Bandwidth Inc.
10/30/2025 | Press release | Distributed by Public on 10/30/2025 06:36
Quarterly Report for Quarter Ending September 30, 2025 (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, a global owned-and-operated network spanning more than 65 countries reaching over 90 percent of gross domestic product, innovative enterprises use Bandwidth's Application Programming Interfaces ("APIs") to easily embed voice, messaging and emergency services 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 solve complex communications challenges every day.
Bandwidth's business benefits from multiple global megatrends, including enterprise migration to the cloud, adoption of Contact Centers as a Service ("CCaaS") platforms, the need to be able to work from anywhere, reinvention of customer experience, growth in messaging applications to engage directly with consumers, and application of artificial intelligence ("AI") technologies to cloud communications use cases. We believe these megatrends, which have created sizable total addressable markets, are secular, long-lasting and still early in the adoption curve.
With the combination of our software APIs, our global Communications Cloud 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 2024 GartnerⓇMagic Quadrant Leaders in the key cloud communications categories of Unified Communications as a Service ("UCaaS") and CCaaS.
Our long-term vision is to continue strengthening this position as the key enabling platform for communications transformation. 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 and powerful APIs 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) aim to be the preferred provider for Software as a Service ("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.
For the three months ended September 30, 2025 and 2024, total revenue was $192 million and $194 million, respectively, representing a decrease of 1% between periods. For the three months ended September 30, 2025 and 2024, net loss was $1 million and net income was less than $1 million, respectively. For the nine months ended September 30, 2025 and 2024, total revenue was $546 millionand $539 million, respectively, representing an increase of 1% between periods. For the nine months ended September 30, 2025 and 2024, net loss was $10 millionand $5 million, respectively.
Management's Discussion and Analysis
Repurchase of 2026 Convertible Notes
During February 2025, we entered into the 2025 Repurchases to repurchase approximately $27 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $26 million.The 2025 Repurchases closed on February 24, 2025. Following the 2025 Repurchases and previous repurchases of the 2026 Convertible Notes, approximately $8 million aggregate principal amount of the 2026 Convertible Notes remains outstanding.
The difference between the consideration used for the 2025 Repurchases and the carrying value of the 2026 Convertible Notes resulted in a gain of $1 million recorded within net gain on extinguishment of debt on our condensed consolidated statements of operations for the nine months ended September 30, 2025.
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 September 30, 2025 and 2024, the net retention rate was 105% and 117%, respectively. The decline in our net retention rate was driven by lower political messaging revenue following the U.S. presidential election in November 2024.
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 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.
Management's Discussion and Analysis
For the three months ended September 30, 2025 and 2024, we generated 74% and 75%, respectively, of our cloud communications revenue from reoccurring sources. For the nine months ended September 30, 2025 and 2024, we generated 73% and 74%, 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 58% and 55% of outstanding accounts receivable, net of allowances, as of September 30, 2025 and 2024, 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.
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.
