You know what I mean? Infrastructure Technology and Software Analyst here at KeyBanc. We're going to add Daryl Raiford, CFO at Anthony Bartolo, COO of Bandwidth. I think I just want to jump right in on this one. It's a relatively, I think, with an overweight rating, it's not misunderstood company. With that, I want you to kind of maybe open it up for Anthony and Daryl just to maybe highlight i n terms of the value prop that Bandwidth gives. I can start in terms of the way I understand this company is that they provide a better service, which is digital communication at a lower price and higher ROI. There's a lot of probably a lot behind that statement. Add to that, if you would.
Well, thanks for the invitation. Appreciate the support. We provide global communications to all the mega platforms that are out in the industry today. Everyone that you see on the Gartner Magic Quadrant, whether leaders or otherwise, for the UCaaS segment or the CCaaS segment, both UC and CC spaces, ride on top of a Bandwidth Communications Cloud. It's a cloud that is global. It operates in 65 countries. We provide voice, emergency services, messaging capabilities to all these mega platforms. They enjoy a very consistent customer experience. It's a network that continues to grow, where we are amongst many other incumbents, but we're one of the very few who operate around the world and consistently around the world.
Thank you for that overview right there. The way I think also frame this, most big companies that you target, correct me if I'm wrong, large global enterprises such as.
Global 2000s, yeah.
Most of these companies clearly already have telephone services.
Yeah.
Walk us through, again, maybe one more time through the value prop or in answering that maybe who the primary competitors are in terms of what are the pain points you're solving for? What's the major kind of impetus for somebody to get their phone and say, "You know something, I'm going to switch now"?
Sure. There's a few value props there. If you take a look at how these enterprises are deploying their communications platform, first, they need to operate in every country that they participate in or they aspire to be in. In order to do that, if they want to couple that together themselves, they have to have a conversation with th e incumbent carriers, which tend to be our competitors in every single country. Those incumbent carriers tend to be geographically restricted. AT&T in U.S., BT in the U.K., Telecom Italia, Telefónica, France Telecom. We'd have to have these conversations with every one of those particular carriers in order t o create this experience for their customers. You can imagine when you're putting that patchwork quilt together, what you end up is an inconsistent experience or not a consistent experience for their particular customers.
In comes a Bandwidth who operates in all these countries, who understands the regulatory environment, the regulatory framework. We own our own network, it exists in every one of those particular countries. We put a software layer on it so that you can interface with us in a very, very easy, methodical manner. You have a single contract that is a single contract rather than negotiating one with every single one of those particular countries or incumbents. You have a single operating procedure when things are needed or go awry. That is a huge value proposition to an enterprise. Not only that now with the emergence of other technologies, we talk about AI, we talk about those type of things.
You can now knit those capabilities into that communications cloud one time rather than going to Telecom Italia to do it and every single one of these other players and beg them to knit that into their fabric. You do it once with the Bandwidth, and you can consume it everywhere in the world that way. That is a value proposition which is emerging and emerging on a precipitous pace at the moment.
Yeah. Well, the perfect segue to everybody's favorite topic is AI.
What a shocker that that's going to come up.
I know. Specifically, I don't know if you were referring to your new product, Maestro, that won Best of Show at the recent Enterprise Connect in March. If you weren't referring to that, there's many value props, just walking through it. I'm looking, I guess, for on this train of thought with AI on a catalyst because, again, these value props exist. These G2K, I assume, I don't know, let's just make a path. Must have heard this story before.
Yes
heard this before when we go to market, we'll get to that. There's still maybe some saying no. It's not a large percentage of them saying no. Could AI be a catalyst?
Firstly, G2K, as you refer to it, is our focus, which is the Global 2000s. That's where we see our value proposition being very attractive to the Global 2000 enterprises around the world. Why? Firstly, because they're very large. As a function of being large, most of the time, if not all the time, you operate in multiple countries. The more countries you operate in, the more valuable the value proposition of a Bandwidth is to them. We got an early read or a beat on AI a couple of years ago. In 2021, we started to focus on enabling capabilities, not just basic connectivity, but intertwining value-added capabilities into that connectivity, such as, authentication. We can capture your voice signature.
