EUR 850.00 For Business Accounts Only

Morningstar | Twilio Makes Significant Headway in Enterprise; Raising FVE to $46. See Updated Analyst Note from 06 Aug 2018

Twilio reported stellar second-quarter results, with top line growth exceeding both guidance and our expectations. We are maintaining our no-moat and positive trend rating, as there was continued evidence this quarter that the firm is further penetrating the enterprise, strengthening existing relationships, and extracting more value from its customer accounts. These developments lend credence to our thesis that switching costs are increasing for this business. Management also raised full-year guidance on the back of these strong results. After incorporating the updated guidance, we are raising our fair value estimate to $46 from $42. Shares continue to trade at a premium however, moving as much as 15% higher after-hours. As such, we believe investors should wait for a pullback before considering this unconventional software player.

Revenue for the quarter came in at roughly $148 million, representing a 54% year-over-year increase. The rise was fueled by an almost 54% increase in base revenue to $135 million, as the company continues to make itself less susceptible to usage vagaries by winning minimum revenue commitments from new and existing clients. In this same vein, we were thrilled to see a 16% increase in average revenue per account as well as dollar-based net expansion (a measure of sales growth from existing customers since the prior-year) ramping up to 137% from 132% in the previous quarter. These positive quantitative metrics dovetail well with management's commentary surrounding the strengthening of existing customer relationships. The firm was able to expand relationships with large customers, such as Bank of America and U-Haul, by continuing to integrate functionality into their platform that address an increasingly broad set of use cases. As enterprises from different industries continue to try and modernize their customer experience, we believe Twilio's reputation as a stalwart in software-based omnichannel communication continues to strengthen.

Adjusted gross margins held firm sequentially at 55% but adjusted operating margin of 1.5% represented Twilio's first quarter of adjusted profitability since the fourth quarter of 2016. We expect margins will be suppressed as the company continues to invest in an enterprise-grade salesforce as well as product innovation to foster larger-scale adoption and deployment of their platform. This will be exacerbated by the inherently lower operating leverage present in Twilio's cost structure compared with other software vendors. Even as the firm remains in heavy-investment mode however, we think increased penetration, particularly within the enterprise, will lead to significant margin expansion longer term.