Bandwidth Inc.
07/29/2026 | Press release | Distributed by Public on 07/29/2026 05:34
Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" in this Quarterly Report on Form 10-Q. Our fiscal year ends on December 31.
Overview
A global communications transformation is underway, and we believe Bandwidth is at the center. Our mission is to develop and deliver the power to communicate. We enable innovative organizations-from startup app developers to the world's largest enterprises-to engage their end-users and deliver exceptional experiences everywhere people live, learn, work, and play. Backed by the Bandwidth Communications Cloud, our global owned-and-operated network spanning more than 65 countries reaching over 90 percent of global gross domestic product ("GDP"), innovative enterprises use Bandwidth's Application Programming Interfaces ("APIs") to easily embed voice, messaging, emergency services, and artificial intelligence ("AI") capabilities into software and applications. Bandwidth was the first cloud communications provider to offer a robust selection of APIs built on our own cloud platform. Our award-winning support teams help businesses around the world transform their communications every day.
Bandwidth is strategically positioned at the intersection of enterprise communications and AI. As global enterprises adopt AI-driven tools to modernize customer experiences, we believe AI voice will become a critical new layer of value creation. Our Maestro™ platform and Communications Cloud are designed to support this evolution, enabling the orchestration of AI voice agents across diverse environments with superior quality, reliability, and scale. We see our emerging leadership in AI Voice as a natural extension of our long-term strategy to power trusted, mission-critical communications for the world's largest enterprises.
Bandwidth's business continues to benefit from the application of AI technologies to cloud communications use cases, the enterprise migration to the cloud, adoption of Contact Center as a Service platforms, the need to be able to work from anywhere, the reinvention of customer experience, and the growth in messaging applications to engage directly with consumers. We believe these market trends are secular, long-lasting, and still early in the adoption curve.
With the combination of our software APIs, our global Communications Cloud, our AI orchestration capabilities, and our broad range of experience with global regulatory frameworks, we believe Bandwidth is one of the best-positioned providers in our space to deliver mission-critical communications for global enterprises. In fact, Bandwidth already powers all the 2025 GartnerⓇ Magic Quadrant Leaders in the key cloud communications categories of Unified Communications as a Service ("UCaaS") and Contact Center as a Service ("CCaaS"), along with leading hyperscalers and Software as a Service ("SaaS") platforms.
We aim to be the key enabling platform for communications transformation in the AI era. We will seek to do this in three ways: (1) cross-sell and up-sell our existing customers as they benefit from our global footprint, powerful APIs, and AI orchestration capabilities to automate and scale cloud communications; (2) focus on direct-to-enterprise growth to serve Global 2000 enterprises that directly leverage Bandwidth services to accelerate their digital transformations; and (3) be the preferred provider for enterprises and SaaS platforms that use conversational voice and messaging to create digital engagements that enhance the customer experience. These three strategies are the foundation of the durable business we seek to build.
Management's Discussion and Analysis
For the three months ended June 30, 2026 and 2025, total revenue was $220 million and $180 million, respectively, representing an increase of 22% between periods. For the three months ended June 30, 2026 and 2025, net income was $2 million and net loss was $5 million, respectively. For the six months ended June 30, 2026 and 2025, total revenue was $429 million and $354 million, respectively, representing an increase of 21% between periods. For the six months ended June 30, 2026 and 2025, net income was $7 million and net loss was $9 million, respectively.
Share Repurchase Program
During February 2026, our board of directors authorized a share repurchase program to repurchase up to $80 million in aggregate value of our Class A common stock, subject to market conditions, contractual restrictions and other factors. The repurchases may be made from time to time at the discretion of management through open market purchases, block trades, privately negotiated transactions, Rule 10b5-1 plans or other means.
During the three months ended June 30, 2026, we repurchased 262,858 shares of our Class A common stock at an average price of $57.06 per share, excluding commissions, for an aggregate purchase price of $15 million. During the six months ended June 30, 2026, we repurchased 576,794 shares of our Class A common stock at an average price of $34.67 per share, excluding commissions, for an aggregate purchase price of $20 million. As of June 30, 2026, approximately $60 million remained available for repurchases under the share repurchase program.
Repurchase of 2028 Convertible Notes
On March 1, 2026, the 2026 Convertible Notes matured and the related 2026 Capped Calls expired. The aggregate remaining outstanding principal amount of $8 million of 2026 Convertible Notes, along with all accrued and unpaid interest, was settled in full in cash. As of June 30, 2026, no 2026 Convertible Notes remain outstanding.
During March 2026, we entered into separate, privately negotiated repurchase agreements with a limited number of holders of the 2028 Convertible Notes (the "March 2026 Repurchases") to repurchase approximately $100 million aggregate principal amount of the 2028 Convertible Notes for an aggregate cash price of approximately $92 million. The March 2026 Repurchases closed on March 4, 2026.
During June 2026, we entered into separate, privately negotiated repurchase agreements with a limited number of holders of the 2028 Convertible Notes (the "June 2026 Repurchases") to repurchase approximately $122 million aggregate principal amount of the 2028 Convertible Notes for an aggregate cash price of approximately $116 million. The June 2026 Repurchases closed on June 18, 2026.
