Greetings, and welcome to the Bandwidth Third Quarter 2019 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Sarah Walas. Please begin.

Thank you. Good afternoon, and welcome to Bandwidth's Third 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 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 fourth fiscal quarter of 2019 and the full year of 2019, and to the extent provided future periods. Our plans to execute on our growth strategy, our ability to maintain existing and acquire new customers and other statements regarding our plans and profits. 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 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 of market 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, Sarah, and please allow me to introduce you to everyone on our third quarter earnings call today. Sarah Walas joins Bandwidth to lead our Investor Relations efforts. She spent the last 7-plus years at Red Hat here in Raleigh in various finance roles, including Investor Relations Manager. Thank you for joining us, Sarah. We're all excited to be working with you. I'm pleased to report that our third quarter results exceeded our expectations on both the top and bottom lines. Our CPaaS revenue increased 24% year-over-year, driving total revenue in the quarter of $60.5 million. We saw continued momentum within our sales and marketing teams, adding 143 net CPaaS customers in the quarter, resulting in a record 39% increase from the prior year, and our ongoing traction with existing customers was demonstrated by our 116% dollar-based net retention rate. These results are evidence that organizations are choosing Bandwidth's software, network and amazing team to deliver the highest quality voice, messaging and emergency services for any application, website or device. Bandwidth has established a reputation as a reliable, scalable platform that successfully serves a diverse range of cloud-native organizations and hyperscaler providers who require a robust communications platform. We continue to gain recognition as a CPaaS provider of choice. In September, Bandwidth was named a leader in IDC's MarketScape Worldwide Cloud Communications Platform 2019 assessment. The primary focus of IDC's study was a platform's ability to facilitate the rapid development of real-time communication services that are both easy to create and are scalable. Bandwidth was identified as a pioneer in establishing the segment and an innovative leader among core CPaaS providers across attributes, which included platform capabilities, network infrastructure and ecosystem integration. Our team's dedication and commitment to serving our customers are key elements of our continued recognition and…

Thank you, David, and good afternoon, everyone. Our team delivered another strong performance in Q3. During the third quarter, our total revenue was $60.5 million, up 20% year-over-year and $1.6 million, above the high end of our guidance range. Within total revenue, CPaaS revenue was $51.5 million, up 24% year-over-year and more than $0.5 million above the high end of our guidance range. Other revenue contributed the remaining $9 million of total revenue which was $1 million above our implied guidance and in line with the same period last year. Here are some key metrics in the third quarter that drove these results. Our expanded go-to-market team continues to attract new customers to our platform. We ended the third quarter with 1,610 active CPaaS customers, up 39% year-over-year, setting another record percentage increase for our business. We expect these newly onboarded customers to scale their usage over future periods as they become increasingly familiar with our platform, network and customer support. Our dollar-based net retention rate was 116% in the third quarter of 2019 compared to 113% in the previous quarter and 117% 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 third quarter 2019 non-GAAP gross profit, which excludes stock-based compensation and depreciation, was $29.1 million, yielding a gross margin of 48% as compared with the $24.1 million and 48% gross margin we achieved in the third quarter of 2018. Third quarter 2019 adjusted EBITDA was a loss of $600,000 compared to $2.3 million of adjusted EBITDA for the same period last year. This change was expected and reflects the investments we're…

[Operator Instructions]. Our first question comes from the line of Richard Davis with Canaccord.

Quick question. So thank you for at least giving out the details of -- at least a broad spectrum about 2020. I mean, I know this is a hard question to ask or answer, but -- however, but -- so what extent -- what degree of confidence, and I know this is a weird thing, but it's like, on a scale of 1 to 10, like are you -- like, is it like we're setting the high jump bar and would like to level the pads or do you have to clear a 7-foot high jump bar? How do you -- I'm just trying to -- because I know this is a question we'll get is like, well, how confident are you guys, and then we can obviously titrate it ourselves on that? But just help us understand how this plays out on kind of confidence level?

Thanks, Richard. This is David. So our forecast for Q4 was based on estimates. Our understanding and confidence about $4 million that we recapture in Q1 and $2 million in Q2, and our 2020 guide is based on evidence. So this handful of new strategic customers that represent characteristics and attributes that are new to us are signed, and they're not just signed, in several cases, they're integrated. And we have revenue that is flowing. So instead of estimates, we're dealing with evidence, and I like your analogy, it's probably somewhere between the blue pad and the high bar, but we are extremely confident, not just about this revenue only being a timing issue, but about achieving the 2020 number that we put out there.

