Thank you for standing by and this is the conference operator. Welcome to the Bandwidth, Inc. Third Quarter 2021 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Sarah Walas, VP of Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to Bandwidth Third Quarter 2021 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed. The press release and earnings presentation with historical financial highlights can be found on the Investor Relations page at investors.bandwidth.com. With me on the call this afternoon is David Morken, our CEO, and Daryl Raiford, our CFO. 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 and full year of 2021. And to the extent provided future periods and our views on the impact of the recent DDoS attacks we've previously disclosed. We caution you not to put undue reliance on these forward-looking statement as they may involve risks and uncertainties that may cause actual results to vary materially from forward-looking statement as described in our risk factors in our reports filed with the SEC. Any forward-looking statements. It's made on this call and the presentation slides reflect our analysis as of today. And we have no plans or obligation to update them 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, as well as in the earnings presentation, which are located on our website at investors.bandwidth.com. With that, let me turn the call over to David.

Thank you, Sarah. And hello, everyone. Thank you for joining us today. This quarter, Bandwidth continued to play a critical role in the enterprise move to the cloud. We celebrated a number of important wins with both new and existing customers. We largely completed completed the integration of our Voxbone acquisition and we withstood an unprecedented cyber attack on our business. Bandwidth delivered another quarter of solid financial results exceeding revenue guidance, including 46% CPaaS revenue year-over-year growth. For both the mountaintops and the valleys that we visited during the quarter, I was inspired by this team's unwavering commitment to our mission and our customers. I have never been more proud of our brave and brilliant team, or more thankful for God's faithfulness. I want to start by talking about the DDOS attack at the end of September. Attacks like ours have been aimed at a number of companies in our global weight ecosystem. First, we were prepared and we weathered the storm well. Our infrastructure includes specific DDOS, mitigation systems and is routinely audited in responding to the attack and real-time, we augmented our DDOS defenses to keep pace with the attackers evolving methods. Some customers saw a periodic service disruptions and we regret any impact to their business. At the same time, we are proud of our team and our partners and the resilience of our platform in avoiding the crippling effects others have seen in similar attacks across the industry. In fact, the vast majority of our traffic continued to be delivered. Second, we serve our customers well and they supported us, too. We have been moved by our customer's trust. We count many of the world's largest and most sophisticated technology leaders as our customers and a number of them joined us in our situation room.…

Thank you, David and good afternoon everyone. I'm thrilled to have joined such a remarkable company at a pivotal point in its history as we lead enterprise communications into the cloud on a global scale. I've enjoyed meeting some of you and look forward to interacting with more of you in the coming months. And thanks to my team for helping me get a running start. So let's dive into some of the highlights of Q3. As Sarah said in her introduction, we posted an earnings presentation detailing our third quarter and historical financial performance on the Investor Relations section of our website. I'll now take you through the third quarter financial results and outlook for the fourth quarter. We provide guidance for CPaaS revenue, total revenue, and non-GAAP EPS. For the third quarter, each of these measures exceeded their corresponding guidance ranges. On a consolidated basis, our third quarter results are as follows: third quarter revenue was $131 million up 54% year-over-year, total revenue on our U.S. platforms, which excludes our international Voxbone integrated platform, increased 22%, non-GAAP gross margins came in at 49%, unchanged from last year's quarter, non-GAAP net income was $6.5 million stronger than expected due to higher revenue, improved mix, and operating expense favorability, and non-GAAP EPS was $0.25, an increase of $0.01 year-over-year. Turning to our segments, CPaaS revenue was $107 million, up 46% year-over-year. This solid result is inclusive of the negative impact of approximately $3 million from the DDoS attack in line with our earlier announcement describing the revenue reduction for loss transaction volume and customer credits in the third quarter. Our third quarter, CPaaS revenue out performance was driven by broad-based demand across our products and geographies. Within the CPaaS segment in terms of U.S. and international revenue contribution, CPaaS, revenue…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. We will pause for a moment as callers join the queue. The first question is from Bhavan Suri from William Blair. Please go ahead.

