Bandwidth Q4 2024 Earnings Call Transcript

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Provided by Quartr
February 20, 2025

There are 9 speakers on the call.

Operator

Good day, and welcome to the Van Wyndt Fourth Quarter and Full Year twenty twenty four Earnings Conference Call. All participants will be in listen only mode.

Operator

After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. I'd now like to turn the conference over to Sarah Wallace, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning. Welcome to Bandwidth's fourth quarter twenty twenty four earnings call. I'm joined today by David Morkin, our CEO and Daryl Raiford, our CFO. They will begin with prepared remarks and then we will open up the call for Q and A. Our earnings press release was issued earlier today.

Speaker 1

The press release and an earnings presentation with historical financial highlights and a reconciliation of GAAP to non GAAP financial results can be found on the Investor Relations page at investors.bandwidth.com. 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 2025 and our current product roadmap. 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.

Speaker 1

With that, let me turn the discussion over to David.

Speaker 2

Thank you, Sarah, and good morning, everyone. Welcome to Bandwidth's fourth quarter and full year twenty twenty four earnings call. This morning, we are excited to share our 2024 results with exceptional performance across all key metrics. Before Daryl dives into the specifics, let me highlight our fourth quarter achievements. 27% revenue growth with record annual non GAAP gross margins, 25% EBITDA growth, 122% net retention rate, and average annual recurring revenue per customer is now at $226,000 a year.

Speaker 2

Our operational momentum was equally strong with record breaking quarterly messaging volume, successful global rollout of our Universal Platform, hundreds of enterprises now utilizing our Maestro platform, while Maestro's AI bridge software enables customers to develop new voice AI capabilities on this award winning platform, and 29% growth in enterprise revenue, driven by strong CCaaS and UCaaS adoption. We want to thank our customers worldwide for their continued trust and partnership, many spanning more than a decade. To our global bandmates, your innovation and customer dedication have been extraordinary. And I thank God for blessing us and our work together. Looking ahead in 2025, we are uniquely positioned to capitalize on the massive opportunity in enterprise communications.

Speaker 2

Let me explain why. First, we've earned the trust of the world's most demanding enterprises for their mission critical communications needs. We are the only provider offering a global communications cloud combined with advanced automation, AI capabilities and premium human support. This unique position has earned us IDC's recognition as a CPaaS leader for the fourth consecutive year. Bandwidth has been a leader in every major communications transformation throughout our history.

Speaker 2

We pioneered cloud communications APIs on our own network, then revolutionized enterprise messaging at scale. Now we're driving the most transformative wave yet, conversational AI in voice communications. This isn't just another iteration in technology, it is a revolutionary development in how enterprises interact with their customers. Every voice AI application and agent require five critical elements: high fidelity, low latency, rich data and context, and intelligent routing, along with seamless app integration. The Bandwidth Communications Cloud is unique in delivering all five.

Speaker 2

Our open technology approach gives customers freedom to choose their preferred AI solutions, positioning us as the essential platform for enterprise voice AI. Here's an example. A leading global hospitality brand is revolutionizing the guest experience by enabling visitors to simply speak to access hotel services, no typing required. Using Bandwidth's voice API, they've created a seamless system where guests can naturally interact with a voice AI assistant for everything from room service and housekeeping to concierge services. What's crucial here is that any interaction can instantly transfer to hotel staff when needed.

Speaker 2

This is the future of hospitality and it's built on our platform. We're seeing AI drive another major trend, accelerated enterprise cloud migrations. Companies are realizing that to leverage AI effectively, they need cloud based capabilities. This is where our Maestro platform with AI Bridge becomes transformative, turning what used to be months of integration work into something that can be done in hours. Let me share two recent wins that showcase this.

Speaker 2

First, one of the world's largest cruise lines chose Bandwidth for their first ever cloud contact center migration and they did it right before their peak holiday season. That is the ultimate vote of confidence. They chose us for three reasons, our proven CCaaS integration capabilities, our comprehensive communications offering and our track record of mission critical reliability. But what really sealed the deal was our ready to deploy voice AI capabilities, positioning them for future innovation. Second, a Fortune 25 healthcare provider needed to switch between cloud contact center platforms, traditionally a massive undertaking.

