Twilio Isn't Planning to Turn a Serious Profit Anytime Soon, and That's Okay

Twilio (TWLO 1.47%) reported earnings Wednesday evening, covering the third quarter of fiscal year 2019. The company, which provides technology platforms and programming tools that help other businesses include cloud-based communication functions in their own software, delivered 75% revenue growth.

Here's a closer look at Twilio's latest results.

Twilio's third-quarter results by the numbers

Data source: Twilio. GAAP = generally accepted accounting principles.

What's new with Twilio?

• The company reported 172,000 active customer accounts in the third quarter, up from 162,000 in the previous quarter and 61,000 in the year-ago period. These figures -- and the related financial results -- include contributions from the SendGrid platform, which Twilio acquired in a $2 billion stock-swap buyout that closed in February.
• SendGrid added $9 million to Twilio's top line in the third quarter, which accounted for 39% of the total year-over-year revenue growth. Stated in a different way, Twilio minus SendGrid would have shown an organic sales boost near 46%.
• Twilio is printing lots of new shares, not only to finance ambitious acquisitions like the SendGrid deal but also to power a generous stock-based compensation program. The company also performed a secondary stock offering in the third quarter, raising $980 million after paying financing fees.
• The balance sheet now holds $1.88 billion of cash equivalents and $452 million in long-term debt papers. Both of these balances have remained relatively stable in recent quarters while the share count increased by 40%.

Image source: Getty Images.

Color commentary from the executive suite

This company is currently not attempting to maximize profits, as every available asset is employed in order to sustain Twilio's skyrocketing customer counts and sales growth. On the earnings call, CFO Khozema Shipchandler explained how this strategy should evolve in the near term and also over the coming years.

"As we get into Q4 and fiscal year [20]20, we see a tremendous opportunity ahead of us to continue to increase market share and grow the company," Shipchandler said. "We believe investing in these areas today, as well as our product innovation, will position us to take advantage of this massive market opportunity."

That was the short-term outlook, followed by a brief discussion of an extended timeline.

Profitability "is an important long-term focal point for the company. We are in the early stages of a number of changes internally to drive efficiencies over time, including changes to strategic sourcing, working capital, and stock-based compensation," he said. "Ultimately, the investments being made today enable Twilio to extend our market-leading position and take full advantage of this generational opportunity."

Looking ahead

Twilio expects fourth-quarter sales to stop in the neighborhood of $313 million, which works out to an approximately 68% year-over-year increase. Adjusted earnings should land near $0.02 per share, down from $0.03 per share in the third quarter and below the $0.04 per share seen in the fourth quarter of 2018.

Management also tightened up full-year revenue guidance around the midpoint of the projection that was offered three months ago. At the same time, the unadjusted earnings target for the full year was reduced from $0.18 to $0.17 per share.

Market feedback

Investors didn't exactly love this report, sending Twilio shares as much as 13.7% lower in Wednesday's trading session. A handful of analyst firms also weighed in with critical reports, slashing target prices and sometimes triggering downgrades as well.

At least one analyst swam against that negative current. Piper Jaffray's Brent Bracelin liked Twilio's risk/reward ratio after Wednesday's sharp sell-off, citing "healthy" organic growth and rapid customer growth.

Both of these analyses may be correct, depending on your chosen set of assumptions. Thanks to the obvious lack of concern for short-term profits, it's nearly impossible to value Twilio's stock based on classical profit-based multiples. Instead, investors must do some educated guesswork on how the company's long-term profits might develop once it shifts out of maximizing revenues and into a new profit focus.

This is a situation often found in fairly small companies chasing down large long-term markets at top speed. If you're comfortable with investing in richly valued growth stocks, Twilio might look like a strong buy today. It just takes a certain type of investor to reach that conclusion.