Good day and welcome to the Bandwidth Fourth Quarter and Full Year 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded. I'd now like to turn the conference over to Sarah Walas, Vice President of Investor Relations. Please go ahead.

Good morning. Welcome to Bandwidth's fourth quarter 2024 earnings call. I'm joined today by 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. Our earnings press release was issued earlier today. The press release and an earnings presentation with historical financial highlights and a reconciliation of GAAP to non-GAAP financial results can be found on the Investor Relations page at investors.bandwidth.com. 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 first quarter and full year 2025 and our current product roadmap. We caution you not to put undue reliance on these forward-looking statements as they may involve risks and uncertainties that may cause actual results to vary materially from any future results or outcomes expressed or implied by the forward-looking statements. Any forward-looking statements made on this call and in 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. With that, let me turn the discussion over to David.

Thank you, Sarah and good morning, everyone. Welcome to Bandwidth's fourth quarter and full year 2024 earnings call. This morning, we are excited to share our 2024 results with exceptional performance across all key metrics. Before Daryl dives into the specifics, let me highlight our fourth quarter achievements. 27% revenue growth with record annual non-GAAP gross margins, 25% EBITDA growth, 122% net retention rate, and average annual recurring revenue per customer is now at $226,000 a year. Our operational momentum was equally strong, with record-breaking quarterly messaging volume, successful global rollout of our universal platform, hundreds of enterprises now utilizing our Maestro platform, while Maestro's AIBridge software enables customers to develop new voice AI capabilities on this award-winning platform, and 29% growth in enterprise revenue driven by strong CCaaS and UCaaS adoption. We want to thank our customers worldwide for their continued trust and partnership, many spanning more than a decade. To our global bandmates, your innovation and customer dedication have been extraordinary, and I thank God for blessing us and our work together. Looking ahead in 2025, we are uniquely positioned to capitalize on the massive opportunity in enterprise communications. Let me explain why. First, we've earned the trust of the world's most demanding enterprises for their mission-critical communications needs. We are the only provider offering a global communications cloud combined with advanced automation, AI capabilities and premium human support. This unique position has earned us IDC's recognition as a CPaaS leader for the fourth consecutive year. Bandwidth has been a leader in every major communications transformation throughout our history. We pioneered cloud communications APIs on our own network, then revolutionized enterprise messaging at scale. Now, we're driving the most transformative wave yet conversational AI in voice communications. This isn't just another iteration in technology, it is a revolutionary…

Thank you, David. Bandwidth delivered strong financial results exceeding guidance for both the fourth quarter and full year of 2024. This performance was driven by robust growth in voice and messaging across all customer categories. For our Q4 2024 results, total revenue increased by 27% to $210 million with cloud communications revenue reaching $144 million, a 15% year-over-year increase. Non-GAAP gross margin improved to 58%, a three-percentage point increase. EBITDA grew by 25% to $23 million. Free cash flow saw a significant increase of 130%, reaching $30 million. In terms of full year 2024 results, total revenue reached $748 million, a 25% increase year-over-year. Cloud communications revenue was $540 million, up 13% year-over-year. Full year non-GAAP gross margin was 57%, a two-percentage point increase. EBITDA increased substantially by 70% to $82 million, and free cash flow showed remarkable growth of 206%, reaching $59 million. Political campaign messaging contributed $62 million to total revenue and $23 million to cloud communications revenue for the full year in line with our expectations. Political campaign message revenue represented 4% of cloud communications revenue. Focusing on our full year 2024 cloud communications revenue growth, enterprise voice revenue grew 29% year-over-year, driven by strong demand within key verticals. Despite a relatively longer sales cycle, this category shows very positive demand patterns and benefits from margins approximately 20 percentage points higher than our overall company non-GAAP gross margin. As the only global cloud communications voice provider and the only provider of an AI voice orchestration experience, we hold a unique position to service this market. Our largest category, global voice plans, met our expectations at 3% revenue growth year-over-year as the underlying communications provider for all Gartner Magic Quadrant leaders in UC and CX. We're encouraged by the stability and growing momentum in this category, especially anticipating…

Thank you. [Operator Instructions] And today's first question comes from Arjun Bhatia with William Blair. Please go ahead.

