Greetings, and welcome to the Bandwidth Inc. First Quarter 2020 Earnings Results Call. [Operator Instructions] 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 Ms. Sarah Walas, Vice President of Investor Relations for Bandwidth. Thank you. You may begin.

Thank you. Good afternoon, and welcome to Bandwidth's First Quarter 2020 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 second fiscal quarter and full year of 2020 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 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 21, 2020 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. 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. Finally, in the interest of transparency in these unprecedented times within our prepared remarks, we have estimated the revenue impact of COVID-19 for this quarter, and for our second quarter outlook, which therefore affects our 2020 outlook, although we have not estimated any impact for our third or fourth quarters. Our methodology attributes significantly elevated platform usage, above and beyond expected thresholds to quantify current and estimate any future financial impacts as a result of COVID-19. Accordingly, identifying any potential impacts in future periods may become challenging as any increased residual usage and the corresponding revenue impact will be inherent to our business and indistinguishable. Management makes no assurances that we will make further COVID-19 distinctions in the future. With that,, let me turn the call over to David.

As Sarah said, we are living in unprecedented times. I want to begin by thanking God for comforting those, who are grieving lost loved ones for giving strength to those who are serving and to ask him to bestow wisdom upon our elected officials and for a safe and rapid return to work and school for the tens of millions who have lost their semesters and jobs. We have been humbled by the importance of our mission to deliver the power to communicate during this season of great loss and sacrifice. We are making sure that health care systems, governments, businesses, teachers and students remain connected with those they need and serve. Our team has been working around the clock and from locations around the country to serve our customers 24 hours each day seven days a week. Our enterprise customers play a pivotal role in our communities and increasingly rely on our software and network platform to both develop and deliver robust voice calling, audio conferencing, text messaging and emergency 911 services, whether they are working remotely or in the office. Our robust platform and nationwide network scaled in days to meet the 30% surge in concurrent call demand caused by so many Americans working from home. Owning and operating our own nationwide All-IP Voice Network proved to be critical. Our technology teams were able to quickly augment capacity and optimize existing network assets to support millions of audio calls into video conferences, voice conference calls, text messages and individual conversations and all without any interruption of any kind. The agility required to add capacity to our network in real-time during unprecedented volume increases, was only possible by owning and operating our network. We benefit from visibility into all network traffic, ensuring the utmost reliability and quality, while allowing…

Thank you, David and good afternoon to everyone on the call. Our business is off to a very strong start in 2020 and we exceeded the high end of our first quarter guidance on both top and bottom lines. During the first quarter, our total revenue was $68.5 million, up 29% year-over-year and $4.8 million above the high end of our guidance range. Within total revenue, first quarter 2020 CPaaS revenue was $59.1 million, up 31% year-over-year and $3.4 million above the high end of our guidance range. As David touched on earlier, the outperformance in CPaaS revenue was driven by two key factors; first, broad-based growth across all of our products as our customers grow their businesses and innovate on our platform. The fundamental strength in our business drove approximately $1.6 million of CPaaS revenue outperformance in the quarter. This broad-based growth includes the ongoing momentum from the previously discussed strategic customer cohort of communication service providers whose migration progress remains on track. The second factor driving our outperformance was the increased usage driven by COVID-19-related remote work requirements resulting in an estimated $1.8 million of CPaaS revenue in the first quarter. Other revenue contributed the remaining $9.4 million of total revenue, which was $1.4 million above our implied guidance and up 13% from the same period last year. The primary driver of the other revenue outperformance was indirect revenue and in particular, the newly implemented carrier A2P messaging surcharges. Our team continues to attract new customers to our platform. We ended the quarter with 1,808 CPaaS customers, adding 80 net new active customers in the quarter. Our go-to-market team continues to exhibit strong sales momentum resulting in customer gross additions in line with the last several quarters. However, we did experience a moderate uptick in customer churn in…

[Operator Instructions] Our first question comes from the line of Alex Kurtz with KeyBanc Capital Markets. Please proceed with your question.

