Company Overview: A software-based company, Bandwidth Inc. (NASDAQ: BAND) is primarily focused on communications for the enterprises. The company is engaged in offering application programming interface (API) platform that owns a Tier 1 network with enhanced network capacity. The deployment of BAND’s API’s aids businesses to embed voice, messaging and 911 access into software and applications.

BAND Details

Higher CPaaS Revenues & Decent Cash Flow Aid BAND: Bandwidth Inc. (NASDAQ: BAND) is a provider of Communications Platform-as-a-Service (CPaaS) and offers software application programming interfaces for voice and messaging services. Founded in July 2000, the company was incorporated in Delaware on March 29, 2001. The company has two reporting segments, namely (1) CPaaS and (2) Other. Despite the global uncertainties led by COVID-19 outbreak, the company’s top line recorded a year over year growth, on the back of advanced technological solutions, higher revenues from CPaaS revenues, as well as increasing customer base, owing to business resiliency. The company’s CPaaS segment is expected to play a key role in accelerating its growth impetus, while delivering positive cash flow backed by cost-effective procedures, thus representing a key long-term growth driver for BAND.

Looking at the past performance over the period of FY18-FY20, the company reported a CAGR of 29.7% in total revenues, with continuous upward progress. Gross profit for the same time span increased at a CAGR of 28.3%. The below trend has been strongly backed by continued growth delivered by ongoing demand for high-quality advanced technological solutions, new customers’ addition, along with fundamental strength and relevance of BANDX’s solution offerings in an ever-growing market.

Key Trend (Source: Company Reports)

The company had collaborated with Relay to route 911 calls initiated by the Relay, thus leveraging its nationwide 911 network, E911 Dynamic Location Routing, and adaptable application programming interfaces to link with concerned parents for emergency services. Bandwidth's dynamic routing along with Relay's GPS tracking certifies that the emergency call is provided quickly to appropriate groups for proper action. This, in turn, will positively aid the company’s financial results, going forward. Recently, the company has informed the market that it has outperformed a key target of more than 20 million 911 endpoints under management throughout the U.S. and Canada. Such developments are likely to positively impact the company’s top-line performance in the long run.

A Look at 4QFY20 Key Results: During the quarter, the company benefitted from growing subscriber base and higher CPaaS revenues. Adjusted net income stood at 13 cents per share as compared to a loss of 2 cents per share in 4QFY19. Revenues during the quarter came in at $113 million, up 82.3% from $62 million reported in the year-ago quarter, owing to higher CPaaS revenues. Further, the top line was positively impacted by higher messaging due to the Presidential elections along with work-from-home trend caused by COVID-19 outbreak. Total operating expenses during the quarter came in at $63.9 million, up from ~$32.5 million reported in the year-ago quarter. Adjusted EBITDA stood at $8.3 million as compared to $1.2 million in 4QFY19.

Coming to the segmental performance, revenues from CPaaS segment stood at $98.1 million, representing a rise of 83.7% year over year and accounted for ~86.8% of total revenues. The increase was mainly driven by higher demand for work-from-home connectivity solutions. Further, higher volumes of political messaging traffic also positively impacted the CPaaS revenues. CPaaS segment saw an addition of 109 new customer and 700 new Voxbone customer in 4QFY20.  Notably, net retention rate (dollar-based) increased from 113% reported in 4QFY19 to 133% in 4QFY20.

4QFY20 Key Results (Source: Company Reports) 

BAND Completes Voxbone Buyout: Acquisition of Voxbone for an enterprise value of €446 million or $527 million complements Bandwidth’s product portfolio and allows it to provide a unified software platform to enhance customer’s experience on a global basis. This move depicts the company’s enhanced role in global enterprise cloud communications. The combined offering will enable numerous companies to combine video, voice, and text communications as part of their digital transition. This is likely to produce additional revenues in coming quarters and increase its subscriber base.

Key Update: Recently, the company informed the market that it has priced $250 million aggregate principal amount of Convertible Senior Notes, which is due to mature in 2028. Additionally, the company has given a 13-day option to the initial purchasers to buy up to an additional $37.5 million aggregate principal amount.

Top 10 Shareholders: The top 10 shareholders together form around 50.1% of the total shareholdings while the top 4 constitutes the maximum holding. The Vanguard Group, Inc. & Neuberger Berman, LLC are holding a maximum stake in the company at 8.22% and 6.94%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

Key Metrics & Decent Liquidity Position: In FY20, the company generated net cash from operating activities of $4.5 million as compared to net cash outflow $1.3 million in the year-ago period. Free cash flow for the same time span stood at -$7.7 million. The company exited the period with cash balance of $72.2 million. Total current liabilities at the end of the period amounted to $92.2 million. The available cash can be utilized for investment in growth initiatives, engaging in planned acquisitions, and enhancing shareholders’ value.  

In FY20, BAND reported EBITDA margin of 1.1% as compared to the year-ago figure of -3.2%. FY20’s current ratio stood at 2.1x, higher than the industry median of 1.09x, demonstrating a decent liquidity position. In FY20, debt to equity ratio of the company was 0.66x as compared to the industry median of 0.84x.

Profitability and Growth Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risks: Stiff competition, adverse currency translations and a volatile macroeconomic environment pose serious threat to the company’s financial position. Further, the company’s financial performance can be battered by increasing headcounts and personnel costs. This is turn may weigh on margin expansion, going forward. Also, changes in capital markets, legal requirements, monetary or geopolitical disruptions, might reduce demand for BAND’s offerings. It is worth noting that a major portion of the company’s revenue is focused on a limited number of enterprise customers. Therefore, loss of one or more top ten customers may decrease orders for the company’s services and may dampen its financial stability.

Outlook: For 1QFY21, the company expects revenues to be in the ambit of $108-$109 million, whereas adjusted earnings are expected to be in the range of 0-2 cents per share. CPaaS revenues for 1QFY21 are estimated to be within a range of $96.6-$97.6 million. For FY21, revenues are expected to be in the ambit of $460.4-$464.4 million, whereas adjusted earnings are likely to be in the ambit of 2-12 cents. Moreover, the company expects CPaaS revenues for FY21 to be in the band of $413.3-$417.3 million. The company remains on track to continue investing in key areas with robust cash flow, which provides the company with ample available liquidity for unforeseen events.

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~1.7%. The stock made a 52-week low and high of $61.76 and $198.6, respectively. On the technical analysis front, the stock has a support level of ~$111.49 and a resistance level of ~$144.2. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight premium as compared to its peer median on the back of growing subscriber base, higher CPaaS revenues and decent outlook. For the purpose, we have taken peers like RingCentral Inc (NYSE: RNG), Twilio Inc (NYSE: TWLO), to name a few.  Considering the company’s track record of robust cash flow from operations, decent 4QFY20 performance, encouraging outlook, growing subscriber base and valuation, we give a “Buy” recommendation on the stock at the current market price of $123, down by 2.95% on 05 April 2021. 

BAND Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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