Seth Potter - IR David Morken - CEO Jeff Hoffman - CFO.

Meta Marshall - Morgan Stanley Patrick Walravens - JMP Securities Richard Davis - Canaccord Genuity Will Power - Robert W. Baird.

Greetings and welcome to the Bandwidth Fourth Quarter 2017 Earnings Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Seth Potter, with Bandwidth Investor Relations. Please go ahead..

Thank you and good afternoon and welcome to Bandwidth’s fourth quarter 2017 earnings call. Today, we’ll be discussing the results announced in our press release issued after the market closes. With me on the call this afternoon is David Morken, Bandwidth’s Chief Executive Officer and Jeff Hoffman, Chief Financial Officer of Bandwidth.

They'll begin with prepared remarks and then open the call for Q&A.

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 first quarter of 2018 and full year of 2018, our plan to execute our growth strategy, our ability to maintain existing and acquire new customers and other statements regarding our plans and prospects.

Forward-looking statements may often be identified with words such as, we expect, we anticipate, or upcoming. These statements reflect our view only as of today and should not be considered our views as any substitute subsequent to this day. We undertake no obligation to update or revise these forward-looking statements.

Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations.

For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our 10-Q filing on December 14, 2017 as updated by our other SEC filings, all of which are available on the Investors section of our website at bandwidth.com and on the SEC’s website at sec.gov.

Finally, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued after the close of market today, which is located on our website at bandwidth.com and the SEC’s website at sec.gov. With that, let me turn the call over to David..

Thank you Seth and thanks to everyone for joining us on the call today. We are pleased with our execution during the fourth quarter.

We exceeded expectations on all of the metrics we provided guidance on during last quarter's call and during the quarter in which we became a public company our team remained focused on our core mission to serve customers. Looking forward we're excited about a great year ahead in 2018 which is supported by our strong outlook.

CPaaS services are empowering new and current enterprise customers to launch and grow voiced and text experiences for consumers and businesses. Our comprehensive software provided communications platform integrates seamlessly with one of the largest IP voice networks in the U.S. that we build and operate.

Our software APIs allow enterprises to rapidly migrate launch and scale advanced voice and messaging capabilities within their applications and devices.

We are the only platform that provides complete communication solutions with integrated 911 services by owning and operating our software platform, IP voice network and 911 services we are able to offer complete solutions, real time quality monitoring, dedicated operating teams and the overall superior customer experiences that enterprises demand.

Our combination of unique and valuable assets, amazing team and dynamic culture drive successful execution for all our customers. The strength of our offering is evidenced by the 21% year over year growth in active CPaaS customers and 111% dollar based net retention rate which drove our better than expected results during Q4.

Specifically total revenue came in at $42.5 million driven by a 16% year over year increase in CPaaS revenue. Now I would like to highlight some of our key accomplishments during the fourth quarter and speak to our plans for 2018.

During the fourth quarter we expanded our relationships with existing enterprise customers as evidenced by the improvement in our net retention rate driven by increased usage across the Board. Expanding enterprise relationships are a strong indicator of the robust nature of our platform to provide multiple services and to deliver all of them well.

We built the Bandwidth platform from the ground up as an enterprise grade cloud application, as a result our average customer deployment is fast, our software APIs are flexible and our enterprise customers are able to launch and scale from day one. Our ability to serve such customers well has created awareness and visibility in the marketplace.

One example is in the business conference calling vertical where we have been able to win the most significant market share leaders in the space in a very short period of time.

We expect in 2018 that the primary driver of our growth will be at the expansion of our existing customer relationships as our customer's increase usage and commonly add other services from our platform over time.

These relationships with large and medium sized businesses across various industries have been both dynamic and durable as our customers use more of our services and stay with us longer. We will continue to cultivate our relationships and focus on enterprise customer satisfaction.

We believe that satisfied customers provide vital product feedback, purchase additional services, renew contracts at a higher rate and provide new customer referrals for our business. We are committed to leveraging our innovative product capabilities to meet our customer's needs.

We intend to invest in continued development of our platform network and product features to support new use cases such as virtual personal assistants and to help our enterprise customers succeed as communications technology evolve.

For example we believe the rise of voice as an interface in the home and office such as Amazon's Alexa and Google Home will expand our existing opportunities. In regard to our international offerings as we stated previously 2018 will be a year of discovery.

We plan to follow and fulfil our existing customers demand in a new country rather than trying to create it from scratch. Many of our existing customers operate at scale internationally or have plans to do so.

As a reminder our international services currently are limited to outbound international calling and outbound international messaging and our international business is currently immaterial if we decide to pursue an opportunity we would take a disciplined approach to capital allocation and building durable structural advantages for quality and cost consistent with our experience here in the U.S.

over the last 10 years. I want to mention we remain committed to our corporate culture given its importance to our success in the future since our inception we have experienced substantial growth and how we work well together as a team has been critical to our success. We define our culture with 3P's, purpose, people and principles.