In the aggregate, the difference between the consideration used for the March 2026 Repurchases and June 2026 Repurchases, and the carrying value of the 2028 Convertible Notes resulted in a gain of $12 million recorded within net gain on extinguishment of debt on our condensed consolidated statements of operations for the six months ended June 30, 2026. Following the March 2026 Repurchases and June 2026 Repurchases, approximately $28 million aggregate principal amount of the 2028 Convertible Notes remains outstanding.
Issuance of 2032 Convertible Notes
On June 18, 2026, we issued $316 million aggregate principal amount of 0% Convertible Notes due July 1, 2032 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act (the "2032 Convertible Notes"). The total net proceeds from the 2032 Convertible Notes, after deducting initial purchaser discounts, costs related to the 2032 Capped Calls (as defined herein), and debt issuance costs paid by us, were approximately $282 million.
Management's Discussion and Analysis
Key Performance Indicator
We monitor the following key performance indicator to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.
Net Retention Rate
We believe net retention rate is useful in evaluating our business. For the three months ended June 30, 2026 and 2025, our net retention rate was 107% and 112%, respectively. The decrease in our net retention rate was driven by less political messaging over the previous four quarters relative to the prior year.
Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our existing customers that generated revenue and seek to increase their use of our platform. We track our performance in this area by measuring the net retention rate for our customers who generate revenue. To calculate the net retention rate, we first identify the cohort of customers that generated revenue in the same quarter of the prior year. The net retention rate is obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year. The net retention rate reported in a quarter is then obtained by averaging the result from that quarter, by the corresponding results from each of the prior three quarters. Customers of acquired businesses are included in the subsequent year's calendar quarter of acquisition. Our net retention rate increases when such customers increase usage of a product, extend usage of a product to new applications or adopt a new product. Our net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our solutions.
As our customers grow their businesses and increase usage of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of revenue in a quarterly reporting period) that has created a new customer, this new customer is tied to, and revenue from this new customer is included with, the original customer for the purposes of calculating this metric.
Key Components of Statements of Operations
Revenue
Cloud communications revenue is derived from (i) reoccurring sources such as per minute voice usage and voice calling, per text message usage and other usage services and fees, and (ii) monthly recurring charges arising from phone number services, 911-enabled phone number services, messaging services, software services and other services. Messaging surcharge revenue is derived from fees imposed by certain carriers within the messaging ecosystem, which are subsequently invoiced and passed through to customers.
For the three months ended June 30, 2026 and 2025, we generated 74% and 73%, respectively, of our cloud communications revenue from reoccurring sources. For the six months ended June 30, 2026 and 2025, we generated 74% and 73%, respectively, of our cloud communications revenue from reoccurring sources. The large bulk of our remaining cloud communications revenue is generated from recurring monthly charges.
We recognize accounts receivable at the time the customer is invoiced. Additionally, we record a receivable for unbilled revenue if services have been delivered and are billable in subsequent periods. Unbilled revenue made up 59% and 55%, of outstanding accounts receivable, net of allowance, as of June 30, 2026 and 2025, respectively.
Cost of Revenue and Gross Margin
Cost of revenue consists of fees paid to other network service providers, network operations costs, personnel costs, allocated costs of facilities and information technology, amortization of acquired technology intangibles and depreciation.
Management's Discussion and Analysis
Fees paid to other network service providers arise when we purchase services such as minutes of use, phone numbers, messages, porting of customer numbers and network circuits.
Network operations costs are incurred for web services and cloud infrastructure, capacity planning and management, software licenses, hardware and software maintenance fees, customer support and network-related facility rents.
Personnel costs (including non-cash stock-based compensation expenses) arise for employees who are responsible for the delivery of services and the operations and maintenance of the communications network.
Gross margin is calculated by subtracting cost of revenue from revenue, divided by revenue, expressed as a percentage. Our cost of revenue and gross margin have been, and will continue to be, affected by several factors, including the timing and extent of our investments in our network, our ability to manage off-network minutes of use and messaging costs, changes to the mix or amount of personnel-related costs included in our cost of revenue, the product mix of revenue, the timing of amortization of capitalized software development costs and fluctuations in the price we charge our customers for services.
Operating Expenses
The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation expenses. We also incur other non-personnel costs related to our general overhead expenses, including facility expenses, software licenses, web services, depreciation and amortization of assets unrelated to delivery of our services. We expect that our operating expenses will increase in absolute dollars driven by the growth in our business.
Research and Development
Research and development expenses consist of salaries and related personnel costs for the design, development, testing and enhancement of our cloud network and software products. Research and development expenses include depreciation and allocated costs of facilities and information technology utilized by our research and development staff.
Sales and Marketing
Sales and marketing expenses consist of salaries and related personnel costs, commissions, and costs related to advertising, marketing, brand awareness activities, sales support and professional services fees, and customer billing and collections functions. Sales and marketing expenses include depreciation, amortization of acquired customer relationship intangible assets, and allocated costs of facilities and information technology utilized by our sales and marketing staff.
General and Administrative
General and administrative expenses consist of salaries and related personnel costs for accounting, legal, human resources, corporate, and other administrative and compliance functions. General and administrative expenses include depreciation, expenditures for third party professional services, and allocated costs of facilities and information technology utilized by our corporate and administrative staff.
