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Bandwidth Announces Second Quarter 2018 Financial Results

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Bandwidth Announces Second Quarter 2018 Financial Results

Total revenue of $48.3 million, up 22% year-over-year

CPaaS Revenue of $39.8 million, up 26% year-over-year

Active CPaaS Customers of 1,092, up 26% year-over-year

Dollar-based net retention rate of 119%, up from 105% in Q2 2017

PR Newswire

RALEIGH, N.C., July 31, 2018 /PRNewswire/ -- Bandwidth Inc. (NASDAQ:BAND), a software company focused on communications for the enterprise, today announced financial results for the second quarter ended June 30, 2018.

(PRNewsfoto/BANDWIDTH.COM)

"Our second quarter results demonstrate that we are executing against our strategic initiatives as highlighted by our dollar-based net retention rate of 119%," stated David Morken, chief executive officer of Bandwidth. "Bandwidth's financial results demonstrate the continued strength of our core business and the impact of our differentiators in the enterprise segment. This includes our highly scalable platform with our easy to use APIs, our vertically integrated nationwide IP voice network that we built and operate and our one of a kind CPaaS based 911 capabilities. We are excited to be in the best position to take advantage of the growing multi-billion dollar CPaaS opportunity."

Second Quarter 2018 Financial Highlights

  • Revenue: Total revenue for the second quarter of 2018 was $48.3 million, up 22% compared to $39.5 million for the second quarter of 2017. Within total revenue, CPaaS revenue was $39.8 million, up 26% compared to $31.5 million for the second quarter of 2017. Other revenue contributed the remaining $8.5 million for the second quarter of 2018. Other revenue was $8.0 million in the same period last year.
  • Gross Profit: Gross profit for the second quarter of 2018 was $21.7 million, compared to $17.2 million for the second quarter of 2017. Gross margin for the second quarter of 2018 was 45%, compared to 44% for the second quarter of 2017. Non-GAAP gross profit for the second quarter of 2018 was $22.8 million, compared to $18.3 million for the second quarter of 2017. Non-GAAP gross margin was 47% for the second quarter of 2018, compared to 46% for the second quarter of 2017.
  • Net Income: Net income for the second quarter of 2018 was $10.5 million, or $0.50 per share, based on 20.9 million weighted average diluted shares outstanding. This includes a $7.1 million income tax benefit from option exercises. During the second quarter of 2017, net income attributable to common stockholders was $1.7 million, or $0.13 per share, based on 12.9 million weighted average diluted shares outstanding for the second quarter of 2017.
  • Non-GAAP Net Income: Non-GAAP Net Income for the second quarter of 2018 was $4.1 million, or $0.20 per share, based on 20.9 million weighted average diluted shares outstanding. Non-GAAP net income excludes the $7.1 million income tax benefit from option exercises. This compares to a Non-GAAP net income of $2.5 million, or $0.17 per share, based on 14.7 million weighted average diluted shares outstanding for the second quarter of 2017.
  • Adjusted EBITDA: Adjusted EBITDA was $3.2 million for the second quarter of 2018, compared to $5.8 million for the second quarter of 2017.


Additional information regarding the non-GAAP financial measures discussed in this release, including an explanation of these measures and how each are calculated are included below under the heading "Non-GAAP Financial Measures." A reconciliation of GAAP to non-GAAP financial measures has also been provided in the financial tables included below.

Second Quarter 2018 Key Metrics

  • The number of active CPaaS customers was 1,092 as of June 30, 2018, an increase of 26% from 865 as of June 30, 2017.
  • The dollar-based net retention rate was 119% during the second quarter of 2018, compared to 105% during the second quarter of 2017.

Additional information regarding our active CPaaS customers and dollar-based net retention rate and how each are calculated are included below.

Financial Outlook

As of July 31, 2018, Bandwidth is providing guidance for its third quarter and full year 2018 as follows:

  • Third Quarter 2018 Guidance: CPaaS revenue is expected to be in the range of $40.0 million to $40.5 million. Total revenue is expected to be in the range of $47.7 million to $48.2 million. Non-GAAP earnings per share is expected to be a loss in the range of ($0.19) to ($0.21) per share, using 18.8 million weighted average basic shares outstanding.
  • Full Year 2018 Guidance: CPaaS revenue is expected to be in the range of $160.7 million to $161.7 million. Total revenue is expected to be in the range of $198.0 million to $199.0 million. Non-GAAP earnings per share ("EPS") is expected to be in the range of approximately of $0.04 to $0.09 per share, using 20.9 million weighted average diluted shares outstanding.

