This Was the Big Surprise From Twilio's Quarterly Report

Going into Twilio's (TWLO 2.94%) third-quarter earnings results after the market close on Oct. 26, the company was having banner year. The stock had nearly tripled so far in 2020, so expectations were high. Twilio reported results that exceeded expectations, while also giving investors a little something extra.

In this Earnings Review episode that aired on Fool Live on Oct. 28, Fool.com contributors Danny Vena and Asit Sharma discuss Twilio's results, and the surprise the company delivered for investors.

Danny Vena: Our first earnings report of the day, we are going to talk a little bit about Twilio. I'm going to go ahead and put that ticker into the chat. Just so for those who may not be aware of what Twilio does. For companies that want to communicate with their customers via their apps, through chat, through emails. If you want to do that, if you have a consumer-facing app, for example, that takes a lot of code writing in order to communicate with your customers via your app. So rather than reinvent the wheel, you can sign up with Twilio. Twilio provides you the building blocks that you can include right in your app and gives you the capacity to communicate with your customers. If you've ever used, say, a ride-hailing app where you get updates via the app about when the ride is arriving, you have probably used Twilio's services.

Twilio announced its earnings after the market closed on Monday. The stock slipped just a little bit. But honestly from what I saw, it really was a fabulous quarter. The headline numbers were above what they were expected to be. Revenue was $448 million up, 52% year over year. Just to give that a little context, that's on top of 75% growth in the prior-year quarter, and 46% growth in Q2. So it's an acceleration sequentially. The company also posted a surprise adjusted profit and delivered non-GAAP earnings per share of $0.04, which was up 3% from the prior-year quarter. Now Wall Street was looking for an adjusted loss per share of $0.03 cents and revenue of $410 million. It was a clean beat on both the top and the bottom line. The fact that they delivered an adjusted profit was really icing on the cake. So this was a really good quarter for Twilio now, and to drill down a little bit into some of the other things. They ended the quarter with about 208,000 active customers, which is up 21% year over year. The dollar-based net expansion rate was 137%.

Now, I want to spend a minute talking about that because that sounds a little confusing. The first time I heard that I shook my head a little, because I didn't know what they are talking about. If you look at existing customers that Twilio has had for at least a year, and you look at what those customers were spending in this quarter last year compared to what they're spending now, that spending has increased by 37%. So what you've got is you've got a company that's adding new customers. Their customer base is up 21%, and their existing customers are spending 37% more. So from a customer standpoint, the company is doing really well. So the short version of that is, this was a fabulous quarter.

There were a couple of other things that they talked about. They talked a little bit about their acquisition of Segment earlier this month. Segment is a customer data platform that helps businesses collect data from various sources, clean it up, put it all in one place and analyze it. This acquisition pushes Twilio a little further into the realm of customer engagement services. So by controlling the collection of this data, it helps companies better connect with and have more meaningful interactions with their customers. Twilio said that this combination would provide a single view of their customer's data across the various channels, providing more seamless and more infective engagements. So I think this is a meaningful acquisition by Twilio.

Overall, like I said, it's a very positive quarter, very solid quarter. The reason that the stock slipped a little bit after Twilio announced was because Wall Street was hoping for a little bit better guidance. Twilio guided for revenue of about $450 million to $455 million, up about 36%, 37% year over year, so a little bit of deceleration. But it's important to keep in mind that Twilio has always been very conservative in their guidance, and Twilio, they like to do the old beat and raise. So they give conservative guidance and then when the next quarter comes along, they're ahead of it. What do you think about the quarter Asit?

Asit Sharma: It sounds like a great quarter to me. I was just at the very end there. I was realizing having read many of your articles for the past few years, that you like nothing more than consecutive beat and raises. So you beat your guidance, you raise your outlook or your forward guidance. I think this is one of the great things of companies that are richly valued in the marketplace. We sometimes look at a lot of qualitative factors, which we should. What's management up to, how strong is management team, what's the strategy? But the ability to make good on your own promises and beat management's guidance. I think it's the most important thing if you can beat Wall Street's guidance, that's even better. Like you, neither of us places a whole lot of stock in. We don't get too tied down into beating estimates versus missing them. But I liked that you always take a look at that every quarter. So that was really nice to hear.