Twilio (TWLO) Q1 2021 Update

Twilio released Q1 2021 earnings results on May 5th. They continue to demonstrate strong revenue growth at scale, with both Q1 actuals and Q2 estimates coming in well ahead of expectations. The continued delayed progress on gross margin improvement is causing some consternation for investors. Twilio has plans for this, but they are taking time to ramp. Additionally, rapid headcount growth is putting pressure on operating margins for the next quarter, but I expect this to be transitory as Twilio absorbs and optimizes staff from recent acquisitions.

Overall, Twilio is continuing their consistent expansion trajectory. The key to appreciating Twilio’s potential is to consider the enormous TAM that they occupy, their leadership position within it and the multiple product expansion vectors still available. Platform growth is coming both from organic product development and strategic acquisitions. Segment in particular adds a whole new dimension of insight to Twilio’s communications capabilities, allowing the combined company to close the loop on customer preferences and optimize marketing performance in a way that CPaaS competitors cannot match. Twilio is quickly evolving beyond just providing communications plumbing to enabling data-informed applications that drive enriched customer engagement for enterprises.

I’ll list the most significant take-aways from the quarter below, with more details provided in the sections that follow. For additional background, readers can review my extensive previous coverage of Twilio results as well as the original investment thesis back in late 2019 when the stock was trading for $98. These set the foundation for my optimistic view long term and supplements this Q1 update.

• Revenue growth is still high at scale and continues to exceed long term analyst models. With a run rate over $2B annually, Twilio is putting up 50% annual growth organically. Analysts have long called for a drop to sub 30% growth. Twilio recently committed to >30% organic revenue growth for each of the next 4 years.
• While growth is strong, profitability improvements keep pushing out. Gross margins remain in the mid-50% range. Operating margin is consistently around 2-3%. Gross profit continues to scale with revenue, and is plowed back into business investment.
• Some of this additional operational cost may be short term. Twilio grew headcount by 79% year/year. Besides investment in GTM, this growth was goosed by several acquisitions completed recently. Assuming redundancies exist, we can expect some moderation in headcount expansion and cost savings going forward.
• Twilio announced a change to the product/engineering group reporting structure. Three stand-alone product units will each report directly to CEO Jeff Lawson. This structure should result in more accountability and delivery in product development, bringing new offerings to market more quickly. CEO Lawson is a developer himself and long-time innovator.
• The Segment integration is progressing well and many customers are asking about the new capabilities expected from the combination. Segment brings a whole new dimension of product efficacy to the Twilio CPaaS offering, by enabling end-to-end tracking of consumer behavior following a communication. This introduces a significant competitive advantage over other players and will justify a pricing premium.

Financial Summary

Top Line Growth

Revenue continued to exhibit strong growth at scale. Specifically, Twilio increased revenue 62% year/year in Q1. Backing out the Segment contribution, Twilio had $545M in organic revenue for growth of nearly 50% year/year. Comparing to Q4, if we remove $23M of one-time political spend in Q4, revenue growth was about 9% sequentially.

Segment accounted for $44.6M of revenue in Q1, up from the $23M contribution in Q4. The Segment acquisition closed on November 2, 2020, which means that it contributed revenue for roughly two-thirds of the quarter. This implies that Segment’s run rate in Q4 was around $35M. Yet, Q1 Segment revenue was $44.6M or about 28% higher. I don’t want to read into this too much, as there may be some acquisition revenue recognition or fiscal year alignment factors at play, but seems like a very favorable outcome. At minimum, this further highlights the large cross-sell opportunity for the base Segment offering to Twilio’s 235k customers.

For Q2, Twilio guided revenue to a range of $591M – $600M, for annual growth of 47% – 50%. Analysts pointed out that the midpoint of this range is only $6M above Q1 revenue of $590M. That appeared to be a primary driver of the stock sell-off after the Q1 announcement. Yet, this conservatism is consistent with Twilio’s historic behavior. In Q1 2020, they guided Q2 revenue to about $3M above the Q1 actual. Their sequential revenue growth usually comes from the magnitude of the beat. For Q2 2021, they are guiding to 48.6% revenue growth at the midpoint. This is higher than the original Q1 revenue guidance for 44% – 47% growth and $531M at the midpoint (versus $590M actual). If we apply the same 16% annualized beat to the Q2 estimate, it implies about 64% annualized growth.

The Q2 revenue guide also does not include contribution from new A2P fees or the ValueFirst acquisition. These could add small boosts to upside. Twilio did not provide a full year guide, consistent with messaging from the beginning of FY 2021. Analysts are currently estimating full year revenue of $2.54B for annual growth of 44.3%. This is up 6% from the 38.2% growth estimate prior to earnings. This will get raised further as the year progresses, and I expect more than 50% y/y growth in 2021.

Looking forward the next couple of years, analysts raised their FY2022 and FY2023 revenue estimates by $137M and $186M respectively, but kept the projected growth rates roughly the same at about 31%. I think these are beatable, as Twilio will likely exit 2021 with organic revenue growth around 50%. Even taking conservative analyst numbers as printed, FY2023 revenue is projected to be $4.35B. With Twilio’s current market cap at $54B, this implies a two year forward P/S of 12.

Investors should recall that Twilio committed to 30% or more revenue growth in each of the next 4 years at their Investor Day in October, 2020. This projection would apply to 2021 through 2024. While valuation multiples are compressing overall, a 12 P/S is likely low for a 30%+ grower. Twilio’s current P/S ratio is 24.

Profitability Measures

On the other side of the income statement, non-GAAP gross margin was 55.5% in Q1, versus 56.9% a year ago. Analysts were expecting a 55.8% gross margin for the quarter. Twilio did disclose that ATT A2P fees contributed about 0.35% of gross margin headwind. As investors likely know, A2P fees are a direct pass through to customers, but inflate the revenue value resulting in a hit to gross margin percentage.

Gross margin progress (or lack thereof) is becoming an area of concern for investors. I too would like to see improvement in gross margins. At their Investor Day in October 2020, Twilio leadership provided extensive data about product mix and the higher gross margins associated with product offerings that are pure software applications, versus the communications channels that have an underlying cost of goods payable to a third party communications network. Over time, the expectation is for the percent of revenue generated from software products to increase and thereby pull up overall gross margin. Example high margin application services are email, video, Flex and the newly added Segment customer data platform.

The challenge to gross margin growth is that demand for lower margin services like international messaging has been stronger than expected. This is resulting in a larger share of total revenue for these products, which is offsetting the benefit from the higher margin application services. As I’ll discuss in the product development section, this will be an area for investors to watch. I think that the opportunity for Twilio is to “invert their pyramid” of product offerings, evolving to a state in which the majority of product offerings are pure software plays, built over a fixed number of existing communications plumbing services. Twilio has a strong developer culture, so I would expect an easy shift to more solutions building.

