Twilio, Inc Earnings: 31% More Customers Drive 68% Sales Growth

Cloud-based communications specialist Twilio (TWLO 1.08%) reported third-quarter earnings this week. The company expanded its client base by 31%, driving revenues 68% higher. Management hopes to ride the recently introduced Flex platform to strong expansion of these two metrics for the next several years.

Twilio's third-quarter results: The raw numbers

Data source: Twilio. GAAP = generally accepted accounting principles.

What happened with Twilio this quarter?

• Twilio spent $42.3 million on research and development (R&D) in the third quarter. Though this was another record -- Twilio's R&D expenses have been increasing in every quarter as far back as the company has been publishing financial details -- this line item became a proportionally smaller part of a fast-growing top line. R&D expenses accounted for 25% of total revenues this time, down from 29% in the previous quarter and 34% in the third quarter of 2017.
• The company now boasts 61,150 customers, up from 57,350 three months ago and 46,490 in the year-ago period. Revenues are growing roughly twice as fast as the client count, showing that customers are willing and able to pay more for Twilio's products and services over time.
• Indeed, the so-called net expansion rate clocked in at 145% -- the highest reading since the end of 2016. That's a direct measure of how much more the average customer pays when they extend, expand, or otherwise renew an existing contract.

Image source: Getty Images.

What management had to say

Twilio CEO Jeff Lawson is excited about the client-attracting prospects of Flex, an advanced development platform intended to simplify the process of building Twilio's services into usable business tools. Lawson said on the earnings call:

For the first time, customers can now have their cake and eat it too. Flex combines the scalability and reliability of our cloud platform with the ability to programmatically customize every element of the contact center experience. This is a powerful combination and we believe we have created a fundamentally new way of delivering software value to customers.

Among the early adopters of Flex, management listed ride-hailing service Lyft and e-commerce specialist Shopify (SHOP -2.37%). Lyft has been a Twilio customer for years, but Flex is helping that company simplify its app-development processes. For a business that lives and dies with the mobile-app experience as Lyft does, better development tools can be downright game changing.

Shopify had been working on a custom contact-center platform for several months when management caught wind of Twilio's Flex in the spring of 2018. The company immediately jumped aboard the Flex train, largely abandoning its in-house development efforts. No need to reinvent the wheel when Flex makes it easy to get a custom cloud platform going.

Those are the flagship accounts in Twilio's early efforts to promote and grow Flex. Management sees it as an essential growth engine for years to come.

Looking ahead

In the fourth quarter, Twilio's management expects to hit the following guidance targets, where each number shown represents the midpoint of the official guidance range:

• Total revenues should land near $184 million, a 60% increase over the $115 million seen a year earlier.
• Adjusted earnings are targeted at $0.04 per share, up from a $0.03 loss per share in the year-ago period.

Twilio doesn't provide guidance in GAAP terms because its stock-based compensation expenses are difficult to predict as they change along with rising and falling stock prices. Therefore, future GAAP figures can't be calculated "without unreasonable effort," while adjusted earnings simply don't take stock-based compensation into account at all. For the record, Twilio's stock-based compensation stood at $22.7 million in this report and $14.2 million a year ago.

Finally, Twilio has outgrown its original headquarters and will be moving into a new space in 2019, roughly tripling the available square footage. The company will account for the $40 million in moving costs under capital expenses on the cash flow statement, mostly spread across the next three quarters. Double rent during the actual move from one facility to the other should add to the operating costs in the first quarter of next year.