Bandwidth's Q3 2025 Earnings Call: Contradictions Emerge on AI-Driven Revenue, Voice Growth, Margins, and Customer Expansion

Date of Call: None provided

Financials Results

• Revenue: $192M total revenue, up 11% year over year (normalized for Q3 2024 political campaign revenue); Cloud Communications Services $142M, up 8% YoY (normalized)
• Gross Margin: 58% non-GAAP; held despite messaging headwind from absent political campaign revenue; company targeting 60%+ gross margin over medium term

Guidance:

• Tightened full-year 2025 revenue range with midpoint yielding ~10% organic revenue growth YoY
• Increased full-year cloud communications revenue growth to ~8% organic YoY
• Raised full-year adjusted EBITDA outlook to $91M at midpoint (~$1.30 non-GAAP EPS)
• Expect 2025 annualized software MRR exit rate > $10M
• 2026 medium-term targets: above-market revenue growth; >=60% gross margin; >=20% EBITDA margin; >=15% free cash flow margin

Business Commentary:

* Voice Revenue Growth and AI Integration: - Bandwidth's Enterprise Voice revenue increased by 22% year over year. - The growth was driven by strong adoption among existing customers and expanding software revenue, with AI-powered voice initiatives contributing significantly.

• Software and Services Revenue Expansion:
• The company reported a growing contribution from software and services revenue, which helped offset the absence of political campaign messaging revenue from the previous year.

• This trend is supported by an increasing mix of recurring software-driven revenue and AI-driven intelligence and automation in the cloud.

• programmable Messaging Performance:

• Programmable Messaging achieved a normalized year-over-year growth of 6%.

• The growth aligns with expectations, reflecting stable demand despite moderated expectations for messaging surcharge growth.

• Customer Retention and Satisfaction:

• The company's net retention rate for the third quarter was 105%, with an average annual revenue per customer setting a record at $231,000.
• Strong customer retention and satisfaction are attributed to disciplined execution and continuous innovation, with AI embedded in the services used daily by customers.

Sentiment Analysis:

Overall Tone: Positive

• Management: "Bandwidth delivered another solid quarter..." Total revenue "$192 million increased 11% year over year." CFO: "Adjusted EBITDA was $24 million, exceeding our expectations" and "we are raising our full-year adjusted EBITDA outlook, now reaching $91 million at the midpoint." These statements show beat, raised outlook, and product-driven optimism.

Q&A:

• Question from Pat Walravens (Citizens): Drill down on overall customer conversations and demand (e.g., property management example) and remind us of the 2026 medium-term targets.
  Response: Record pace of $1M+ customer wins and broad-based voice demand; medium-term targets are above-market revenue growth, >=60% gross margin, >=20% EBITDA margin, and >=15% FCF margin.

• Question from Joshua Riley (Needham): How are 1H2025 customer additions ramping into revenue and live deployments; are onboarding/deal cycles compressing?
  Response: Deal cycles are broadly consistent but channel is compressing cycles; customer ramps align with projections and large ARR deals continue to contribute to revenue.

• Question from Joshua Riley (Needham): How are new software products layering into Enterprise Voice versus Global Voice Plans—which segment is adopting them?
  Response: Products launch for enterprise first but are rapidly rolled to Global Voice Plans; both segments are adopting the software offerings.

• Question from James Fish (Piper Sandler): For the digital commerce AI voice example, are customers pursuing DIY approaches or integrating with conversational AI partners?
  Response: Both approaches are used; Bandwidth supports standards-based integrations enabling DIY implementations and pre-built partner integrations.

• Question from Pat Walravens (Citizens): Can you explain gross margin dynamics—messaging surcharge weakness, segment gross margins, and international versus domestic mix?
  Response: Non-GAAP gross margin was 58% despite messaging headwinds from missing political campaign revenue; growing software revenue offset the headwind and international (nearly all voice) grew 11% YoY; expect >$10M annualized software MRR exit.

• Question from Will Power (Baird): Clarify the narrowed 2025 revenue guidance—is the upside driven by voice (calling plans or Enterprise Voice) and what's the messaging outlook?
  Response: Revenue range tightened with a midpoint just above $753M driven by stronger voice trends; messaging surcharges expected modestly lower (which don't impact gross margin or EBITDA).

