Greetings, and welcome to the Bandwidth Incorporated Second Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded today, Wednesday, August 3, 2022. I would now like to turn the conference over to Sarah Walas, VP of Investor Relations. Please go ahead.

Thank you, Grant. Good afternoon, and welcome to Bandwidth's Second Quarter 202 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market close. The press release and an earnings presentation with historical financial highlights can be found on the Investor Relations page at investors.bandwidth.com. With me on the call this afternoon is 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. 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 quarter and full year of 2022. We caution you not to put undue reliance on these forward-looking statements as they may involve risks and uncertainties that may 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, 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, as well as in the earnings presentation, which are located on our website at investors.bandwidth.com. With that, let me turn the call over to David.

Thank you, Sarah, and thanks to each of you for joining us. We're pleased to share that we exceeded expectations on the top and bottom lines for the second quarter with revenue up 13% over last year to $136 million and a non-GAAP net loss ahead of our guidance of $1 million. Thank you to all our Bandmates for another terrific quarter and for your commitment to our customers and to each other. And I thank God for watching over us and for giving us our work to do together. In a few moments, I'll share details about the quarter and our strong momentum within the enterprise. But first, I'd like to discuss the question looming front and center: how will Bandwidth's business perform during this economic downturn? Amid the current economic turbulence, there is no such thing as business as usual, and macroeconomic factors are likely to impact all of us. The only question is magnitude. And the answer to that question is that for four key reasons, Bandwidth is well positioned to do what we said we will do through these uncertain times. First, we power business-critical communication for a diverse set of customers across many industries. Contact centers, telehealth, hybrid work and emergency calling are just a few examples of how our customers rely on the Bandwidth cloud for essential communications. Early indicators prove that certain categories of IT spend are more exposed in this season than others. For example, it seems marketing use cases are being impacted more than cloud computing. By contrast, many of the connections Bandwidth enables are mandatory rather than discretionary. And history has shown that these are not just less susceptible to cost savings measures but are actually essential to achieve them. Second, we believe that enterprises' cost-cutting efforts will actually lead them to embrace cloud communication solutions. Businesses everywhere must now do more with less, and we enable them to do just that. We do not expect a sustained downturn to halt large enterprises' unrelenting march to the cloud and all the cost savings and the enhanced productivity that they find there. Third, Bandwidth's position is strengthened by our large enterprise customer base, our enterprise product, and our enterprise go-to-market focus. Because the large enterprises we serve are well-funded, established businesses, we believe there is less likelihood that their ongoing digital transformations, all designed to drive efficiencies, will be disrupted. We enjoy a strong position because our revenue is not heavily concentrated among small and medium businesses who are likely to be disproportionately impacted in a downturn. Fourth, and finally, profitable growth is a first principle for this team. Bandwidth was largely bootstrapped until its IPO in 2017, and we have always been focused on profitability. This enduring commitment to operating bottom line discipline has always served us well. Our leaders are focused on cost management and effective investment with prudent payback periods, directing resources to initiatives that are most certain to reinforce our success. So in summary, we are confident in the profitable course and speed that we've charted through these troubled times because we provide mission-critical cloud communications that reduce costs for large enterprises. Now I'd like to turn to our Q2 results, which show that our team is executing well and delivering solid outcomes in spite of the isolated customer headwinds we've previously discussed. We're focused on growing with existing customers, winning new large enterprise customers, and becoming the global CPaaS platform of choice for scaling digital engagement. Our wins this quarter demonstrate success on each of those fronts. Our global network, cloud-native mentality, and consultative support team established our mission-critical role, powering all the Gartner Magic Quadrant leaders in UCaaS, CCaaS, and meeting solutions. And these same capabilities are now creating exciting new opportunities within Global 2000 enterprises. Last quarter, we shared news of our new AI integration with Pindrop, a leading voice biometric authentication and anti-fraud solutions. I'm pleased to share some examples of how that unique integration is helping us win new business, both with existing and with new customers. We've told you before about a top 10 bank, one of