Hi, everybody. It's Matt Stotler on for Bhavan. Thank you for taking the questions. Just a couple here related to the DDoS attacks. So I'll start with 1 and then I have a quick follow-up. Just in terms of the remediation, obviously, helped that your customers moving traffic to where they needed to. Good year that someone come back. When you look at that $9 million to $12 million hit that you talked about from usage and customer credits, any color you can provide on how much of that is usage versus customer credits? And then as you think about the tail from here and the visibility you have into your customers are doing tend to come back, and what-have-you, you just speak to expectations beyond Q4 as to what we should expect, and we're thinking about kind of year-over-year comps beyond just the fourth quarter?

Hey,?Matt,? this is David, thanks much for your question, the vast majority of the financial impact was utilization or usage not credits to answer the first part of your question. We expect far less of an impact in Q1 than we have seen in Q4 and are predicting for Q4. It's early, obviously we have a lot of Q4 still left ahead of us and we don't want to get ahead of ourselves in terms of providing guidance for '22, but Q1 we expect will have far less of an impact than Q4.

That's helpful. And then maybe just one follow-up. Obviously, you're [inaudible 00:22:30] closed several large deals. I mean, you talked about a number of pretty impressive ones here. In the -- even in this environment where you were dealing with this DDoS attack, how was this changing your conversations with customers? Would love to just kind of dig into what's changed, their reaction in both -- obviously, with the new customers you are expanding within as you're continuing to sell to and land new customers, how does that factor into those conversations?

It's pretty remarkable, Matt. Those conversations unexpectedly have become extremely positive regarding Bandwidth being the most resilient and best place to go if you are concerned about a DDoS attack. And the reason is we have successfully fought back against the latest methods in the VoIP space that before now were unheralded, unprecedented. We essentially won and so the conversations with customers have gotten something like this. There is no better place on the planet to go than Bandwidth right now, regarding DDoS attacks worldwide. And we're extremely proud of that. It comes with scars, but we bear those scars proudly.

Got it. Thanks again.

The next question is from Mark Murphy from JPMorgan. Please go ahead.

Thank you. David, just kind of continuing along that thread. I was wondering if you could clarify. You said you were prepared for the DDoS attacks and you've been regularly audited. There's preparations, but you have the service was impacted. You do have revenue impact. What was it that was unique about this attack that it kind of overcame the full capability to prevent any impact?

Hey, Marc. If the attack had occurred in July, it would've set a world record for DDoS volumes of any kind. This attack was unique and not only was it massive in its size, it was specifically on a dimension using UDP packets and fragmented UDP packets which had never been seen before. We're only seeing very recently in our space with voice why you need signaling and medium and UDP fragments, we can't just block wholesale in the way that you can with an HTTP attack. So we had a very good, robust solution for attacks that have been seen in the past. We rallied during this attack and used vendors like Cloudflare and taught them how to address this issue for the first time and collaborated with them in a way that they then we're able to go to the whole industry and share. So it was an unprecedented in size, and in a very unique way that we experienced this attack for what was really the first time. Confident the way that we've adjusted our defenses, that we can withstand this and other similar attacks going forward.

Okay. What percentage of your overall traffic do you think would led to other options in the wake of that attack? And I'm wondering how much has reached of what you lost, how much has returns, how much of it, if any, do you think could be permanently lost?

So we had some of our most important customers that we said, you need to move quickly, we're experiencing this. And we were around the clock 24-7 overnight, all hours, all hands on deck to have our customers evacuate during the early stages. And we're delighted that those customers watch us communicate well with them, watched us restore service so quickly and most of them return.

Okay. One other question for you just at a high level, how is usage trending into reopening of the economy and with people starting to return to the office, starting to travel a bit more versus what you might have expected 6 or 9 months ago?

We're global now, so it does depend on the theatre that you're talking about and things do change. We've got some sectors of our customer base, like hospitality and ride share that benefit from the return and indeed even the travel industry customers that we have. So those numbers are obviously improving and we're excited about reopening of quarters. And then we've got a cross-section of all of UCaaS, CCaaS, and conferencing customers. It's a blend in terms of the current dynamic with usage, but overall we're excited about the re-openings that are occurring that benefit our enterprise customers everywhere.

Thank you very much.

Thanks, Mark.

The next question is from Will Power from Baird. Please go ahead.

