- Twilio delivered a strong beat on both top and bottom line numbers in its first earnings after the IPO.
- Twilio stock has more than tripled from its IPO price of $15, backed by strong growth.
- Twilio is currently trading at an annualized Price to Sales (PS) ratio of 16 which is a bit expensive.
On August 8th, Monday, cloud communications company Twilio Inc (NYSE:TWLO) came out with its first ever earnings result since its IPO in late June. The company delivered a solid beat on both the top line and the bottom line numbers which sent the already rising stock soaring. Earlier this year in June, Twilio became the first "Tech Unicorn" to go for an IPO in 2016 at an IPO price of $15. The company had a very successful listing, with stock price soaring around 92% on the listing day. Today the company is trading at $48.7, representing a return of 324% on its IPO price in less than two months.
Strong Earnings And Declining Losses
Twilio's first earnings release was an impressive one. The company delivered an EPS of -$.08 on a revenue of $64.5M against consensus estimates of an EPS of -$0.14 on a revenue of $58.22M. This represented a beat of 10% on revenue and 42% on earnings. Twilio's revenue grew by 70% in the latest quarter. That said, the company does face some risk from revenue concentration. It's top 10 customers contribute more than 31% of its revenue.
Twilio's revenue growth came from both, the addition of new customers and higher revenue from existing customers. Twilio's total customer accounts increased from 21266 to 30280. But the even better part was that its dollar based net expansion rate (revenue from existing customer, similar to same store sales for retailers) stood at 164%, much better than any of its peers. The advantage of expanding revenue from your current customers is that it reduces the selling and marketing expenses. And this can be seen clearly from Twilio's financials. Sales and marketing expenses as a percentage of revenue declined from 37% last year to 28%, contributing significantly towards its declining losses.
Twilio is not like any other high growth company which believes in "growth for the sake of growth". It is highly focused on its profitability and doesn't believe in compromising profitability for the sake of growth. The company has been able to drastically cut its losses while still maintaining the strong pace of growth. Twilio's operating margin improved 10% over the last year from negative 19% to negative 9%. Moreover, the company has a strong gross margin of around 55%. The company expects to break even by the end of the next year, which is very positive news, considering that a host of tech companies have remained in red for years after listing.
In a previous article before the earnings, it was mentioned that Twilio is a fast growing company at a reasonable valuation. And that was true. But now, while it continues to grow at a fast pace, its valuation is no more attractive. On an annualized basis the company is trading at a PS ratio of around 16 which is expensive by most standards. Also, going by the guidance, for the full year, the company is likely to grow at 52%, slower than the current quarter growth of 70%. And the company is still a loss making one.
Twilio had a very successful IPO, with the stock gaining more than 300% from the IPO price. And Twilio has backed up the run up in price with an impressive earnings, with revenue growing at 70% and losses declining drastically. The company has a strong product line-up and boasts of several household names such as Uber, WhattsApp as its customers. However, the recent run up in the price has sent valuations soaring. The company is trading at a PS of around 16 which is expensive by most standards. While declining losses and strong growth make the company an attractive buy, valuations must be taken into account. At the current valuation, Twilio stock is not for risk averse investors.