Once the poster child for unprofitable tech companies, Twilio (TWLO 1.47%) is dead set on transforming itself into a sustainable, profitable business. The communications software provider has already gone through two rounds of significant layoffs, slashing its workforce by 11% last September and by another 17% in February.
Twilio also began a broad restructuring in February, grouping businesses with similar growth profiles. The communications segment, home to the core messaging APIs, would be focused on boosting efficiency. The data and applications segment, containing the rest of Twilio's product portfolio, would be focused on accelerating growth.
The company has made progress in reducing its losses, driven by both job cuts and efficiency improvements in the communications segment. While Twilio's revenue rose by just 5% year over year in the third quarter, the company's gross profit jumped 12%, and its operating loss was 76% smaller.
Trouble with growth
One-half of Twilio's strategy is going even better than expected. In a letter to employees on Monday, Twilio CEO Jeff Lawson noted that the company is ahead of schedule boosting efficiency and profit in the communications segment. With the communications segment accounting for about 88% of total revenue in the third quarter, that progress is critical.
But the data and applications segment was falling short of expectations, Lawson said. The company had upped its investments in growing Segment, its customer data platform, last year. Those investments didn't pan out, failing to produce the level of growth the company was anticipating. Given those lackluster results, Twilio has decided to cut Segment-related spending.
Overall, Twilio plans to lay off another 5% of its workforce. Many of those jobs are related to Segment, but the company is also relocating Flex, its contact center solution, to the communications segment. As a result, some Flex-related jobs will be eliminated as well. Twilio is also winding down its Programmable Video product, which has never gained much traction.
Sticking with its guidance
Despite the disappointing results from Segment, Twilio reaffirmed its guidance for the fourth quarter and the full year. The company expects revenue to rise by just 1% to 2% in the fourth quarter, or by 4% to 5% on an organic basis.
While Twilio's path to GAAP profitability depends on boosting profits in the mature communications segment, growing the data and applications segment is equally important. While the communications segment generates gross margins of around 50%, a consequence of the economics of sending text messages, the data and applications segment sports a far higher gross margin near 80%. An additional dollar of data and applications revenue is worth more than an additional dollar of communications revenue.
Accelerating growth while simultaneously reining in costs is a tricky balance that Twilio has yet to get right. The communications segment is performing well, but the data and applications segment remains a work in progress. Twilio still sees plenty of long-term potential for Segment, but selling it to prospective customers is proving to be a challenge.
Shares of Twilio are down about 85% from their pandemic-era high . But with the company still valued at around 3 times annual sales, anemic growth won't be enough to convince investors to give the stock another shot.