Management's Discussion and Analysis
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
Our effective tax rate was 64.8% and 228.7% for the three months ended September 30, 2025 and 2024, respectively, and 18.3% and 21.0% for the nine months ended September 30, 2025 and 2024, respectively. The decrease in the effective tax rate from 2024 to 2025 is primarily due to an increased operating loss in the U.S. This increased operating loss did not result in a corresponding increase to income tax benefit because the related deferred tax assets are subject to a valuation allowance. In periods in which we are in a pre-tax loss position, a decrease in the effective tax rate is considered unfavorable, as it indicates that a smaller portion of the pre-tax loss is recognized as an income tax benefit. The unfavorable change in the effective tax rate is partially offset by favorable U.S. income tax law changes under the One Big Beautiful Bill Act ("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 September 30, 2025, 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 consolidatedstatements of operations data for the periods indicated.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Revenue | $ | 191,895 | $ | 193,883 | $ | 546,149 | $ | 538,518 | |||||||||||||||
| Cost of revenue | 118,097 | 120,749 | 329,175 | 335,071 | |||||||||||||||||||
| Gross profit | 73,798 | 73,134 | 216,974 | 203,447 | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Research and development | 33,008 | 30,171 | 95,389 | 87,215 | |||||||||||||||||||
| Sales and marketing | 24,702 | 26,285 | 75,976 | 81,490 | |||||||||||||||||||
| General and administrative | 18,096 | 17,576 | 56,052 | 52,130 | |||||||||||||||||||
| Total operating expenses | 75,806 | 74,032 | 227,417 | 220,835 | |||||||||||||||||||
| Operating loss | (2,008) | (898) | (10,443) | (17,388) | |||||||||||||||||||
| Other (expense) income | |||||||||||||||||||||||
| Net gain on extinguishment of debt | - | - | 1,082 | 10,267 | |||||||||||||||||||
| Interest expense, net | (498) | (1,025) | (1,533) | (1,090) | |||||||||||||||||||
| Other (expense) income, net | (1,016) | 1,602 | (1,233) | 2,181 | |||||||||||||||||||
| Total other (expense) income | (1,514) | 577 | (1,684) | 11,358 | |||||||||||||||||||
| Loss before income taxes | (3,522) | (321) | (12,127) | (6,030) | |||||||||||||||||||
| Income tax benefit | 2,281 | 734 | 2,215 | 1,265 | |||||||||||||||||||
| Net (loss) income | $ | (1,241) | $ | 413 | $ | (9,912) | $ | (4,765) | |||||||||||||||
The following table sets forth selected condensed consolidatedstatements of operations dataas a percentage of our total revenue for the periods presented. *
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
| Cost of revenue | 62 | % | 62 | % | 60 | % | 62 | % | |||||||||||||||
| Gross profit | 38 | % | 38 | % | 40 | % | 38 | % | |||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Research and development | 17 | % | 16 | % | 17 | % | 16 | % | |||||||||||||||
| Sales and marketing | 13 | % | 14 | % | 14 | % | 15 | % | |||||||||||||||
| General and administrative | 9 | % | 9 | % | 10 | % | 10 | % | |||||||||||||||
| Total operating expenses | 40 | % | 38 | % | 42 | % | 41 | % | |||||||||||||||
| Operating loss | (1) | % | - | % | (2) | % | (3) | % | |||||||||||||||
| Other (expense) income | |||||||||||||||||||||||
| Net gain on extinguishment of debt | - | % | - | % | - | % | 2 | % | |||||||||||||||
| Interest expense, net | - | % | (1) | % | - | % | - | % | |||||||||||||||
| Other (expense) income, net | (1) | % | 1 | % | - | % | - | % | |||||||||||||||
| Total other (expense) income | (1) | % | - | % | - | % | 2 | % | |||||||||||||||
| Loss before income taxes | (2) | % | - | % | (2) | % | (1) | % | |||||||||||||||
| Income tax benefit | 1 | % | - | % | - | % | - | % | |||||||||||||||
| Net (loss) income | (1) | % | - | % | (2) | % | (1) | % | |||||||||||||||
(*) Columns may not foot due to rounding.
Management's Discussion and Analysis
Comparison of the three months ended September 30, 2025 and 2024
Revenue
| Three months ended September 30, | |||||||||||||||||||||||
| 2025 | 2024 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cloud communications | $ | 141,806 | $ | 138,826 | $ | 2,980 | 2 | % | |||||||||||||||
| Messaging surcharges | 50,089 | 55,057 | (4,968) | (9) | % | ||||||||||||||||||
| Revenue | $ | 191,895 | $ | 193,883 | $ | (1,988) | (1) | % | |||||||||||||||
For the three months ended September 30, 2025, our cloud communications revenue increased by $3 million, or 2%, compared with the same period in 2024. Within cloud communications revenue, our Global Voice Plans revenue grew by 7% and was driven by higher voice traffic on our network. Our Programmable Messaging revenue decreased by 20% largely from lower political messaging activity following the U.S. presidential election in November 2024. Our Enterprise Voice revenue grew by 22%, reflecting strong momentum as our Maestro platform's flexibility and vendor-agnostic UCaaS/CCaaS strategy continues to attract new customers.
