Welcome to the Bandwidth Second Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Sarah Walas, Vice President of Investor Relations for opening remarks. Please go ahead.

Thank you. Good afternoon, and welcome to Bandwidth's second quarter 2021 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, our CEO; and Jeff Hoffman, our CFO; and it is my pleasure to also welcome Daryl Raiford, who will become our new CFO later this month. 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 third fiscal quarter and full year of 2021 and to the extent provided future period as well. 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 latest 10-K filing 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 investors.bandwidth.com. With that, let me turn the call over to David.

Thank you, Sarah. And thank you to everyone, joining our call this afternoon. I am delighted to share some of the successes of our last quarter. Please let me start by thanking God and for him giving this team, a huge opportunity and healthy ambition. Our mission is to develop and deliver the power to communicate, and we are motivated to serve customers together day in and day out. And these days are unprecedented. The world is undergoing a profound technological change in how we communicate and Bandwidth is at the center of it. No company has our unique combination of assets to meet emerging and dynamic communications needs, a powerful software platform integrated with a global communications network, deep industry expertise, long-standing embedded customer relationships, and a culture of exceptional service and innovation. We reflect on the quarter with gratitude for solid growth and deepening customer relationships. Thank you to all the Bandmates around the world, whose hard work drives our success and to all our customers for trusting us with your mission-critical communications needs. The continued successful execution of our long-term strategy is evident in the 57% year-over-year increase in CPaaS revenue, fueled by broad-based demand across all our services and expanded global footprint. This success is a testament to the power of Bandwidth's global offering. We've long understood the enormous need for a CPaaS platform that offers flexibility, reliability and scale globally. That is what drove us to acquire Voxbone in late 2020, a team that had spent 15 years meticulously building global coverage, jurisdiction by jurisdiction. And our world tour began not a moment too soon. In the midst of unprecedented digital transformation, global business communications are moving to the cloud. We expect this trend will continue long after the world reopens. This is, because enterprises…

Thank you, David. I'm thrilled to be a part of the band. I've been on board for just over three weeks and my enthusiasm about the opportunity ahead of us has only grown. The passion for serving our customers is evident in every interaction I've had across the entire organization from sales to IT to our interns. Jeff, has built a highly capable world-class finance organization and I'm very much enjoying working with the team. I chose to join the Band because of our unique position in the industry to power the generational communication shift to the cloud. Bandwidth's strong history of execution, market leadership, ability to innovate and serve customers around the world were all compelling in my decision to join. And the whole person culture and the opportunity to work alongside such a strong collaborative team was just too good to pass up. I look forward to meeting each of you at upcoming investor events. And with that, I'll turn it over to Jeff to walk through our financial performance.

Thanks, Daryl and good afternoon everyone. Our team delivered another strong performance in the quarter with both top and bottom line results exceeding expectations. Second quarter total revenue was $121 million up 57% year-over-year. Within total revenue, CPaaS revenue was $105 million also up 57% year-over-year and more than $3 million higher than the midpoint of our guidance. Our overperformance was driven by continued broad-based growth as enterprise customers are increasingly using our global platform to meet their communication needs. Other revenue contributed the remaining $16 million of total revenue, which is up 61% from the same period a year ago and includes A2P messaging surcharges of approximately $6 million in the quarter. Voxbone contributed approximately $26 million to CPaaS revenue and $1 million to other revenue in the quarter. Excluding Voxbone Bandwidth's stand-alone CPaaS revenue growth was 18% year-over-year and Bandwidth's stand-alone total revenue grew 22% year-over-year. As a reminder, in the second quarter of last year, we benefited from existing customers increased usage driven by COVID-related remote work requirements which peaked in April of 2020. At that time we estimated, the revenue impact in the second quarter of 2020 to be in the range of $4.5 million to $5 million. Normalizing for this COVID impact, Bandwidth's second quarter 2021 standalone CPaaS revenue growth would have been 27% year-over-year and Bandwidth's standalone total revenue would have been 30% year-over-year. Our dollar-based net retention rate was 114% in the period and this metric was also confronted by the COVID challenging comparison from a year ago. If we normalize for the one-time COVID impact from last year, our second quarter dollar-based net retention rate would have been 123%. As a reminder, Voxbone won't impact the dollar-based net retention rate until we lap the anniversary of the acquisition in the fourth quarter…

Thank you. [Operator Instructions]

Bhavan?

