Welcome to Bandwidth's Inaugural Investor Day. Thank you for joining us virtually today. I'm Sarah Wallace, Bandwidth's Vice President of Investor Relations. We have an exciting agenda focused on Bandwidth's key differentiators, our long-term strategy and the opportunity ahead. In a moment, you'll hear from David Morken, our Co-Founder, Chairman and Chief Executive Officer. He'll share Bandwidth's origin story, vision and strategy. Anthony Bartolo, Chief Operating Officer, will elaborate on operationalizing our vision; and Daryl Raiford, our Chief Financial Officer, will discuss our recent financial performance, our capital allocation strategy, and how it all comes together in our long range plan. At the end of our speaker presentations and closing remarks, we will have a live question-and-answer session with today's presenters covering the Investor Day content as well as our fourth quarter and full year 2022 earnings, which we released earlier today. All of the materials we'll present today, including the speaker video presentations, and the accompanying slides will be available on our website shortly after the event. Before we begin the presentations, I would like to remind you that statements made today, including any statements regarding goals for our financial performance, over the next three years, may contain forward-looking information, so typical safe harbor and risk factors apply. Please review the slide you now see that provides additional details about risks related to those forward-looking statements and where to obtain additional information about risk factors in our SEC filings. All financial measures are presented on a non-GAAP basis except for revenue, which is a GAAP measure, unless otherwise specified. Reconciliations between our GAAP and non-GAAP results for historical periods can be found at the end of this investor presentation. Please be aware that similar to our prior quarters, details related to our fourth quarter and full year 2022 performance are provided in a separate earnings presentation that may be accessed on our Investor Relations website. So now let's get started. It's my pleasure to introduce you to Bandwidth. In the global economy, delivering exceptional experiences is how businesses compete and how they communicate is at the heart of their customer experience. Bandwidth is a communications cloud that simplifies how you deliver integrated global experiences. It's flexible and robust, ready to connect across your entire communications stack, built on our own global network for unmatched reliability. It's grounded in telecom, regulatory, and real world software expertise, so you can create exceptional experiences for whatever you're building, wherever you're going, and however you want to communicate.

Welcome to Bandwidth Investor Day. My name is David Morken and I serve our team as Co-Founder, CEO and Chairman. You are joining us here in our Raleigh, North Carolina office, one of several we have around the world, and this is where the magic happens. Many of you are new to our story. Thank you for joining us. You've chosen an amazing moment in time to get to know us. We've chosen the famous movie Back to the Future to capture this moment, a rare opportunity to climb into a time machine. It was actually a 1980s car called the DeLorean, buckle in next to Michael J. Fox and travel back to the future. Are you with me? Our first destination is the year 2017 when Bandwidth IPOed. In 2017, our revenue is one third of today. Gross margins are 7 points less than today. We only offer one primary service in a single country, and messaging is a new product. Spin the dial on the DeLorean dashboard from 2017 to 2026, and when we land, you will see we provide service in over 60 countries, serve billions of messages and voice calls, expect 60% non-GAAP gross margins, 20% EBITDA margins, and approximately $125 million in total free cash flow from the prior three years, all while growing annual revenue 15% to 20% on average. Set the year in the DeLorean one more time to get back to 2023, and you suddenly realize as you get out of the car that you can invest in Bandwidth today at a price close to that of 2017. Yes, it really is like being able to go back to the future. We believe that after today, you will want to join us on the road ahead. Actually, as Doc said in the…

Thanks David and hello everyone. You may know that Bandwidth is admired for its strong reputation in the market and unique work culture. What I'm most excited to share with you is that after a year operating with the team, we are exceptionally well positioned to lead the next chapter in cloud communications transformation. We believe we have the right strategy, compelling offers and proven team to make our ambitious goals a reality. I want to start by looking at the market dynamics in our space and how Bandwidth has the key differentiators for success. As David mentioned earlier, there are traditionally two ways for enterprises to choose how they consume communications. They can either go to a pure-play CPaaS provider or source from a legacy network operator. Each has its limitations. The CPaaS platforms are very innovative, but they have to rent their cloud. They don't own it. That means their customers get limited control and limited scalability, so eventually they outgrow them and guess what? They also have a terrible support experience. In most cases, you can't even reach a real human who would only hand it off to the vendor they rented it from anyway. On the other side, there are network operators also known as incumbents, which are the legacy carriers whose names you probably know, characteristically they often lack any software integrations and they are slow to innovate. They also often provide a disappointing support experience. If you want to work with these carriers, you have to do it their way. And if you want to operate globally, well, you have to sign contracts with multiple providers wherever you want to do business because they're geographically restricted. That's an incredibly complex, expensive, and time consuming proposition. Power platforms need the best of both worlds, and…

