Cloud communications infrastructure company Twilio (NYSE:TWLO) reported strong growth in the Q2 FY2021 earnings announcement, with revenue up 66.8% year on year to $668.9 million. Twilio made a GAAP loss of $227.8 million, down on its loss of $99.9 million, in the same quarter last year.
Twilio (TWLO) Q2 FY2021 Highlights:
- Revenue: $668.9 million vs analyst estimates of $599 million (11.6% beat)
- EPS (non-GAAP): -$0.11 vs analyst estimates of -$0.13 (17.7% beat)
- Revenue guidance for Q3 2021 is $675 million at the midpoint, above analyst estimates of $639.3 million
- Net Revenue Retention Rate: 135%, in line with previous quarter
- Customers: 240,000, up from 235,000 in previous quarter
- Gross Margin (GAAP): 49.5%, down from 50.5% previous quarter
Founded in 2008 by Jeff Lawson, a former engineer at Amazon, Twilio is a software as a service platform that makes it really easy for software developers to use text messaging, voice calls and other forms of communication in their apps.
The company functions as a bridge between the legacy systems of global telecommunications carriers and internet applications, and offers a set of building blocks developers can use to add external messaging to their services.
For example it makes it possible for developers to provide SMS notifications in a food delivery app, the ability to call the driver in a ride-sharing app or two factor account verifications for internet banking without needing to invest in their own infrastructure and routing algorithms.
The rise of the consumer internet is what drives the demand for platforms like Twilio. Organizations are conducting more business online and need to be able to bi-directionaly communicate with their customers, and the COVID pandemic has only further accelerated this shift.
Competitors include Agora (NASDAQ:API), Vonage, Plivo, and Bandwidth (NASDAQ:BAND).
As you can see below, Twilio's revenue growth has been incredible over the last year, growing from quarterly revenue of $400.8 million, to $668.9 million.
This was another standout quarter with the revenue up a splendid 66.8% year on year. On top of that, revenue increased $78.9 million quarter on quarter, a very strong improvement on the $41.8 million increase in Q1 2021, and a sign of acceleration of growth, which is very nice to see indeed.
Analysts covering the company are expecting the revenues to grow 30.7% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
You can see below that Twilio reported 240,000 customers at the end of the quarter, an increase of 5,000 on last quarter. That is a bit slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.
One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.
Twilio's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 135% in Q2. That means even if they didn't win any new customers, Twilio would have grown its revenue 35% year on year. Significantly up from the last quarter, this is a great retention rate and a clear proof of a great product. We can see that Twilio's customers are very satisfied with their software and are using it more and more over time.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Twilio's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 49.5% in Q2.
That means that for every $1 in revenue the company had $0.49 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.
Key Takeaways from Twilio's Q2 Results
With market capitalisation of $67.4 billion, more than $5.92 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We were impressed by how strongly Twilio outperformed analysts’ revenue expectations this quarter. And we were also excited to see the really strong revenue growth. On the other hand, it was unfortunate to see the slowdown in customer growth and gross margin deteriorated a little. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. The company is down -3.1% on the results and currently trades at $380.5 per share.
Is Now The Time?
Twilio may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Twilio is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its gross margins show its business model is much less lucrative than the best software businesses, the good news is its customers are increasing their spending quite quickly, suggesting that they love the product, and its very efficient customer acquisition hints at the potential for strong profitability.
The market is certainly expecting long term growth from Twilio given its price to sales ratio based on the next twelve months is 23.3. There are definitely things to like about Twilio and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.