Greetings. Welcome to Bandwidth's First Quarter 2019 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] Please note this conference is being recorded. I will now turn the conference over to your host, Marc Griffin, Investor Relations. Mr. Griffin, you may begin.

Thank you. Good afternoon, and welcome to Bandwidth's first quarter 2019 earnings call. Today, we'll be discussing the results announced in 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 we will then 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 second fiscal quarter of 2019 and the full-year of 2019, our plans to execute on our 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 these 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 15, 2019 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.gov. 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 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 first quarter earnings call. We have once again exceeded the high-end of our financial outlook this quarter. Our CPaaS revenue increased 16% year-over-year driving total revenue of $53.3 million. We are beginning to see early indicators of success from investments we are making in our business. In the first quarter, our expanded sales and marketing teams helped grow new customers a record 31% year-over-year. This new cohort of enterprise customers represents use cases from all service offerings and are from a diverse set of industry verticals. We are focused on cultivating these relationships as these new customers become more familiar with our platform and service. In addition to growing customers 31%, we are excited about our expanded [audio dip] productivity throughout 2019. During the quarter, we onboarded 121 net new customers, beating our previous record set last quarter of 75, an increase of 61%. We continue to be pleased by the fundamental strength in our business. The three pillars supporting our success are our highly scalable platform of flexible APIs, our vertically integrated nationwide IP voice network that we built and operate, and our 911 capabilities that we believe are unique among CPaaS providers. Enterprises choose to build on these bandwidth pillars because of their clear quality and cost benefits. They also choose us because of our amazing people who answer the call to serve our customers. We recently completed a follow-on public offering of common stock to be able to reinforce the success we see with our pillars and with our people. The most innovative technology companies continue to choose Bandwidth. During the first quarter, we entered into a new relationship with one of the pioneers of better and easier point of sale solutions for small and…

Thank you, David, and good afternoon to everyone on the call. We had a solid start to 2019 with all of our key financial metrics outperforming the high-end of our guidance. Our first quarter performance was driven by strong demand from a variety of enterprise customers with use cases across many verticals that are embedding mission critical communications into their products and services. During the first quarter, our total revenue was $53.3 million, $1.8 million above the high-end of our guidance range. Total revenue was up 0.6% or 14% year-over-year excluding the $6.3 million one-time Verizon legal settlement reported in the first quarter of 2018. Within total revenue, CPaaS revenue was $45 million, up 16% year-over-year and $1 million above the high-end of our guidance range. Other revenue contributed the remaining $8.3 million of total revenue, which was $0.8 million above our implied guidance. Other revenue was $14.1 million in the same period last year and included the $6.3 million legal settlement. Our go-to-market investments continue to build momentum. We ended the first quarter with 1,351 active CPaaS customers, up 31% year-over-year. Sequentially, we achieved a record 121 customer net additions in the first quarter. Consistent with previous cohorts, we expect these newly onboarded customers to scale their platform usage over future periods as they become increasingly familiar with our platform, network and customer support. Our dollar-based net retention was 111% in the first quarter of 2019 as compared to 115% a year-ago. 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 first quarter 2019 non-GAAP gross profit, which excludes stock-based compensation and depreciation was $25.9…

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Richard David from Canaccord. Please proceed with your question.

Hey, thanks guys. It's D.J. on the line for Richard this evening. How are you doing?

Doing well, D.J. Thank you.

Great. I wanted to ask about the linearity of CPaaS revenues. It's kind of what's implied in the guide here. I mean if we look at first half to second half weighting, obviously, it sounds like you're expecting some pretty material acceleration. By my math, it looks like we could cross 30% CPaaS growth in Q4. Just help me to understand what's driving that? Is it just the success of the onboarding of customers that we're seeing now with those customers ramping over the course of the years or is that large customers, existing customers ramping? Just help me understand to unpack the drivers of that accelerating growth.

Hi, D.J. This is Jeff. Definitely you're seeing it right. The business is set up for a stronger second half of the year and there's really two primary reasons for that. One is based on our close collaboration with our existing enterprise customers who give us insight into their go forward usage growth on the platform. We see more opportunity there to grow those revenues and these relationships in the second half of the year. Secondly, we expect the strong go-to-market investments that we made in 2018 will increasingly provide revenue growth contribution from new customers as our larger sales force reaches full productivity in the second half of the year. So it's both of those factors that are setting up our year this way. And we like some of the early signals that we're seeing out of the sales force like the 121 net additions that we referenced in our prepared remarks.

Yes, got it. And then second question just in terms of mix. I mean, it sounds like maybe messaging - you called out a couple of deals, right? You had - A2P was called out as a new product in the press release and then you talked about the retail point of sale win, which was also a messaging win. Are you seeing more interest or traction there? And can you qualify - obviously, messaging is coming off of a smaller base. But is it growing as a percent of the business mix and what are the implications on margins there?

Hey D.J. this is David. So historically our voice revenues have been approximately 94%; messaging right now at around 6%. And we see the trajectories of those percentages being relatively consistent. So there is interest for sure given the fluidity of the messaging space, but we're having great success with voice simultaneous. So I don't think there'll be a substantial or material change to that mix.

Okay. Perfect. Maybe one last one if I could slip it in. Enterprise Connect, you guys had a much bigger presence this year. I think it was down to - attendee name badges were labeled Bandwidth. Any discernible yield from that in terms of pipeline? Or any other measure that you're tracking?

As you know, we focus a great deal on sales and marketing efficiency and the conversion off of our spend historically in terms of gross profit payback period. And we were pleased with Enterprise Connect historically before this year and so we invested accordingly. And we're proud of our marketing team and Noreen Allen, our Chief Marketing Officer, had a great experience. And we think that that investment will pay off over time.