Income Taxes
For the three months ended June 30, 2026 and 2025, our effective tax rate was 693.8% and (2.8)%, respectively. For the three months ended June 30, 2026 and 2025, our income tax benefit was $3 million and our income tax expense was less than $1 million, respectively. The increase in tax benefit is primarily due to favorable U.S. federal and state tax law changes as a result of the One Big Beautiful Bill Act ("OBBBA").
Management's Discussion and Analysis
For the six months ended June 30, 2026 and 2025, our effective tax rate was (197.0)% and (0.8)%, respectively. For the six months ended June 30, 2026 and 2025, our income tax benefit was $4 million and our income tax expense was less than $1 million, respectively. The increase in tax benefit is primarily due to favorable U.S. federal and state tax law changes as a result of the OBBBA.
Judgment is required in determining whether deferred tax assets will be realized in full or in part. Management assesses the available positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized and when it is more likely than not that all or some deferred tax assets will not be realized, and a valuation allowance must be established. As of June 30, 2026, we continue to maintain a valuation allowance against our U.S. federal and state net deferred tax assets.
Management's Discussion and Analysis
Results of Operations
The following table sets forth selected condensed consolidated statements of operations data for the periods indicated.
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Revenue | $ | 219,897 | $ | 180,013 | $ | 428,681 | $ | 354,254 | |||||||||||||||
| Cost of revenue | 141,354 | 108,349 | 272,224 | 211,078 | |||||||||||||||||||
| Gross profit | 78,543 | 71,664 | 156,457 | 143,176 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 37,343 | 31,749 | 75,809 | 62,381 | |||||||||||||||||||
| Sales and marketing | 25,360 | 24,818 | 49,987 | 51,274 | |||||||||||||||||||
| General and administrative | 20,393 | 18,845 | 39,835 | 37,956 | |||||||||||||||||||
| Total operating expenses | 83,096 | 75,412 | 165,631 | 151,611 | |||||||||||||||||||
| Operating loss | (4,553) | (3,748) | (9,174) | (8,435) | |||||||||||||||||||
| Other income (expense), net: | |||||||||||||||||||||||
| Net gain on extinguishment of debt | 5,163 | - | 12,446 | 1,082 | |||||||||||||||||||
| Interest expense, net | (967) | (547) | (1,640) | (1,035) | |||||||||||||||||||
| Other (expense) income, net | (45) | (500) | 558 | (217) | |||||||||||||||||||
| Total other income (expense), net | 4,151 | (1,047) | 11,364 | (170) | |||||||||||||||||||
| (Loss) income before income taxes | (402) | (4,795) | 2,190 | (8,605) | |||||||||||||||||||
| Income tax benefit (provision) | 2,789 | (136) | 4,315 | (66) | |||||||||||||||||||
| Net income (loss) | $ | 2,387 | $ | (4,931) | $ | 6,505 | $ | (8,671) | |||||||||||||||
The following table sets forth selected condensed consolidated statements of operations data as a percentage of our total revenue for the periods presented. *
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
| Cost of revenue | 64 | % | 60 | % | 64 | % | 60 | % | |||||||||||||||
| Gross profit | 36 | % | 40 | % | 36 | % | 40 | % | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 17 | % | 18 | % | 18 | % | 18 | % | |||||||||||||||
| Sales and marketing | 12 | % | 14 | % | 12 | % | 14 | % | |||||||||||||||
| General and administrative | 9 | % | 10 | % | 9 | % | 11 | % | |||||||||||||||
| Total operating expenses | 38 | % | 42 | % | 39 | % | 43 | % | |||||||||||||||
| Operating loss | (2) | % | (2) | % | (2) | % | (2) | % | |||||||||||||||
| Other income (expense), net: | |||||||||||||||||||||||
| Net gain on extinguishment of debt | 2 | % | - | % | 3 | % | - | % | |||||||||||||||
| Interest expense, net | - | % | - | % | - | % | - | % | |||||||||||||||
| Other (expense) income, net | - | % | - | % | - | % | - | % | |||||||||||||||
| Total other income (expense), net | 2 | % | (1) | % | 3 | % | - | % | |||||||||||||||
| (Loss) income before income taxes | - | % | (3) | % | 1 | % | (2) | % | |||||||||||||||
| Income tax benefit (provision) | 1 | % | - | % | 1 | % | - | % | |||||||||||||||
| Net income (loss) | 1 | % | (3) | % | 2 | % | (2) | % | |||||||||||||||
(*) Columns may not foot due to rounding.
Management's Discussion and Analysis
Comparison of the three months ended June 30, 2026 and 2025
Revenue
| Three months ended June 30, | |||||||||||||||||||||||
| 2026 | 2025 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cloud communications | $ | 151,869 | $ | 135,857 | $ | 16,012 | 12 | % | |||||||||||||||
| Messaging surcharges | 68,028 | 44,156 | 23,872 | 54 | % | ||||||||||||||||||
| Revenue | $ | 219,897 | $ | 180,013 | $ | 39,884 | 22 | % | |||||||||||||||
For the three months ended June 30, 2026, our cloud communications revenue increased by $16 million, or 12%, compared with the same period in 2025. Within cloud communications revenue, our Global Voice Plans revenue grew by 10% and was driven by higher voice traffic on our network. Our Programmable Messaging revenue increased by 22% benefiting from elevated commercial messaging activity during the quarter. Our Enterprise Voice revenue grew by 8%, remaining constructive as customers increasingly chose Maestro for its software-driven orchestration layer that enables resilient, scalable global voice communications.
