Welcome, everybody. I'm Meta Marshall. I head up communications software here at Morgan Stanley. We're delighted to have Bandwidth here with us today. David Morken, CEO, Daryl Raiford, CFO. We're to the point where I start butchering last names. So I'm good. I'm good.
You nailed it.
So David, obviously, you know, delighted to have you back here. The Bandwidth portfolio has evolved pretty meaningfully over the last couple of years, and so just how has the portfolio and the mix of the business changed, maybe since, you know, we had you here for the IPO many years ago?
Many years ago. Thank you, Meta, for having us back-
Yeah
And to Morgan Stanley for putting on this awesome conference. Five years ago, our revenue mix, our product portfolio, was primarily voice-
Yep
... followed by messaging and then emergency service, and back then, messaging was about 10% of our total. Fast-forward to today, and it's almost 20%, so that's the first portfolio change that is really important to understand about us. The second is Maestro. Maestro is an orchestration layer that our enterprise customers can plug our global owned and operated network into it and then select their favorite UCaaS, CCaaS, or emerging AI or machine learning solution into it, and very easily and elegantly add to their call flows, virtual assistants, identification, authorization, all kinds of emerging use cases for the contact center and other UCaaS applications. That Maestro platform was added in the last year and is vital to understanding our success in the enterprise.
Those are the two biggest changes that I see to our product portfolio, messaging and Maestro.
Okay, got it. You know, the comm software space has faced a few challenges, particularly on the UCaaS side, you know, and so what used to be kind of a good portion of your customer base, the enterprise piece of the business, has become a more critical driver of growth, going forward. Just what are the needs of these customers that you're kind of uniquely able to address, and what tends to be the entry point with those customers?
They are vital for us.
Their entry point focuses on simplifying their communications stack, and the reason they're trying to simplify it and unify voice and messaging and emergency service into a single platform is because they need to adapt to the emerging AI conversational solutions that seem to come out every week.
First thing first, in the cloud, they have to unify on a single platform, voice messaging, and emergency services.
We do that for them with the Maestro platform. We also do that for them globally.
So simplify, move to the cloud, do it globally, and then plug in emerging solutions. And we're agnostic. We're not trying-
Sure
... to lock them into a walled garden . We believe that the best of breed in these use cases have yet to really be established, and so instead of lock-in, Maestro lets them be agnostic-
... and try before they buy, in some cases, where we have pre-integrations. So whether it's, AI Bridge, or Maestro, we have had real success with these large enterprises globally who need to unify, simplify, and integrate new solutions rapidly, and that's what Maestro and our global owned and operated network give them.
Okay, and so you think increasingly, kind of Maestro will be that first entree into a customer-
Yeah
... versus kind of, traditionally, what you've done in the past with kind of-
The unifying communication?
Yeah. The network and the platform are essential. The Maestro orchestration layer-
... is what is driving our enterprise growth to be 21% in this last year-
... and doubling our share of our revenue with enterprises from 5%, doubling it to 10% by 2026. Maestro is the inflection that allows enterprises to adopt our global network and also future-proof it to adjust to AI opportunities that are emerging again almost every week.
Okay, perfect. So you know, basically back to Maestro and what would kind of draw a customer to Maestro first? You know, is it conversational AI and just all of the different solutions they're being bombarded with right now and just trying to figure out how to organize that? Like, what is that catalyst that draws a customer towards Maestro?
Conversational AI is a dialogue between-
... an intelligent agent and a customer or a constituent.
Yeah.
We support the media and the signaling between those two vital parties in a conversational AI dialogue.
Maestro, as an orchestration layer, allows our customers to adjust and add to their call flow or-
... to their message flow, new attributes. You can send a call for sentiment. You can send a call for identification. You can inject a virtual agent into the conversation and resolve an issue 90% faster, 10x faster.
So for us, every single AI endpoint represents a new user of our voice network or of our messaging solution. So you've got an exponential increase in the number of endpoints that we're going to facilitate over the next decade, and the amount of intelligence in those conversations means our enterprise customers lower costs and increase joy-
... where in the contact center, it hasn't existed before because they know you-
Right
... they know things about you, and they're able, in the middle of that conversation, to add value.
Okay, and so maybe sticking with Maestro, just I know that you've been kind of building in additional integrations into that. Just where are we in terms of kind of what are the next priorities in terms of integration pipeline?