Yes, perfect. Thank you for taking the question. One quick one. If I can just start on the fourth quarter results. It looks like if I am backing out political, it looks like cloud communications revenue ex-political growth slowed slightly in Q4. So, Daryl, I'm curious, what kind of excluding all the political noise, what ended up playing out in the fourth quarter, and how you're thinking of fourth quarter results plus that 122% net retention base as a starting point for your 2025 plans here?

Hey, there. Thank you. We were really pleased with the execution this last year in 2024 with our record performance across revenue, profitability and free cash flow. For the full year, cloud communications grew 13% and when we adjust for the political campaign revenue, it grew 8%. For the fourth quarter, those adjustments were cloud communications revenue growing 15% and excluding campaign seven point something percent. So, I think that it's pretty much -- the fourth quarter is really honestly in line with the full year.

Okay. Understood. And then just again going back to 2025, the 2025 guide, how should we think about kind of growth rates across your three core kind of segments in global communications, programmable services and enterprise? It seems like you're certainly getting some traction here with Maestro and direct enterprise. Should we expect that to be the big growth driver again in next year as we're looking at the outlook? And could you just please touch on the macro and the demand environment? It sounds like things are improving there, which is great to hear. Thank you.

Yes. So, certainly. So, for the full year guide, just as a reminder, we've guided total revenue to $740 million to $760 million with a midpoint of $750 million, which is 9%, 10% growth at the midpoint when normalized for the $62 million of political campaign messaging cyclicality. So that 9%, 10% growth at the midpoint is, we think is sturdy. And we're seeing that from expected growth across each of our customer categories. Global voice plans, enterprise voice and programmable messaging. We're actually with global voice plans, we are expecting the growth in '25 to be more than it was in '24. And that's a large portion of our revenue. And we're seeing -- as we said in the prepared remarks, we're seeing both stabilization and growing momentum. And we're really gratified with what we understand our customers, what we see as our customers, initiatives in AI which drives cloud usage across our network. So, we're pleased with that. Enterprise voice is only -- continues to be a really good driver outback from a small base. And we see early good traction already in '25 on that. And programmable messaging, we think we see that pretty much steady on when adjusted for political campaign. Programmable messaging, we've been really proud of in terms of the commercial aspects of that. Again, adjusting for the political campaign cyclicality, our commercial programmable messaging growth has well exceeded the growth of others. And we believe we're taking market share and we'll continue to take market share.

Perfect. Thank you. Thank you, Daryl. I appreciate it.

Thank you. And our next question today comes from Ryan MacWilliams with Barclays. Please go ahead.

Hey, guys. Thanks for the question. David, Just I love your breakdown on why Bandwidth was positioned well for the voice AI agent opportunity. Can you just talk about what like your customers are talking like, describing their demand for that? Like, is that like on a couple years from now or is that happening now? And then how does Bandwidth relationships with the contact center provider help win those voice AI agents that are attaching either before or on top of the contact center. Does that help your competitive positioning there? Thanks.

Thank you, Ryan. Those are great questions and some of the examples we gave in the period I think really highlight the answers. The leading global hospitality brand that we talked about has an AI agent experience for their customers that are staying in their hotels. And they've really revolutionized the guest experience by allowing that AI agent to always be available and that the customer can speak to access everything from room service to housekeeping. Importantly, when the AI agent needs to escalate, then it gets routed directly to hotel staff. So that leading brand already has an agent in marketing and used bandwidth in order to give that AI agent a voice. The second part of your question regarding contact centers and what role do they play, I think is really illustrated by the Fortune 25 healthcare provider that we talked about. They were switching cloud contact center platforms and the incumbents gave them an incredibly long timeframe for doing so. The incumbents gave them no Maestro equivalent orchestration layer that allowed them to be pre-integrated with the new contact center platform they were migrating to. Nor was there any way to integrate AI capabilities that this Fortune 25 healthcare provider has on its roadmap. So, whether it's a leading hotel globally that already has an agent in market that's serving customers or a Fortune 25 healthcare provider that's planning for that agent AI future, we are watching our enterprise customers make decisions whether it's to migrate between cloud contact centers or to give an AI agent a voice. We're seeing that today.

Perfect. I appreciate that color. And then, Daryl, just on the first quarter guide, any puts and takes there? I know we're coming up the election, but it just seemed a touch more conservative than folks were expecting. And any fluctuations in macro in the fourth quarter or in the first quarter, that we should think about. Thanks.