For the three months ended June 30, 2026, our messaging surcharges revenue increased by $24 million, or 54%, compared with the same period in 2025. This increase was primarily driven by higher commercial messaging activity, as well as increased carrier surcharges within the messaging ecosystem.
For the three months ended June 30, 2026, our average annual customer revenue was $0.3 million, which increased by 11% compared with the same period in 2025, as a result of our strategy to attract and retain larger customers who provide revenue scale and enhanced profitability.
Cost of Revenue and Gross Margin
| Three months ended June 30, | |||||||||||||||||||||||
| 2026 | 2025 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 141,354 | $ | 108,349 | $ | 33,005 | 30 | % | |||||||||||||||
| Gross profit | $ | 78,543 | $ | 71,664 | $ | 6,879 | 10 | % | |||||||||||||||
| Total gross margin | 36 | % | 40 | % | |||||||||||||||||||
For the three months ended June 30, 2026, total cost of revenue increased by $33 million, compared with the same period in 2025, driven by higher pass-through messaging surcharges of $23 million primarily from higher commercial messaging activity. The combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of $7 million, or 10% from the same period in 2025, driven by higher cloud communications revenue.
For the three months ended June 30, 2026, our total gross margin percentage of 36% decreased by 4%, compared with the same period in 2025, driven by higher pass-through messaging surcharges within the total revenue mix.
Management's Discussion and Analysis
Operating Expenses
| Three months ended June 30, | |||||||||||||||||||||||
| 2026 | 2025 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 37,343 | $ | 31,749 | $ | 5,594 | 18 | % | |||||||||||||||
| Sales and marketing | 25,360 | 24,818 | 542 | 2 | % | ||||||||||||||||||
| General and administrative | 20,393 | 18,845 | 1,548 | 8 | % | ||||||||||||||||||
| Total operating expenses | $ | 83,096 | $ | 75,412 | $ | 7,684 | 10 | % | |||||||||||||||
As a percentage of revenue, total operating expenses for the three months ended June 30, 2026 and 2025 were 38% and 42%, respectively.
For the three months ended June 30, 2026, research and development expenses increased by $6 million, or 18%, compared with the same period in 2025. The increase was primarily from higher personnel-related expenses associated with increased research and development headcount to support continued investment in product innovation and platform development.
For the three months ended June 30, 2026, sales and marketing expenses increased by $1 million, or 2%, compared with the same period in 2025, primarily due to primarily due to higher non-headcount operating expenses.
For the three months ended June 30, 2026, general and administrative expenses increased by $2 million, or 8%, compared with the same period in 2025, driven by higher headcount expenses in connection with ongoing operational support needs.
Interest Expense, Net
For the three months ended June 30, 2026, interest expense, net of interest income increased by less than $1 million compared with the same period in 2025, primarily from an increase in interest expense resulting from borrowing on our Credit Facility (as defined herein).
Income Tax Benefit (Provision)
For the three months ended June 30, 2026, we recognized an income tax benefit of $3 million, an increase of $3 million compared with the same period in 2025. The resulting effective tax rate for the three months ended June 30, 2026 was 693.8%, compared with (2.8)% for the three months ended June 30, 2025. The increase in income tax benefit was primarily due to favorable U.S. federal and state tax law changes as a result of the OBBBA.
For the three months ended June 30, 2026, the effective tax rate of 693.8% differed from the federal statutory rate of 21% in the U.S. primarily due to the valuation allowance recorded against our U.S. federal and state net deferred tax assets, as well as differences in statutory income tax rates across foreign jurisdictions.
We continue to expect recurring changes to the valuation allowance as deferred tax assets within the U.S. increase or decrease in subsequent periods. We will maintain a valuation allowance against all U.S. federal and state deferred tax assets until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized.
Management's Discussion and Analysis
Comparison of the six months ended June 30, 2026 and 2025
Revenue
| Six months ended June 30, | |||||||||||||||||||||||
| 2026 | 2025 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cloud communications | $ | 302,026 | $ | 269,315 | $ | 32,711 | 12 | % | |||||||||||||||
| Messaging surcharges | 126,655 | 84,939 | 41,716 | 49 | % | ||||||||||||||||||
| Revenue | $ | 428,681 | $ | 354,254 | $ | 74,427 | 21 | % | |||||||||||||||
For the six months ended June 30, 2026, our cloud communications revenue increased by $33 million, or 12%, compared with the same period in 2025. Within cloud communications revenue, our Global Voice Plans revenue grew by 11% and was driven by higher voice traffic on our network. Our Programmable Messaging revenue increased by 18%, benefiting from elevated commercial messaging activity during the quarter. Our Enterprise Voice revenue grew by 11%, remaining constructive as customers increasingly chose Maestro for its software-driven orchestration layer that enables resilient, scalable global voice communications.
For the six months ended June 30, 2026, our messaging surcharges revenue increased by $42 million, or 49%, compared with the same period in 2025. This increase was primarily driven by higher commercial messaging activity and higher surcharge fees imposed by certain carriers within the messaging ecosystem.