I’m Daryl Raiford, CFO of Bandwidth and it’s really great to be speaking with you today. David and Anthony shared our rich history, our customer stories, and our business model, all of which have led to Bandwidth’s financial success over the last five years. Today, I’m going to cover three topics. First, a review of our quarterly and full year 2022 results. Second, our 2023 outlook. And lastly, our three-year financial targets. Turning to our first topic, we had a very strong fourth quarter with revenue of $157 million, which was higher than expected, exceeding the midpoint of our guidance by $10 million. Fourth quarter fully diluted EPS of $0.19, likewise, well exceeded our guidance by $0.15. All of our products came out higher. Messaging continued to be a strong driver at 17% of our total fourth quarter revenue and growing 62% year-over-year, benefiting from the U.S. midterm election. Our fourth quarter revenue included $33 million of pass through messaging surcharges. For the full year 2022, our total revenue was up 17% from the prior year. Excluding pass through surcharges, our revenue grew 6%, certainly exceeding our expectations from the start of the year. Our fourth quarter non-GAAP gross margin was 56% up 3 percentage points from the prior year’s quarter. Our full year 2022 non-GAAP gross margin set an all-time annual record at 55%, also rising 3 percentage points from last year. We’re focused on margin expansion, and this record result shows that. Adjusted EBITDA for the fourth quarter was $8 million and $35 million for the full year. Also, in the fourth quarter, we strengthen our balance sheet by repurchasing $160 million of our 2026 convertible notes at a nearly 30% discount. Turning to KPIs, our dollar-based net retention rate or DBNR grew sequentially to 112% for customers…

Thank you, Daryl for a terrific update. In a moment, we’ll open it up for Q&A. So allow me to summarize what we’ve heard together. We are more excited about the next three years than at any time before our cloud strategy, owned assets, market offers, flux capacitor and amazing team create an extremely wide moat. We are in a great space where we are a proven leader. We’ve shared a three-year plan for the first time in our history showing our businesses predictably cyclical, and that we believe we are in control of our profitability and our financial density. And finally, we are inviting you to go back to the future with us between now and 2026.

Thank you for joining us for the live Q&A session of Bandwidth’s 2023 Investor Day. I’m Sarah Wallace and I’m happy to be joined today by David, Anthony and Daryl. The question-and-answer session will last 30 minutes. If you’re joining us on the live stream, there is a form for you to submit questions. We’ll get to as many of those as we can. Now let’s get started. Our first question comes to us from Ryan McWilliams of Barclays. Go ahead, Ryan.

Hey guys, thanks for taking the question. Love this presentation by the way. Great idea. I also like the new long-term targets and how Bandwidth can capitalize from here and improve profitability on some of the strategic investments that you already made over the life of five years. So just in the near-term, how do we bridge what the macro could mean these targets and your strategy like, so we think about the profitability improvements for now and then more top-line growth when the macro outlook is better.

Ryan, thanks for your good question to kick us off. I sure appreciate it. And to answer your question, I think it is important to understand how to bridge from 2022 through 2023 to 2024 and that our long range targets, and that’s exactly why we wanted to have an Investor Day to talk beyond just the next 12 months for the first time in our five-year history as a public company. So great question. Let me back up for a moment and talk about 2022. We did really well in 2022 in particular with messaging. And for those who aren’t familiar with our messaging business, we began growing messaging with commercial applications for point of sale customers like block and financial customers like the largest credit card issuer in the United States. We achieved high deliverability and massive scale and great support for commercial messaging capabilities and that attracted civic engagement customers. These are constituencies and classrooms and congregations. And in 2022 midterm season campaigns. So in 2022, we did $37 million of messaging, civic engagement directly related to political campaigns. The next campaign season is in 2024. And between now and then there aren’t elections. And so the bridge that you should think about toward our long-term targets that we articulated today includes the 2023 guide. And how do we get from here to there. In 2022, as you’ve seen from our materials, we are guiding low single digits or net of political messaging just under double digit growth. And there’s a another reason for our bridge from an outperformance in 2022 to 2024, and that’s the macro in 2023. As we’ve heard from many other teams, we’re also being very prudent about the 2023 macro environment and what it means in particular for a usage-based model like…

Okay. Our next question will come from Tom Blakey at KeyBanc.