You know, the one that immediately comes to mind is in the contact center.
The need to have, beyond what we've already done with Cognigy and Google and Pindrop, the need to add additional integrations for contact center efficiency, that's the focal point that I think is top of mind right now as we focus on Maestro expanding. If you fast-forward 12 months, 24 months from now, you should expect to see dozens and dozens and dozens of new integrations to best of breed UCaaS, best of breed CCaaS, and conferencing, and then a whole slew of emerging AI and machine learning solutions. First, I think in the enterprise, the focus of effort is in the contact center at the enterprise.
Are you seeing amplification, you know, with Cognigy or with, you know, Google now kind of pointing customers to Maestro that helps kind of amplify the effect of your sales force?
There's no doubt that early integrations draw a lot of attention from others that wanna be part of our ecosystem-
Okay.
they wanna be part of the Maestro... Yeah, part of the orchestra that Maestro conducts, if you will, and-
Back of the band.
I can't help it. Guilty as charged.
It's fun.
Yeah. So it's-
You gave me my next title, so there you go. But just in terms of... Okay, so that brings other people who wanna be a part of the platform, but are they then pointing... You know, a Google customer is now saying, "Hey, if you want to use us, a really easy way is to use Maestro," and so bring that in?
So much so-
Yeah
... that we launched a channel program for the first time-
Okay
... for Enterprise this last year, to take advantage of those relationships and compensate parties for bringing us to the table in an enterprise sale. So not only are they doing so, we've established a channel to support that, and invest in it.
Okay, perfect. And any conflict that that's caused between kind of your own direct sales force versus the channel, or just early days, and it's largely additive for now?
No, it's, it's apparent that we have room within our long-term gross margin targets to compensate appropriately-
... sales staff that are essential in the relationship and a channel partner that brings them to the table. And so that's something that we've thought very, very much about, as we're very disciplined bottom-line operators-
... and there's plenty of room.
Okay, perfect. You know, I mentioned upfront, you know, maybe the comm software space and just kind of the UC space, there's been some weight or just kind of slowdown of growth over the past couple of years. But where are you still kind of seeing the biggest opportunity with those kind of comm software cloud customers that were such a big driver of growth early on in, Bandwidth?
Yeah, the cohort I think you're talking to is the internet giants-
Yeah
... and those in UCaaS and CCaaS and conferencing who emerged. We are now focused on the Global 2000.
Okay.
And growing with them around the world, with our 65 countries that support full voice capabilities that are regulatorily compliant, and-
... last year, started international messaging to be a bundled product for those large enterprise. But as we started growing significantly with internet giants, we have focused on enterprise, and as I said, we're doubling between now and 2026, the percentage of our revenue attributable to enterprise.
I think Maestro is a critical part of that, and that's where our focus of effort is. Global 2000, many of whom are actually at this conference.
I think we've bumped into both of them. And so in terms of... You know, I know in the past, maybe this is a different question, but in the past, you haven't wanted to have competing products with a lot of those customers, you know, of your kind of cloud giants or, you know, comm software customers, just because, you know, they were such good customers and you didn't want to compete with them. You know, just as you think about expanding the portfolio and addressing more of the enterprise market, does any of that philosophy change, or just kind of how are you thinking about evolving that portfolio?
That's a terrific question. Communications is suddenly at the very center of the AI season because in conversational AI, you have to support that dialogue. The feature set and the benefits that we have to make real for enterprise customers in the communications layer is more than enough red meat for all the young lions that we have at the company.
Yeah.
And so we know our role, we think it's vital, and the Maestro orchestration layer on top of a massively important piece of infrastructure to support what our customers are doing upstack.
Nothing changes about our philosophy. It's been very effective.
Okay. So kind of remaining the agnostic layer, but-
Yes
... just expanding the reach-
Yeah
... of that agnostic layer.
The agnostic layer is becoming an ecosystem of pre-integrations that allow a CIO at a global enterprise to rely on-
... for speed, for efficiency, for capability. So that ecosystem is more than a large enough mission for us.
Okay. I mean, I've asked you this a number of times, but you've been very successful in the past of, you know, you kind of get a beachhead customer in one type of vertical or use case, and then really exploiting that, you know, to all of the customers, kind of within that vertical or use case. As you go towards kind of this Global 2000, you know, are you slicing it into certain verticals or use cases, or just kind of how are you best approaching that opportunity?