Cost of Revenue and Gross Margin
| Six months ended June 30, | |||||||||||||||||||||||
| 2026 | 2025 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 272,224 | $ | 211,078 | $ | 61,146 | 29 | % | |||||||||||||||
| Gross profit | $ | 156,457 | $ | 143,176 | $ | 13,281 | 9 | % | |||||||||||||||
| Total gross margin | 36 | % | 40 | % | |||||||||||||||||||
For the six months ended June 30, 2026, total cost of revenue increased by $61 million, compared with the same period in 2025, driven by higher pass-through messaging surcharges of $41 million primarily from higher commercial messaging activity. The combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of $13 million, or 9%, from the same period in 2025, driven by higher cloud communications revenue.
For the six months ended June 30, 2026, our total gross margin percentage of 36% decreased by 4% compared with the same period in 2025, driven by higher pass-through messaging surcharges within the total revenue mix.
Management's Discussion and Analysis
Operating Expenses
| Six months ended June 30, | |||||||||||||||||||||||
| 2026 | 2025 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 75,809 | $ | 62,381 | $ | 13,428 | 22 | % | |||||||||||||||
| Sales and marketing | 49,987 | 51,274 | (1,287) | (3) | % | ||||||||||||||||||
| General and administrative | 39,835 | 37,956 | 1,879 | 5 | % | ||||||||||||||||||
| Total operating expenses | $ | 165,631 | $ | 151,611 | $ | 14,020 | 9 | % | |||||||||||||||
As a percentage of revenue, total operating expenses for the six months ended June 30, 2026 and 2025 were 39% and 43%, respectively.
For the six months ended June 30, 2026, research and development expenses increased by $13 million, or 22%, compared with the same period in 2025. Our continued investment in evolving our network infrastructure was the key driver behind this increase.
For the six months ended June 30, 2026, sales and marketing expenses decreased by $1 million, or 3%, compared with the same period in 2025, primarily due to lower headcount expenses from lower average headcount during the period.
For the six months ended June 30, 2026, general and administrative expenses increased by $2 million, or 5%, compared with the same period in 2025, driven by higher headcount expenses in connection with ongoing operational support needs.
Interest Expense, Net
For the six months ended June 30, 2026, interest expense, net of interest income increased by less than $1 million compared with the same period in 2025, primarily from an increase in interest expense resulting from borrowing on our Credit Facility.
Income Tax Benefit (Provision)
For the six months ended June 30, 2026, we recognized an income tax benefit of $4 million, an increase of $4 million compared with the same period in 2025. The resulting effective tax rate for the six months ended June 30, 2026 was (197.0)%, compared with (0.8)% for the six months ended June 30, 2025. The increase in income tax benefit was primarily due to favorable U.S. federal and state tax law changes as a result of the OBBBA.
For the six months ended June 30, 2026, the effective tax rate of (197.0)% differed from the federal statutory rate of 21% in the U.S. primarily due to the valuation allowance recorded against our U.S. federal and state net deferred tax assets, as well as differences in statutory income tax rates across foreign jurisdictions.
We continue to expect recurring changes to the valuation allowance as deferred tax assets within the U.S. increase or decrease in subsequent periods. We will maintain a valuation allowance against all U.S. federal and state deferred tax assets until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized.
Management's Discussion and Analysis
Liquidity and Capital Resources
Our liquidity is provided by our cash flow from operations less expenditures for capital equipment, and supplemented by financing activities from time to time. Our cash flow from operations is driven by monthly payments from customers for communication services consumed during the period. Our primary uses of cash include operating costs, such as fees paid to other network service providers, network operations costs, personnel costs and facility expenses, as well as the purchase of property, plant and equipment to support growth on our communications platform and repurchases of shares of our Class A common stock under our share repurchase program. As of June 30, 2026, we had cash and cash equivalents of $170 million and marketable securities of $4 million.
In August 2023, we entered into a credit agreement (as amended to date, the "Credit Agreement"), among the Company, as borrower, the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent, swingline lender and letters of credit issuer, which provides for a $150 million revolving credit facility (the "Credit Facility"). As of June 30, 2026, we had no outstanding borrowings under the Credit Facility and the available borrowing capacity was $150 million. See Note 7, "Debt," to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding the Credit Agreement, including a summary of the current terms of the Credit Facility.
In March 2026, we repaid the remaining $8 million aggregate principal amount of the 2026 Convertible Notes. We also repurchased $100 million aggregate principal amount of the 2028 Convertible Notes for an aggregate cash price of $92 million, reducing the outstanding principal balance to approximately $150 million.
In June 2026, we issued $316 million aggregate principal amount of the 2032 Convertible Notes. The total net proceeds from the 2032 Convertible Notes, after deducting initial purchaser discounts, costs related to the 2032 Capped Calls (as defined herein), and debt issuance costs, paid by us, were approximately $282 million. We used approximately $122 million of those proceeds to repurchase additional 2028 Convertible Notes, reducing the outstanding principal balance to approximately $28 million. We may, at any time and from time to time, seek to retire or purchase our 2028 Convertible Notes or 2032 Convertible Notes through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
We believe that our cash, cash equivalents and marketable securities balances, and the cash flows generated by our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled "Risk Factors." We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.