Thanks everyone. Can you hear me okay?

You sound great, Alex. Thanks.

Thanks, David. And everyone at Bandwidth and your families, I hope everyone is safe and healthy. I appreciate the message upfront. I'm just going to keep my question -- I'll just ask one question, just be respectful for everyone else on the call here. Great outcome from work from home, I guess, to both of you. How did you try to model the impact the positive benefits here in the retention rate and the Q2 guide coming from this work from home? Like, how do you kind of work through that, because obviously that's coming from indirect customers of your UCaaS platforms that you work with? So just sort of take us through how you put that framework together?

Be glad to, Alex. This is Jeff. So we clearly have good indicators from first quarter in the strength of the business. Obviously, those results were amplified by COVID-19 due to the work from home dynamic that you talked about as people were sheltering in place. As we looked at 2Q, that heightened demand we continued to see in April and, obviously, have good visibility at the end of the month with that. But our expectation is that that will gradually dissipate throughout the second quarter in a cadence consistent with current governing guidelines to reopen economic sectors and move away from the shelter-in-place measures. And so we have and we quantified in the prepared remarks the amount for the first half of the year to be as clear and transparent as we could and also noted that we didn't put anything in the second half of the year. We think the economic uncertainty is too great at this point and we'd like to take in more data in future days, weeks and months before we relook at the second half of the year.

Okay. Thank you.

Thank you. Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question.

Yes. Thank you. And I will add my congrats. David, I'm interested, if you set aside this fantastic strength that you saw in the quarter from existing customers, presumably all those customers like Zoom and Slack and RingCentral. What are the current dynamics in terms of the new logo acquisition, not for the smaller customers, but for the larger and more complex projects? And are you finding that those companies will be able to kind of avoid the distractions and engage in those kinds of projects in this environment?

Hey, Mark. Thank you for your question. Those conversations that are well along in the sales funnel continue to progress as expected. What we're anxious about are the earlier-stage conversations with the very largest Fortune 500 kinds of customers that you're talking about. And I think it's too early to yet know, if there will be an urgency toward value and features and capabilities that we offer, or if the macro will delay decision making. It hasn't delayed the top of the sales funnel and those large enterprise opportunities that are well along are trending exactly as we expect.

Okay, great. And then, Jeff, I'm wondering are you able to say how many customers contributed 10% of revenue or more during Q1, if there were any?

Yes, there weren't any, Mark. Yes, there weren’t any. We still do not have any 10% of total revenue customers. So we remain pretty well diversified.

Okay. Great to hear. And then the final question I had is just really how many customers have shown interest to you in using your network, not only in North America, but also overseas?

The existing customer funnel we've talked about at length as among our Internet giants, being about a dozen or so that consistently have asked us over the years and more recently collaborated with us on joining our international infrastructure. We did announce, Mark, in our earnings report, we had two new customers that are on board that joined this quarter. But we have focused our attention and intent on the existing customers. And of those the very largest with whom we work well already in North America. So no change in the strategy for international customers.

Thank you very much.

Thank you, Mark.

Thank you. Our next question comes from the line of Rich Valera with Needham & Company. Please proceed with your question.

Thank you. Let me add my congratulations to the strong performance in the quarter. Just a quick follow-up on the international customers. I thought you said in your prepared remarks that the two you added were for messaging. Just wanted to clarify, if that was messaging and not voice at this point? So that was the first question. And then I had one follow-up.

Rich, that's correct.

Got it. And can you characterize the discussions on the voice front? And any thoughts there in terms of potential additions on -- in terms of voice international customers?

Voice includes emergency service, which here is 911 and there are different variations in the EU where we have footprint. But we haven't announced anything more broadly or involved about voice recently. But stay tuned.

Got it. And then, Jeff, just a quick one for you on margins. The A2P surcharges should be margin dilutive. And I'm guessing they were. Obviously, you offset that with a very strong performance. Can you give us a sense of just how much of a margin dilutive. And I'm guessing they were. Obviously, you offset that with a very strong performance. Can you give us a sense of just how much of a margin dilution headwind they were in the quarter?

