Conference Transcript - BAND 2026-05-13

Josh, Analyst — Needham

All right, well, good afternoon, and welcome to the Needham Technology and Media Conference. This afternoon, we are excited to have Bandwidth presenting with CEO David Morkin and CFO Daryl Rayford. So, David, you just had a pretty big quarter here, and we'll get to all of that, but maybe to start off with an overview of Bandwidth and how you compare and contrast to a traditional carrier.

David Morken, CEO

Thank you, Josh, and appreciate being here. Thank you to all the Needham folks. So Bandwidth is based in Raleigh, North Carolina. We are a global provider of communications and have an owned and operated voice network in over 60 countries and a software platform on top of that network that allows enterprise customers and large conferencing customers and large unified messaging customers and now recently large CRM customers do voice calling around the world and also text messaging. And we are very different from an incumbent carrier such as Verizon and AT&T and Lumen from whom we win most of our new enterprise business because of two important factors. The first, our footprint is around the world. Theirs is domestic only. And second, we have a software platform on top of that network that allows our enterprise customers to orchestrate call flows, to provision in real time, to configure services in ways that are both through a GUI, through an API, and then recently through a command line interface for the emerging agentic voice agents that we serve.

Josh, Analyst — Needham

Got it. So one of the common questions I get is why is it important as a CPaaS vendor for you to own your own network versus kind of this fully aggregate others' networks? And how does that kind of create a competitive advantage for you?

David Morken, CEO

The utility and value of owning and operating your own voice network around the world, a network that's regulatorily compliant, really has two primary dimensions. The first is quality slash reliability, and the second is cost. So on quality and reliability, by being able to control the hardware and the interconnected circuits around the world of this network, you really do have visibility and can manage the service delivery and plan and promise through an SLA the level of that service to your large enterprise customers. So that when Microsoft, for example, has a QBR with us and comes to the office rolling deep with 30 people, you're talking about your network's performance according to the parameters that you promised them. And you're also showing them where they may have emerging issues that only you can see throughout the guts of your network. That's the quality component. The reliability component is you get to manage your uptime by deploying capital against needs and priorities in a way that you don't get to see. if you're relying on a Lumen, for example, and you're just renting or leasing the network from them. I don't have anything against them. I'm just using them as an example. And then the second part is the cost advantage. So when we went public in 2017, we had gross margins of mid-40s. We are now just below 60% gross margins for our voice service or for our overall company, and the voice services are very similar. And the reason we've grown our voice gross margins over that period of time is because we get to put every additional billion minutes of month of voice traffic on our fixed infrastructure costs. And so the economies of scale emerge and allow you to grow your gross margin from the mid-40s towards 60. So quality, reliability, cost, those all allow you to go to an enterprise customer as a single source around the world at a very good value.

Josh, Analyst — Needham

Got it. Another question I often get on you guys is why haven't the legacy carriers done more to keep up on the voice AI support kind of opportunity there? What do you think is their strategy around voice AI? And how has that static development helped your competitive dynamic?

David Morken, CEO

Yeah, I think static is a compliment. I mean, I think that the incumbent providers domestically have focused on the mobile opportunity for consumers. They have focused on broadband and rolling that out. and they have not at all paid any attention to voice and what it means to support either cloud-based voice during the last migration from the premise to the cloud nor the voice agent AI moment that we're in now. And I've been told that they are the place where innovative software developers go to die. And because that's true, they have very little innovation or vision for what the future may or may not be. and I don't see that changing. We're about to be 27 years old as a company in August and that certainly hasn't changed for those 27 years.

Josh, Analyst — Needham

Got it. All right. So before we get to some product and financial questions, maybe you could just rewind the last five years for investors since the pandemic. What caused the voice revenue growth to slow post-pandemic? And then now, how do you think about the reacceleration here? How much is driven by AI versus some other market share gains or other factors?

