Communications platform as a service company Bandwidth (NASDAQ: BAND) reported results ahead of analysts' expectations in Q3 FY2023, with revenue up 2.49% year on year to $152 million. However, next quarter's revenue guidance of $154 million was less impressive, coming in 2.1% below analysts' estimates. Turning to EPS, Bandwidth made a non-GAAP profit of $0.23 per share, down from its profit of $0.27 per share in the same quarter last year.
Bandwidth (BAND) Q3 FY2023 Highlights:
- Revenue: $152 million vs analyst estimates of $149.1 million (1.96% beat)
- EPS (non-GAAP): $0.23 vs analyst estimates of $0.20 (16.5% beat)
- Revenue Guidance for Q4 2023 is $154 million at the midpoint, below analyst estimates of $157.3 million
- Free Cash Flow of $18.2 million is up from -$1.23 million in the previous quarter
- Gross Margin (GAAP): 39.1%, down from 42.8% in 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 unremarkable over the last two years, growing from $130.6 million in Q3 FY2021 to $152 million this quarter.
Bandwidth's quarterly revenue was only up 2.49% year on year, which might disappoint some shareholders. Additionally, its growth did slow down compared to last quarter as the company's revenue increased by just $6.14 million in Q3 compared to $8.03 million in Q2 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter, Bandwidth is guiding for a 1.89% year-on-year revenue decline to $154 million, a further deceleration from the 24.5% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 9.47% over the next 12 months before the earnings results announcement.
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 39.1% in Q3.
That means that for every $1 in revenue the company had $0.39 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 it's deteriorated even further over the last year. This is probably the opposite direction that shareholders would like to see it go.
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's free cash flow came in at $18.2 million in Q3, up 34.8% year on year.
Bandwidth has burned through $8 million of cash over the last 12 months, resulting in a negative 1.44% 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 Q3 Results
With a market capitalization of $270.8 million, Bandwidth is among smaller companies, but its more than $107.4 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.
It was encouraging to see Bandwidth narrowly top analysts' revenue expectations this quarter. That really stood out as a positive in these results. On the other hand, its revenue guidance for next quarter underwhelmed and its gross margin shrunk. Overall, this was a mediocre quarter for Bandwidth. The company is down 6.2% on the results and currently trades at $10.13 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'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 weak over the last two years, and analysts expect growth to deteriorate from here. And 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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