Yeah, global enterprise for us is not a leap of faith. It's more of a hop, skip, and a jump. It was, as you said, cohorts by cohorts that we grew with-
Yeah
... and now we're more than capable of serving the Global 2000 broadly. Mm-hmm, whether it's healthcare, fintech, retail, manufacturing, we've seen dozens of companies adopt Maestro across the Global 2000 verticals. And so I think in this season, it's unlikely that we will concentrate in a particular Global 2000 vertical-
Because the voice and messaging needs are so universal. That's what we're seeing in the early days of Maestro, and I expect that to continue.
Okay, perfect. Maybe stepping into the 2024 outlook and just kind of the political season. You had laid out that political messaging would contribute upwards of $40 million this year. Just kind of what drives the remainder of the balance of the growth that you pointed to from the 2024 outlook? And just kind of how would you characterize visibility you have in a lot of these different factors?
I'll take that, if it's okay.
Yeah. Yeah.
Thank you, Meta, and thank you also for hosting us-
Yeah.
-and hosting us at the conference. We really appreciate it. Like David said, it is an awesome event. We reported $601 million of revenue this last year in 2023, and we just last week guided 2024 to $700 million at the midpoint. And so that's roughly. Well, that is right at $100 million of revenue growth or 16% year-over-year for 2024. That's broken down. You can think about that being broken down into half and half. Half of that growth is from surcharges with the carriers, and the other half is in our c- is in our cloud communications revenue. The two-thirds of the cloud communications revenue is coming from, our commercial revenue, and a third from the political or the amount that you were-
Yeah.
You were describing. So of that two-thirds, that two-thirds growth, which is commercial, non-political, it breaks down into being driven. We are expecting all three of our market categories to grow: global communications plans, programmable services, and direct enterprise. But it breaks down mostly into growth, again, continuing on from our in enterprise, continuing on from our 21% last year, and in programmable services, continuing on from our 31% growth year-over-year from the last year.
Okay. I mean, just in terms of... I know this question kind of comes up a lot on earnings calls, but just this idea that, you know, how much-- Yes, we see an elevated political season as we go into 2024, but it seems as if we're in this kind of constantly elevated political environment. And so how much of a, of a surcharge, you know, of a ramp do you really see when we're kind of in this, feel like we all get texts a million times a day from that environment? So just how do you kind of measure how to differentiate what comes in an election season versus kind of what's more normal state?
What comes in an election season is generally what we know to be the traffic related to political campaigns.
Okay.
In the midterm elections of 2022, we reported around $37 million of political campaign-related messaging. Again, we're guiding to about $40 million this coming year. We do understand that cyclicality. We've been working really hard over the 18 months-
Yeah
-since we laid out our strategy, to grow our commercial business and reduce the cyclicality, the cyclical nature-
Yeah
of that political. And I think that 24 is really beginning to characterize that in the sense that we've guided to $700 million of revenue at the midpoint.
But the political cyclicality revenue is only $40 million, 40 and 700.
Yeah.
So the effect is beginning. As our commercial business grows to the extent that it has been, it is really beginning to. We love our cyclical campaign revenue. It produces a very nice gross margin, but the effect, the swing effect, is beginning to diminish. We just did, as I said, last year, grow our commercial messaging 32% over the year, 2023 over 2022. That was accelerating in Q3 and Q4. In the third quarter, we grew at 51% over the prior third quarter and 66% over the prior fourth quarter. So the acceleration is not necessarily a you know, it, it's accelerating, and we like that. That gives us...
As we project that forward into the growth for 2024, it pretty much diminishes the $40 million in terms of the cyclical nature of being noticed, and that sets us up very nicely as we move forward towards our medium-term targets in 2026.
Okay. Just for people who might be less familiar with the name, you know, that $50 million that's coming in surcharges, that's certainly a faster growth rate on the surcharges than it is kind of on the core business. Can you just kind of give a sense of why surcharges would be growing faster than messaging?