the largest issuers of Visa and Mastercard credit cards in the U.S., who chose Bandwidth for a new cloud contact center build-out to support its vast credit card services operation. With the release of our Pindrop AI integration, we secured traffic from an additional business unit in their contact center portfolio. It is another terrific example of how we're expanding the Bandwidth platform ecosystem to add more value and more capabilities for complex contact center migrations. I'd also like to highlight another Bring Your Own Carrier contact center win this time with Five9. The customer who provides consolidated technology support for state credit unions selected Five9 to modernize its contact center. But they were struggling to integrate the incumbent provider into both Five9 and Pindrop. Enter Bandwidth and our seamless integrations with both of these partners. Our platform ecosystem and operational excellence solved what we call the telecomplexity often found in such transformations and dramatically accelerated this customer's journey to the cloud. Last quarter, we also shared examples of the strong momentum we're seeing with our new Duet for Genesys partnership. That momentum is growing with new customers in diverse businesses across retail, healthcare, Fortune 500 global manufacturing, and call center outsourcing. Duet for Genesys allows enterprises to capture the power and feature set of Genesys Cloud while maintaining the flexibility, service, and savings that come from a direct global relationship with Bandwidth. One of these new wins is the largest Duet for Genesys opportunity that we've signed outside of the U.S. to date. This customer is one of the fastest-growing contact center and customer experience providers in the entire Asia Pacific region with more than 18,000 employees across five countries. As they continue to expand, they were facing challenges maintaining five different carrier relationships, each with its own contract terms and interconnections. Consolidating with Bandwidth, this customer not only solved for complexity but also benefited from upgraded call quality, reliability, and speed of deployment. So despite the magnitude of their operation, this customer was up and running faster than they expected, thanks to the permanent test environment that Bandwidth and Genesys maintain as an element of our ongoing partnership. With big plans to grow outside their home region, including into Europe and North America, this customer knows that Bandwidth can meet even their most ambitious future needs. Our contacts there summed it up best when they said, "Bandwidth has accomplished in weeks what it took other vendors months to do." These examples show how our Duet strategy positions us to unlock the massive opportunity represented by enterprise contact center transformation. Each of these large enterprises recognizes Bandwidth as the best partner for their journey to the cloud. We differentiate by combining a collaborative co-creation mentality with our enterprise-grade CPaaS platform and our global network, which allows us to power complex, business-critical contact center solutions out of the box to move at lightning speed compared to legacy carriers, delivering access to the apps and the geographic regions that enterprises need to build a best-of-breed total customer experience. Another strategic priority is for Bandwidth to be the global CPaaS platform of choice for scaling enterprise digital engagement. And today, we are announcing another major new customer win this past quarter. If you are one of the millions of consumers who interact with brands over text message to get coupons or shopping assistance, then you've most likely used this company. They rapidly become one of the largest and fastest-growing players in text messaging and commerce with a customer base of over 5,000 top retail brands that send billions of text messages annually. Our new customer's incumbent provider could not adequately support their hyper growth. So they came to Bandwidth for our ability to reliably deliver at scale, for our ease of use of our APIs, and for the customer experience that has absolutely wowed them since they onboarded. Their goal is to achieve no less than 20% of their customers' total online revenue through conversational texting, and Bandwidth simplifies the complex underlying requirements that are essential to reliable, scalable message delivery. When they told us, "Nobody could have gotten this done but Bandwidth," it was a huge validation of our enterprise-grade messaging capabilities and our team. When we say we're enterprise-grade, it's because we have a long history of serving the largest and most demanding technology companies in the world. These customers hold us to the highest standards of information security and data privacy. In keeping with this commitment, we are announcing a significant accomplishment by our team, the extension of our ISO 27001 Certification from our North American network to our entire global network. ISO 27001 is the gold standard for information security management and it's highly valued by our customers. Additionally, Bandwidth has now completely implemented STIR/SHAKEN throughout 100% of our IP network. Congratulations to all our Bandmates whose hard work allows us to meet our customers' exacting standards. I'll now turn it over to Daryl to walk through the details of our financial results and outlook for the second half of the year. Daryl?

