BAND - NASDAQ

Good morning, and welcome to the Bandwidth Inc. Third Quarter 2025 Earnings Conference Call. [ Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sarah Walas, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Bandwidth's Third Quarter 2025 Earnings Call. I'm joined today by David Morken, our CEO; and Daryl Raiford, our CFO. They will begin with prepared remarks, and then we will open up the call for Q&A. Our earnings press release was issued earlier today. The press release and an earnings presentation with historical financial highlights and the reconciliation of GAAP to non-GAAP financial results can be found on the Investor Relations page at investors.bandwidth.com. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the full year 2025. We caution you not to put undue reliance on these forward-looking statements as they may involve risks and uncertainties that could cause actual results to vary materially from any future results or outcomes expressed or implied by the forward-looking statements. Any forward-looking statements made on this call and in the presentation slides reflect our analysis as of today, and we have no plans or obligation to update them. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our latest 10-K filing as updated by other SEC filings. With that, let me turn the discussion over to David.

Thank you, Sarah, and good morning, everyone. Thank you for joining us. Bandwidth delivered another solid quarter of execution with outperformance in revenue and profitability that extended our momentum from the first half. We again saw accelerating growth in our core voice business, driven by broad-based demand across our global voice plans and enterprise market offers as real-world AI voice usage continued to grow, and we closed more million dollar-plus deals in the third quarter, bringing us to a record pace year-to-date as the largest Global 2000 enterprises increasingly choose Bandwidth. To our customers, thank you for placing your trust in us for your most essential communications. To our bandmates, thank you for the talent, energy and commitment you bring to our customers' success. And I thank God for the blessings and purpose that continue to guide our work. Our third quarter performance strengthens the foundation for continued growth, fueled by large customer wins, conversational AI adoption and disciplined execution. At the same time, we're evolving our business model toward a higher mix of recurring software-driven revenue, adding intelligent automation and value-added services that customers love. We're seeing especially strong traction in financial services and health care, where performance and trust matter most in mission-critical communications. An example of how much bandwidth is valued is the Technology Disruptor award we won from Ally Financial, which recognized our key role in transforming their customer experience. It was especially meaningful to be honored by Ally, which is one of the original disruptors in digital banking. The story of this quarter is innovation, powering our growth, strengthening our customer relationships and moving AI voice from potential to production. At Reverb25, our award-winning annual product and customer showcase, we announced the next chapter of Bandwidth's AI and software strategy to make cloud communications more intelligent, more automated and more trusted. It was part of an entire Reverb week of customer roundtables; market offer deep dives and hands-on sessions, attended live by more than 100 customers and partners along with nearly 3,000 online. Customer feedback was overwhelmingly positive as they saw how our product road map connected directly to their priorities and real-world use cases. Last year at Reverb, we talked about the promise of AI. This year, we're delivering it. Let me give you some highlights. We shared our vision to be the most open and flexible provider for enterprises to integrate conversational AI into cloud communications through 4 key paths: native AI within CCaaS platforms, prebuilt partner integrations, bring your own AI with third-party apps and public APIs like OpenAI's real-time interface. Whatever path customers choose, our new MCP server empowers AI voice agents to control Bandwidth APIs in real time using natural language, enabling actions like searching phone numbers, sending text or triggering other actions mid-conversation, no custom code required. This open freedom of choice strategy gives customers the power to innovate on their terms and keep control over their tech stack without sacrificing optionality or scalability. It also reinforces our role as a platform partner that supports the full life cycle of customer engagement. By building on Bandwidth, enterprises can move faster now and derisk changes in the future. In short, we are strongly positioned to be the provider of choice for conversational AI deployment, no matter what path our customers choose. This strategy is already translating into meaningful deployments. For example, a long-time Bandwidth customer in digital commerce serving tens of millions of small business customers expanded their partnership with us for their new AI-powered voice ordering system for food venues nationwide. The service answers 100% of incoming calls with natural conversational AI and is sophisticated enough to allow customers to place complex orders by phone just as they would with a staff member. This is large-scale AI voice in production today made possible by our Maestro software and AI optimized edge infrastructure, enabling enterprises to integrate AI voice on their terms. At Reverb, we also did a live demo of the prototype for our AI receptionist, an automated front door for any business. It uses conversational AI to handle most calls without human intervention, answer questions in detail and route inquiries efficiently. For small businesses sold through our resellers, it can deliver a professional always-on customer experience at scale. For large enterprises, it could serve as a modern IVR replacement, streamlining call handling and improving operational efficiency. AI receptionist processes calls natively within our communications