And for those not familiar with the name, the industry, when it comes to messaging and working with the carriers, is characterized by this phenomenon that the carriers introduced a few years ago called surcharges, where we are charged a surcharge from the carriers, and then under our contract, we provide that or pass that through at zero profit to our end user, who then remits it to us, and we remit it back to the carrier. So it's kind of a zero-profit thing. We are not in control. It's a bit of a tax-
... without it being actually a jurisdiction doing it. And so we are not in charge of pricing.
We don't control that pricing. The carriers have raised surcharges from time to time. I believe in October, AT&T did raise prices on surcharges. That was always in our projection. We get a good amount of lead time to understand of that, so we incorporate that into our total revenue guidance. But, we don't really control that pricing.
... It has grown, and in our, it's predicated that within our $700 million midpoint guidance, that $50 million of growth, that it will grow, and it grows on the fact that our messaging volume-
- is increasing so much, growing our commercial revenue, as well as the carriers can raise prices.
Okay. Then sticking with outlook, just what kind of macro assumptions are embedded in your outlook, and how does that compare to 2023, particularly as you kind of start to target more enterprise customers?
We expect to be able to thrive throughout different economic seasons, and we certainly have proved that in the past. I'll go all the way back, it'll be 25 years since we started the company in August of this year, and we've survived through '01, '04, '08.
You were 10 then.
I was 29. I'm now a grandfather of six. True story. But yeah, I think we've really got an essential service that has seemed recession-proof in the past. And we expect this year, in terms of the macro assumptions underlying our guide, that it, that it's okay, absent, you know, global anarchy.
I think we're going to thrive, and I think 25 quarters of exceeding guidance in a row since Morgan Stanley was our primary partner going public, is a pretty good track record.
Okay. So any particular verticals or customer size, where you're thinking about seeing those impacts, or are we kind of in a more stabilized environment now, as you're kind of thinking about 2024?
We are looking... You know, 2023 was certainly characterized by crosswinds. We have seen some stabilization that was embedded into our 2024 guide. Again, we are looking for each of those three market categories to grow.
Our global communications plans at the, you know, modest single digits, it's a large base for us.
And then, programmable services driven by messaging, commercial, commercial messaging and political in the year of 2024 to grow really well. And then enterprise. Our funnel—we feel really good about our funnel. We have some demonstrable trajectory entering the year, and we see with the Maestro adoption, we see some good things ahead.
Okay. And so, you kind of teed up my, my next question about, you know, this kind of stabilizing environment and new products. Just what drives the improvement to the NRR sustainably to kind of expand from where we've been over the past couple of quarters?
We, our commercial business, our business-
... excluding the political effect from the missing cohort that was in 2022 but not in 2023, reported 109% net retention.
You know, that's in 2023, with the, again, the crosswinds that I think everyone-
... was experiencing, that's a pretty good figure.
Right.
That's a really good figure. We think that, you know, moving forward into 2024, that that figure is going to reflect the commensurate level of activity that we have in our 16% revenue guide going forward.
Okay. I mean, maybe on the international piece that you were just talking about, you know, you guys did the acquisition of Voxbone a couple of years ago. Just where are you in kind of the integration of that, and how much of that is kind of some of the reason that you can see this NRR expansion or bringing that global platform to customers?
That global platform has been unified as a single technology stack and infrastructure, and user experience for customers that's vital, driving 18% of our revenue from international and contributing 25% of our EBITDA. That acquisition has proved incredibly accretive to both gross margin and importantly, every conversation with enterprise prospects.
We have an incredibly unique footprint across 90 countries, 65 of which are full stack. So those global enterprises that are moving everything in their messaging and voice to the cloud are doing so to go global, and, and we're able to support them. So whether it's on the infrastructure being unified-
... contribution to gross margin or user experience for Global 2000, it was a phenomenal addition to our team.
All of that, I think you were reasonably saying kind of all of that has finally been-
Yes
... kind of, the bells and whistles below the surface have finally been integrated.
Huge hat tip to our Chief Operating Officer, Anthony Bartolo, and the whole team that's been-
... focused on that. Yes, we're there, and that's why our CapEx will continue to be a very low percentage of revenue. We're efficient in that regard, but a really heavy lift, and we're done.
Awesome. Okay. You know, as you just mentioned, you guys have always been relatively efficient, kind of from an OpEx perspective. You know, R&D and SG&A have stayed relatively steady, yet there's a lot of things that you want to do, areas, integrations that you need to build out. Just where would you invest in and, you know, how much of that has always been going on? And so, you know, we may not have seen it, but the dollars were being spent on that purpose.