Speaker 2

Because Maestro is pre integrated with leading CCaaS platforms, we made this transition seamless. Their legacy provider quoted months for the same project. Even more compelling, our platform enables them to integrate AI capabilities that were simply impossible with their previous solution. We're also applying AI innovation to transform our own operations. Here's a recent example.

Speaker 2

Our AI analytics engine, which won a Stevie Award for Innovation, detected an incoming surge in call volume for one of our top banking customers. Before the bank even noticed the spike, our system had automatically scaled capacity to handle it. This kind of proactive AI driven support is why the world's largest companies trust us with their mission critical communications. Before wrapping up, I want to call out Divesh Agarwal's promotion to Chief Operating Officer on January 1. Divesh has embodied our commitment to customer success and innovation since joining us two years ago as Chief Software Strategy Officer.

Speaker 2

In his new mission, his leadership will be instrumental in executing our strategy, driving operational excellence and strengthening our global customer partnerships to deliver the next phase of our growth. In closing, 2024 was exceptional, but we believe we are just getting started. We're leading another transformation in cloud communications just as we did with cloud voice two decades ago and enterprise messaging after that. The AI revolution represents a shift as fundamental as the Internet itself. We are more excited about our opportunity to shape the future of enterprise communications today than we have ever been before.

Speaker 2

I'll now turn it over to Daryl to walk through the details of our financial results and outlook.

Speaker 3

Thank you, David. Bandwidth delivered strong financial results, exceeding guidance for both the fourth quarter and full year of 2024. This performance was driven by robust growth in voice and messaging across all customer categories. For our Q4 twenty twenty four results, total revenue increased by 27% to $210,000,000 with cloud communications revenue reaching $144,000,000 a 15% year over year increase. Non GAAP gross margin improved to 58% a three percentage point increase.

Speaker 3

EBITDA grew by 25% to $23,000,000 Free cash flow saw a significant increase of 130% reaching $30,000,000 In terms of full year 2024 results, total revenue reached $748,000,000 a 25% increase year over year. Cloud Communications revenue was $540,000,000 up 13% year over year. Full year non GAAP gross margin was 57%, a two percentage point increase. EBITDA increased substantially by 70% to $82,000,000 and free cash flow showed remarkable growth of 206% reaching $59,000,000 Political campaign messaging contributed $62,000,000 to total revenue and $23,000,000 to cloud communications revenue for the full year, in line with our expectations. Political campaign message revenue represented 4% of cloud communications revenue.

Speaker 3

Focusing on our full year 2024 cloud communications revenue growth, enterprise voice revenue grew 29 year over year, driven by strong demand within key verticals. Despite a relatively longer sales cycle, this category shows very positive demand patterns and benefits from margins approximately 20 percentage points higher than our overall company non GAAP gross margin. As the only global cloud communications voice provider and the only provider of an AI voice orchestration experience, we hold a unique position to service this market. Our largest category, Global Voice Plans, met our expectations at 3% revenue growth year over year. As the underlying communications provider for all Gartner Magic Quadrant leaders in UC and CX, We're encouraged by the stability and growing momentum in this category, especially anticipating our customers' plans to capture value and drive bandwidth cloud usage through their own AI initiatives.

Speaker 3

Programmable messaging accounted for 23% of cloud communications revenue and saw a 46% year over year increase, driven by demand from customers in key verticals, including e commerce, financial services, retail and healthcare as well as cyclical demand for political campaign messaging. Moving to operating metrics, net retention rate for full year 2024 was 122112% excluding political campaign revenue. Customer name retention remained well above 99%. Average annual recurring revenue per unit reached a record $226,000 or a record $208,000 when excluding the political campaign benefit. In summary, 2024 saw excellent business model performance.