• Question from Will Power (Baird): How do you view the opportunity for Number Reputation Management and the trends driving it?
  Response: NRM addresses falling answer rates and fraud concerns, is already driving wins, launched to enterprise and wholesale, and represents a sizable global growth opportunity.

Contradiction Point 1

AI Impact on Revenue Growth

It directly impacts expectations regarding the revenue growth driven by AI use cases, which are a key strategic focus for the company and crucial for investor expectations.

Can you discuss the overall demand outlook and how you characterize it? Can you clarify the 2026 medium-term targets? - Pat Walravens(Citizens)

2025Q3: Maestro was a critical component of every single one of our enterprise wins, and the AI use case thesis continues to manifest, which is pleasing. - David Morken(CEO)

How will AI use cases impact additional voice minutes on the platform? How does this relate to the unchanged full-year revenue guidance? - Joshua Christopher Reilly(Needham & Company, LLC, Research Division)

2025Q2: Maestro was a critical component of every single one of our enterprise wins, and the AI use case thesis continues to manifest, which is pleasing. - David Morken(CEO)

Contradiction Point 2

Revenue Growth and Voice Calling Plans

It involves changes in financial forecasts, specifically regarding revenue growth expectations, which are critical indicators for investors.

Can you clarify the 2025 revenue guidance, particularly the growth potential in voice calling plans compared to Enterprise Voice? - Will Power(Baird)

2025Q3: Revenue range tightened with midpoint slightly above $753 million. Voice growth drove the increase. Messaging and surcharges held as expected, with lower surcharges due to carrier pricing environment. - Daryl Raiford(CFO)

What is the integration pace into the platform? How will the voice multiplier function as a step function? Will it be gradual? - Meta A. Marshall(Morgan Stanley, Research Division)

2025Q2: Revenue guidance for the second quarter is $181 million to $185 million with a normalized growth rate of 11%, indicating 12% for the full year. - Daryl Raiford(CFO)

Contradiction Point 3

Gross Margin Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

Can you discuss gross margin trends, particularly international vs. domestic mix? - James Fish (Piper Sandler)

2025Q3: Our gross margin held at 58% in Q3. We have confidently said in the past that we'd achieve 60% gross margins in 2026, and we have confidence that we will achieve this. - Daryl Raiford(CFO)

Will Blackwell's Q4 revenue be additive, and what is the expected gross margin exit rate? - Stacy Rasgon (Bernstein Research)

2025Q1: We expect our gross margins for the year to be in the mid-70s and Q3 gross margins are expected around 75%. - Daryl Raiford(CFO)

Contradiction Point 4

Demand and Customer Growth

It highlights potential inconsistencies in the company's reported demand and customer growth, which are crucial for understanding market traction and future revenue projections.

What’s your assessment of overall demand? - Pat Walravens(Citizens)

2025Q3: Conversations reflect broad-based demand with a record number of $1 million plus revenue customers. Voice is growing, and AI is a central topic. - David Morken(CEO)

What growth rates can we expect for your three core segments: global communications, programmable services, and enterprise? - Arjun Bhatia(William Blair)

2024Q4: We're seeing growth across global voice plans, enterprise voice, and programmable messaging. Global voice plans are expected to grow more than in 2024, thanks to AI driving cloud usage. - Daryl Raiford(CFO)

Contradiction Point 5

Customer Growth Dynamics

It involves differing perspectives on the growth trajectory and customer ramping periods, which can impact revenue projections and strategic planning.

How are first-half 2025 customer additions translating to revenue, and what's the duration of the transition period? - Pat Walravens (Citizens)

2025Q3: Our largest customer segment, which is over $1 million in annual recurring revenue, grew 7%. We added over $1 million in customer revenue in just three quarters, which is a significant acceleration. If you look into last year, we added over $1 million in customer revenue in 12 quarters, and this is a significant acceleration in the addition of large customers. - Daryl Raiford(CFO)

What are the key success factors and growth drivers for enterprise voice? How are you marketing the enterprise voice category—through partnerships or direct initiatives—and how do you source opportunities? - Arjun Bhatia (William Blair)

2025Q1: We signed more million dollar-plus annual revenue deals in Q1 than ever before, indicating strong traction. We have a direct sales motion to enterprises but are building on partnerships and selling through MSPs and channel partners. - David Morken(CEO)