On Feb. 7, cloud platform provider Twilio (NYSE: TWLO) delivered a solid fourth quarter earnings report. Its revenue rose 60% annually to $82 million, beating estimates by nearly $8 million, and its non-GAAP earnings broke even, compared to a net loss of $0.07 per share in the prior year quarter. On a GAAP basis, its net loss narrowed from $0.48 to $0.15 per share.
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Yet shares of Twilio -- which had fallen more than 55% from its 52-week high last September -- barely budged after that earnings beat. Let's take a closer look at the pros and cons from Twilio's report to understand why investors didn't rush to buy more shares.
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First, the good news...
Twilio's "base revenue" rose 73% annually to $75.2 million last quarter. That figure excludes revenue from "Variable Customer Accounts" with large customers -- like Facebook (NASDAQ: FB) and its subsidiary WhatsApp -- which have never entered into 12-month minimum revenue commitment contracts with the company.
Twilio believes that those accounts "exhibit significant fluctuations" and are a less reliable measure of its core growth. Looking ahead, Twilio expects its base revenue to rise 48%-52% in fiscal 2017. It expects its total revenue to rise 31%-34% for the year, which beats analyst expectations for 27% growth.
Twilio's Active Customer Accounts -- defined as any unique account from which it has generated at least $5 in revenue during the last month of the period -- rose44% annually to 36,606. The company added several major customers during the quarter, including Capital One, Atlassian, and "one of the largest U.S. airlines".
Twilio's "dollar-based net expansion" rate, which measures its revenue growth per customer, also rose 155% annually, compared to 175% growth in the year ago quarter. That metric rises when an Active Customer Account boosts its usage of one of Twilio's services, expands it to new applications, or starts using a new service. It falls when a customer reduces or ceases usage of Twilio's services.
Now, the bad news...
Those top line numbers were all rock solid, but they were overshadowed by some disappointing bottom line forecasts. Twilio's non-GAAP loss narrowed to the break even point during the fourth quarter, but it expects to post a loss of $0.06-$0.07 for the first quarter, and a loss of $0.15-$0.19 for the full year. Analysts had expected a loss of $0.04 for the first quarter and a loss of just $0.10 for the year.
Those wider-than-expected losses will likely be caused by higher investments into widening the company's competitive moat, as it has constantly done over the past year. Last year, the company launched Twilio Enterprise Plan, which added security, access management, and administration tools for larger businesses. It also added Voice Insights, which analyzes voice application data for developers, and acquired WebRTC's media processing technologies for Twilio Programmable Video -- which lets developers add real-time voice and video to mobile apps.
During the fourth quarter, Twilio acquired Swedish SMS provider Beepsend for an undisclosed amount, and launched a wide variety of new voice call connection and recording tools. These types of investments could boost its dollar-based net expansion rate, but weigh down its margins over the next few quarters. Rising stock-based compensation expenses, which claimed 9% of its revenues in 2016, could also cause its non-GAAP and GAAP earnings to diverge.
Meanwhile, Twilio's dependence on a few large customers likely remains high. In Twilio's most recent 10-Q filing, it revealed that WhatsApp generated 10% of its revenue in the first nine months of 2016. Facebook's integration of Twilio's services into Messenger last April has also likely boosted the company's weight on Twilio's top line. Therefore, investors should wait for Twilio to release its 10-K filing to see just how much it relies on Facebook and WhatsApp.
Its valuation is still lofty
Lastly, Twilio's valuations are still worrisome. The stock trades at 10 times sales, which is nearly double the average P/S ratio of 5.3 for software companies. Its inability to generate a profit -- even after connecting billions of Messenger, WhatsApp, Uber, and Airbnb users to mobile carriers -- is worrisome, and makes it difficult to properly value the stock.
All these concerns are likely keeping investors on the sidelines for now. I personally own a small position in Twilio, but the company's fourth quarter report didn't convince me to add more shares, since the company clearly still has a lot to prove.
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