Twilio Earnings: Good Quarter, but Growth Expected To Remain Depressed Near-Term

Narrow-moat Twilio TWLO reported solid results with good revenue and strong profitability. However, guidance for the second quarter, while only slightly below our model on profitability, was materially below on revenue. Macro pressures are hurting more than anticipated, while the new sales team for data and applications is not fully ramped, and the disposition of the Internet of Things business is an incremental modest headwind. On the positive side, recent restructuring actions are already bearing fruit, as profitability was strong, and large deals are still being won. We are significantly reducing our growth estimates throughout our model, and as a result, are cutting our fair value estimate to $56 per share, from $95 previously. We think the stock remains a work in progress with the timing of growth acceleration a moving target, and we therefore prefer our wide-moat names currently.

First-quarter revenue was $1.007 billion and grew 15% year over year, or 21% organically, compared with the midpoint of guidance at $1.000 billion. Data and applications revenue was $120 million and grew 19% year over year, while communications revenue grew 14% to $847 million. Persistent macro pressures are driving longer sales cycles, while deal sizes are smaller and expansion within existing clients is weaker. Dollar-based net expansion ticked down again, to 106%, versus 127% a year ago. International was 34% of total revenue, consistent with recent quarters.

For the quarter, non-GAAP operating margin was 10.3%, compared with negative 0.6% a year ago, and was nicely ahead of the guidance midpoint of 5.0%. 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.