David Morken, CEO

When the pandemic hit and everyone was required to work from home, we were forced overnight to scale our network and service massively in support of customers such as Zoom and Microsoft Teams and Google. And so we were able to do that with our model effectively, and yet what that really did at that time was pull forward a huge amount of demand for moving from the prem to the cloud. And that demand pull forward happened, and we scaled massively, but when everyone returned to the office or began returning to the office, that growth slowed, and you had more of a tempered pace of migration to the cloud in the intervening period. But going back now, about a year, what has emerged is this moment of voice AI agents, their effectiveness and their vitality. And that's turned voice into an enormous new opportunity as a critical infrastructure layer for the primary interface that we are all beginning to use for AI.

Josh, Analyst — Needham

Got it. All right. You just had a significant, may understate it, win with Salesforce. Agent Force and their contact center offering, why do you think you won that deal? How are you thinking about the ramp there? And then any other relevant information that you can share regarding the deal at this point?

David Morken, CEO

We are fired up to be Salesforce's partner with their announcement of Agent Force voice agents and won that opportunity to partner with them precisely because of the global reach and the orchestration capability of our network and platform. The team there is very innovative. Their vision that every call should be a conference call with an intelligent voice agent as part of it really resonates deeply with our team. We think that that intelligence is meaningful in every sales conversation and so the ability to support that is a great opportunity. They are a visionary team. They have enormous scale. They have a vision for agent force and voice agents that's compelling. And we have an asset base that was so unique globally and has such high value that we were able to win out and be their partner and are excited about that now being GA and scaling.

Josh, Analyst — Needham

All right. In terms of product innovation, you've done a lot around maestro, trust and verification to drive total cost of ownership. But what specifically has been some of the priorities over the last few years in terms of product investments?

David Morken, CEO

We have invested in R&D to bring that maestro orchestration layer to life, to have pre-integrations with all the major CCAS providers, many of the UCAS providers, with AI leaders. And so effort into that integration has been key. Footprint expansion is something that isn't, I think, valued appropriately, but getting to be able to provide regulatorily compliant PSTN service in Turkey, for example, with emergency services is highly valued by our enterprise customers as an edge case jurisdiction. And we have others that we've been building toward that we look forward to announcing in the future. And then supporting the AI use cases that are emerging now has been a key area. So when you have your OpenClaw or Hermes agent and you want to be able to have it make a phone call or receive a phone call, we have a command line interface that you can go to or actually that you could point your agent at and it could sign up on your behalf. And so the efforts like that have been really exciting over the last several years and seeing those come to fruition to provide a low latency global voice network for voice agents has been very rewarding.

Josh, Analyst — Needham

Right, all right. So one area I think is underappreciated is your global capabilities, which you've highlighted a little bit here. And now you've continued to add a number of new countries under support. How do you think about adding new countries and ensuring direct carrier connections in these regions to support these low latency use cases? Because that's really critical with the voice AI stuff.

David Morken, CEO

It starts with having a universal platform of the shared same components in each jurisdiction. So if you are trying to stitch together various networks that you've acquired over years, that's a very challenging thing. We are excited about having come through and having a universal platform everywhere so that when we expand to a new jurisdiction, it has the uniform stack of gear and the protocols for security and jurisdictionalizing the traffic. There are countries we are not yet in which we're excited about, India being among them, where we're aggressively working toward offering the same level of service that we offer elsewhere. But when we have customers, whether it's a large global enterprise or Salesforce, it's incumbent upon us to make sure we have the appropriate reach at the same level of quality and fidelity and to navigate that on their behalf. And so there's an enormous high value. AT&T can do that for you in the United States. Colt can do that for you in EMEA. Tata can do that for you in some jurisdictions. nobody can touch the scale and scope of our country-by-country geography we serve.

Josh, Analyst — Needham

Got it. And maybe just touch on, you know, with voice AI, isn't this becoming an even bigger competitive advantage for you because of the low latency dynamic with all the direct carrier connections you have? How do you think about that aspect of it?