To Twilio leadership’s credit, they justify the gross margin trade-off by explaining that increased use of lower margin messaging products simply generates incremental gross profit that they are happy to collect. There is no incremental cost to selling a customer more messaging. A look at gross profit trends supports this. In Q1, Twilio generated $327.4M of Non-GAAP gross profit, versus $207.7M in Q1 2020, representing an increase of 57.6% year/year. This is higher than the growth of gross profit for FY2020.

Growth in gross profit of 58% year/year is impressive and puts Twilio inline with other hypergrowth peers. Comparable high growth software infrastructure companies can achieve a higher gross margin, due to their lower cost of revenue and lack of third party fees. For their elevated gross margins, software peers are rewarded with a higher valuation multiple, as typically measured by Price/Sales ratio (or EV/Sales). Twilio’s P/S ratio is about 30-50% lower than peers with roughly similar revenue growth rates.

However, if we examine the ratio of Price/Gross Profit, the values are more comparable. We can look at annualized growth in gross profit, in addition to revenue growth. This provides another insight, accounting for changes in gross margin over the period. For illustration, I compared these metrics in the table below for the high growth cohort of companies that I cover. I ordered them by year/year growth in gross profit for the most recently reported quarter. For this exercise, all numbers are GAAP, as that makes the data collection easier. Non-GAAP would reflect a similar high-level pattern.

The take-away for investors is that Twilio’s lower gross margin percentage relative to peers in software infrastructure is already accounted for in its lower P/S valuation multiple. Additionally, a comparison of valuation ratios based on gross profit shows that Twilio falls in a similar range to high growth peers. This implies that Twilio is fairly valued relative to peers on the basis of market cap to gross profit.

Looking forward, if revenue growth and gross margin stay in the same range, then stock price should appreciate proportionally to gross profit. Peers with higher gross margin rates won’t necessarily increase their stock price faster, if their revenue growth is similarly fixed. Put another way, TWLO stock price shouldn’t appreciate by 30-50% less than peers due to its lower gross margins. This is because the valuation multiple already takes the lower gross margin into account.

Dropping further down the income statement, Twilio continued to generate positive operating income on a non-GAAP basis. In Q1, income from operations was $17.3M, up from $6.1M a year ago. This represented an operating margin of 2.9%, which was also an increase over the 1.7% delivered a year ago. The 184% increase in operating income year/year was much greater than revenue growth, but the margins are still too small to get very excited about. Nonetheless, it is demonstrating some leverage as Twilio expands.

Looking to Q2, Twilio projected an operating loss of $22M – $27M. This would represent an operating margin of -4.6% to -3.7%. This is obviously a significant change from Q1’s positive operating margin of 2.9%. Investors were rightfully worried about this change in posture coming out of the Q1 results and it likely influenced the stock price drop.

However, it is worth recognizing that in Q1’s report, Twilio leadership projected an operating loss of $15M – $20M and actually delivered $17.3M. So, we can expect Q2 actual operating income to be positive, but not by as much as in Q1. I think this overhead is explained by the large increase in headcount in the last two quarters, primarily driven by acquisitions. Over time, I expect some of this headcount to be eliminated as part of normal organizational consolidation following an acquisition.

Nonetheless, at some point, Twilio needs to demonstrate consistent improvement in operating margins. Software peers that I also track are delivering noticeable growth in operating margin each year, transitioning from negative to positive and then continuing to push upwards. Twilio leadership has committed to a long-term target of operating margin over 20%. As revenue continues to expand, operating income could become meaningful quickly.

Customer Activity

Twilio ended Q1 with 235k total customers. This was up from 190k a year ago and 221k at the end of Q4. This translates into 24% annualized growth and 6.3% sequentially. In Q1, Twilio added a total of 14k customers, versus 13k in Q4. Some of these increases in customers represented contributions from acquisitions. Specifically, Segment closed in Nov 2020 and disclosed 5k customers. ValueFirst was acquired in March 2021 and had 2,500 customers at the time of acquisition.

Beyond tracking the change in total customers, the other dimension of customer activity is the expansion of spending for existing customers over time. For this, Twilio provides a dollar-based net expansion rate (DBNER). Customer spend continued to increase by more than 30% year/year, with DBNER hitting 133% in Q1. This is down from 139% in Q4 but roughly inline with Q1 2020’s rate of 135% (adjusted for SendGrid). I don’t see anything of major concern here, as DBNER does bounce around and is still best of breed over 130%.

Twilio does not regularly break out customer counts by amount of spend (like over $100k, $1M, etc.) or the number of products adopted per customer. They did provide one time updates on these metrics in their Investor Day presentation in October 2020. Over a 2.5 year period, growth in customer counts reaching each revenue threshold roughly tripled or more. Also, while G2K penetration grew modestly, total spend from these enterprise customers expanded by 7.5x.

Twilio has an efficient go-to-market motion, primarily driven by developer engagement. At IPO in 2016, Twilio reported just over 1M developer accounts on the platform. At the end of 2020 (about 4.5 years later), this number exceeded 10M for a 10x increase. Developers often bring Twilio into their organization to address a simple use case. With open APIs and automated onboarding, Twilio makes it simple for a developer to add one of their communications channels to a new customer-facing application. After the initial use case is addressed, usage will expand to more use cases and other communications channels. Developers also bring Twilio into their new team when they switch jobs.

This developer sales motion results in a very efficient allocation of Sales and Marketing resources. Of SaaS peers, Twilio has one of the lowest percent of revenue allocated to S&M on a Non-GAAP basis. This offsets the lower gross margin and still allows a healthy allocation to R&D.

Other customer growth opportunities for Twilio exist in enterprise, international and partner channels. They currently serve about 18% of Global 2000. As more companies invest in building out digital channels for customer engagement, this percent should increase. Also, Twilio began investing more heavily in enterprise sales in 2020, reporting a 79% year/year increase in quota carrying reps in Q2 2020.

In Q1, only 29% of revenue was generated by companies with a presence outside the U.S. This represents an obvious growth opportunity, and Twilio has been investing in sales presence in various global markets. Recent acquisitions, like ValueFirst, provide immediate in-market experience. ValueFirst is based in India and has a strong influence in SouthEast Asia.

