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Twilio (NYSE:TWLO) Beats Expectations in Strong Q3, Provides Encouraging Quarterly Guidance


Full Report / October 27, 2021
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Cloud communications infrastructure company Twilio (NYSE:TWLO) reported Q3 FY2021 results beating Wall St's expectations, with revenue up 65.2% year on year to $740.1 million. Guidance also exceeded expectations with next quarter revenues guided to $765 million, or 1.9% above analyst estimates. Twilio made a GAAP loss of $224.1 million, down on its loss of $116.9 million, in the same quarter last year.

Twilio (TWLO) Q3 FY2021 Highlights:

  • Revenue: $740.1 million vs analyst estimates of $684 million (8.19% beat)
  • EPS (non-GAAP): $0.01 vs analyst estimates of -$0.14 ($0.15 beat)
  • Revenue guidance for Q4 2021 is $765 million at the midpoint, above analyst estimates of $750.6 million
  • Free cash flow was negative $81.6 million, down from positive free cash flow of $3.15 million in previous quarter
  • Net Revenue Retention Rate: 131%, down from 135% previous quarter
  • Customers: 250,000, up from 240,000 in previous quarter
  • Gross Margin (GAAP): 49.2%, down from 51.5% same quarter last year

Founded in 2008 by Jeff Lawson, a former engineer at Amazon, Twilio (NYSE:TWLO) 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).

Sales Growth

As you can see below, Twilio's revenue growth has been incredible over the last year, growing from quarterly revenue of $447.9 million, to $740.1 million.

Twilio Total Revenue

This was another standout quarter with the revenue up a splendid 65.2% year on year. Quarter on quarter the revenue increased by $71.2 million in Q3, which was roughly in line with the Q2 2021 increase. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Analysts covering the company are expecting the revenues to grow 29.8% over the next twelve months, although estimates are likely to change post earnings.

Customer Growth

You can see below that Twilio reported 250,000 customers at the end of the quarter, an increase of 10,000 on last quarter. That is quite a bit better customer growth than last quarter and in line with what we have seen in previous quarters, demonstrating the company has the sales momentum required to drive continued growth. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is running smoothly.

Twilio Customers

Product Success

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 Net Revenue Retention Rate

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 131% in Q3. That means even if they didn't win any new customers, Twilio would have grown its revenue 31% year on year. Despite it going down over the last year this is still 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.

Profitability

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 49.2% in Q3.

Twilio Gross Margin (GAAP)

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 Q3 Results

With a market capitalization of $62.6 billion, more than $5.39 billion in cash and the fact it is operating close to free cash flow break-even, we're confident that Twilio has the resources it needs to pursue a high growth business strategy.

We were impressed by the exceptional revenue growth Twilio delivered this quarter. And we were also glad to see the acceleration in customer growth. On the other hand, there was a deterioration in revenue retention rate. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is down 4.68% on the results and currently trades at $329.68 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. Although we have other favorites, we understand the arguments that Twilio is a good 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.

The market is certainly expecting long term growth from Twilio given its price to sales ratio based on the next twelve months is 18.6x. There are things to like about Twilio and there's no doubt it is a bit of a market darling, at least for some. But it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.

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