Bandwidth Inc. (BAND) Q4 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Bandwidth Fourth and Full Year Earnings Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Marc Griffin. Please go ahead.

Thank you, good afternoon, and welcome to Bandwidth's fourth quarter and full year 2018 earnings call. Today, we'll be discussing the results announced on our press release issued after the market close. With me on the call this afternoon is David Morken, Bandwidth's, Chief Executive Officer; and Jeff Hoffman, Chief Financial Officer of Bandwidth. They will begin with prepared remarks and then we will open up the call for Q&A. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the first fiscal quarter of 2019 and the full-year of 2019, our plans to execute on growth strategy, our ability to maintain existing and acquire new customers, and other statements regarding our plans and prospects. Forward-looking statements may often be identified with words, such as, we expect, we anticipate or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our 10-K filing on February 26, 2018, as updated by other SEC filings, all of which are available on the Investor Relations section of our website at bandwidth.com, and on the SEC's website at SEC.com. Finally, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued after the market close today, which is located on our website at bandwidth.com and on the SEC's website at sec.gov. With that, let me turn the call over to David.

Thank you, Marc, and thank you to everyone joining us on our fourth quarter and full year 2018 earnings call. Since we are reporting results for our first full-year as a public company, I want to begin by thanking God, all our Band mates and their families, our customers, and current investors. We are proud that we delivered an excellent first full-year as a public company and know it was only possible because of the creative work and commitment of many people, including those on this call. We are also excited to finish the year so strong with our fourth quarter performance well above our guidance. During this past year, we achieved remarkable results by serving our enterprise customers well. Our total revenue for the year exceeded $200 million. We ended this past quarter with 26% CPaaS revenue growth year-over-year. Our solid results continue to be driven by expanding our relationships with existing enterprise customers. Demand for our services have been solid throughout the year and in the fourth quarter was again driven by a diverse set of customers using the full breadth of our offering. Our unique combination of software APIs and a nation-wide vertically integrated all IP voice network resonates clearly with enterprise customers. During our fourth quarter, we developed deeper relationships with existing customers and had several notable new customer wins. For example, an existing customer who is a fast-growing leader in modern enterprise video and voice conferencing and who provides services to clients such as Uber, Slack, Sonos and many others recently announced a Cloud phone system solution that will be available nationwide in 2019. Bandwidth's APIs already power the voice calling components of the company's video conferencing platform and we are excited that they will be using us to power their next generation enterprise cloud phone system solution. Our software platform is well suited for creative teams such as this one to launch and scale dynamic voice experiences. Enterprises do not have to choose between speed and high-quality voice and messaging, the functionality of our APIs and the stability of our IP voice network gives them both. During the quarter, we also started a new relationship with one of the fastest growing cloud strategy company as it serves more than 1,500 enterprises, including many of the world's most recognizable brands. The company offers enterprises, cloud communications solutions, including cloud contact centers, cloud phone systems, and unified communication services. Experiencing exclusive growth, the company was looking for a provider that could effectively and efficiently scale with the business. Bandwidth met their criteria as a single platform that could deliver a complete communication suite. Our flexible voice, messaging, and 911 APIs enable the customer to develop their services rapidly, reliably and at excellent economic value at scale. And as is often the case among large enterprises to work with us, this customer placed a premium on our exceptional dedicated enterprise customer support. Changes in the messaging industry are driving more demand for Bandwidth’s Enterprise Messaging services. Wireless carriers are sun setting shared sort code messaging, and developing new solutions that balance the urgent need to protect consumers from unwanted messages with reliable deliverability by filtering, blocking, and raising rates. Bandwidth’s enterprise solution, which enables application to person messaging on toll-free numbers is available today, is designed to protect consumers from spam, and is not impacted by these impending industry changes. Unlike short codes, which enable only one-way messaging to a customer, our service