Finally, Twilio launched their Build Partner program in 2018, but it really began to gain traction in 2020. Build program member companies help enterprises design, develop and deploy customized communications solutions using the Twilio platform. It offers go-to-market support, training and certification for partners and assists in planning for large implementations. As Twilio products become more software-driven, they allow for extensive customization and integration with other business systems. These types of implementation projects are more meaningful for integration partners, attracting renewed interest in building practices around Twilio software products like Flex.

In September 2020, Twilio announced that Deloitte Digital had become a Premier Global Systems Integrator. Deloitte Digital established a dedicated Twilio practice. It will offer support for the full set of Twilio communications APIs and platform services, including Flex, to help its clients reinvent their consumer marketing and transform the customer engagement experience.  Deloitte’s client base spans the Global 2000 across industries including consumer, financial services, government, life sciences, healthcare, technology, media and telecommunications. 

Other Metrics

Growth in Twilio’s headcount warrants particular attention from investors, as Q1 highlighted the significant ramp up over the last 6 months. Twilio ended the quarter with 5,482 total employees, which was up 79% percent from 3,060 in Q1 2020 and 18% percent from 4,629 at end of Q4. The year/year increase is staggering and underscores the significant investment that Twilio is making to pursue what they see as a huge opportunity.

In some ways, I view this as one of the most important metrics coming out of the Q1 report. As I have discussed in tracking the performance of other high-growth software companies, we often see employee expansion run in parallel to revenue growth. Datadog, for example, added 56% headcount in 2020 and grew revenue by 66% for the year. For Twilio, their 79% increase in headcount provides support for heightened revenue growth going forward in 2021.

Additionally, a good percent of the 2,400 headcount additions came from the acquisitions of Segment and ValueFirst (I estimate about 850 or 40%). We can expect some attrition, primarily where duplicate functions exist in G&A departments, like HR, Finance and Legal. There will be some efficiencies gained as these departments consolidate. This will drive cost reductions and improve the profitability picture. This factor explains why I am not worried about the negative estimate for non-GAAP operating margin in Q2 and the implication that this represents a loss of operating leverage for Twilio. This should work itself out as these new headcount are absorbed.

Product Development

Product Releases

Similar to some other software infrastructure providers (like Datadog and their Dash event), the majority of new product launches for Twilio coincide with their annual user conference, Signal. For example, at Signal 2020, Twilio announced the following new product offerings:

• Microvisor – Managed IoT software platform for device builders that includes many common IoT software infrastructure components, like security, version updates and network connectivity. 
• Frontline – Mobile application for “deskless” sales and service employees that connects them with customers via SMS, WhatsApp or Voice. While the app is installed on the employee’s mobile device, the login, messaging and phone number are tied to the company’s identity. 
• Video WebRTC Go – Provides developers with a toolkit, sample code and documentation to enable them to quickly implement 1:1 video use cases like tutoring, dating, counseling, etc.
• Event Streams – Provides a single API that consolidates event data from all Twilio touch points into a single data stream. 

Signal 2021 will be held from October 20-21. Given that we are several months away, and Twilio’s product releases so far this year have been light, I think we can expect some big announcements. These will likely incorporate new capabilities from the Segment acquisition, as well as continue the trajectory of building out new high-level software-based products. In 2020, most of the new product releases, like Frontline, Video WebRTC Go and Microvisor, are software applications, not new underlying communications services. For 2021, I think we will see even more offerings along these lines.

While we look forward to the Signal event in October, there were a few notable product releases over the last few months. Just recently in May 2021, Twilio announced that they had extended their SuperSIM IoT connectivity platform to function as an eSIM Consumer Profile for UICC-enabled IoT devices. For IoT devices that make their connection to a cellular network through a SIM card, they are bound a particular carrier based on the data in the physical SIM card. Switching carriers requires updating the SIM card. An eSIM allows the device’s profile information to be stored electronically on the UICC, which enables updates to be made over the wire.

When IoT fleet managers need to switch network providers, they traditionally would physically swap SIM cards out on IoT devices. This can be a cumbersome process. Twilio’s support of the eSIM standard allows companies to load Twilio’s multi-carrier Super SIM profile onto their devices over-the-air, and then switch between the different SIM profiles as needed. This eliminates the need to physically interact with the devices, all while improving the end user experience by delivering best-in-class IoT connectivity.

As with the Microvisor release at Signal 2020, Twilio is continuing to build out their IoT capabilities. The IoT market is still nascent, but Twilio is ensuring they can occupy a position as a leading provider of IoT communications services. This builds on their Electric Imp acquisition from July 2020. eSIM support for SuperSIM is being offered to existing IoT customers as a private beta and later will be rolled out more broadly.

Other smaller releases since the beginning of 2021 include the following:

• Deadshot. Open source project contribution from Twilio Labs that automatically scans a company’s GitHub repo for sensitive data at the pull request stage. Not a revenue driver at this point, but represents a thoughtful open source contribution for security teams.
• Survey Dynamix integration with Flex. Twilio Flex customers can initiate customer surveys through Email, Conversational SMS, Web SMS, Web, or Voice IVR, after any type of interaction. The results are then collected and displayed on a dashboard accessible from Flex. This is an interesting move in that it could signal a future product direction or acquisition for Twilio.
• Other Flex integrations – Puzzel Workforce Management, Glance Cobrowse for shared screens, Calabrio ONE for Workforce Optimization.
• Event Streams moves to public beta. Announced previously at Signal 2020, the product is now ready for broader customer use and has pricing. They also added a webhook sink for customers not using AWS Kinesis, while they build out direct integrations with other cloud solutions.
• OpenAPI Specification. Provides developers with a generic API interface definition that allows them to automatically implement connection code for Twilio communications APIs in the language of their choice. This dramatically speeds up development, testing and monitoring.
• Chat support added to Twilio Video quick start app. Extended the open source starter video app to support text-based chat functionality. This uses the Twilio Conversations API under the hood.
• Elastic SIP Trunking support for Microsoft Teams. Enables customers using Microsoft Teams to access the PSTN (public switched telephone network) through Twilio’s Elastic SIP Trunking service.
• Automated Flow Deployments. Twilio Runtime is Twilio’s serverless environment where users could publish Flows to set up call routing and automated voice response workflows. Twilio released an updated version of the Studio API that enables these Flows to be created programmatically, allowing customer engineering organizations to manage them as code in their CI/CD pipeline.

These releases all represent incremental improvements to previously announced products. These expand the usability for customers and are usually in response to customer requests. It is also important to see Twilio contributing open source code to the developer community, as that is valued by both developers at customer organization as well as potential candidates to join Twilio’s engineering team.

Acquisitions

Twilio has been on an acquisition tear over the last 6 months. I will cover each briefly and provide some perspective on how these could set Twilio up for much larger future opportunities.

