For years, technology platform provider Twilio (TWLO +2.96%), like many tech companies, prioritized growing its business over profits, resulting in a whopping net loss of $1.3 billion in 2022, up from $950 million in 2021. But over the past year, as macroeconomic conditions, such as rising interest rates, hit tech stocks particularly hard, and Twilio's revenue growth decelerated, the company underwent a transition amid this challenging environment.
In recent months, Twilio shifted its focus toward achieving profitability. Not only that, the company also restructured its organization into two divisions called Communications and Data & Applications.
Do these shifts make Twilio an attractive investment? Understanding the implications of these changes and unpacking where Twilio is today can provide insights into whether Twilio makes a good long-term investment.
NYSE: TWLO
Key Data Points
What galvanized Twilio's changes
The company's second quarter represented the first time Twilio reported performance under its new structure. There's a reason why Twilio chose to restructure its business now.
The company enjoyed double-digit revenue growth for years, more than doubling its sales from 2020's $1.76 billion to 2022's $3.8 billion. But, the macroeconomic environment of the past year caused customers to curb spending, resulting in a decline in revenue growth from a 61% year-over-year increase in 2021 to 35% in 2022.
That growth rate dipped further in 2023, dropping to 10% in the second quarter compared to 41% last year. Yet even with lower growth, Q2 revenue reached $1 billion compared to $943.4 million in 2022, representing the third consecutive quarter of at least $1 billion in sales.
However, the company estimates its third-quarter revenue growth will be flat or no more than a 1% increase compared to the prior year. Total Q3 revenue last year was $983 million, meaning Twilio's streak of $1 billion or more in quarterly revenue would end if it meets guidance.
Breaking down Twilio's new structure
With revenue growth decelerating, the company began aggressively cutting costs over recent months. As a result, Twilio's Q2 net loss plunged nearly 50% from last year's net loss of $322.8 million to $166.2 million.
The cost-cutting measures are part of the company's goal to reach profitability by 2027. To that end, Twilio restructured its operations into two divisions: Communications and Data and Applications.
The former encompasses its core communications services, which include the application programming interfaces (APIs) that deliver text messages, voice, and other communication functionality for Twilio's clients to incorporate into their apps and websites. This is the company's more mature product suite and generates revenue primarily through fees based on the usage of Twilio's APIs.
The second business unit aims to expand Twilio's relationship with its clients and thereby grow revenue by providing complimentary products to its communication capabilities. These products collect and analyze data to gain as many customer insights as possible, then use those insights to help Twilio's clients engage their customers in a more personalized way. An example is email marketing tailored to appeal to an individual consumer.
A key point about the Data and Applications segment is that it generates revenue through a predictable, subscription-based pricing structure. This stands in contrast to the Communications division, where revenue can be unpredictable as clients dial up or down their API use. However, the Communications division accounted for $913 million of Twilio's $1 billion in Q2 revenue.
To buy or not to buy Twilio
Twilio's gambit is to grow its Data & Applications division's more predictable subscription-based revenue, which generates higher margins as well. If this business unit can successfully increase product adoption, the company may be able to return to a more sustainable revenue growth trajectory.
However, the Data & Applications division has a long road ahead. In Q2, it had around 27,000 customers compared to 289,000 for its Communications segment.
Still, it's not all doom and gloom for Twilio. According to CFO Aidan Viggiano, the company generated $72 million in Q2 free cash flow. She added, "This is an area of focus for us as we drive greater profitability in the business."
Moreover, the company's Q2 balance sheet is solid. Twilio held $675.1 million in cash and equivalents and another $3 billion in marketable securities, bringing total Q2 assets to $11.9 billion while total liabilities were $1.9 billion.
Twilio's stock price moved up in recent months, but it's still well off its 52-week high of $81.25, making the stock a potential buy. But since Q2 is the first time Twilio broke out numbers for the two new divisions, no trend exists to gauge how well the Data and Applications business can grow its revenue.
Therefore, the company's recent changes remain unproven in terms of pointing to long-term success. So, at this time, it's prudent to see how Twilio performs in Q3, especially since it's in a transition phase as it pivots toward profitability.
If you're thinking about buying shares, you may want to hold off until Q3 results are announced, or you could take a small position in Twilio if you have a long time horizon and high risk tolerance to see if the company can achieve its goals of profitability and reigniting revenue growth.
