Communications platform as a service company Bandwidth (NASDAQ: BAND) reported Q1 FY2023 results that beat analyst expectations, with revenue up 4.93% year on year to $137.8 million. The company expects that next quarter's revenue would be around $141 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Bandwidth made a GAAP profit of $3.61 million, improving on its loss of $6.81 million, in the same quarter last year.
Bandwidth (BAND) Q1 FY2023 Highlights:
- Revenue: $137.8 million vs analyst estimates of $133 million (3.66% beat)
- EPS (non-GAAP): $0.05 vs analyst estimates of $0.01 ($0.04 beat)
- Revenue guidance for Q2 2023 is $141 million at the midpoint, above analyst estimates of $139.2 million
- The company reconfirmed revenue guidance for the full year, at $580 million at the midpoint
- Free cash flow was negative $10.9 million, compared to negative free cash flow of $14.1 million in previous quarter
- Net Revenue Retention Rate: 109%, down from 112% previous quarter
- Gross Margin (GAAP): 40.4%, down from 42.2% same quarter last year
Started in 1999 by David Morken who was later joined by Henry Kaestner as co-founder in 2001, Bandwidth (NASDAQ:BAND) provides thousands of customers with a software platform that uses its own global network to provide phone numbers, voice, and text connectivity.
Bandwidth might not be well known with consumers, but most of us would have used their services unknowingly either using online conferencing software, or contacting customer service representatives through a company’s website. Bandwidth’s core advantage is that it provides a software platform over its own telecommunications network, and is therefore able to better control the quality of the connection, all while providing cheaper prices than a legacy voice connection.
Founder David Morken started Bandwidth while on 90 days of paid leave from the Marine Corps. He moved into his parents’ house with his three children and wife in order to bootstrap the company.
The first shift towards voice communication over the internet (VOIP), rather than traditional phone networks, happened when the enterprises started replacing business phones with the cheaper VOIP technology. Today, the rise of the consumer internet has increased the need for two way audio and video functionality in applications, driving demand for software tools and platforms that enable this utility.
Even though Bandwidth competes with other well known CPaaS companies like Twilio (NYSE:TWLO), it mostly competes with legacy telecommunications companies such as Verizon (NYSE:VZ) and AT&T (NYSE:T), which lack the equivalent software layer over their own networks.
Sales Growth
As you can see below, Bandwidth's revenue growth has been strong over the last two years, growing from quarterly revenue of $113.5 million in Q1 FY2021, to $137.8 million.
Bandwidth's quarterly revenue was only up 4.93% year on year, which might disappoint some shareholders. But the revenue actually decreased by $19.1 million in Q1, compared to $8.65 million increase in Q4 2022. We'd like to see revenue increase each quarter, but a one-off fluctuation is usually not concerning and the management is guiding for growth to rebound in the next quarter.
Guidance for the next quarter indicates Bandwidth is expecting revenue to grow 3.31% year on year to $141 million, slowing down from the 13.1% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 3.29% over the next twelve months.
Product Success
One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.
Bandwidth's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 109% in Q1. That means even if they didn't win any new customers, Bandwidth would have grown its revenue 9% year on year. Despite it going down over the last year this is still a decent retention rate and it shows us that not only Bandwidth's customers stick around but at least some of them get increasing value from its software over time.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Bandwidth's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 40.4% in Q1.
That means that for every $1 in revenue the company had $0.40 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Bandwidth burned through $10.9 million in Q1.
Bandwidth has burned through $8.79 million in cash over the last twelve months, resulting in a negative 1.52% free cash flow margin. This below average FCF margin is a result of Bandwidth's need to invest in the business to continue penetrating its market.
Key Takeaways from Bandwidth's Q1 Results
With a market capitalization of $310.8 million Bandwidth is among smaller companies, but its more than $85.3 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.
It was good to see Bandwidth outperform Wall St’s revenue expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, revenue retention rate decreased and the company is still burning through cash. Overall, this quarter's results were mostly in line, showing the Bandwidth is staying on target. The company is up 6.05% on the results and currently trades at $12.45 per share.
Is Now The Time?
Bandwidth may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of Bandwidth we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.
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