David Morken, CEO

I think it's vital. I think that the tech stack for inference and reasoning by itself is already 400 milliseconds to round-trip a prompt and a response. and yet the PSTN latency is understood to be about 400 milliseconds by itself. So you've already spent your entire time budget for a conversation you don't get ticked off by just in getting an answer from the model. So we have an advantage in our network when we can yield back to the reasoning model even 50 milliseconds or 20 milliseconds advantage. We have a thesis that there are component parts of the tech stack on the reasoning side that may be more effectively deployed closer to the core of the network where we have an advantage. So owning and operating the infrastructure and being able to drop components of the tech stack closer to where the communication is happening may yield back even more latency savings and therefore accuracy. So those are things, even just adjusting jitter buffers to get 10 millisecond gains are vital for the improvement in accuracy and responsiveness. So that's an advantage we have that others don't.

Josh, Analyst — Needham

Got it. That's a great point there. But as you think about the progression of voice AI use cases across the ecosystem, right now they're heavily focused in customer support. And you were talking about this a little bit earlier in your meetings, but how do you see this evolution to sales and marketing use cases and other areas for enterprises developing in the next few years?

David Morken, CEO

So it's very, very early in the growth of voice agents. and they originally became rationalized to save OPEX in a cost center like customer support. It was very easy for Daryl and his peers to say, we know we can use a voice agent to render service more effectively in a customer care context, resolving tickets, doing ticket deflection. What's happened just in the last 90 days, voice agents have gotten better and better, not just at handling customer care, but now in doing demand generation, lead creation and qualification, prospecting. That's new, and that's only in the last quarter. Those are revenue-generating upside cases. Small and medium business are deploying voice agents now during times of day when they don't have employees on station, doing roles that they otherwise wouldn't staff, whether it's appointments or calendaring or reminding. These are use cases beyond customer care that small and medium business now have access to that they're using that they would never otherwise be able to do.

Josh, Analyst — Needham

Got it. All right. One concept that's gaining traction with investors right now is around the whole theme of conversational AI or guiding a call with a voice chat bot to messaging as needed, depending on the use case. That obviously can enhance messaging volumes. But how do you see that opportunity playing out over the next few years? Well, we'll start with that.

David Morken, CEO

Yeah, I think a voice agent will be very good at tool calling. So if we're having a conversation and you say, you know what, will you text me that? where it'll actually volunteer, hey, I'm going to send you that picture or I'm going to send you that boarding pass or I'm going to send you that reminder. That'll be during the conversation and it'll just be a tool call. So you can have a messaging point solution as part of a conversational AI solution just like it could send you an email and it'll be a great and effective tool call during a conversation and it's going to be important and that's something that we certainly have natively by providing messaging ourselves for the voice agent services we support.

Josh, Analyst — Needham

All right. You now have about $25 million in ARR from high-margin software add-on revenue. Can you, from a high level, discuss what's included in this figure and how you see that metric maybe evolving over the next few years without giving too much guidance?

David Morken, CEO

Let me take that. So we have, with the Maestro platform, a platform fee. You have a fixed fee for using that orchestration layer. You have more usage-based components for trust services that help large brands verify that they are who they say they are when they call. We have other services within the orchestration layer that are integrations done to every single CCAS platform out there, pre-integrations on UCAS, integrations done on AI. all those component parts are factors into that 25 million number and are all very gross margin accretive. And we believe that they are growing fast. Let me pause and ask Daryl to remind me how fast they're growing, the 25 million.

Daryl Raiford, CFO

Absolutely. And thank you, Josh. Really appreciate you inviting us to the conference. It's been a wonderful event. We did exit the first quarter at an ARR exit rate of $25 million for software services. That grew from $15 million at the end of December in the fourth quarter. As David said, that's an exciting basket of features and capabilities that are primarily recognized on a monthly recurring charge basis. We're really excited about that. We think the uptake is going to be increasing and improving. And as David said, the gross margin profile is extremely accretive to our consolidated gross margin.

Josh, Analyst — Needham

Got it. Final product and strategic question. As we move more towards orchestration of AI across different channels being the key to success versus simply aggregating messaging and voice volumes, how does that impact your pricing power and competitive position relative to, I don't want to say the old way of doing business, but the old world of a year ago.