Segment

In October 2020, Twilio announced they would acquire Segment for $3.2B in class A stock. The deal closed on November 2nd and accounted for $23M of revenue in Twilio’s Q4 report (roughly 2/3 of the quarter). For Q1, Segment’s contribution increased to $44.6M, which appears to be an acceleration on the surface (assuming a full Q4 run rate of about $35M). However, there may have been other factors around timing of the deal, Segment’s own fiscal calendar, revenue recognition, etc. In Q2’s report, we will get a more apples/apples comparison.

The near term opportunity to simply drive incremental revenue through cross-sell opportunities stands. Segment had about 5,000 customers prior to the acquisition, compared to Twilio’s 235,000 at the end of Q1. This obviously provides a huge opportunity to simply offer Segment’s existing product to a broader audience, bundled in with Twilio’s other products.

This opportunity was validated on the Q1 earnings call. The COO mentioned that Segment has been raised as a topic in more than two-thirds of the customer calls that he had participated in over the past quarter.

In terms of Segment, the people are very excited about it. I’ve had it come up in probably more than two-thirds of the calls I’ve been on with customers in the last 90 days. We’ve talked about Segment and the opportunity there. I think people are very excited about the idea of delivering much more personalized engagement.

And the idea of Segment as a foundational component to that is very interesting for a lot of customers. So we’re excited about that and the opportunity for us going forward on that front as well.

George Hu, COO, Twilio Q1 earnings call, May 2021

Prior to the acquisition, Segment was already on a 50%+ annual revenue growth path. As a predominately software-driven business, their gross margin profile is better than the core Twilio CPaaS business, with non-GAAP gross margins around 75%, versus Twilio’s range in the mid-50’s. In Q1, Segment made up about 7.5% of Twilio revenue or $44.6M out of $590M total for the quarter. This implies that Segment was responsible for about $9M extra gross profit than if that $44.6M were regular Twilio revenue. That was worth about 2% of overall gross margin.

I do this to illustrate how these higher-margin software products can start to exert a positive bias on Twilio’s overall gross margins in a meaningful way. Gross margin on Twilio’s core messaging business averages about 45%. For international messaging, which is seeing accelerated growth recently, the take rate is even lower. On the other end of spectrum, app services like Flex and email can generate a gross margin in the high 80% range. This implies that growth in Segment and other app services enhanced by Segment’s additional insight will eventually pull Twilio’s gross margins back upwards. I’ll discuss that a bit more later.

As background, Segment offers a Customer Data Platform (CDP), which consists of software tools and APIs to enable online businesses to collect, clean, combine and distribute their customer data. This data can be aggregated around a unique customer identifier to form a full profile of each customer, which includes a history of their interactions with the business across all channels. That customer profile data can then be piped to CRM, marketing, loyalty or other tools to inform future interactions with that customer.

Segment enables these capabilities by providing compact code snippets that can easily be embedded into a company’s web site and mobile apps to collect customer data. That data is then imported into Segment’s cloud data store, cleansed and consolidated. Segment users can easily configure destination applications for customer data to be shipped. This is all done through an intuitive UI and includes 350+ integrations to most of the major SaaS-based business applications.

Twilio and Segment leadership size the market for CDP at about $17B, which means the total TAM for the Twilio/Segment combination is $79B. According to IDC, Segment had the greatest share of the CDP market in 2019 and was 2x the size of their largest competitor.

On the Q1 earnings call, Twilio management reiterated the opportunity for enterprises to bring their customer data into one location. Jeff Lawson highlighted the challenge for enterprises to collect customer activity data into one place to form a cohesive view of the customer. Communications with the customer is a primary mechanism for engagement, which is how the traditional communications products from Twilio have been leveraged. The addition of Segment provides Twilio will a powerful combination – the ability to directly observe customer activity across digital channels and then send communication prompts to guide them towards enterprise goals.

Every company that I talk to seems to be struggling with, like, how do I build this one picture of my customer based on data that is spread across all these different (systems)… They’ve got a separate system for marketing and a separate system for the contact center and a separate system for commerce but also across business units.

And so this question of how do you actually build that profile of your customer? How do you understand your customer? The story that is being told by all the data that customers are giving off by how they use your website, how they use your mobile app, what things they bought, what things they’ve returned, et cetera, that story is resonating with customers because they all see that problem.

But then, not just how do you make sense of that data, how do you act on it? And that’s where Twilio comes in. How do you actually build really engaging communications, whether it’s marketing during your sales process, during your support or in-product, how do you tailor and make all that stuff dynamically personalized to every single customer to optimize their chances of becoming a repeat buyer, becoming a loyal customer of yours. And that’s something you see so many companies wanting to do, struggling to do and looking to us to help them to do. And so when I look forward to what we’re going to build with Segment, I see a tremendous surface area across pretty much every industry to help them solve this problem.

Jeff Lawson, CEO, Twilio Q1 2021 EArnings call

This capability moves Twilio’s current communications platform from being “single shot” into an intelligent feedback cycle. With Segment, Twilio will be able to close the loop on customer communications and offer enhanced services to drive the effectiveness of an omni-channel customer engagement campaign. This is very powerful, as they could optimize customer response based on measured preferences for communication channel (SMS, email, voice, social, etc.), frequency, content, etc. This data could be fed into other Twilio software products such as Flex, Marketing Campaigns, or provide the basis for new customer engagement offerings.

Management highlighted the immediate benefit to Flex (Twilio’s contact center offering) through an integration with Segment. By surfacing a broader view of customer data within Flex, call center employees can immediately provide more personalized customer support. They can see not just a customer’s purchase history, but more granular activity across e-commerce touch points. For example, they would know that a customer placed a certain product in the shopping cart, but didn’t purchase it, or that they were reading about the benefits of a service subscription. This data will empower call center reps to proactively form personalized offers for customers in response to their past activity.

Just as I was wrapping up this post, Twilio Segment announced a new product called Journeys that enables the weaving together of customer activity data across multiple digital channels to create a single view of their experience with a company. Experiences can be modeled into a series of steps, called a journey, that nudge a customer towards a desired business outcome (like a purchase). These nudges are often communications, like an email or SMS, which would be delivered by the Twilio platform.

The data collected by Segment is first-party, meaning it is pulled directly from the digital touch point through a software integration. It isn’t inferred indirectly from cookies or anonymized pattern matching. This capability will allow marketers to create user engagement campaigns that boost conversion rates, lower cart abandonment and improve customer retention.

The release announcement included quotes from existing Segment customers like Intuit and Rugs.com, which are presumably already using the capability. Journeys is being bundled into Segment’s Personas Advanced subscription at no additional cost. This new enhancement should add value for the subscription level and drive incremental usage of Twilio communications services later, once the full Twilio/Segment platform integration is complete.

