed improvement in non-GAAP gross margin primarily to Voxbone’s higher-margin business. Consolidated non-GAAP gross margin was 50% versus 48% in Q2 2020.
- Operating expenses increased 53% in Q2 and 51% in the first half, with acquisition-related headcount, amortization, professional and facilities costs among the drivers. Operating expenses declined as a share of first-half revenue, from 48% to 45%.
- Q2 net loss narrowed year over year, but the comparison includes a substantially smaller income-tax provision in 2021; the 2020 quarter included a $16.5 million tax provision. Adjusted EBITDA and non-GAAP net income are non-GAAP measures and should be considered alongside GAAP results.
Cash, liquidity and debt
- At June 30, 2021, cash and cash equivalents were $309.6 million, restricted cash was $9.4 million, and current assets were $408.2 million versus current liabilities of $92.3 million. Management said cash and expected operating cash flows should cover working capital and capital expenditure needs for at least 12 months.
- First-half operating cash flow was $8.8 million. Reported free cash flow was negative $16.8 million, reflecting capital spending and the land transaction; the company bought land for $30.0 million and sold a parcel for $17.5 million. The filing’s free-cash-flow calculation includes these net land-related cash flows.
- Convertible notes had $650 million aggregate principal outstanding: $400 million due 2026 at 0.25% and $250 million due 2028 at 0.50%. Their combined net carrying amount was $472.0 million. The $25 million revolving credit facility was terminated in May 2021 with no borrowings outstanding.
- The company issued the 2028 notes in March 2021, generating approximately $217.0 million net proceeds after specified costs. Q2 interest expense, net, was $7.7 million, up $3.8 million year over year, primarily due to convertible-note expense and lower interest income.
Outlook, risks and notable items
- No specific numeric revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management expects operating expenses to increase in absolute dollars and plans continued investment in R&D, sales and marketing, and international expansion.
- Management reported stable or increased usage among customer groups affected by COVID-19 but warned that future customer usage, demand and buying behavior could be volatile as the pandemic abates.
- Dollar-based net retention was 114% for Q2 and 120% for the first half, down from 133% and 130%, respectively, in the comparable 2020 periods. Active CPaaS accounts increased 61% year over year to 3,051.
- A new Raleigh headquarters project is expected to commence occupancy around May 2023, under a 20-year lease. Estimated payments over the initial term are approximately $495.7 million; the lease liability had not been recognized at June 30, 2021 because the lease had not commenced.
- Bandwidth faces unresolved lawsuits alleging failures to bill, collect and remit 911 taxes or surcharges in several jurisdictions, as well as a putative class action concerning alleged failure to block unsolicited calls. Management intends to defend the matters; outcomes are uncertain.
- Other principal risks include integration and purchase-accounting uncertainty for Voxbone, customer usage and concentration, competition and pricing pressure, network reliability and cybersecurity, evolving telecommunications and privacy regulation, foreign exchange exposure, and the ability to fund cash settlement or repurchase obligations on convertible notes.
- Management stated disclosure controls were effective at a reasonable-assurance level and reported no material quarter changes in internal control over financial reporting.
Investor verification priorities
- Separate organic growth from Voxbone’s contribution and assess the sustainability of usage-driven revenue growth and the decline in retention metrics.
- Review the reconciliation and exclusions in adjusted EBITDA, non-GAAP net income and free cash flow, especially the land transaction’s effect on reported free cash flow.
- Assess cash generation, capital expenditure needs and the scale and timing of the new headquarters’ long-term lease commitments.
- Check convertible-note conversion, cash-settlement and repurchase terms, including the 2026 notes’ conditional convertibility and capped-call limitations.
- Track the status, potential exposure and developments in the 911 tax and unsolicited-call litigation, and any changes to tax reserves or regulatory requirements.
- Monitor Voxbone integration, acquisition accounting adjustments, customer retention, employee attrition and COVID-19-related demand uncertainty.