Bandwidth Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. Bandwidth provides cloud communications software APIs and network services; its reportable segments are CPaaS and Other. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $84.8 | $60.5 | $230.1 | $170.6 |
| Gross profit / margin | $39.2 / 46% | $27.4 / 45% | $106.2 / 46% | $78.6 / 46% |
| Operating income (loss) | $1.9 | $(4.6) | $(1.3) | $(14.2) |
| Net income (loss) | $(2.4) | $(1.0) | $(24.1) | $4.5 |
| Operating cash flow | $11.6 | $1.9 | $11.3 | $(3.5) |
| Free cash flow, non-GAAP | $9.3 | $(4.4) | $(0.1) | $(19.3) |
- Growth and customer measures: Q3 revenue rose 40% year over year; CPaaS revenue grew 43% to $73.8 million, while Other revenue increased 22% to $11.0 million. For the nine-month period, revenue grew 35% and CPaaS revenue 38%. Active CPaaS customer accounts increased 25% to 2,015; dollar-based net retention was 131% for Q3 and 130% for the nine-month period.
- Margins and expenses: Q3 CPaaS gross margin improved to 47% from 43%, while Other gross margin declined to 44% from 58%. Total operating expenses increased 17% in Q3 and 16% for the nine-month period, slower than revenue growth. Adjusted EBITDA, a non-GAAP measure, was $9.3 million in Q3 and $17.9 million for the first nine months, compared with losses of $0.6 million and $2.3 million, respectively, in 2019.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $300.2 million and other investments, consisting of time deposits, were $230.8 million. Current assets were $590.8 million against current liabilities of $57.8 million. The company reported $313.1 million of stockholders’ equity. Management said available cash, investments, credit capacity and operating cash flows were expected to meet working capital and capital expenditure needs for at least 12 months.
- Debt: The company issued $400 million of 0.25% convertible senior notes due 2026. Their balance-sheet carrying value was $277.5 million after unamortized discounts and issuance costs; the notes’ disclosed fair value was approximately $798.5 million. The company had no borrowings under its $25 million revolving credit facility, and reported compliance with its covenants.
Changes and notable items
- Revenue growth reflected higher voice and messaging usage, increased phone-number and 911 services, a more favorable usage mix, and new customers. Management attributed higher usage in part to COVID-19 work-from-home and communications demand, as well as messaging volumes related to the 2020 election. Some of this activity may not persist.
- For the nine months, operating cash flow improved from an outflow of $3.5 million to an inflow of $11.3 million, but free cash flow remained slightly negative. Accounts receivable increased by $16.2 million in operating cash-flow movements.
- Investing cash outflow was $242.2 million for the first nine months, primarily reflecting $230.8 million placed in other investments, plus capital spending and capitalized software. Financing cash inflow of $347.1 million chiefly reflected the $400 million note issuance, partly offset by capped-call and issuance costs.
- The company recorded a $14.2 million tax expense to establish a valuation allowance on U.S. deferred tax assets; the deferred tax asset fell from $34.9 million at year-end 2019 to zero. This contributed to the nine-month GAAP net loss. Management changed its estimated benefit period for nonrefundable upfront customer fees from three to four years, reducing nine-month revenue by approximately $1.3 million and cost of revenue by $0.7 million.
- After the quarter, Bandwidth agreed to acquire Voxbone in a transaction valued at €446 million, with approximately $400 million cash consideration and approximately $128 million in Bandwidth shares, subject to customary adjustments and closing conditions. Management expected closing in Q4 2020. The company reported $1.7 million of related expenses in the first nine months; the acquisition’s effects are not included in its operating discussion.
Outlook, risks and contingencies
- The filing provides no numerical revenue or earnings guidance. Management expected operating expenses to increase in absolute dollars and anticipated continued investment in R&D, sales and marketing, and international expansion. It expected elevated COVID-related usage to continue until pandemic effects abated, while noting that longer-term effects on demand and performance remained uncertain.
- Convertible noteholders may have conversion rights when specified conditions are met. Bandwidth stated its current intent to settle the notes’ principal in cash; conversions or repurchases could affect liquidity. Capped calls are intended to offset some potential dilution, subject to a cap.
- Bandwidth faces unresolved lawsuits alleging failure to bill, collect and remit certain 911 taxes and surcharges in Illinois, New York, Pennsylvania and Rhode Island. Management said it believed resolution would not materially adversely affect financial position or results, but acknowledged litigation is uncertain.
- Other material risks include reliance on usage and enterprise customers, competition and pricing pressure, network and third-party supplier reliability, regulatory and privacy obligations, COVID-19 uncertainty, and integration and financing risks associated with the proposed Voxbone acquisition. One customer represented approximately 13% of net accounts receivable at quarter-end, although no customer exceeded 10% of revenue.
Most important facts for investors to verify
- Whether Voxbone closed on the expected timetable, the final cash and share consideration, and resulting liquidity, dilution and integration costs.
- Whether COVID- and election-related traffic persists, and whether usage growth converts to sustainable margins and cash generation.
- Cash collection trends, including the elevated receivables balance and the customer concentration within receivables.
- The status and potential financial exposure of the 911 tax and surcharge litigation, and the basis for the deferred-tax valuation allowance.
- Convertible-note conversion and settlement requirements, including potential cash needs and dilution, and the company’s continued compliance with credit-facility covenants.