Six months into the acquisition, CEO Jeff Lawson reported that the development work to connect the Twilio and Segment platforms is progressing well. Additionally, Segment’s CEO, Peter Reinhardt, was just made the leader of the new Twilio Data Platform business unit. While Twilio leadership has highlighted the near term leverage from integrating Flex and Segment, those enhanced customer data insights can be applied to optimize other communications channels, like email and messaging. At Twilio’s annual user conference, Signal, in October, I think we can expect to hear about more exciting new product directions coming out of the combined companies.

ValueFirst

Twilio (TWLO) announced the acquisition of ValueFirst in March. Based in India, ValueFirst provides an enterprise communications platform that helps businesses conduct conversations with their customers across multiple channels. They support voice, chat, SMS, email and WhatsApp. Similar to Twilio’s approach, integration is API-driven and developer-friendly.  ValueFirst started in 2003 with 14 employees and has grown to over 350. They processed over 50B interactions in 2020, making them one of India’s largest messaging aggregators and CPaaS providers. 

India is an important international market for Twilio. Previously, they had established an R&D center there to offload some product development work from the headquarters location in San Francisco. This acquisition provides an anchor to further extend Twilio’s presence in India, which is undergoing rapid growth in mobile-based messaging. India provides Twilio with a large regional market for selling their full suite of CPaaS services and higher-end customer engagement applications (like Flex and Frontline).

Twilio hopes that by acquiring ValueFirst, they will accelerate growth in Southeast Asia. ValueFirst has over 3,000 customers (as of June 2021), including large regional companies and significant divisions of multi-nationals like Google, IndiGo, InfoEdge, Axis Bank, Punjab National Bank, P&G and Tata Motors. Interestingly, at the time of the acquisition, ValueFirst claimed over 2,500 customers, but currently displays 3,000 on their web site. It’s also worth noting that ValueFirst customers are not just located in India. As an example, ValueFirst provides automated email services to Domino’s Pizza in Indonesia. 

Twilio didn’t disclose financial terms or the impact of the acquisition. In the Q1 earnings report, the CFO commented that ValueFirst would have a “very de minimis contribution” to the current quarter and going forward. He did emphasize the opportunity to open up the India market for Twilio more broadly and that they will realized some cost efficiencies by having a local team. Finally, it provided a good way to fast-track talent acquisition (like sales and service) for that geographic region.

The CEO of ValueFirst commented on the acquisition in an interview with TechCircle India.

For Twilio, India is a very important market. It is a sizeable business and several of Twilio’s clients in US have customers in India. What we bring to Twilio is the local knowledge of how to conduct business in India with regulatory compliances – as our business is regulated by TRAI. Also, we have more than 2,500 customers already and we will give them a ready market to scale. 

Vishwadeep Bajaj, CEO of ValueFirst, March 2021

Overall, I like this acquisition. Primarily, it expands Twilio’s international reach. In Q1, only 29% of Twilio’s revenue was generated by companies with headquarters outside of the U.S.  ValueFirst brings 3,000 customers to jumpstart Twilio’s growth in the region.

Ionic Security

On May 17th, Twilio announced they acquired Ionic Security. Ionic was founded in 2011 and is located in Atlanta, GA. They built a data security platform that enforces granular data access policy controls and cryptographic key management. They provide developers with APIs and SDKs that make it easy to embed data access control into their applications. Ionic’s platform then protects sensitive data through a Zero Trust model. Their dynamic authorization engine checks the context of every request against policy to establish trust before access is granted.

The architecture of their approach allows data access logic to be separated from the application’s code, enabling security teams to change policy enforcement across multiple applications without code changes.

Ionic’s solution is already used broadly. They have over 2M licensed users in Fortune 100 companies and government agencies. The company has been consistently named to the list of the 10 best start-ups in Georgia. Additionally, their solution has been recognized by several industry analysts, including Gartner and Forrester as part of their annual reports on security offerings. In fact, Forrester added Ionic Security to a list of only 15 vendors in their Q3 2020 report “Forrester Wave™: Zero Trust eXtended Ecosystem Platform Providers”. Other industry heavyweights included on the list were Akamai Technologies, Cisco, Google, Illumio, Microsoft, Okta, Palo Alto Networks, Proofpoint and Unisys.

As part of the acquisition, Ionic will continue supporting existing customers, but limit new additions to the stand-alone Ionic platform. Work has begun to integrate Ionic’s data access security capabilities into Twilio’s core platform, creating a differentiated security-focused advantage for Twilio’s suite of communications services. This will accelerate the development of Twilio’s data security features.

With governments imposing new regulations to protect consumer data within their geographies along a myriad of contextual rules, the flexibility that Ionic’s platform offers will enable Twilio to provide their enterprise customers with programmable solutions to control the flow of data and prevent data loss. This will provide Twilio with capabilities to develop new Zero Trust services for customers, primarily focused on communication channels (as opposed to other application and network access Zero Trust providers). This additional security layer also provides a competitive advantage over other CPaaS providers, which do not offer such granular data governance controls.

Zipwhip

Just when we thought acquisitions were complete, on May 17th, Twilio announced the acquisition of Zipwhip. The deal will close at the end of 2021 and will contribute modestly to revenue next year. The company will be part of Twilio’s Messaging Business Unit. The acquisition cost $850M, funded by Twilio through an equal mix of cash and stock.

Zipwhip offers a suite of data-driven text messaging templates and automation tools.  They provide a user interface for managing text communications that allows for easy curation of personalized text messaging with customers.  Enhanced, rich content can be easily embedded like pictures, emojis, dynamic fields and a custom signature.  Messages can be scheduled for repeat sends through automation. For example, a dentist office or fitness trainer could distribute reminders each morning for all appointments the next day.

The key differentiation for their service is that Zipwhip messaging is sent from the business’ actual phone number.  This gives recipients more confidence that it is a legitimate communication. Zipwhip claims to be the first company to enable texting on a business’ existing phone number, whether a landline, VOIP or toll-free number.  To accomplish this, they created unique integrations with the major telecommunications carriers, so that the incoming and outgoing text messages could be intercepted by Zipwhip’s platform.  In fact, they claim to have the most direct carrier connections of any provider.

The benefit for Twilio is that these automated content management tools will allow Twilio users to more easily create and send text messages. Traditionally, text messages are constructed and sent programmatically from applications through Twilio APIs.  Those scale nicely, but require the work of developers to create or modify.  The tools from Zipwhip allow non-technical business users to easily craft, schedule and respond to text message communications.  This should drive increased messaging usage for Twilio, as users create more of these automated messaging workflows.

