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Bandwidth's (NASDAQ:BAND) Q2 Sales Top Estimates, Stock Soars


Full Report / August 03, 2022
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Communications platform as a service company Bandwidth (NASDAQ: BAND) reported results ahead of analyst expectations in the Q2 FY2022 quarter, with revenue up 13.1% year on year to $136.4 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $141 million, 0.18% below analyst estimates. Bandwidth made a GAAP loss of $6.24 million, improving on its loss of $6.92 million, in the same quarter last year.

Bandwidth (BAND) Q2 FY2022 Highlights:

  • Revenue: $136.4 million vs analyst estimates of $133.6 million (2.18% beat)
  • EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.07 (39% beat)
  • Revenue guidance for Q3 2022 is $141 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $554 million at the midpoint
  • Free cash flow of $2.67 million, up from negative free cash flow of $12.6 million in previous quarter
  • Net Revenue Retention Rate: 112%, in line with previous quarter
  • Customers: 3,362, down from 3,372 in previous quarter
  • Gross Margin (GAAP): 40.5%, down from 45.2% 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 year, growing from quarterly revenue of $120.6 million, to $136.4 million.

Bandwidth Total Revenue

This quarter, Bandwidth's quarterly revenue was once again up 13.1% year on year. We can see that revenue increased by $5.12 million in Q2, which was roughly the same as in Q1 2022. This steady quarter-on-quarter growth shows the company is able to maintain its paced growth trajectory.

Guidance for the next quarter indicates Bandwidth is expecting revenue to grow 7.93% year on year to $141 million, slowing down from the 54.1% 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 13.3% over the next twelve months.

Customer Growth

You can see below that Bandwidth reported 3,362 customers at the end of the quarter, a decrease of 10 on last quarter. That is suggesting that the customer acquisition momentum is slowing a little bit. 

Bandwidth Customers

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 Net Revenue Retention Rate

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 112% in Q2. That means even if they didn't win any new customers, Bandwidth would have grown its revenue 12% year on year. Despite the recent drop this is still a good retention rate and a proof that Bandwidth's customers are satisfied with their software and are getting more value from it over time. That is good to see.

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 40.5% in Q2.

Bandwidth Gross Margin (GAAP)

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 been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Cash Is King

If you follow 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's free cash flow came in at $2.67 million in Q2, turning positive year on year.

Bandwidth Free Cash Flow

Bandwidth has generated $10.5 million in free cash flow over the last twelve months, 2% of revenues. This FCF margin is a result of Bandwidth asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from Bandwidth's Q2 Results

With a market capitalization of $457 million Bandwidth is among smaller companies, but its more than $302.8 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

It was good to see Bandwidth outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see the slowdown in customer growth and gross margin deteriorated. Overall, this quarter's results were mixed. The company is up 5.69% on the results and currently trades at $20.78 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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