Bandwidth Inc

Previous wording

A global communications transformation is underway, and we believe Bandwidth is at the center. Our mission is to develop and deliver the power to communicate. We enable innovative organizations—from startup app developers to the world’s largest enterprises—to engage their end-users and deliver exceptional experiences everywhere people live, learn, work and play. Backed by the Bandwidth Communications Cloud, a global owned-and-operated network spanning more than 65 countries reaching over 90 percent of GDP, innovative enterprises use Bandwidth’s APIs to easily embed voice, messaging and emergency services capabilities into software and applications. Bandwidth was the first cloud communications provider to offer a robust selection of APIs built on our own cloud platform. Our award-winning support teams help businesses around the world solve complex communications challenges every day.

Current wording

A global communications transformation is underway, and we believe Bandwidth is at the center. Our mission is to develop and deliver the power to communicate. We enable innovative organizations—from startup app developers to the world’s largest enterprises—to engage their end-users and deliver exceptional experiences everywhere people live, learn, work and play. Backed by the Bandwidth Communications Cloud, a global owned-and-operated network spanning more than 65 countries reaching over 90 percent of GDP, innovative enterprises use Bandwidth’s Application Programming Interfaces (“APIs”) to easily embed voice, messaging and emergency services capabilities into software and applications. Bandwidth was the first cloud communications provider to offer a robust selection of APIs built on our own cloud platform. Our award-winning support teams help businesses around the world solve complex communications challenges every day.

Previous wording

For the three months ended March 31, 2024 and 2023, total revenue was$171 million and $138 million, respectively, representing an increase of 24%. For the three months ended March 31, 2024 and 2023, net loss was $9 million and net income was $4 million, respectively.

Current wording

For the three months ended June 30, 2024 and 2023, total revenue was$174 million and $146 million, respectively, representing an increase of 19%. For the three months ended June 30, 2024 and 2023, net income was $4 million and net loss was $4 million, respectively. For the six months ended June 30, 2024 and 2023, total revenue was$345 million and $284 million, respectively, representing an increase of 21%. For the six months ended June 30, 2024 and 2023, net loss was $5 million and less than $1 million, respectively.

Previous wording

For the three months ended March 31, 2024 and 2023, we generated 74% and 72%, respectively, of our cloud communications revenue from reoccurring sources. The large bulk of our remaining cloud communications revenue is generated from recurring monthly charges.

Current wording

For the three months ended June 30, 2024 and 2023, we generated 73% and 72%, respectively, of our cloud communications revenue from reoccurring sources. For the six months ended June 30, 2024 and 2023, we generated 74% and 72%, respectively, of our cloud communications revenue from reoccurring sources. The large bulk of our remaining cloud communications revenue is generated from recurring monthly charges.

Previous wording

We recognize accounts receivable at the time the customer is invoiced. Additionally, we record a receivable for unbilled revenue if services have been delivered and are billable in subsequent periods. Unbilled revenue made up 54% and 59% of outstanding accounts receivable, net of allowance for doubtful accounts, as of March 31, 2024 and 2023, respectively.

Current wording

We recognize accounts receivable at the time the customer is invoiced. Additionally, we record a receivable for unbilled revenue if services have been delivered and are billable in subsequent periods. Unbilled revenue made up 55% and 52% of outstanding accounts receivable, net of allowance for doubtful accounts, as of June 30, 2024 and 2023, respectively.

Previous wording

For the three months ended March 31, 2024 and 2023, our effective tax rate was 2.1% and (647.6)% respectively. The increase in our effective tax rate from 2023 to 2024 is primarily due to near breakeven pre-tax income in the first quarter of 2023 ofless than$1 million in relation to the tax benefit resulting from operating losses outside of the U.S.

Current wording

For the three months ended June 30, 2024 and 2023, our effective tax rate was(8.9)% and (4.1)% respectively. The decrease in the effective tax rate from 2023 to 2024 is primarily due to an increased tax benefit from operating losses outside of the U.S., where tax benefits are not offset by a valuation allowance.

