Communications platform as a service company Bandwidth (NASDAQ: BAND) beat analyst expectations in Q2 FY2021 quarter, with revenue up 57.1% year on year to $120.6 million. Bandwidth made a GAAP loss of $6.92 million, improving on its loss of $20.6 million, in the same quarter last year.
Bandwidth (BAND) Q2 FY2021 Highlights:
- Revenue: $120.6 million vs analyst estimates of $116.4 million (3.63% beat)
- EPS (non-GAAP): $0.32 vs analyst estimates of $0.09 ($0.23 beat)
- Revenue guidance for Q3 2021 is $124.1 million at the midpoint, above analyst estimates of $118.5 million
- The company lifted revenue guidance for the full year, from $474.6 million to $485.8 million at the midpoint, a 2.35% increase
- Free cash flow was negative -$18.95 million, down from positive free cash flow of $2.12 million in previous quarter
- Net Revenue Retention Rate: 114%, down from 125% previous quarter
- Customers: 3,051, up from 2,959 in previous quarter
- Gross Margin (GAAP): 45.2%, down from 45.9% previous quarter
Founded in 1999, 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 shift towards communication over the internet (VOIP), rather than traditional phone networks, is a big tailwind behind the demand for services like Bandwith.
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, boosted by the acquisition of Voxbone, Bandwidth's revenue growth has been incredible over the last year, growing from quarterly revenue of $76.7 million, to $120.6 million.
This was another standout quarter with the revenue up a splendid 57.1% year on year. On top of that, revenue increased $7.17 million quarter on quarter, a very strong improvement on the $432 thousand increase in Q1 2021, and a sign of acceleration of growth, which is very nice to see indeed.
Analysts covering the company are expecting the revenues to grow 20.4% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
You can see below that Bandwidth reported 3,051 customers at the end of the quarter, an increase of 92 on last quarter. That is a bit slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.
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 114% in Q2. That means even if they didn't win any new customers, Bandwidth would have grown its revenue 14% year on year. Despite it going down over the last year 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.
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, licences, technical support and other necessary running expenses was at 45.2% in Q2.
That means that for every $1 in revenue the company had $0.45 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.
Key Takeaways from Bandwidth's Q2 Results
With market capitalisation of $3.13 billion Bandwidth is among smaller companies, but its more than $309.6 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.
We were impressed by the exceptional revenue growth Bandwidth delivered this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the deterioration in revenue retention rate and there was a slowdown in customer growth. Overall, this quarter's results still seemed pretty positive and shareholders can feel optimistic. The company is up 4.59% on the results and currently trades at $130.5 per share.
Is Now The Time?
When considering Bandwidth, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. 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 exceptional, though we don't expect it to maintain historical growth rates. But while its customers are increasing their spending quite quickly, suggesting that they love the product, the downside is that its customer acquisition is less efficient than many comparable companies and its gross margins show its business model is much less lucrative than the best software businesses.
Bandwidth's price to sales ratio based on the next twelve months is 6.1, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.