Greetings, welcome to Bandwidth's Second Quarter 2020 Earnings Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I'll turn the conference over to Sarah Walas. Ms. Walas, you may begin..

Thank you. Good afternoon, and welcome to Bandwidth's second quarter 2020 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market close. With me on the call this afternoon is David Morken, Bandwidth's Chief Executive Officer; and Jeff Hoffman, Chief Financial Officer of Bandwidth.

They will begin with prepared remarks, and then we will open up 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 third fiscal quarter and full year of 2020, and to the extent provided future periods, our plans to execute on 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 views only as of today and should not be considered our views as of any subsequent date. 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-K filing on February 21, 2020, as updated by other SEC filings, all of which are available on the Investor Relations section of our website at bandwidth.com and on the SEC's website at sec.gov.

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.

Finally, in these unprecedented times, within our prepared remarks, we have estimated the revenue impact of COVID-19 for this quarter. Our methodology attributes significantly elevated platform usage above and beyond expected thresholds to quantify current and estimate any future financial impacts as a result of COVID-19.

Accordingly, identifying any potential impacts in future periods may become challenging as any increased residual usage and the corresponding revenue impact will be inherent to our business and indistinguishable. Management makes no assurances that we will make further COVID-19 distinctions in the future.

With that, let me turn the call over to David..

our highly scalable platform of flexible APIs, our vertically integrated nationwide IP voice network that we build and operate and our 911 capabilities that we believe are unique among CPaaS providers.

Enterprises choose to build on these pillars because of their quality, cost benefits and our amazing people who answer the call to serve our customers. And it is because of the strength of these pillars that we are able to significantly raise our annual CPaaS outlook, as Jeff will outline momentarily.

Our vertically integrated approach to CPaaS and overall value proposition are what disproportionately attract and benefit large customers operating at scale.

Many leading technology enterprises are long-standing Bandwidth customers, and our CPaaS revenue acceleration has been bolstered by their solutions being heavily used for remote connectivity in the current environment.

At the onset of many more Americans working from home, our teams worked 24/7 to scale our platform and network to support the surge driven by our large enterprise customers who themselves experienced explosive growth among their users.

In this season, we have once again demonstrated our mission-critical value to the most innovative companies in the world. Our customer-centric approach has yielded relationships with our enterprise customers that are multifaceted, deep-seated and expanding.

As a result of our ability to serve, our largest customers extended their contracts, and we are pleased to announce that we signed a multiyear extension with one of our largest customers, which retains our position as their primary provider.

We look forward to serving this customer for years to come in their quest to provide productivity tools and connect knowledge workers.

In this season, we also completed a two-year extension of an originally executed five-year multimillion-dollar exclusive agreement with a Fortune 500 company that offers communications and technology solutions for residential, small business and enterprises across the United States. We announced the original agreement this time last year.

We are pleased by the early extension of this customer's commitment to the Bandwidth platform, and we are eager to continue to exclusively serve this customer. Now I'd like to share a significant customer win from this quarter that marks an evolution of our engagement in serving enterprise customers migrating to the cloud.

We are pleased to announce a five-year multimillion-dollar agreement to provide CPaaS services to a Fortune 100 company that is one of the nation's 10 largest banks and one of the largest issuers of Visa and Mastercard credit cards in the US.

This customer will exclusively utilize Bandwidth's voice services and phone numbers to power their migration to a cloud contact center to support their card services. Enterprises are increasingly migrating to the cloud, but remain challenged by managing complexity, ensuring operational continuity and maintaining regulatory compliance.

CIOs, as in the case of this customer, are challenged by tens of thousands of employees moving from on-premise legacy solutions to the cloud. Unpredictable migration time lines can span days, cause telephony issues and disrupt scheduled meetings.

Additionally, migrating to a cloud provider can often entail reliance on a mix of incumbent network providers and local operators that can result in poor service quality. As a strategic partner to many leading UC collaboration and contact center providers, Bandwidth is ideally positioned to directly connect enterprise customers to cloud solutions.

To do so requires agile software-driven tools capable of provisioning and porting numbers in a predictable process, where automation is the only viable solution at scale.

These capabilities are encompassed in our software platform and, in the case of this customer, most critical to maintaining control and avoiding disruption traditionally encountered in migrating large employee bases from on-premise to cloud solutions. Equally important to this customer and large-scale customers alike is voice quality and reliability.