Well, hey, great guys. My question is around go to market on the enterprise opportunities. That sounds like an exciting opportunity . Just wanted to know where the investment you made and how you’re back?

Thank you, Tom. Let me ask Anthony to handle that one.

Sure. Thanks for the question, Tom. It’s actually a really good one. Look, firstly, we think that there’s the undeniable shift that we articulated in my presentation, which the IDC articulated. That enterprises are moving their business critical communications to the cloud. So about 96% of them are moving them to the cloud. Only 24% have moved thus far. So we think that’s definitely going in our favor. The other is we think our offers themselves attract these enterprises, the global two thousands and messaging customers to us because we have that unique combination of the software consumability network ownership and regulatory experience. And that removes tele complexity for these guys. They’re all growing markets for us, whether it’s in the global communications area, which is growing about 8%, we’re seeing our programmable services growing about 21%. We also see enterprise growing about 14%, which we plan to outstrip. And we plan to outstrip that because we have a focus on that. Each of those constituencies that consume those three offers are all consuming the very same platform. But how you go to market matters. So we’re putting fine tuning our go to market with regards to channels as well as dedicated account representatives to some of those large enterprises to help nurture them through that tele complexity. So it’s a good pickup on your part, but one we’re spending a lot of energy behind and it’s paying off, it’s growing at a pretty fast clip. Yes, it’s a relatively small base, but it’s growing at a pretty fast clip. We’re proud of it.

Okay. Our next question will be from Meta Marshall at Morgan Stanley.

Great guys. Quick question, kind of back to the programmable services and just – you just addressed a little bit. But just like, how should we think of either, are most R&D resources invested there? Or like is there a change with the sales people to kind of direct them more towards these services versus kind of the traditional communication? I guess I’m just trying to struggle a little bit with like what the difference is between these kind of programmable services and the traditional telephony business that you guys have always had and just whether there’s a difference in the sales people that are more directed one way or another?

You met Meta and thank you for joining us this morning, and I’ll let Anthony handle that one as well.

Sure. Our sales team is centralized. We have a centralized sales team, Meta. So our sales team has the cranial capacity to handle all of our products. They’re very focused. We simplified our product and our portfolio. And they’re easily consumable. So our sales guys can position each and every one of them to and tailor them to each of the enterprises or the large players that are consuming them. So we haven’t really changed our sales force with regards to consuming or being able to sell those particular products. What we’ve done is we’ve just simplified the packaging. I mean, now customers are coming to us for real-time communications capabilities at scale that are mission critical. And today that is just another real-time mission, critical communications that they’re looking for their businesses. And it’s becoming even more prominent than email. Right now I think our customers are actually seeing that messaging gets opened about 98% of the time, whereas emails, a lot of them get filtered and moved into your spam folder. So it’s becoming a much more critical piece of enterprise communication. So it’s just a natural extension of the conversation ourselves guys are having already.

Okay. Our next question will come from Matt Stotler from William Blair.

Hey everybody. Thank you for taking the question. Maybe just one on the partner ecosystem. You mentioned a couple of your key relationships there. We’d love to get some thoughts on forward investments and expanding that ecosystem, especially as you’re looking at the revenue diversity and the direct to enterprise cohort specifically?

Hey, Matt, can you clarify for me, when you say partners, are you talking about channel or are you talking about some of our largest enterprise customers?

Talking about I guess broadly, channel partners, system integrators, or consulting firms that maybe could add value when it comes to implementation and processes and things like that. But also some of the enterprises that maybe are leveraging you for and customer solutions as well.

Yes, perfect. Thank you very much. And Anthony will take that as well.