Bandwidth has not reconciled its third quarter and full-year guidance related to non-GAAP net income to GAAP net income and non-GAAP EPS to GAAP EPS, because stock-based compensation cannot be reasonably calculated or predicted at this time. Accordingly, a reconciliation is not available without unreasonable effort.

Quarterly Conference Call

Bandwidth will host a conference call today at 5:00 p.m. Eastern Time to review the Company's financial results for the second quarter ended June 30, 2018. To access this call, dial (877) 407-0792 for the U.S. or Canada, or (201) 689-8263 for international callers. A live webcast of the conference call will be accessible from the Investors section of Bandwidth's website at https://investors.bandwidth.com, and a recording will be archived and accessible at https://investors.bandwidth.com. An audio replay of this conference call will also be available through August 14, 2018, by dialing (844) 512-2921 for the U.S. or Canada, or (412) 317-6671 for international callers, and entering passcode 13681237.

About Bandwidth Inc.

Bandwidth (NASDAQ:BAND) is a software company focused on communications for the enterprise. Companies like Google, Microsoft, and Ring Central use Bandwidth's APIs to easily embed voice, messaging and 9-1-1 access into software and applications. Bandwidth is the first and only CPaaS provider offering a robust selection of communications APIs built around their own nationwide IP voice network- one of the largest in the nation. More information available at www.bandwidth.com.

Forward-Looking Statements

This press release includes forward-looking statements. All statements contained in this press release other than statements of historical facts, including, without limitation, statements regarding our future financial and business performance for the third quarter 2018 and full-year 2018, attractiveness of our product offerings and platform and the value proposition of our products, are forward-looking statements. The words "anticipate," "believe," "continue," "estimate," "expect," "intend," "guide," "may," "will" and similar expressions and their negatives are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks and uncertainties, including, without limitation, risks related to our rapid growth and ability to sustain our revenue growth rate, competition in the markets in which we operate, market growth, our ability to innovate and manage our growth, our ability to expand effectively into new markets, our ability to operate in compliance with applicable laws as well as other risks and uncertainties set forth in the "Risk Factors" section of our prospectus related to the initial public offering (IPO), filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on November 13, 2017 and subsequent reports that we file with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, we cannot guarantee future results, levels of activity, performance, achievements or events and circumstances reflected in the forward-looking statements will occur. We are under no obligation to update any of these forward-looking statements after the date of this press release to conform these statements to actual results or revised expectations, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this press release.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with Generally Accepted Accounting Principles in the United States, or GAAP, we provide investors with certain non- GAAP financial measures and other business metrics, which we believe are helpful to our investors. We use these Non-GAAP financial measures and other business metrics for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these Non-GAAP financial measures and other business metrics provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

The presentation of Non-GAAP financial information and other business metrics is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. While our Non-GAAP financial measures and other business metrics are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, we urge investors to review the reconciliation of these financial measures to the comparable GAAP financial measures included above, and not to rely on any single financial measure to evaluate our business.

We define Non-GAAP gross profit as gross profit after adding back depreciation and amortization and stock-based compensation. We add back depreciation and amortization and stock-based compensation because they are non- cash items. We eliminate the impact of these non-cash items, because we do not consider them indicative of our core operating performance. Their exclusion facilitates comparisons of our operating performance on a period-to- period basis. Therefore, we believe that showing gross margin, as adjusted to remove the impact of these non- cash expenses, such as depreciation, amortization and stock-based compensation, is helpful to investors in assessing our gross profit and gross margin performance in a way that is similar to how management assesses our performance.

We calculate Non-GAAP gross margin by dividing adjusted gross profit by revenue, expressed as a percentage of revenue.

We define Non-GAAP net income as net income adjusted for certain items affecting period to period comparability. Non-GAAP net income excludes stock-based compensation, change in fair value of shareholders' antidilutive arrangement, amortization of acquired intangible assets related to the Dash acquisition, impairment charges of intangibles assets, loss (gain) on disposal of property and equipment, estimated tax impact of above adjustments, income tax benefit resulting from excess tax benefits associated with the exercise of stock options, benefit resulting from the release of the valuation allowance on our deferred tax assets ("DTA"), and impact on remeasurement of DTA as a result of 2017 tax reform.

