Company Overview: Bandwidth Inc. (NASDAQ: BAND) is a software-based company, which is mainly focused on communications for enterprises. The company provides an application programming interface (API) platform that owns a Tier 1 network with improved network capacity, mostly serving business enterprises. The utilization of BAND’s APIs aid companies to embed voice, messaging and 911 access into software and applications. The company is engaged in offering unparalleled network quality and proactively monitors network operations 24/7 to settle quality issues, thereby leveraging on an efficient cost structure for continuous flow of connectivity and speed-to-market.

BAND Details

Strategic Alliance & Growing Subscriber Base Remain Key Catalysts: Bandwidth Inc. (NASDAQ: BAND) functions as a Communications Platform-as-a-Service (CPaaS) provider, offering software application programming interfaces for voice and messaging services. The company was founded in July 2000 and incorporated in Delaware on March 29, 2001. The company’s reporting segments are classified into CPaaS (~85% of total revenues in FY19) and Other (~15% of total revenues in FY19). The company’s CPaaS segment leverages cloud-based software platforms for enhanced communications services and is well-positioned to gain from the increasing demand for Unified-Communications-as-a-Service (UCaaS) and Meeting Solutions. A few of the company’s customers, who use Bandwidth's APIs are Google, Microsoft, Cisco, Zoom, and Ring Central.

Key Customers (Source: Company Reports)

The company’s 2019 was marked by continued revenue growth and outstanding performance, mainly driven by higher Communications Platform as a Service (CPaaS) revenues, pioneering technological solutions and wide-established growth across its customer base, owing to its business resiliency. BAND’s CPaaS segment has played a major role in accelerating its growth momentum and remains on track, while producing positive cash flow backed by cost-effective measures, thus, depicting a key long-term growth driver for the company.

Recently, the company announced that it has completed the buyout of Voxbone for an enterprise value of €446 million (~$519.4 million). The move was in-line with BAND’s strategies to enhance its product portfolio and empowers it to bid a unified software platform to better assist global customers. The company has funded the transaction with approximately €354.6 million in cash and €91.3 million in common stock. The company follows a usage-based revenue model that enables it to concurrently expand its revenue growth and increase subscriber base. The company opines that its growing portfolio and accretive customer base are the keystones of long-term growth across a varied set of markets.

Coming to the financials, the company witnessed a CAGR of 14% in revenue over the period of FY15-FY19. CPaaS revenues for the same period grew at a CAGR of 18.2%.

Past Revenue Performance (Source: Company Reports)

During 3QFY20, the company launched an innovative solution for Direct Routing and Dynamic E911, which, in turn, is expected to reinforce Bandwidth and Microsoft’s long-standing relationship with further growth opportunities. This is expected to positively impact BAND’s financial performance, going forward.  BAND also joined forces with two leading organizations — Comcast Corporation (NASDAQ: CMCSA), T-Mobile US, Inc. (NASDAQ: TMUS). These partnerships are mainly focused on enhancing the interoperability of authenticated calls between their networks to curb the ever-increasing numbers of spam calls, thereby safeguarding both consumers and businesses. Overall, these developments are likely to boost the company’s top-line performance, in the coming quarters.

3QFY20 Key Financial Highlights: During the quarter, the company reported a GAAP net loss of $2.4 million or a loss of 10 cents per share as compared with a net loss of $1 million or a loss of 4 cents per share reported in the prior corresponding period. Higher operating expenses and income tax provision during the period impacted the bottom-line performance. However, the company benefitted from a growing subscriber base and higher CPaaS revenues in 3QFY20. Adjusted net income stood at 24 cents per share as compared to a loss of 6 cents per share in 3QFY19. Revenues, during the quarter, came in at $84.8 million, up 40.1% from $60.5 million reported in the year-ago quarter, owing to higher CPaaS revenues, and higher work-from-home trend due to COVID-19 induced pandemic. Total operating expenses during the quarter came in at $37.4 million, up from ~$32 million 3QFY19, primarily due to higher research and development, and general & administrative expenses. Adjusted gross profit in the quarter came in at $41.6 million, up 42.6% on pcp. Adjusted EBITDA stood at $9.3 million as compared to a loss of $0.6 million in 3QFY19.

