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Twilio (TWLO) Posts Q1 Loss, Shares Plunge on Dismal Outlook

Zacks Equity Research

Twilio Inc. TWLO reported first-quarter 2017 results yesterday, wherein the top line came ahead of our expectations, while the bottom line matches the same. Also, the company witnessed year-over-year improvement on both the counts.

Although the company reported adjusted loss (including one-time expenses and income but excluding stock based compensation) of 14 cents per share, the figure came in line with the Zacks Consensus Estimate. Furthermore, on a non-GAAP basis, the company posted a loss of 4 cents which not only compared favorably with the year-ago quarter’s loss of 5 cents, but also its own guided range of a loss of 6 –7 cents.

The year-over-year improvement in the bottom line was mainly driven by strong top-line growth, which was partially offset by increased operating expenses and higher share count.

Twilio Inc. Price, Consensus and EPS Surprise


Twilio Inc. Price, Consensus and EPS Surprise | Twilio Inc. Quote

Despite reporting strong first-quarter results, shares of this cloud communication platform provider plunged nearly 30% during yesterdays’ after-hour trade, as the company lowered its guidance for full-year 2017. Also, its sales outlook was a big miss from our estimates.

For 2017, Twilio now expects revenues to come between $356 million and $362 million (mid-point $359 million), down from $364–$372 million (mid-point $368 million) projected earlier. This is significantly lower than the Zacks Consensus Estimate of $369.80 million. Similarly, base revenue is anticipated to be in a range of $340–$343 million, lower than the previous forecast of $351–$355 million. Non-GAAP net loss is projected to come in the range of 27–30 cents, much higher than its previous projection of 15–19 cents per share.

For the second quarter, Twilio expects revenues to come between $85.5 million and $87.5 million (mid-point $86.5 million). This is lower than the Zacks Consensus Estimate of $87.16 million. Base revenue is anticipated to be in the range of $81.5–$82.5 million. Non-GAAP net loss is projected to come in the 10–11 cents per share range.

Jeff Lawson, CEO of Twilio, blamed Uber for this disappointing outlook which is changing the way they utilized and consumed communication services. Uber uses Twilio for a variety of used cases such as driver and rider communication, driver marketing and several others.

Till last year, Uber used Twilio’s platforms in most of its geographical operations. However, since last quarter, Uber is “optimizing by used case and by geography” and is planning to "move communications for some use cases in-app." This means that Uber is now trying to do its messaging services internally.

Looking at the recent development in its biggest customer’s strategy on communication services, Jeff Lawson is concerned and opines that this will restrain Twilio’s overall growth in 2017. Uber’s contribution to Twilio’s revenues has now declined to approximately 12% in the first quarter from roughly 17% in fourth-quarter 2016.

Notably, Twilio outperformed the Zacks categorized Internet Software industry in the YTD period. The stock  gained 17.7%, while the industry recorded growth of 11.6%.

Now, let’s discuss the first-quarter results in detail.

Quarter in Detail

The company’s first-quarter revenues surged 47.2% year over year to $87.4 million and surpassed the Zacks Consensus Estimate of $84 million. Also, it came ahead of the previously guided range of $82–$84 million.

The robust top-line performance was mainly driven by remarkable year-over-year growth in active customer account. During the quarter, the company registered a 42% rise in active customer account, adding over 4,000 active customer accounts, bringing the total count to 40,696 as of Mar 31.

Adjusted gross profit jumped 56.8% year over year to $51.1 million, while margin expanded 370 basis points (bps) to 58.5%. Per Twilio “year-over-year increase was due to combination of efficiency gains and the mix of international usage.”

Adjusted operating expenses were up 66% year over year to $64.4 million. As a percentage of revenues, the figure advanced 840 bps to 73.8%. The year-over-year surge was mainly due to increased investment in research and development, and sales to capitalize on the market opportunity.

Further, the company’s operating loss more than doubled to $13.3 million from $6.2 million in the year-ago quarter.

The company exited the quarter with cash and cash equivalents of $288.5 million, down from $305.7 million at the end of the previous quarter. In addition, during the quarter, the company generated operating cash flow of $2.4 million.

Our Take

San Francisco, CA-based Twilio offers cloud-based software that helps developers make and receive phone calls, text messages and video chats. The company boasts a strong clientele that includes the likes of Netflix NFLX, salesforce.com CRM and Twitter among others. Furthermore, the long-standing relationship with Amazon AMZN is particularly noticeable. Twilio uses Amazon Web Service (AWS) to host its platform. Additionally, Amazon invested during Twilio’s Series E round funding in 2015.

However, Uber’s recent strategy on utilizing communication services will have a negative impact on Twilio’s overall growth prospect throughout this year. Furthermore, intensifying competition in the communications market and growing prevalence of in-app push notifications are major concerns. Moreover, customer concentration is a headwind.

Currently, Twilio carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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