We define adjusted EBITDA as net income adjusted to reflect the addition or elimination of certain income statement items including, but not limited to: income tax expense (benefit), interest expense, net, depreciation and amortization expense, stock-based compensation expense, impairment of intangible assets, and loss (gain) from disposal of property and equipment. We have presented Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital. In particular, we believe that the exclusion of certain items in calculating Adjusted EBITDA can produce a useful measure for period-to-period comparisons of our business.

We define Free Cash Flow as net cash provided by or used in operating activities less net cash used in investments of property, plant and equipment activities and capitalized development costs for software for internal use. We believe free cash flow is a useful indicator of liquidity and provides information to management and investors about the amount of cash generated from our core operations that can be used for investing in our business. Free cash flow has certain limitations in that it does not represent the total increase or decrease in the cash balance for the period, it does not take into consideration investment in long-term securities, nor does it represent the residual cash flows available for discretionary expenditures. Therefore, it is important to evaluate free cash flow along with our condensed consolidated statements of cash flows.

We believe that these Non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

While a reconciliation of Non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis as a result of the uncertainty regarding, and the potential variability of, many of these costs and expenses that we may incur in the future, we have provided a reconciliation of Non-GAAP financial measures and other business metrics to the nearest comparable GAAP measures in the accompanying financial statement tables included in this press release.

We define an active CPaaS customer account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $100 of revenue in the last month of the period. We believe that the use of our platform by active CPaaS customer accounts at or above the $100 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform at levels below $100 per month. A single organization may constitute multiple unique active CPaaS customer accounts if it has multiple unique account identifiers, each of which is treated as a separate active CPaaS customer account.

Our dollar-based net retention rate compares the CPaaS revenue from customers in a quarter to the same quarter in the prior year. To calculate the dollar-based net retention rate, we first identify the cohort of customers that generate CPaaS revenue and that were customers in the same quarter of the prior year. The dollar-based net retention rate is obtained by dividing the CPaaS revenue generated from that cohort in a quarter, by the CPaaS revenue generated from that same cohort in the corresponding quarter in the prior year. When we calculate dollar-based net retention rate for periods longer than one quarter, we use the average of the quarterly dollar-based net retention rates for the quarters in such period.

 

 


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME

(In Thousands, Except Share and per Share Amounts)

(unaudited)






Three months ended

Six months ended


June 30,

June 30,


2017

2018

2017

2018

Revenue 

$

39,526

$

48,304

$

79,151

$

101,316

Cost of revenue 

22,294

26,566

43,860

51,930

Gross profit 

17,232

21,738

35,291

49,386

Operating expenses: 





     Research and development 

2,409

4,435

5,091

8,216

     Sales and marketing 

2,413

4,654

4,971

9,176

     General and administrative

8,257

11,490

15,894

22,059

Total operating expenses 

13,079

20,579

25,956

39,451






Operating income

4,153

1,159

9,335

9,935

Other (expense) income, net  

(991)

90

(1,412)

139

Income before taxes  

3,162

1,249

7,923

10,074

Income tax (provision) benefit 

(1,215)

9,263

(2,987)

6,629

Net income 

$

1,947

$

10,512

$

4,936

$

16,703

Other comprehensive income (loss)  





     Unrealized gain (loss) on marketable securities, net of income
     tax benefit 

$

$

4

$

$

(2)

Total comprehensive income 

$

1,947

$

10,516

$

4,936

$

16,701






Earnings per share: 





Net income 

$

1,947

$

10,512

$

4,936

$

16,703

     Less: net income allocated to participating securities  

254

645

Net income attributable to common stockholders 

$

1,693

$

10,512

$

4,291

$

16,703






Net income per share:  





     Basic 

$

0.14

$

0.58

$

0.36

$

0.93

     Diluted 

$

0.13

$

0.50

$

0.33

$

0.80






Weighted average number of common shares outstanding:  





     Basic 

11,814,584

18,154,964

11,806,619

17,908,159

     Diluted 

12,889,334

20,893,653

12,977,606

20,866,777

 

 