enables full customer engagement with two-way text messaging and voice communications. During the fourth quarter, we saw strong enterprise interest in our enterprise grade A2P toll free SMS. We added a large new customer that provides a customer loyalty and marketing platform to 14,000 local businesses in more than 30 million people. The company was previously experiencing deliverability issues with short codes for customer loyalty programs within their rapidly growing user community. The company will now use bandwidth's enterprise toll-free SMS solution and toll-free numbers to empower their merchant customers to engage in full loyalty program conversations with end uses. Our messaging products offer dedicated throughput, high economic value at scale, and excellent customer support. I want to now turn to the investments we made to expand our team in 2018. During last year, 233 new Bandmates joined us from many local and national software and technology companies. We grew our team by 62% from 378 to 611. We more than doubled our sales and marketing team from 63 to 150, which now includes 45 enterprise hunters and 8 strategic sales reps. In addition, we expanded our sales in marketing team by adding more new development reps to directly support our inside sales representatives. During 2018, we also grew both our technology and our R&D teams from 66 to 156 to develop and broaden our platform and meet growing market demand. The majority of these hires were software developers and engineers who will accelerate the launch of planned services on our platform. In 2019, we will expand our toll-free voice platform and network to add many new call management capabilities. This will allow us to better serve our customers, especially those with contact center applications. We also plan to expand our platform’s messaging capabilities to include additional A2P services, which will assist our customers who are increasingly using messaging within their customer engagement strategy. Furthermore, we plan to expand our platform’s emergency call APIs to support to support mobile work force used cases by enabling real time notifications of location specific emergencies. These enhancements support both regulatory compliance and our enterprise customer’s need to direct first responders quickly and precisely. Last, we plan to continually improve our platform’s fraud and detection capabilities and will continue with others to lead the industry’s effort to combat fraudulent robocalling. I’d now like to take a moment to reiterate our mission to develop and deliver the power to communicate. This past year marked our tenth-year building the future of voice. The software platform and nationwide network we built has become the foundation on which the greatest creative teams launch and scale dynamic voice experiences. IDC estimates that the global CPaaS market opportunity will grow from $2 billion in 2017 to $10.9 billion by 2022. Communications have reached a tipping point as enterprises are harnessing software powered voice and messaging to meet customer expectations and fulfill mission critical customer experiences. The enterprise is rapidly embedding voice messaging and 911 into applications we use every day where we live, work, and play. Bandwidth continues to be well-positioned to meet the end-to-end needs of our enterprise customers. We are growing our customer base, expanding our existing relationships, selling to new organizations, innovating with our platform and developing our international offerings. And regarding international, during 2018, our international strategy was to recruit great leadership and to work with our largest customers to validate and model the legal regulatory and commercial assumptions required for serving them well in their highest demand countries. We spent a year learning how we could expand our domestic platform and IT voice infrastructure in other countries to support this growth with higher reliability, larger scale, and greater economic value for our customers. And today, we are excited to announce that we have reached an agreement in principle with one of our largest voice customers to expand our platform in network in into the UK and the EU to support an important product launch. We expect to begin providing service by the end of the first quarter and we will continue to scale throughout 2019. I am very pleased with the progress of our international team. We now have a better understanding of the opportunities and challenges for important services in the highest usage countries and have moved from exploring to executing, or said differently, Bands world tour has officially begun. Overall, 2018 was a great year for Bandwidth. Once again, thank you to those who have been most responsible for our continued success. To our many customers and our investors, thank you for your continued trust. To our Bandmates, many of who joined us during the year, thank you for your commitment to each other to our customers and to your creative work. I’m extremely proud of everything we have accomplished in 2018. We are committed to achieving our objectives together in 2019 and beyond. With that, let me turn the call over to Jeff.