Sorry, I didn't hear. Can you hear me okay?

We sure can. Hey Bhavan, you've got David and Jeff.

And Daryl. Hi Daryl welcome. And Jeff my friend I'm sure we'll run into each other again. That's been a pleasure. Congrats on the numbers guys. Nice job as usual. I'll dive right in. It was really good to lay out the tailwinds that we saw in the usage as a result of COVID which played out in Q2 last year. Obviously, those have moderated. But do you think through what a more normalized environment looks like balanced with some of the delta things, but I'd love to understand what you're seeing from the customer, what you're seeing from usage? And then what would normalized sort of environment look like going forward? Where do you sort of see steady-state usage netting out relative to pre-COVID levels? I think maybe we'll start there.

Bhavan, this is David. I'll start and then invite Jeff to add on. We're not sure is the short answer. I think that we are excited about the broad-based growth across products and across customers and across segments. But as you know, we are in an uncertain time and all of us are looking forward into the future and hoping that the economy continues to accelerate, but it would be imprudent if we weren't cautious in our approach to how we think about the future. And that's our general mindset.

I think that's right. I don't think I have much to add there Bhavan, but we're monitoring it just like the rest of the world.

Yeah. Fair enough, it really is not easy. And then I wanted to touch a little bit on Duet with RingCentral a little bit here. You've got sort of this concept of sort of bring your own provider on this partnership that's playing out. And David, I'd like to think maybe five years out and what you think that looks like and sort of this concept of bringing on provider to bring some of the back piece. Is that sort of more efficient way to do this? Do you think that's how the business plays out and have big partnerships to drive that, or do you think you're still much more tied to specific applications with the customer, if you see what I'm trying to get to?

It's a good question, Bhavan. 85% of UCaaS seats remain on-prem and the largest enterprises are lagging in adopting a cloud approach. So a partner like RingCentral who have a terrific suite of bundled solutions with messaging, video and phone from $19 to $49 a month are ideal down market. As you get into large enterprise, unbundling becomes vital because of the myriad different complexities from call centers to UCaaS solutions, there's a need at the enterprise level for more flexibility. And so this go-to-market brings the best-of-breed, UCaaS, user interface and user experience and it brings what we do globally. And so that combination I think will yield over time to your question lots more adoption among the very largest enterprises. And so we're delighted about our Duet partnership with RingCentral.

Great. Helpful. Thank you guys. Thanks for taking my question. Nice job.

Thanks, Bhavan.

Thanks.

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

This is Charlie Erlikh on for Will. Thanks for taking the question. I just wanted to start with the full year CPaaS revenue guide. Seems to imply if I'm doing the numbers correctly that the Q4 CPaaS revenues may be implied to be a little bit in terms of the growth over Q3, the sequential growth a little bit lower than seasonally normal. Is that just conservatism, or is there something to call out there?

Hey, Charlie, this is Jeff. Yeah. So in terms of Q4 you're right. That is, we do have some seasonality in that quarter as there's less effective business days. But what I think is driving what you're looking at in the fourth quarter is remember we had the US presidential election last year and there was a tremendous amount of political messaging traffic in that volume making it for a very tough year-over-year compare. That number in the fourth quarter last year that we called out was $8 million of political messaging revenue in the quarter if that helps you normalize.

Yeah, that's helpful. Thanks, Jeff. And then also it sounds like a lot of deal momentum. And I just wanted to ask about what you're hearing from customers as you're talking to them and going through renewal cycles. Are they more interested in lengthening their contract cycles than normal, or -- and maybe on the flip side are customers still sometimes asking for pricing concessions. I'd just love to get more detail on how those conversations are going as renewals are coming up?

