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Twilio Sees Slower Q4 Growth and Lower Profit: Rapid Earnings Reaction
Key Points
Twilio grew organic revenue 16% in the third quarter, but it expects that pace to slow to 11% to 12% in the fourth.
The quarter showed Twilio can turn growth into profit, but the outlook calls for a step down.
Twilio (NYSE:TWLO) grew organic revenue 16% in the third quarter, but it expects that pace to slow to 11% to 12% in the fourth. Shares fell about 14% in early after-hours trading. The quarter showed Twilio can now turn growth into real profit, yet the outlook calls for both growth and operating profit to step down at year-end, and the release doesn't say why.
Key Numbers
- Revenue: about $1.56 billion, up 20% from a year ago.
- Dollar-based net expansion rate: 114%, up from 109% a year ago.
- GAAP operating margin: 10%, up from 3% a year ago.
- Free cash flow: about $370 million, up from about $248 million a year ago.
What It Means
Existing customers drove the gains. Twilio charges by use, so when customers send more texts and calls, revenue rises without extra sales effort. The expansion rate tracks exactly that: how much more the same accounts spent than they did a year earlier. Carrier fees padded the top line, though, since about $53 million came from new carrier fees that Twilio passes along at cost, which adds revenue but no profit.
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The profit jump came from cost control: operating costs rose less than 4%, so most of the new gross profit fell straight to the bottom line.
The outlook is the weak spot. Twilio guided fourth-quarter adjusted operating income to $300 million to $310 million, below the third quarter's level even as revenue keeps rising. The raised full-year forecast locks in the strong third quarter, but it doesn't extend it.
What to Watch Next
Track whether fourth-quarter organic growth lands at 11% to 12% and whether management explains what is slowing. Also watch whether the expansion rate holds above 110%.
David Kretzmann has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Twilio. The Motley Fool has a disclosure policy.