Thanks David, and good afternoon to everyone on the call. Today, I will review our fourth quarter 2018 financial results according to the historical revenue recognition standard of ASC 605. In addition, we will discuss our financial guidance for the first quarter, and the full-year 2019 according to the new standard ASC 606. As an emerging growth company, we are adopting 606 starting January 1, 2019 under the modified retrospective method and do not expect any material changes to our revenue recognition nor our sales commissions accounting. Based on our evaluation to date, we expect the revenue related impact to result in a reduction to retain the earnings between approximately $100,000 and $200,000. Our fourth quarter was an outstanding finish to a great year and as David mentioned earlier, we are pleased to report that we once again exceeded the high-end of all of our guiding metrics. We continue to see good momentum across our entire product line and over a diverse set of enterprise customers. We believe this is a testament to the high value our customers place on the combination of our software and network platform, as well as our teams enduring commitment to delivery world-class customer service. During the fourth quarter, our total revenue was $52.3 million, up 23% year-over-year and $2.7 million above the high-end of our guidance range. Within total revenue, CPaaS revenue was $44.1 million, up 26% year-over-year and $1.5 million above the high-end of our guidance range. Other revenue contributed the remaining $8.2 million of total revenue, which was $1.2 million above our implied guidance and more than the $7.5 million from the fourth quarter of 2017, due to higher indirect revenues. Our 121% dollar-based net retention rate in the fourth quarter was our best yet as a public company and is well above the 111% we achieved in the fourth quarter of 2017. On average, our enterprise customers continue to spend $150,000 with us annually. We ended the fourth quarter with 1,230 active CPaaS customers, up 75 sequentially from the end of third quarter. Active CPaaS customers increased 27% year-over-year, which was the highest level of growth recorded during the year. The acceleration in customer ads is due to robust demand for our offering and early indicators of payback on our increased investments in sales. Before moving on to profitability metrics, I would like to call out that I will be discussing non-GAAP results going forward. Our GAAP financial results along with the full reconciliation between GAAP and non-GAAP results can be found in our earnings release. Our non-GAAP gross profit, which excludes stock-based compensation and depreciation was $24.9 million yielding a gross margin of 48% for the fourth quarter of 2018, as compared to the $20.7 million and the 49% gross margin we achieved in the fourth quarter of 2017. The slight change in gross margin is primarily due to the timing of investments in the fourth quarter of 2018 as we continue to expand the reach and scale of our platform. Fourth quarter adjusted EBITDA was a loss of $0.1 million, compared to 4.4 million of adjusted EBITDA for the same period last year, which reflects the increased investments we have made in research and development and sales and marketing to support our long-term growth objectives. On a GAAP basis, we reported a net loss of $1.3 million of $0.07 per share based on 18.4 million weighted average basic shares outstanding during the fourth quarter of 2018. Our non-GAAP net loss in the fourth quarter was $0.8 million or loss of $0.04 per share based on 18.4 million weighted average basic shares outstanding. This is well above our guidance for the fourth quarter of a net loss of $0.28 to $0.30 per share. A favorable non-GAAP net loss variance as compared to our guidance was primarily driven by gross profit and operating expense out performance. During the quarter, we generated $0.6 million in net cash from operations and utilized $5.4 million in free cash flow, which includes 6 million of purchases of property and equipment, as well as capitalized software development cost for internal use. Turning to a quick summary of the financial results for the full-year 2018, total revenue was $204.1 million, up 25% year-over-year. Within total revenue, CPaaS revenue was $164.4 million, also up 25% year-over-year. The fundamentals of our business proved