For the three months ended September 30, 2025, our messaging surcharges revenue decreased by $5 million, or9%, compared with the same period in 2024. This decline was primarily driven by lower political messaging activity following the U.S. presidential election in November 2024.
For the three months ended September 30, 2025, our average annual customer revenue was $0.2 million, which increased less than $0.1 million compared with the same period in 2024, 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 September 30, | |||||||||||||||||||||||
| 2025 | 2024 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 118,097 | $ | 120,749 | $ | (2,652) | (2) | % | |||||||||||||||
| Gross profit | $ | 73,798 | $ | 73,134 | $ | 664 | 1 | % | |||||||||||||||
| Total gross margin | 38 | % | 38 | % | |||||||||||||||||||
For the three months ended September 30, 2025, total cost of revenue decreased by $3 million, compared with the same period in 2024, driven by lower messaging cost of revenue of $5 million from less political messaging following the 2024 U.S. presidential election. The combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of $1 million, or 1%from the same period in 2024, driven by ongoing efficiencies and improved unit economics as we successfully scale larger volumes of voice traffic on our network.
For the three months ended September 30, 2025, our total gross margin percentage of 38% increased by less than 1%, compared with the same period in 2024, driven by lower pass-through messaging surcharges within the total revenue mix.
Management's Discussion and Analysis
Operating Expenses
| Three months ended September 30, | |||||||||||||||||||||||
| 2025 | 2024 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 33,008 | $ | 30,171 | $ | 2,837 | 9 | % | |||||||||||||||
| Sales and marketing | 24,702 | 26,285 | (1,583) | (6) | % | ||||||||||||||||||
| General and administrative | 18,096 | 17,576 | 520 | 3 | % | ||||||||||||||||||
| Total operating expenses | $ | 75,806 | $ | 74,032 | $ | 1,774 | 2 | % | |||||||||||||||
As a percentage of revenue, total operating expenses for the three months ended September 30, 2025 and 2024were 40% and 38%, respectively.
For the three months ended September 30, 2025,research and development expenses increasedby $3 million, or 9%, compared with the same period in 2024. Our continued investment in evolving our network infrastructure was the key driver behind this increase.
For the three months ended September 30, 2025,sales and marketing expenses decreasedby $2 million, or 6%, compared with the same period in 2024, primarily due to lower headcount expenses from our resource optimization efforts.
For the three months ended September 30, 2025,general and administrative expenses increasedby $1 million, or 3%, compared with the same period in 2024, driven by higher non-headcountexpensesin connection with maintaining and enhancing day-to-day business support activities.
Interest Expense, Net
For the three months ended September 30, 2025, interest expense, net of interest income decreasedby $1 millioncompared with the same period in 2024, primarily from a decrease in interest expense resulting from the 2025 Repurchases in February 2025.
Income Tax Benefit
For the three months ended September 30, 2025,we recognized an income tax benefit of $2 million, an increase of $2 million compared with the same period in 2024. The resulting effective tax rate for the three months ended September 30, 2025 was 64.8%, compared with 228.7% in 2024. The increase in income tax benefit was primarily due to a $2 millionbenefit recognized as a result of favorable tax law changes enacted under OBBBA.
For the three months ended September 30, 2025, the effective tax rate of 64.8% 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.
Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Section 41 of the Code, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, we realized an estimated state effective tax rate of 4.3% for the three months ended September 30, 2025. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax laws and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Section 162(m) of the Code.
Management's Discussion and Analysis
Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance include federal and state tax payables, foreign tax benefits and foreign rate differentials. As we continue to scale our international business, any changes to foreign business activity may impact our effective tax rate in the future.
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.