Be glad to Rich. So just starting out with some of the good news, yes, this was our best gross margin performance in the quarter rounding to 51% gross margin, very proud of our team for continuing to expand gross margins. I think it's especially impressive due to what you highlight and that is we encountered this quarter as Verizon and SAP moved forward with SMS, A2P surcharges and those did serve to compress those results, again which make it even more compressed -- or I mean more impressive rather. In terms of quantification on total margin, it was about 0.5% compression related to A2P. And you can see in the other margins, if you look through the press release that there was about a 4% compression related to that segment specifically.

Great. Thank you for all the disclosure and clarity on how you're thinking about the COVID numbers and congratulations again guys.

Thank you, Rich.

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

Okay. Great. Yes, I guess a couple of questions for you. I guess I wonder Jeff, if you could provide perhaps any further I don't know qualitative or quantitative thoughts on how you're thinking about second half economic impacts? And maybe just thinking through any further numbers around what you're seeing on the bad debt front customer payment issues that you alluded to at least minimal thus far but how that's maybe trending through April? And any kind of thoughts around your exposure to the broader travel hospitality and retail industries in particular?

Glad to Will. So I'd start by saying there's probably been never a more challenging time for us to predict a back half of the year due to all the economic uncertainty. That being said, you can see we had a lot of success in the first quarter and second quarter. We've rolled the strength from first quarter results and in our guide implicitly in second quarter. So that's flowing into the back half of the year. But we've taken as we said in our prepared remarks, a cautious approach to do in the second half, because there's a lot of variables that I think we can all appreciate that are outside of our control that could influence the economy and our customers. So that's how we got to sort of second half results. In terms of bad debt, David highlighted that we are part of Keep America Connected pledge, where we're promising not to disconnect or terminate service with small business customers and we'll waive any late fees there. We have had a number of customers take advantage of that, but it does not amount to a material number within our bad debt or accounts receivable. And then third, I think was exposure related to hospitality and those things. Our business is not built up that way. Hospitality travel ride hailing what have you we have very limited if any exposure to there. That being said, we do have some consumer-oriented businesses that would include also job search platforms, point-of-sale solutions that appear to have some negative impact in there. But I would characterize these as relatively small pockets of weakness. And they are far overshadowed by the benefits of other usage that we've seen and as demonstrated in the first quarter results.

Okay. And if I can slip in a second one. You've got a nice balance of cash on the books, which is needless to say great in this environment, but probably more than you have to have. So I wonder just how you're thinking strategically about the use of that cash or the things you're already looking at? Is this about maybe creating some additional M&A opportunities, or do you await to get through this environment first?

Yes, I think Will that right now we're all watching the fluidity and the uncertainty and hoping that things coalesce around a bright future. And a recovery that's not shaped like an L. And we're very grateful that we have the cash balance that we do. It represents optionality. And it's something that -- we don't think there's any urgency it's not burning a hole in our pocket. We're team over the course of 20 years, it's done one acquisition. So primarily builders, but we are opportunistic and we'll be looking for the right opportunity if there is yield and strategic combination with our core strategy. But there's no urgency and we're again very fortunate and grateful that we have in our balance sheet.

Great. Thank you all.

Thank you, Will.

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

Great. Thank you. And let me add my congratulations and best wishes to you and your loved ones.

Thank you, Pat.

I have two questions one for Jeff and one for Dave. So for Jeff, so if I heard you right, net expansion went from 113% last quarter to 126% this quarter and 4% of that came from COVID-19. What drove the other 9%?

So most of that would come from just the fundamental strength in the business and a number of customers that are doing very well and expanding their platform usage. The other thing that I would point you to is if you look at that and you take the total growth and then subtract the dollar-based net retention percentage, you'll see that our new logo growth went down a little bit this quarter. It's in line with a year ago, but it's down sequentially in the quarter. And that had to do with a handful of customers that are sizable that hit their 1-year anniversary and came out of the new logo calc and into existing customers and part of the dollar-based net retention. So it's really that 1-2 punch sort of that produced the great result for us even if you do normalize for the COVID impact.

