There was a great deal of debate surrounding high-growth but low- to no-profit companies during the peak-pandemic stock boom. For some investors, these stocks were untouchable given their premium valuations and loss-generating operations. Others thought these companies could cut expenses and quickly begin turning a profit when they so chose. 

The past year or so has tested that argument. Some companies were indeed able to cut expenses, and are now healthy and self-sustaining -- but others not so much. Twilio (TWLO 1.47%) has so far fallen into the latter group, and it could take years for the business to get itself into profitable territory. Nevertheless, it's making progress.

Here's what happened during the last quarter that gives me encouragement.

Twilio beats on the top and bottom(ish) line

Life hasn't been so easy for cloud-based communications companies in the past couple years. Cloud messaging services like those that Twilio provides have been no exception. Twilio basically charges based on the volume of text messages it processes -- and that volume has softened.

Meanwhile, Twilio's small subscription software businesses, like its data analytics platform (based on a start-up called Segment that it acquired in 2020) hasn't generated enough growth to offset weakness in its messaging services.  

However, Twilio has recently seen some rays of light. In Q2, its revenue totaled $1.04 billion, up 10% from a year ago -- and $14 million better than the high end of its guidance three months ago. Adjusted operating income was $120 million, compared to guidance for as much as $75 million.

Management issued its outlook for Q3 revenue to be $980 million to $990 million, flat from a year ago but up 3% to 4% when excluding some small business divestitures that Twilio made to sharpen its focus. Plus, the company raised guidance for adjusted operating income to $350 million to $400 million for full-year 2023, versus $275 million to $350 million it forecast earlier. 

Who cares about adjusted income?

Of course, an adjusted profit metric like this doesn't matter so much to many investors these days, especially for a non-growth business like what Twilio has become this year. On a GAAP basis, Twilio actually reported a net loss of $166 million -- steep, although half the loss from the same period last year. 

Nevertheless, it's important to understand the difference between adjusted and GAAP profitability metrics. For Twilio, the discrepancy is primarily from non-cash employee stock-based compensation (SBC) of $153 million last quarter (down $90 million from last year) and non-cash amortization expense from acquisitions in years past.

When excluding these numbers (some of which are due to one-time "restructuring" expenses when Twilio laid off a big chunk of its workforce), resulting free cash flow was a positive $72 million in the last quarter.

More progress still needs to be made on this front, but Twilio has at least stemmed much of its problems. Plus, the company used its newly found positive free cash flow to repurchase stock -- $485 million worth through the first half of 2023.

At the end of June, Twilio had $3.68 billion in cash and short-term investments and debt of $988 million.

Is Twilio stock a buy?

Don't get me wrong, Twilio still has plenty of work ahead to get itself in robust financial shape -- and it's likely going to take a couple more years. It remains to be seen if this year's revenue slowdown can be fixed once the company starts lapping effects from the global economic cool off -- perhaps growth will come back in 2024. Management is optimistic, especially when citing the potential of its non-core but emerging AI software business it's patched together via acquisitions.

All in all, I continue to rank Twilio stock as a high-risk and potentially high-reward investment. The business was mismanaged early in the pandemic and caught flat-footed when interest rates skyrocketed in 2022. Buying during that period was a mistake. Twilio is now a small position for me, but one I'll keep nibbling on as management takes further steps in the right direction to become profitable.