When Twilio (NYSE:TWLO) announced earnings on Feb. 12, almost everything went right. Revenue soared 77% year over year, while per-share earnings, adjusted for stock-based compensation and one-time expenses, rose 33%.
What went wrong: guidance. Twilio forecast either breakeven or $0.01 a share of adjusted profit for the first quarter of the new fiscal year; analysts were looking for $0.02 or better, and the stock fell 6.6% in response. Call it the curse of investing in high-growth stocks -- sometimes expectations get too high.
Never mind that Twilio blew past revenue guidance for both the fourth quarter of 2018 ($204.3 million, versus $185 million expected) and the forthcoming first quarter of 2019 ($222 million to $225 million, versus $192 million forecast).
CEO and co-founder Jeff Lawson's "Twilions" -- his nickname for Twilio employees, of which there are now 1,440, according to S&P Global Market Intelligence -- didn't set the stage for enough growth in 2019. Or did they?
Here are nine things I learned from the fourth-quarter earnings call with analysts:
- Twilio is connecting with developers, at scale. Chief operating officer George Hu said the company's go-to-market team engaged with developers at "more than 300 events across 20 countries in 2018, driving awareness in the developer community that fuels our business." Hu said the team is also building out a partner program and hosted its biggest yet customer conference -- an annual event dubbed "Signal."
- Twilio is connecting companies to their customers in new ways. Lawson doesn't shy away from hyperbole in describing the opportunity in front of Twilio. As he sees it, software is reshaping the entire communications industry, and putting pressure on those who tie services to big chunks of expensive hardware. "From our perspective, we're at the early stages of a complete transformation of communications from its legacy based on physical networks to its future based in software," Lawson said. "Our 'developer first' go-to-market is an efficient way to reach this broad range of companies."
- Heavy investment in research and product development will continue for the foreseeable future. Twilio sells its software in a variety of ways, but it's common for a developer to swipe a credit card, build an app with Twilio, and get started; those small engagements lead to insights that help to grow the business. "As a platform, we get a front-row seat to learn the major business problems that customers are looking to solve. This view drives our product roadmap, resulting in products like [the] Flex [contact-center software]. That's why we plan to continue to invest across the company to support elevated growth over an extended period of time, rather than taking profits in the short term," Lawson said.
- The Flex contact-center product is already gaining traction. Lawson said the reaction to the Flex contact-center software has been "tremendous," while Hu cited a fourth-quarter win with ezCater, an online marketplace for orchestrating office catering from more than 60,000 restaurants across the U.S. "This deal was yet another great example of where developers were involved from the beginning to the end of the process," Hu said, noting that ezCater's "journey" with Flex began at a customer event in Boston.
- Twilio's management bench is deep and getting deeper. In January, former Amazon, Alphabet (Google), and Microsoft engineer Chee Chew joined Twilio as chief product officer to help build new capabilities into the platform. Adding Donna Dubinsky during the quarter was also a win. "Her experience building leading technology companies will provide valuable insights to our board discussions," Lawson said.
- With SendGrid, Twilio is now serving over 140,000 different customer accounts. That's roughly $73,643 in enterprise value (market cap minus excess cash) for every account, which seems pretty reasonable. Why? Twilio is calling for 65% revenue growth in 2019, resulting in $1.07 billion in net sales, or roughly $7,643 per account. Twilio trades for about 9.6 times the enterprise value of its current-year sales forecast -- pretty reasonable for such a fast-growing company.
- Twilio and SendGrid are "kindred spirits," and the combined company will continue to grow fast. Can we really expect Twilio and SendGrid to integrate successfully and maximize the combined company's account footprint? SendGrid chief Sameer Dholakia has no doubt. "[A] Fortune 100 retailer who spoke at our company kickoff in January [happens] to be a joint customer of both companies and foresee[s] a future where Twilio is the foundation of their customer engagement platform across all channels," Dholakia said. "We have an opportunity to help companies around the world to engage with their end customers in a whole new way."
- Twilio has pricing power and will expand gross margin. Already in the mid-50s, Twilio is targeting long-term improvements in gross margin that will pull it "in the long term to something that's approaching [the] 60s," chief financial officer Khozema Shipchandler told analysts. A broader platform that serves more needs is key to that growth.
- The Internet of Things is a long-term catalyst. Lawson sees the emergence of narrowband 5G radio signal as a key driver of pulling and transferring data from the Internet of Things to the cloud and other sources for analysis. "We're way ahead. We've got the first developer platform for narrowband," Lawson said.
Whether you think Twilio's guidance for Q1 is sandbagging (setting expectations deliberately low to exceed them easily), or a disappointment, or just the natural conservatism of a skilled management team, it's clear the company has a big ambitions and a clear long-term vision. I expect we'll forget any short-term hiccups soon enough.