Two out of the five individual cases that we announced in the quarter were indeed with existing customers that are expanding their relationship with us globally either cross-selling into many new countries where they had other partners in the past or cross-selling from legacy Voxbone's base into the United States. And so those two large in one case over a decade old customer are indeed going all in with Bandwidth globally. And we're excited about that. Even existing partners like RingCentral are able to add to the global footprint they already offered through the relationship that we announced. So the function of global footprint yields partnership and expansion and we're excited about that because of the second part of your question, which was focused on, are there pricing headwinds during these conversations? And the short answer is no. When I say partnership as a result of footprint, you're collaborating on doing what we do well, while our customers are able to focus on what they do best. And that conversation yields new addressable markets for both. And it's a creative dialogue and it's not one that results in contraction in pricing.

Sounds great. All right. Thanks guys. Congrats on the result.

Sure.

And the next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question.

Great. Hey everybody David, Jeff, and welcome Daryl. This is Pinjalim on behalf of Mark if you have not understood from my extent I guess. But David I wanted to ask you about in general it seems like I would imagine that Voxbone is working pretty well. So is it fair to say the new companies, which might have been hesitant large enterprises, which might be hesitant before because of your global footprint are now coming to you and that is acting as a big differentiation for you in the market?

That would be highly accurate Pinjalim.

Okay. The other question I had David was -- there has been some moving pieces in the industry, of course, around toll-free messaging and some acquisitions. I know messaging is not a big part of your business, but how are you reading kind of tea leaves with respect to Zipwhip's acquisition of Twilio -- Twilio's acquisition of Zipwhip I should say.

We are focused on providing messaging for enterprise customers who are asking for it domestically. We've also done it internationally, but an enterprise focus for messaging is vital to providing really some of the last puzzle pieces needed for the entire picture of the cloud to become clear for that enterprise. So it's a vital and essential component to what we do in addition to our robust global voice platform and we'll continue to serve well with messaging and that includes as you asked toll-free messaging. And we have a long-standing very healthy robust relationship in a bilateral way with Zipwhip that we believe is both durable and advantageous to our competitive position in the market. And so I think the tea leaves have steeped long enough to say that it's a good cup for bandwidth.

Okay, understood. And lastly I guess the Azure Communication Services, what have you seen so far? Any update on the traction? And do you see that channel becoming pretty meaningful for you over time?

We remain thrilled with the partnership that we enjoy with Microsoft. Their approach to the enterprise is both massive in scale and unique and creative and we are excited about how they've taken teams to market and believe Azure Communication services will follow that great lead.

Understood. Thank you.

And the next question comes from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.

Great. Thanks for taking my question. I guess, Jeff first question for you is great to see some of the traction with Voxbone. You highlighted some of the existing customers now going more global. Any update on just with your global platform now the pipeline for new customers maybe that you're -- that you could onboard with this opportunity?

Hey Mike, this is Jeff. Yeah, I think we were really pleased in the quarter. We had 92 net new logos. Obviously that number can fluctuate from quarter-to-quarter. But there's no doubt that the global footprint has really been a differentiator and it's initiated a lot of conversations on our sales desk and we're just thrilled to serve these multinational companies across the globe.

Great. Thanks. And Jeff best wishes on your next steps. Maybe one more question for you. Could you just walk us through a little bit of the puts and takes on your implied second half guidance now that you've given Q3 and full year. But maybe just help us remember what the COVID benefit was in Q3 and Q4 of last year along with the political benefit?

Sure. Glad to. So let me start with full year and then we'll talk about the back half. So what we're talking about Mike here, some of the tailwinds that we had that amplified our results last year. So COVID for the year was worth about $11 million of revenue, of which $4.5 million of that was in the back half of the year. And then political messaging, that was more back weighted. So that was $12 million of benefit and it was -- $8 million of which I said earlier on this call, in the fourth quarter, and the balance of that in third quarter. In terms of the puts and takes, our guidance is rooted in a deep understanding of our customers' growth. Every period we scrub that hard. We do quarterly business reviews with our key customers to know what's coming up next and we incorporate that all into our guidance. So those are the things that really sort of move it for us. Sometimes it's up, sometimes it's a little bit back, but that's how I describe it.

Great. Thanks. And last question for me, David. Just -- thanks for some of the color on CCaaS ones and the opportunity. Just wondering what your thoughts on the pending acquisition of Zoom to Five9, if that changes any of the competitive dynamics in the industry?