Comparison of the nine months ended September 30, 2025 and 2024
Revenue
| Nine months ended September 30, | |||||||||||||||||||||||
| 2025 | 2024 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cloud communications | $ | 411,121 | $ | 395,676 | $ | 15,445 | 4 | % | |||||||||||||||
| Messaging surcharges | 135,028 | 142,842 | (7,814) | (5) | % | ||||||||||||||||||
| Revenue | $ | 546,149 | $ | 538,518 | $ | 7,631 | 1 | % | |||||||||||||||
For the nine months ended September 30, 2025, our cloud communications revenue increased by $15 million, or 4%, compared with the same period in 2024. Within cloud communications revenue, our Global Voice Plans revenue grew by 6% and was driven by higher voice traffic on our network. Our Programmable Messaging revenue decreased by 10% largely from reduced political messaging activity following the U.S. presidential election in November 2024. Our Enterprise Voice revenue grew by 25%, reflecting strong momentum as our Maestro platform's flexibility and vendor-agnostic UCaaS/CCaaS strategy continue to attract new customers.
For the nine months ended September 30, 2025, our messaging surcharges revenue decreased by $8 million, or5%, compared with the same period in 2024. This decline was primarily driven by lower political messaging activity following the U.S. presidential election in November 2024.
For the nine months ended September 30, 2025, our average annual customer revenue was $0.2 million, which increased less than $0.1 million compared with the same period in 2024, as a result of our strategy to attract and retain larger customers who provide revenue scale and enhanced profitability.
Management's Discussion and Analysis
Cost of Revenue and Gross Margin
| Nine months ended September 30, | |||||||||||||||||||||||
| 2025 | 2024 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 329,175 | $ | 335,071 | $ | (5,896) | (2) | % | |||||||||||||||
| Gross profit | $ | 216,974 | $ | 203,447 | $ | 13,527 | 7 | % | |||||||||||||||
| Total gross margin | 40 | % | 38 | % | |||||||||||||||||||
For the nine months ended September 30, 2025, total cost of revenue decreased by $6 millioncompared with the same period in 2024, driven by lower messaging cost of revenue of $10 million from less political messaging following the 2024 U.S. presidential election. The combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of $14 million, or 7%, from the same period in 2024, driven by ongoing efficiencies and improved unit economics as we successfully scale larger volumes of voice traffic on our network.
For the nine months ended September 30, 2025, our total gross margin percentage of 40% increased by 2% compared with the same period in 2024, driven by lower pass-through messaging surcharges within the total revenue mix.
Operating Expenses
| Nine months ended September 30, | |||||||||||||||||||||||
| 2025 | 2024 | Change | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 95,389 | $ | 87,215 | $ | 8,174 | 9 | % | |||||||||||||||
| Sales and marketing | 75,976 | 81,490 | (5,514) | (7) | % | ||||||||||||||||||
| General and administrative | 56,052 | 52,130 | 3,922 | 8 | % | ||||||||||||||||||
| Total operating expenses | $ | 227,417 | $ | 220,835 | $ | 6,582 | 3 | % | |||||||||||||||
As a percentage of revenue, total operating expenses for the nine months ended September 30, 2025 and 2024were 42% and 41%, respectively.
For the nine months ended September 30, 2025,research and development expenses increasedby $8 million, or 9%, compared with the same period in 2024. Our continued investment in evolving our network infrastructure was the key driver behind this increase.
For the nine months ended September 30, 2025,sales and marketing expenses decreasedby $6 million, or 7%, compared with the same period in 2024, primarily due to lower headcount expenses from our resource optimization efforts.
For the nine months ended September 30, 2025,general and administrative expenses increasedby $4 million, or 8%, compared with the same period in 2024, driven by higher headcountexpenses in connection with ongoing operational support needs.
Interest Expense, Net
For the nine months ended September 30, 2025, interest expense, net of interest income, increasedby less than $1 million, compared with the same period in 2024, primarily from decreased interest income resulting from cash used to fund the 2024 Repurchases and 2025 Repurchases.