Yeah, the feet below the surface of the water are kicking pretty hard.
Yeah.
And they'll continue to innovate at the Maestro orchestration layer with footprint globally at a consistent percentage or ratio that you've seen in the past, with creative new opportunities. So I think it's probably important to note, we have not done any layoffs at all, so our team is intact, whether it's the R&D team, sales team, support team. And so we'll continue the mission for all those teams the way we've planned, including our R&D.
... Okay. But any areas where, you know, as a CEO, if you had incremental dollars that you would be spending on right now?
If we had incremental dollars, we would probably put them toward growing the go-to-market team larger.
Okay.
I think our maturity in the product area and the unified experience global area would let us go to market more aggressively, but again, we reconcile a real tension between top line and bottom line profitability, and we just came through a year where we-
... did extraordinary growth of, I think, 39% on our-
- EBITDA number in 2023, and we're gonna do a 50% growth on EBITDA again in 2024. So we could grow a lot faster, more expensively, perhaps, but we choose not to. So if I had free money-
... then we might increase go-to-market.
Okay.
Put, uh-
Yep.
Let me just put a fine point on it. We will, in 2024, implied in our guide of $78 million of EBITDA, which is a 50% growth over 2023, we will grow R&D and sales-
... and marketing. In whole dollars, it is going to grow. It's our long-term, and it's because we're innovating, and as our pipeline grows, our sales and marketing activities grow, too, and that's a healthy dynamic. We are committed in, through our 26 medium-term targets, to have a model, to have an operating scale model that puts us at around 40%, maybe slightly less, but 40% of operating expenses as a percentage of cloud communications revenue. In 2023, we were not there. We were above the 40% range.
So while those expenses are going to grow and we're going to continue to innovate, we are going to get within our model that allows us to drive from the 14% EBITDA margin in 2024 that we've guided to, to above 20%, and part of that is operating expense leverage across the revenue growth.
Okay. And so, you know, balance sheet has been another area of, you know, just as we've gone through the past couple of years, that it brought up a little area of concern with investors. You've taken a number of actions kind of on the capital structure to kind of reduce risk. Do you wanna just... Can you just walk through, for our investors, some of those steps?
We have. Well, in terms, you know, I, we spent some time on our earnings call last week and in dialogue. You know, really going over and I think putting a nail in the coffin when it comes to the health of our very solid balance sheet.
We ended last year with $153 million of cash and securities, and our first debt maturity is in March 2026, at a face value of 175, trading at roughly $150 million today. So, you know, well in the future, two years in the future, we essentially have the cash and securities balance at the trading value to retire it, notwithstanding our $50 million undrawn revolver and things along those lines and other access to liquidity.
We have guided $72 million of EBITDA in 2024, we have projected and helped this, helped those walk down to free cash flow, that $72 million as a proxy for free cash flow, in terms of EBITDA, less 3% CapEx, roughly is something over $50 million of free cash flow. You complement the $153 million with $50+ million of free cash flow, by the end of 2025, we will have more than sufficient amount to retire our March 2026 notes, 14 months in the future. So in terms of our capital structure, we have a great deal of flexibility. I'm not, we're not even projecting forward 2025, you know, free cash flow and the like.
We think that, you know, we'll do the right things, but that we are not hamstrung in any way, shape, or form in terms of our balance sheet. It's very healthy, and we're in control of what we want to control.
Okay, perfect. Yeah, mentioned Voxbone. You guys have done some kind of selective M&A over time. Are there any areas where you would, you know, think that would make sense inorganically?
Selective M&A over time is very kind for a company that's done two deals in 25 years, so thank you for that.
Well...
Um, probably-
Of late. Of late.
Of late? Okay. We're a very healthy, organic, growing team. It would take something extraordinary to take us off that mission.
Okay. So, you know, Daryl, you just kind of guided to talking about the EBITDA margins targets being 13%-14% this year, kinda ex the surcharges. Just what gives you confidence about... Like, just the, what should be the cadence we should be thinking of, of getting towards that kind of greater than 20% target that you have out there?