strong during a year of higher investment as we expanded our non-GAAP total gross margins from 48% to 49%. During 2018, adjusted EBITDA was $16.1 million and non-GAAP net income was $9 million or $0.43 per share based on 21.1 million weighted average diluted shares outstanding. Turning to the balance sheet. As of December 31, 2018, Bandwidth had cash and equivalents, plus marketable securities of $58.7 million. Now, I’d like to finish with some thoughts regarding our financial outlook. In terms of CPaaS revenue, we expect the full year of 2019 to be in the range of $201 million to $203 million or up 23% at the midpoint of the range. We expect total revenue for 2019 to be in the range of $231.5 million to $233.5 million, up 14% at the midpoint of the range. I want to remind everyone that other revenue in 2018 benefited from a 6.3 million one-time favorable impact related to the Verizon settlement. If we normalize for this one-time impact, total revenue for 2019 would be up 18% at the midpoint of the range. In addition to indirect revenue, other revenue includes our legacy services, which are expected to continue their slow decline in 2019. We are excited about the opportunity in front of us and we plan to continue our investment strategy to scale our CPaaS business in 2019. The investments in our platform coupled with ongoing economies of scale and network effects will allow us to expand CPaaS gross margins in 2019. Total gross margin in 2018 benefited from the aforementioned one-time $6.3 million settlement that flowed directly to our bottom line. We expect to achieve total gross margins consistent with 2018 by expanding CPaaS margins in the coming year, which should virtually offset the lack of one-time benefit from the Verizon settlement in 2019. As a result, non-GAAP earnings per share for 2019 is expected to be in the range of approximately a loss of $0.64 to $0.74 per share. This outlook assumes weighted average shares outstanding of approximately $19.9 million. Turning to our guidance for the first quarter of 2019, we expect CPaaS revenue to be in the range of $43.5 million to $44 million or up 13% year-over-year at the midpoint of the range at $43.8 million. This contributes to our total revenue guidance of $51 million to $51.5 million. I now want to provide some additional color to put our view of first quarter CPaaS revenue guidance in perspective. We are facing a challenging year-over-year comparison in the first quarter given our strong performance in the first quarter of 2018, which benefited from a high concentration of customers scaling on our platform in a single quarter. As you will recall, our CPaaS sequential revenue growth in the first quarter of 2018 was approximately $4 million, an all-time high, which is more than double the average sequential revenue growth of approximately 1.7 million we have experienced over the last eight quarters. If we adjust for this outside performance in the first quarter of 2018, CPaaS revenue for the first quarter of 2019 would be expected to be up 19% at the midpoint of the range. Most importantly, when you consider that our full-year CPaaS revenue growth guidance is 23% at the midpoint, compared to 13% for the first quarter, it is clear that we expect year-over-year growth to re-accelerate in the second quarter through year-end 2019. As we have discussed in the past, we have high visibility into our revenue growth since it is derived primarily from our existing customer base. In addition, we expect to see benefit from the increased pace of acquisition that we began to see in the fourth quarter of 2018, and we are excited about the favorable impact of our larger sales force coming to full productivity throughout 2019. Turning to the first quarter of profitability, non-GAAP earnings per share is expected to be in a loss in the range of $0.27 to $0.30 per share. This outlook assumes weighted average basic shares outstanding of approximately 19.8 million. In conclusion, we are very pleased with our 2018 performance. Our business fundamentals are strong, bandwidth continues to be well-positioned to capture an expanding CPaaS market as enterprises continue to embed voice, messaging, and 911 to deliver connected experiences that are core to the mission of these enterprise customers. With that, I will now hand the call back to the operator for the Q&A portion of the call.