Management's Discussion and Analysis
Income Tax Benefit
For the nine months ended September 30, 2025,we recognized an income tax benefit of $2 million, an increase of $1 million, compared with the same period in 2024. The resulting effective tax rate for the nine months ended September 30, 2025was 18.3%, compared with 21.0% in 2024. The increase in income tax benefit was primarily due to a $2 millionbenefit recognized as a result of the favorable tax law changes enacted under OBBBA.
For the nine months ended September 30, 2025, the effective tax rate of 18.3% 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.
Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Section 41 of the Code, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, we realized an estimated state effective tax rate of 4.3% for the nine months ended September 30, 2025. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax laws and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Section 162(m) of the Code.
Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance include federal and state tax payables, foreign tax benefits and foreign rate differentials. As we continue to scale our international business, any changes to foreign business activity may impact our effective tax rate in the future.
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.
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. As of September 30, 2025, we had cash and cash equivalents of $73 million and marketable securities of $7 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 September 30, 2025, we had no outstanding borrowings under the Credit Facility and the available borrowing capacity was $150 million. See Note 8, "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.
Management's Discussion and Analysis
During February 2025, we repurchased approximately $27 millionaggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $26 million. Following the 2025 Repurchases and previous repurchases, approximately $8 millionaggregate principal amount of the 2026 Convertible Notes remains outstanding. We may, at any time and from time to time, seek to retire or purchase our 2026 Convertible Notes or 2028 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$258 millionin Convertible Notes, (ii) $456 million in future minimum rent payments for our current office space, including a $450 million non-cancelable lease for ournew corporate headquarters, which commenced in the third quarter of 2023 and which will continue for an initial twenty (20) year term, and (iii) $19 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 8, "Debt," andNote 12, "Commitments and Contingencies,"to the condensed consolidatedfinancial statements included elsewhere in this Quarterly Report on Form 10-Q.
Cash Flows
The table below summarizes our cash flow information for the periods presented:
| Nine months ended September 30, | |||||||||||
| 2025 | 2024 | ||||||||||
| (In thousands) | |||||||||||
| Net cash provided by operating activities | $ | 50,877 | $ | 47,365 | |||||||
| Net cash (used in) provided by investing activities | (30,053) | 1,692 | |||||||||
| Net cash used in financing activities | (29,076) | (106,144) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (284) | 41 | |||||||||
| Net decrease in cash, cash equivalents, and restricted cash | $ | (8,536) | $ | (57,046) | |||||||
Management's Discussion and Analysis
Cash Flows from Operating Activities
For the nine months ended September 30, 2025, net cash provided by operating activities was $51 million and was generated by our aggregate results of $70 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-basedcompensation, deferred taxes and other, net gain on extinguishment of debt and (2) a $19 millioncash outflow from lower operating liabilities and higher operating assets. Within operating liabilities, the net cash used as a result of lower accrued expenses and other liabilitiesof $13 millionduring the nine months ended September 30, 2025, was primarily driven by thetiming of payments. Within operating assets, the net cash used as a result of higher accounts receivable of $6 millionduring the nine months ended September 30, 2025,was driven by higher unbilled receivables balances arising from higher usage amounts in the last month of the quarter ended September 30, 2025.
Cash Flows from Investing Activities
For the nine months ended September 30, 2025 net cash used in investing activities was $30 million. Cash used in investing activities was primarily driven by (1) cash used for the purchase of property, plant and equipment of $17 millionand cash used for capitalized software development costs of $8 million, driven by investments in the communications platform, and (2) cash used for purchases of marketable securities, net of maturities, of $5 millionfrom diversifying into higher yielding investments.
Cash Flows from Financing Activities
For the nine months ended September 30, 2025,net cash used in financing activities was $29 million, consisting primarily of $26 millionof cash used tocomplete the 2025 Repurchases.
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 define Non-GAAP gross profit as gross profit after adding back the following items:
•depreciation and amortization;
•amortization of acquired intangible assets related to acquisitions; and
•stock-based compensation.
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, 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.
