Why Twilio Is Down Almost 30% This Month

This month, Twilio (TWLO -0.12%) reported earnings that met on guidance, but the market sent the company down almost 30% on the report.

In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and David Kretzmann go over the most important points from the earnings report and explain why the market sold the company off so dramatically. Also, the hosts look at what the biggest risks facing Twilio today are, why it's such a big deal that Twilio lost its contract with Uber, whether this could be a buying opportunity for long-term investors, and more.

Dylan Lewis: Twilio was down nearly 30% since reporting earnings earlier this month. As a reminder for people who might not be as familiar with the company, they are what they say is a cloud communications company. Basically, you can think of them as the company that provides building blocks for developers to include communication features. Basically, things like protected calling, two-factor authentication, stuff like that, in their apps and services. So they make life a lot easier for developers -- I think that's the best way to describe it in layman's terms.

David Kretzmann: Yeah, and they have a lot of high-profile clients. Airbnb, Uber, to an extent. We'll talk about that.

Lewis: A sore subject.

Kretzmann: Right. So they have a lot of high-profile customers. This is the type of company where you probably interact with their products or services without knowing it. It's a back-end company.

Lewis: Yeah, they are behind the scenes making everything happen. Really, the story with Twilio looking at their most recent report wasn't the trailing results. The company posted revenue of $87.4 million for the quarter, which is good for over 40% growth year over year. Top-line growth is decelerating a little bit, but they're still comfortably within the company's guidance. It was really the look at future guidance that sent the stock down. People were not super-thrilled with some of the news about one of the company's biggest customers and what that might do to the company's financials.

Kretzmann: Yeah. In this case, it's Uber. With Twilio, they've had a lot of customer concentration, especially with Uber and WhatsApp, which is owned by Facebook. In this case, Uber essentially let Twilio know, "We're going to be looking to develop some of the technology in-house, and in some of the geographies around the world, we might be looking to switch over to other vendors." Essentially, that's 12% of Twilio's revenue that they can't count on over the next year or so.

Lewis: I hope that was at least a phone call. [laughs]

Kretzmann: Hopefully, a little bit of a heads-up.

Lewis: And not just a text, right? So they are a very large part of the top line for Twilio, like we said. Customer concentration has been an issue for them in the past. But you look at the sell off, they lost $1 billion in market cap on this news, more or less. When you think about the revenue contribution that a customer like Uber has for them, it seems a little asymmetrical. I look at the trends of their top 10 customers and how much of their business they make up, and it seems like they're moving further and further away from that heavy reliance. So there's a part of me that thinks maybe this is an overreaction by the market a little bit.

Kretzmann: Yeah, I think you can certainly argue that. Right now, their top 10 customers account for 25% of total revenue. And I think you said before the show that that number has actually been trending down over the past several quarters.

Lewis: Yeah, six months ago, that was 31%.

Kretzmann: Yeah, so it's moving in the right direction. That's definitely what you like to see. They added 4,000 new customers, essentially new developers. So, by and large, they have a very diversified customer base. For me, the concerning part about this announcement with Uber isn't so much that Uber is developing some of the technology in-house, and they will be doing it under their own roof, because not many customers are going to take the time or resources to develop that kind of expertise and do it in-house. To me, the most concerning aspect of this Uber announcement is that Uber will be switching to other vendors in certain geographies that might provide better service, or charge a lower price, or whatever that may be. To me, that brings up some questions about, how much of a moat does Twilio have, if Uber is saying, "We can get a better deal, one way or another, in other geographies where we don't need to rely on Twilio." Then, tens of thousands of other developers could potentially make that same choice. To me, that's not as much of a leap as developing the tech in-house, which I think very few customers are likely to do. So I think there's some bigger question marks around Twilio's moat, and I think that might be causing a lot of the skepticism or concern over Twilio right now.

Lewis: Yeah, I think that's a good point to make. They talked about this quite a bit in the conference call. Management was like, there are not a lot of our customers who can pull this off. The amount of resources that you need to put into developing all of this in-house and hosting it yourself and making it your own property, no one is going to want to do that. Maybe WhatsApp decides to do that at some point. But you look at their customer base, and aside from those two, there's really no one else in their profile. And just for background, I think WhatsApp makes up 5% of their top line right now.

Kretzmann: And that's also been trending down the past few quarters. Again, moving in the right direction, they're not overly dependent on one customer. And with Twilio, that is one of the risks. This isn't necessarily the easiest business to understand, unless you're a developer and working hands on with a product like Twilio. And another risk here, too, is that they are still unprofitable, they are still burning cash. That alone always will make a company more risky than a company that is producing cash and is profitable. But they do have $289 million in net cash. That's over 10% of their current market cap, which is $2.2 billion. So they're not in danger of going anywhere overnight. And even without Uber, they're still guiding for about 30% sales growth this year. So I am definitely more interested in Twilio than I was a few months ago, when people were going gaga for this stock after the IPO, it was trading at pretty unsustainable levels. Like, OK, the expectations are pretty high; I'm not sure they can meet that. Bu, now, it seems more reasonable. And even with Uber leaving, as long as they can demonstrate that they have a moat and they are able to retain these customers that they bring on board, and hopefully they can expand the relationship with the customers they bring on board, if they can do that, I think this can be a sustainably profitable business over the long term. But again, there are still some questions there, so I'm not surprised to see those questions continuing over the moat.

Lewis: Yeah. You talked about valuation a little bit. The company is currently trading for around six times sales. Less than nine months ago, they were double that. So that's the fall from grace we've seen. I've certainly been keeping an eye on them for a while. I was really interested to see what happened in this report.