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Bandwidth (NASDAQ:BAND) Q1: Beats On Revenue, Provides Encouraging Quarterly Guidance


Full Report / May 04, 2022
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Communications platform as a service company Bandwidth (NASDAQ: BAND) announced better-than-expected results in the Q1 FY2022 quarter, with revenue up 15.7% year on year to $131.3 million. Guidance for next quarter's revenue was $133.5 million at the midpoint, which is 1.39% above the analyst consensus. Bandwidth made a GAAP loss of $6.81 million, down on its loss of $5.31 million, in the same quarter last year.

Bandwidth (BAND) Q1 FY2022 Highlights:

  • Revenue: $131.3 million vs analyst estimates of $125.7 million (4.43% beat)
  • EPS (non-GAAP): $0.09 vs analyst estimates of -$0.08 ($0.17 beat)
  • Revenue guidance for Q2 2022 is $133.5 million at the midpoint, above analyst estimates of $131.6 million
  • The company reconfirmed revenue guidance for the full year, at $554 million at the midpoint
  • Free cash flow was negative $12.6 million, down from positive free cash flow of $8.26 million in previous quarter
  • Net Revenue Retention Rate: 114%, up from 110% previous quarter
  • Customers: 3,372, up from 3,228 in previous quarter
  • Gross Margin (GAAP): 42.1%, down from 45.9% 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 very strong over the last year, growing from quarterly revenue of $113.4 million, to $131.3 million.

Bandwidth Total Revenue

This quarter, Bandwidth's quarterly revenue was once again up 15.7% year on year. On top of that, revenue increased $5.23 million quarter on quarter, a strong improvement on the $4.5 million decrease in Q4 2021, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates Bandwidth is expecting revenue to grow 10.6% year on year to $133.5 million, slowing down from the 57.1% 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 12.4% over the next twelve months.

Customer Growth

You can see below that Bandwidth reported 3,372 customers at the end of the quarter, an increase of 144 on last quarter. That is a little better customer growth than last quarter and quite a bit above the typical customer growth we have seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

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 114% in Q1. That means even if they didn't win any new customers, Bandwidth would have grown its revenue 14% year on year. Significantly up from the last quarter, this 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 42.1% in Q1.

Bandwidth Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.42 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 burned through $12.6 million in Q1, with cash flow turning negative year on year.

Bandwidth Free Cash Flow

Bandwidth has burned through $11.1 million in cash over the last twelve months, resulting in a negative 2.18% 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 $581.4 million Bandwidth is among smaller companies, but its more than $316 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 very impressed by Bandwidth’s very strong acceleration in customer growth this quarter. And we were also glad to see the improvement in net revenue retention rate. On the other hand, revenue growth is overall a bit slower these days. Overall, we think this was still a really good quarter, that should leave shareholders feeling positive. The company is flat on the results and currently trades at $26.03 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 strong, 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.

Bandwidth's price to sales ratio based on the next twelve months is 1.1x, 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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