Bandwidth Inc. (NASDAQ:BAND) Q4 2023 Earnings Call Transcript
Bandwidth Inc. (NASDAQ:BAND) Q4 2023 Earnings Call Transcript February 28, 2024
Bandwidth Inc. beats earnings expectations. Reported EPS is $0.38, expectations were $0.24. Bandwidth Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and welcome to the Bandwidth Inc. Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to hand the call to Sarah Walas. Please go ahead.
Sarah Walas: Thank you. Good morning and welcome to Bandwidth's fourth quarter 2023 earnings call. Today, we'll discuss the results announced in our press release issued earlier this morning. The press release and an earnings presentation with historical financial highlights can be found on the Investor Relations page at investors.bandwidth.com. With me on the call this morning is David Morken, our CEO and Daryl Raiford, our CFO. They will begin with prepared remarks and then we will open up the call for Q&A. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the first quarter and full year of 2024. We caution you not to put undue reliance on these forward-looking statements as they may involve risks and uncertainties that may cause actual results to vary materially from any future results or outcomes expressed or implied by the forward-looking statements.
Any forward-looking statements made on this call and in the presentation slides reflect our analysis as of today, and we have no plans or obligation to update them. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our latest 10-K filing as updated by other SEC filings, all of which are available on the Investor Relations section of our website at bandwidth.com and on the SEC's website at sec.gov. During the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued earlier this morning as well as in the earnings presentation, which are located on our website at investors.bandwidth.com.
With that, let me turn the call over to David.
David Morken : Thank you, Sarah. Welcome to Bandwidth's Q4 2023 earnings call. We're pleased to report we exceeded our guidance for the fourth quarter, capping off a full year of solid execution. We grew and diversified our revenue by adding a number of significant customers across our commercial messaging and direct to large enterprise categories. We invested in our business and introduced new products like our next generation Maestro platform and AIBridge, and we grew profitability 39% year-over-year delivering record adjusted EBITDA in the fourth quarter and yielding record second half free cash flow. The team is grateful and honored by our customers’ trust in Bandwidth to provide their business critical communication services around the world.
Thank you to our band mates for serving our customers, executing our mission and delivering these strong results, and I thank God as we charge into our 25 year as a company. Last year, during our Investor Day, we laid out a four year plan and said we were more confident about our mission to develop and deliver the power to communicate than when we started the company or at any time since. After exceeding our plans for the first year, we are even more confident today. That's because Bandwidth is leading in the front ranks of the worldwide cloud communications revolution, which is a secular trend still in its early stages. Automating voice, text messaging and emergency calling through cloud software is the fastest way for enterprises to build a better brand experience, reduce operating costs, leverage emerging AI technologies and simplify and derisk digital transformation company-wide.
And they're doing it with Bandwidth because we are the only provider in our space with a unique combination of global owned and operated cloud network, AI ready capabilities, programmable software APIs and deep regulatory insight. Today we are the only CPassS provider with our own global communications cloud. The depth and breadth of our competitive moat is evidenced by the fact that we serve all the world's leading power platforms in cloud communications, as recognized by Gartner Research, whether it's iconic hyperscalers like Microsoft, Google or Zoom for hybrid work, customer experience, pioneers like AWS, Genesys and Five9 for cloud contact centers or the many innovative SaaS and application companies building text messaging into everything from healthcare to conversational e-commerce, Bandwidth is their communications cloud.
All these players count on us for global reach, scale, reliability, security, leading edge innovation and incredible customer support that is always available 24/7. During the past year, we continued to expand our investment in innovation with a launch of many new features and capabilities. In our global communications plans category we improved our already best-in-class customer experience with expansive new self-service capabilities. That's why TNS a provider serving 27,000 separate businesses switched to Bandwidth from a key competitor placing their trust in us as the sole provider for their mission critical toll-free calling and other programmable voice services. In our enterprise category, we launched 10 new products, including Bandwidth Maestro, our AI ready next gen software platform, which was judged by our peers to be such a game changer that it won best of show at Enterprise Connect.
In fact, industry recognition for Maestro continues as it won a product of the year award from internet Lefty just last week. These new offerings, each substantial in their own right, drove our opportunity pipeline to new highs, accelerated our enterprise revenue growth 21% year-over-year and led to new customer wins like Ally Financial, Western Union, Children's Health, Fabletics and so many others. All chose Bandwidth to improve their customer experiences and to adopt conversational AI. In our programmable services category, we are adding new global two-way messaging capabilities in more markets around the world, which we expect to continue to fuel our growth. Last year we grew commercial messaging 32% year-over-year. The most demanding high volume senders are using our global messaging API for diverse commercial use cases across fintech, healthcare, patient engagement, civic engagement, conversational e-commerce and more, like WellSky, for example, a premier health and community care technology provider in North America, which in Q4 moved the rest of its HIPAA-compliant messaging and voice to Bandwidth from a competitor trusting us to deliver vital communications between their more than 600,000 caregivers and 4,000 personal care agencies across the U.S. and Canada.
In 2024, we expect our growth in commercial messaging to be joined by further benefit from the U.S. election season, where our capabilities uniquely serve many longstanding customers. Each one of these examples demonstrates the growth and rapid innovative capabilities of the Bandwidth communications cloud. As we reflect on the past year, we are pleased with our execution and forward momentum through any crosswinds in the current macro environment. For example, we hosted more in-person visits in 2023 from large Global 2000 enterprise customers and prospects than in any other year by far. We launched Maestro and AIBridge our biggest innovations ever, and as you would expect from a durable franchise, our profitability has shown remarkable growth significantly outpacing our revenue increases as we deliver on our promise to grow revenue profitably.
