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Twilio's (NYSE:TWLO) Q4 Sales Top Estimates But Stock Drops 10.1%


Full Report / February 14, 2024

Cloud communications infrastructure company Twilio (NYSE:TWLO) announced better-than-expected results in Q4 FY2023, with revenue up 5% year on year to $1.08 billion. On the other hand, next quarter's revenue guidance of $1.03 billion was less impressive, coming in 1.9% below analysts' estimates. It made a non-GAAP profit of $0.86 per share, improving from its profit of $0.22 per share in the same quarter last year.

Twilio (TWLO) Q4 FY2023 Highlights:

  • Revenue: $1.08 billion vs analyst estimates of $1.04 billion (3.2% beat)
  • EPS (non-GAAP): $0.86 vs analyst estimates of $0.58 (49.5% beat)
  • Revenue Guidance for Q1 2024 is $1.03 billion at the midpoint, below analyst estimates of $1.05 billion
  • Free Cash Flow of $213.1 million, similar to the previous quarter
  • Net Revenue Retention Rate: 102%, in line with the previous quarter
  • Customers: 305,000, down from 306,000 in the previous quarter
  • Gross Margin (GAAP): 49.4%, up from 47% in the same quarter last year
  • Market Capitalization: $12.55 billion

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.

Communications Platform

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 strong over the last two years, growing from $842.7 million in Q4 FY2021 to $1.08 billion this quarter.

Twilio Total Revenue

Twilio's quarterly revenue was only up 5% year on year, which might disappoint some shareholders. However, its revenue increased $42.28 million quarter on quarter, a strong improvement from the $4.09 million decrease in Q3 2023. This is a sign of acceleration of growth and very nice to see indeed.

Next quarter's guidance suggests that Twilio is expecting revenue to grow 2.3% year on year to $1.03 billion, slowing down from the 15% year-on-year increase it recorded in the same quarter last year.

Customer Growth

Twilio reported 305,000 customers at the end of the quarter, a decrease of 1,000 from the previous quarter, suggesting that the company's customer acquisition momentum is slowing.

Twilio Customers

Product Success

One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.

Twilio Net Revenue Retention Rate

Twilio's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 102% in Q4. This means that even if Twilio didn't win any new customers over the last 12 months, it would've grown its revenue by 2%.

Despite falling over the last year, Twilio still has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 49.4% in Q4.

Twilio Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.49 left to spend on developing new products, sales and marketing, and general administrative overhead. Twilio's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Twilio's free cash flow came in at $213.1 million in Q4, turning positive over the last year.

Twilio Free Cash Flow

Twilio has burned through $365.8 million of cash over the last 12 months, resulting in a negative 8.6% free cash flow margin. This below-average FCF margin stems from Twilio's poor unit economics or a continuous need to reinvest in its business to penetrate the market.

Key Takeaways from Twilio's Q4 Results

It was good to see Twilio beat analysts' revenue expectations this quarter. That stood out as a positive in these results. On the other hand, its revenue guidance for next quarter missed analysts' expectations and its customer growth decelerated. Overall, this was a mediocre quarter for Twilio. The company is down 10.1% on the results and currently trades at $65.09 per share.

Is Now The Time?

When considering an investment in Twilio, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in case of Twilio, we'll be cheering from the sidelines. Although its , Wall Street expects growth to deteriorate from here. On top of that, its customer acquisition is less efficient than many comparable companies and its gross margins show its business model is much less lucrative than the best software businesses.

Twilio's price-to-sales ratio based on the next 12 months is 3.0x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

Wall Street analysts covering the company had a one-year price target of $73.90 per share right before these results (compared to the current share price of $65.09).

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