Dave, this is Charlie Erlikh on from Will. Thanks for taking the question. Just wanted to ask one about the DDoS attack and kind of going off of that last question. For those customers, especially the larger ones that have not brought their traffic back to Bandwidth, is there any sort of common theme or common thread between them in terms of the main reasons why they -- why they haven't come back to Bandwidth?

Large customers move slower. It's that simple. I think administratively you've got different procedural steps to take for large customers. Those that have continued to believe in us are moving back at the speed that's appropriate for their operating team. I think it's that simple.

Okay. Got it. And then I also wanted to ask about Voxbone. I think the CPaaS revenue from Voxbone $26 million in the quarter was about flat sequentially. Is there anything specific to call out there? Sounds like things are going pretty well from the customer anecdotes, but just wondering if there's anything to call out there.

You're right, Charlie, this is Daryl. Things have gone pretty well from the customer side. The $26 million is essentially flat to the second quarter. It's a bit of a half glass-full. We were gratified in the second quarter that we were able to accelerate some timing and bring customers on early versus in terms of scaling. And of course, we operate a global platform. So having exact predictability across all of our -- through all of our 60 countries and where the usage is going to be in the like is not 100% perfect. But in the second quarter and in the third quarter, our aggregate platform beat our expectations. So we're happy about that.

Got it. All right. Thanks.

The next question is from Meta Marshall from Morgan Stanley. Please go ahead.

This is Klarna for Meta. Thank you for the question. So appreciate that you guys are having pretty positive conversations for customers rerouting revenue back to your platform. I guess, is there's any more detail you can give on how long of a process it is based on the customer size of bringing the reroute revenue back to the platform and timing around that? That'd be helpful. And then I have a quick follow-up.

Klarna, this is David. I shared earlier this evening on one of the calls that we expect in Q1 of '22 that the shortfall from the DDoS attack will be far less than what we are projecting for Q4. So that's very encouraging and reflects the pace of the return, and I would hope that that pace accelerates, but that's what we're thinking at this moment in time as we continue to finish out Q4.

Got it. That's helpful and then just a quick follow-up in terms of the across off between Voxbone and Bandwidth, I guess just -- has there been interest in -- has there been more interest one-way earned other and then just any detail around that opportunity would be helpful in terms of whether you're seeing it accelerate one way or another. Thank you.

Thank you. The cross-sell opportunities that we've been most excited about, an open in talking about our among the U.S. based large technology customers that we serve and their desire to go globally with Bandwidth. We have shared that we for example, closed a global leader in the electronic signature space, who are consolidating 9 different providers across 15 countries because of our singular global footprint. That's an example of a strong technology leader that uses our combined U.S. and international platform. And we think we'll see more of that.

Got it. Thank you.

The next question is from Steve Enders from KeyBanc. Please go ahead.

Hi, guys. Thanks for taking my question. This is George on for Steve. 2 questions. First one on gross margins, a really nice quarter-on-quarter step-up. Can you give a sense for unpacking? I think you mentioned international mix on both scale. And if you could rank order the effects and where should we expect that number to go? And then second question on the linearity of customer adds also fairly healthy metric. Wondering if you saw any slowdown in October tied to the DDoS attacks and how you see that trending. Thank you.

Hey, there, this is Daryl. Thanks for the question. In terms of unpacking the record 54% margin in Q3 for CPaaS, revenue did exceed our expectations. So certainly revenue does help in that scale across a fixed cost base. We also experienced just better improved operating leverage, which means costs -- favorable costs, as well as the mix you alluded to our international platform margins are higher than our U.S. margins. And so we were able to improve through mix as well. That's essentially how we put that it. And in terms of customer adds, we're pleased with the customer adds, but really nothing to call out that would say it's an outlier in terms of some customer mix issue.

Great. Thank you, again.

The next question is from Tyler Radke of Citi. Please go ahead.

Hey, good afternoon. Thanks for taking my question. I wanted to just ask, excluding the DDoS attack which understandably, there's a lot to talk about there, but just kind of how did you see seasonality in overall usage trends play out through the third quarter? Obviously, there's been a lot of talk in the industry just around a summer slowdown. So I was just wondering that to see what you saw on that front and just anything to call out in terms of the overall usage in seasonality trends that you've seen here thus far in Q4.

