Twilio (TWLO 1.08%) has been a top growth pick in 2020. Organizations have accelerated their shift to cloud-based contact centers in the wake of the coronavirus pandemic so that their customer service operations can continue seamlessly, even if physical offices remain closed to abide by stay-at-home orders.
The pandemic has given the cloud communications specialist a nice shot in the arm, helping it step on the gas after a tepid start to the year. And now, Twilio's fiscal second-quarter results show that its momentum is far from over. Its revenue grew 46% year-over-year last quarter, and active customer accounts jumped 24%. Adjusted net income jumped 189% year-over-year to $0.09 per share.
The numbers steamrolled past analysts' expectations, and the third-quarter guidance calls for year-over-year revenue growth of 36% to 38%. But investors decided to press the sell button and book profits. As a result, Twilio shares have pulled back in August -- but opportunistic investors looking for a top growth stock might find this drop enticing. Let's see why.
Investors need to look beyond Wall Street expectations
Twilio expects third-quarter revenue between $401 million and $406 million, which is well above the $379 million consensus estimate. However, the company has guided for an adjusted loss of $0.07 per share at the mid-point of its guidance range, which is a penny higher than the $0.06-per-share loss Wall Street originally anticipated.
Investors may have been spooked by Twilio's bottom-line forecast, as well as the fact that its top-line growth this quarter won't be as spectacular as in the last one. But they shouldn't be, as Twilio has a history of low-balling its guidance.
For instance, Twilio's original second-quarter guidance called for a non-GAAP net loss of $0.11 to $0.08 per share on revenue between $365 million and $375 million. The company galloped past those numbers easily, and it could do so once again thanks to the impressive growth of its customer base and the uptick in the adoption of its services.
Twilio's call for a loss this quarter isn't a cause for concern either. The company has guided for an operating loss of $10 million to $15 million this quarter. That doesn't paint a good picture at first, as Twilio generated an operating profit of $10 million last quarter. Its third-quarter fiscal 2019 operating loss was also lower at $3.6 million.
Now, Twilio could have cut down its operating losses, since its customer and developer conference is going to be held online this year. The company had earmarked $10 million in expenses for the event, which should ideally lead to substantial cost savings. But Twilio will direct the cost savings toward marketing expenses, indicating that it will be stepping up its customer acquisition efforts.
Twilio's non-GAAP sales and marketing expenses were 24% of its revenue in the second quarter. The company increased its outlay on this line item by 42% year-over-year, nearly matching the pace of its actual revenue growth. The ramp-up in marketing expenses reaped rich rewards, as Twilio exited the quarter with 200,000 active customers, compared to around 162,000 customers in the prior-year period.
What's more, Twilio's dollar-based net expansion rate came in at 132% during the quarter, which means that the company's existing customers have increased their spending on its solutions.
Twilio is focusing on the bigger picture
Mordor Intelligence estimates that the cloud-based contact center market will clock a compound annual growth rate of 23% through 2025, hitting nearly $45 billion in revenue. The migration from on-premise call centers to cloud-based ones is expected to drive the market's growth, and that shift has been accelerated by the novel coronavirus pandemic.
So Twilio is doing the right thing by going after more customers in such a scenario. The company may not be paying much attention to its bottom-line performance right now, but that shouldn't be a cause for concern. If Twilio can build a strong customer base now and corner a bigger share of the cloud contact center market, it can gradually lower its marketing expenses in the future and boost earnings.
That's why investors shouldn't be spooked by short-term metrics, and should keep holding Twilio -- this growth stock could resume its journey north once again.