Zipwhip’s service is currently sold as a monthly subscription with different tiers based on number of messages, users and phone lines. I imagine Twilio will repackage this in some way to reflect their usage-based pricing. Perhaps they provide the software for free and charge based on the number of messages sent.  

We can conceive of a number of use cases for this capability. All of these have obvious scale due to the repetitive nature. Additionally, the recipient can reply to any outgoing message, setting up a two-way communication that results in more usage. Here are a few potential use cases, as listed on the Zipwhip site:

• Customer service.  Set up auto-responders geared towards common questions or issues.
• Reminders and Group Alerts.  Send out reminders for upcoming appointments and handle cancellations. Send alerts to groups for triggered events.
• Marketing and Promotions.  Send out text messages to customer segments promoting sales events, contests or special offers.
• Payment and Collections.  Remind customers of upcoming payment deadlines and notify of delinquent payments.
• Internal Communications.  Distribute emergency messages to all employees.
• Recruiting.  Send interview reminders and request additional documents.

Founded in 2007 in Seattle, Zipwhip has an extensive customer set of over 30,000 businesses.  This will represent a nice addition to Twilio’s existing 235,000 customers.  Zipwhip lists some marquee customers on their site like Comcast, Barre3, LawnDoctor, Harry & David, Stanley Steemer, Massage Envy and the Detroit Tigers.  To date, Zipwhip has enabled over 4M landlines with text message capabilities, primarily in the US and Canada.  In the acquisition announcement on Zipwhip’s blog, the Zipwhip CEO mentioned a stat that “66% of Americans received at least one text from our network.” They have about 275 employees, primarily based in the Seattle area.

In the acquisition announcement, Twilio mentioned that after close, they expect the transaction “to be modestly accretive to Twilio’s gross margin and revenue.” We don’t know Zipwhip’s actual revenue, but I have seen estimates ranging between $20M – $50M a year. At a 20 P/S ratio, the acquisition price of $850M would imply a revenue run rate of about $40M. In a company blog post in April 2021 announcing a new developer hub in Calgary, Zipwhip’s CEO included a stat that the company doubled its revenue in 2020 and increased texting traffic over its network by 129%.

Given Zipwhip’s modest revenue run rate and the large market for messaging, it is reasonable to expect this high revenue growth to continue. In addition, both Twilio and Zipwhip will benefit from cross-sell of services to their combined customer base. Also, Zipwhip’s direct integration with the carriers to allow for text messaging from a business’ actual phone number will represent a useful enhancement for Twilio’s existing messaging service.

Future Opportunities

The next wave of product development opportunity for Twilio is to build out the set of software product offerings that sit at the top of their platform pyramid. As long-time investors know, early focus for Twilio has been on establishing the foundational layers in the Super Network and their programmable communications services. In the last year, they have started building out software applications that sit on top of these layers in earnest.

These application services are pure cloud-based software offerings. Examples include Flex (contact center), Marketing Campaigns and Frontline (mobile app for deskless service employees). Segment as a stand-alone CDP product also falls into application services. These types of software services have usage and subscription pricing that is separate from the communication channels that they may use. These are more akin to traditional SaaS products, in that the cost of revenue (subtracted from revenue to yield gross profit) does not include a payment to a third party. SaaS cost of revenue usually only includes items necessary to host, deliver and support the service, allowing for gross margins near 80% or higher.

While these app services don’t include fees to third parties, they may generate incremental usage of the underlying communications services. For example, if a call center agent in Flex sends an SMS message to a customer, that generates incremental revenue separate from the per seat cost of Flex. This provides a nice side effect in which Twilio can contribute to multiple revenue streams from a fully deployed app service.

While the Twilio product team is always improving the capabilities of the Super Network and communications APIs, these products are fairly established. I think we will see Twilio’s product teams building out more pure software offerings in the future. These would sit at the top of the product pyramid diagram above and reside in what is labeled as the Engagement Cloud. Over time, I think the Engagement Cloud layer could have as many unique product offerings (with pricing) as currently exist in the Programmable Communications Cloud. This would change the product “pyramid” into more of a rectangle.

I think this top-level product development motion will be enhanced by the new product team reporting structure. CEO Jeff Lawson is a product developer at heart (and still codes). I think the move to have the product teams report directly to him was deliberate and shows where he wants to focus his energy. The COO, George Hu, has the go-to-market effort well in hand. This allows Jeff the latitude to really drive his product vision forward.

The Segment acquisition provides a lot of ammunition for new offerings. We got a glimpse of potential product expansion areas in the Segment acquisition Investor Presentation from October 2020. Customer insights from Segment’s CDP could be layered on top of Twilio’s programmable communications services to create new software product offerings in areas like customer service, sales, product development and marketing.

Besides generating new revenue streams, the important benefit of more app services is the implication for gross margins. Twilio’s valuation multiple is depressed due to its low gross margin (mid-50% range) relative to software infrastructure peers (70-80% range). At Twilio’s Investor Day in October 2020, management provided some detailed data about gross margin per product.

We know that Segment’s gross margin is about 75%. The email product margin of 87% is associated with the SendGrid acquisition from 2019. This product is mostly software-driven, with low infrastructure costs and no underlying payment to third-party service providers. App Services has the highest gross margin at 89% and includes Flex, Video, Authy, Studio, Verify, and the messaging software products like Conversations, Notify and OTT.

Twilio also revealed the high growth rates for their application services and the gradual increase in share of total revenue from these. The “Other” category represents Twilio’s lower-usage and mundane infrastructure products like trunking, voice conferences and support. As these growth rates for application services continue, we can expect these products to contribute a larger percentage of total revenue over time.

At the Investor Day, management revealed a long term target for gross margins of 60-65%, which would help push operating margins over 20%. This is also combined with operational leverage in S&M spend, where Twilio has one of the most efficient GTM models of comparative SaaS companies. Twilio allocates just 24% of revenue on a non-GAAP basis to Sales and Marketing, versus many peer software providers in the 30-40% range.

This presents a powerful potential combination for stock price appreciation. With a large and growing TAM, Twilio management is confident they can maintain revenue growth over 30% for the next several years. The commitment at Investor Day was for organic growth over 30% in each of the next 4 years. This would apply to 2021 – 2024. Also, management clarified this is not an average (CAGR), implying that growth may be much higher in each year (as appears will be the case for 2021).