Previous wording

For the three months ended March 31, 2024, our revenue from messaging surcharges increased by$19 million, or 82%, compared with the same period in 2023. This growth was driven by higher overall messaging traffic, campaign related product mix dynamics resulting in higher MMS traffic and more expensive per message MMS surcharges, and new fees imposed by certain carriers for unregistered traffic.

Current wording

For the three months ended June 30, 2024, our revenue from messaging surcharges increased by$18 million, or 65%, compared with the same period in 2023. This growth was driven by higher overall messaging traffic, campaign related product mix dynamics resulting in higher MMS traffic and more expensive per message MMS surcharges, and new fees imposed by certain carriers for unregistered traffic.

Previous wording

As a percentage of revenue, total operating expenses for thethree months ended March 31, 2024 and 2023 were 44% and 49%, respecti vely.

Current wording

As a percentage of revenue, total operating expenses for the three months ended June 30, 2024 and 2023 were 41% and 46%, respecti vely.

Previous wording

For the three months ended March 31, 2024, research and development expenses increased by $3 million, or 13%, compared with the same period in 2023. This increase was primarily due to higher facilities and depreciation expenses in support of our expanding research and development capabilities.

Current wording

For the three months ended June 30, 2024, research and development expenses increased by$3 million, or 13%, compared with the same period in 2023. This increase was primarily due to higher facilities and depreciation expenses in support of our expanding research and development capabilities.

Previous wording

For the three months ended March 31, 2024, general and administrative expenses increased by $1 million, or 7%, compared with the same period in 2023, driven by higher headcount expenses which were partially offset by lower corporate administrative expenses.

Current wording

For the three months ended June 30, 2024, general and administrative expenses increased by$1 million, or 5%, compared with the same period in 2023, driven by higher headcount expenses which were partially offset by lower corporate administrative expenses.

Previous wording

For the three months ended March 31, 2024, we recognized an income tax benefit ofless than $1 million, a decrease of$3 million, compared with the same period in 2023. The resulting effective tax rate for the quarterly period ended March 31, 2024 was 2.1% compared with(647.6)% in 2023. For the quarterly period ended March 31, 2024, the change to the effective tax rate was primarily due to near breakeven pre-tax income in the first quarter of 2023 of less than$1 million in relation to the tax benefit resulting from operating losses outside of the U.S.

Current wording

For thethree months ended June 30, 2024, we recognized an income tax benefit ofless than $1 million, an increase ofless than $1 million, compared with the same period in 2023. The resulting effective tax rate for thethree months ended June 30, 2024 was (8.9)%, compared with(4.1)% in 2023.

Previous wording

For the three months ended March 31, 2024, the effective tax rate of 2.1% differed from the federal statutory tax rate of 21% in the U.S. primarily due to a valuation allowance recorded against U.S. federal and state net deferred tax assets.

Current wording

For the three months ended June 30, 2024 and 2023, the effective tax rate of (8.9)% and(4.1)%differed from the federal statutory rate of 21% in the U.S. primarily due to the valuation allowance recorded against our U.S. federal and state net deferred tax assets.

Previous wording

For the three months ended March 31, 2024, our cloud communications revenue increased by$14 million, or 12%, compared with the same period in 2023. This growth was primarily the result of higher sales across all product categories including voice, phone numbers, 911 enabled phone number services, and messaging.

Current wording

For the six months ended June 30, 2024, our cloud communications revenue increased by$24 million, or 10%, compared with the same period in 2023. This growth was led by higher sales of messaging and amplified by higher political messaging leading up to the U.S. presidential election in November 2024. Other core product categories including voice, phone numbers, and 911 enabled phone number services also exhibited broad-based growth during the quarter.

