Twilio Earnings: Good Performance; Profitability Tracking Ahead and Revenue Acceleration Looming

Narrow-moat Twilio TWLO reported blowout second-quarter results with both revenue and profitability well-ahead of our expectations. Guidance was mixed with immediate near-term pressure arising from a change to 10DLC messaging rules, while non-GAAP operating profit is tracking ahead of management’s prior outlook. We see green shoots with continued maturation of the specialized salesforce for data and applications, where management characterized the pipeline as robust and bookings showing good momentum. We are also encouraged by stabilization in messaging volumes. Recent restructuring actions are clearly bearing fruit, as profitability was strong, and large deals are still being won. Based on results and guidance, we raised our profitability estimates and are therefore raising our fair value estimate to $64 per share, from $56 previously. We view shares as fairly valued at present levels.

Second-quarter revenue was $1.038 billion and grew 10% year over year, both as reported and organically, compared with the midpoint of guidance at $985 million. Data and applications revenue was $125 million and grew 12% year over year, while communications revenue grew 14% to $913 million. Persistent macro pressures are driving longer sales cycles, while deal sizes are smaller and expansion within existing clients is weaker. Small businesses are particularly hurting, as are the crypto and social verticals. Dollar-based net expansion ticked down again, to 103%, versus 123% a year ago.

Margin performance in the quarter was impressive and was driven by revenue upside coupled with spending discipline. For the quarter, non-GAAP operating margin was 11.6%, compared with negative 0.8% a year ago, and was nicely ahead of the guidance midpoint of 7.1%. Given the gross margin anchoring from the messaging business, we think Twilio’s operating margins will be limited near the low end of our software group even at maturity.