Management's Discussion and Analysis
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 September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Gross Profit | $ | 73,798 | $ | 73,134 | $ | 216,974 | $ | 203,447 | |||||||||||||||
| Gross Profit Margin % | 38 | % | 38 | % | 40 | % | 38 | % | |||||||||||||||
| Depreciation | 5,299 | 4,679 | 15,137 | 14,135 | |||||||||||||||||||
| Amortization of acquired intangible assets | 2,100 | 1,977 | 6,039 | 5,877 | |||||||||||||||||||
| Stock-based compensation | 542 | 352 | 1,597 | 1,123 | |||||||||||||||||||
| Non-GAAP Gross Profit | $ | 81,739 | $ | 80,142 | $ | 239,747 | $ | 224,582 | |||||||||||||||
|
Non-GAAP Gross Margin % (1)
|
58 | % | 58 | % | 58 | % | 57 | % | |||||||||||||||
________________________
(1)Calculated by dividing Non-GAAP gross profit by cloud communications revenue of $142 million and $411 million for the three and nine months ended September 30, 2025, respectively, and $139 million and $396 million for the three and nine months ended September 30, 2024, respectively.
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;
•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 (loss) income to non-GAAP net income and net (loss) income per share to non-GAAP net income per non-GAAP share for the periods presented:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
|
(In thousands, except share and per share amounts)
|
|||||||||||||||||||||||
| Net (loss) income | $ | (1,241) | $ | 413 | $ | (9,912) | $ | (4,765) | |||||||||||||||
| Stock-based compensation | 12,328 | 11,449 | 38,448 | 35,148 | |||||||||||||||||||
| Amortization of acquired intangibles | 4,633 | 4,436 | 13,485 | 13,133 | |||||||||||||||||||
| Amortization of debt discount and issuance costs for convertible debt | 278 | 311 | 854 | 1,180 | |||||||||||||||||||
| Net cost associated with early lease terminations and leases without economic benefit | - | 350 | - | 2,383 | |||||||||||||||||||
| Net gain on extinguishment of debt | - | - | (1,082) | (10,267) | |||||||||||||||||||
|
Non-recurring items not indicative of ongoing operations and other (1)
|
1,185 | (957) | 2,002 | (828) | |||||||||||||||||||
|
Estimated tax effects of adjustments (2)
|
(5,721) | (3,211) | (9,373) | (6,654) | |||||||||||||||||||
| Non-GAAP net income | $ | 11,462 | $ | 12,791 | $ | 34,422 | $ | 29,330 | |||||||||||||||
|
Interest expense on Convertible Notes (3)
|
238 | 251 | 726 | 868 | |||||||||||||||||||
| Numerator used to compute Non-GAAP diluted net income per share | $ | 11,700 | $ | 13,042 | $ | 35,148 | $ | 30,198 | |||||||||||||||
| Net (loss) income per share | |||||||||||||||||||||||
| Basic | $ | (0.04) | $ | 0.02 | $ | (0.33) | $ | (0.18) | |||||||||||||||
| Diluted | $ | (0.04) | $ | 0.01 | $ | (0.33) | $ | (0.18) | |||||||||||||||
| Non-GAAP net income per Non-GAAP share | |||||||||||||||||||||||
| Basic | $ | 0.38 | $ | 0.47 | $ | 1.16 | $ | 1.09 | |||||||||||||||
| Diluted | $ | 0.36 | $ | 0.43 | $ | 1.10 | $ | 0.98 | |||||||||||||||
| Weighted average number of shares outstanding | |||||||||||||||||||||||
| Basic | 30,278,516 | 27,374,367 | 29,721,404 | 26,983,931 | |||||||||||||||||||
| Diluted | 30,278,516 | 28,615,520 | 29,721,404 | 26,983,931 | |||||||||||||||||||
| Non-GAAP basic shares | 30,278,516 | 27,374,367 | 29,721,404 | 26,983,931 | |||||||||||||||||||
| Convertible debt conversion | 1,478,379 | 1,779,025 | 1,537,847 | 2,503,118 | |||||||||||||||||||
| Stock options issued and outstanding | 17,324 | 25,021 | 20,247 | 28,785 | |||||||||||||||||||
| Nonvested RSUs outstanding | 510,590 | 1,216,132 | 811,839 | 1,430,317 | |||||||||||||||||||
| Non-GAAP diluted shares | 32,284,809 | 30,394,545 | 32,091,337 | 30,946,151 | |||||||||||||||||||
(1) Non-recurring items not indicative of ongoing operations and other include (i) $1.2 million of foreign exchange charges primarily related to balance sheet revaluations during the three and nine months ended September 30, 2025, and less than $0.1 million and $0.2 million of losses on disposals of property, plant and equipment during the three and nine months ended September 30, 2025, respectively, (ii) $0.5 million of nonrecurring litigation expense and $0.1 million of losses on sale of business during the nine months ended September 30, 2025, and (iii) $1.0 million gain on the sale of an intangible asset during the three and nine months ended September 30, 2024, and less than $0.1 million and $0.2 million of losses on disposals of property, plant and equipment during the three and nine months ended September 30, 2024, respectively.