Our principal future commitments consist of (i) an aggregate of $344 million in Convertible Notes, (ii) $441 million in future minimum rent payments for our current office space, including a $434 million non-cancelable lease for our corporate headquarters, which commenced in the third quarter of 2023 and which will continue for an initial twenty (20) year term, and (iii) $21 million in non-cancelable purchase obligations and future minimum payments under contracts to various service providers. For additional information on these future contractual obligations, see Note 7, "Debt," and Note 11, "Commitments and Contingencies," to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Management's Discussion and Analysis
Cash Flows
The table below summarizes our cash flow information for the periods presented:
| Six months ended June 30, | |||||||||||
| 2026 | 2025 | ||||||||||
| (In thousands) | |||||||||||
| Net cash provided by operating activities | $ | 37,540 | $ | 28,638 | |||||||
| Net cash used in investing activities | (10,376) | (22,067) | |||||||||
| Net cash provided by (used in) financing activities | 41,000 | (29,067) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1,151) | 657 | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 67,013 | $ | (21,839) | |||||||
Cash Flows from Operating Activities
For the six months ended June 30, 2026, net cash provided by operating activities was $38 million and was generated by our aggregate results of $52 million during the period, net of (1) non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred taxes and other, net gain on extinguishment of debt and (2) a $14 million cash outflow, primarily from lower operating liabilities and higher operating assets. Within operating liabilities, net cash provided of $9 million was primarily attributable to an increase in accounts payable as a result of the timing of payments at quarter end. Within operating assets, the net cash used of $23 million was primarily driven by higher unbilled receivables balances of $19 million from higher usage amounts in the last month of the quarter ended June 30, 2026 and changes in prepaid expenses and other current assets of $4 million.
Cash Flows from Investing Activities
For the six months ended June 30, 2026, net cash used in investing activities was $10 million, primarily reflecting $10 million of capital expenditures for property, plant and equipment and $5 million of capitalized software development costs related to investments in our communications platform, partially offset by $4 million of net proceeds from marketable securities.
Cash Flows from Financing Activities
For the six months ended June 30, 2026, net cash provided by financing activities was $41 million, primarily reflecting net proceeds of $282 million from the issuance of the 2032 Convertible Notes, after debt issuance costs and capped call payments, partially offset by $216 million used to repurchase the 2028 Convertible Notes. We also used $20 million for share repurchases under our share repurchase program and $5 million for tax withholdings on vested employee awards.
Management's Discussion and Analysis
Non-GAAP Financial Measures
We use Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net income, Adjusted EBITDA and free cash flow for financial and operational decision making and to evaluate period-to-period differences in our performance. Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net income, Adjusted EBITDA and free cash flow are non-GAAP financial measures, which we believe are useful for investors in evaluating our overall financial performance. We believe these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key performance indicators used by management in its financial and operational decision making. See below for a reconciliation of each of the non-GAAP financial measures described below.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
GAAP defines gross profit as revenue less cost of revenue. Cost of revenue includes all expenses associated with our various service offerings as more fully described under the caption "Key Components of Statements of Operations-Cost of Revenue and Gross Margin."
We calculate Non-GAAP gross margin by dividing Non-GAAP gross profit by cloud communications revenue.
In our calculation of Non-GAAP gross profit and Non-GAAP gross margin, we eliminate the impact of depreciation and amortization, amortization of acquired intangible assets related to acquisitions, stock-based compensation and related payroll taxes, pass-through messaging surcharges, and all significant non-cash items, because we do not consider them indicative of our core operating performance. The exclusion of these items facilitates comparisons of our operating performance on a period-to-period basis. Management uses Non-GAAP gross profit and Non-GAAP gross margin to evaluate operating performance and to determine resource allocation among our various service offerings. We believe Non-GAAP gross profit and Non-GAAP gross margin provide useful information to investors and others to understand and evaluate our operating results in the same manner as our management and board of directors and allows for better comparison of financial results among our competitors. Non-GAAP gross profit and Non-GAAP gross margin may not be comparable to similarly titled measures of other companies because other companies may not calculate Non-GAAP gross profit and Non-GAAP gross margin or similarly titled measures in the same manner we do.
The following table shows a reconciliation of gross profit to non-GAAP gross profit and gross profit margin to non-GAAP gross margin for the periods presented:
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Gross Profit | $ | 78,543 | $ | 71,664 | $ | 156,457 | $ | 143,176 | |||||||||||||||
| Gross Profit Margin % | 36 | % | 40 | % | 36 | % | 40 | % | |||||||||||||||
| Depreciation | 6,122 | 5,160 | 11,948 | 9,838 | |||||||||||||||||||
| Amortization of acquired intangible assets | 5,060 | 2,042 | 10,134 | 3,939 | |||||||||||||||||||
| Stock-based compensation and related payroll taxes | 521 | 530 | 986 | 1,055 | |||||||||||||||||||
| Non-GAAP Gross Profit | $ | 90,246 | $ | 79,396 | $ | 179,525 | $ | 158,008 | |||||||||||||||
|
Non-GAAP Gross Margin % (1)
|
59 | % | 58 | % | 59 | % | 59 | % | |||||||||||||||
________________________
(1) Calculated by dividing Non-GAAP gross profit by cloud communications revenue of $152 million and $302 million for the three and six months ended June 30, 2026, respectively, and $136 million and $269 million for the three and six months ended June 30, 2025, respectively.