Our purpose is to accomplish our mission for customers and it is our top priority. Second are people who are essential to accomplishing this mission as a result we invest heavily and happily into our people. We do this through our whole person framework, programs and policies designed to strengthen our body, mind and spirit.

At the very heart of our company culture is our desire to grow from strength to strength through every season. Our third piece stands for our principles, we are committed to strong principles which we define and share across the entire company more importantly we live by them.

We ended 2017 with 378 employees up approximately 12% during the last six months. Finally I wanted to briefly address an extremely favorable resolution of a legal matter. We entered into a settlement agreement to resolve our ongoing dispute and litigation with Verizon.

Under the settlement agreement Verizon made a $4.4 million lumpsum payment to Banwidth in February and we issued Verizon bill credits with respect to amounts previously billed. The settlement also specifies certain terms for our billings to Verizon prospectively. The settlement agreement also results Verizon's counter claims against Bandwidth.

We're thrilled with this outcome and excited to have a clear path forward working with the Verizon team. So in summary our strong fourth quarter capped off an exciting year for Bandwidth.

Looking to 2018 we believe that Bandwidth is well positioned to further leverage our unique combination of our API platform, our all IP network, and amazing team to serve the communication needs of enterprise customers. With that let me hand it over to Jeff to walk through the financials in more detail..

Thanks, David. I will provide a more detailed overview of our fourth quarter and full year 2017 financial performance and then provide our outlook for the first quarter and full year 2018. Following my remarks we will open up the call to your questions.

Fourth quarter was another strong performance for Bandwidth highlighted by accelerated revenue growth and improvement in our dollar based net retention rate which resulted in exceeding expectations across all guiding metrics.

Our solid performance continues to be driven by ongoing demand as enterprises continue to embed voice, messaging and 911 into their products and services. During fourth quarter our total revenue was 42.5 million up 10% year over year. Within total revenues see CPaaS revenue was 35 million, up 16% year over year.

Other revenue contributed the remaining 7.5 million of total revenue down from 8.6 million in the fourth quarter 2016 due to the expected continued decline in Legacy services and indirect revenue. We ended the fourth quarter with 965 active CPaaS customer accounts up 21% year over year.

In addition, our dollar based net retention rate, a gauge of our ability to retain and expand business with our existing customers was 111% compared to a 108% during the fourth quarter of 2016. Our fourth quarter dollar based net retention rate reflects our decision to curtail services to a competitive CPaaS provider.

This is the last quarter we expect this issue to impact our dollars base never retention rate. Before moving on to profitability metrics I would like to point out that I will be discussing non-GAAP results going forward.

Our GAAP financial results along with the full reconciliation between GAAP and non-GAAP results can be found in our earnings release.

Our non-GAAP gross profit which excludes stock based compensation and depreciation was 20.7 million yielding a gross margin of 49% for the fourth quarter 2017 up from the 18.8 million and 48% gross margin we achieved in the fourth quarter of 2016.

Fourth quarter adjusted EBITDA was 4.4 million compared to 5 million for the same period last year which reflects an increase in operating expenses primarily driven by personnel related costs to support our growth.

On a GAAP basis we reported a net loss from continuing operations attributable to common stockholders of 0.6 million or $0.04 per share based on 14.9 million weighted average basic shares outstanding during fourth quarter 2017.

The enactment of the tax cuts and Jobs Act in December 2017 resulted in a onetime charge of $2.1 million in the fourth quarter due to the remeasurement of our deferred tax assets.

Our non-GAAP net income in fourth quarter was 1.6 million or $0.09 per share based on 18.1 million weighted average diluted shares outstanding, this was well above the high end of our guidance of breakeven to $0.01.

During the fourth quarter we generated 4.8 million in net cash from continuing operations and 1.7 million in free cash flow which includes purchases of property and equipment as well as capitalized software development costs for internal use of 3.1 million.

Turning to a quick summary of financial results for the full year 2017 total revenue was a 163 million up 7% year over year. Within total revenue CPaaS revenue was 131.6 million up 12% year over year.

During 2017 adjusted EBITDA was 22.2 million and non-GAAP net income was 9.5 million or $0.59 per share based on 16.1 million weighted average diluted shares outstanding. Turning to the balance sheet as of December 31, 2017 Bandwidth had cash and cash equivalents of 37.6 million and no debt.

As a reminder during the fourth quarter the company completed its IPO which generated proceeds net of underwriting discounts and commissions to the company of approximately 74.4 million, a portion of which was used to pay down all amounts outstanding on our term loan facility. Now I'd like to finish with some thoughts regarding our financial outlook.