And then just real quickly. The delay in deployment was that -- did that upset your customers at all, or were they good with that? Or is there any friction with regard to that? And then I'll turn it over to the next person.

No friction whatsoever. Our team moves extremely quickly and is agile. So the timetables that we set, we called a tune that was pretty quick. Not understanding that these customers who have the largest installed customer bases that we've ever ported over to our platform simultaneously move slower than we do.

Our next question comes from the line of Mark Murphy with JPMorgan.

What type of messaging are you receiving from some of the higher growth software and Internet customers, the companies like Zoom and RingCentral, Slack, Google, Microsoft, Amazon, et cetera? Do you feel like they're leaning in and using your network more aggressively? Or are any of them indicating that they're less confident or would be pulling back at all?

Mark, they're growing very well, and our [indiscernible] 116 is the evidence of that. But overall, both UCaaS and the business VoIP segment is growing well.

Okay. Is there any way to just help us verify and size up the value of that new business you booked in Q3? I think you're talking about half a dozen strategic customers who are signing the longer contracts? In other words, can you comment on maybe how bookings grew year-over-year? Or is there something that's visible to you in a backlog trend or anything else you can speak to?

So Mark, this is Jeff. It's a usage-based revenue business, so you're not going to see it in a booking or deferred revenue number. That being said, we've quantified that the timing issue is a $6 million issue of which we have a high degree of confidence that we will realize $4 million of that in first quarter of 2020 and $2 million in second quarter of 2020. And that confidence comes from the progression we've made on the integration over the last 90 days and what we're seeing with these customers as well as what David attributed to, these are signed agreements with existing volumes today and we need to get through a integration and testing period. That's where we're at now. And once you get through that, that's when the volumes come in.

And I would only add, Mark, to answer your question as well, that the large Fortune 500 customer that we talked about, we did describe in 2020 is becoming among our very largest customers.

Okay. So okay. Understanding it's not going to be -- you can't speak to it from a standpoint of bookings or deferred revenue. Is that -- I mean, do you feel as though you signed a much higher volume of kind of new potential business in Q3 than you did in Q3 a year ago?

By far.

By far, okay. Then, Jeff, as well, I think we already had CPaaS revenue growing 22% next year. And so with that coming down a bit on the base year of '19, I guess I'm trying to understand, if the deployments are slipping from 2019 to 2020, why would that maybe not be just growing a bit faster there in the out year?

So Mark, this is David. I'll go first and then hand it over to Jeff. It's a logical intuitive question. We've had a timing issue in the fourth quarter of '19, pushed to '20. We're guiding 22% in 2020 out of principle. We're a team that values meeting and exceeding expectations as we have for our first 9 straight quarters as a public company. And we're also a team that is operating against the principle of returning to profitability in 2021. And that remains something we've talked about from day 1 as a team and a company and we are committed to that as the primary guiding principle leading us into 2021. And so this guide reflects both a pretty keen eye on the top and bottom lines, and the fact that we value very highly managing expectations across all the constituents we -- constituencies that we serve, including investors, both those principles inform how we approach 2020. But let me ask Jeff to also add to that.

Thanks, David. What I'm going to add is that we always endeavor to provide you the best forecast at the time it's provided, and we definitely had a learning here in this quarter and we own that. Short term, this is a lot of pain. Long term, I think this is a fantastic thing for the business because we have large customers who are bringing high volumes and stronger ways of being single-sourced and primary provider terms in contracts with longer-term lengths, trying to integrate and turn up multiple products at once. And I think that's a favorable thing for our business.

Our next question is coming from the line of Will Power with Robert W. Baird & Co.

Maybe first, just a clarification. So thanks for the color on the numbers on the different impacts here. I guess, as you talk about the $4 million moved into Q1, $2 million into Q2 of next year. Is the majority of that from the Fortune 500 company? And if so, maybe any other color on time lines for the other cohort of like companies that you're expecting to ramp, just trying to get comfort that those companies are all on track as well.

Sure, Will. Yes. So we haven't sized exactly that particular Fortune 500 customer. What I can tell you is that related to the timing issue, that was the biggest factor in the annual guidance revision. And given that it was an existing customer, it will impact our dollar-based net retention going forward in a positive way. But as far as the rest of the business outside these new strategics who are sort of behaving in a different way and it's very favorable once again, long term. Our new customer metrics remain strong, and we feel really good about the business and a lot of things that we accomplished in the third quarter.