Speaker 3

Revenue grew 25%. Within total revenue, cloud communications revenue grew 13%. Gross profit grew 18%. We set a record annual non GAAP gross margin of 57%. We invested in our business with over half of our six percentage point operating expense growth going to increases in R and D and innovation, All adding up to remarkable profit growth of 70% yielding an EBITDA margin of 15% representing a five percentage point increase from 2023.

Speaker 3

Now looking ahead to 2025, our business strategy remains consistent. As previously mentioned, we believe the wave of voice AI is approaching and we'll stay focused on three key principles: Strategically investing in our business, profitable growth and strengthening our capital structure. Along with these three principles, our 2025 outlook is shaped by two additional specific factors. First, we factored in the expected off year fluctuation in political campaign messaging. 2024 election cycle activity generated $62,000,000 in total revenue that of course won't reoccur this year.

Speaker 3

Second, our 2025 full year guidance overall represents prudence predicated upon the evolving economic conditions moderately stabilizing throughout 2025. Taking these factors into account, we expect full year total revenue of $740,000,000 to $760,000,000 which reflects growth of 8% to 11% when normalized for 2024 cyclical political campaign revenue. In terms of EBITDA, we expect to continue to benefit from the operating leverage inherent in our business model. And that's why, like the last two years, our guidance shows continued EBITDA growth with implied gross margin and free cash flow growth that exceeds our reported top line growth. Accordingly, we expect EBITDA to grow to $86,000,000 at the midpoint.

Speaker 3

Our 2025 profitability outlook reaffirms that we're on track to achieve our 2026 target of a 20% adjusted EBITDA margin. With that, I'll now turn the call over to the operator for the question and answer portion of today's call.

Operator

Thank And today's first question comes from Arjun Bhatia with William Blair. Please go ahead.

Speaker 4

Yes, perfect. Thank you for taking the question. One quick one, if I can just start on the fourth quarter results. It looks like if

Speaker 5

I am backing out political, it looks like cloud communications revenue ex political growth slowed slightly in Q4. So, Daryl, I'm curious what kind of excluding all the political noise, what ended up playing out in the fourth quarter? And how you're thinking of fourth quarter results plus that January net retention base as a starting point for your 2025 plans here?

Speaker 3

Hey there, thank you. We were really pleased with the execution this last year in 2024 with our record performance across revenue, profitability and free cash flow. For the full year, cloud communications grew 13% when we and when we adjust for the political campaign revenue, it grew 8%. For the fourth quarter, those adjustments were cloud communications revenue growing 15% and excluding campaign seven point something percent. So I think that it's pretty much the fourth quarter is really honestly in line with the full year.

Speaker 5

Okay, understood. And then just again going back to 2025 or the 2025 guide, how should we think about kind of growth rates across your three core kind of segments in Global Communications, Programmable Services and Enterprise. It seems like they're certainly getting some traction here with Maestro and Direct Enterprise. Should we expect that to be the big growth driver again in next year as we're looking at the outlook? And can you just please touch on the macro and the demand environment?

Speaker 5

It sounds like things are improving there, which is great to hear.

Speaker 3

Thank you. Yes. So certainly. So for the full year guide, just as a reminder, we've guided total revenue to $740,000,000 to $760,000,000 with a midpoint of $750,000,000 which is 9%, ten % growth at the midpoint when normalized for the $62,000,000 of political campaign messaging cyclicality. So that 8% to that 9%, ten % growth at the midpoint is we think is sturdy.

Speaker 3

It's sturdy and we're seeing that from growth expected growth across each of our customer categories, Global Voice plans, Enterprise Voice and Programmable Messaging. We're actually with Global Voice plans, we are expecting that the growth in 2025 to be more than it was in 2024. And that's a large portion of our revenue. And we're seeing as we said in the prepared remarks, we're seeing both stabilization and growing momentum. And we're really gratified with what we understand our customers what we see as our customers initiatives in AI, which drives cloud usage across our network.

Speaker 3

So we're pleased with that. Enterprise voice is only continues to be a really good driver, albeit from a small base. And we see early good traction already in 2025 on that. And programmable messaging, we think we see that pretty much steady on when adjusted for political campaign. Programmable messaging, we've been really proud of in terms of the commercial aspects of that, again adjusting for the political campaign cyclicality.