Excellent. Thanks guys.

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

Hi. This is Stefan, dialing in for Meta. Could you talk about how you're prioritizing the interest you are getting from international? Do you have an obligation to meet an anchor customer first so will you be able to service all immediately?

Hey, Stefan. This is David. We have an obligation to our flagship anchor customer. However that singular obligation does not prevent us from serving other customer demand from existing relationships that we have in either the UK, EU or elsewhere. We announced that and don't have any material new update. But to the crux of your question, the fact that we're obligated to support the UK anchor tenant does not prevent us from fast follow or parallel opportunities.

Okay, thank you. One last question. As far as the net expansion rate contracting, is this just a matter of difficult compares or is there an explanation for the contraction?

Yes. Thanks for the question. This is Jeff. I'll take that one. We continue to expand our customer relationships and in turn, our platform usage continues to grow. But to your point, yes, existing customer revenue as reflected in the dollar-based net retention didn't grow as fast in the first quarter as compared to a year ago. And as you pointed out, our first quarter CPaaS revenue comparison to the prior year is challenging. And we outlined on our last call that our strong first quarter 2018 performance had a bunching up of customer growth that resulted in more than double the sequential CPaaS revenue growth we had realized in the previous eight quarters which had created a much harder comp for us this time. And so I think that's something that we'll overcome and that's implicit in our annual guidance. So last thing that I'll say on that is, it's very common absent this hard comp that there can be fluctuations in our business and that's very normal for a usage-based business. So the numbers go up a little bit or down, as they did in 2018, very normal for our business.

Thank you.

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

Great. Thanks for taking the question. Maybe just a follow-up on the dollar-based net retention rate. Jeff, I appreciate the further color there. How should we think about that going forward? Is that something then that you would expect as you kind of lap that tough comp to accelerate? Can it get back to more recent trends? Any further color on that front?

Hi, Will. You know and others know we don't specifically guide on dollar-based net retention. But implicitly, I think you can see that, we expect an acceleration in our CPaaS revenue growth rate in the second half of the year, and I think it's fair to assume that some of this growth will come from an improving dollar-based net retention as we overcome that hard comp that we incurred in the first quarter. And we still feel really good about the business. We like the relationships and how we're expanding them with our existing customers. And we have really good visibility and what that usage will be going forward. And so, would expect an uptick there as we go throughout the year.

Okay. And then, just maybe a comeback to international. I know, David, you had noted the investments that are being made in the UK and across Europe. How should we think about the cadence of revenue growth there? And was there any - I'm assuming there wasn't contribution in Q1. Will there be at least some contribution in Q2 or when will that start to kick in and become more meaningful?

Thanks, Will. We've guided specifically about international in 2019 being nominal in overall contribution relative to the goals that we've guided overall. And that's consistent and we don't have any change to that guidance. So we are executing well and on track for our plans but nothing new to change in terms of how we're guiding revenue impact in 2019 and then expect there to be more meaningful material growth in 2020 and beyond.

Okay. Great. Thank you.

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

Great. Thank you. Sorry about that. Trying again here. Jeff, can we start with your comment about having really good visibility. So I think it's interesting, when you guys guide, can you just talk a little bit about what the inputs are into that because most software companies as we have a big pipeline and we assume a close rate, and I get the sense that yours is different because your clients tell you what they need.

Hi, Pat. Yes, I think that's right. We do. Just sort of as I explained, we work very closely with our top customers and we know what their growth plans are and we incorporate that data into our forecasting process. Obviously, in addition to that, there's other inputs to our forecast like sales pipeline and understanding to the best of our ability, how newly onboarded customers will grow. And I think, thus far as a public company, we've had a pretty good track record of guiding there but also want to call out that as our larger sales force comes to fruition and full productivity this year, we'll have a richer mix of revenue and customers we don't know quite as well, and so that's something that we're assimilating into our process. And I think, like all things with more time, data and experience will nail that down as well, but just want to identify that risk factor within our process are different.

All right. Great, thanks. And then, Dave, how are the regulatory requirements, let's say, in the UK different than they are in the U.S. So my recollection is in the U.S. you and someone else basically had to go stand up in front of every public utility commission to be able to issue phone numbers. But how does that work in the UK? What do you need to do?

That's correct. Yes, the number authority regs are different in the UK compared to the U.S. because of the 50 states relative to Ofcom. There's also a very real difference in terms of tonality. But I would describe the UK process for acquiring numbers as less rigorous in terms of - in places you have to go stand tall in front of. But there are important differences about how you relate to BT and Vodafone and others and how Ofcom works with all of us over there when it comes to things like emergency service, 911 equivalent innovation. And so there's a very real relationship and dialogue that goes into the work that we're doing there. What we believe and have firm conviction on is that the path is clear for us to innovate with our largest customers in the U.S. as they enter those markets and do what they do so well creatively and the environment is healthy. And Ireland is different than the UK and the EU is then different again. But so far we have line of sight to the calendar that we've set for finishing our build out in the UK and EU by the end of this year to support the calling and the services that our large customers are asking for.

Okay, great. And then just a fine point on that. Is the EU - are there more regulatory hurdles in the EU than there are in the UK, or is the same or less?

EU is heavier. You've got French differences compared to German differences relative to privacy and how long you keep call data records or what fields you must validate for addresses to receive phone numbers. So there are heavier burdens, I would describe, in the EU than the UK.

Okay, great. Thank you.

Thank you, Pat.

We have reached the end of the question-and-answer session. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.