Communications platform as a service company Bandwidth (NASDAQ: BAND) reported Q2 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 6.88% year on year to $145.9 million. The company also expects next quarter's revenue to be around $149 million, roughly in line with analysts' estimates. Bandwidth made a GAAP loss of $3.89 million, improving from its loss of $6.25 million in the same quarter last year.
Bandwidth (BAND) Q2 FY2023 Highlights:
- Revenue: $145.9 million vs analyst estimates of $140.9 million (3.55% beat)
- EPS (non-GAAP): $0.16 vs analyst estimates of $0.04 ($0.12 beat)
- Revenue Guidance for Q3 2023 is $149 million at the midpoint, above analyst estimates of $147.7 million
- The company lifted revenue guidance for the full year from $580 million to $590 million at the midpoint, a 1.72% increase
- Free Cash Flow was -$1.23 million compared to -$10.9 million in the previous quarter
- Net Revenue Retention Rate: 106%, down from 109% in the previous quarter
- Gross Margin (GAAP): 40.4%, in line with the 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.
As you can see below, Bandwidth's revenue growth has been over the last two years, growing from $120.7 million in Q2 FY2021 to $145.9 million this quarter.
Bandwidth's quarterly revenue was only up 6.88% year on year, which isn't particularly great. However, its revenue increased $8.03 million quarter on quarter, a strong improvement from the $19.1 million decrease in Q1 2023. This is a sign of acceleration of growth and very nice to see indeed.
Next quarter's guidance suggests that Bandwidth is expecting revenue to grow 0.46% year on year to $149 million, slowing down from the 13.5% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 4.54% over the next 12 months.
One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.
Bandwidth's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 106% in Q2. This means that even if Bandwidth didn't win any new customers over the last 12 months, it would've grown its revenue by 6%.
Despite falling over the last year, Bandwidth still has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 40.4% in Q2.
That means that for every $1 in revenue the company had $0.40 left to spend on developing new products, sales and marketing, and general administrative overhead. Bandwidth's gross margin is poor for a SaaS business and we'd like to see it start improving.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Bandwidth burned through $1.23 million of cash in Q2 despite being cash flow positive last year.
Bandwidth has burned through $12.7 million of cash over the last 12 months, resulting in a negative 2.15% free cash flow margin. This below-average FCF margin stems from Bandwidth's poor unit economics or a continuous need to reinvest in its business to penetrate the market.
Key Takeaways from Bandwidth's Q2 Results
With a market capitalization of $383.2 million, Bandwidth is among smaller companies, but its more than $91.8 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.
It was good to see Bandwidth beat analysts' revenue expectations this quarter. We were also glad that its full-year revenue guidance came in higher than Wall Street's expectations, and this outlook was raised from previous guidance. On the other hand, its slowing growth in net revenue retention wasn't great and while full year revenue guidance was raised, full year adjusted EBITDA guidance was maintained at the midpoint. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is up 6.27% after reporting and currently trades at $14.75 per share.
Is Now The Time?
When considering an investment in Bandwidth, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of Bandwidth, we'll be cheering from the sidelines. Its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there. And while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately gross margins show its business model is much less lucrative than the best software businesses.
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