[Operator Instructions] Our first question comes from the line of Brent Bracelin with KeyBanc. Please proceed with your question.

Thanks for taking the question and I'd love to maybe start with you, David here. If I look at kind of just the Q4 kind of results, it looks like you've beat the midpoint of CPaaS by close to $2 million. Yet, it looks like a lot of that came from the best net retention rate in over two, three years. So, as you think about the drivers of your existing customer base, the consumption pattern you are seeing, did you see kind of a one-time benefit from mid-term elections? Was there other factors that drove it? Help us understand the drivers of the strength here in Q4, I have several other questions. Thanks.

You bet, Brent. The growth in Q4 was broad-based. We did add as Jeff mentioned, 75 new customers during the quarter, but of course they take time to ramp. So, Dubner [ph] was, as you said high, but the breadth of the growth is what was most characteristic of the quarter and no spikes to call out. The election certainly does lift boats some, but it's primarily messaging, I think in its emphasis, and for us, there is a lift, but it doesn't explain the overall increase.

Got it. And then, Jeff, as we think about just the CPaaS guide, I obviously, I looked back at the dollar change in your CPaaS business, clearly a big spike there $3.9 million sequential increase in Q1 of last year, so I get the tough compare, but it also implies in order to get to 23% growth for the full-year, you're going to have some big step-ups in the CPaaS business in Q2, Q3 and Q4 to get to the 23% growth, and so I guess my question is, what's the line of sight that you have to a step-up in Q2, Q3? Is it tied to the new customer win and rollout of the cloud phone system? Just trying to understand the tough comparing Q1 and then what gives you confidence you will see a big step up here in Q2, Q3, Q4? Thanks.

Sure. Thanks for the question, Brent. Our plan in 2019, late 2018 is rooted in serving our customers well and expanding our enterprise relationships, but at the same time, we expect a more meaningful contribution from our larger sales force this year, due to the investments that we made in 2018. We expect new customer sales to increase in 2019 in a cascading fashion as each quarterly new sales rep cohort comes online and reaches full productivity. The combination of these two factors then forms the 23% CPaaS revenue guide and implies for that last three quarters that will grow in those quarters at an average of 26%.

Got it. That's helpful color. So, it sounds like you're literally looking for those sales investments to help pay off, and then as we think about the net dollar retention, would you expect that to moderate some, or you know, could you talk maybe about pricing as we think about the pricing change of the business? Clearly, I get new sales in the ramp and we're getting very good visibility there, but I also want to understand your thinking around what you've baked in around net retention rates within the existing installed base?

Sure. So, our pricing has remained very consistent. So, I don't think there's anything new there to report. Certainly, in the first quarter for all the things that we've already discussed, we would expect a lower dollar based net retention rate, but for the rest of the year, again that's a really important part of our growth. One of the things that we always emphasize with folks like you is that you know, our growth is not always linear and it can fluctuate a little bit from quarter-to-quarter, which is why we as a team will focus on annual trends, but we expect to continue to expand the relationships with our customers and serve them well, and so, we expect strong retention rates.

Great. My last question is for you, David here, will – I got to ask on the world tour here, now that you're kicking that off, it sounds like you have secured an anchor tenant. Is that correct and does that help absorb some of the capital costs that you could burden here in the short run? Thanks.

You got it, Brent. That is correct. We've got an anchor tenant. And we have a relationship with them that reduces our exposure to the expense that we incur as we serve internationally as opposed to building something pristine with no customers involved, that was orientation during the last year we learned and we're excited to begin the world tour.

Great, thank you. That's all I had. Thanks.

Our next question comes from the line of Richard Davis with Canaccord Genuity. Please proceed with your question.

Hi, thanks guys. It's actually D.J. Hynes on the line for Richard. Congrats on all the good news. Maybe just piggybacking off of Brent's last question there on international. Can you talk about the gross margin impact as you move internationally? Will that have a materially different profile than the core business? And just help us think about kind of some of the upfront costs involved in kind of building out that effort?

Sure, D.J. This is Jeff. I'll start, and then if David wants to fill in, he can. So, it's still very nascent for us as we look into international, product matters here. I think the more messaging we do just like domestically, that's a little bit higher margin for us than it is voice and we're certainly starting out in new territories, and so the gross margin will be influenced by the size and number of investments that we make, it will also over time as that scales will benefit from economies of scale and network effects that we have and so initially the margins could potentially be a little bit lower, but we expect them to grow over time, but we obviously still have a very material base here in the U.S., and that's what will be the largest influencer of our gross margins.

Thanks, Jeff and DJ, I would just add that, over the last year, what we've articulated is the desire to understand how we can deploy infrastructure for our platform and are all-IP voice networks to be more reliable for customers that are doing international service, as well as a better economic value. So, we're trying to replicate the value of the asset-based combination that we have in the U.S., and that's our goal.

