Twilio (TWLO 1.47%), once a growth-at-any-cost Wall Street darling, is remaking itself as a company focused on the bottom line. The communications software provider originally laid out a plan to become profitable on a GAAP (generally accepted accounting principles) basis by 2027. That target hinged on accelerating growth in the data and applications portion of the business, which excludes the core communications products.
While Twilio succeeded in improving profitability in its mature lines of business, Segment, the customer data platform the company shelled out $3.2 billion for in 2020, has been a major disappointment. Segment's revenue grew by just 7% in 2023, and the business remained profoundly unprofitable.
A management shakeup in January brought in Khozema Shipchandler, previously the head of Twilio's Communications segment, as CEO to replace founder Jeff Lawson. Two months later, Twilio has now presented an updated turnaround plan that shifts even harder toward profitability and away from growth.
No good choices for Segment
Segment generated $295 million in revenue last year, making up just 7% of Twilio's total revenue. The business is a drag on profits, with an adjusted operating loss of $72 million in 2023. The communications segment, which accounted for 93% of revenue, grew organic revenue by 11% and produced an adjusted operating profit of $842 million.
Twilio has completed a review of the Segment business, concluding that attempting to sell the business wouldn't make financial sense. Indeed, given Segment's growth and profitability profiles, Twilio would likely take a sizable loss on its investment.
The plan going forward is to pull back on growth investments for Segment and focus on making the platform easier and faster to adopt and use. Segment will also be integrated more tightly with the communications business this year through the launch of three new products.
Long story short, any notion that Segment is a growth business for Twilio is effectively dead. The goal is now to make Segment profitable. Twilio is aiming for Segment to produce an adjusted operating profit by the second quarter of 2025.
Segment's newfound focus on profits allows Twilio to move up its target for GAAP profitability. The company now expects to produce a positive GAAP operating profit by the fourth quarter of 2025. For this year, Twilio expects organic revenue to grow by 5% to 10%, and for adjusted operating profit to land between $550 million and $600 million.
On top of the new profitability goals, Twilio announced another share buyback program to add to the $1 billion it allocated in early 2023. That money is expected to be used up in the next few weeks, and another $2 billion has been tacked on. Twilio expects to fully use this new money by the end of 2024.
Is Twilio stock a buy?
The stock market's reaction to Twilio's updated turnaround plan was not positive, with shares down around 5% by early Tuesday afternoon. The new plans for Segment all but guarantee that Twilio's overall growth will be sluggish for the foreseeable future.
Slower growth isn't necessarily a bad thing if it's paired with rising profits, but Twilio's valuation may be too rich, given the strategy shift. Twilio is valued at about $10.4 billion, or about 2.5 times annual sales. That's a low ratio in the world of fast-growing software companies, but Twilio is no longer growing fast. The stock trades for roughly 29 times free cash flow, which seems too expensive to me for what investors are getting in return.
Twilio chose the least bad option for Segment, choosing to retain it and drive it toward profitability. But without a real growth business, Twilio's valuation needs to come down before the stock makes sense to me as an investment.
