Summary
- Twilio's revenue growth continued to accelerate, reaching $670M and 67% growth.
- Twilio remains positioned to deliver long-term elevated growth.
- Despite often guiding for flat sequential growth, Twilio consistently outperforms its expectations.
Investment Thesis
After the recent Q2 results, my thesis for Twilio (TWLO) has not changed. If anything, it has only been further confirmed in the last few quarters. I previously detailed the thesis here:Twilio: A Valid Investment Proposition.
In short, Twilio is one of those growth companies of which one can be quite sure it will continue to grow at a steady clip for many years given its multi-billion potential and leadership position, enabling its customers to go through their digital transformation through its B2C engagement solutions across digital channels (SMS, e-mail, etc.). Such a prospect may offset some valuation concerns in the long run, as Twilio is positioned to aim for a >$100B market cap.
Q2 results
Q2 was very much a repeat of Twilio’s performance in the last so many quarters. After last earnings, it seemed some investors were concerned about sequential growth deceleration. However, in my previous analysis, I pointed out that Twilio had guided flat in Q1 and then delivered a large beat. This is indeed what happened yet again, as Twilio delivered another large beat.
The $70M beat resulted in another revenue acceleration quarter to ~$670M, delivering 67% growth. Net retention remained steady at 135%. The initial Q3 guidance, again, assumes another sequentially near-flat quarter. This would result in >50% growth in Q3. In a sense, it is a bit ironic that a company that mostly guides for sequential flat growth is actually growing at such strong rates. Although these results contain the contribution of the Q4 Segment acquisition, the contribution is just $45M. Organic growth was 52%.
Investors may remind themselves that this kind of performance is what ultimately drives the stock price. For example, a bit over a year ago, another Contributor urged investors to take profits when the stock initially surged at the onset of COVID-19 due to a strong report. Instead, Twilio’s continued performance has validated the rising stock price, and the price never returned back below $200 and is already much higher. It is not a fluke.
Further, Twilio has recently more strength in its international business, which grew from 27% to 32% of revenue.
One often mentioned criticism about Twilio is its relatively low gross margin, which was 54% in the quarter. Twilio has seen some margin pressure due to the reacceleration and strength of its legacy SMS product. Nevertheless, many of Twilio's newer products (such as the Flex cloud contact center and Segment) are often significantly above the corporate average, rivaling traditional software or SaaS margins.
On the business side, Twilio introduced two notable products. First, Segment Journeys is the integrated product from the acquisition. Secondly, Twilio Live aims at the next frontier, which is live audio and video experiences.
Investor Takeaway
When looking at sub-$100B market cap tech companies that could grow out to for above that level, the two that are perhaps mostly mentioned and hyped upare Snowflake (SNOW) and Palantir (PLTR). However, not to be outdone is Twilio, a digital transformation company that has seen its strong growth continue, and even (re)accelerate, during all stages since the pandemic.
To that end, Twilio’s performance simply continued with another beat-and-raise. The company is firing on all cylinders with continued customer growth, strong net retention, and increased international expansion.
Although valuation (well over 20x forward P/S) may be high for some, those with a holding window of many years could see great returns. For example, Twilio's official long-term guidance is 30% annual growth. At that rate, Twilio may reach $10B revenue in a bit over five years. Even if the P/S would collapse to just 10x, then a $100B market cap implies nearly 60% stock upside.
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