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Twilio (NYSE:TWLO) Surprises With Q1 Sales, Customer Growth Accelerates


Full Report / June 23, 2022
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Cloud communications infrastructure company Twilio (NYSE:TWLO) reported Q1 FY2022 results beating Wall St's expectations, with revenue up 48.3% year on year to $875.3 million. The company expects that next quarter's revenue would be around $917 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Twilio made a GAAP loss of $221.6 million, down on its loss of $206.5 million, in the same quarter last year.

Twilio (TWLO) Q1 FY2022 Highlights:

  • Revenue: $875.3 million vs analyst estimates of $863.8 million (1.33% beat)
  • EPS (non-GAAP): $0 vs analyst estimates of -$0.21 ($0.21 beat)
  • Revenue guidance for Q2 2022 is $917 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow was negative $34.8 million, compared to negative free cash flow of $58.7 million in previous quarter
  • Net Revenue Retention Rate: 127%, in line with previous quarter
  • Customers: 268,000, up from 256,000 in previous quarter
  • Gross Margin (GAAP): 48.5%, down from 50.5% 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 first shift towards voice communication over the internet (VOIP), rather than traditional phone networks, happened when the enterprises started replacing business phones with the cheaper VOIP technology. Today, the rise of the consumer internet has increased the need for two way audio and video functionality in applications, driving demand for software tools and platforms that enable this utility.

Competitors include Agora (NASDAQ:API), Vonage, Plivo, and Bandwidth (NASDAQ:BAND).

Sales Growth

As you can see below, Twilio's revenue growth has been exceptional over the last year, growing from quarterly revenue of $589.9 million, to $875.3 million.

Twilio Total Revenue

And unsurprisingly, this was another great quarter for Twilio with revenue up 48.3% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $32.6 million in Q1, compared to $102.5 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Twilio is expecting revenue to grow 37% year on year to $917 million, slowing down from the 66.8% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 31.3% over the next twelve months.

Customer Growth

You can see below that Twilio reported 268,000 customers at the end of the quarter, an increase of 12,000 on last quarter. That is a little better customer growth than last quarter and quite a bit above the typical customer growth we have seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

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 127% in Q1. That means even if they didn't win any new customers, Twilio would have grown its revenue 27% 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, licenses, technical support and other necessary running expenses was at 48.5% in Q1.

Twilio Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.48 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Twilio burned through $34.8 million in Q1, increasing the cash burn by 218% year on year.

Twilio Free Cash Flow

Twilio has burned through $172.1 million in cash over the last twelve months, resulting in a negative 5.5% free cash flow margin. This below average FCF margin is a result of Twilio's need to invest in the business to continue penetrating its market.

Key Takeaways from Twilio's Q1 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Twilio’s balance sheet, but we note that with a market capitalization of $20.3 billion and more than $5.22 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were very impressed by Twilio’s very strong acceleration in customer growth this quarter. And we were also excited to see the really strong revenue growth. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. The company currently trades at $88.4 per share.

Is Now The Time?

When considering Twilio, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Twilio is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. But while its customers are increasing their spending quite quickly, suggesting that they love the product, the downside is that its gross margins show its business model is much less lucrative than the best software businesses and its customer acquisition costs are higher than we like to see.

Twilio's price to sales ratio based on the next twelve months is 5.2x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Twilio doesn't trade at a completely unreasonable price point.

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