Quick Profitability Turnaround and New Share-Repurchase Program for Twilio

Narrow-moat Twilio TWLO reported meaningful upside on the top and bottom lines for its fourth quarter, provided strong profitability guidance for 2023, and announced a $1 billion stock buyback, with $500 million occurring in the next six months. The firm dropped other news as well, including an additional 17% head count reduction on top of the 11% cut made last year, and a new business structure for the communications unit and the data and applications (formerly referred to as software) unit, both with new business leaders. We were already contemplating meaningful margin improvements over the next five years and see no change to our long-term outlook; therefore, we are maintaining our fair value estimate of $95 per share. We see the shares as undervalued but prefer some of our wide-moat names based on our concerns about the macroenvironment.

Fourth-quarter revenue was $1.025 billion and grew 22% year over year, or 21% organically, compared with the midpoint of guidance at $1.000 billion. Revenue for the new data and applications business was $118 million and grew 25% year over year. Unlike for much of our coverage, currency does not have an impact here. Management noted some continued signs of macro weakness over the last couple of quarters, mainly sales cycles elongating, modest weakness from small businesses, and pockets of softness, such as from cryptocurrency, consumer on demand, and social. Dollar-based net expansion ticked down again, this time to 110%. International was 34% of total revenue, consistent with recent quarters.

For the quarter, non-GAAP operating margin was 3.2%, compared with negative 3.2% a year ago, and was nicely ahead of the midpoint of guidance at negative 1.0%. Given the gross margin anchoring from the messaging business, we think Twilio will generate operating margins at the low end of our software group even at maturity, but we think the firm is now off to a good start.