3QFY20 Key Results (Source: Company Reports)

Segmental Performance: During the reported quarter (3QFY20), CPaaS revenues stood at $73.8 million, depicting a rise of 43.3% year over year and accounted for ~87% of total revenues. The increase was mainly driven by higher demand for work-from-home connectivity solutions. Further, higher volumes of political messaging traffic also positively impacted CPaaS revenues. CPaaS customers saw an increase of 25.2% year over year in 3QFY20, depicting the resiliency of the business model. Notably, the net retention rate (dollar-based) increased from 116% reported in 3QFY19 to 131%.

CPaaS gross profit margins on an adjusted basis jumped 47% reported in the year-ago period to 50% in 3QFY20. Notably, active CPaaS customers at the quarter-end stood at 2,015. Other revenues during the quarter came in at $11 million, up 22.2% year over year and represented the remaining 13% of the total revenues in 3QFY20.

Segmental Performance (Source: Company Reports)

Healthy Balance Sheet and Decent Liquidity: During the first nine months of FY20, the company generated net cash from operating activities of $11.3 million as compared to net cash outflow of $3.5 million in the year-ago period. The company exited the quarter with a cash balance of $300.2 million. Total current liabilities at the end of the period amounted to $57.8 million. BAND reported Sep’ 2020 quarter’s operating margin at 46.3%, higher than the year-ago quarter’s figure of 45.3%. EBITDA margin, in the same time span, came in at 6.1%, as compared to the year-ago figure of -3.8%. Sep’20 current ratio stood at 10.21x, higher than the industry median of 1.02x, demonstrating a sound liquidity position. The company remains on track to continue investing in key areas with robust cash flow, which provides the company with ample available liquidity for unforeseen events.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Recent Updates:

1. On November 3, 2020, the company stated the pricing of its previously declared secondary offering of shares of its Class A common stock. VIP II Nominees Limited has consented to sell an aggregate of 663,394 shares in an underwritten public offering for a price consideration of $152.00 per share.
2. On November 2, 2020, the company announced the appointment of numerous new leaders to the executive management team aiding the company for global expansion and continuous growth opportunities.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 41.83% of the total shareholding. The Vanguard Group, Inc., holds the maximum interests in the company at 7.67%, followed by BlackRock Institutional Trust Company, N.A. holds 5.54%, interest.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Risk Analysis: Increasing competition and risks relating to foreign currency rates and inflation may put revenues and margins under pressure. Further, changes in capital markets, legal requirements, monetary or geopolitical disruptions, might reduce demand for BAND’s offerings. It is worth noting that a major portion of the company’s revenue is focused on a limited number of enterprise customers. Therefore, loss of one or more top ten customers, may decrease orders for the company’s services and may dampen its financial stability. Moreover, network breaches, failure to comply with privacy and data security regulations in the United States add to the woes.

Outlook: For 4QFY20, the company expects revenues to be in the ambit of $96.5-$97 million, whereas, adjusted earnings are expected to be in the range of 3-5 cents per share. CPaaS revenues for 4QFY20 are estimated to be within a range of $84.3-$84.8 million. For FY20, revenues are expected to be in the ambit of $326.6-$327.1 million, whereas, adjusted earnings are likely to be in the ambit of 44-46 cents per share. Moreover, the company expects CPaaS revenues for FY20 to be in the band of $284.3-$284.8 million.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of BAND closed at $141.65 with a market capitalization of ~$3.43 billion. The stock made a 52-week low and high of $50.89 and $198.6, respectively. The stock went up ~27.7% in the last six months. On a technical analysis front, the stock has a support level of ~$138.26 and an immediate resistance level of ~$152.14. Considering the above factors, we have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method. For this, we have considered peers like Verizon Communications Inc (NYSE: VZ), AT&T Inc (NYSE: T), Twilio Inc (NYSE: TWLO), to name a few, and arrived at a target price which is offering a lower double-digit upside (in % terms). Hence, we give a ‘Buy’ recommendation on the stock at the closing price of $141.65, down by 1.43% as on 16 November 2020.

BAND Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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