Given that we operate our own All-IP nationwide voice network, we can predict, quickly detect and resolve voice issues in real time. Enterprises today need a migration partner that can connect them to the cloud and deliver an onboarding experience that allows them to continue to focus on their customers.

I am proud that Bandwidth was able to deliver that experience to this customer. Likewise, we recently announced Duet for Microsoft Teams, which is a comprehensive solution for enterprises deploying Teams to accelerate their telephony migration while meeting complex 911 regulations through a single software-centric communications provider.

Bandwidth is currently one of only two providers certified by Microsoft to provide dynamic E911 calling capabilities for direct routing, all built on a reliable, software-powered network, which has long been the voice standard for leading UCaaS and CCaaS platforms. We engage with enterprises and connect them on their digital transformation journey.

On the international front, we continue to make progress toward extending our world-class network into 13 European countries. In the second quarter, we provided new services to both existing and new customers.

We continue to pursue our international mission and objectives consistent with our profitability principle as a key part of our long-term growth strategy. I want to end by thanking all our customers for the opportunity to serve and by thanking the Bandwidth team for your ongoing dedication to achieving our mission and to each other.

With that, let me turn it over to Jeff..

Thank you, David, and good afternoon, everyone. Second quarter total revenue was $76.8 million, up 35% year-over-year. Within total revenue, CPaaS revenue was $67.1 million, up 40% year-over-year, a new record percentage growth for our business. Other revenue contributed the remaining $9.7 million, which is up 11% from the same period a year ago.

Revenue growth at this scale is a testament to the power of our vertically integrated platform to serve the increasing communication needs of enterprise customers. Our stellar second quarter CPaaS revenue performance was driven by two key factors.

First, ongoing and expected broad-based growth across our platform from enterprise customers who continue to scale usage in a predictable cadence with their plans to increasingly utilize cloud-based communication by embedding voice, messaging and emergency services into their products and services.

The second factor driving our outperformance was the increased usage driven by COVID-19-related remote work requirements which peaked in April and thereafter dissipated throughout the quarter, but remained at elevated levels as compared to pre-pandemic period.

While it is becoming increasingly difficult to differentiate COVID-19-related usage from organic usage growth, we estimate that COVID-19 revenue impact in the second quarter to be in the range of $4.5 to $5 million.

As for other revenue, the primary driver of our outperformance was due to higher A2P messaging surcharges, driven by continued strong customer demand for our messaging offering.

Moving on to other key metrics, our dollar-based net retention rate was 133% in the quarter, another new record for our business and strong evidence of our ability to drive deeper and more meaningful relationships with our enterprise customers. We ended the second quarter with an even 1,900 active CPaaS customers up 30% year-over-year.

Gross margins came in at 48% for the quarter as margins were negatively impacted by SMS surcharges, which we passed through to our customers, as well as heavier network investment within cost of revenue in response to the surge demand created by the pandemic.

This is expected to normalize over time and we continue to believe that our gross margins will be in the high 40s for the year.

Consistent with our commitment to balancing growth with profitability, our non-GAAP net income in the second quarter was $3.1 million or $0.13 per share which is favorable to our breakeven guide due to gross profit overperformance as well as operating expense favorability. Now I'd like to expand our thoughts regarding our financial outlook.

For the balance of 2020, we expect the estimated COVID-19-related usage to continue to dissipate, consistent with observable usage trends to date that show COVID-related usage declines from April's peak throughout the second quarter as work-from-home behavior evolves with the reopening of the economy.

Despite less expected contribution from COVID-19 in the second half of the year, we are raising our annual 2020 CPaaS revenue guidance by more than $13 million based on the second quarter overperformance and our strong continuing business fundamentals.

In terms of CPaaS revenue, we have raised our full year 2020 guidance to be in the range of $260.3 million to $261.8 million or up 32% at the midpoint of the range. We expect total revenue for 2020 to be in the range of $296.8 million to $298.3 million, up 28% at the midpoint of the range.

We're estimating our full year non-GAAP earnings per share to be in the range of $0.05 to $0.11 per share, assuming 25.5 million weighted average diluted shares outstanding.

Turning to our guidance for the third quarter 2020, we expect CPaaS revenue to be in the range of $67.1 million to $67.6 million or up 31% year-over-year at the midpoint of the range. This contributes to our total revenue guidance of $76 million to $76.5 million.

Third quarter non-GAAP earnings per share is expected to be in the range of a loss of $0.03 to a loss of $0.01 per share using 24.2 million weighted average shares outstanding. Finally, I want to thank all our Bandmates for their tremendous efforts that led to our exceptional performance this quarter.

