EUR 850.00 For Business Accounts Only

Morningstar | Twilio Poised for Torrid Growth with Sendgrid Deal Closed; Raising FVE, but Upside Priced In. See Updated Analyst Note from 12 Feb 2019

No-moat Twilio delivered a strong coda to its record 2018, with fourth-quarter sales appreciably above our lofty expectations and earnings in line with our estimate. Enterprises continue to increase usage of Twilio’s platform as they strive for competitive differentiation through digital transformation of their customer engagement and service apparatuses. With the Sendgrid transaction now complete, the firm is poised to expand its leadership within the communication platform-as-a-service, or cPaaS, space, in our view. We are maintaining our positive trend rating, as we continue to see evidence that the extent of application deployments and product superiority are forming the basis for structural advantages in the future. We are raising our fair value estimate to $83 per share from $66, stemming from three factors: the time value of money as we roll our model forward; a slightly lower weighted-average cost of capital due to the firm’s addition of convertible debt to its capital structure; and modestly rosier near-term growth assumptions. Even with shares down after hours, we continue to believe the firm’s auspicious positioning is more than priced into the stock.

Sales came in at $204 and $650 million for the fourth quarter and full year, representing comparable period growth of 77% and 63%, respectively. Management’s revenue guidance for 2019, which includes 11 months of Sendgrid revenue, is $1.071 billion at the midpoint, which implies torrid growth of 65% on a consolidated basis and 45% organically. The firm had mixed results on the margin front, with 70 basis points of margin compression on the adjusted gross margin line and 560 basis points of expansion on the adjusted operating margin line.

Despite Sendgrid having structurally higher gross margins due to the lack of communication service provider, or CSP, fees in its cost structure, management does not expect material margin accretion in the near term as they continue to scale the business model, and we continue to see relatively limited upside on the gross margin front over our explicit forecast given their structural reliance on CSPs and the negotiating clout that carrier wield. With regards to operating profitability, while we see healthy operating leverage materializing longer term, the firm remains laser-focused on reinvesting for growth through sales and marketing to further penetrate the massive enterprise opportunity, research and development, and the supporting administrative infrastructure.

Twilio continues to do an excellent job driving incremental usage within its existing customer base even as it adds accounts at a rampant pace. Our calculated average revenue per account continued its steady march upwards, and the firm’s reported dollar-based net expansion rate increased to 147% in the fourth quarter from 118% a year ago. Uber now has a de minimis impact on the firm’s consolidated results, and we see customer concentration as less of an issue going forward as the firm benefit’s from secular shifts in the ways that enterprises engage and communicate with their customers. The high-margin Orchestration layer of Twilio’s platform, Engagement Cloud, continues to see strong traction anchored by Twilio Flex. We believe customers will extract increasing marginal utility from these products as the firm continues to innovate in the Engagement Cloud, and we see healthy upside in the firm’s APIs for narrow-band Internet of Things and artificial intelligence use-cases.

Finally, we’d like to reiterate that, from our vantage point, Sendgrid will enhance the value proposition and competitive positioning of Twilio’s platform in the marketplace. Sendgrid’s ability to provision APIs that optimize for deliverability among a myriad of inbox service providers is not something Twilio could have built easily, and integrating these APIs into the broader Twilio stack will facilitate an all-encompassing communication platform for developers without compromising Twilio’s aura of product superiority. Sendgrid’s ability to comfortably institute price increases recently lends credence to its healthy positioning in the marketplace, and the addition of these products to Twilio’s portfolio should ultimately give rise to a sticky, best-of-breed platform conducive to economic rents.