Yes, you can do it with a third party, but usually those third parties want to integrate into the Bandwidth platform, capture that voice signature, allow that AI or your biometrics to allow you to have an easier flow through a contact center. Those are the beginnings of some of the AI capabilities. We've done it with a lot of biometrics. We've done it with voice. We continue to look at different AI methodologies and introduce them into the framework of our platform. We're really building an ecosystem around it. We found that before we were going out, now many of these vendors are coming into a Bandwidth and taking a look at the Maestro solution. The Maestro solution really is about creating that ecosystem, having everybody integrate into a Bandwidth, because we already have integrated into Bandwidth all the UCaaS and the CCaaS players.
If you think of Five9, 8x8, RingCentral, Teams, et cetera, they're already integrated into Bandwidth. As a customer comes in and wants to pick best-of-breed solutions, they can mix and match any one of those players, and because they're already pre-integrated, we can take months off their deployments and months off their time to revenue or time to benefit to their customer. AI is that next wave, where there's no singular AI player that is a winner yet. We're at the top of that hype curve. Well, I think we're at the top of that hype curve, where we don't know who's going to win out. The CIO is making decisions each and every time on who their CC player is, who their UC player is, but also who their AI player is.
If you stack up the Magic Quadrants for each of those particular areas, you'll find that there is no one player that dominates all three. They're forced to make best-of-breed, mix-and-match solutions. Maybe they're wrong. Maybe it doesn't solve their particular problem, and they want to have the ability to change. As long as that underlying fabric is a Bandwidth Maestro solution, they have the ability to mix and match those solutions quite easily.
I have some more questions about GenAI and the drivers there that maybe you're seeing from your customer conversations just now. I'll try to segue back there as I bring in Daryl Raiford here, the CFO. You laid out at your Analyst Day in February a pretty well-articulated plan about selling more value-added services on top of, in my mind, of my words, the value-added services on top of your platform, going more direct to enterprises. Before we get into the details around that, Daryl, what was the genesis behind that plan, if you will? What was the main one or two or three factors that led to you developing that internally at Bandwidth in terms of disclosing that to us? Bandwidth has been going to market a different way, and there seemed to have been a little bit of a change in focus.
Tom , t hank you. Before I start, I want to say thank you and echo Anthony's thanks for having us here at the conference. It's been tremendous. We're very grateful. Bandwidth, in 2022, reached its five-year mark from its IPO, and it had clearly accomplished everything that it had set out to do from when it was a $160 million company in 2017 going public to today. It felt right as that season and chapter was closing to lay the cornerstones, lay the plan for the next four to five years. That's the genesis of what we call our medium-term targets through 2026.
The company clearly evolved over those five years between IPO, going from a single product company to a multiple product company, going from a principally U.S. domiciled, U.S. Operated company to a global company, going from a several hundred person organization to well over a thousand person organization, acquiring and serving all the customers, as Anthony said, in the Gartner Magic Quadrant for UCaaS and CCaaS. It made sense to us that we should do that and set it out. We set out a very simple plan. We felt like we set out a very simple plan.
Yep. Maybe we just dive into a couple of those items. The main tenet behind these drivers for what you call programmable services, which is driven by messaging on the platform, which is a higher margin service, and the direct to enterprise line, which is a mid-single digit percentage of adjusted 2022 revenue. That programmable service is almost 20% of the adjusted, excluding surcharges revenue in 2022. That's a big chunk of revenue. You hope to grow it bigger going forward. Walk me through the go- to- market and what, again, those pain points are that you're solving, where you're taking share from. I think the big mantra that you told us in terms of the February 2023 Analyst Day was that you need to take share in these markets.
We do believe so. You're right. We have aligned the company and re-expressed the company around three market offers or customer categories, Global Communications Plans, Programmable Services, and Direct to Enterprise. They each operate on the Bandwidth Communications Cloud, but they each have their own attributes themselves. Global Communications Plans are the power platforms, the players that Anthony spoke about in terms of the UCaaS and CCaaS Magic Quadrant leaders. Our Programmable Services customers are messaging- led. They consume many other services from us as well, but messaging-l ed. Our Direct to Enterprise, we recognized in 2021 when we launched our BYOC partnerships with Five9, as an example, and other important partners, and BYOC, Bring Your Own Carrier, that larger enterprises with their complexity, thinking about moving from telco incumbents and on-prem contact center software and things like that.
