Bandwidth (BAND)

Cloud communications provider Bandwidth (NASDAQ:BAND) reported Q3 CY2025 results topping the market’s revenue expectations, but sales fell by 1% year on year to $191.9 million. The company expects the full year’s revenue to be around $753.5 million, close to analysts’ estimates. Its non-GAAP profit of $0.36 per share was 3.2% below analysts’ consensus estimates.

Company Overview

Powering communications for tech giants like Microsoft, Google, and Zoom, Bandwidth (NASDAQ:BAND) provides cloud-based communications software and APIs that enable businesses to embed voice, messaging, and emergency services into their applications and platforms.

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.

Bandwidth's competitors include traditional telecommunications carriers like AT&T, Verizon, and Lumen Technologies, as well as other cloud communications providers such as Twilio (NYSE:TWLO), Vonage (acquired by Ericsson), and 8x8 (NYSE:EGHT).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Thankfully, Bandwidth’s 21% annualized revenue growth over the last five years was decent. Its growth was slightly above the average software company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within software, a half-decade historical view may miss recent innovations or disruptive industry trends. Bandwidth’s recent performance shows its demand has slowed as its annualized revenue growth of 12.9% over the last two years was below its five-year trend.

This quarter, Bandwidth’s revenue fell by 1% year on year to $191.9 million but beat Wall Street’s estimates by 1%.

Looking ahead, sell-side analysts expect revenue to grow 9.1% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Bandwidth is extremely efficient at acquiring new customers, and its CAC payback period checked in at 14.6 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

For software companies like Bandwidth, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Bandwidth’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 38.8% gross margin over the last year. Said differently, Bandwidth had to pay a chunky $61.19 to its service providers for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Bandwidth has seen gross margins decline by 1.5 percentage points over the last 2 year, which is poor compared to software peers.

This quarter, Bandwidth’s gross profit margin was 38.5%, in line with the same quarter last year. On a wider time horizon, Bandwidth’s full-year margin has been trending up over the past 12 months, increasing by 1.1 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Bandwidth’s expensive cost structure has contributed to an average operating margin of negative 1.7% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Bandwidth reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

Over the last two years, Bandwidth’s expanding sales gave it operating leverage as its margin rose by 2.2 percentage points. Still, it will take much more for the company to reach long-term profitability.

Bandwidth’s operating margin was negative 1% this quarter.

If you’ve followed StockStory for a while, you know 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 has shown weak cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.4%, subpar for a software business.

Bandwidth’s free cash flow clocked in at $13.14 million in Q3, equivalent to a 6.8% margin. This cash profitability was in line with the comparable period last year and its one-year average.

Over the next year, analysts predict Bandwidth’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 7.4% for the last 12 months will increase to 9.6%, giving it more flexibility for investments, share buybacks, and dividends.

Bandwidth reported $80.37 million of cash and $472 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $91.86 million of EBITDA over the last 12 months, we view Bandwidth’s 4.3× net-debt-to-EBITDA ratio as safe. We also see its $2.89 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Bandwidth blew past analysts’ EBITDA expectations this quarter. We were also glad its full-year EBITDA guidance exceeded Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 7.2% to $18 immediately following the results.

Updated: December 4, 2025 at 9:13 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Bandwidth isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its gross margins show its business model is much less lucrative than other companies. And while the company’s efficient sales strategy allows it to target and onboard new users at scale, the downside is its expanding operating margin shows it’s becoming more efficient at building and selling its software.

Bandwidth’s price-to-sales ratio based on the next 12 months is 0.5x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $23.67 on the company (compared to the current share price of $14.73).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.