Okay. Great, thank you. And then Dave when I do one of these video meetings, when I launched it at the beginning I get three choices; number one, do I want to use computer audio? Number two, do I want to dial this 800 number? Number three, do I want the vendor to call me. My understanding is number 2 and number 3 is, what you guys would power. What I'm curious about is, in a rough ballpark how often are people picking number 2 or number 3?

So if you've been on these conference calls you are seeing what we are seeing. And as users of these conferences what I don't have in our log of calls is how many video participants there were on any one of the conferences that we supported or powered. So we've got very clear vision into the audio component. So my answer is actually more informed by our own business experience than it is any particular log file. Historically what we've seen is when you have a conference of five people or more someone's in the car someone's outside of a place with video and they're calling in. I don't think there's any significant change to that ratio through this season. In fact there's been some video fatigue and perhaps folks are choosing audio-only more. What we did see initially was a spike, but then a significant continued high use from the work from home dynamic. And so what hasn't happened Pat is large abandonment of the audio channels through this video season even though WiFi is obviously supporting a lot of video. And so it remains a very robust and healthy dynamic for us in that customer base.

Great. I mean that's – personally, I can't take any more Zooms. It's seven days at the most. I just starting to just dial in more. I'm going back to old school but that's really helpful.

Well, thank you.

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

Great. I know you made some investments last year to kind of improve the margins of conferencing. And I just wanted to get a sense of are the conferencing lines in general margin accretive or dilutive? Understand that you're getting a lot more usage across the platform in general which is helping margins. And then maybe second question on the international side with all of that buildout activity kind of complete I think it was but just were there any restrictions to kind of any buildout that you wanted to do in the quarter just based on kind of not being able to access locations? Thanks.

Meta, this is Jeff. I'll take the first one and then let David take the question on international. So yes, we have over the last year-plus been investing heavily in our toll-free platform and it's paid dividends for us. And we've – it's been part of our margin expansion throughout that time as we're going as we're now in a yield period and getting benefit from that investment. Overall, toll-free as one of our voice products is kind of in line with our general averages on voice. We've said before today messaging is a little bit higher than voice on this. But toll-free is great business both top line and gross margin for us.

And on your -- did you have a follow-up on that Meta before I answer your international question?

No that's helpful. That's helpful.

You bet. You're right. We built out the physical infrastructure in London and Frankfurt that supports the voice entry into the U.K. and the EU, but there's no question that the lockdowns and travel restrictions prevent us from doing many of the meetings with regulators and other participating carriers with whom we interconnect and business development. There's no question that the lack of travel is an impact and the inability to be face-to-face at the cadence that we're used to. We factored that into how we think about the remainder of this year in our guidance. But candidly that it has had an impact.

Thanks and congrats.

Thank you, Meta.

Our final question today comes from the line of Catharine Trebnick with Dougherty & Company.

Okay, thank you for taking the question and congratulations on a very good quarter. And likewise, I hope you're all healthy too. So a quick one. On international granted that you just discussed some travel restrictions holding things up, is there any other insight you can give us or parse for us on where you expect that growth to be like for this quarter? Can you give us a split of domestic versus international? Did you have international revenue this quarter? And when do you really let's just say you didn't have the travel restrictions when would you expect it to pace in? And then with it once you remove do you think it would be a hockey stick, or will it take a longer time?

Catharine, this is Jeff. I'll take a crack at that. So today international is not a large part of our business. It's not something that we break out explicitly. Obviously in our Q you'll be able to see that revenue that will be based on where customers are billed. But I would characterize as things generally tracking to planned and we've included the international contribution in our overall guidance and just noting that we did raise guidance in this quarter based on the strong performance for Q1 and what we see coming up.

All right. Thank you. I will take the rest.

Thank you, Catharine.

Thank you ladies and gentlemen. This concludes our Q&A session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.