While revenue growth remains elevated, if gross margins reverse their downward trajectory and start ticking up in the low 60% range, we should see operating income increase as well as operating margin. The higher gross margins will push up TWLO’s valuation multiple, not necessarily to values assigned to other high revenue growth peers with 70%+ gross margins, but may close the gap by half. This multiple expansion, combined with revenue growth, could provide outsized share price increases over the next several years.

Competitive Landscape

The key to understanding Twilio’s competitive advantage is to consider their offering from the perspective of the development organization that would utilize it. This comes down to use cases, optionality for future growth and prioritization of dev resources. Enterprises with customer-facing software applications typically utilize Twilio’s platform to facilitate the programmatic transmission of communications to their customers. These communications can span multiple channels, like Voice, SMS, Email, Video, WhatsApp / FB Messenger and Chat.

Twilio enterprise customers typically start with one or two channels and then add more over time. This is because they find more ways to reach their customers and want to make sure that they can accommodate the customer’s preferred channel. In the U.S. that may be SMS, but internationally, it could be WhatsApp. Another consumer might prefer to be reached by email, or possibly a voice call. A well-developed customer engagement strategy offers multiple channels and the ability for customers to indicate their preference at any point in time.

Even more advanced platforms can “infer” consumer preference, by monitoring engagement with each type of communication. Perhaps a consumer ignores emails, but responds to SMS. Or, the opposite. By measuring the response to each type of communication, the platform can model each consumer’s behavior and optimize future communications by channel, time of day, message, etc.

In the past, this “learning” was informed by event tracking within the communication itself. Twilio could record consumer actions like opening an email, clicking on a link, responding to an SMS or answering a voice call. However, beyond that immediate event, Twilio couldn’t follow the consumer’s behavior. They would know that a consumer clicked on a promotional link in an email or an SMS, but not whether that action resulted in a sale or other business outcome.

With Segment, however, this all changes. Once the integration with Segment is complete, Twilio will be able to not just record the immediate consumer engagement with the communication itself, but also capture all follow-on consumer activity within the enterprise’s digital channels, whether their e-commerce site, call center, mobile app or chat. All this activity can be correlated and analyzed, allowing the Twilio/Segment platform to build a 360 degree profile of each consumer related to their engagement with the business’ digital channels and the outcome of each communication.

This “closing of the loop” will drive an order of magnitude improvement in the effectiveness of Twilio’s communications platform and underscores the recent evolution of their product marketing messaging to include the words “customer engagement”. That is because the combination of Twilio’s communications channels and Segment’s customer data platform (CDP) will enable the creation of a true “Engagement Cloud”.

This ability to collect consumer engagement data across multiple communications channels and thousands of business customers will provide Twilio with powerful insights to help marketers optimize the performance of their customer engagement campaigns. By correlating all this activity data in a single engagement platform, the effectiveness of Twilio’s comprehensive suite will exceed anything that point solution competitors can muster.

The extent of this activity data will be driven by completeness across three dimensions – communication channel coverage, global reach and depth of consumer tracking. Each of these are critical contributors to create the most complete view of every consumer and the broadest set of activity data. Twilio already had the leading CPaaS offering across the first two dimensions. They address the most communications channels in the broadest set of global markets. The addition of Segment has added a third dimension of coverage, measuring the full lifecycle of consumer engagement.

And this is where Twilio just flipped the script on the other CPaaS fast-followers. Not only do competitors need to address all the channels that Twilio includes across 180+ countries, but they also need provide a CDP. Twilio just bought the leading solution in Segment.

We can examine Twilio’s competitive advantage in cloud-based data collection within the context of other industries. Cybersecurity offers a case in point. Investors (myself included) recognize the advantage of Crowdstrike as a cloud-based security platform, because they can collect threat intelligence data across all its enterprise customers, multiple device types and runtime environments. The Falcon platform can analyze all this incoming data, identify trends and surface security threats to the benefit of all customers.

The same argument can be made for Twilio. With Segment, the Twilio Engagement Cloud will be able to observe (anonymized) consumer engagement behaviors across all enterprise customers, communications channels and geographies and craft the most useful insights and recommendations for enterprises to create and optimize communications for their customers. No other CPaaS solution on the market can do this.

The three dimensions of data collection that make this possible are communications channels, global footprint and activity tracking.

• Breadth of communications channels. Does the provider address every common communications channel for interacting with customers? These include SMS, WhatsApp/Messenger, voice, email, video, chat and call center. In the future, IoT will even come into play here, as communications are sent to connected devices beyond the mobile phone or desktop.
• Global coverage. Consumers must be reached anywhere on the planet. Communication across each channel requires an integration with the carriers in each target country. It is common for consumers to change their communications preferences based on the country they are traveling in – like SMS for the U.S., WhatsApp overseas. A provider must be able to support both. The provider must also be able to reach the consumer in every major country, as most G2K companies are multi-national.
• Extent of engagement lifecycle. Most providers are constrained to tracking consumer engagement within the communication message itself, with little ability to track the activity of the consumer once they leave the communication and engage with the enterprise’s digital footprint. The CPaaS vendor should provide the enterprise development team with a software framework to instrument their digital channels and a cloud-based CDP to capture and correlate consumer behavior to form a personalized profile based on first-party data. This profile should then inform and optimize the next engagement cycle with the consumer, driving a continuous learning lifecycle that results in the most beneficial business outcomes.

Viewed across these three dimensions, Twilio can claim the most complete solution. They address more communications channels than any CPaaS competitor, most of which are missing at least one or more channels. Twilio has integrations with sufficient carriers to distribute communications across 180+ countries. Competitive CPaaS providers have traditionally been regional, available just in North America or Europe. Finally, the addition of Segment’s CDP has evolved Twilio’s platform along a third dimension of engagement tracking that places them even further ahead of competitors.

Twilio’s coverage across all three dimensions makes a compelling developer resource efficiency argument, relative to competitive point solutions. It is true that a sufficiently motivated development team could create their own integrations to address each communications channel. They might code directly to Facebook’s WhatsApp API, stand up their own email servers and use separate providers for SMS and voice. Most CPaaS providers have easy-to-use APIs that make this work straightforward. To achieve global coverage, the development team might also have to add a few more providers. However, this work all represents low-value reproduction of plumbing already available from Twilio. Developers should be focused on building unique software solutions that deliver incremental value for the enterprise.

To carry the DIY approach further, to collect the consumer engagement data across these different channels and providers will require the development team to collect event data from each provider’s communication and then correlate that to the activity data on their digital channels (assuming they have those sufficiently instrumented). This effort will quickly balloon into an enormous headache. The marketing team will want to know whether consumers are more likely to purchase from an SMS message or an email. Without the full lifecycle of measurement in place across all channels and countries, the development team will not be able to provide that simplest of insights.