As we enter our milestone 25 year as a company, we are more confident in our mission and our opportunity than ever before. I'll now turn it over to Daryl to walk through the details of our financial results and outlook.
Daryl Raiford : Thank you, David, and good morning, everyone. Our team performed exceptionally well in the fourth quarter, rounding out a solid year of consistent performance and positioning us to reach our 2026 medium-term targets. We're proud of what we've accomplished and confident that our dedication, hard work and unwavering commitment to excellence will continue to drive us forward. The team is laser focus on accelerating sustainable, profitable growth is evident in our results once again with fourth quarter and full year revenue and adjusted EBITDA, both exceeding high-end of guidance ranges as we benefited from strong usage in commercial messaging and operating discipline. Fourth quarter total revenue of $165 million, increased 5% year-over-year.
Cloud communications revenue, which is total revenue excluding pass-through messaging surcharges was $126 million, up 12% when excluding the year-over-year effect of $11 million of cyclical political campaign messaging revenue in 2022. Our full year 2023 revenue was $601 million, up 5% year-over-year, cloud communications revenue was $479 million, also up 5% year-over-year when excluding last year's political campaign messaging benefit. Messaging continues to be a valuable tool businesses use to engage with customers and differentiate themselves in the market. The strong demand for messaging and Bandwidth’s software automated ability to deliver at scale drove 32% revenue growth year-over-year in commercial messaging, driven by increasing usage in conversational e-commerce, conversational marketing and financial services sectors.
Total messaging for the full year reached 18% of cloud communication revenue. At Investor Day, one year ago, we provided a new view of our revenue by market offer and shared our expectations and market growth rates for those three categories. In our global communications plans category, revenue growth for 2023 was roughly flat as expected due to usage patterns in the macro environment last year. In 2023, our programmable services category, which primarily utilizes our messaging portfolio, delivered commercial revenue growth of 31% year-over-year. This growth in our programmable services category far outpaced the expected market growth CAGR of 21%. We cited at our Investor Day one year ago. We're very pleased with this performance, which provides meaningful support towards our 2026 medium-term revenue and gross margin targets.
Last year in our direct to enterprise customer category, we grew 21% year-over-year, handily exceeding the estimated market growth CAGR of 14% shared at Investor Day. Our customers love Bandwidth software automation. Our capabilities to simplify global communications, facilitate migration to the cloud, enable conversational AI experiences and orchestrate call flows between best in brief platforms aligns perfectly with the goals and objectives of the global 2000. I'd also like to remind you that programmable services and direct to enterprise enjoys gross margins in excess of our aggregate company gross margin of 55%. We're thrilled with the trajectory of the programmable and enterprise categories and expect them to be consistent contributors to achieving our 2026 medium-term gross margin target of greater than 60%.
Now turning to operating metrics, average annual revenue per customer continued to climb reaching $178,000 in the fourth quarter, reflecting our continued focus on and ability to serve large customer opportunities. Our customer name retention rate once again remained at excess of 99%, a result that speaks to the loyalty and durability of our customer base. Our 2023 net retention rate, which understandably reflected downward pressure from the absence of 2022 campaign revenue not present in 2023 was 101%. Adjusting for that absence, our net retention rate achieved 109%, an excellent growth result from our commercial customers for a year characterized by macro cross wins. I'm especially proud of our outstanding progress in accelerating profitability and generating cash.
We achieved a record 39% growth in adjusted EBITDA in 2023 and reached an inflection point in free cash flow, generating a record $31 million in the second half of the year. We ended the year with a cash and securities balance of $153 million far exceeding our business needs and providing us with a great deal of financial flexibility. We're excited as we look ahead to 2024, where we're expecting continued accelerating growth in commercial revenue and a tailwind from cyclical political campaign messaging related to the U.S. election season. Revenue in 2024 is expected to grow 16% to approximately $700 million and assumes a projected $40 million contribution from political campaign messaging and associated surcharges from the U.S. election season.
We expect to continue our acceleration in profitability with adjusted EBITDA growth of 50% year-over-year, accomplish through a combination of higher revenue and continued operating and spending discipline. We also expect 2024 free cash flow margins to make further progress towards our medium-term target of 15% margin and provide the flexibility to address our 2026 convertible notes and fully fund our business needs. I'd like to put a fine point on our healthy balance sheet. As I said, we ended 2023 with $153 million in cash and securities. Our March 2026 debt maturity has an outstanding face value of $175 million. With our adjusted EBITDA projection of approximately $72 million in 2024, a relatively light capital expenditures outlook of 3% of revenue and modest working capital, it's reasonable to project we could generate approximately $50 million of cash yielding a year in cash and securities balance clearly in excess of our 2026 debt requirements, a full 14 months in advance of that maturity.
All of this gives us confidence in reiterating our 2026 medium-term targets of 15% to 20% revenue CAGR, greater than 60% non-GAAP gross margins, greater than 20% adjusted EBITDA margins and greater than 15% free cash flow margins. In closing, I want to emphasize the remarkable journey Bandwidth has embarked upon this past year. Our record-breaking performance in profitibility and free cash flow, alongside the successful launch of our groundbreaking Maestro platform, underscore our unwavering commitment to innovation and excellence. The trust and partnership of our global customer base, powered by our unique blend of software automation, global network, AI-ready capabilities and regulatory expertise solidify our leadership in the cloud communications revolution.
Looking ahead, we remain focused on leveraging our competitive strengths to drive sustainable growth, enhance customer experiences and deliver long-term value to our shareholders. I am incredibly proud of our team's hard work and dedication, confident in our clear and focused strategic direction and excited about how we are executing the vision we outlined at Investor Day one year ago. Thank you again for your continued support to Bandwidth. I'd now like to turn the call over to the operator to begin the question-and-answer portion.
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