With their own complexity, they wanted to have the ability to control or to orchestrate, but to control the service acquisition and service delivery of a communication stack, like a Bandwidth Communications Cloud, versus taking that provision through some of our valued partners in the contact center space or through the UCaaS partners and the like. From 2021, we began a very successful initiative in selling direct to some of those larger enterprises. We've announced over these last several years a number of different engagements that large banking institutions, large investment banks, large cruise lines, large hotel chains, and just selling direct that way. That led to a natural evolution in our strategic thinking, which was only just 20% at most of the Global 2000 enterprises have begun their digital transformation to the cloud. This is a huge market for us.
It's going to grow disproportionately greater over these next five or 10 years, and we should organize around that and have a direct market activity on that.
Down to the essence there. I think that's a good segue back to Anthony in terms of GenAI. Whether it's something as simple as AI summaries or some other solution there, in our own checks, in our own conversations with other companies, we've seen a big uptick in RFP production or conversations around this only 20%, I think it might even be a little less, in terms of how G2K have begun this transition to a digital communications platform. Maybe this is the catalyst that I've been trying to talk about the last five or 10 minutes here. Are you hearing that from your customers today?
Yeah.
To bring in Bandwidth into that fold.
Yeah, it's one of the catalysts. If you really think about it, we talk about disputing whether it's 20% or 25% or less, what's indisputable is 96% of these guys, according to IDC, are going to move to the cloud. They're going to embark on this particular journey. When you embark on a journey like that, you think about what are the other things that I can consume while I'm moving through this transformation? AI is one of them. One of the interesting things about AI and the contact center, it's really focusing around the contact center and the experience center or the customer experience. They keep thinking about translations would be a classic example. Why are translations important? If you take a look at what AI is doing, it is converting voice sometimes into text.
They convert that into text, and then they do sentiment analysis based on the text. Now, if you really think about that is the basic of what goes on a lot of the time with regards to a contact center and AI. Contact centers have been absorbing AI for a long period of time. Why is that important? Because if you're translating, for instance, what starts to happen is if you're going to translate something, fidelity of the voice is super important, because if it's not very clear, you're going to get a bad translation. If you get a bad translation, you're going to have a poor AI experience or you're not going to get the insights you want. Fidelity matters, and if you want to make sure you can protect the fidelity, the way you're going to protect fidelity is having a quality network.
The only way to have a quality network is to own your own network. Because otherwise, if you're renting the network from somebody else, all of a sudden now when you get that poor quality, you can't sift through it in any real amount of time. Enterprises recognize this, particularly as they're deploying AI. That's why they're coming to us a little bit more often to help form that throughout their experience with our customers.
Would you say just on that follow up there, that you're seeing more inbound?
Yeah, we are.
When did that kind of happen?
I think we've been seeing it now for about 14, 15 months for the most part. I think the market has been hot on AI in the contact center a little bit earlier than most. We went to obviously the tech layoffs. If you take a look at the tech layoffs, it really hit its crescendo. There's about 470,000 tech layoffs that have taken place over the course of last year. The crescendo occurred in about January, about 100,000, 108,000. You sit there the last month, it was sub 9,000, right? The issue with the enterprise, I wouldn't say issue, the thing that we factor into this choppy market is you win these customers, now the rollout starts to happen and they've got less people to roll these out. This is why we look at it as a choppy market. The desire is there.
Their speed o f rolling out is what causes any of us to sit back and think and be cautious as we look through the rest of the year.
That's a great point on the layoffs. We've heard that in our checks as well. Sometimes there's no one there to make the decision.
Well, we're seeing-
Sign off on the form.
Well, we're having great success in the enterprise. At the same time, sometimes you run into enterprises and the decision maker is there one day and may not be there the next. There's ambiguity as to who has the right to sign the document. We sort through that pretty quickly. The value proposition is very strong, we find that we do.
We've talked about the value proposition a few times in multiple different facets as well. If the enterprises are truly going to be catalyzed to finally make this transition to a global digital communications platform to better enable many services in addition to GenAI and everyone throat to choke, so to speak, those are my words, who would be the competitor along those lines? Who would you view as your main competitor there? Because it can't be the regional telcos.
Yeah.
Is it another major platform like the cloud providers?