In terms of CPaaS revenue we expect the full year of 2018 to be in the range of 156 million to a 158 million or up 19% at the midpoint of the range. We expect total revenue for 2018 to be in the range of 188 million to a 190 million.

We wanted to point out that our other revenue includes the favorable impact related to the Verizon settlement that David mentioned earlier. Specifically for the full year 2018 other revenue includes a onetime benefit of approximately 6.9 million excluding the settlement as expected other revenue would have declined compared to 2017.

We expect the positive impact to be realized in the first half of the year and to flow directly to our bottom line net of taxes. As a result non-GAAP EPS is expected be in the range of approximately breakeven to a loss of $0.11 per share.

This outlook assumes weighted average shares outstanding of approximately 17.8 million which includes the shares of Class A common stock issued by the company in the IPO as well as the conversion of the company's convertible preferred stock into shares of common stock.

Turning to our guidance for the first quarter of 2018 we expect CPaaS revenue to be in the range of 36 million to 36.5 million. We expect total revenue to be in the range of 47 million to 47.5 million, other revenue includes the favorable impact of the 4.4 million lumpsum related to the Verizon settlement.

Non-GAAP earnings per share is expected to be in the range of $0.07 to $0.10 per diluted share. This outlook assumes weighted average diluted shares outstanding of approximately 20.3 million.

In 2018 we expect to invest a portion of our IPO proceeds to extend our CPaaS platform to support our growth and anticipate overall gross margins to be consistent with 2017 results with the exception of the first quarter which is expected to be slightly favorable to fourth quarter margins primarily due to the impact of the Verizon settlement.

So in summary 2017 was an exciting year which has positioned Bandwidth to accelerate growth. We continue to address a large and growing marketplace and we believe we have the opportunity to build a very large business as enterprises continue to embed voice, messaging and 911 into their products and services.

With that I will now hand the call back to the operator for the Q&A portion of the call..

[Operator Instructions]. Our first question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question..

I wanted to get a sense of now that you guys have started making some hiring and you know have gained a good number of new customers just what are kind of the most common use cases that you're finding success with kind of those initial sales with and then second question if I could is just if you could kind of talk about how some of the larger customers or how some of those initiatives are kind of tracking to where you expected them to kind of perform? Thanks..

To answer your question the use cases that we're seeing join the company in the fourth quarter are consistent with our experience throughout the year and even preceding that as the CPaaS value proposition and hypothesis is being embraced by enterprises promotes messaging and voice within applications and on devices.

There's no new novel use case that’s top of mind that we are surprised by the most recent quarter and it's been a good trend of adoption engaging customers through our enterprise, our enterprise customers products and services. I forgot the second part of your question..

Just on kind of the large customers and how they're tracking to expectations?.

Yes, so I'll answer and then ask Jeff to chime in as well. Our largest customer set are busy executing their strategies and they keep us up to speed on what those are and I would describe those as tracking within our expectations throughout the end of 2017 so consistent with how we had planned to support them. .

So was just going to say in general the fourth quarter we had a strong performance across the Board so although we're getting good growth from our large customers that you mentioned we also have the base of customers that's growing at a good rate to just want to mention that..

Okay, and then I mean just circling back to the first question again.

You know you noted kind of similar use cases as in general but is there kind of you know could we assume that these are still mostly customers with mobile presence or application companies or just how should we think of kind of the make-up of who are the new customers?.

Yes the composition of the new customer cohort is consistent with what we've seen and it doesn't really concentrate in any particular vertical but does represent a customer set that we have historically targeted as larger enterprise and as you know we have a database of both the Fortune 1000 but then 43,000 other enterprise target customers that our sales force is actively approaching to provide our platform service so we have a broad appeal and that's been consistent with those customers that have joined us in the most recent quarter..

Our next question comes from the line of Patrick Walravens with JMP Securities. Please proceed with your question..

I guess my first question is that the 111% dollar based net retention rate is terrific. How should we think about that trending in 2018?..

I think how we should look at that is I think we're now sort of into a range that we can continue at going forward, one of the things that I mentioned in my comments this is the fourth quarter was the last quarter that we had to drag from curtailing services to a competitive provider and so we'll see that going forward, we'll see that go away going forward and then I think is as with the growth and demand from our existing customers as well as are beginning to ramp the sales force in 2018 we will expect overtime that continue to trend up..

Terrific. And then Dave for you, you know one of the reasons for going public was to build the new customer acquisition engine.

How's that going so far?.

It was Pat, you're absolutely right and I have a tradition around here of doing new hire breakfasts where I'll take 12 folks at a time and have a blast getting to know them and I did another one of those this morning and we are well underway in our staffing plan and feel good about that so far for the year..