cloud to ensure natural human-like conversations and protection of customer data. Our team built the AI receptionist to showcase our ability to develop intelligent voice solutions that unlock new opportunities for recurring scalable software revenue over time. We also see it as a potential extension of our Maestro software platform. We're also applying AI to simplify our customers' back-office workflows. At Reverb, we introduced our first AI agent, the Bandwidth Activation agent to automate complex number activation through a guided compliance-aware chat interface. Designed for customers managing high-volume multi-country deployments, it reduces operational workload and accelerates time to value. We'll continue expanding its capabilities to help customers operate more efficiently, reduce support tickets and scale faster. It's another step toward embedding automation into the core of our cloud platform, improving customer experience while lowering our cost to serve. As we expand AI-driven intelligence and automation, we're also strengthening the foundation every customer interaction depends on, trust. At Reverb, we announced an expanded trust services portfolio with new capabilities for our number reputation management solution. Originally launched as an enterprise offering, we've now expanded NRM to serve our global voice plans customers as well. This reflects growing interest from the power platforms we serve across the UCaaS and CCaaS landscape. NRM addresses an urgent customer challenge to protect call answer rates in an era of spoofing and fraud. If end-users don't trust who's calling, they don't answer, leading to lost revenue and missed critical calls like medical test results or service notifications. Because we own the network layer, Bandwidth can embed trust directly into our cloud platform, authenticating identity, managing number reputation and controlling how brands appear on mobile devices. The result is higher connection rates, stronger engagement and greater platform usage as we elevate outbound phone calling as an essential and high-performing channel for enterprise communication. Number reputation management was the deciding factor for a leading transportation and logistics provider. They chose Bandwidth to modernize their communications stack, consolidated 161 call paths to 10 and installed number reputation management to resolve spam-likely flags that were negatively impacting answer rates with carriers and distributors. Our trust services software portfolio was a key lever for this win, and we expect it to deliver a significant competitive advantage going forward. Finally, we advanced our vision for next-generation messaging through a new RCS for business partnership with Out their Media, which we announced at Reverb25. Based in Europe and trusted by global brands like Coca-Cola, Unilever, Disney and Netflix, Out their Media chose Bandwidth as the sole provider to launch its RCS portfolio in the United States. It's a strong validation of our platform's deliverability and scalability as we partner to launch a new wave of exciting mobile-first brand experiences from some of the world's most recognized companies. Trust and scalability continue to resonate with enterprises that depend on both messaging and voice, and this quarter brought another powerful example of Bandwidth as their unified platform for mission-critical communications. A leading property management software company chose Bandwidth as their primary voice and messaging provider for a cloud contact center migration. Using Genesis with our Bring Your Own Carrier model, they ported more than 300,000 toll-free and local numbers from multiple legacy carriers and unified programmable voice and text messaging on the Bandwidth platform. They also activated our built-in transcription and call recording APIs for compliance. It's a textbook Bandwidth win, showing how we can consolidate providers and deliver total communications transformation as a trusted partner. While many of our Reverb announcements scale over coming quarters, Global 2000 enterprises are choosing Bandwidth today for reliability, flexibility, scalability and AI voice. Let me walk through a few highlights. A financial services firm responsible for nearly $2 trillion in client assets chose Bandwidth to move their legacy on-premises call center to the cloud. Their need to run both environments simultaneously during the migration is proof of our Maestro software's strength in orchestrating complex compliance-driven contact center call flows. In another financial services win, a credit union serving employees of a U.S. government Space Administration selected Bandwidth for a comprehensive communications upgrade, integrating Microsoft Teams Operator Connect for employee communications and Five9 with Pindrop for a new cloud contact center build. Our Maestro software's ability to support the customers' chosen multi-vendor environment across UCaaS, CCaaS and fraud prevention without being locked in was the key differentiator. It's our freedom of choice strategy in action. In summary, this quarter combined 3 powerful drivers of our business: disciplined execution, continuous innovation and deep customer trust in our mission-critical communications platform. We delivered another quarter of solid growth and profitability. We showcased at Reverb how Bandwidth is shaping the future of trusted intelligent communications enabled by AI, and we expanded customer adoption with more multi-solution deployments and a record number of million-dollar wins. These are all clear demonstrations of solid momentum and durable growth powered by a trusted platform our customers rely upon, and a team committed to delivering long-term value. Across AI voice, trust and messaging, our focus is the same: to evolve Bandwidth toward a higher mix of software-driven revenue that broadens market differentiation and deepens customer loyalty while expanding margin performance. We're building toward a future where every enterprise interaction is more than a transaction. It's a conversation that is trusted, intelligent, secure and AI optimized. Now I'll turn it over to Daryl to detail our financial results.