And during these challenging times, I want to wish everyone's strength, and hope you and your family remain safe and healthy. With that, let's open up the call for questions.

Operator?.

Thank you. At this time we'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. The first question is from the line of Bhavan Suri with William Blair. Please proceed with your question..

Hey guys, thanks for taking my questions and congratulations. Those are a great set of results there. I'd like to talk a little bit about the progression that you see in terms of platform usage and kind of deal flow from March-April into May-June, et cetera.

Sort of were there any sort of notable behavioral changes over the last several months compared to what you saw early on in the pandemic lockdown that we've talked about in the past? Just want to understand sort of how that played out? What you've seen as you talked to customers and obviously, the usage you see on the platform?.

Glad to Bhavan, hi, this is Jeff. In terms of the progression that we saw, I think you have to take it in two pieces. So let's first talk about the COVID impact. And obviously, we're doing our best to try to carve that out for you all. We saw a peak in April. That peak was higher than March.

But thereafter, it began to decline in May, further declined in June and we've seen that further decline even in July. Obviously, we're almost at the end of the month and we've seen that as well. And so what you're going to see when we get to guidance is that we've followed that trend that we expect it to continue to come down.

And our belief is people have gone back to work, to some degree, but we can clearly see the usage is down. We've seen other data points externally that have been similar to this.

In terms of the organic business, meaning everything else other than COVID-related usage, we're seeing great fundamental strength in the business, and we're, frankly, just clicking on a number of cylinders. And so the business is very strong, and we'll carry that with us in the second half of the year..

Yeah. That's super helpful. And thanks for the transparency. You guys are always very clear about the puts and takes. I guess maybe a broader question. The messaging business is growing, but there's a whole host concerning messaging aggregators out there globally. Some of them are just sort of aggregating some of the messaging minutes.

Some are sort of discounting heavily with low gross margins.

When you think about the competitive environment and your ability to maybe even see pricing pressure or pricing power, how do you think about how that business trends, not over the next few quarters, but over the next, say, five years, both from a growth perspective and a pricing perspective? That would be really helpful..

Sure. I'd be glad to start. I'd start with the messaging business is performing very well. You heard in David's prepared remarks, year-over-year, we grew 108%. A lot of what's driving that is toll-free messaging. And messaging is actually accretive to our overall gross margins and so that's actually helping and is additive to our margins right now.

So I don't know, David, if there's anything you want to add there, but that's where I would start..

Thank you, Jeff. Bhavan, I would only add that 89% of our revenue remains voice, and we've got structural advantages in voice related to quality and costs that we believe over a five-year time horizon will be very stable and favorable.

Messaging, we think, has a different profile over that kind of time horizon, but we are growing that business as well, but it remains a small minority..

Got it, hat's helpful. I guess the focus on voice keeps the differentiation going. Coo, thanks for taking my questions guys and obviously, a very nice job. Thanks..

Thanks Bhavan..

The next question is from the line of Will Power with Robert W. Baird. Please proceed with your question..

Okay, great. Thanks. That's great quarter results.

Maybe just to come back to the messaging strength, up over 100%, you called out a total of three message, any other kind of drivers within that? And how do we think about the sustainability of that and what's in the pipeline ahead on that front?.

Will, this is David. There are a broad set of use cases during the current season that we're in, where engagement and communication among different constituencies remains vital where face-to-face contact is not allowed or is really impaired.

In addition, you've got political activities and an election season that also contributes, so broad-based in terms of use cases and also political..

Okay. And I just want to maybe just come back to the Q3 guidance and thinking about the different puts and takes there. I think if I look last year, you had a nice increase sequentially into Q3.

How do we think about what the normal seasonality would look like there? And I'm just kind of curious about the COVID impacts, as people go back to work, presumably there'll be a little less meetings usage, but it would seem like the core UCaaS case, it's a big part of your customer base, would actually be continuing to grow at a nice pace.

I think we're still pretty early innings there.

So any way to kind of disaggregate the different pieces related to the COVID impacts that you've seen trend over the last couple of months?.

Will, this is Jeff. I'll start, then if David would like to chime in as well, that would be great. I think the way that you look at as we go into third quarter, you've got some netting going on. Again, what I would start with is the fundamental strength of the business and we're just seeing a number of things going very well.