Management's Discussion and Analysis
(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 17.2% and 15.5% for the nine months ended September 30, 2025 and 2024, respectively. For the nine months ended September 30, 2025, the Non-GAAP effective income tax rate differed from the federal statutory tax rate of 21% in the U.S. primarily due to the research and development tax credits generated in 2025. We analyze the Non-GAAP valuation allowance position on a quarterly basis. As of September 30, 2025, 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.
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;
•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.
Management's Discussion and Analysis
The following table shows a reconciliation of net (loss) income to Adjusted EBITDA for the periods presented:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net (loss) income | $ | (1,241) | $ | 413 | $ | (9,912) | $ | (4,765) | |||||||||||||||
| Income tax benefit | (2,281) | (734) | (2,215) | (1,265) | |||||||||||||||||||
| Interest expense, net | 498 | 1,025 | 1,533 | 1,090 | |||||||||||||||||||
| Depreciation | 9,208 | 7,989 | 26,173 | 24,005 | |||||||||||||||||||
| Amortization | 4,633 | 4,436 | 13,485 | 13,133 | |||||||||||||||||||
| Stock-based compensation | 12,328 | 11,449 | 38,448 | 35,148 | |||||||||||||||||||
|
Net cost associated with early lease terminations and leases without economic benefit
|
- | 350 | - | 2,383 | |||||||||||||||||||
| Net gain on extinguishment of debt | - | - | (1,082) | (10,267) | |||||||||||||||||||
|
Non-recurring items not indicative of ongoing operations and other (1)
|
1,185 | (957) | 2,002 | (828) | |||||||||||||||||||
| Adjusted EBITDA | $ | 24,330 | $ | 23,971 | $ | 68,432 | $ | 58,634 | |||||||||||||||
(1) Non-recurring items not indicative of ongoing operations and other include (i) $1.2 million of foreign exchange charges primarily related to balance sheet revaluations during the three and nine months ended September 30, 2025, and less than $0.1 million and $0.2 million of losses on disposals of property, plant and equipment during the three and nine months ended September 30, 2025, respectively, (ii) $0.5 million of nonrecurring litigation expense and $0.1 million of losses on sale of business during the nine months ended September 30, 2025, and (iii) $1.0 million gain on the sale of an intangible asset during the three and nine months ended September 30, 2024, and less than $0.1 million and $0.2 million of losses on disposals of property, plant and equipment during the three and nine months ended September 30, 2024, respectively.
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 September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 22,239 | $ | 20,464 | $ | 50,877 | $ | 47,365 | |||||||||||||||
|
Net cash used in investing in capital assets (1)
|
(9,104) | (6,219) | (25,406) | (19,207) | |||||||||||||||||||
| Free cash flow | $ | 13,135 | $ | 14,245 | $ | 25,471 | $ | 28,158 | |||||||||||||||
(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 consolidatedfinancial 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 20, 2025 (the "Annual Report").
Recently Issued Accounting Guidance
See Note 2, "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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