2023-11-09 06:30:19 ET
Summary
- Twilio's Q3 revenues of $1.03 billion beat reduced street estimates by $40 million, but the growth rate has stalled out.
- Customer growth has nearly flatlined, with only 2,000 new accounts in Q3, and the dollar-based net expansion rate continues to decrease.
- Twilio's net losses are improving, but perhaps the company should be focusing on acquisitions and not share buybacks.
After the bell on Wednesday, we received third quarter results from Twilio (TWLO). The customer engagement platform was one of the 2020 pandemic darlings, with soaring revenues leading to a sharp spike in shares. Over the last couple of years, growth rates have plunged, sending the stock much lower however. The latest set of results showed a continuation of recent trends, but improving losses have me raising my rating on the stock here today.
For the third quarter, revenues came in at $1.03 billion, handily beating street estimates by about $40 million. It's not surprising to see the number come in ahead of what analysts expected, as the company has done this in each quarter of the past five years. Management has usually been very conservative with its guidance, which pushes down estimates in between reports. This was again the case for Q3, which saw its street average revenue figure dip by about $30 million since the August report, and a lot more if we go back further in time.
The real headline here is that growth has essentially stalled out. Total revenue growth of 5% was the lowest reported figure in several years. Even when including a divestiture, organic growth of 8% was the first single digit number reported in quite a while, with barely any sequential dollar growth. This was a name growing in the high double digits, percentage wise, a few years back, and even the year ago period saw 33% top line growth. The company is working off higher base numbers than prior year periods, which does hurt its percentages, but that's not the whole story here.
As I've detailed in the past, there are a few major reasons why revenue growth has stalled out. Most importantly, the company's customer growth has nearly flatlined. Active customer accounts rose by just 2,000 in the third quarter, the lowest number in years, representing less than 10% year over year growth compared to more than double that percentage just two years ago. Also, as the chart below shows, the dollar-based net expansion rate continues to drop over time, with the peak being 143% in Q1 2020. This means that the company is really struggling to increase revenues from its existing customer base.
Dollar-Based Net Expansion Rate (Q3 2023 Earnings Presentation)
The revenue growth issue here doesn't seem to be going away anytime soon. Management did guide to revenues of $1.03 billion to $1.04 billion for Q4, which was ahead of the street's average for $1.02 billion. However, the average stood at $1.37 billion a year ago, so even accounting for the divestiture, that's a massive reduction in expectations. When considering the usual guidance conservatism here, organic growth of 4% to 5% in Q4 implies a mid to high single digit percentage growth rate for the current quarter, which would be in-line to lower as compared to Q3.
I'd be a lot happier if management was making moves to bolster its revenue profile. The company had a net cash position of nearly $3 billion at the end of Q3, which would certainly allow for an acquisition or two to help the top line. However, Twilio has decided to go the share repurchase route instead to offset its large stock-based compensation figures. The overall share count is finally starting to come down, with $620 million of the $1 billion repurchase plan completed so far, but you have to wonder if that money would have been spent better elsewhere.
The good news here is that Twilio is finally starting to cut down on some of its large net losses. The Q3 operating loss was down to around $100 million excluding impairment and restructuring costs. While that's still a very large number, it's much better than the nearly $287 million comparable operating loss from the year ago period. The company has swung this year to being free cash flow positive, but that of course wouldn't be the case if all of that tremendous stock-based compensation was being paid out in cash. Again, the balance sheet here is quite healthy and I have no concerns over the company's overall financial situation.
While I'm still not 100% pleased with the revenue situation currently, I am upgrading the stock to a hold today. Shares have bounced a bit from when I covered the name earlier this year , and I partially attribute that to unprofitable tech names becoming a bit more attractive as we approach the expected end of Fed rate hikes. Twilio shares currently trade about twice their expected sales figure for 2025, but a name like this with a decent growth profile would usually fetch in the mid single digits on a P/S basis. The average street target of nearly $68 implies some upside from here, and that figure might go higher on the latest beat and decent guidance, but the street did see this name worth about $500 just a few years ago.
In the end, Twilio announced a decent set of results on Wednesday, although the Q3 report did have its flaws. The company beat on the top and bottom line as it basically always does, sending the stock higher in the after-hours session. Revenue growth rates continue to dwindle, however, and key customer metrics have not shown any recent improvement. While street expectations have come down significantly in the past year, guidance wasn't bad, and net losses are improving. There could be some valuation upside here in the coming years if the revenue growth picture starts to accelerate again. For now, I'm not ready to completely buy into this story just yet, but I'm not totally bearish as I once was.
For further details see:
Twilio: Revenue Growth Problem Remains (Ratings Upgrade)