Twilio (TWLO 1.47%) has been a disaster of a business after the fallout from the pandemic a couple of years ago. Despite operating at a $4 billion-per-year revenue run-rate (up more than 500% in five years) and sitting on a mountain of cash, the cloud-based communications business has struggled mightily with profitability.
As a result, share prices remain down nearly 20% from where they were at the beginning of 2019, despite Twilio's stock notching a 55% rally in 2023.
Twilio set out to fix many of its issues this last year, but in the minds of many investors, a bigger change in upper management was needed. Twilio just made such a change, with co-founder and CEO Jeff Lawson announcing his departure to kick off 2024. Does this make Twilio's stock a buy?
A focus on deeper cost-cutting is needed at Twolio
Before delving into the specifics of the leadership change, it's important to understand what's driving this decision in the first place. About 90% of Twilio's revenue in the third quarter of 2023 was cloud-based messaging and communications -- a consumption, or usage-based (not a subscription) business model called CPaaS (communications-platform-as-a-service) that Twilio helped pioneer over a decade ago.
In simple terms, CPaaS reimagines the way businesses communicate with their customers and how employees communicate with each other by utilizing cloud computing (data center-based and app-based) messaging instead of traditional telecom networks.
It isn't a high-profit-margin business like a lot of cloud software companies flaunt. However, Twilio has operated with sufficient scale for a long enough time that it should be turning a healthy profit margin anyway. It still doesn't. When backing out amortization expenses from past acquisitions and employee stock-based compensation (SBC), it did begin turning an adjusted operating profit and free cash flow profit in 2023. But more work is needed.
Data by YCharts.
SBC is especially high for Twilio's management, and CEO Lawson earned hundreds of millions via new stock awards in recent years -- most of which was sold (as of this writing, Lawson owns just 0.3% of total Twilio stock outstanding). Twilio's dual-class share structure that gave Lawson over 20% of voting rights was also eliminated last year.
However, though SBC was reduced by 16% year over year through the first nine months reported in 2023, it was still very high at $509 million as of the end of September 2023 -- 17% of revenue, or 4% of the current market cap.
Thus, after a battle with activist investors, Lawson is stepping down as CEO and chairman of the board. He is being replaced as CEO by Twilio's CFO (who took the CFO role in 2018), Khozema Shipchandler. The chairman of the board role is being taken over by current board member (since 2017) Jeff Epstein, who is the operating director of venture capital firm Bessemer Venture Partners.
With Lawson out, it cements Twilio's transition from a "visionary" communications technologist to a "grown-up" business that needs to focus on generating a robust profit.
Is it time to buy Twilio stock?
Going forward, Twilio's new management will be tasked with accelerating revenue growth and, more importantly, dramatically improving profitability. For the record, along with the leadership transition, Twilio also said it would exceed its prior guidance for fourth-quarter 2023 year-over-year revenue growth of 1% to 2% (or 4% to 5% on an organic basis, which backs out the effect of some asset sales), and adjusted operating income of $115 million to $125 million.
It's a decent start, but more progress is needed, especially if activist investors are to be mollified.
The upshot is that Twilio could be a long-term value if the new management team can indeed execute, especially in terms of profitability. Twilio stock trades for a modest 3.4 times trailing 12-month sales -- since adjusted profit is slim and generally accepted accounting principles (GAAP) profit negative, Twilio can't be valued based on these metrics.
I continue to hold my Twilio position and rank the stock a moderate buy for 2024 -- assuming investors have an appetite for a higher-risk and only potentially high-reward investment. Twilio still has a great deal to prove in the years ahead.