Thank you, David, and good afternoon, everyone. As a reminder, details related to our second quarter performance are provided in an earnings presentation that may be accessed on our Investor Relations website. Now turning to our second quarter results. We reported revenue and non-GAAP EPS, both coming in above their corresponding guidance ranges. As David said, we have always focused on growing profitably and the uncertain macroeconomic outlook has heightened that focus. Second quarter revenue was $136 million, up 13% from last year. This result included $21 million of pass-through messaging surcharges compared to $6 million in the prior year quarter. If we exclude the contribution from surcharges, our revenue grew 1% year-over-year. There were underlying cross currents driving that result. First, we saw 14 points of growth across our broad base of customers, driven by strong contributions from both usage-based and monthly recurring charges for voice APIs, phone numbers, and emergency services and by continued demand for messaging, which grew 25% year-over-year. As David said, we serve a diverse set of enterprise customers across many verticals and business-critical use cases, and we continue to expect this usage to be durable. This growth was offset by 13 points from the previously discussed headwinds, those being: lower usage revenue from the cohort of 40 DDoS-impacted customers, the two large customer dynamics we referenced at the start of the year and the absence of revenue from legacy businesses that we divested earlier this year. These revenue headwinds were fully in line with our previously communicated expectations. More than offsetting those, we're very encouraged with the broad-based customer growth and our business durability achieved within the current uncertain macroeconomic environment. Our non-GAAP gross margin was 53% for the second quarter, up 200 basis points from the prior year's quarter, driven by a richer mix of higher-margin products and continuing efficiencies from scale. EBITDA for the second quarter was $5 million. Non-GAAP net loss was $1 million and non-GAAP EPS was a loss of $0.04, both measures exceeding our guidance. Combined with our overachievement in the first quarter of this year, we're pleased to have reported non-GAAP earnings per share of $0.09 for the first half of 2022. In terms of our operating metrics, in the second quarter, our net retention rate was 112%. Active customer count was 3,362, which is 10 fewer than the first quarter. We added new customers at a higher rate than the first quarter, but these additions were offset by an uptick in non-regrettable churn amongst our smallest customers, the majority of which spend less than $5,000 annually. The trimming of the smallest customers had no material impact on our revenue as we remain focused on attracting and serving larger enterprises. In fact, our average annual revenue per customer increased from last quarter to $161,000. Now turning to our financial outlook for the remainder of 2022. While we have now overachieved expectations in the first two quarters, we are maintaining our full year 2022 revenue and profitability guidance. We believe it is prudent and cautious to do so in light of the uncertain macroeconomic conditions. In this context, we've spoken to our customers, we've evaluated our pipeline and we're confident in our operating plan. In contrast to others, our business does not focus on small, long-tail developers with on-again, off-again trials and usage. The bulk of our business is not directed towards discretionary advertising spend. Instead, we believe our business of providing mission-critical cloud communications represents durable demand as we power global mission-critical cloud communication services for the internet giants, the entire Gartner Magic Quadrant in UCaaS, CCaaS, and Meeting Solutions and serve the large global enterprise market for both their customer-facing and internal communications needs with a long-held balance of growing our business profitably. Accordingly, we continue to expect full year revenue to be in the range of $551 million to $557 million and non-GAAP earnings per share to be in the range of $0.10 to $0.14, assuming approximately 31.2 million weighted average diluted shares outstanding. In summary, our financial and operating performance in the first half of this year reflects the growing momentum of our strategic focus on enterprise customers while navigating both an uncertain macro environment and isolated customer headwinds. Our outlook for the second half of the year represents an achievable operating plan that contributes to an improved profitability profile. The solutions we provide are mission-critical for the enterprise, and our business has proven to be resilient in prior economic downturns. Now I'd like to turn the call back over to the operator for questions.

And the first question comes from Ryan MacWilliams with Barclays.

Daryl, thank you for the detail on the moving pieces between voice and SMS growth and some of the one-time items like divestiture and FX headwinds. Just kind of in that same line of questioning, on the FX side, what was the impact to revenues in the quarter and for the full year guide? And then, David, any update on the effect that DDoS traffic would be helpful, too.

In the quarter, it's just over $1 million of revenue dampening. Assuming the current rate moves forward in our guide, we're expecting something just a little less than $4 million.

And in regard to DDoS, Ryan, we continue to bracket accurately the impact in Q1, Q2 and throughout the remainder of the year, and that issue has been contained.