Sure. It’s a great question. It’s a natural – another natural progression is that our ecosystem is actually expanding to systems integrators and other and our existing customers who are also reselling our product. So we are seeing that expand. It’s a natural progression because they’re seeing that business critical communications is a key part of putting any solution together. That’s what you saw with our major initial customers or very large customers who are power platforms. They’ve built their power platforms on top of our power platform of communications. Well, that’s – and that would be a Microsoft or a Zoom or a Google, et cetera. And all of the Gartner Magic Quadrant guys it's no different for a large enterprise. And as systems integrator who serves a large enterprise wants a power platform to ride communications upon, and that's what they're doing. So it's a natural extension. So your question's right on and it's really focused on how we are seeing the progression of customers consuming our product.

Okay. And our next question will come from Will Power from Baird.

Great. Thanks again for hosting us, a lot of helpful color. Question on the next three-year revenue growth target of 15% to 20%. I wonder if you could help us understand what you're assuming for macro in that? And how do we think about growth excluding the political messaging, you're going to have an uplift in 2024 and again in 2026, hold on those two fronts would be great?

You bet will. Let me ask Daryl to speak to the assumptions on the macro to answer your question initially.

Hi, Will. We do expect the macro to persist mostly through 2023? It's been fairly uncertain, and so we're taking a prudent approach on that. It's possible. We've heard from some of our customers of improvement in the latter half is possible. Our view for 2024 and 2025 is an improving macro, a stabilization as the – as the economy begins to digest through the federal bank policies that are inhibiting at the moment.

And let me take the second part of your question, Will, if I could. When you think about our growth longer term in our plan from 2023 into 2024 and beyond, and what the role of messaging is about half of the growth that we'll see in 2024 is attributable to messaging during a Presidential campaign year. You also have Gartner contributing well, new products in our portfolio that Anthony's been really driving velocity to market with. So those are contributors, but messaging is significant and wonderfully predictable and durable. So whatever the macro may end up being during that year, we know that it is going to be all hands on deck at the political campaigns. And so we're confident as we get to know those customers about that contribution level for 2024. Let me pause and ask Anthony if he wants to add anything.

Yes. The only additional color I would add is if you think about how we build the grounds up model, we've invested in our sales organization, but we haven't increased the close rate. So we've put some assumptions into the model that are somewhat conservative with regards to the close rate. We know it takes time for sales forces to get up and running. But there's Daryl and David have both articulated. We are taking a view that the macroeconomic environment stays somewhat muted through 2023 and a little bit into 2024.

Okay. Excellent. Our next question will come from Ryan Koontz at Needham.

Hi, thanks for the question. I wanted to ask about the Microsoft relationship and the competitive environment there in that ecosystem, particularly as it applies to Microsoft teams, which is really putting up some, some strong growth here in PSTN connectivity, obviously. And it doesn't seem that kind of growth from teams doesn't really seem to be reflected in the kind of bandwidth core voice revenues. So I wonder if you could kind of reflect on what's happening within the voice business in this migration to cloud that doesn't seem to really be benefiting the revenue line as strongly for bandwidth? Thank you.

You bet. And thanks for the good question. I know a big part of the answer is Operator Connect, and admittedly we are later with Operator Connect and launching it and really excited about its impact precisely for the reasons you're articulating, which is it should disproportionately impact the Microsoft benefit and the team subscription rates for the Bandwidth revenue going forward. We've been foundational with Microsoft Teams, if you're getting a license directly from Microsoft, Operator Connect is a really important development that we're excited about launching. And so I think you'll see in terms of share with Microsoft greater contribution going forward, which we've factored in considered in both 2023 and beyond. Do you want to add to anything?

Look Ryan, I think it's important to recognize we are one of the primary players in each of the Gartner Magic Quadrant players. So even though some of that – some of that growth may occur in one of the – one of those particular players, it should – having 100% of those players in our – in our net as it were, as our user shifts from one player to another, we may not see a net increase as a result of that. So any given quarter market share shifts from one to the other, we, because it just moves to another part of our network to be perfectly honest. So that's what we – that's what we see. But Microsoft's been a fantastic partner. We think they have a gravitational pull because of their power platform and I think your observations are right on that one.

Okay. Now we'll take a question from the website. How do you think about gross margin going forward and what do you need to do to get 60% gross margins?

I'll take that one.

Please.