The Company recognized total stock-based compensation expense in continuing operations as follows:





Three months ended  

Six months ended  


June 30,

June 30,  


2017

2018

2017

2018

Cost of revenue

$

21

$

32

$

41

$

49

Research and development

30

129

62

203

Sales and marketing

43

140

70

218

General and administrative

150

461

317

785

Total

$

244

$

762

$

490

$

1,255

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS  

(In Thousands)

(unaudited)











December 31,

June 30,  


2017

2018

Assets  



Current assets:



     Cash and cash equivalents 

$

37,627

$

45,806

     Marketable securities 

10,992

     Accounts receivable, net of allowance for doubtful accounts 

21,225

23,001

     Prepaid expenses and other current assets 

6,400

7,395

Total current assets 

65,252

87,194

Property and equipment, net 

14,946

19,331

Intangible assets, net 

7,643

7,348

Deferred costs, non-current 

2,068

1,811

Other long-term assets 

1,192

798

Goodwill 

6,867

6,867

Deferred tax asset 

6,526

13,204

Total assets 

$

104,494

$

136,553

Liabilities and stockholders' equity 



Current liabilities: 



     Accounts payable 

$

3,025

$

1,786

     Accrued expenses and other current liabilities  

15,725

18,531

     Current portion of deferred revenue and advanced billings  

5,768

5,607

Total current liabilities  

24,518

25,924

Other liabilities 

716

2,392

Deferred revenue, net of current portion  

2,549

6,851

Total liabilities 

27,783

35,167

Stockholders' equity: 



     Class A and Class B common stock 

17

19

     Additional paid-in capital  

102,465

110,437

     Accumulated deficit   

(25,771)

(9,068)

     Accumulated other comprehensive loss  

(2)

Total stockholders' equity  

76,711

101,386

Total liabilities and stockholders' equity   

$

104,494

$

136,553

 

  

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)








Six months ended


June 30,


2017

2018

Operating activities



Net income

$

4,936

$

16,703

Adjustments to reconcile net income to net cash provided by operating activities:



Depreciation and amortization

2,821

2,683

Accretion of bond discount

(26)

Amortization of debt issuance costs

64

32

Stock-based compensation

490

1,255

Change in fair value of shareholders' anti-dilutive arrangement

553

Deferred taxes

2,456

(6,677)

Loss on disposal of property and equipment

9

10

Changes in operating assets and liabilities:



Accounts receivable

(130)

(1,776)

Prepaid expenses and other assets

(1,180)

(620)

Deferred costs

(598)

225

Accounts payable

(2,997)

(2,375)

Accrued expenses and other liabilities

(2,229)

3,542

Deferred revenue and advanced billings

811

4,141

Net cash provided by operating activities

5,006

17,117

Investing activities



Purchase of property and equipment

(1,123)

(3,113)

Capitalized software development costs

(1,598)

(1,547)

Proceeds from sale of property and equipment

3

3

Purchase of marketable securities

(13,995)

Maturities of marketable securities

3,000

Net cash used in investing activities

(2,718)

(15,652)

Financing activities



Borrowings on line of credit

4,000

Repayments on line of credit

(6,500)

Payments on capital leases

(23)

(50)

Repayments on term loan

(1,000)

Payment of costs related to the initial public offering

(285)

Proceeds from issuances of common stock

109

7,004

Net cash (used in) provided by financing activities

(3,414)

6,669

Net (decrease) increase in cash, cash equivalents, and restricted cash

(1,126)

8,134

Cash, cash equivalents, and restricted cash, beginning of period

7,028

37,870

Cash, cash equivalents, and restricted cash, end of period

$

5,902

$

46,004

Supplemental disclosure of cash flow information



Cash paid during the year for interest

$

965

$

45

Cash paid for taxes

$

484

$

155

Supplemental disclosure of noncash investing and financing activities



Purchase of property and equipment, accrued but not paid

$

74

$

2,126

 

 

Reconciliation of Non-GAAP Financial Measures

(In Thousands, Except Share and per Share Amounts)

(Unaudited)


