Will Twillo continue to underperform?
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Twilio: Trust Issues?
Communication tools supplier Twilio Inc. (TWLO) spooked investors after a huge quarterly loss and soft revenue guidance. The management has also cut its long-term revenue growth guidance. Issues are also emerging from the acquisitions that the company has made. Has Twilio's top management lost the trust of investors?
Problems Lie Within
Companies use tools made by Twilio to interact with employees and customers by text, WhatsApp, other chat services, and more.
However, it depends on carrier fees that telecom companies set based on cloud-based services for accessing their networks. These carrier fees, which hurt Twilio's margin and rising competition, have curtailed the company's pricing power in its core business.
For this reason, it forayed into the software space to focus on higher-margin businesses. Twilio acquired wireless carrier Zipwhip for $850M and customer data platform, Segment in its most expensive deal worth $3.2B.
The company is now facing execution challenges in its acquisitions. The segment is seeing elevated attrition levels, particularly of those with better knowledge about the product, the segment market, and the customer.
Twilio touted Flex to be a crucial product over the last four years. Even in this time frame, it has only scaled to an Annual Recurring Revenue (ARR) of $100M, whereas analysts expected much more progress.
Throughout the year, the management kept telling investors that the company would see incremental revenue from the upcoming election cycle, which will reflect in the December quarter financials. Just days before the US went to mid-term polls, Twilio said that they have refused additional business from political election cycles saying that revenue came from customers “who did not intend to honor the company's policies.”
The management is now putting up a brave face saying that these “short-term revenue bumps” are immaterial to the company's overall story.
In September, Twilio laid off 11% of its workforce, with CEO Jeff Lawson saying the company's headcount grew too fast as it aimed for profitability and began pursuing non-priority projects. As of June, Twilio had 8.5K employees. Over 800 employees will be leaving in the current quarter. It will take a charge of $70M - $90M for severance payments and employee benefits.
Going Back On Promises
Twilio had its worst day on record last week after the company reported a hefty quarterly net loss, partly due to the one-time charge, and also issued soft revenue guidance, implying that growth will slow down even further from what it already has.
Key Highlights From Q3 2022:
Revenue: $983M Vs $972.2M expected
Loss Per Share: $0.27 Vs $0.36 expected
Net Loss: $482.3M Vs $224.1M year-on-year
Here's Twilio's guidance for the current quarter:
Revenue: $995M - $1B Vs $1.1B expected
Loss Per Share: $0.06 - $0.11 Vs $0.12 expected
Twilio's revenue growth slowed for the fifth straight quarter to 33% from 41% in Q2 and 65% last year. Its current quarter guidance implies revenue growth of a paltry 19%. The management also cut its long-term revenue growth guidance of 30%, which it reiterated only three months earlier, to 15-25%.
The management said that while the company faces short-term headwinds, the long-term trends remain intact. During this period of uncertainty, Twilio is looking to build more customer engagement strategies, become more efficient, and build better and more personalized customer relationships. Twilio's active customers increased to 280K from 275K earlier for the recently ended quarter.
In addition to cutting its workforce, Twilio also plans on slowing hiring and reducing its real estate footprint. Combining the three would bring about annualized cost savings worth $330M.
Over the long term, Twilio aspires to achieve a 20% operating margin, which investors believe is challenging. It intends to turn operationally positive next year and increase its margin by 1-3% every year post that. However, the management has not specified what level the margin will start at if it indeed does next year.
Another area of concern is the company's stock-based compensations, which also create further hurdles in achieving their 20% margin target. SBCs in 2022 were 22% of revenue, and the management only expects them to moderate to 15-20% over the medium term.
Analysts are also shocked by Twilio's cut in guidance, saying that competition and mis-execution are to blame for the company's current state. Some could no longer defend a positive stance on the company and said that it has a “long journey ahead” to a recovery.
For a stock that once traded at over $430, Twilio made a new low at $41, a reverse ten-bagger of sorts, as one analyst called it. Its market value has dwindled from a $70B peak to just above $10B. The management appears to have lost the trust of its investors with its constant flip-flops, and it will take much more than just one quarter of delivering to regain the trust, let alone the lost value!
Market Reaction
TWLO ended at $53.88, up 1.97%.
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