Well, firstly we have a – it's a great question. I'll answer it in three parts. We've got it. The first is we believe 60% is easily is attainable because we have a track record of attaining gross margin growth. Over the last three years we've grown 7% and the next three years we're predicting to grow another 5%. So we've done it before. We've got that economic engine or that owner economic engine that I'd sort of highlighted in my presentation. The other is the business mix of our product portfolio. If you take a look at those – the business that product mix in that portfolio, couple of them are growing in excess of 60 points margin, non-GAAP gross margin, whether it's programmable services or it's the enterprise side. So we've got the product mix wind aiding us as well. And then there's the business model value drivers. You heard us talk about them. The scale from the platform helps and the network ownership as a result. The product mix, I just articulated the global coverage that we now have as a function of the Voxbone acquisition as that's been totally ingested into the company and providing a consistent experience in every country that a – our enterprises aspire to be in. And then lastly, just operating efficiencies. We are known to be quite prudent with our operating position., and I think those efficiencies are going to continue.

Okay. Our next question will come from Pat Walravens at JMP.

Great. Thank you. Hey, Daryl, can we – your slide on the debt, can we go a little deeper into that? At the end of your last bar there, it says you'll have $120 million after you pay off the first trache, but the second trache is due two years later, it's 250 and I assumed you need some pack, right? So what are the options?

Well, I did address thank you, Pat. That's a great question. I did address it in terms of the remarks earlier. We think that at the end of 2025, as you see on the chart in advance of retiring the 2026 notes, that we'll have sufficient resources to do that and to have very sufficient resources to continue to fund and capitalize the company. At the growth rates we're expecting and at the through 2026 into 2027 and 2028 with modest revenue assumptions and our greater than 20% EBITDA margins and greater than 15% free cash flow margins, we think in 2026 and 2027, it will give us plenty of capability to retire the 28 notes when they come due. If we so choose to do that, there are certainly other options as well, but that's a rundown of how we believe the cash flow will playout.

Hey Pat, this is David. I would also just add that our debt continues to trade well below par.

Okay. Our next question will come from Tyler Radke at Citibank.

Hey, good morning. Can you hear me okay?

Yes.

Yes. We hear you fine.

Okay, wonderful. So I was hoping you could just help us bridge the long-term targets in terms of your EBITDA and free cash flow margins. How are you just thinking about the incremental cost opportunities that you see in terms of the belt tightening you mentioned and just as it relates to growing headcount in some of the go-to-market initiatives how should we think about that in relation to the growth that you're targeting, which seems to be above corporate average?

Yes, let me start thanks for the great question. And I don’t know if this is absolutely true, but I suspect it’s very, very close. I think we may be the only team that’s achieving the growth in EBITDA that we’re projecting in 2023 and beyond without doing any layoffs. So when I say belt tightening, that’s because we’re already a lean and mean healthy team and have been for quite a while. We will continue and are continuing to hire. So Anthony has open Rex right now for roles that drive growth in 2023 and beyond 2023. And so while others are laying off, our approach reflects a discipline that really comes from our background of being profitable and that belt tightening in this season is right, growing EBITDA and free cash flow, as Daryl just talked about toward our debt repayment is absolutely right. It’s controlling our density, if you will. And we’re just that we’re built that way. So it’s good for the season that we anticipate in a macro sense. But what you won’t see us doing is unnatural acts related to our future period growth. You’ll see it be disciplined in the allocation of capital to respectable return while we significantly and responsibly grow the bottom line.

Okay. We’ll go to a web question next. How should we think about CapEx cycles for the business as a whole? For 2023 and 2024 in particular?

Daryl?

We expect our CapEx to be roughly in line with our longer term expectations for 2023 of 3% to 5% of revenue. In 2022, we had approximately $30 million of capital expenditures of a one-time nature that we don’t expect to recur in 2023. Going forward, we do expect when we bridge between 20% greater than 20% EBITDA margins and greater than 15% free cash flow margins, we expect about 3% to 4% of CapEx as part of that bridge.

Okay. And next up we’ve got Quinton Gabrielli from Piper.

Hey guys, thanks for taking our question. I’m on for Jim Fish. One interesting point that we got up early in the presentation was the investment in AI specifically for call routing. And this is an area that’s really been focused by the CCaaS players. So how do you view what you can bring to the, from an AI that maybe won’t step on the toes of some of the customers that you’re…

Quinton, apologize, you’re breaking up a little bit. We should have applied some AI to your voice signal there during the call. Let me just begin and hand off to Anthony quickly. But we are excited about what having a very flexible software platform and global IP network means for all the incredible emerging applications and conversational AI, the fidelity of audio and the intensity and importance of conveying inputs and outputs across third party apps in the contact center is firing us up and is exciting. Without getting into too much detail, would ask Anthony to round out our answer.