And frankly, I think our value prop is resonating in the market. And so there's strength there. What I had alluded to earlier was that COVID is declining. And we're seeing that through July. We expect that to continue throughout the balance of the year. And so that's balancing it.

And so I think if you kind of normalize for COVID, and you look at second quarter, as an example, you take our 40% CPaaS growth rate, take about 10% off for COVID, that's 30%. We're right in line with our third quarter guidance..

Okay, great. Thank you all..

Thank you. Our next question is from the line of Patrick Walravens with JMP. Please proceed with your question..

Great, thank you and congratulations, Dave and Jeff. There's so many things to talk about. I think that I'll do the Fortune 500 company extension.

So Dave, can you go back and remind us sort of what stage 1 was for this company? And then just give us more details on what stage two is?.

You bet, Pat, and great to hear your voice. This company, quite a few years ago, engaged us as a primary provider to supply them with all of the platform needs that they used for UCaaS, CCaaS suite, and we've been effective in renewing that agreement a couple of times.

And in this case, having served them so well during such a critical season, we both came to terms on a two-year extension that's really exciting for us in terms of the continuity and visibility that gives us in the role that we maintain with them that's really favorable, if that helps..

Yeah. And Jeff, can you just remind us how do you measure – how do you know what's – and you're saying it's getting harder, I get it.

But how do you know how much is the COVID impact? What do you benchmark it against? How do you do that?.

Sure. Let me start with how we did March because I think that's the easiest to understand, and then we just extended that same principle. So we knew there was no COVID impact to speak of in January and February. And so there was a natural trend to our key customers. And obviously, where we're really scrubbing is in UCaaS and Meeting Solutions.

And then we compare that to what we expected that trend to be in March, knowing if that customer is still growing, we would attribute some of that organic, but where we really saw the pop, we would attribute that to COVID. We used the same thing in second quarter.

And the reason that we provided a range this time is there's some interpretation that's involved with this. And we acknowledge that it's definitely getting harder to differentiate an organic growth minute of use from a COVID-driven minute of use without talking to the customer and asking why.

And I think even if we did do that in a theoretical sense, they might say both. The business could be doing well, but COVID may have amplified their usage. And so we're doing the best that we can and trying to be as transparent as we can..

Okay and then just sort of like a – to go just a level deeper. So for example, like the video conferencing providers who are big customers that would be an example, someone where you're trying to figure out how much was the natural rate versus COVID.

Is that right?.

Exactly right. You can look at that trend. You would extrapolate to what that would be. We use other data points, anecdotes that we know, and then we estimate what that COVID-related amount would be because – and often cases, particularly in March, a little bit less so in the second quarter, it was very distinct. You could see a different trend.

And so I think we're very close, even though it's an estimate..

Okay, great. Thank you very much and congratulations again..

Thanks Pat..

Our next question comes from the line of Rich Valera with Needham & Company. Please proceed with your question..

Hey, it's Chad David [ph] on for Rich Valera. Just in terms of the Duet for Microsoft Teams.

Just wondering if you can talk about any early success or any additional color about that announcement?.

The primary takeaway is that we're one of only two E911 certified providers with Microsoft, and Duet is a – it's a powerful solution that our platform provides that is extremely unique, and the market opportunity is tremendous. There's lots of great information on our site about the announcement.

To your point, we have not, other than the press release we put out, made additional announcements about customer wins, but we look forward to doing so in the future..

Great, thank you..

Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question..

Hey again, I'll add my congrats.

David, I'm wondering regarding Zoom, are you seeing any signs of video fatigue where perhaps users don't always want to turn the camera on and so they're dialing in via telephone rather than using video in a way that benefits you?.

We are, Mark, and in particular, a use case I didn't anticipate, which is simply the ability to get up and walk around out from behind the screen at whatever time you want to.

So by dialing in and starting your video, we're seeing users go ahead and use the video on the screen for video, but then dial in with their mobile phone and then be able to walk away and still be on the conference whenever they want. So that's kind of a new aggressive power user use case that's favorable for us.

And something I certainly didn't anticipate..

Okay, got it. So back to the extended agreement with some of your large strategic customers, perhaps I'm misunderstanding. It almost sounded like they're preemptively extending when they still had some runway left on the contract.

So first of all, am I understanding that correctly or not? And if that's the case, what's prompting them to do that?.

You are understanding that perfectly, Mark. And what's prompting them to do that is the great work that both of our customer teams that we're talking about and our own team are doing during an extraordinary season. There are so many opportunities to do great business together.