David Morken, CEO

Some of our call flows used to just be a single call between a hotel receptionist and a guest. That same call flow with AI involved really now routes what was one call to a sentiment analysis engine, to a transcription service, to a translation service potentially, as well as to potentially recording. So that becomes four legs of the call and monetization of each for us. And so that's a much more lucrative call flow. Our pricing power is unique in our owned and operated model, but the value of these kinds of call flows to the outcomes that the enterprise customer is looking to achieve are so high that it isn't yet, and I don't anticipate it being for a long time, a price conversation at all. And that's exciting to us. There's an enormous amount of value for us to add to these new use cases. And that's evident in the pricing history we've disclosed where it's favorable, and we're actually increasing prices.

Josh, Analyst — Needham

Right. And I think that that's an important distinction, right, because the traditional carriers, they've increased prices, but they've kind of been under price pressure themselves for a number of years. So you actually have pricing power going forward now relative to what maybe the investors from the outside would maybe not understand that dynamic, right?

Daryl Raiford, CFO

It is interesting. What David was saying, you look back at least over the last eight years, potentially more, the company every year has, on an aggregate basis, both grown its volume and its price, in a price-volume analysis. And I'm not addressing one of 10,000 SKUs, but on aggregate, we've always been able to do that. Well, how have we been able to do that? One is through the attachment of higher-value software services and the like, as well as growing our mix towards higher-value products in terms of pricing with enterprise, in terms of pricing with messaging. So we've been very, very successful with that. Obviously, you've seen that with our growing margin. It's really driven our growing gross margin as well. So I don't see, I agree with David, I don't see, When you are already, how we win from the incumbents is a really nice surprise to any particular customer prospect. When they realize that we are bidding as a low-cost provider against a higher-cost product that they have with the incumbent, and we're providing substantially more features, you will not believe the surprise and delight on their face when that occurs. And valuable features, price and commoditization is not an issue. Right.

Josh, Analyst — Needham

All right. I'll just throw out there that we can leave some time for questions at the end. So if anybody wants to prepare questions in the audience, we'll leave some time at the end for that. Moving on to some financial questions. You previously gave some three-year targets in 2023 with some ranges on revenue growth and margins.

Daryl Raiford, CFO

As we think about the guidance for 26, how are you thinking about these targets now with kind of greater clarity on how the year is shaping up well we think that we are um we're really pleased with where we're coming out we're guiding to we're guiding to revenue growth of approximately total revenue growth of approximately 18 percent our cloud communications growth growing at 10 percent embedded in that growth embedded in that uh guide is a is a 60 target gross margin which we set out on a mission to achieve in january of 23 and embedded in that guide is a 20% EBITDA margin, again, that we set out in early 23 to achieve with a 15% free cash flow margin. So we're really pleased to be growing into those medium-term targets this year with an 18% total revenue growth, 31% EBITDA growth, and a substantial growth in free cash flow.

Josh, Analyst — Needham

You've impressively added some large $1 million-plus customers in the last few years. I guess a couple items. Are you winning these customers from legacy carriers? And as we think about their ramp in 26, what process are you using to include some of these volumes and guidance?

Daryl Raiford, CFO

All these voice wins are from legacy incumbent carriers. We had a large messaging win. It was from a CPaaS competitor, where that customer just needed more deliverability insurance and reliability. But we're very successful in demonstrating our capabilities with those large voice customers, and many of them are enterprise related. And we feel like we have a really pretty good pipeline moving forward on that as well.

Josh, Analyst — Needham

Got it. And just for some perspective, if we look at, I think you added five or six million dollar plus customers last year. How would that have compared to the kind of a three or four year period before that?

Daryl Raiford, CFO

That was the number was six, and that's a record. That was a record for us in $1 million-plus deals in terms of contract value. Before that, I think we might have been four. So in the law of low numbers, that would have been a 50% growth rate. How about that? But importantly, it's like, what are you doing with those customers, and what is your time to revenue? We're real excited about the time to revenue, and what we're seeing in terms of those contract values. By the time the first quarter occurred, one of the six had fully deployed and fully deployed at 120% of our initial estimated total contract value. Very happy about that. The other ones are on track to deploy this quarter and into the third quarter. We're seeing a very nice, calling for a very nice, healthy growth acceleration rate in our enterprise voice category in the second half.