Previous wording

For the three months ended March 31, 2024, total cost of revenue increased by$23 million, compared with the same period in 2023, driven byhigher pass-through messaging surcharges of $19 million. Thecombination of changes in total revenue and total cost of revenue yielded gross profit of$65 million, which increased$10 million from the same period in 2023, driven by higher revenue across all product categories

Current wording

For the six months ended June 30, 2024, total cost of revenue increased by$45 million, compared with the same period in 2023, driven byhigher pass-through messaging surcharges of$37 million. Thecombination of changes in total revenue and total cost of revenue yielded gross profit of $130 million, which increased$16 million from the same period in 2023, driven by higher revenue across all product categories.

Previous wording

Our total gross margin percentage of 38% for the three months ended March 31, 2024, declined by 2%, compared with the same period in 2023, driven by higher pass-through messaging surcharges within the total revenue mix.

Current wording

Our total gross margin percentage of 38% for the six months ended June 30, 2024, declined by 2%, compared with the same period in 2023, driven by higher pass-through messaging surcharges within the total revenue mix.

Previous wording

For the three months ended March 31, 2024, sales and marketing expenses increased by$4 million, or 16%, compared with the same period in 2023, primarily due to higher facilities and depreciation expenses in support of our sales force.

Current wording

For the six months ended June 30, 2024, sales and marketing expenses increased by $4 million, or 9%, compared with the same period in 2023, primarily due to higher facilities expenses in support of our sales force.

Previous wording

For the three months ended March 31, 2024, interest income, net of expense increased by $2 million, compared with the same period in 2023, due to lower interest expense of$1 million as a result of the 2026 Convertible Notes repurchases of approximately$65 million in March 2023 andhigher interest income of$1 million from higher interest rates on invested cash.

Current wording

For the six months ended June 30, 2024, interest income, net of expense increased by$1 million, compared with the same period in 2023, primarily from higher interest income of $1 million from higher interest rates on invested cash.

Previous wording

Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Internal Revenue Code Section 41, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, we realized an estimated state effective tax rate of 4.4% for the quarterly period ended March 31, 2024. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax laws and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code Section 162(m).

Current wording

Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Section 41 of the Code, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, we realized an estimated state effective tax rate of 4.3% for the six months ended June 30, 2024. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax laws and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Section 162(m) of the Code.

Previous wording

Our liquidity is provided by our cash flow from operations less expenditures for capital equipment, and supplemented by financing activities from time to time. Our cash flow from operations is driven by monthly payments from customers for communication services consumed during the period. Our primary uses of cash include operating costs, such as fees paid to other network service providers, network operations costs, personnel costs and facility expenses, as well as the purchase of property, plant and equipment to support growth on our communications platform. As of March 31, 2024, we had cash and cash equivalents of $105 million and marketable securities of $42 million.

Current wording

Our liquidity is provided by our cash flow from operations less expenditures for capital equipment, and supplemented by financing activities from time to time. Our cash flow from operations is driven by monthly payments from customers for communication services consumed during the period. Our primary uses of cash include operating costs, such as fees paid to other network service providers, network operations costs, personnel costs and facility expenses, as well as the purchase of property, plant and equipment to support growth on our communications platform. As of June 30, 2024, we had cash and cash equivalents of $62 million and marketable securities of $14 million.

Previous wording

On August 1, 2023, we entered into the Credit Agreement, which provides for a $50 million Credit Facility, including a $15 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million. The Credit Facility has an accordion feature that allows for an increase in the total borrowing size up to $25 million, subject to certain conditions. See Note 8, “Debt,” to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on the Credit Agreement.

Current wording

On August 1, 2023, we entered into the Credit Agreement, which provides for a $50 million Credit Facility, including a $15 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million. On May 1, 2024, we amended the Credit Agreement by upsizing the Credit Facility from $50 million to $100 million and extending the maturity date to May 1, 2029. As of June 30, 2024, we had $40 million in outstanding borrowings under the Credit Facility and the available borrowing capacity was $60 million. See Note 8, “Debt,” to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on the Credit Agreement.

