Bandwidth Inc. Q3 FY2025 earnings call

• Bandwidth delivered solid execution, with outperformance in revenue and profitability, extending momentum from the first half. - Accelerating growth in core voice business driven by broad-based demand across global voice plans and enterprise market offers, with real-world AI voice usage growing and record million-dollar-plus deals in Q3. - Innovation showcased at Reverb25 with announcements on AI and software strategy, including AI receptionist, Bandwidth Activation agent, expanded trust services portfolio (number reputation management), and RCS for business partnership. - Key customer wins in financial services, health care, property management, etc., leveraging Maestro software and AI-optimized infrastructure. - Focus on evolving toward higher mix of software-driven revenue, expanding margin performance, and deepening customer loyalty.

Total revenue for Bandwidth Inc. Third Quarter 2025 was $192 million, representing an 11% year-over-year increase. Cloud communications revenue reached $142 million, up 8% year-over-year on a normalized basis. Enterprise voice revenue grew 22% year-over-year, driven by strong adoption among existing customers and new wins. Global voice plans, the largest customer category, saw 7% year-over-year revenue growth, more than doubling the prior year's growth rate. Programmable Messaging achieved a normalized 6% year-over-year growth. Non-GAAP gross margin was 58%. Net retention rate for the third quarter was 105% (excluding 2024 political campaign revenue benefit), customer name retention remained above 99%, and average annual revenue per customer set a record at $231,000 (or $224,000 excluding 2024 political campaign revenue), up 46% over the last 3 years.

Full year revenue guidance tightened with midpoint yielding 10% organic revenue growth year-over-year, driven by stronger voice growth and moderated messaging surcharge growth. Cloud communications revenue growth raised to 8% organically year-over-year. Adjusted EBITDA outlook raised to $91 million midpoint, representing about $1.30 non-GAAP earnings per share. Medium-term targets (2023-2026) include above-market revenue growth, 60%+ gross margin, 20%+ EBITDA margin, and 15%+ free cash flow margin.

No specific risks detailed in the provided transcript, but generally, forward-looking statements involve risks and uncertainties that could cause actual results to vary from projections, as outlined in the latest 10-K and SEC filings.

Q: Congratulations to you guys. David, for you first, can you maybe drill down a little more on what your overall conversations are like and what you're seeing, how you characterize sort of overall demand? And then I think -- I thought the property management example was particularly interesting. And then on the financial side, maybe if you guys could remind us what those 2026 medium-term targets actually are and so what it means when you say that you're driving towards them?

A: Thanks, Pat. And I'll answer the first part of your question and then hand it over to Daryl. I'd characterize broadly the conversations that we're having with customers consistent with signing a record number of $1 million-plus revenue customers again this period for the second time this year. That stat reflects broad-based demand. Voice is growing in a way that's really healthy and exciting, and every conversation is reflecting the AI moment that we're all in. Maestro is a fundamental component of the example that you cited regarding the property management software company. And I think that one illustrates a consistent dialogue we're having with enterprises who are moving to the cloud. They have multiple vendors that they're either consolidating or trying to orchestrate. And the combination of Maestro and the network that we own and operate is really resonating. And again, that's reflected by a record number of large enterprise deals and then average customer spend continuing to grow at record pace. But let me turn it over to Daryl for the second part of your question.

Q: Maybe just starting off, I know you had some strong customer additions in the first half of '25. Curious how those have been ramping into revenue and going live now. And then you mentioned some strong customer additions here in Q3, $1 million-plus customers. Can you just speak to broadly like how long is the period transitioning from when you get the customer win to when you're actually getting them live? And how much is that compressing because of maybe internal processes that you continue to improve?

A: You bet. Deal cycles from initiation to close have been consistent, although the channel opportunities that we've enjoyed have compressed that deal cycle significantly in an exciting way. But as customers come on board, they have continued to ramp as we've projected based upon the systems that we have in place, the personnel that we have in place, the policies and practices that bring them aboard and allow them to move mission-critical phone numbers and sites and services in a way that preserves continuity. So, there's always a concern about making sure that services are uninterrupted, but we're very, very good at working with enterprises and have an extraordinarily high level of customer support that allows them to onboard elegantly and to scale in a way that we're really familiar with projecting. And so, the large number of significantly larger annual operating revenue deals or annual recurring revenue deals that we signed at the beginning of this year continue to contribute to the success and the solid results in this period and we will continue to do so into next year.

Q: On the digital commerce one, I found that one interesting. Are you seeing customers like this more and more in terms of deploying a DIY strategy? Or are you integrating more and more with some of these conversational AI tools that is leading to wins like this?

A: So, it's a great example of a very large at-scale e-commerce point-of-sale related customer allowing small business to take advantage of AI at a very local DIY level to enable food ordering and delivery. And we are seeing as one of the primary use cases for voice AI, scheduling, calendaring, ordering and fulfilling at the very front lines of small and medium business nationwide. So yes, I think, James, you're accurate in saying this looks like or sounds like a real reference implementation for a growing trend. And so, we are seeing conversations like this more frequently.

Q: On the 2025 revenue guidance, I think you suggested you were narrowing the range a bit or look like raising the low end a bit. And I think you cited stronger voice trends. So, I guess, a, it would be great just to get any further color on the upside in your voice calling plans versus enterprise voice or is it maybe both? And then maybe just any other color on what's happening on the messaging side. It sounds like a little somewhat weaker outlook there.

A: Okay. Yes. So glad that you asked me to clarify that. We are -- we tightened our range on the lower end with respect to revenue. Our midpoint is just with the decimal slightly above $753 million. Within that is 2 elements. In cloud communications, we've raised that guidance, the implied guidance that builds into the $753 million on the strength of voice. And within cloud communications, we've held messaging as we had fully expected already in line with what we had guided previously. The other component, surcharges, we've lowered that modestly just based in terms of the carrier pricing environment, carrier mix and the type of messaging mix as we're entering in a very large fourth quarter messaging seasonality with Black Friday, Cyber Monday. We have good line of sight to our customers' demand, and we see surcharges coming in a little lower. That lower surcharges, as you know, doesn't contribute anything to gross margin or EBITDA. And so, we are very enthused when it comes to being able to raise our cloud communications revenue.

Q: This number of reputation management product really seems like a nice opportunity and good market fit. I mean, just given what a lot of us as consumers kind of see on a regular basis. So maybe just talk about the trends you're seeing there and kind of how you view that opportunity? How meaningful could that product addition be?

A: Yes, great question. The trends you see is the consumer, our customers see, and it hurts their business. They are trying to -- businesses are trying to reach consumers, and the consumers won't pick up the phone. So, it's a very basic value proposition, and it is something that we, with our owned and operated network can attack head on and there's immediate value in there. And so, as you did hear, we were -- it's driving customer wins now. We launched it with our direct enterprise customers. This week, we launched it to wholesale customers as well to address their unique needs. And so, we do see global opportunity for that product.