Josh, Analyst — Needham

Awesome. And I think you mentioned this either on the call or the callback, but you have a nice pipeline of million-dollar-plus customers that you can add even this year, right? I think you added two so far that you publicly announced.

Daryl Raiford, CFO

Two in the first quarter, one substantially over a million dollars, two in the first quarter. And while we don't really guide that sort of bookings detail, I think that we're very much on track to achieve what we did last year, if not overachieve.

Josh, Analyst — Needham

Right, and then that would be a positive indicator for next year's revenue, right? Maybe discuss it takes 6 to 12 months or maybe a wide range.

Daryl Raiford, CFO

The deployment rate for the largest enterprise, the largest banks in the world, the largest health care concerns, it will take a ramp of between 3 and 9 months.

Josh, Analyst — Needham

Right, so that would be a positive indicator for next year's revenue growth as a starting point. All right. As we think about the ramp for agent force in your business, I know you've discussed this in some of the meetings. You're taking a pretty conservative approach to the outlook there. But how do you kind of anticipate that the project will be rolled out over the next couple of quarters in terms of customer usage?

Daryl Raiford, CFO

Well, the partnership is in place, and our partner, Salesforce, has launched their offering. So there are customers, they have customer dialogues in place right now, which lead to customer dialogues with us, and we feel like there's good traction and momentum growing with the just recently launched, I think it was in middle March sort of time frame. So we feel pretty positive about that. Importantly, we have not played, we have not gotten ahead of our customer and tried to forecast adoption rates. We have not played a significant amount of financial benefit or favorability into the guide for this year. So to the extent that customers with Salesforce are able to launch on the AgentForce platform, take advantage of the capabilities with the voice AI agents, to the extent that that embeds itself into our second half financials, that's really all upside to what we are calling for the year.

Josh, Analyst — Needham

Got it. And could Salesforce have done what they need to do with this integration and agent force with a traditional carrier, or would it only have worked? That's maybe more of your question.

David Morken, CEO

Yeah. No, they could not. It's that straightforward. The ambition is global. It is not just domestic. And the orchestration for call flows is essential to integrate with their tech stack and to deliver quality and reliability. So no. Got it.

Josh, Analyst — Needham

All right. In the last quarter, global voice plan revenue growth rate accelerated. What is driving the higher growth rate with those customers? And maybe you could just explain how that segment differs from enterprise voice.

Daryl Raiford, CFO

You're right. In the first quarter of 26, our global voice plan growth rate over the first quarter of 25 tripled. And the tripling occurred from really two dynamics, price and volume. So if I take the latter one first, in terms of volume, we are seeing in global voice plans, our largest customers, the power platforms, the hyperscalers, as well as the CCAS and UCAS providers, we are seeing favorable volume profiles from those large customers where we believe that volume is being driven by their own initiatives in terms of AI solutions being released. Those AI solutions embedded with Genesys and embedded with others in each of those customers will improve ultimately our volume and we believe we're seeing that. The second thing is when we, the second is price And in terms of price, it's not that a SKU gets improved or increased. It's that part of that software services that we spoke about with an annual recurring revenue exit rate of $25 million in the first quarter of 26, part of that is in enterprise and part of that is embedded in our Global Voice Plans customers as they adopt Maestro and they're using the integrations and the like for their customers as well. And so we're able to embed the software services both into global voice plans as well as into enterprise. But that's the dynamic in GVP. It did triple its growth rate. We think that those are the two principal reasons. Turning to enterprise voice, enterprise voice is characterized as a market category where we sell directly to large enterprises. And many of those large enterprises, I encourage you to look at our investor deck and the like. We highlight many of those. we highlight many use cases that you can access that describe our product offering for those enterprise customers and who those are. That sector is characterized by 15% higher, percentage point higher gross margin than the company's aggregate gross margin rate. And part of that is due to the global nature of our offering and the ability to enable AI as they're thinking about their use cases.