Previous wording

Additionally, we have supplemented our liquidity with proceeds from our issuance of the 2026 Convertible Notes in February 2020 and the 2028 Convertible Notes in March 2021. We used a majority of the proceeds from the issuance of our 2026 Convertible Notes to consummate the acquisition of Voxbone. On March 6, 2023 and November 2, 2022, we repurchased $65 million and $160 million, respectively, of our 2026 Convertible Notes, as further described in Note 8, “Debt,” to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We may, at any time and from time to time, seek to retire or purchase our 2026 Convertible Notes or 2028 Convertible Notes through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Current wording

Additionally, we have supplemented our liquidity with proceeds from our issuance of the 2026 Convertible Notes in February 2020 and the 2028 Convertible Notes in March 2021. We used a majority of the proceeds from the issuance of our 2026 Convertible Notes to consummate the acquisition of Voxbone. On May 9, 2024, we completed the 2024 Repurchases, as further described in Note 8, “Debt,” to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Following the 2024 Repurchases and previous repurchases, approximately$35.0 million principal amount of the 2026 Convertible Notes remain outstanding. We may, at any time and from time to time, seek to retire or purchase our 2026 Convertible Notes or 2028 Convertible Notes through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Previous wording

Our principal future commitments consist of (i) an aggregate of $425 million in Convertible Notes (see Note 8,“Debt,” to thecondensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of the 2026 Convertible Notes and the 2028 Convertible Notes), (ii) $490 million infuture minimum rent payments for ourcurrent office space, including a $482 millionnon-cancelable lease for our new corporate headquarters, which commenced in the third quarter of 2023 and which will continue for an initial twenty (20) year term, and (iii) $22 million in non-cancelable purchase obligations and future minimum payments under contracts to various service providers (see Note 12,“Commitments and Contingencies,” to thecondensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on future contractual obligations).

Current wording

Our principal future commitments consist of (i) an aggregate of $285 million in Convertible Notes, (ii)$40 million under our Credit Facility (iii) $484 million infuture minimum rent payments for ourcurrent office space, including a $477 millionnon-cancelable lease for our new corporate headquarters, which commenced in the third quarter of 2023 and which will continue for an initial twenty (20) year term, and (iv) $21 million in non-cancelable purchase obligations and future minimum payments under contracts to various service providers. For additional information on these future contractual obligations, see Note 8,“Debt,” and Note 12,“Commitments and Contingencies,” to thecondensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Previous wording

For the three months ended March 31, 2024, net cash provided by operating activities was$2 million and was generated by our aggregate results of $16 million during the period, net of (1) non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred taxes and other, and (2) a$14 million cash outflow from lower operating liabilities and higher operating assets.

Current wording

For the six months ended June 30, 2024, net cash provided by operating activities was$27 million and was generated by our aggregate results of $32 million during the period, net of (1) non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred taxes and other, net gain on extinguishment of debt, and (2) a$5 million cash outflow from lower operating liabilities and higher operating assets.

Previous wording

Within operating liabilities, the net cash provided as a result of higher accrued expenses and other liabilities of$7 million during 2024 was driven by higher general accrued expenses due to timing of incurred expenses and partially offset by lower advanced billings. The cash outflow related to the operating right-of-use liability was $1 million. This was partially offset by cash used by accounts payable of$9 million andwas primarily related tothe timing and amounts of purchases of both services and tangible goods and their related payment arrangements.

Current wording

Within operating liabilities, the net cash provided as a result of higher accrued expenses and other liabilities of$4 million during 2024 was driven by higher general accrued expenses due to timing of incurred expenses. The cash outflow related to the operating right-of-use liability was $2 million.

Previous wording

Within operating assets, the net cash used as a result of higher accounts receivable of$11 million during 2024 was driven by higher unbilled receivables balances arising from higher usage amounts in the last month of the first quarter. This was partially offset by cash provided as a result of lower prepaid expenses and other assets of $1 million during 2024 from a lower income tax receivable.

Current wording

Within operating assets, the net cash used as a result of higher accounts receivable of$8 million during 2024 was driven by higher unbilled receivables balances arising from higher usage amounts in the last month of the first quarter. This was partially offset by cash provided as a result of lower prepaid expenses and other assets of $2 million during 2024.