Speaker 3

Our commercial programmable messaging growth has well exceeded the growth of others and we believe we're taking market share and we'll continue to take market

Speaker 5

share. Perfect. Thank you. Thank you, Daryl. Appreciate it.

Operator

Thank you. And our next question today comes from Ryan McWilliams with Barclays. Please go ahead.

Speaker 4

Hey guys, thanks for the question. David, just I love your breakdown on why bandwidth was positioned well for the voice AI agent opportunity. Can you just talk about what like your customers are talking like describing their demand for that? Like is that like a couple of years from now or is that happening now? And then how does Bandwidth relationships with the contact center provider help win those voice AI agents that are attaching either before or on top of the contact center?

Speaker 4

Does that help your competitive positioning there? Thanks.

Speaker 2

Thank you, Ryan. Those are great questions. And some of the examples we gave in the period, I think, really highlight the answers. The leading global hospitality brand that we talked about has an AI agent experience for their customers that are staying in their hotels and they've really revolutionized the guest experience by allowing that AI agent to always be available and that the customer can speak to access everything from room service to housekeeping. Importantly, when

Operator

the AI agent needs to escalate,

Speaker 2

then it gets routed directly to hotel staff. So that leading brand already has an agent in market and used bandwidth in order to give that AI agent a voice. The second part of your question regarding contact centers and what role do they play, I think is really illustrated by the Fortune 25 healthcare provider that we talked about. They were switching cloud contact center platforms and the incumbents gave them an incredibly long timeframe for doing so. The incumbents gave them no Maestro equivalent orchestration layer that allowed them to be pre integrated with the new contact center platform they were migrating to, nor was there any way to integrate AI capabilities that this Fortune 25 healthcare provider has on its roadmap.

Speaker 2

So whether it's a leading hotel globally that already has an agent in market that's serving customers or a Fortune 25 healthcare provider that's planning for that agent AI future, we are watching our enterprise customers make decisions whether it's to migrate between cloud contact centers or to give an AI agent a voice. We're seeing that today.

Speaker 4

Perfect. I appreciate that color. And then Daryl, just on the first quarter guide, any puts and takes there? I know you were coming off the election, but it seemed a touch more conservative than folks were expecting. And any fluctuations in macro in the fourth quarter or in the first quarter that we should think about?

Speaker 4

Thanks.

Speaker 3

Yes, thank you. Absolutely, Ron. Our first quarter guidance of $169,000,000 at the midpoint is relatively flat year over year from the first quarter of twenty twenty four, but it is up 4% normalized for the $8,000,000 of political campaign benefit in the first quarter of twenty twenty four, the prior quarter. So we are seeing growth there. Now in terms of the mix within top line cloud communications and surcharges, we are expecting surcharges to be lower in the first quarter of twenty twenty five than they are in the first quarter of twenty twenty four.

Speaker 3

That's just based on mix and it's based on the fact that there was $5,000,000 of political messaging surcharges in the first quarter of twenty twenty four as well. So we have those dynamics going on and then that essentially explains it across our organic growth.

Speaker 2

And Ryan, I just want to add to Daryl's comments there. This is the twenty ninth straight quarter and it's all quarters since we've gone public that we are meeting or exceeding our guidance. And that's just the team that we are. When we look forward, we make sure that we are projecting what we know we can do. But if I zoom out back to your earlier question about AI agents, our firm conviction is that the AI agent moment that we're in will exceed as a durable opportunity for us and our space what work from home represented back during COVID.

Speaker 2

That was temporary. Work from home was a fad. The AI future for voice, it's the future. It's no fad. And it represents, we think, an extraordinary opportunity.

Speaker 2

But the guide that we have is based on the present. Our enthusiasm is based on the future.

Speaker 4

I appreciate that perspective and color. Thanks guys.

Operator

Thank you. And our next question today comes from Patrick Walravens with Citizens Bank. Please go ahead.

