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Twilio (TWLO) Soars on Strong Q3 Results and Upbeat View

Zacks

Shares of Twilio Inc. TWLO jumped over 4% during yesterday’s after-hours trade after the company reported splendid third-quarter top-line results and raised its 2017 outlook. Twilio’s third-quarter revenues topped the Zacks Consensus Estimate as well as management’s guidance range. Also, the top line marked solid year-over-year growth.

Talking about the company’s bottom-line results, though it posted a loss per share, the figure came in line with the consensus estimate and matched the upper-end of management’s guidance range as well. However, the reported loss came in wider than the year-ago quarter’s loss.

Let’s discuss the third-quarter results in detail.

Revenues


The company’s third-quarter revenues surged 40.6% year over year to $100.5 million and surpassed the Zacks Consensus Estimate of $91.9 million. Also, it came ahead of management’s previously guided range of $91-$93 million. Furthermore, the company’s base revenue jumped 43% year over year to $92 million.

The robust top-line performance was mainly driven by remarkable year-over-year growth in active customer account which was a result of the company’s continued focus on introducing products as well as its go-to-market sales strategy.

Part of this tremendous top-line growth was also contributed by the strong adoption of the Twilio Studio product launched in the third quarter. Jeff Lawson’s statement on Twilio Studio suggests he is very optimistic about this product’s success. He noted, “With Twilio Studio, the visual builder for Twilio, we can accelerate our customers’ roadmaps and help an even larger set of users build on our platform. We are excited by the size, scale and diversity of what new and existing customers are creating with Twilio.”

During the reported quarter, the company registered a whopping 34.9% surge in active customer accounts, adding over 12,032 accounts in the last 12 months, bringing the total count to 46,489 as of Sep 30, 2017. During the second quarter alone, Twilio added over 3,058 active customer accounts.

Going forward, we believe the company will continue with its strategy of bringing in new and advanced products in the quarters ahead. It should be noted that during the second-quarter conference call, the company had stated, “We had a total of 42 product announcements around SIGNAL this year, including Twilio Functions, our serverless computing product, new analytics products, our voice recognition product we built in conjunction with Google and support for several new third-party communications channels like Alexa, Slack, Twitter and email for companies want to communicate with their customers in a growing list of new mediums.”

Operating Results

Non-GAAP gross profit jumped approximately 33% year over year to $53.7 million. However, gross margin contracted 310 basis points (bps) to 53.4%, as elevated cost of goods sold more than offset the benefit of higher revenues.

Non-GAAP operating expenses flared up 40.4% year over year to $61.4 million. The year-over-year surge was mainly due to increased investment in research and development, and sales to capitalize on the market opportunity. However, as a percentage of revenues, the figure was flat at 61.1%.

Further, the company’s non-GAAP operating loss increased to $24 million from $11.3 million reported in the year-ago-quarter. Non-GAAP net loss came in at $7.1 million or 8 cents per share, which is wider than the year-ago quarter figure of $3.3 million or 4 cents. The year-over-year widened loss was mainly due to elevated costs and operating expenses which more than offset the benefit of sturdy top-line growth.

However, non-GAAP loss per share came in line with management’s upper-end guided range of a loss of 7-8 cents. Also, the quarterly loss matches the Zacks Consensus Estimate.

Twilio Inc. Price, Consensus and EPS Surprise

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

Balance Sheet

The company exited the quarter with cash and cash equivalents of $283.9 million, slightly down from $289.2 million at the end of the previous quarter. In addition to this, during the first three quarters of 2017, the company used $7.1 million worth of cash for operational activities.

Outlook

Buoyed by a strong quarterly performance, Twilio raised its full-year outlook and provided encouraging guidance for the fourth quarter. For 2017, Twilio now expects revenues to come between $386.5 million and $388.5 million (mid-point $387.5 million), up from $371-$375 million (mid-point $373 million) projected earlier. This is significantly higher than the Zacks Consensus Estimate of $373 million.

Similarly, base revenue is estimated to be in the range of $356.5-$357.5 million, higher than the previous forecast of $348.5-$350.5 million. Non-GAAP net loss is now projected to come in the range of 22-23 cents, against its previous projection of 22-24 cents per share. The Zacks Consensus Estimate is pegged at a loss of 23 cents.

For the fourth quarter, Twilio estimates revenues to be between $102.5 million and $104.5 million (mid-point $103.5 million). This is higher than the Zacks Consensus Estimate of $98.2 million. Base revenue is anticipated to be in the range of $96.5-$97.5 million. Non-GAAP net loss is projected to lie in the 5-6 cents per share band. The consensus estimate is currently pegged at a loss of 6 cents.

Recovers from Uber Hangover

The recently reported strong quarterly results clearly indicate that the company has been able to mitigate the loss of revenues from Uber.

It should be noted that Uber uses Twilio services for a variety of used cases such as driver and rider communication, driver marketing and several others. Till 2016, Uber used Twilio’s platforms in most of its geographical operations. However, since first-quarter 2017, 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 operate its messaging services internally.

Looking at these developments in its biggest customer’s strategy on communication services, Jeff Lawson (Twilio’s co-founder and chief executive officer) is concerned and during the second-quarter conference call he had stated that this will restrain Twilio’s overall growth in 2017. Uber’s contribution to Twilio’s revenues was declined to approximately 9% in the second quarter from roughly 12% in the first quarter and 13% in the second quarter of 2016.

Despite this, the company managed to report robust revenue growth in back-to-back two quarters, returning itself once again on growth trajectory mainly due to its sustained focus on rolling out products, global expansion, go-to-market sales and acquisition strategies.

Our Take

We believe back-to-back strong quarterly results and optimistic guidance will give a fresh boost to the company’s share price which is currently trading below 28% to its 52-week high level of $38.88.

Notably, Twilio’s shares have underperformed the industry to which it belongs to in the year-to-date period. The stock has lost 3.5% of its value during the said period, while the industry recorded growth of 30%.

Going forward, the company’s key initiatives, including product innovation, global expansion and acquisitions, are helping it gain customers, which bode well for long-term growth. We believe proliferation in cloud and mobile penetration across the globe will continue to fuel Twilio’s customer growth over the long run.

Twilio 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.

Nonetheless, 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 #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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