Twilio (TWLO 2.94%) aims to fuel the future of communications by helping companies reinvent the way they engage with customers. In 2018, Twilio took a step toward realizing this mission with the release of Twilio Flex, a product that helps businesses create an affordable contact center to handle customer inquiries. Investors should take note of how quickly Flex is gaining traction, both because it gives Twilio a shot at a $7 billion market opportunity, and because it highlights the underlying value and efficiency of Twilio's business model.
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Why is Twilio Flex important?
Prior to Flex, developers were using Twilio's platform to build contact centers from scratch -- a challenging endeavor that involved stitching together various pieces of voice and text software. Recognizing the opportunity, Twilio built its own programmable cloud contact center: Twilio Flex. Management believes their relationship with the developer community is a source of efficiency, because it allows the company to create the products developers need most. Flex has finally given it a solid proof of concept to back up that belief.
At Twilio's Investor Day in October 2020, management revealed that Twilio Flex has accumulated over 600 customers in the two years since its launch. And while management didn't include specific dollar figures, they noted that revenue from Flex was up 184% in the first half of 2020. In other words, Flex is growing more than three times faster than Twilio's core business. Management also indicated that the Contact Center-as-a-Service (CCaaS) market, currently valued at $7 billion, should reach $13 billion by 2023. That figure alone represents more than eight times Twilio's revenue over the last 12 months. That's great news for Flex, but the implications for Twilio's business are even more important.
Flex's success suggests that Twilio's business model is working. As developers use Twilio to address an expanding variety of problems, Twilio gains insight into what types of products developers need most. They can then use this insight to build new products that address those needs. This should make Twilio's platform increasingly valuable over time, reinforcing its benefits to developers while driving strong customer and revenue growth.
Twilio Flex is just the beginning
By 2023, management estimates Twilio's total addressable market will reach $87 billion. This means Twilio Flex is only a small part of the big picture. Still, Flex demonstrates Twilio's ability to help businesses effectively engage with their customers. For instance, Twilio Flex can be integrated with products from companies like Salesforce and Zendesk, which allows contact center agents to access relevant customer information, such as previous communications or order history. This simplifies the process for agents and improves the experience for customers.
Who are Twilio's competitors?
Twilio faces competition from other Communications Platform-as-a-Service (CPaaS) providers like Bandwidth (BAND 3.54%) and Agora (API 1.63%), though both of these companies generate far less revenue and recognize far fewer customers than Twilio. More recently, Microsoft (MSFT 1.65%) announced its entry into the market with Azure Communication Services. For the most part, these competitors offer similar products to Twilio, though Microsoft's vast customer base makes it the most worrisome rival. Microsoft put Slack in a tough spot when it bundled its competing offering Teams with Microsoft 365; it could theoretically do something similar with Azure Communications Services.
However, Microsoft has not announced a purpose-built contact center solution like Twilio Flex, nor has Bandwidth or Agora. This, along with the headache of switching CPaaS providers, helps create the high switching costs that fortify Twilio's business. Supporting this idea, Twilio's dollar-based net expansion rate was 137% last quarter for its business as a whole, meaning the average customer spent 37% more this year than they had the year before. In other words, customers are becoming more dependent on Twilio, making it increasingly costly for them to switch providers.
Additionally, Twilio's Super Network, the foundational software on which Twilio's platform is built, uses artificial intelligence to improve communications. For instance, the Super Network can measure voice quality, then route calls through whichever carrier network provides the best connection. As a result, the Super Network becomes more intelligent over time, making products like Twilio Flex more reliable and convenient for customers. This creates a network effect that further strengthens Twilio's competitive advantage.
Even so, investors should pay attention to Twilio's customer growth. In order to reach profitability, its business must continue to scale. If customer growth or dollar-based net expansion should start to decelerate sharply, this could be a sign that Twilio is losing ground to competitors. But Twilio's strong relationship with its developer community is a key advantage; if Twilio can continue to build on this strategy, that should help it stay ahead of the competition.