Josh, Analyst — Needham

And as you think about selling the voice, or not the voice, but just the software add-on products back into the global voice plan customer base, because I think you have had more penetration thus far with the enterprise voice. Maybe you could explain to investors the dynamic there of the uptake of the software add-ons into that piece and how you can expand it now more into global voice as well.

David Morken, CEO

Yeah, we talked about Maestro attach rates being 100% Q4, Q1, but we have an install base of enterprise customers we've sold to prior to that, and even prior to the rollout of Maestro generally that we need to upsell to with the use cases that are now native and are more expansive in AI than they may know about or be used to, and so that's a deliberate motion by the sales force, and we're excited about what that represents over time.

Josh, Analyst — Needham

And then what about selling software add-ons into the global voice customers? Is that an opportunity as well?

David Morken, CEO

Yeah, same thing. So parts of Maestro are available to the GVP customers as well. Just like CRM with Salesforce contains components of orchestration, that's also something that we can upsell the GVP partners to as well.

Josh, Analyst — Needham

Got it. Okay, cool. All right, as we think about capital deployment, I've pointed out to investors my expectation for a pretty healthy ramp and free cash flow in 2026 and with a nicely de-levered balance sheet. What becomes the capital allocation priorities here going forward?

Daryl Raiford, CFO

We have expressed what we believe to be just a balanced and prudent capital allocation strategy. First and foremost, our mantra has always been over these last five years to grow profitably, and we've done that both in terms of gross margin, EBITDA margin, and now you see it in terms of free cash flow. So to grow profitably, especially in the face of the growing momentum and wave of voice AI-enabled usage patterns, we have been investing in R&D. This year we're making our largest investment in R&D as we roll out more features and capabilities, primarily in software services, again at a very high margin and what is appearing to be a very nice attach rate. That's balanced against our primary capital strategy objective of deleveraging. We have, over the last four years, reduced hundreds and hundreds of millions of dollars of long-term debt. We finished the first quarter at $150 million long-term debt even on convertible notes that are due April 1, 2028. That's against our guided EBITDA midpoint for 2026 of 122. So we've essentially hit a 1.2 times leverage ratio on long-term debt. And I think we're pretty close to declaring victory on that particular aspect. And recently our board has announced as a third prong a $80 million share repurchase program for equity, which we deployed towards that aim, $11 million in March after it was announced in the first quarter. So we're tackling all of those things, and we feel real confident. You're right, Josh. Our cash flow is growing quite a bit, and we're really, really pleased with that. It gives the company a great deal of flexibility.

Josh, Analyst — Needham

One of the questions I get when I'm doing a teach-in or people who are new to the story, they ask well as the voice and revenues grow on the network why does that not lead to like higher capital expenditures at a you know a similar pace why are you able to scale the growth in the network and not necessarily have a lot more capex that might be helpful for people to understand in terms it is worth you know having a bit of perspective we have all last five years essentially we have maintained around a 3% to 4% of revenue CapEx rate, which means for folks listening around $15 to $20 million a year in terms of CapEx.

Daryl Raiford, CFO

Our CapEx is actually a fairly light model. This last year in 25, we did announce in 24, towards the end, and in 25 we invested in about $10 to $12 million more CapEx for network expansion, primarily some geographic expansion in Asia, as well as United States network efficiencies and optimization. And so that put us in a really good place for the next few years in terms of what we think we're looking at. But it's important to know that even when we invest $10 or $12 million, we're not investing $100 million. We're investing $10 to $12 on free cash flow of something that looks like $100 million. So it's not really of any substantial hardship to the company to ensure that our network stays bleeding edge. Right. Exactly.

Josh, Analyst — Needham

All right. Any questions from the audience?

David Morken, CEO

Going once.

Josh, Analyst — Needham

Going twice. All right. Well, with that, I think we are up on time here, and I want to thank the bandwidth team.

David Morken, CEO

Thank you, sir.