2023-07-25 01:03:58 ET
Summary
- Twilio is set to report its Q2 earnings on August 8th; the company has beaten analyst estimates for EPS and revenue each quarter for the past two years.
- The company's Q2 revenue estimates have been coming down and are now 17% lower versus a year ago, while Q2 EPS estimates have risen from -1 cents a year ago to an expectation of 30 cents currently.
- TWLO stock remains cheap, and the involvement of an activist investor may help put a floor under the stock.
Back in April , I wrote that while Twilio ( TWLO ) faces some headwinds, I thought the stock was too cheap. Since then, the stock is up about 15%, outpacing the approximate 10% in the S&P 500 over the same period. Let's catch up on the name ahead of its Q2 earnings.
Company Profile
As a refresher, TWLO is a cloud communication platform that allows developers to insert voice, messaging, and email into customer-facing apps. The firm's four core products are programmable messaging, programmable voice, email, and account security, all of which are usage based except email, which is subscription based.
TWLO's programmable messaging product is an API that facilitates the sending and receiving of various messages, while its Programmable Voice product, allows developers to create solutions so that users can make and receive phone calls through apps and browsers. Its SendGrid Email API, meanwhile, helps bulk emails reach their in-box destinations. Finally, its Verify product allows for second-factor authentication by sending codes through text, voice, of push notification.
The company also has several emerging products it offers through a subscription basis that are in its Data & Applications segment.
Q2 Earnings Preview
TWLO is set to report its Q2 earnings on August 8th. The stock has been quite volatile following its earnings, moving more than 10% six of the past 10 quarters. The stock has risen following its earnings report in only 4 of the past ten quarters. Investor reactions have ranged from a -36.6% move in Q3 of last year, to a 21.5% move in Q4 of last year. The stock has fallen each of the past three times it has reported its Q3 results.
TWLO has beaten analyst estimates for EPS and revenue each quarter for the past two years. It tends to beat on the EPS line quite handily. Revenue beats have been getting smaller, with last quarter the company only topping the consensus by $3.8 million on over $1 billion in revenue.
TWLO's Q2 revenue estimates, meanwhile, have been coming down, and are now -17% lower versus a year ago. Revenue estimates are down nearly -6% since early May and now stand at $987.2 million.
TWLO's Q2 EPS estimates, meanwhile, have trended in the opposite direction and have risen from -1 cents a year ago to an expectation of 30 cents currently. Analyst expectations have increased by a penny since May.
ON its Q2 call, TWLO guided for revenue of between $980-990 million, representing 4-5% growth. This assumes that the sale of its IOT business closes in Q2. The company is looking for adjusted operating income of between $65-75 million.
The company blamed a difficult macro-environment as reason for its muted forecast. It cited things such as increased sales cycle lengths, lower average selling prices, weaker conversion rates across the funnel, and some contraction. Management also noted that a year ago it was experiencing strong growth coming from the crypto vertical, which it is no longer seeing.
Discussing its Q2 guidance on its Q1 earnings call , FO Adian Viggiano said:
So it's largely macro as we think about the second quarter. So, the market continues to be pretty dynamic, and we're feeling the impacts of a broader slowdown. And so you see that reflected in our guide. I think the other thing that's important to remember is that the majority of our revenue comes from our communications business, about 85% of our revenue. And as Khozema just said, that's a consumption model tied to consumer activity. So in that business, we are dealing with a combination of macro as well as the tough comparisons that we just talked about on crypto. And so again, that's creating a headwind year-over-year as it relates to the second quarter growth rate. On the data and application side, Elena has talked about it as well, but we are rebuilding. Elena talked about our efforts there to ramp up the sales force and really enable the team further. And we're also doing that in a tougher macro cycle. So I'd say on the communications side, it's a combination of macro, some tough comparisons on the software side, it's a mix of our efforts to rebuild plus the macro, and we factored all of this into our guide. So I'd say some choppiness on growth in the short term, but despite that, we're focused on what we can control, which is delivering profit in any environment."
Sell-side analysts for their part are cautious on TWLO ahead of its Q2 earnings report. Piper Sandler downgraded the stock earlier this month, citing the macro environment and the impact of recent divestiture that will make sales estimates look too high. Meanwhile, Barclays was also cautious on the name given company-specific headwinds, but it did think Q3 comps were easier.
The focus from investors will largely be on its Q3 revenue forecast and if the environment is improving. Look for the company to give a growth number, excluding its divested IOT and ValueFirst businesses. I'd also pay attention to its net dollar retention number. This number has been in decline, hitting only 106% in Q1, down from 127% a year ago. A number above 100% will likely be looked upon favorably, while a continued decline could worry investors.
I'd also expect the company to try to hype some potential AI use cases as a way to invigorate growth. AI hype has helped drive many tech stocks, so it will be interesting to see what TWLO has to offer on this front and if it can get investors excited.
Valuation
Since TWLO doesn't have SaaS-type, I prefer to value the company on an EV/gross profit metric. On this front, it trades at 3.9x the approximate $2 billion in gross profit it will generate in 2023. I think this is probably the best way to value the company.
It is projected to grow revenue by nearly 7% this year, and 13% in 2024.
When you compare the company's EV/gross profit versus names with similar revenue growth, it trades at a very large discount to names like Okta ( OKTA ) or HubSpot ( HUBS ).
Conclusion
TWLO's stock remains cheap and the involvement of an activist investor may help put a bit of a floor under the stock. Expectations are pretty low going into the quarter, which can be a good thing.
That said, the company is clearly dealing with some issues, and its largely usage based model isn't quite as predictable as a traditional SaaS model. Crypto companies were about 3% of revenue last year, and that industry imploded, while retail and social media are two other large verticals that are experiencing some headwinds. However, on at a JP Morgan conference in May, the company said it has seen usage volumes stabilize and that it is taking share, which are good things.
Overall, I continue to see potential in TWLO despite what are likely temporary headwinds. Given its valuation and long-term growth potential, I continue to rate the stock a "Buy."
For further details see:
Twilio: Q2 Earnings Preview