Great. And then just on the spread between the amount of messaging revenues and the amount of pass-through surcharges, it looks like that spread is increasing. And it looks like the surcharges are growing faster sequentially. Is there anything to call out there? Like is more of your traffic now attached to fees with the carriers or any changes in pricing per SMS message?

We did have an increase in some carrier surcharges in the month of March that applied throughout the quarter. So you'll see new surcharges for the first time from some of the carriers, which would explain the divergence.

And the next question comes from the line of Will Power with Baird.

I have a couple of questions. To start with some macro comments, it seems like you are confident in your position and have shown resilience so far. However, I would like to clarify whether there have been any changes in the average sales cycle as you progressed through the quarter, particularly regarding slower sales in June or reduced usage among your customers. I'm trying to determine if you have observed any macroeconomic impacts yet or if your guidance for the year is simply being conservative in anticipating potential issues on the margins.

Will, this is David. I'll begin by just highlighting, really non-regrettable churn in the small customer segment also is consistent with some usage among smaller customers but, by and large, maintain that we are going to execute the way we thought we did throughout the balance of the year and don't see significant changes in pipeline and the large customers that we serve. That said, we are maintaining guidance out of an abundance of caution for the rest of the year. But as to the actual characteristics of the customer base, they remain sound.

Okay. That's great. Okay. And then just maybe as you think about the unified communications space and the cohort of customers you have there, it sounds like you're seeing a lot of strength in contact center and broad-based, which is great. I wonder if you could just update us on the UCaaS side where I know you still have exposure, right, whether it's Microsoft, Zoom, RingCentral, Dialpad on and on. What do the trends look like there in terms of traffic, pricing, overall growth?

So certainly, you see in the UCaaS space some share transfer across different platforms, whether it's Teams related or the emergence of Zoom's phone service. But we support all of the Gartner Magic Quadrant providers in UCaaS. And so those share transfers or conquest across platforms usually nets out for us being a provider for all of them.

The next question is from the line of James Fish with Piper Sandler.

What are you guys seeing on pricing in the space between voice and messaging? It did seem like messaging outbound pricing, I think you guys changed around at least on a year-to-year basis for the outbound piece.

Overall, pricing in the second quarter had a favorable impact on us. It wasn't primarily due to per unit price increases but was driven by a richer mix of higher-priced products, such as messaging and toll-free services, which grew disproportionately. That said, if you look at our pricing grid for new customers, there were some modest price increases, but those did not significantly impact the quarter.

Okay. If I could follow up on the net new customer additions, is there a way to understand how many "non-regrettable" customers have churned? I'm trying to grasp what the normalized number looks like for net additions, as we are accustomed to seeing Bandwidth grow its installed base.

That was, again, just sub-100 new gross additions, just sub-100. The churning offset that and lowered it by 10 overall. We did note that the average revenue per customer did improve to $161,000, and that was an outcome of just disproportionately churning the lowest, the smallest ARPU customers.

And some of that's by design on the lower end of our customer base as these are not efficient customers to serve and support versus acquire on a cost basis. We call that architected in terms of the longer end of our customer tail. And I'd also just highlight that when it comes to the new customer adds, there's really a power law that applies. And you can have a very small number of our new customers driving the preponderance of the growth from that cohort of customers over their lifetime. So it's not a terrific metric to look at to index accurately for our growth because there's such large contribution inevitably from a small, larger set of customers within that.

And the next question comes from the line of Ryan Koontz with Needham.

You guys have been great about kind of the transparency around election impacts. And I wonder if you could characterize for us within your second half guide how much of a tailwind from election you might anticipate in the second half that's not recurring.

Within messaging, specific engagement is a term that captures a broad set of use cases that are much more than just seasonal political elections. And the recent Supreme Court decision cycle really illustrated that for us. We are at an increasing active civic engagement dialogue across the country. And so we haven't called out specifically what in the second half of the year will accrue to our messaging contribution to revenue from specific campaigns or elections. But civic engagement broadly, whether it's interest groups or all kinds of civic-minded endeavors that are going on has become something way bigger than just campaigns.

That's fair, David. And on the comments around share shifts toward Teams, which we're all hearing about is a real landslide out there. Can you characterize your attach rate to Teams? It sounds like it's pretty consistent with the rest of the industry as opposed to something where you feel like you have an outsized share in the Teams ecosystem?