Yeah. Thank you. Absolutely, Ryan. Our first quarter guidance of $169 million at the midpoint is relatively flat year-over-year from first quarter of '24. But it is up 4% normalized for the $8 million of political campaign benefit in first quarter of '24, the prior quarter. So, we are seeing growth there. Now in terms of the mix within top line cloud communications and surcharges, we are expecting surcharges to be lower in first quarter of '25 than they are in first quarter of '24. That's just based on mix and it's based on the fact that there was $5 million of political messaging surcharges in first quarter of '24 well. So, we have those dynamics going on and then that essentially explains it across our organic growth.

And Ryan, I just want to add to Daryl's comments there. This is the 29th straight quarter and it's all quarters since we've gone public that we are meeting or exceeding our guidance. And that's just the team that we are. When we look forward, we make sure that we are projecting what we know we can do. But if I zoom out back to your earlier question about AI agents, our firm conviction is that the AI agent moment that we're in will exceed as a durable opportunity for us and our space. What work-from-home represented back during COVID, that was temporary. Work-from-home was a fad. The AI future for voice. It's the future. It's no fad and it represents, we think, an extraordinary opportunity. But the guide that we have is based on the presentation, our enthusiasm is based on the future.

I appreciate that perspective and color. Thanks, guys.

Thank you. And our next question today comes from Patrick Walravens with Citizens Bank. Please go ahead.

Great. Thank you. Two questions. I guess, first of all, can you just talk a little bit about what's going on in terms of your enterprise go-to-market and the salesforce like that hotel deal that you described, David. How do you land something like that? Is that a salesperson? And then, Daryl, if you wouldn't mind touching on where we are on the long-term prospects around the debt, that would be awesome. Thank you.

Thank you, Pat. We have an early channel program that is going to market with indirect partners and that's proved to be effective. But these large enterprise customers that we're growing and revenue for the enterprise space for us was up 29% year-over-year in '24. But those customer wins, like I talked about, are almost always direct, right now. Our channel progress is early, we're excited about it and we've got a lot of catching up to do to compete well in that space with others that are already there. So, our go-to-market motion in enterprise is direct. We have an excellent Chief Revenue Officer and enterprise team. They're active and these wins represent their hard efforts.

Hey, Pat. This is Daryl. In terms of our capital structure and our balance sheet strength and in specific your question around leverage and debt, long-term debt, yesterday, it's worth probably remarking. Yesterday we entered the market and completed a repurchase of essentially the remaining $35 million of the 2026 notes that will be due in March of next year. We purchased as much as we could subject to the repurchase rules, and that was just a little short of $30 million. So that's essentially done. And we did that with just cash on hand. Looking forward, the March -- 1st of April, March 2028 note, so $250 million at face amount, we think that that represents very, very manageable leverage. If you take our last -- not next 12 months, but if you take our last 12 months, $82 million of EBITDA and you adjust for the recent repurchase of the almost $30 million on that $35 million of 2026, and you take into account the $250,000 and you subtract out cash on hand to get to a net debt balance, we're running it just at 2.0 or on last 12 months EBITDA or just slightly less than 2.0 on the round of leverage on net debt. And we feel that that is extraordinarily manageable and really suitable for our size company. So, we really don't have a conversation internally anymore around leverage. We're really focused on our growth prospects and our investments in AI.

That's terrific. Thank you both.

Thank you, Pat.

And our next question today comes from Meta Marshall with Morgan Stanley. Please go ahead.

Great, thanks. I just wanted to ask a little bit more about kind of Maestro traction. Is there a way to kind of say how many accounts have grown on Maestro kind of year-over-year, or a way to kind of contextualize? Are these largely new customers that are coming to the platform or existing customers? And just kind of what efforts are being made, particularly for existing customers, to kind of upsell them the Maestro product? That'd be helpful. Thanks.

Thanks, Meta. The customer examples we gave in the period are just a selection of hundreds that have begun using Maestro. And when we say hundreds, keep in mind our average customer spend annually is over $200,000 a year, and we don't have free to use customers. The three examples we gave all focus on Maestro as a path forward for them to orchestrate different aspects of their voice solution. And that includes lots of AI agent use cases. So, while we haven't provided KPI or particular metrics yet on Maestro revenue or things like that, it's hundreds of enterprise customers, and that's very significant. It's not thousands and thousands of developers using for free. These are folks that spend significant money with us today and new to your good second part of your question. And that layer is often, I think, undervalued. Our approach to AI is to support this extraordinarily explosive moment when everyone is building their own agent and they need to connect them to a telephony layer, easily integrate them into CCaaS and UCaaS. We're not trying to provide a best of breed agent for very specific use cases. We're realizing this layer welcomes everyone to bring the best agents that they've built and I think that's really unique. AIBridge similarly allows them to tap into the pre-integrations to some really powerful AI solutions that are like Google Dialogflow, like Cognigy. We've added two more. So both the AIBridge and Maestro components of our solution are vital to support the enterprises that are thinking about the future. But the only metric we provided is hundreds of them are already using it since we launched last year.