And I think you know the other big place that you wanted to spend was on building out the capabilities of the API platform, how is that going?.

So that's a good point, part of the use of our proceeds from our public offering that we execute against in the fourth quarter was continuing to build out the platform so it wasn't just hiring it was also the platform and that strategy is near and dear and still very much part of our focus until we think we've done well with that in the fourth quarter as well..

Our next question comes from the line of Richard Davis with Canaccord Genuity. Please proceed with your question..

A couple things more kind of on the product side, as you introduced I guess it's called dynamic location, API's and things like that.

How do you see that kind of giving yourself some differentiation and then the second question that kind of ties in with that would be to what extent and how much technical talent would I have to have to build my own kind of critical messaging system and will the cost savings be worth it and are DC people using that as use case? Thanks..

Thanks, Richard. Emergency service 911 location services within our platform is a real standout distinctive for us. We have owner economics on the underlying infrastructure that connects to all the public safety access point to United States and the location specificity for that service is essential.

We've seen new customers join us because of that value proposition from the platform and so expanding and extending that capability is very much part of our product strategy.

If you wanted to replicate the value extent coverage and reach of that you would have to undertake significant expense to provide the infrastructure but then also to integrate it within a CPaaS platform.

We've spent significant time on the location work and integrating that within the platform so I can't get too terribly specific about how much money you would have to spend or how much time but I would consider it to be quite significant..

[Operator Instructions]. Our next question comes from the line of Will Power with Robert W. Baird. Please proceed with your question..

Yes maybe just starting with following up on the dollar based new retention rate, nice to see that acceleration.

Maybe just trying to unpack that a little bit further as you look at customer usage patterns how much of that was your increase voice to your existing customers versus adding your new API capabilities within those customers whether it be [indiscernible] 911 etcetera, any other color within that?.

I would say that the preponderance of the growth in the dollar based net intention rate was driven by usage but we are seeing favorable uptake of the other products that you mentioned but that would be the lesser of the two impacts..

Okay.

And then Jeff maybe for you, the gross margin upside in the quarter any further color as to drivers there and then I think with respect to guidance on that front you expect it to be similar to the '17 level and '18 is that coming off at the higher Q4 level or what's the right way to kind of frame that for '18?.

Sure. So yes we were really pleased with our performance in Q4 on the gross margin front and the margin expansion that you saw there continues to benefit from a favorable revenue mix and our ability to also drive efficiencies within our platform.

Going forward in 2018 we are going to be doing more investment putting the IPO proceeds to work and so we expect throughout the year rather than growing our margins will be more flat initially with the intent of better serving our customers and increasing scale going forward and some of these investments will help us with margin enhancement going forward as well..

Okay.

And then you know David in your prepared remarks you referenced you know voice system markets is one of the opportunities you're excited about and I suspect it's still pretty early but I wonder if there are any early anecdotes with respect to you know traction and voice calling trends yet?.

We're excited about what that user interface and technology means for our business going forward and I don't have anything to specific to share but the overarching ease of use in homes and offices of AI tied to big data doing voice rec [ph] with robust down and all of the fundamentals behind the thesis that really drove us to invest you know in that area remains the same.

So we're still very, very bullish about what that means for us going forward..

Our next question comes from the line of Brant Branson with Brent Bracelin with KeyBanc Capital Markets. Please proceed with your question..

This is [indiscernible] on for Brent.

I was wondering if I could ask sort of maybe the future of services delivered through API, if you are putting forward any initiatives on kind of expanding the horizons of what can be delivered maybe a different kind of service outside of voice or SMS and the potential for services that are higher margin or higher price point and how those could be incorporated into your current offerings?.

Today we don't offer a service paid or free for video from our platform that's not something we've done historically and most of the time when we hear that question that's what I understand primarily the interest to be in but for us 2018 really is focused on scaling our sales headcount and expanding the robustness of our platform and network and improving the gross margins but also it's a year of discovery for international and so we aren't focused on our novel or revolutionary new bell or whistle on the platform but what we are looking at is footprint outside of our current domestic jurisdiction with the platforms that we have built and invested in over the past several years and so I don't have any special new product roadmap items to share on the call but we are constantly innovating with our enterprise customers and we do historically have moments of inspiration with them where we will add significant functionality or breakthrough value and we would anticipate being able to do that you know as we have in the past..

Thank you. Ladies and gentlemen we have reached the end of the question and answer session and I would like to turn the call back to David Morken for closing remarks..

Thank you, Hector and thank you to everyone for joining us today on the call. We're excited about 2017 and everything that we were able to achieve as a team and on that note I'd just like to thank all of our Band-mates here and to all of you for joining the band. Thank you..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..