What I've shared in the past, Ryan, is that we are Microsoft's primary partner when the phone capability is activated within a Teams seat, and we have additional really tight integrations with Microsoft product in their enterprise offers. But when you see a Microsoft Teams with phone service enabled, you can assume that within that attach rate, we enjoy the preponderance of the revenue from the voice part of that seat. Does that help?

The next question comes from Matt Stotler with William Blair.

I think the first one here just on the partner ecosystem. I mean you mentioned a number of integrations, Duet with Genesys and the integration with Pindrop. I guess, a couple of months ago now, you also announced a partnership with Alianza. And so clearly, an effort to kind of expand the number and the character of the relationships you have in your partner ecosystem. I'd love to get an update on, I guess, your efforts and opportunities that you see here and continue to broaden the ecosystem as well as how meaningful that could be to the business over time.

So we haven't announced any specific channel program yet and you've heard me in the past talk about how we are direct in our go-to-market motion for enterprise. But with the addition of senior leadership, from Anthony Bartolo and Sandy Preizler, we have an opportunity to bring to bear in our go-to-market for a large enterprise a wealth of experience and knowledge and success with various designed partner opportunities. And so you'll probably hear us talk about that some more later this year.

That's super helpful. And then maybe just one more on the international side. We'd love to get, I guess, an update there. Now that Voxbone is fully integrated, how is that ramp going in terms of cross opportunities and then kind of expect the contribution in terms of revenue and bookings on that front?

One of the customer wins that we announced for the quarter was thrilling because it covers the broader Asia Pacific region and illustrates, I think, beautifully the power of the Voxbone-Bandwidth combination and the underlying footprint that it opens up for our platform and our ecosystem. And this was a massive international contact center that we talked about. They have 18,000 employees, and they were working with five different global carriers, and they have consolidated that completely to come with us. And so that, I think, is just a powerful illustration of the combination. And there are more opportunities like that. But you can't do a deal like that unless you've got the back office squared away and you have the teams unified and working well together. And so we're really happy about the progress and I think that there will be more like that in the future.

And the next question comes from the line of Patrick Walravens with JMP Securities.

Awesome. So Daryl, on my model, your Q3 guidance combined with the annual guidance implies something like 8% growth in Q3 and then like 16% in Q4. So there's a pretty good ramp there. Do you mind just reminding us why?

We do expect higher messaging in the second half of the year and in particular in the fourth quarter. So there is some of that as well.

Yes, in a much easier comp, right?

Well, thank you for that, Pat. I appreciate that.

That's the big point I'm trying to get...

It seems like it's been quarter after quarter after quarter of difficult comps. That is true. By the time we went in the fourth quarter of last year, we did experience the lower usage from the event that we had previously discussed. And so that does provide us some lifting under our wings in terms of a favorable comp for that quarter.

Okay. And then this one, you're probably going to answer around a little bit, and that's okay. But I mean, generally, what I've been doing in this recession is I've been taking company's implied Q4 guidance. And I've been saying, okay, I'm going to use that for next year, right? And for most companies, that actually sort of lowers the bar, right? But is that a reasonable way to think about Bandwidth's business?

We have a history of sequential quarterly growth, except for the fourth quarter last year. So it's reasonable to expect continued growth. However, it's important to note that there are still five months until we reach January and February, and I don't want to make any predictions based on that.

And Pat, this is David. Hope you've been well. I would just focus leading this year for us more on profitability than we've done in the past. We've always been focused on profitability, and we've had years in the past where we've done $49 million of EBITDA. We understand quite well the environment that we're going to be operating through, we think, and that top line revenue growth that you've seen from us in the past has always come with a reconciliation of the tension between that and the bottom line. And we think we're headed into a season where profitability is a big deal. And so I wouldn't just think about the top line growth and how you factor our fourth quarter into '23. I would also be remiss if I didn't say that we're operating with a pretty keen eye on the bottom line as well.

There are no further questions at this time. I will now turn the presentation back to the host.

Thank you, and I appreciate everybody joining us on the call this evening. God bless, and God bless America.

That does conclude today's conference. We thank you for your participation and ask that you please disconnect your lines.