What happened

Shares of Twilio (TWLO 2.64%) were pulling back today after the cloud-based communications software company posted a strong first-quarter earnings report but offered weaker-than-expected guidance on the bottom line. With the software as a service (SaaS) stock coming into the report "priced for perfection," that was enough to send shares spiraling.

As a result, the stock finished the day down 9.4%.

A digital image of a cloud.

Image source: Getty Images.

So what

Twilio reported revenue growth of 62% to $590 million, well ahead of estimates at $532.9 million. It also posted a dollar-based net expansion rate of 133%, showing that continuing customers increased their spending by 33%, though that was down slightly from 143% in the quarter a year ago. Active customers' accounts increased from 190,000 a year ago to 235,000,  and on an adjusted basis, profitability ramped up as adjusted operating income jumped from $6.1 million to $17.3 million. 

On the bottom line, adjusted earnings per share came in at $0.05, down from $0.06 a year ago in part because of share dilution, but that beat estimates at a loss of $0.09 per share.

CEO Jeff Lawson said:

We delivered another quarter of outstanding growth in Q1, as companies across industries and around the world continue to turn to Twilio's customer engagement platform to drive their digital transformation. Over the last year, one thing has become extremely clear: we are in the midst of a massive shift in the way companies engage with their customers that is driving a generational opportunity for Twilio.

The company also said it would split up its R&D function into three units.

Now what

Twilio's second-quarter guidance shows the company still expects to maintain its brisk growth rate even as it laps the beginning of the pandemic in the year-ago quarter. On the top line, it's calling for 47% to 50% revenue growth, or $591 million to $601 million, well ahead of the consensus at $577.1 million. However, the company projected a loss in Q2, likely a reflection of investments it's making to capture the opportunity Lawson referred to above. Management forecast an adjusted loss per share of $0.16 to $0.13, worse than expectations at a $0.05 per-share loss.

Overall, it's hard to complain about the report, but the stock trades at a steep multiple -- around a price-to-sales ratio of 25 --which explains why just one weak data point can spark a sell-off.