I think what ends up happening is the regionals have a role, right? What ends up happening is it depends on how many countries they're operating in. Once again, if they're operating in lots of countries, there's much fewer players that they can deploy in. What I find is it ends up being systems integrators, but we don't tend to compete with systems integrators because they don't have a network. They tend to come to us to help them deploy or give them the carrier side or the Communications Cloud side to integrate into their solutions. That's what we're seeing. We're seeing that these transformations are larger for the most part, especially when you're focused on the Global 2000.
When you talked about before the major other decisions that these enterprises are making about standardizing a new platform and all the benefits that come with that, there also seems to be a bit of a co-opetition or maybe even straight up competition with some of your partners, like a Teams, maybe less of Teams, maybe a Five9. Do you ever run into that in the market?
No, because that's another distinguishing fact. A lot of people look at us and compare us with a Twilio or some such. What we don't do is we don't build our own applications. That's a really important point. We have focused purely on bi-directional real-time communications, and we go a mile deep. Whereas others have chosen have a breadth of products, but they're not as deep. When you start to move into a wide breadth, you inevitably move into applications, and when you have those applications, you start to compete against the Teams or a Five9s and against your customers. We just don't do that. We think that we're going to focus on our knitting. We do that really, really well. We've expanded since the IPO into messaging.
We've expanded into enterprise, and we're doing that relatively well right now, and we anticipate that will continue in the future.
Daryl, maybe switching back to that framework that you provided at the February Analyst Day. I think it included a 15%-20% revenue CAGR. I think that's on an adjusted basis. Correct me if I'm wrong. I think this year, I think the street's looking for maybe a high single digit on adjusted basis. What accelerates us from here to hit those targets? You've got multiple new products, you got multiple new segments. Just maybe point to us in terms of a couple of KPIs you're watching internally to hit those top-line CAGRs. I think you've been already a proven purveyor of hitting your gross margin targets which will end up leading to the $125 million cumulative free cash flow guide for the next three years. That top-line CAGR, I'd like to understand what the accelerating drivers are there.
We have just reported another very strong quarter of growth in our commercial messaging lines of businesses. We think the commercial messaging will very much outgrow that 15%-20% CAGR over the time. We also benefit from a cyclical nature of campaign messaging, which is in absence this year, but we expect to be in full swing for the 2024 election cycle. That will outpace, we believe, the overall CAGR and allow us to get to that 2026 CAGR. We do think that as messaging and along with the growth of the other service lines and the like, and the fact that, and people ask me about this, the fact that our churn is so little.
We've talked about Bandwidth intentionally grooming off the very smallest in our customer set, those with $3,000 ARR and the like. Our logo retention rate remains well over 99%. People ask because what that tells you is that when a company, whether it's in the global communications plans, whether it's a power platform, or whether it's a Global 2000 enterprise, when they adopt the Bandwidth Communications Cloud, they stay with the Bandwidth Communications Cloud. Just to drive that home, 99% is such an incredible logo retention rate that we went back for Investor Day to 2019 to say, "Of the cohorts of our customers in 2019, what is our retention even through the disruption of COVID and the discontinuity that occurred?" That's over 97%.
We know from the data that is in front of us that when we bring a new customer onto the cloud, they stay on the cloud. We're not subject to a lot of churn, and that leads to upselling cross-sells, because when they adopt our cloud, it may only be in one line of business, but as we upsell and cross-sell and international, it leads to that CAGR that we're projecting.
You have a lot more arrows in the proverbial quiver as well.
Yeah. Mm-hmm.
Have you disclosed NRR? When you looked at that cohort analysis, have you looked at net expansion rate for those customers?
No, we have not. We disclose net retention rate and our customer logo rate.
And so the net-
We've also disclosed our net retention rate for customers greater than $100,000, which is another indication of the growth in the Direct Enterprise space, those being the larger customers. That net retention rate is above the average retention rate of the company as a whole. Because that's where the growth is coming from, and we love to see that expanded usage within an already established customer of over a year old.
You're focusing more o n those large customers.
Right. Yeah.
relative to that CAGR. Great answer. All right. Well, if there's no other questions in the audience, any questions? I think we're right out of time. 26 minutes. Thank you so very much.
Thank you. Thank you, Tom.
Very helpful.
Thanks everybody.