For us, it doesn't. They're both terrific customers of Bandwidth. We love seeing our customers work well together and in some cases join forces. We believe that that combination will serve many global end users really well. And so for us, we just -- we celebrate great innovative teams that we serve and support. And in this case they got together and have a view of the world that's exciting and we're going to do our best to keep up with them.

Great. Thank you.

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

Hi. This is Dave Nwokonko for Meta Marshall at Morgan Stanley. Congrats on the quarter and thank you for the question. I was wondering on Voxbone integration. How is it going versus expectations? And then also, what have you been able to do remotely versus waiting to do in person?

Hey, Dave, this is David Morken. Thanks for your question. All five of the examples that we included for the quarter were grounded upon global footprint and global reach. That fundamental thesis was the foundation for acquiring Voxbone. And the integration is going well. All but one operating area of the Voxbone Company have been integrated. We're making great progress on SOX and in ERP and in all the essential IT ways that we need to. But the leadership are integrated, the teams are working well together and it's a huge testament to the teams on both sides of the pond, because we haven't been able to travel with the exception of our intrepid General Counsel, who did make a foray to Belgium recently and we're proud of him for doing that. But it's been extraordinary. The teams are hammering and the results are already beginning to show up.

Great. Thank you. And then, maybe just one more for me. When would you expect to be able to meet customer demands for multi-country voice?

We have been already post acquisition. And to be clear, already provide -- and maybe I'm misunderstanding your question, over 60 countries we have direct PST interconnectivity with more than two points of presence in each region, serving large enterprise, including all five of the examples we gave for the quarter. So maybe I'm misunderstanding your question.

That’s fine. Thank you.

And the next question comes from the line of Andrew King with Colliers Securities. Please proceed with your...

Hey, guys. Thanks for taking my question. Welcome to the team Daryl. Just wanted to double tap into the RingCentral BYOC solution. Really can you detail a little bit clear the selling process that that solution will have? And further, do you see any opportunity within RingCentral's current customer base, or is this more targeted at new customers?

We are already sharing prospects between the teams and the go-to-market motion, the sales activity is an arm-in-arm activity where we work with a large enterprise prospect that has a very complex need and RingCentral's solution is proposed side-by-side deeply integrated through our Duet product with Bandwidth. But the enterprise customer the decision-maker will sign a contract with Bandwidth in a separate contract with RingCentral. And so, you are selling together into a large complex enterprise environment with the flexibility of the Bandwidth platform really breaking through RFP barriers and bundled barriers that may exist in smaller market product offerings. So, we've got a great partnership with RingCentral. We've already begun sharing opportunities between the two companies and are excited about going to market together.

Great. And then just looking at the DBNE you mentioned that without the COVID impact you saw in DBNE it's still down about 200 basis points quarter-over-quarter. Could you just detail a little bit of how you're thinking about that the DBNE trending throughout the year as people start to return?

Andrew this is Jeff. Yes. So we don't specifically guide dollar-based net retention. We like -- I think when you normalize as we said in our prepared remarks the quarterly results of 114 you get to 123%. So not too far off the 125% from last quarter and in line with the normalized COVID number from a year ago and second quarter of '20. We are -- a reminder again this past quarter that was the peak of the COVID benefit last year. So that was our toughest comp, although there were COVID benefits as we outlined in the last half of the year. So, it will challenge that dollar-based net retention but want to emphasize that we continue to see strong broad-based demand and a number of the use cases that David outlined will be accretive to dollar-based net retention as their existing customers.

Great. Thanks for taking my question and congrats on the quarter.

Thank you, Andrew.

[Operator Instructions] And the next question is from the line of Jim Fish with Piper Sandler. Please proceed with your question.

Hey guys. This is Quinton on for Jim. Thanks for taking our questions. Maybe first of all I want to touch base on the competitive landscape. Obviously, the big US win against the CPaaS competitor is really exciting. But are the majority of net new customers still coming from legacy replacements, or are these CPaaS replacements coming up more regularly?