Previous wording

For the three months ended March 31, 2024, net cash used in investing activities was$27 million. Cash used in investing activities was driven by the purchase of marketable securities of $22 million to benefit from the favorable interest rate environment. Additionally, cash used for the purchase of property, plant and equipment was $3 million and cash used for capitalized software development costs was $4 million, driven by investments in the communications platform.

Current wording

For the six months ended June 30, 2024, net cash used in investing activities was $5 million. This was primarily driven by (1) cash used for the purchase of property, plant and equipment of $7 million and cash used for capitalized software development costs of $6 million, driven by investments in the communications platform, and (2) net cash provided by the sales of marketable securities of $7 million to partially fund the 2024 Repurchases.

Previous wording

(1) Calculated by dividing Non-GAAP gross profit by cloud communications revenue of $128 million and $114 million in the three months ended March 31, 2024 and 2023, respectively.

Current wording

(1) Calculated by dividing Non-GAAP gross profit by cloud communications revenue of $128 million and $257 million in the three and six months ended June 30, 2024, respectively, and $118 million and $233 million for the three and six months ended June 30, 2023, respectively.

Previous wording

(1)Non-recurring items not indicative of ongoing operations and other include $0.1 million of losses on disposals of property, plant and equipment during the three months ended March 31, 2024, and $0.4 million of expense resulting from the early termination of our undrawn SVB credit facility and $0.2 million of losses on disposals of property, plant and equipment during the three months ended March 31, 2023.

Current wording

(1)Non-recurring items not indicative of ongoing operations and other include (i) less than $0.1 million and $0.2 million of losses on disposals of property, plant and equipment during the three months ended June 30, 2024 and 2023, respectively, (ii) $0.1 million of losses on disposals of property, plant and equipment during the six months ended June 30, 2024, and (iii) $0.4 million of expense resulting from the early termination of our undrawn SVB credit facility and $0.3 million of losses on disposals of property, plant and equipment during the six months ended June 30, 2023.

Previous wording

(2) The estimated tax-effect of adjustments is determined by recalculating the tax provision on a Non-GAAP basis. The Non-GAAP effective income tax rate was 13.0% and (143.4)% for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024, the Non-GAAP effective income tax rate differed from the federal statutory tax rate of 21% in the U.S. primarily due to the research and development tax credits generated in 2024. We analyze the Non-GAAP valuation allowance position on a quarterly basis. In the fourth quarter of 2022, we removed the valuation allowance against all U.S. deferred tax assets for Non-GAAP purposes as a result of cumulative Non-GAAP U.S. income over the past three years and a significant depletion of net operating loss and tax credit carryforwards on a Non-GAAP basis. As of March 31, 2024, we have no valuation allowance against our remaining deferred tax assets for Non-GAAP purposes.

Current wording

(2) The estimated tax-effect of adjustments is determined by recalculating the tax provision on a Non-GAAP basis. The Non-GAAP effective income tax rate was 15.0% and 2.8% for the six months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024, the Non-GAAP effective income tax rate differed from the federal statutory tax rate of 21% in the U.S. primarily due to the research and development tax credits generated in 2024. We analyze the Non-GAAP valuation allowance position on a quarterly basis. In the fourth quarter of 2022, we removed the valuation allowance against all U.S. deferred tax assets for Non-GAAP purposes as a result of cumulative Non-GAAP U.S. income over the past three years and a significant depletion of net operating loss and tax credit carryforwards on a Non-GAAP basis. As of June 30, 2024, we have no valuation allowance against our remaining deferred tax assets for Non-GAAP purposes.

Previous wording

(1)Non-recurring items not indicative of ongoing operations and other include $0.1 million and $0.2 million of losses on disposals of property, plant and equipment during the three months ended March 31, 2024 and 2023, respectively.

Current wording

(1)Non-recurring items not indicative of ongoing operations and other include less than $0.1 million and $0.2 million of losses on disposals of property, plant and equipment during the three months ended June 30, 2024 and 2023, respectively, and $0.1 million and $0.3 million for the six months ended June 30, 2024 and 2023, respectively.