Management's Discussion and Analysis
Non-GAAP Net Income
We define Non-GAAP net income as net income or loss adjusted for certain items affecting period-to-period comparability. Non-GAAP net income excludes:
•stock-based compensation and related payroll taxes;
•amortization of acquired intangible assets related to acquisitions;
•amortization of debt discount and issuance costs for convertible debt;
•acquisition related expenses;
•impairment charges of intangibles assets, if any;
•net cost associated with early lease terminations and leases without economic benefit;
•(gain) loss on sale of business;
•net (gain) loss on extinguishment of debt;
•gain on business interruption insurance recoveries;
•non-recurring items not indicative of ongoing operations and other; and
•estimated tax impact of above adjustments, net of valuation allowances.
We calculate Non-GAAP basic and diluted shares by adding the weighted average of outstanding Series A redeemable convertible preferred stock, if any, to the weighted average number of outstanding basic and diluted shares, respectively. The tax-effect of Non-GAAP adjustments is determined by recalculating the tax provision on a Non-GAAP basis. When we have a valuation allowance recorded and no tax benefits will be recognized, the rate is considered to be zero.
We believe Non-GAAP net income is a meaningful measure because by removing certain non-cash and other expenses, we are able to evaluate our operating results in a manner we believe is more indicative of the current period's performance. We believe the use of Non-GAAP net income may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations and assists in comparisons with other companies, many of which may use similar Non-GAAP financial information to supplement their GAAP results. As a result of the adoption of ASU No. 2020-06 on January 1, 2022, we add back cash interest expense on the Convertible Notes, as if converted at the beginning of the period, if the impact is dilutive for the purposes of calculating diluted Non-GAAP net income or loss per Non-GAAP share.
Management's Discussion and Analysis
The following table shows a reconciliation of net income (loss) to non-GAAP net income and net income (loss) per share to non-GAAP net income per non-GAAP share for the periods presented:
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
|
(In thousands, except share and per share amounts)
|
|||||||||||||||||||||||
| Net income (loss) | $ | 2,387 | $ | (4,931) | $ | 6,505 | $ | (8,671) | |||||||||||||||
| Stock-based compensation and related payroll taxes | 15,385 | 12,545 | 28,375 | 26,120 | |||||||||||||||||||
| Amortization of acquired intangibles | 7,586 | 4,565 | 15,190 | 8,852 | |||||||||||||||||||
| Amortization of debt discount and issuance costs for convertible debt | 214 | 278 | 457 | 576 | |||||||||||||||||||
| Net gain on extinguishment of debt | (5,163) | - | (12,446) | (1,082) | |||||||||||||||||||
|
Non-recurring items not indicative of ongoing operations and other (1)
|
(746) | 278 | (1,134) | 817 | |||||||||||||||||||
|
Estimated tax effects of adjustments (2)
|
(6,106) | (905) | (10,872) | (3,652) | |||||||||||||||||||
| Non-GAAP net income | $ | 13,557 | $ | 11,830 | $ | 26,075 | $ | 22,960 | |||||||||||||||
|
Interest expense on Convertible Notes (3)
|
125 | 238 | 335 | 488 | |||||||||||||||||||
| Numerator used to compute Non-GAAP diluted net income per share | $ | 13,682 | $ | 12,068 | $ | 26,410 | $ | 23,448 | |||||||||||||||
| Net income (loss) per share | |||||||||||||||||||||||
| Basic | $ | 0.07 | $ | (0.16) | $ | 0.20 | $ | (0.29) | |||||||||||||||
| Diluted | $ | (0.07) | $ | (0.16) | $ | (0.15) | $ | (0.29) | |||||||||||||||
| Non-GAAP net income per Non-GAAP share | |||||||||||||||||||||||
| Basic | $ | 0.42 | $ | 0.40 | $ | 0.82 | $ | 0.78 | |||||||||||||||
| Diluted | $ | 0.37 | $ | 0.38 | $ | 0.72 | $ | 0.74 | |||||||||||||||
| Weighted average number of shares outstanding | |||||||||||||||||||||||
| Basic | 32,129,631 | 29,889,020 | 31,906,992 | 29,438,230 | |||||||||||||||||||
| Diluted | 33,490,677 | 29,889,020 | 33,225,729 | 29,438,230 | |||||||||||||||||||
| Non-GAAP basic shares | 32,129,631 | 29,889,020 | 31,906,992 | 29,438,230 | |||||||||||||||||||
| Convertible debt conversion | 1,361,046 | 1,478,379 | 1,318,737 | 1,568,075 | |||||||||||||||||||
| Stock options issued and outstanding | 35,993 | 14,988 | 42,020 | 19,471 | |||||||||||||||||||
| Nonvested RSUs outstanding | 3,515,243 | - | 3,186,926 | 482,045 | |||||||||||||||||||
| Non-GAAP diluted shares | 37,041,913 | 31,382,387 | 36,454,675 | 31,507,821 | |||||||||||||||||||
(1) Non-recurring items not indicative of ongoing operations and other include (i) $(0.8) million and $(1.4) million of foreign exchange charges primarily related to balance sheet revaluations during the three and six months ended June 30, 2026, respectively, (ii) less than $0.1 million and $0.2 million of losses on disposals of property, plant and equipment during the three and six months ended June 30, 2026, respectively, (iii) $0.2 million of losses on disposals of property, plant and equipment during the three and six months ended June 30, 2025, (iv) $0.1 million of losses on sale of business during the three and six months ended June 30, 2025, and (v) $0.5 million of nonrecurring litigation expense during the six months ended June 30, 2025.