So let me -- maybe just the second question, and I guess, maybe you partly answered it, given its existing customers that will have impact on your net retention rate, I guess, in Q4. I know one of the elements you expected to help with the Q4 ramp was growing usage among your existing customers, I think, broadly. So what are you seeing across the base generally in terms of retention rate? And how do we think about the 116 number into Q4, will that now decline because of that big customer? Or what's kind of the trajectory there?

It will. So the way I would think about it, Will, is the midpoint of our guidance for fourth quarter CPaaS revenue was 15%. I think you can take a look at our trend on new logo growth, which was about 8% in third quarter, and you can kind of back into what the dollar-based net retention will be in fourth quarter and get to a number there. And it's certainly going to be lower than it was in third quarter. To explain some of that, fourth quarters are always challenging for us because we have some headwinds, and it relates being, once again, in a usage-based revenue business. We're driven by effective business days and the fact that we have more holidays in the fourth quarter, there's always on a sequential basis, more pressure on fourth quarter. Now in previous years, this has been masked by other favorable factors driving higher usage, like last year, where we had election year-related platform usage as well as another large customer that drove higher usage that mask this headwind from the effective business days. We don't see that this year happening, and that's why the numbers look like they do.

Okay. And maybe just one quick additional follow up. Just on the new customers that are ramping, is that -- and given some of the timing delays, is that requiring more investment from you all? Should we expect commensurate increase in cost through the first half of next year to kind of support those efforts?

No. This is all part of our plan. Again, we knew these customers and these opportunities have been identified. It's really just the onboarding that's been delayed. So I wouldn't make any changes along that way. This is really sort of, in many ways, normal course, maybe just a confluence of more larger opportunities at one time and behaving in a way where they want to integrate with us more and are trusting our capabilities more than ever.

[Operator Instructions]. Our next question comes from the line of Andrew King with Dougherty & Co.

Just two quick ones. First, with international, can you just give us a little bit more color into when you see those revenues starting to ramp and come into play. And then also, since you had mentioned that you're seeing a longer process of onboarding from the time of closing the sale. About how long would you say you're now seeing these new logos take for revenue recognition?

You bet. So our international deployment is on track, and our 2020 guide includes our international revenue forecast for the year. It's revenue that will come throughout 2020, but it's captured within our first 2020 view that we gave tonight. In response to your second question, these large customers are different from those who are in our base averaging 60 to 90 days to onboard, integrate and begin generating recognizable revenue. And we are including the lessons learned to forecast these as up to 180 days to generate recognizable revenue, given the breadth of the platform that they embrace right out of the gate from their large existing customer bases.

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

Great. Maybe just focusing on for a second, that the new international or kind of bogey account on international is not part of the six strategic accounts? Or is it -- and just how we should expect international revenue to kind of ramp throughout the year? And then maybe the second question. You guys added a number of customers throughout the quarter. I know you've spent a lot of time on the strategic and kind of larger customers, but just what you're seeing in the makeup or kind of sales effectiveness around just kind of the smaller customer base.

Meta, the international customer you mentioned is within this cohort that we described as our new category. And the international revenue throughout 2020, we haven't talked about sequencing by quarter how that revenue comes in. What is consistent and that you'll remember is how we are following demand in those markets where we are authorized to do business. And that demand is from our existing customers. So those jurisdictions come online, and we are working with our existing customers as the initial revenue contributors for international, but haven't provided more detail about the quarter-over-quarter slope of that revenue throughout 2020.

And then on the kind of just the normal course, everyday customers that you're bringing on, just what you're seeing and maybe as far as ARPUs versus expected or sales effectiveness versus expected?

Yes, we've set a new record for new logos coming onboard in Q3, and it's a tribute to the sales leadership of our greatly expanded sales teams and our marketing team, and those 2 teams are as efficient as we've ever seen in the past. And so we've maintained that very, very efficient spend on marketing and sales to generate those logos. And I think that's important because returning to profitability depends upon that continued efficiency. As to the ARPU, we are tracking ARPU across the base, including this new cohort of customers. There's no fundamental change, either with the base of customers that we have today or what we anticipate as we forecast 2020.

We have reached the end of our question-and-answer session. Allow me to hand the floor back over for closing remarks.

Thank you, and thanks to everyone on the call. Very proud of the entire team and looking forward to closing out this year strong and to 2020 and beyond. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.