Great. Thanks so much.

Thank you. And our next question today comes from Ryan Koontz with Needham. Please go ahead.

Great morning and congrats on a nice finish to the year here. Daryl, can you comment on the increasing mix of A2P fees? Kind of what's behind that mechanically? Is that a higher percentage of A2P typically with the political traffic? And then also, what are your assumptions for these faster [ph] fees in your guidance for the quarter and the year ahead in '25? Thanks.

Yeah. Thank you. That is -- it’s a really great question. We started the year from the first quarter of last year through the fourth quarter with the growing political mix and just the growing political demand, campaign demand that was within the messaging overall sales. We saw that their attach rate and their mix of surcharges increased and it differed from what the normal mix of surcharges or the attached rate for surcharges would be for our commercial messaging customers in aggregate. We do expect that in first quarter of '25 that now absent the political campaign cyclicality, the attach rate of surcharges to our commercial messaging will regress and return to that rate that we experienced in first quarter of '24. And that's why we outright expect both surcharges to be down, not just because -- or to be lower and say more efficient or a lower attach rate to a dollar earned in commercial messaging, but not just from political campaign, but on average as well. So, you're seeing that. So, you picked -- that's a good dynamic to point out. I'm glad you asked that question.

Great. Thanks. And then in terms of new developments, you talk a lot about the impact of AI with Maestro on your voice business. Are you starting to see much of an impact from AI implementations, maybe from your customers using LLMs on messaging volumes.

Related to messaging volumes is the requirement to register campaigns. And we have an AI solution internally that does precampaign vetting and that expedites campaign registration approvals significantly from days and days down to hours. And so, the current messaging solution that we have related to AI, it's important because messaging has grown. But make no mistake, the future of AI as an experience in business to business and in consumer is in voice. So, if you zoom out, ChatGPT and the text based interface that AI really began with is very, very quickly hurtling toward an elegant voice to voice interface. And it will be the primary way that most folks engage with and utilize AI. Grok 3's voice service I think drops this week and we've been watching many, many go-to-market AI opportunities relative to voice. So, we're thrilled and excited to be in the tech stack and in the solution roadmap for AI's primary user experience, which is voice.

Got it. Really helpful, David. Thank you. And any quick thoughts about RCS and if that starts to impact the messaging business at all in '25?

Yeah. We're excited. We're excited about RBM and RCS and are supporting it and believe that it's a vital part of the messaging strategy, especially for businesses. And it's a proof point for our leadership historically in messaging. We are an RBM partner with Google. We were very early to market with them. The speed of the US mobile operator rollout is important. Two of the big three are now operational for testing, which is awesome. But yes, RBM, RCS, both game changers for business messaging and we're going to be a leader for large enterprise on that dimension and just like we are today in SMS.

Great. Thanks so much for the questions.

Thank you.

Thank you. And our next question comes from Will Power of Baird. Please go ahead.

Okay. Great, thanks. Yeah. We just kind of want to follow up on some of the previous comments on growth drivers for 2025, particularly the global voice plan. It sounds like you do expect growth to improve. And I wondered if you could drill down any further as to the drivers there. Is that share gains within UCaaS or CCaaS, or just better trends within one of those customer cohorts? Any other color I guess you can provide on the visibility and the opportunity there?

Thanks, Will. We launched the universal platform and are watching it, watching its uptake globally. So, footprint I would describe as the most important first driver that underpins the expansion of our global communications plans. Then on top of that enterprise adoption of our platform that immediately scales globally. So, if you have a US domiciled enterprise that comes on board, almost every time they have a global need, and so that drives global communications plans in our forecast. And then last, as I've talked about, there is not a significant enterprise anywhere that isn't already neck deep understanding the voice agent opportunity that they have. And so that will also drive part of our growth and forecasting for GCP and globally for voice.

Okay. Great. Thank you. End of Q&A:

Thank you. Ladies and gentlemen, this concludes our question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.