Hey Quinton. Great question. Great observation. Yes, AI is important to us. I think it’s important to a lot of our enterprises, which is more important. Our approach to AI is not to go off and rebuild what other people are building in AI space. Our opportunity is to enable our enterprises CIOs to execute their strategy for AI. We’re agnostic with regards to the AI platform. We have an AI bridge capability that’s being built native into the network. And you’ll see it all the way from conversational intelligence to noise suppression, but it gets built into the baseline power platform. So anybody who rides on our platform gets the advantage of that and allows them to integrate to their AI player of choice, which is really powerful for an enterprise not to uproot. And we don’t pick winners and losers in the AI space. We enable the enterprise to pick the winner that they’ve chosen to allow them to execute consistently around the world, their AI solutions. So you’ll hear a lot more about that in the coming weeks and look forward to seeing you at Enterprise Connect where you can see some of it live if you like.

Okay. Our next question will come from Mike Walkley with Canaccord Genuity.

All right, thank you for the all the details in the presentation today. Just wanted to dig in a little bit to the 2023 guidance as it relates to gross margins. Should we expect some more gross margin expansion this year? Or is it more flattish with 2022 given some adverse mix effects from messaging and the tough back environment and then expands more towards 60 and 2024 through 2026?

Hey Mike, you nailed it with $37 million of messaging revenue going away in 2023 and a macro that is going to put downward pressure that’s reflected in our gross margin thinking four 2023. Daryl, would you like to add anything to that?

I think that’s exactly right. Our gross margin expectation that’s comprehended within our guide for adjusted EBITDA of $35 million is essentially in line with 2022 or slightly higher because of the dynamics that David mentioned.

And I’ll just add Mike, we are incredibly proud of having grown, as Anthony mentioned, gross margins seven points over the last three years and anticipate growing it another five points over the next three years while doubling revenue and more during that period. That reflects the health of a business model. We are consistently going to drive over six years, 12 points of gross margin expansion while more than doubling revenue. Those are the attributes of a very healthy functioning business model.

Okay, we’ll go to a question from the web. What do you attribute the very high customer retention rates to? What do you attribute the very high customer retention rates to and why do you believe that they are sustainable?

Customers stay with us at an extraordinary rate statistically, if you think about the last four years in terms of logo retention 97% and in terms of revenue retention it’s 99.8%, which is extraordinary. So why do customers love us? The short answer, I think is quite simple. Our people are extraordinary. Our technology is reliable, and we tell the truth and you put those things together and your customers love you for a lifetime.

Okay. And before we wrap it up, I have one question that I wanted, to get in that I’m surprised actually, frankly, no one else has asked. And David, this is for you. If you could get into the DeLorean right now, spin the dial, where would you go? What time would you go to and why?

Thank you, Sarah. And thanks for all the work that you’ve done to get this day a reality for us. If I could spin the dial on the DeLorean what, where would I go? There is no greater time than the present. And at Bandwidth, we are an in-person culture. We come to the office and work together. We are present, in the present. So counterintuitively, if I spun the dial, it would be right now, there is no better time than the present. Great questions. Thank you. And to close our first ever Investor Day, everything we’ve shared has been made possible by our really remarkable team of Band mates all around the world. They inspire us each and every day with their ideas, their achievements, their sacrificial serving of each other, and serving our customers. Thank you for the honor of serving with you, and we thank God for blessing our work and our families. I’ll end with this. Today, we invite you to go back to the future with us through 2026, and you might be asking why you should believe us today. Maybe you’re wondering if we’re the mad scientist, like in the movie like doc, well the past isn’t necessarily prologue, and I’m the first to add Lord willing to all future plans, which my dad taught me. Rest assured that far from mad. We are instead the motivated team that has expanded our and exceeded our quarterly guidance to you on all metrics. Not for a few, not for 10, but for 22 quarters in a row. Thank you for joining us. Hope to see you in person in Raleigh, North Carolina soon.