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Twilio (NYSE:TWLO) Posts Better-Than-Expected Sales In Q2 But Quarterly Guidance Underwhelms


Full Report / August 04, 2022
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Cloud communications infrastructure company Twilio (NYSE:TWLO) reported Q2 FY2022 results topping analyst expectations, with revenue up 41% year on year to $943.3 million. However, guidance for the next quarter was less impressive, coming in at $970 million at the midpoint, being 0.95% below analyst estimates. Twilio made a GAAP loss of $322.7 million, down on its loss of $227.8 million, in the same quarter last year.

Twilio (TWLO) Q2 FY2022 Highlights:

  • Revenue: $943.3 million vs analyst estimates of $920.9 million (2.43% beat)
  • EPS (non-GAAP): -$0.11 vs analyst estimates of -$0.20 (44.7% beat)
  • Revenue guidance for Q3 2022 is $970 million at the midpoint, below analyst estimates of $979.3 million
  • Free cash flow was negative $78.4 million, compared to negative free cash flow of $34.8 million in previous quarter
  • Net Revenue Retention Rate: 123%, down from 127% previous quarter
  • Customers: 275,000, up from 268,000 in previous quarter
  • Gross Margin (GAAP): 47.2%, down from 49.5% 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 $668.9 million, to $943.3 million.

Twilio Total Revenue

And unsurprisingly, this was another great quarter for Twilio with revenue up 41% year on year. On top of that, revenue increased $67.9 million quarter on quarter, a very strong improvement on the $32.6 million increase in Q1 2022, and a sign of acceleration of growth.

Guidance for the next quarter indicates Twilio is expecting revenue to grow 31% year on year to $970 million, slowing down from the 65.2% 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 28.7% over the next twelve months.

Customer Growth

You can see below that Twilio reported 275,000 customers at the end of the quarter, an increase of 7,000 on last quarter. That is a little slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

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 123% in Q2. That means even if they didn't win any new customers, Twilio would have grown its revenue 23% year on year. Despite it going down over the last year this is still a good retention rate and a proof that Twilio's customers are satisfied with their software and are getting more value from it over time. That is good to see.

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 47.2% in Q2.

Twilio Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.47 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.

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 $78.4 million in Q2, with cash flow turning negative year on year.

Twilio Free Cash Flow

Twilio has burned through $253.7 million in cash over the last twelve months, resulting in a negative 7.45% 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 Q2 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 $17.7 billion and more than $4.39 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We enjoyed seeing Twilio’s impressive revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and there was a slowdown in customer growth. Overall, this quarter's results were not the best we've seen from Twilio. The company is down 3.7% on the results and currently trades at $94.59 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. 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 4.1x, 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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