Yes. So, the higher losses in 2019 implicit in the guidance, is that a result of now just bearing the cost of the investments that you made in 2018, you know, you talked about the growth in the headcount and the sales infrastructure build out? Or is that more being driven by some of these newer international expansion efforts?

The short answer D.J. is all of the above within there, but one of the things that is new to our guidance here, because we now have more clarity of a plan is the international investment, and you could think of that sort of in the call it $5 million to $6 million range in our 2019 plan that's within OpEx or certainly also some CapEx included in there as well, and then really the other piece is, when you look at our OpEx growth, we continue to want to reinforce our success that we've had in hiring sales and marketing folks and also research and development and to the extent that we need to – our folks that are classified in G&A, and so the plan all along has been to make 2018 and 2019 investment years, I think our plan shows that, but just to bring it full circle, international sort of the new ad in here that we have that informs both non-GAAP net loss and our EPS.

Yes, okay. Yes, quantifying that spend is helpful. One last one if I may, so have you seen any change in the mix of B2B call volumes versus what I guess I would call B2C or IoT driven calls? And I guess as part of that answer, can you talk about the margin differences you may see between those two – I'm assuming that you can kind of leverage off peak hours with some of that B2C IoT traffic, is that a fair assumption? And any color you could give would be helpful.

So, to the extent that we serve voice as an interface consumer devices, to answer your question, we've seen a very steady drumbeat in the quantity of calling across new interface customers that we work with and indeed much of that calling does occur after normal business hours, and so there are aspects of a fixed-cost network and platform that offset that new call pattern favorably as it relates to having a fixed cost. Does that answer your question?

Yes, it does. So that doesn't sound like a discernible mix shift, but you're seeing nice traction with the new interface devices?

Yes. I wouldn't go so far as to answer the specific around the mix of traffic between B2B and B2C. What I – what we are seeing is a steady drumbeat of adoption where we serve folks in the consumer space, who are doing creative new experiences in the home, some of which are voice as an interface, but not ready to comment on the absolute shift across those two categories.

Very good. That's perfect. Thanks, guys, congrats.

Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

Great, thanks guys. I just wanted to get a sense of, obviously, you guys are starting to see some traction with the new salespeople and just if there was anything around kind of a size of what their initial year of – what their spend was kind of in the initial year or just kind of whether these customers were off the original targeting list, just some kind of context around some of the normal course, the average customer? And then second, just kind of circling back to the gross margins, you guys have been, I understand it's some of the international piece on gross margins, but you've been making some investments, and you were expecting to get some leverage in 2019, and so I just wanted to get a sense of, what we should expect as far as those investments? Thanks.

You bet, Meta, this is David. Just as a quick reminder, on your first question, we have two distinct sales groups. We have our Hunter enterprise team and then a strategic team, and to answer your question, the Hunter team, they will take 90 days to ramp after joining and we expect them to close 1.9 new enterprise customers per month thereafter at full quota. That customer within their first 12 months after onboarding will in that first 12-month period generate $20,000 of annual revenue, in the second year $30,000, in the third year $40,000 and when you combine that with the other large customers, our average is $150,000 annually. On the strategic side, those reps take nine months to close their first deal. Their first strategic customer will generate $500,000 of annual revenue within their first year on our platform. And those reps are closing about [1 to 1.1 or 1.2] large deals a year. And then your second part of your question was gross margin and I'll turn it over to Jeff for that one.