The first thing I'd look at is the demonstrable trajectory of the path that we've been on. We've grown in 2023, we grew to 14% EBITDA margins, a 39% profitability growth in 2023 over 2022, so that was a step for EBITDA margins of 10% in 2022 to 14% in 2023 to, or excuse me, 10% in 2023 to 14% guide in 2024. I see us as on a similar trajectory into 2025, and that's how we feel confident about our medium-term margins of greater than 20%.
Okay, so steady Eddie along the way-
Yeah
... nothing
A quick view of the data shows it's happening.
Okay, perfect. Then similarly, on gross margins , you know, what kind of brings you to that CPaaS 60% target?
Well, we reported 55% non-GAAP gross margins in 2024. We feel confident that we're on our way to greater than 60% by 2024, by four attributes that we spent the last 18 months re-articulating around scale. We own our cloud, as David said. We own our network. We do not rent our network. The more transactions and volume that we drive across a fixed cost platform, the more variable contribution margin you make. And so we think through scale, through revenue growth, through improving our product mix. Clearly, messaging and enterprise is outgrowing our global communications plans category, which we've called for modest growth in 2024. Those categories of programmable services led by messaging and enterprise exceed those categories. Their margins exceed our company-wide gross margins.
So as we move towards that, we intend on growing. We intend on growing our international business, as David had remarked, just a little disproportionate with the American business. Our international business benefits from higher margins just because of the pricing dynamics overseas. And then we're really good at operating efficiencies. We can invest in our cloud. We take actions to reduce the cloud cost, where if we had rented the cloud, we wouldn't be able to control what the landlord is doing on that.
Got it. And then, I mean, just in terms of it always comes up kind of talking about the CPaaS space of, you know, there's a lot of different mixes to the gross margins, but everybody kinda wants to get a sense of what like for like, you know, within messaging margins or within voice margins, just any pressure, or have those largely kind of stayed the same, particularly as you've gained scale?
We've only grown our gross margin even as we've changed our product mix, so we haven't sacrificed gross margin to gain revenue. We've been disciplined about it, and I think we'll continue to exercise that discipline as we grow. And as Daryl said, Maestro is beneficial to growing gross margin with scale, so is our owned and operated voice network. So we've, we've got a great track record, and I'll confess, when we started the company, our gross margins were 2%. We've come a long way. I think when we went public, they were 47%.
Yeah.
I think we've continued now, and I see 60%+ as well within reach.
Okay. Any questions from the audience? All right, perfect. So you saw a big move off of the quarter last week. Just how have conversations with investors changed, you know, from last year, from the last week, and just what do you think are still kind of the most misunderstood pieces of the Bandwidth story?
The conversations are definitely encouraging coming off of the quarter.
Yeah.
There's no denying that. There are still common misperceptions around the diminishing cyclicality of our business as commercial grows. There are continued misperceptions about surcharges and what they mean, and we'll continue to address that. But there are very real substantive challenges to understanding the complexity in our model, and we'll continue to endeavor to convince and explain and teach what the upside looks like for us in the midterm plan, as we've reiterated, for now till 2026.
But there are, again, rewards for engaging and understanding our model and our success profile going forward, and we're working hard with investors to make sure they understand that.
Okay.
It's been a really interesting dialogue. It's been an interesting journey, Meta, that you have been on with us-
Yeah
... for the last 18 months. In the middle of 2022, the team, we set out a very determined strategic plan and objectives about what we wanted to do and to execute.
Yeah.
In February of last year, we held our investor day-
Yeah
... where we articulated that, and I think we have been executing and achieving that all along the way, and I think what we just reported last week is simply progress on those strategic objectives and that resolve to operate the company the way, the way that we said. We're. I think with investors, it's beginning, the point is beginning to be taken that, you know, Bandwidth is a say-do company.
Yeah.
What we say, we do, but we're also a say-do more company, and I think the more part is beginning to really sink in.
I'll make one other point, which is, I think, coming out of the announcement about 2023 results and guiding 2024, there was a viability question that existed about how much free cash flow we could generate to-
... take responsibility for our debt appropriately. That question's been answered.
Okay.
You can compare and contrast conversations with investors about debt a year ago. We don't have those questions anymore.
Okay.
That's wonderful.
All right. Perfect. Well, David and Daryl, this has been a great discussion. Thanks so much for being here.
Thank you, Meta.
Thank you, Meta.