Thank you, David, and good morning, everyone. Building on our solid performance in the first half of the year, Bandwidth delivered another good quarter, highlighted by further accelerating momentum in voice. Profitability remains central to our strategy, and this quarter's results reflect that discipline with both revenue and adjusted EBITDA exceeding the high end of our guidance ranges. Let me now walk you through our third quarter 2025 results. Total revenue of $192 million increased 11% year-over-year normalized for third quarter 2024 cyclical political campaign revenue, included within that result, cloud communications revenue reached $142 million, an 8% year-over-year increase on a normalized basis. Non-GAAP gross margin remained strong at 58%. We are really pleased with that result as we had expected and did experience third quarter cross currents, namely the tougher comparison to last year's quarter given the absent benefit of political campaign messaging completely overcome by the growing contribution from software and services revenue. That growing contribution is accelerating and has long-term staying power, positioning us for continuing margin expansion over the next year. Adjusted EBITDA was $24 million, exceeding our expectations due to a combination of higher revenue and lower spending from timing of cloud expansion operating expenses. We generated $13 million of free cash flow in the quarter, modestly below last year, driven by normal timing of working capital and capital investments for cloud expansion. Our trailing 12-month free cash flow grew 35% year-over-year, underscoring the durability of our cash generation. Focusing on our 3 market offers. Enterprise voice revenue increased 22% year-over-year, reflecting strong adoption among existing customers expanding through Maestro software integrations and AI voice initiatives, along with contributions from new customers ramping on our Bandwidth cloud. Global voice plans, our largest customer category, grew revenue 7% year-over-year, more than doubling the growth rate from last year. It's worth noting that the combined voice growth of our enterprise voice and global voice plans was 9% year-over-year, an acceleration from last year, driven in part by expanding software revenue. Programmable Messaging achieved a normalized 6% year-over-year growth, in line with our expectations. Moving to operating metrics. Net retention rate for the third quarter was 105% and 107% when excluding the benefit from political campaign revenue in 2024. Customer name retention remained well above 99%. Average annual revenue per customer set another record at $231,000 or $224,000 when excluding political campaign revenue in the 12-month period. Over the last 3 years, average annual revenue per customer has grown 46%. Reflecting on the quarter performance, both our operating and financial results again demonstrate the strength, resilience and long-term value of our business model. AI is not a stand-alone product for Bandwidth. It's integrated throughout our cloud and embedded in the services our customers use every day. You see its influence in our revenue growth, our gross margin expansion and in the continued durability of our cash generation. AI is everywhere and is a central theme in every customer discussion. We are creating a synergistic effect. At times, we are leading our customers to AI with our advanced offerings. And at other times, we are supporting our customers as they rapidly deploy their AI initiatives. We believe this is just the beginning of how AI is accelerating innovation and creating new sources of value, value that we believe will continue to set us apart in 2026 and beyond. Looking ahead to the remainder of 2025, for full year revenue guidance, we are tightening the range with the midpoint yielding 10% organic revenue growth year-over-year. This is due to moderated expectations for messaging surcharge growth and increased expectations for voice growth. As a result, we've increased our full year cloud communications revenue growth to 8% organically year-over-year. And for the third time this year, we are raising our full year adjusted EBITDA outlook, now reaching $91 million at the midpoint. Reflecting our third quarter overperformance and strong execution and financial discipline, we now expect the updated EBITDA outlook of $91 million to represent about $1.30 non-GAAP earnings per share. In closing, we believe the growing momentum in voice AI, our increasing software revenue, strong customer focus and our sharp business execution position us for a solid fourth quarter and start to the new year. Looking ahead to 2026, we anticipate continued momentum within our global voice plans and enterprise voice customers as well as another robust political campaign messaging season to drive us toward our 2026 medium-term financial targets. With that, I'll now turn the call over to the operator for the question-and-answer portion of today's call.