Will clearly, we did say the third quarter was impacted by the $750,000, which is which over those 5 days is a little less significant than the our estimate of the full year impact. The third quarter the international platform on a normalized basis, grew 20%. We're happy about that in terms of CPaaS revenue that's right where -- that's right pretty much where we'd like it to be, the -- and we normalize for the last year's $6 million of political messaging and COVID. But that in terms of 20% to 25% growth, that seems in our zip codes. We just feel like the market is expanding at the pace we'd estimate the digital transformation is underway, and we think that's a long term rate for us.

Thanks, Daryl. This is David. I agree. We did not see some slowdown that was isolated to within a specific sector or something that was seasonal. We were on track based on our understanding of how the year would go. So we haven't seen that.

Great. And if I could just ask you around the customers that you did might help migrate to another platform. I guess just where did those customers go? Is it the main competitor? And I'm curious, as you've looked to restore that traffic, have you had that -- make anymore aggressive price concession that I would imagine that whoever benefited from that traffic would do a lot of things to hold onto their customers? But just curious if some of the dynamics as you try to get back to that traffic.

You bet. When we moved some of our largest customers, they moved to -- depending on the nature of their service, they move to large incumbents as quickly as they were able to. So Verizon AT&T, Lumen. You have others that they might move to overnight. When they came back it was under the terms of our service that they left with. So there is not going a discount -- that it is not a discount season to return. It is all clear. You have trusted us for years. welcome back.

Great. Super helpful. Thank you.

You bet.

The next question is from Andrew King from Colliers Securities. Please go ahead.

Hey, there. Thanks for taking my question. Are you moving on from the DDoS attacks, we've got plenty of questions on that. I wanted to dive a little bit in the lab and opportunities specifically the next quarter as we see the rate is the next level of instrumentation with brave off, very flock coming in. How much of [inaudible 00:36:55] expect from this? And where is your primary computation for these solutions? Is it more of an in-house developed or is there another player out there that you're seeing a lot?

Now thanks for calling in from the upper deck of a stadium somewhere. But in all seriousness, I do love the question about the 911 special service that we do provide. For example, at Microsoft Teams, we're 1 of only 3 certified providers. And we do dynamic location routing that satisfies the latest requirements for both fixed and nomadic lines. Those are huge door openers for conversations within the large enterprise. And we're excited about the season that we're in where emergency service is featuring so importantly in the minds of decision-makers that are going through a digital transformation move to cloud. And Microsoft is just one example. We have other Duet products with other providers. We're proud of where the 911 service is a leading conversational piece.

Great. Thanks.

The next question is from Ryan Koontz from Needham & Company. Please go ahead.

Hi, thanks for the question. Want to drill down on your commentary around the contact center market and how you're tapping into that. Is this a different go-to-market motion you're finding traction with, or are these like strategic relationships with these partners that they are referencing you straight in without much effort on the sales side? I have a follow-up.

Can you -- that's a good question, but I want to make sure I understand it. The two differences that you're asking about in our sales motion, I thought I understood the first part, but then your comment about a strategic partner, I didn't follow.

As you partner with these contact center players, are they referencing you in or is it more of a proactive effort to penetrate by their incumbent base, their installed base?

Got it. Thank you. We have an aggressive, active, outbound enterprise sales motion where we are focused on the C-suite decision-maker, the SVP decision-maker, and the contact center leader. And certainly there is word of mouth in the industry when you solve a problem. For a financial, you might get a reference into another large strategic financial, but it is an individual effort. We don't have a channel, we've got a dynamic group of enterprise salespeople that are making great inroads. And this quarter we announced a great win among the Fortune 200 a managed care provider, $16 billion company. And that was a direct win into the senior decision-maker and it's an example of that sales motion that we have. But the contact center is filled with enormous complexity. They're trying to take call flows and route calls for authentication for using AI whether it's to prevent fraud or for sentiments analysis. There are lots of very creative, intelligent things happening in the contact center. And because we are a network and platform owner, we're able to have both a signaling in the media to route those calls very flexibly. Literally a contact center executive can drag and drop calls for different reasons to different places in real-time, compare that to what you can get from a large domestic or international incumbent, and it's night and day. So when you think about all the emerging, exciting technological change in the contact center, you've got to have a flexible partner like Bandwidth in order to have the actual audio transit all these solution providers elegantly. And so that merit - based value prop is resonating audibly in the contact center.

