Bandwidth (NASDAQ:BAND) Exceeds Q3 Expectations But Quarterly Guidance Underwhelms

Full Report / November 08, 2021
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Communications platform as a service company Bandwidth (NASDAQ: BAND) announced better-than-expected results in the Q3 FY2021 quarter, with revenue up 54.1% year on year to $130.6 million. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $118.2 million, or 5.81% below analyst estimates. Bandwidth made a GAAP loss of $6.94 million, down on its loss of $2.35 million, in the same quarter last year.

Bandwidth (BAND) Q3 FY2021 Highlights:

  • Revenue: $130.6 million vs analyst estimates of $126 million (3.61% beat)
  • EPS (non-GAAP): $0.25 vs analyst estimates of $0.08 ($0.17 beat)
  • Revenue guidance for Q4 2021 is $118.2 million at the midpoint, below analyst estimates of $125.4 million
  • Free cash flow of $12.1 million, up from negative free cash flow of -$18.95 million in previous quarter
  • Net Revenue Retention Rate: 108%, down from 114% previous quarter
  • Customers: 3,173, up from 3,051 in previous quarter
  • Gross Margin (GAAP): 44.5%, down from 46.2% 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 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.

Sales Growth

As you can see below, Bandwidth's revenue growth has been incredible over the last year, growing from quarterly revenue of $84.7 million, to $130.6 million.

Bandwidth Total Revenue

This was another standout quarter with the revenue up a splendid 54.1% year on year. On top of that, revenue increased $10.0 million quarter on quarter, a very strong improvement on the $7.2 million increase in Q2 2021, and a sign of re-acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 15.5% over the next twelve months, although estimates are likely to change post earnings.

Customer Growth

You can see below that Bandwidth reported 3,173 customers at the end of the quarter, an increase of 122 on last quarter. That is quite a bit better customer growth than last quarter but while it is still a bit below what we have typically seen over the last year, it is suggesting that the company may be reinvigorating growth.

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 108% in Q3. That means even if they didn't win any new customers, Bandwidth would have grown its revenue 8% 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.


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 44.5% in Q3.

Bandwidth Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.44 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 Q3 Results

With a market capitalization of $2.12 billion Bandwidth is a relatively smaller company, but with more than $321.8 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 to see the acceleration in customer growth. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue retention rate deteriorated. Overall, this quarter's results were not the best we've seen from Bandwidth. The company is up 1.2% on the results and currently trades at $84.00 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 3.8x, 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.

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