Speaker 4

Great. Thank you. Two questions. I guess, first of all, can you just talk a little bit about what's going on in terms of your enterprise go to market and the sales force, so like that hotel deal that you described, David, how do you land something like that? Is that a salesperson?

Speaker 4

And then Daryl, if you wouldn't mind touching on where we are on sort of the long term prospects around the debt, that would be awesome. Thank you.

Speaker 2

Thank you, Pat. We have an early channel program that is going to market with indirect partners and that's proved to be effective. But these large enterprise customers that were growing and revenue for the enterprise space for us was up 29% year over year in 2024. But those customer wins like I talked about are almost always direct right now. Our channel progress is early.

Speaker 2

We're excited about it, and we've got a lot of catching up to do to compete well in that space with others that are already there. So our go to market motion in enterprise is direct. We have an excellent Chief Revenue Officer and enterprise team. They're active and these wins represent their hard efforts.

Speaker 3

Hey, Pat, this is Daryl. In terms of our capital structure and our balance sheet strength and in specific your question around leverage and debt, long term debt, Yesterday, it's worth probably remarking. Yesterday, we entered the market and completed a repurchase of essentially the remaining $35,000,000 of the twenty twenty six notes that will be due in March of next year. We purchased as much as we could subject to the repurchase rules and that was just a little short of $30,000,000 So that's essentially done And we did that with just cash on hand. Looking forward, the March 1 of April, March '20 '20 '8 notes of $250,000,000 at face amount, we think that that represents very manageable leverage.

Speaker 3

If you take our last not next twelve months, but if you take our last twelve months, dollars eighty two million of EBITDA and you adjust for the recent repurchase of the almost $30,000,000 on that $35,000,000 of 2026 and you take into account the $250,000,000 and you subtract out cash on hand to get to a net debt balance, we're running it just at two point zero on last twelve months EBITDA or just slightly less than two point zero on the round of leverage on net debt. And we feel that that is extraordinarily manageable and really suitable for our size company. So we really don't have a conversation internally anymore around leverage. We're really focused on our growth prospects and our investments in AI.

Speaker 4

That's terrific. Thank you, both.

Speaker 2

Thank you, Pat.

Operator

And our next question today comes from Meta Marshall with Morgan Stanley. Please go ahead.

Speaker 6

Great. Thanks. I just wanted to ask a little bit more about kind of Maestro traction. Is there a way to kind of say how many accounts have grown on Maestro kind of year over year? Or a way to kind of contextualize are these largely new customers that are coming to the platform or existing customers?

Speaker 6

And just kind of what efforts are being made particularly for existing customers to kind of upsell them the Maestro product? That would be helpful. Thanks.

Speaker 2

Thanks, Meta. The customer examples we gave in the period are just a selection of hundreds that have begun using Maestro. And when we say hundreds, keep in mind our average customer spend annually is over $200,000 a year and we don't have free to use customers. The three examples we gave all focus on Maestro as a path forward for them to orchestrate different aspects of their voice solution and that includes lots of AI agent use cases. So while we haven't provided KPI or particular metrics yet on Maestro revenue or things like that, it's hundreds of enterprise customers and that's very significant.

Speaker 2

It's not thousands and thousands of developers using for free. These are folks that spend significant money with us today and new to your good second part of your question. And that layer is often I think undervalued. Our approach to AI is to support this extraordinarily explosive moment when everyone is building their own agent and they need to connect them to a telephony layer easily, integrate them into CCaaS and UCaaS. We're not trying to provide a best of breed agent for very specific use cases.

Speaker 2

We're realizing this layer welcomes everyone to bring the best agents that they've built. And I think that's really unique. AI Bridge similarly allows them to tap into the pre integrations to some really powerful AI solutions that are like Google Dialogflow, like Cognigy, and we've added two more. So both the AI Bridge and Maestro components of our solution are vital to support the enterprises that are thinking about the future. But the only metric we provided is hundreds of them are already using it since we launched last year.

Speaker 6

Okay, great. Thanks so much.

Operator

Thank you. And our next question today comes from Ryan Coons with Needham. Please go ahead.