And in our case, what I'm gratified by is that our team has been perceived to be doing so well that the relationship is being extended for so long, so early. And it gives us great continuity and visibility, and it's precisely because of strong positive sentiment across both of these customer opportunities. The chemistry is just at an all-time high..

Okay. And I wanted to ask you as well, a final one. When you look at what has happened, maybe in June and July, I heard all your commentary on how the COVID impacts peaked in April. But some of the re-openings are being challenged or reversing, unfortunately.

And I think we're all curious if some of these behaviors are going to become ingrained even as people go back to work.

So I guess I'm just interested in whether there are – whether you wonder in the back of your mind that maybe some of this remote work and remote learning is going to sustain, again, understanding that maybe it's peak, but maybe some of that tailwind is going to sustain farther into the second half or into 2021?.

We are, like you Mark, wondering what will be behavior modification that's ongoing after the reopenings happen or don't. But the way that we're forecasting takes into account what we're actually seeing on the platform, the trend and our approach, which is not to get out over our skis.

And so I think you'll see – you should understand us to be consistent with the past where we're doing the best job we can forecasting going forward. Certainly, if behaviors change on a more permanent basis, that would be favorable. But we're looking at what's in front of us and projecting. But let me invite Jeff to add to my comments..

I think that's well said and pretty comprehensive. I guess what I would add is I don't think there's going back to a normal or what there was pre-pandemic. Work-from-home, working remotely, to some degree, is around for I think the foreseeable future. And that's, I think, multiple years, if not permanent.

I think we're trying to find where that new level is, but I think we're confident it's higher than what the sort of old normal level would be..

Okay. Yeah. Well said, thank you very much..

Our next question is from the line of Meta Marshall with Morgan Stanley. Please proceed with your question..

Great, thanks.

Just wanted to ask just on some of the gross margin investments that you made for scalability in Q2, just how we should think about whether those were onetime in nature or just over what time period they're made? And then second, just any update on progress with international or how you're seeing that business ramp?.

Meta, this is Jeff. I heard the first question, and I kind of missed the second part of it. Maybe, David got it and I'll him to repeat it after this one, but let me tackle the first one. In terms of sequentially, we did see a decline in our gross margin. This was really related to a timing issue.

So in March, when the pandemic hit, we were able to utilize our existing network excess capacity at the end of the quarter when the pandemic hit. And so you saw our margins pop a little bit in the first quarter.

In the second quarter, based on the continued high level of COVID-related usage, we elected to invest more heavily in our network at that point. And these costs are captured in our cost of revenue. And it was designed to sort of recreate this headroom or regain some excess capacity for future growth.

And admittedly, this was more a step function in nature. We believe that over time, this will normalize into future periods, and you'll see somewhat of a bounce back of our margin. So that was the primary reason. There were some other factors like A2P messaging surcharges and some minor changes to geographic mix that also informed our gross margins.

But that's really what caused the change..

Meta, this is David. I think the second part of your question related to general progress on international.

Did I get that right?.

Yes. But during the working from home, there's lots of background noise. But yes, international progress would be the one..

Yeah. No worries. We are continuing to make good progress selling new services to both new and existing customers per our go-to-market plan. The build-out continues. There's certainly been some headwinds with decisions like Schrems II around privacy that we're all understanding, and it's very early, but things are going according to plan..

Great, thanks..

Thank you. Our next question is from the line of Mike Walkley with Canaccord. Please proceed with your question..

Great thanks for taking my question. Hope everybody is healthy on the call.

Just building on kind of the slowing trend, any thoughts at all with kind of the summer season, more vacations, schools out, do you get any benefit maybe from your UCaaS and video conference customers from distant learning as it looks like colleges and schools might have some kind of hybrid approaches coming up in the fall season?.

We do think that there are many use cases that may persist that benefit us. Some of those are affiliated with schools and whether or not return to school in-person occurs, no question about it. But as Jeff mentioned earlier, we're doing our best to estimate the new normal level on our platform through this season. It is fluid.

We certainly all hope for everything to return to normal as quickly as possible. But to your point, there may very well be fall tailwinds that benefit us disproportionately compared to the summer season..

Great and just my follow-up question, can you just update us your thoughts kind of – I think you've shared some prior months about deal closing accelerating through April.

Has that kind of normalized now? Is it tougher to close some of these deals with everybody working remote? Or how do you see the overall deal flow?.

We see lead flow that's strong. We have talked in past periods about decision-makers delaying during uncertainty. I think things are relatively stable as it relates to decision-making time periods. But to the second part of your question, it sure is very involved.

