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Two Things Investors Should Know About Twilio's Top Line

By Motley Fool Staff – Oct 19, 2016 at 2:49AM

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Twilio has some unconventional ways of breaking down their revenue mix -- we explain what it all means.

Cloud communications company Twilio (TWLO 5.14%) is this year's hottest tech IPO. In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and David Kretzmann explain how the company breaks down their revenue and the metrics that investors need to know to understand how they make money.

A full transcript follows the video.

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This podcast was recorded on Sept. 30, 2016.

Dylan Lewis: So, let's talk about a couple different things that I think people should know about this business. You look at their revenue, and they break down the top line a couple different ways, one of the most important ones, in my view, is by customer type. You look at their most recent quarter, they break into base and variable revenue. Variable revenue is revenue from active customer accounts. That's people that have spent, I believe it's $5 in the trailing month. So, revenue from active customer accounts with large customers, so, customers that make up at least 1% of the company revenue, that have never entered a 12-month minimum revenue contract commitment. The idea is, they don't have a minimum spend with Twilio, it's variable. And that was $8.1 million in Q2. Base, which is everything except that, so, pretty much, contracted revenue, at this point, with minimum spends, $56 million. So, they slant heavily toward base revenue, about 87% is coming from there at this point. If you look, year-over-year growth, 84% year-over-year growth with base revenue, only 12% growth with variable. They're clearly pushing the business that way.

David Kretzmann: Right. And they look at base revenue as a more reliable indicator of where the business is going. Understandably, you have at least a minimum contract of revenue coming in from those customers. So that is a more reliable, stable indicator of where revenue is going. That's why the company focuses on it. It is the bulk of their overall sales. So that should be the sales number that investors pay the most attention to.

Lewis: And as of last quarter, the company had nine variable customer accounts, and one of them was WhatsApp. All nine, total, make up about 13% of the revenue contribution. Looking at how they break out geographically, the U.S. makes up a majority of their revenue at this point, about $55 million. Internationally, only about $10 million. Year-over-year growth has been pretty consistent for both of them. U.S. is at 69%, international is at 75%. I think one of the frustrating things with Twilio is that they do not break out revenue by product segment or by use case. That can make it a little bit tougher to see how businesses are incorporating their products. It would be nice to have the insight of how two-factor authentication is used in 35% of our customers, and just get a sense of where their strengths are at the moment, and what the market is looking for in terms of communication help.

Kretzmann: Yeah, really, besides anecdotal evidence, of what Home Depot says they're using Twilio for or any other company, we don't necessarily have that great of an idea of, what are the main Twilio products that their customers are using? Besides anecdotal evidence -- and sometimes the company will share a little bit more, but it is hard to have very detailed numbers in those areas.

David Kretzmann owns shares of Home Depot. Dylan Lewis has no position in any stocks mentioned. The Motley Fool recommends Home Depot. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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