Jim great to talk with you and great question. The preponderance of our new customer additions remain conquest from the incumbents Lumen AT&T Verizon. The examples that we did provide that are grounded on our global footprint did come as win aways from other CPaaS companies. But to the premise of your question the majority remain and will for quite some time wins from incumbents.

Yes that makes a lot of sense. And then maybe thinking about the accounts that you're in that are using multiple solutions. How do you think you're maintaining share within those accounts? And how sustainable is that wallet share? And then has there been any changes in the amount of efforts to those major customers internalizing the voice or messaging services, or is that just too costly or too technical for them to kind of take right now?

Thank you, Jim. Multi-sourcing is a dynamic that we faced when we were domestic only. And the reason is because there were apples-to-apples comparisons that were possible to a certain degree. Those days are now gone. No one has the asset combination the global reach the flexible platform, the innovative culture and focus on service globally. As a result, the dialogues that we're having illustrated by the five customer examples this quarter are conversations they're outside of historical procurement areas of an enterprise or of a partner and are in the executive product senior suite. And that's exciting for us. We've had rich partnerships with certain large giant customers for years and years and we're seeing that same relationship dynamic really blossom now because of the global footprint and the expansive platform.

Great. Thanks for the color.

Thanks, Jim.

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

Hi. This is Joe Goodwin on for Pat. Thank you so much for taking our question. A little while back you guys used to talk about strategic customers that were actually coming over. Can you just talk about kind of maybe the pipeline that's there kind of what you're seeing from that kind of caliber customer, I guess, we'll say. And kind of how -- maybe how the motion has changed for those folks?

Thanks Joe. By motion our activity as an enterprise or strategic sales team remains the same identifying executives in the C-suite GM's product owners and having conversations with them about their needs globally. The pipeline is robust and I would describe it as I did last quarter as consisting of more large opportunities than we've seen historically. And it's a direct function of the uniqueness of our offer and its availability. So we're excited about that. We factored it into how we think about the future and the conversations do remain not in person for the most part, but more and more our outbound activity that I described is including face-to-face, and we hope that continues. Certainly that would be indicative of a return to normalcy as a society. But at the enterprise level, in-person sales is something historically that's been a key driver for us. Very proud of the team for overcoming the impediments to doing that with customers that are around the world, but excited about how the pipeline looks.

Great. Thank you.

Thank you, Joe.

And the next question comes from the line of Steve Enders with KeyBanc Capital Markets. Please proceed with your question.

Hi. This is George on for Steve. Thanks for taking the question. Wanted to follow-up on the question about Zoom and Five9. It seems to be part of a larger trend of that kind of coming together of UCaaS and CCaaS. And wanted to get your all's perspective on how you think that impacts your customer base. Thank you.

You bet. I think you're watching bundling happen in the CCaaS and UCaaS spaces. And what that I think will drive is renewed vigor and focus on partnership among those customers. So that they can focus on the vital core competencies that they're trying to offer their customers in a bundled future. So our uniqueness the flexibility of our platform as global reach becomes more important than ever, while these customers of ours join forces to serve their end users in a new way. and we're excited about that. And the reason for that is ultimately all of us are chipping away at the 100-year old incumbents who have failed to innovate. And so that transformation, that migration away from uninspiring analog past to exciting cloud-based future is the secular shift that we're enjoying and we're going to support those in the vanguard of that transition now for some period to come.

Great. Thank you. And a quick follow-up on the net dollar expansion. Any commentary or color on gross retention churn in the quarter? Thank you.

Hey, George, this is Jeff. We don't report on that particular metric. Obviously, churn is implicit in the dollar-based net retention, and there hasn't been a lot of change there. So we continue to deliver strong results.

Got it. Thank you very much.

And there are no further questions at this time. I will now turn the presentation back to the host.

Thanks all for joining us. And I just want to close by thanking Jeff Hoffman, who's been an incredible professional colleague and a great friend, without whom we would not be here today. Jeff on behalf of all of us at Bandwidth, Godspeed, fair winds and following seas.

Thank you David and thanks everyone on the call.

And that does conclude today's conference. We thank you for your participation and ask that you please disconnect your line.