When you can't get on a plane and be in person to have an enterprise opportunity truly close and come to fruition. We're excited about the Fortune 100 company that we've announced during this quarter, closing, and we're excited about what that means for us. But we're confident that we can overcome the challenges selling remote.

We've seen that throughout the year since March. I believe that the mindset of the decision-maker at the enterprise level about digital transformation is resolved to make sure that they get to the cloud in full.

And that aggressive transition away from premise-based legacy solutions to the cloud for many of our customers is really obvious and apparent, and we're excited about it..

Great, well, congrats on the record revenue growth quarter and thanks for taking my questions..

Thank you..

Thank you. Our next question comes from the line of Alex Kurtz with KeyBanc. Please proceed with your question..

This is Steve Enders on for Alex. I just want to check on the CCaaS opportunity that you won in the quarter.

I'm just trying to understand what were the factors that led to the win versus some of the incumbent voice providers that I think you said that customer was using previously?.

All of the benefits of the Bandwidth platform include aspects of an API approach to communications that the legacy providers just have never had.

And so when you are an enterprise CCaaS customer and you need a flexible solution that scales massively, you're looking at a Bandwidth platform that is designed to help you migrate to the cloud at light speed, to do so reliably. And that's just something that the incumbent carriers have never been able to address.

And we don't see any change in their behavior. We expect that we've really begun a new chapter with the very largest enterprises in the country as it relates to providing them with service through our platform. So we're excited about the differentiation that we continue to develop and extend from where we've begun.

But the bottom line is a software platform and vertically integrated network is a dominant offer relative to incumbent solutions that have no software platform..

Okay, great. That's helpful. And just, I guess, to touch a little bit more on there. I don't know if you've heard much about CCaaS being an opportunity in the past.

Just wondering where does that stand today? And does it feel like it's kind of a newer use case that's emerging for Bandwidth?.

We have talked about CCaaS in the past, but this is the first material announcement we've made about a customer that's significant. It does represent a great opportunity. And we've been active in supporting the CCaaS space with lots of good partners and vendors that provide extraordinary solutions.

And we are excited about what it means to have a role in the CCaaS ecosystem that's positive and it really helps the largest enterprises in the country, transform beyond the premise-based solutions they've had in the past. And so it's emerging. It's early. We have talked about it in the past, and we're excited about what it means for the future..

All right, great. Thank you..

Our next question comes from the line of Derek Soderberg with Colliers Securities. Please proceed with your question..

Hi, everyone. I'm sitting in for Catherine Trebnick. You guys talked a little bit about SMS surcharges. We've seen Verizon and AT&T do this, implementing the surcharge on A2P text message notifications.

Is this creating a more favorable competitive environment for Bandwidth and their solution relative to the others? And then also relatively, how do Bandwidth surcharges compare to Verizon and AT&T?.

So there's no question that surcharges are an additional cost that is passed through to the customer for 10-digit long code SMS messages.

The preponderance of our messaging service is toll-free messages, but we've been clear that we would anticipate over time the carrier ecosystem that has applied surcharges to the former 10-digit scenario likely would apply them to the toll-free world.

And when that happens, we would have surcharges like the 10 DLC, and we would pass those through to customers. So it's an ecosystem where everyone is on the same playing field. When a carrier decides to assess surcharges, it's to everybody.

So it's essentially an increased cost basis for everyone involved, no matter who the provider is, that the Verizon or AT&Ts of the world decide to tax. So whether it's 10 DLC, which is long code regular phone numbers or toll-free eventually, we think that the carriers are on the path to asking for a toll or a tax for each one of those messages.

We will pass that through just like everybody else, and everyone is on the same playing field. Today, toll-free certainly has an advantage without those surcharges, but we've talked in the past and are consistent that we think that over time, that very well may change..

Okay, great. And then as my follow-up, I was wondering if you guys can expand on E911 on sort of how that business is trending and maybe some of the growth drivers looking forward..

We were really excited to announce that we are one of only two providers that Microsoft has certified when we announced our Duet, which is the direct routing for Teams solution from Bandwidth.

That E911 solution is vital to large companies that are transitioning from a legacy solution with an SPC in the past and a carrier that they've utilized to the cloud. And we are one of only two and that is a very real leadership position that our E911 business enjoys.

And we think that, that bodes very well for the prospects of supporting that very large addressable market going forward..

Great, thanks..

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation..