Cloud communications infrastructure company Twilio (NYSE:TWLO) beat analysts' expectations in Q2 FY2023, with revenue up 10% year on year to $1.04 billion. However, next quarter's revenue guidance of $985 million was less impressive, coming in 3.48% below analysts' estimates. Twilio made a GAAP loss of $166.2 million, improving from its loss of $322.8 million in the same quarter last year.
Twilio (TWLO) Q2 FY2023 Highlights:
- Revenue: $1.04 billion vs analyst estimates of $987.2 million (5.12% beat)
- EPS (non-GAAP): $0.54 vs analyst estimates of $0.30 (80.5% beat)
- Revenue Guidance for Q3 2023 is $985 million at the midpoint, below analyst estimates of $1.02 billion
- Free Cash Flow of $71.9 million is up from -$114 million in the previous quarter
- Net Revenue Retention Rate: 103%, down from 106% in the previous quarter
- Customers: 304,000, up from 300,000 in the previous quarter
- Gross Margin (GAAP): 48.7%, up from 47.2% in the 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 very strong over the last two years, growing from $668.9 million in Q2 FY2021 to $1.04 billion this quarter.
This quarter, Twilio's quarterly revenue was once again up 10% year on year. On top of that, its revenue increased $31.2 million quarter on quarter, a strong improvement from the $18 million decrease in Q1 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 0.2% year on year to $985 million, slowing down from the 32.8% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 6.21% over the next 12 months.
Customer Growth
Twilio reported 304,000 customers at the end of the quarter, an increase of 4,000 from the previous quarter. That's a little slower customer growth than what we've observed in past quarters, suggesting that the company's customer acquisition momentum is slowing.
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's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 103% in Q2. This means that even if Twilio didn't win any new customers over the last 12 months, it would've grown its revenue by 3%.
Despite falling over the last year, Twilio still has an adequate net retention rate, showing us that it generally keeps customers retained 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 48.7% in Q2.
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 would be considered poor for a SaaS business and shareholders would probably like to see it start improving.
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 $71.9 million in Q2, turning positive over the last year.
Twilio has burned through $240.4 million of cash over the last 12 months, resulting in a negative 6.08% 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 Q2 Results
With a market capitalization of $11.3 billion, a $3.68 billion cash balance, and near-breakeven free cash flow status, we're confident that Twilio is in a healthy financial position.
We enjoyed seeing Twilio exceed analysts' revenue expectations this quarter. That really stood out as a positive in these results, together with free cash flow that turned positive for the first time since Q2 2021. On the other hand, its revenue guidance for next quarter missed analysts' estimates and there was a slowdown in customer growth. Overall, this was a mediocre quarter for Twilio. The stock is up 5.07% after reporting and currently trades at $61.32 per share.
Is Now The Time?
Twilio may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. 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. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, the downside is that its gross margins show its business model is much less lucrative than the best software businesses and its cash burn raises the question if it can sustainably maintain its growth.
Twilio's price to sales ratio based on the next 12 months is 2.5x, 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, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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