For these reasons, Twilio is well positioned to continue to dominate the $62B CPaaS market. Following the Segment acquisition, Twilio leadership published updated estimates for their TAM as part of an Investor Deck in March 2021. Including the Customer Data Platform (CDP) market that Segment addresses, they estimated a TAM of $79B in 2020, expanding to a total TAM of $110B by 2023. These numbers are obviously getting very large. Few software companies can project a TAM over $100B.

Within this enormous TAM, Twilio is already the largest player by a large margin and continues to grow faster than (or as fast as) their smaller competitors. Some cloud vendors have stuck a toe into the space (like the Microsoft Azure Communications Services), but will not represent a meaningful threat due to less coverage across the three dimensions above. Additionally, enterprise technology organizations pursuing a multi-cloud strategy would prefer to work with an independent provider where possible.

CPaaS is still a fast growing market. IDC predicted a 4x increase in CPaaS spend over the 5 year period from 2020 through 2024. Enterprises will continue to expand their digital footprints (a consequence of digital transformation) as consumer expectations for convenience increase. I discussed these trends in a prior post. Consumers are increasingly willing to delegate tasks to digital channels (shopping, food delivery, health tracking, etc.) and give their digital providers more permission to reach them with communications about these services. Twilio’s comprehensive customer engagement platform fits squarely into this trend, providing a growth driver for many years to come.

Final Thoughts and Investment Plan

Twilio is still delivering high revenue growth at scale, with a 50% annual increase organically in the last two quarters. This still doesn’t appear to want to drop to 30% growth, as analysts have modeled in past years. Looking forward, analyst estimates call for about 31% revenue growth in FY2022 and FY2023. Yet, they have FY2021 currently modeled for 44% growth, which we would expect Twilio to beat handily. Additionally, Twilio leadership committed to organic revenue growth over 30% in each of four years from 2021 to 2024 at their Analyst Day. So, it’s plausible Twilio will continue to outperform and these estimates will be raised. If Twilio delivers just 35% revenue growth in the next two years, then FY2023 revenue will hit $5B.

On the other end of the spectrum, the profitability picture is less compelling currently, but has potential. Gross margins continue to track in the mid-50% range. Twilio leadership has plans to improve these to over 60%, but they are taking time to materialize. Application services (like Flex, chat and video) contributed 12% of total revenue in 2020. These types of software-driven offerings have gross margins approaching 80% or higher. Usage of these products is growing much faster than the core, so increasing revenue contribution should continue. Segment, with gross margins in the 75% range and a run rate of about $180M, will further help.

Operating margin consistently lands in the low single percentage range, with Q2 estimates dropping to a negative margin. This is most likely attributable to the huge surge in headcount in the last 12 months, growing 79% year/year. I estimate that a good portion of that came from acquisitions. We can expect this incremental cost to be a near term hit, with cost savings going forward due to elimination of duplicate functions and less need to hire as aggressively. Nonetheless, profitability is weighing on the Twilio story.

Customer metrics continue to support revenue growth looking forward. Twilio grew its total customer count by 24% year/year and is keeping DBNER above 130%. These two factors should combine to keep annualized revenue growth high. Twilio has a number of other go-to-market opportunities, like enterprise account growth, international expansion and partner channels. Last year, they announced a strategic partnership with Deloitte Digital, which will help extend the reach of software-heavy implementations with Deloitte’s G2K clients. International customers contributed 29% of revenue in Q1 and Twilio has a relationship with just 19% of the G2K currently.

On the product front, Twilio has their Signal event coming up in October. This should unleash another set of high-value product introductions. This year, in particular, will be critical for Twilio to build out the top layer of their platform offering pyramid, leveraging the existing communications channels to create new software-driven customer engagement solutions. These would also likely incorporate capabilities from recent acquisitions Ionic Security, Zipwhip and Segment.

The Segment integration is progressing well and management reported that many customers are interested in the new capabilities that the combination will bring. Segment adds a whole new dimension of product efficacy to the Twilio CPaaS offering, by enabling end-to-end tracking of consumer behavior following a communication event. Closing the feedback loop and moving beyond “single shot” communications will put Twilio far ahead of competitive offerings and likely justify a pricing premium. Additionally, combining insights from this new data platform with existing communications services should enable a new wave of customer engagement product offerings in areas like marketing, sales, customer service and operations.

In an Investor Presentation from March for their $1B senior note offering, Twilio leadership included a slide I hadn’t seen previously identifying large IT market segments that are cloud-enabled and the anointed leader within each. As expected, they defined their segment broadly as “Communications” and included some other peers. Interestingly, Salesforce wasn’t on this diagram and Twilio management considers themselves as a peer to AWS. For what it’s worth, leadership is thinking big.

The key consideration for investors is how long they want to wait for the profitability dynamics to play out. The market opportunity is enormous for Twilio. With the addition of Segment, Twilio leadership estimates their TAM will grow to $110B in 2023. Twilio is clearly the gorilla in the CPaaS market, and is investing heavily to solidify and extend their lead. As new software-defined products increase their revenue mix, operating leverage will accelerate and deliver outsized income. The combination of high revenue growth and an improving margin picture will provide a powerful upward bias on the stock price.

For me personally, I am willing to be patient. I think Twilio has a lot of potential and I like owning the leader in this large, expanding market. I have been invested in TWLO at varying levels since 2018. In the last two months, I have shifted some of my portfolio allocation from TWLO to SNOW (Snowflake), where I think there is a large opportunity as well. SNOW’s valuation reached the cusp of rationalization as the price dipped below $200. Additionally, the subsequent change in the stock price of TWLO from being up YTD has reduced its relative percentage in my portfolio. TWLO now represents about 13% of my personal investment portfolio. I will continue to monitor their progress and may add again as the margin story materializes.

Additionally, when I initiated coverage of Twilio in November 2019, the stock was trading at $98. I set a 5-year price target of $320, anticipating TWLO would reach that price by the end of 2024. Roughly 18 months later, it has already hit that target. Therefore, I am raising my end of 2024 price target to $660. I arrived at this value by projecting revenue growth of 35-40% for the next 3 years, on top of a target of $2.73B for 2021. This implies revenue of $7.11B in 2024. At a P/S ratio of 16 (for a 35% grower approaching 60% gross margins and reasonable op margin), target market cap is $114B for about 107% growth from today’s value. Investors can apply their own models and valuation metric to my 2024 revenue estimate to yield their target price.

NOTE: This article does not represent investment advice and is solely the author’s opinion for managing his own investment portfolio. Readers are expected to perform their own due diligence before making investment decisions. Please see the Disclaimer for more detail.