Thanks, David. Hi, Meta. So yes, despite our higher level of investment in 2018, our track record of growing gross margin year-over-year continued. So, we achieved 49% in 2018, which was 140 basis point improvement over 2017. As we've discussed there's a number of factors that affect our gross margin. Certainly, the level of investment and we've been very explicit in saying we're investing more in 2018 and 2019 to expand the reach and scale of our platform, we do that with the platform and with the team, product mix influences it, certainly one-time events like we experienced in 2018 and the Verizon settlement influenced that, but on a longer-term basis, the great positive tailwind that we have is economies of scale and network effects and we enjoy that as a result of our vertically integrated platform and enjoying owner economics. And so, when you balance all those things in with again another heavier load of investments and certainly getting some yield on those the 2018 investments in 2019, but on balance, we would expect our gross margins in 2019 to be virtually in line and consistent with what we saw in 2018. Now in the future, as we sort of grow out of that, we would expect gross margins to continue to enhance. And David and I still believe along with the rest of the team that this is a 60% margin business, we've just got to get through some scale and demonstrate some more operating leverage.

Just sort of going back to that real quick, like when you're saying solid or steady gross margins from 2018 and 2019 are you talking about CPaaS gross margins or overall gross margins?

That's overall gross margin, so what's going to happen in 2019 is you're going to see CPaaS margins grow, and you're starting to see as we do have some additional scale there. The economies of scale and network effects come into play there, so we will expect that to grow, where we'll actually reduce margin is on the other side of the business, which is less than 20% of our revenue, and the reason is this the one-time Verizon settlement that happened in 2018 will not reoccur in 2019, and so the blending of those two impacts put us at a flattish sort of level for this year.

Got it. No, I just wanted to clarify. Great, thanks guys.

Our next question comes from the line of Pat Walravens with JMP Group. Please proceed with your question.

Oh, great. Thank you and congratulations to you guys. That's really impressive. So, Dave, I once heard you say that you would rather grow 20% for 20 years than 40% for four, and as I look at what you guys are doing, 26% CPaaS growth this quarter guidance to 23% for next year, a lot of investments, the big question investors have for me is, is this going to accelerate out of sort of the current growth range at some point? What would you say?

Well, I would – by the way, thank you for your kind words, Pat. The beat goes on. I would say that those investments as we have made in sales and marketing, if they are successful investments, those individual contributors on a per headcount basis should fuel our growth, and we have grown from 12% CPaaS growth in 2017 to 25% CPaaS growth that we've just done, and so we've doubled in 2018 and if our sales investments don't increase our growth, I have failed as a leader. That's the short answer.

Alright. Great. Thank you. And my second question is just with – so you have – what an impressive increase in the number of R&D people? What is their top priority today?

Expand the platform both breadth and depth, capacity in terms of throughput to support the growth of both messaging and voice as well as incremental use cases that are being asked for by our enterprise customers. There's also some international development work to be effective across different jurisdictions. But the focus is on the platform and making sure that the network keeps up with the growth that we're experiencing.

Awesome. Thank you.

Our next question comes from the line of Catharine Trebnick with Dougherty. Please proceed with your question.

Congratulations on the quarter. So, I just need to drill in on the guide here, just to make sure I understand what you're saying. So, it looks like for Q1, The Street was at loss of $0.12 you're guiding to $0.27 to $0.30 and for the full year at $0.64 to $0.74, Street was at $0.46. So, can I, do we attribute – how much of that is attributed to this international expansion, and how much of that is a drag?

Yes. So, as far as the annual earnings per share, Catharine, there is a sort of a new entrant into our guidance here, and we talked a little bit about this with D.J.'s question, which was, we're adding to our forecast in the range of $5 million to $6 million for international that's hitting OpEx, as well as some additional CapEx to get us going with this flagship customer that David had talked about, and then we'll add from there and so that is the primary difference to it. If you look at it, everything else in The Street rev is above where The Street was gross profit is above, I think OpEx is generally in line, absent the investment that we're making in international, but we believe once again that this is the year to make those investments and expand and will help us grow and scale in the future.

So, when we think about modeling means, we think that this will be more of a back-end loaded year with sales guys, it seems like you hired most of them in Q3 and Q4, majority of them. So, should we think of this more as maybe a 45-55 split, when we model up the top line revenue or how should we look at that?