[Operator Instructions] And our first question comes from Patrick Walravens from Citizens.

Congratulations to you guys. David, for you first, can you maybe drill down a little more on what your overall conversations are like and what you're seeing, how you characterize sort of overall demand? And then I think -- I thought the property management example was particularly interesting. And then on the financial side, maybe if you guys could remind us what those 2026 medium-term targets actually are and so what it means when you say that you're driving towards them?

Thanks, Pat. And I'll answer the first part of your question and then hand it over to Daryl. I'd characterize broadly the conversations that we're having with customers consistent with signing a record number of $1 million-plus revenue customers again this period for the second time this year. That stat reflects broad-based demand. Voice is growing in a way that's really healthy and exciting, and every conversation is reflecting the AI moment that we're all in. Maestro is a fundamental component of the example that you cited regarding the property management software company. And I think that one illustrates a consistent dialogue we're having with enterprises who are moving to the cloud. They have multiple vendors that they're either consolidating or trying to orchestrate. And the combination of Maestro and the network that we own and operate is really resonating. And again, that's reflected by a record number of large enterprise deals and then average customer spend continuing to grow at record pace. But let me turn it over to Daryl for the second part of your question.

Pat, it's nice to say hello. Back at the first part of '23 in our Investor Day, we set out our vision for the company over 4 years to drive us through the end of 2026, and we titled those our medium-term targets. We're driving for, and we believe that we're very much on track to achieve above-market revenue growth, 60% and greater gross margins, 20% and greater EBITDA margin and 15% and greater free cash flow margin.

Okay. So just as a reminder for everyone, so Daryl, you guide 15% to 20% in 2023 to 2026. That implies a range of $729 million to $827 million in 2026, $729 million at the low end. I've always thought that was probably too much of a stretch. So just where you really think you can get to the low end of that 15% to 20% CAGR?

We are continuing to focus on. We've guided to $753 million at the midpoint this year in terms of total revenue, and we're very much focused on above-market revenue growth.

The next question comes from Joshua Reilly from Needham.

Maybe just starting off, I know you had some strong customer additions in the first half of '25. Curious how those have been ramping into revenue and going live now. And then you mentioned some strong customer additions here in Q3, $1 million-plus customers. Can you just speak to broadly like how long is the period transitioning from when you get the customer win to when you're actually getting them live? And how much is that compressing because of maybe internal processes that you continue to improve?

You bet. Deal cycles from initiation to close have been consistent, although the channel opportunities that we've enjoyed have compressed that deal cycle significantly in an exciting way. But as customers come on board, they have continued to ramp as we've projected based upon the systems that we have in place, the personnel that we have in place, the policies and practices that bring them aboard and allow them to move mission-critical phone numbers and sites and services in a way that preserves continuity. So, there's always a concern about making sure that services are uninterrupted, but we're very, very good at working with enterprises and have an extraordinarily high level of customer support that allows them to onboard elegantly and to scale in a way that we're really familiar with projecting. And so, the large number of significantly larger annual operating revenue deals or annual recurring revenue deals that we signed at the beginning of this year continue to contribute to the success and the solid results in this period and we will continue to do so into next year.

And then you highlighted a number of new products at the September customer event. Obviously, those tend to have a higher gross margin because they're more software-like margin structure. Curious how these have been layering into new deals for enterprise voice this year versus a year ago? And then how much are those also kind of bleeding into the global voice plan deals as well? Maybe give us a sense of how much is getting bought by Enterprise voice on the software side versus Global Voice.

You bet. Let me ask John Bell, our Chief Product Officer, to answer that one.

Yes. So, we're -- starting our launches with these products for enterprise customers, but they are immediately interesting to our GBP customers as well. So, we build them initially for that target market but do fast follows with releases to the GBP customers. The topics are very interesting both to the enterprises. And since our GBP customers are serving the same enterprises, they naturally are naturally adopted there as well.

And the next question comes from James Fish from Piper Sandler.

