Twilio: The Rebound Rally Is Here

seekingalpha05:25

Shares of Twilio have rebounded sharply after the company's favorable Q3 results, and I believe there is further upside ahead.The company's growth revitalization plan, driven by AI-enhanced product ...

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Enthusiasm over interest-rate cuts and President Trump's reelection have buoyed further steam into rebound rallies, especially for companies that have shown signs of growth reacceleration. Such is the case for Twilio Inc. (NYSE:TWLO), the communications software platform that has recently struggled with customer defections and tighter budgets. And yet, the company's recent Q3 earnings release showed a different side of the story, with net revenue retention rates and organic growth seeing a strong pickup after years of decline. Shares of Twilio have skyrocketed since, and are now up nearly ~40% on the year: Data by YChartsI last wrote a bullish note on Twilio in August, when the stock was still trading in the low $60s. Since then, the company has shown signs that its growth revitalization plan is working. Added on top of improving margins and cash flow and a fortress balance sheet with ~$2 billion in cash, I'm reiterating my buy rating on Twilio despite its recent run-up. The company has led its resurgence efforts through an improvement of its product, which has brought more customers back into the fold. AI has been core to improving the company's feature set. It has released new virtual agents that help customers tweak and refine their communication strategies with their customers. The company has also released improved analytics features, which give Twilio's customers the ability to receive a \"deliverability score\" on their planned communications in order to tweak errors. The company also noted that its struggling Segment subsidiary, which helps customers store and view customer data from a single pane of view, has returned to positive y/y comps. As a reminder to investors who are newer to Twilio, here is my full long-term bull case on the company:   Horizontal software platform with many use cases: Almost all businesses deploy some sort of communication with their clients, and Twilio's platform is industry-agnostic with wide applicability to a range of businesses and use cases.  Recurring revenue and already profitable: Twilio generates revenue each time its users request an API connection (i.e., by sending messages in applications or making internet voice calls). As internet usage expands, so does Twilio's capacity for revenue.  Focused on cost: Since new management took over, CEO Khozema Shipchandler has been laser-focused on reviewing the business and cutting out costs. The result has been significant increases in profitability expectations.  Immense net cash position with buybacks to leverage it: Twilio has over $2 billion in net cash on its balance sheet, and has plowed significant resources into aggressive share buybacks ($3 billion in total, with most of this planned to be complete by the end of 2024) at an opportune time while the share price was low.  Stay long here and keep riding the recent strength upward. Q3 download Let's now go through Twilio's latest quarterly results in greater detail. The Q3 earnings summary is shown below: Twilio Q3 results (Twilio Q3 earnings deck)Twilio's revenue grew 10% y/y to $1.13 billion, far surpassing Wall Street's expectation of $1.09 billion (+6% y/y) by a four-point margin. As shown in the chart below, Twilio's revenue accelerated substantially versus just 4% y/y growth in Q2 (six points better). We note as well that the company's beat spread was much better than just a two-point beat in Q2. Twilio revenue trends (Twilio Q3 earnings deck)Equally encouraging is the company’s net revenue retention rates, which improved to 105% in the quarter - representing a 5% net expansion (in other words, the average install base customer is increasing their spending by 5% y/y). Net retention rates had been a major issue for Twilio amid tighter customer budgets and defections among SMB customers, which appears to be on an improving path now. Twilio net expansion rates (Twilio Q3 earnings deck)And unlike many other communications software companies that benefited from political cycle messaging in Q3, this was only a minor contributor to Twilio’s results - hence we can treat the company’s performance as truly organic. Per CFO Aidan Viggiano’s remarks on the Q3 earnings call:  Our efforts with ISVs and on self-serve and cross-sell initiatives continue to yield good results. We also implemented several new features, including the messaging deliverability dashboard that Khozema mentioned that helped drive volume and revenue in the quarter. In addition, our new AI-enabled products and features such as Verify and SMS Pumping Protection are helping to drive faster growth. While we had higher political revenue in the quarter, those contributions were fairly immaterial and contributed roughly 90 basis points to our reported revenue growth rate. This was offset by a 90 basis point headwind associated with sunsetting the software component of our Zipwhip business.”  On the profitability front, Twilio expanded its pro forma operating margins by 290bps y/y to 16.2%: Twilio adjusted EBITDA margins (Twilio Q3 earnings deck)The company’s pro forma EPS of $1.02 also beat Wall Street’s expectations of $0.86 with 19% upside. Valuation and key takeaways At current share prices of just under $100, Twilio trades at a market cap of $15.66 billion. After we net off the $2.70 billion of cash and $990.2 billion of debt on Twilio’s latest balance sheet, the company’s resulting enterprise value is $13.95 billion. Meanwhile, for the next fiscal year (FY25), Wall Street analysts are expecting Twilio to generate $4.29 in pro forma EPS (+17% y/y) on $4.76 billion in revenue (+8% y/y). And if we assume Twilio can generate a 17% FCF margin on this revenue profile (flat to both the current quarter as well as YTD FCF margins), FCF would be $809 million. This puts Twilio’s valuation multiples at:  2.9x EV/FY25 revenue. 17.2x EV/FY25 FCF. 23x FY25 P/E.   For a company that is just returning to growth and expansion of net revenue retention rates, a low-single digit revenue multiple here is quite appealing. In my view, Twilio has many paths to continue revitalizing its growth, especially after its recent slew of product updates that are helping to galvanize the install base. Stay long here and keep holding out for further upside.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485221295"}