(2) The estimated tax-effect of adjustments is determined by recalculating the tax provision on a Non-GAAP basis. The Non-GAAP effective income tax rate was 20.1% and 13.9% for the six months ended June 30, 2026 and 2025, respectively. We analyze the Non-GAAP valuation allowance position on a quarterly basis. As of June 30, 2026, we have no valuation allowance against our deferred tax assets for Non-GAAP purposes.
(3) Non-GAAP net income is increased for interest expense as part of the calculation for diluted Non-GAAP earnings per share.
Management's Discussion and Analysis
Adjusted EBITDA
We define Adjusted EBITDA as net income or losses from continuing operations, adjusted to reflect the addition or elimination of certain income statement items including, but not limited to:
•income tax (benefit) provision;
•interest (income) expense, net;
•depreciation and amortization expense;
•acquisition related expenses;
•stock-based compensation expense and related payroll taxes;
•impairment of intangible assets, if any;
•(gain) loss on sale of business;
•net cost associated with early lease terminations and leases without economic benefit;
•net (gain) loss on extinguishment of debt;
•gain on business interruption insurance recoveries; and
•non-recurring items not indicative of ongoing operations and other.
Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends, to generate future operating plans and to make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis.
The following table shows a reconciliation of net income (loss) to Adjusted EBITDA for the periods presented:
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net income (loss) | $ | 2,387 | $ | (4,931) | $ | 6,505 | $ | (8,671) | |||||||||||||||
| Income tax (benefit) provision | (2,789) | 136 | (4,315) | 66 | |||||||||||||||||||
| Interest expense, net | 967 | 547 | 1,640 | 1,035 | |||||||||||||||||||
| Depreciation | 10,141 | 8,750 | 19,924 | 16,966 | |||||||||||||||||||
| Amortization | 7,586 | 4,565 | 15,190 | 8,852 | |||||||||||||||||||
| Stock-based compensation and related payroll taxes | 15,385 | 12,545 | 28,375 | 26,120 | |||||||||||||||||||
| Net gain on extinguishment of debt | (5,163) | - | (12,446) | (1,082) | |||||||||||||||||||
|
Non-recurring items not indicative of ongoing operations and other (1)
|
(746) | 278 | (1,134) | 817 | |||||||||||||||||||
| Adjusted EBITDA | $ | 27,768 | $ | 21,890 | $ | 53,739 | $ | 44,103 | |||||||||||||||
(1) Non-recurring items not indicative of ongoing operations and other include (i) $(0.8) million and $(1.4) million of foreign exchange charges primarily related to balance sheet revaluations during the three and six months ended June 30, 2026, respectively, (ii) less than $0.1 million and $0.2 million of losses on disposals of property, plant and equipment during the three and six months ended June 30, 2026, respectively, (iii) $0.2 million of losses on disposals of property, plant and equipment during the three and six months ended June 30, 2025, (iv) $0.1 million of losses on sale of business during the three and six months ended June 30, 2025, and (v) $0.5 million of nonrecurring litigation expense during the six months ended June 30, 2025.
Management's Discussion and Analysis
Free Cash Flow
Free cash flow represents net cash provided by or used in operating activities less net cash used in the acquisition of property, plant and equipment and capitalized development costs of software for internal use. We believe free cash flow is a useful indicator of liquidity and provides information to management and investors about the amount of cash generated from our core operations that can be used to invest in our business. Free cash flow has certain limitations because it is subject to working capital timing, it does not represent the total increase or decrease in the cash balance for the period, it does not take into consideration investment in long-term securities, nor does it represent residual cash flows available for discretionary expenditures. Therefore, it is important to evaluate free cash flow along with our condensed consolidated statements of cash flows.
The following table presents free cash flow for the periods presented:
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 28,772 | $ | 31,721 | $ | 37,540 | $ | 28,638 | |||||||||||||||
|
Net cash used in investing in capital assets (1)
|
(5,033) | (6,090) | (14,383) | (16,302) | |||||||||||||||||||
| Free cash flow | $ | 23,739 | $ | 25,631 | $ | 23,157 | $ | 12,336 | |||||||||||||||
(1) Represents the acquisition cost of property, plant and equipment and capitalized development costs for software for internal use.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions, and any such differences may be material.
There have been no material changes to our critical accounting policies and significant judgments and estimates as compared to the critical accounting policies and significant judgments and estimates disclosed in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on February 19, 2026.
Recently Issued Accounting Guidance
See Note 1, "Description of Business and Summary of Significant Accounting Policies," to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of recently adopted accounting standards and recent accounting pronouncements not yet adopted, if applicable.
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