On the digital commerce one, I found that one interesting. Are you seeing customers like this more and more in terms of deploying a DIY strategy? Or are you integrating more and more with some of these conversational AI tools that is leading to wins like this?

So, it's a great example of a very large at-scale e-commerce point-of-sale related customer allowing small business to take advantage of AI at a very local DIY level to enable food ordering and delivery. And we are seeing as one of the primary use cases for voice AI, scheduling, calendaring, ordering and fulfilling at the very front lines of small and medium business nationwide. So yes, I think, James, you're accurate in saying this looks like or sounds like a real reference implementation for a growing trend. And so, we are seeing conversations like this more frequently.

Right. My question though on that is, is it more the DIY approach? Or are you integrating with some of the other conversational players out there to help enable this?

So, this is John. Good to talk to you again. It really is both. And so, our approach has really been focusing more on the standards-based approach so we can help with more and more of those integrations, whether they are DIY or really reusing some of the do-it-yourself into turning them into prebuilt. That's really the pivot we've taken recently so we can support both because we do see a strong mix of different approaches customers are taking.

Okay. And then, Daryl, for you, gross margin did come in a little lower than we all had modeled. Can you just talk us through what you're seeing across the segment's gross margin, particularly on the messaging side, given there was some lower pass-through surcharges, as you pointed out? And how should we think about the international versus domestic mix this quarter?

Gross margin had some cross currents moving through it in the third quarter, and we were able to hold it at a 58% rate, which we're very happy about. On the headwind cross current, we had lower messaging primarily because of the missing political messaging last year. And that messaging is -- that contribution in gross margin is at a higher amount than our aggregate company gross margin. And we were able to offset that completely and overcome it with our growing software revenue contribution. And in fact, we're really, really pleased with the way that is developing from a relatively recent start, we expect to end 2025 with an annualized MRR exit rate on software greater than $10 million, and that's going to substantially be built upon in 2026. So, we're excited about that. We really think that, that's going to continue to propel the company along with our other pillars of software -- excuse me, of gross margin improvements that will take us into the 60% and above. In terms of international, international grew very nicely. It grew at 11% year-over-year and international is nearly all voice, and that was at the exact same rate as the overall company's third quarter organic growth rate of 11%. So very good in terms of that mix.

[Operator Instructions] Our next question comes from Will Power from Baird.

I guess maybe first question for either for Daryl or David, who wants to take it. But just on the 2025 revenue guidance, I think you suggested you were narrowing the range a bit or look like raising the low end a bit. And I think you cited stronger voice trends. So, I guess, a, it would be great just to get any further color on the upside in your voice calling plans versus enterprise voice or is it maybe both? And then maybe just any other color on what's happening on the messaging side. It sounds like a little somewhat weaker outlook there.

Okay. Yes. So glad that you asked me to clarify that. We are -- we tightened our range on the lower end with respect to revenue. Our midpoint is just with the decimal slightly above $753 million. Within that is 2 elements. In cloud communications, we've raised that guidance, the implied guidance that builds into the $753 million on the strength of voice. And within cloud communications, we've held messaging as we had fully expected already in line with what we had guided previously. The other component, surcharges, we've lowered that modestly just based in terms of the carrier pricing environment, carrier mix and the type of messaging mix as we're entering in a very large fourth quarter messaging seasonality with Black Friday, Cyber Monday. We have good line of sight to our customers' demand, and we see surcharges coming in a little lower. That lower surcharges, as you know, doesn't contribute anything to gross margin or EBITDA. And so, we are very enthused when it comes to being able to raise our cloud communications revenue.

And then my second question, again, if we want to take David or maybe John, but this number of reputation management product really seems like a nice opportunity and good market fit. I mean, just given what a lot of us as consumers kind of see on a regular basis. So maybe just talk about the trends you're seeing there and kind of how you view that opportunity? How meaningful could that product addition be?

Yes, great question. The trends you see is the consumer, our customers see, and it hurts their business. They are trying to -- businesses are trying to reach consumers, and the consumers won't pick up the phone. So, it's a very basic value proposition, and it is something that we, with our owned and operated network can attack head on and there's immediate value in there. And so, as you did hear, we were -- it's driving customer wins now. We launched it with our direct enterprise customers. This week, we launched it to wholesale customers as well to address their unique needs. And so, we do see global opportunity for that product.