Non-GAAP Gross Profit and Non-GAAP Gross Margin

     Consolidated







Three months ended

Six months ended


June 30,

June 30,


2017

2018

2017

2018

Consolidated Gross Profit 

$

17,232

$

21,738

$

35,291

$

49,386

     Depreciation 

1,036

1,015

2,083

2,078

     Stock-based compensation 

21

32

41

49

Non-GAAP Gross Profit 

$

18,289

$               22,785

$

37,415

$

51,513

Non-GAAP Gross Margin %  

46 %

47 %

47 %

51 %






By Segment  





CPaaS  











Three months ended

Six months ended


June 30,

June 30,


2017

2018

2017

2018


(In thousands)

CPaaS Gross Profit  

$

12,628

$

16,696

$

26,047

$

33,688

     Depreciation     

1,036

1,015

2,083

2,078

     Stock-based compensation  

21

32

41

49

Non-GAAP Gross Profit     

$

13,685

$

17,743

$

28,171

$

35,815

Non-GAAP CPaaS Gross Margin %  

43 %

45 %

45 %

45 %






Other





There are no non-GAAP adjustments to gross profit for the Other segment.

 

 

Adjusted EBITDA







Three months ended

Six months ended


June 30,

June 30,


2017

2018

2017

2018


(In thousands)

Net income

$

1,947

$

10,512

$

4,936

$

16,703

Income tax provision (benefit) (2)

1,215

(9,263)

2,987

(6,629)

Interest expense (income), net

438

(90)

859

(139)

Depreciation

1,235

1,166

2,401

2,388

Amortization

210

130

420

295

Stock-based compensation

244

762

490

1,255

Loss on disposal of property and equipment

1

9

10

Change in fair value of shareholders' anti-dilutive arrangement (1)

553

553

Adjusted EBITDA

$

5,842

$

3,218

$

12,655

$

13,883

(1)

Relates to an anti-dilutive agreement which allows certain principal non-founder shareholders the ability to purchase additional common shares. See Note 4, Fair Value of Financial Instruments, in the Annual Report on Form 10-K for further explanation.

(2)

Includes the tax benefit of $7,052 associated with the exercise of stock options

 

 

Reconciliation of Non-GAAP Financial Measures

(In Thousands, Except Share and per Share Amounts)

(Unaudited)  


Non-GAAP Net Income















Three months ended

Six months ended


June 30,

June 30,


2017

2018

2017

2018


(In thousands)

Net income  

$

1,947

$

10,512

$

4,936

$

16,703

     Stock-based compensation  

244

762

490

1,255

     Change in fair value of shareholders' anti-dilutive
     arrangement (1)  

553

553

     Amortization related to acquisitions  

130

130

260

260

     Loss on disposal of property and equipment  

1

9

10

     Estimated tax effects of adjustments 

(355)

(229)

(501)

(391)

     Income tax benefit of option exercises  

(7,052)

(7,052)

Non-GAAP net income          

$

2,519

$

4,124

$

5,747

$

10,785






Non-GAAP net income per Non-GAAP share   





Basic 

$

0.19

$

0.23

$

0.42

$

0.60

Diluted 

$

0.17

$

0.20

$

0.39

$

0.52






Non-GAAP Weighted Average Number of Shares outstanding   





Basic 

11,814,584

18,154,964

11,806,619

17,908,159

Series A redeemable convertible preferred stock outstanding  

1,775,000

1,775,000

Non-GAAP Basic Shares  

13,589,584

18,154,964

13,581,619

17,908,159






Diluted 

12,889,334

20,893,653

12,977,606

20,866,777

Series A redeemable convertible preferred stock outstanding    

1,775,000

1,775,000

Non-GAAP Diluted Shares     

14,664,334

20,893,653

14,752,606

20,866,777


(1)

Relates to an anti-dilutive agreement which allows certain principal non-founder shareholders the ability to purchase additional
common shares. See Note 4, Fair Value of Financial Instruments, in the Annual Report on Form 10-K for further explanation.

 

Free Cash Flow





Three months ended

Six months ended


June 30,

June 30,


2017

2018

2017

2018


(In thousands)

Net cash provided by operating activities

$

5,975

$

5,874

$

5,006

$

17,117

Net cash used in investing in capital assets (1)

(1,914)

(3,258)

(2,721)

(4,660)

Free cash flow

$

4,061

$

2,616

$

2,285

$

12,457


(1)

 Represents the acquisition cost of property, equipment and capitalized development costs for software for internal use.

 

 

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SOURCE Bandwidth Inc.

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