Twilio: Still Far From Where It Should Be Attractive (NYSE:TWLO)
A little over three months ago, in early March of this year, I decided to upgrade shares Twilio (New York Stock Exchange:TWLO) From “sale” to “reservation”. Before that point, going back to an article published in November of 2021, I He was somewhat bearish about the company. This downward trend turned out to be accurate, as the company’s shares fell 81.4% while the S&P 500 rose 7.9%. When I decided to upgrade the stock, it was based on improving fundamentals. Revenues were continuing to grow and the company was quickly racing to break even from a profitability perspective. Cash flows were also growing at a good rate.
However, since this article was published, the stock has continued to see downward pressure. Although shares were much better than seen before, they were down 6.8% compared to a 3.8% increase. It was also seen in the S&P 500. While I’m not completely shocked by this, given some of the problems the company is facing, I remain optimistic that further declines may be unwarranted. Let’s be clear, the company is not yet at the stage of meriting a promotion. Stocks aren’t cheap enough and cash flows aren’t strong enough to make that happen. But the company is starting to make some good progress on this front. I object to management’s decision to waste cash on stock buybacks when they should instead be focusing on more growth. But overall, things could be much worse.
Look at recent data
The only new fundamental data that management has provided since I last wrote about Twilio covers the first quarter of fiscal 2024. During that period, the company showed that it was rapidly approaching break-even from a profitability perspective. Some of this, no doubt, can be attributed to continued top-line growth. Revenues of $1.05 billion were about 4% above the $1.01 billion generated one year earlier.
This appears to be largely attributable to a 4.3% increase in the number of active customers served by the company. This number increased from 300,000 in the first quarter of 2023 to 313,000 at the same time this year. As a note, management has determined that revenue from active customer accounts is responsible for 99% of the company’s total sales.
Most of this revenue comes in the form of usage-based fees charged by the company so that customers can access the products and solutions offered by the company. About 71% of total sales come from these types of fees. Another 29% comes from non-usage-based fees such as subscription products.
With the rise in revenues also came an improvement in the company’s bottom line. During the quarter, the company posted a loss of just $55.3 million. While that’s a big chunk of change, it pales in comparison to the $342.1 million loss reported just one year ago. There were several contributors to this improvement. Some were due to the absence or reduction of one-time costs. For example, in the first quarter of last year, Twilio booked $121.9 million in restructuring costs. That number dropped to just $9.9 million this year. Additionally, in the first quarter of last year, the company reported $21.8 million in impairment of long-term assets. This is nothing compared to the same time this year. It also recorded losses worth $46.2 million last year related to the decline in the value of strategic investments.
But this is not the only change the company has witnessed for the better. Although the company is spending more on R&D this year than last year, there are some key cost categories that have improved significantly. For starters, the company’s gross profit margin has been up nicely, rising from 48.75% to 51.96%. This may not seem like a lot, but when applied to revenue generated in the first quarter of this year, this represents an additional $33.6 million in pre-tax profits for shareholders. At the same time, sales and marketing expenses decreased from 25.82% of sales to 20.44%. That’s an additional $56.3 million to the bottom line. Finally, the percentage of general and administrative expenses increased from 11.18% of sales to 10.69%. This represents an additional benefit of 5.1% to shareholders on a pre-tax basis.
Some of these changes include reductions in stock-based compensation. This number decreased from $170.8 million last year to $158.6 million this year. The company also saw a decrease of approximately $21.9 million, including the amortization of acquired intangible assets including revenue category cost, research and development, and sales and marketing. However, the company is also seeing a decline in tangible expenses as well. This is reflected in cash flow. The company’s operating cash flow rose from negative $97.9 million last year in the first quarter to positive $190.1 million this year. If we adjust for changes in working capital, we get an improvement from $45.3 million to $215.2 million. Meanwhile, the company’s EBITDA rose from negative $120.4 million to negative $33.6 million.
In all likelihood, improvements will continue throughout this year. Management expects organic revenue growth of between 5% and 10%. For a company that is supposed to be growing quickly, this is somewhat disappointing. However, the company now expects non-GAAP operating income to be between $585 million and $635 million. In addition to being up from the $533 million announced for 2023, this should represent an improvement over the previous expected range of $550 million to $600 million. Given how volatile this particular metric has been in previous years, that doesn’t tell us much about what other profitability metrics should look like. But that doesn’t mean we can’t get an idea of what the photo should look like before the work looks attractive.
In the table below, you can see two different scenarios. The first looks at what type of adjusted operating cash flow a company would need in order to trade at an adjusted operating cash flow multiple of either 10 or 15. The second scenario looks at the same thing but for an EV the EBITDA is many times higher. Using last year’s data, we get adjusted operating cash flow of $645.4 million. Given how much cash flow has improved this year, it is not unlikely that we will be able to achieve this goal. However, we probably still have a long way to go when it comes to EBITDA. After all, last year, it was negative by as much as $100.3 million. Even in the first quarter of this year, it remained in the red. Of course, this does not mean that the company has a bad prospect. I dare say it will not be long before he achieves these goals. That may not be the case this year, at least when it comes to EBITDA, but it could be next year.
I have another complaint, however. In my personal opinion, management is making a big mistake by acting on the $2 billion stock buyback program currently in place. In the first quarter of this year alone, the company spent $384.3 million to buy back 6.1 million shares. While many shareholders will be happy about this, you want to issue shares when you are in the red in order to grow more quickly by making more investments or buying other companies. This has caused the company’s net cash position to shrink very quickly. At the end of 2021, the company had net cash of $4.35 billion. This number dropped to $3.01 billion by the end of 2023. By the end of the last quarter, it had reached $2.83 billion. That’s still a huge amount of cash on hand, especially for a company with a market cap of $9.71 billion. But it would be nice if this capital could be used elsewhere.
He stays away
As it stands, Twilio’s future is probably decent at worst and really good at best. I don’t think shares have fallen enough, given the company’s cash flow position, to justify a “buy” rating. But at some point, maybe over the next year, or if stocks fall a little more from where they are today, my mindset could change.