I think that's fair. Our intent and what we have performed in 2018 was our hiring was pretty consistent throughout all the year, but there is a cascading impact into 2019 as each cohort comes online and gets to full productivity. So, the effect of that is, is that it is a little bit more back weighted with that, but that all underlines the foundation of us serving our existing customers well and expanding our relationships there, but I think you're generally on track.

Okay, good. And then the other question I had, just usually you have a couple of interesting nuggets on new customers, any of the current existing large Internet giants, any interesting new app use cases I'd say came on board with during the quarter?

None that we announced publicly, so no, Catharine, there's nothing that we've announced publicly.

I was just trying to pull something.

[Indiscernible] no names basis though, Catharine, David did highlight three or four use cases, that you might leverage if that's helpful.

Oh, no. I was just trying to find – last time you talked about Google, I was just looking for some other color there. Thank you very much.

Thank you, Catharine.

Thanks.

Our final question comes from the line of Will Power with Baird. Please proceed with your question.

Great, thanks. Yes, well, congratulations on the international progress, I know that's been a big focus for a while. I guess maybe several questions on that front, David can you just help us understand architecturally how that will look like versus the U.S. soft switches, access to phone numbers, how many countries will you be up and running in, out of the gate? That's the first question. And then what do the CapEx requirements look like? And my other question is, with regard to revenue contribution, how do we think about revenue contribution in 2019 as it pertains to the overall guidance? Thanks.

You bet, Will. I'll talk about the strategy and the architecture and what we're trying to achieve and then turn it over to Jeff to talk about margin and revenue contribution. What's most important to keep in mind is that internationally, what we're going to deploy is a stack that replicates the same architecture that we maintain in the U.S. So, the gear that we put in a data center supports all IP, voice, and messaging services, and it's a great extension of an operating team that knows how to administer, maintain and support that gear in multiple data centers. And as a result of putting that gear in multiple replicated data centers, you're able to offer high reliability. Yes, you do cross connect and interconnect with incumbent service providers under key regulatory licenses that you're able to achieve or by commercial agreement as well. And that's what allows you to do, whether it's emergency voice calling in a jurisdiction or just regular voice services, you've got the ability with this gear and the right interconnects and the right regulatory approvals, what you're trying to do is lower your cost structure and get it to be as close as what you've done in the United States at the same level of reliability in the United States, and so the value under the platform for our large enterprise customers, many of whom are domiciled here in the U.S. is it for their product teams they already know how to utilize our platform, we just added a new jurisdiction. It has all the hallmarks and characteristics of the quality and the cost that they've come to understand domestically to the best of our ability to replicate, that's the model, that's the desire. Be the easy button, not just in the U.S., but in other jurisdictions. We've been able to achieve a very high level of quality and great economic value for the customers that we have using the platform today in the U.S. and we're targeting to do the same thing, focused on the UK and EU as I mentioned, those are the jurisdictions of highest volume where we are supporting our lighthouse customer and after that we'll prioritize based on customer need and demand, but the underlying infrastructure and architecture is precisely the same design that we've really scaled well in the United States. And then I'll turn it over to Jeff.

Thanks, David. Hi, Will. I would just emphasize that we’re still early days despite the articulate plan David laid out, it takes a while for revenue to come and of course expenses precede revenue, and so our guidance is not overly reliant on international at all in 2019. In terms of CapEx and the spend, we’d already talked about the OpEx contribution, but in terms of CapEx, I would think about this in a 3% of revenue range for CapEx in the initial international build out. As a reminder, what we've guided everyone is domestically, our CapEx is 7% of revenue. This would be an additional call it 3% or so on top of that, so overall CapEx for 2019 coming in the 10% range and that's how we see it, we're very excited about this sort of greenfield opportunity so to speak, and we look forward to serving customers in new jurisdictions.

Yes. It sounds like a nice opportunity. Good luck for that.

Thank you, Will.

Ladies and gentlemen, this concludes our question-and-answer session, as well as our call. We thank you for your participation and have a wonderful day. You may now disconnect.