Super interesting, thanks. And a quick follow-up, if I could for David. You mentioned the Voxbone integration, mostly complete. Can you give us any color there in terms of -- is this mostly IT, customer systems headcount, I mean, any other color you can give us there on the Voxbone will be great.

You bet. The customers that we serve are primarily focused on having 1 point of contact, 1 resolution path for issues, they're okay if they have more than 1 build right now. We've achieved integration with all of the personnel on both sides of the company, which is vital for our large customers. So single point-of-contact, single individual is the first point. Second point is all of the SOX compliance, all of the IT controls, all the ERP, all that hard heavy lifting work is largely behind us where we're headed next is a single paint of glass experience, where a customer has a universal journey through the Bandwidth service during their lifetime. That will take some longer time, but the team has done an extraordinary job during a time when we could not be together physically for the vast majority, to do the vast majority of the integration.

That's great as we think about the OpEx impact of that going forward. Does it stand out much at all in terms of what remains or is it just small stuff?

It's going to be -- this year we've clearly experienced integration costs that 's embedded in our OpEx cost structure. Going forward next year, we'd expect that to be much less and become more business as usual, continuous improvement as we innovate and serve our customers.

That's really great. Thanks a lot.

The next question is from James Fish, from Piper Sandler. Please go ahead.

Hey guys, this is Quinton on for Jim. Thanks for taking our question. Maybe just to beat 1 more time on the dead horse, the DDoS attack. But is the majority of the Cyber Security and Investment now behind us given the rapid response in quarter, or should we expect some additional investments as we move into Q4 beyond, just stay ahead of these tasks? Thank you.

Yes. Thanks, Jim. this is Daryl again. The bulk of it is behind us. It's -- the incremental investment was less than a million dollars in terms of what we've experienced. And there's going to be some maintenance, this is software, this is sub-service, this is some maintenance and things like that that would go on, but it won't be noticeable in our cost structure.

Got it.?See we're able?. Thank you.

The next question is from Pat Walravens from JMP Securities. Please go ahead.

Great. Thank you and congratulations for getting it all under control. So I suspect, Dave, that everyone on this call has had the experience now when they navigate to Bandwidth site, there's a little pop up from Cloudflare that says, "Please hold on a second while we check your browser. " And then the little dots go by and then you get to your website. You didn't have that before, you do now. Did Cloudflare not work for some reason for your kind of network before and it does now? What's going on there?

When the attack started, Pat, we had a network-based best-of-breed awesome solution by a great vendor in the industry and it worked well for the first 48 hours of the running gun battle. After that, there was a different dimension to the attack. On a different protocol, different ports, different origins. And you're talking about attacks originating in a different nations-state transiting through a partner that doesn't know any better and then hitting all your IP ranges with different flavors of traffic in different ways. And so we migrated from the original defense that we had stood up that was working and use Cloudflare thereafter. They were superlative in working with us, rallying with us. We shared in real time aspects of the vector of attack for the changing dimension, and they would adjust with us their solution in real time. And it was a combined effort, and one that should be celebrated, and I think resulted in many of those in the voice industry probably becoming Cloudflare customers. It is a small price to pay right now, as a prophylactic security to have that additional nominal step at the beginning of a user experience. We're not a consumer service, so that brief interruption we don't think deters prospects or those who know us from a user experience right now that's appropriate, but we will work that out of the user experience here shortly.

Great. Thank you. And my follow-up is just I noticed the same thing pop up on a completely different vendor site. So is this something that you're sharing with others in the industry who might have a similar risk profile than you had before it?

Yes. We immediately reached out to our top competitors and shared everything we knew. We told them get ready, it's probably going to hit you next. Here's what we did. Here's how we did it. Here's the playbook and shared openly. And at the vitality and the quality of our ecosystem is essential for enterprises around the world. And so we wanted to protect it with those that we happen to compete with, and did so openly right out of the gate.

Got it. All right, thank you.

Thank you, Pat.

This concludes the question-and-answer session, as well as today's conference call. You may disconnect your lines at this time. Thank you for participating and have a pleasant day.