Speaker 7

Great. Good morning and congrats on the nice finish to the year here. Daryl, can you comment on the increasing mix of A2P fees? Kind of what's behind that mechanically? Is that a higher percentage of A2P typically with the political traffic?

Speaker 7

And then also what are your assumptions for the faster fees in your guidance for the quarter and the year ahead in 2020?

Speaker 3

Thanks. Yes. Thank you. That's a really great question. We started the year from the first quarter of last year through the fourth quarter with the growing political mix and just the growing political demand, campaign demand that was within the messaging overall sales, we saw that their attach rate and their mix of surcharges increased and it differed from what the normal mix of surcharges or the attach rate for surcharges would be for our commercial messaging customers in aggregate.

Speaker 3

We do expect that in the first quarter of twenty twenty five that now absent the political campaign cyclicality, the attach rate of surcharges to our commercial messaging will regress and return to that rate that we experienced in the first quarter of twenty twenty four. And that's why we outright expect both surcharges to be down, not just because of or to be lower and say more efficient or a lower attach rate to a dollar earned in commercial messaging, but not just from political campaign, but on average as well. So you're seeing that. So you picked that's a good dynamic to point out. I'm glad you asked that question.

Speaker 7

Great. Thanks. And then in terms of new developments, you talk a lot about the impact of AI with Maestro on your voice business. Are you starting to see much of an impact from AI implementations maybe from your customers using LLMs on messaging volumes?

Speaker 2

Related to messaging volumes is the requirement to register campaigns. And we have an AI solution internally that does pre campaign vetting and that expedites campaign registration approvals significantly from days and days down to hours. And so the current messaging solution that we have related to AI, it's important because messaging has grown, but make no mistake, the future of AI as an experience in business to business and in consumer is in voice. So if you zoom out, chatGPT and the text based interface that AI really began with is very, very quickly hurtling toward an elegant voice to voice interface. And it will be the primary way that most folks engage with and utilize AI.

Speaker 2

Grok3's voice service, I think, drops this week and we've been watching many, many go to market AI opportunities relative to voice. So we're thrilled and excited to be in the tech stack and in the solution roadmap for AI's primary user experience, which is voice.

Speaker 7

Got it. Really helpful, David. Thank you. And any quick thoughts about RCS, if that starts to impact the messaging business at all in 2025?

Speaker 2

Yes, we're excited about RBM and RTS and are supporting it and believe that it's a vital part of the messaging strategy, especially for businesses. And it's a proof point for our leadership historically in messaging. We are an RBM partner with Google. We were very early to market with them. The speed of The U.

Speaker 2

S. Mobile operator rollout is important. Two of the big three are now operational for testing, which is awesome. But yes, RBM, RCS, both game changers for business messaging and we're going to be a leader for large enterprise on that dimension and just like we are today in SMS.

Speaker 7

Great. Thanks so much for the questions.

Speaker 5

Thank you. Thank you.

Operator

And our next question comes from Will Power of Baird. Please go ahead.

Speaker 3

Okay, great. Thanks. Yes, I really just kind of

Speaker 8

want to follow-up on some of the previous comments on growth drivers for 2025, particularly the global voice plan. It sounds like you do expect growth to improve. And I wondered if you could drill down any further as to the drivers there. Is that share gains within UCaaS or CCaaS or just better trends within one of those customer cohorts? Any other color, I guess, you can provide on the visibility and the opportunity there?

Speaker 2

Thanks, Will. We launched the Universal platform and are watching it watching it to uptake globally. So footprint, I would describe as the most important first driver that underpins the expansion of our global communications plans. Then on top of that enterprise adoption of our platform that immediately scales globally. So if you have a U.

Speaker 2

S. Domiciled U. S. Domiciled enterprise that comes on board, almost every time they have a global need and so that drives global communications plans and our forecast. And then last, as I've talked about, there is not a significant enterprise anywhere that isn't already neck deep understanding the voice agent opportunity that they have.

Speaker 2

And so that will also drive part of our growth and forecasting

Operator

ladies and gentlemen, this concludes our question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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