|Shares Out. (in M):||20||P/E||0||0|
|Market Cap (in $M):||1,000||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Bandwidth.com (BAND) is a leading North American Communications Platform as a Service (“CPaaS”) provider, with most of its revenue coming from powering Unified Communication as a Service (“UCaaS”) related customers. For simplicity, we will mostly refer to the broader CPaaS market to avoid too many acronyms.
BAND is not your typical VIC long that is cheap on traditional PE and FCF metrics, as the company is currently investing behind its growth opportunity. Key investment highlights include the following:
What is CPaaS?
CPaaS essentially provides an outsourced communications software platform that quickly, reliably and cost-effectively enables mobile applications and unified communications (VOIP calling, voice and video conferencing and team collaboration). BAND rents phone numbers and provides wholesale voice usage minutes and texts as a service to its customers. More than 90% of BAND’s CPaaS revenue is voice related (mainly UCaaS) while most of the remainder is messaging related. TWLO does not break out its voice vs. messaging revenue, but messaging is a much larger component of its revenue compared to BAND. The vast majority of BAND’s voice-related CPaaS revenue comes from powering UCaaS companies like GOOG, MSFT, Cisco Webex, RingCentral and 8x8. See the Appendix for more detail on CPaaS.
Source: Morgan Stanley research, 12/5/17
Led by founder and controlling shareholder David Morken, BAND is a leading North American CPaaS company. Until the mid-2000’s, BAND was primarily a reseller of long-distance services. In 2007, GOOG acquired Grand Central, which in its current form is the GOOG Voice product. BAND was a supplier of long-distance minutes to Grand Central. After the Grand Central acquisition, GOOG helped fund BAND’s buildout of a nationwide CLEC network. With a nationwide CLEC network established, BAND started offering wholesale CPaaS voice services to GOOG, Skype, Cisco-Webex and others. In 2011, Bandwidth acquired Dash Carrier Services (“Dash”), which provides carrier 911 services to its CPaaS customers, enabling high margin 911 calling from Voice over Internet Protocol (“VOIP”) lines and through mobile phone apps.
In 2010, Mr. Morken created a mobile virtual network operator (“MVNO”) within BAND called Republic Wireless that sold low cost mobile phone service. Republic was spun off in 2016 to make BAND a pure play CPaaS company prior to IPO in 2017.
BAND is aggressively investing in sales and marketing to drive growth in existing clients and add new customers, in the process taking EBITDA margins down from 15% to close to breakeven. Prior to its IPO, BAND had been boot-strapped and run more like a private equity backed company. Consequently, BAND was unable to invest in the high growth CPaaS market to the same degree as TWLO. We believe that investors are materially underestimating the future CPaaS revenue growth that will be driven by these investments, creating a compelling entry point for longer-term investors.
BAND should compound CPaaS revenue at 25%+ annually over the next four years. The UCaaS market should grow high teens annually and BAND’s large UCaaS customers (GOOG, MSFT, RNG, and EGHT) should grow in excess of this rate. Adding new CPaaS customers in areas outside of UCaaS should lead to additional growth. Adding in the optionality of international expansion increases the CPaaS revenue growth to the mid-30’s. As this growth materializes, BAND offers an excellent return for investors, even without any narrowing of the valuation discount to TWLO.