(Bloomberg) — Twilio Inc. addressed Wall Street’s concerns about its lack of profitability, removing a key shadow as it ramps up competition with Salesforce.com Inc. and Adobe Inc.
An announcement on Wednesday that it would make money on an operating basis beginning next year, combined with a bullish sales forecast and fourth-quarter revenue that topped analysts’ estimates, sent shares up as much as 16% intraday Thursday in New York. Twilio gave back most of those gains in the broader market decline, and closed up 1.9% at $205.91.
Chief Executive Officer Jeff Lawson has taken Twilio from the dominant provider of business-to-consumer communications tools, powering messages such as the Uber notification you receive after ordering a ride, into an estimated $79 billion market for software to help optimize customer experiences. With a slate of acquisitions to help supplement Twilio’s existing technology, Lawson is positioning the company to compete against powerful rivals like Adobe and Salesforce. But bolstering the bottom line continues to be an issue for investors.
In 2023, however, Twilio said it expects to begin “delivering non-GAAP operating profitability,” signaling it will continue to thrive without the pandemic boom that helped accelerate sales at many software vendors. Of note, though, that outlook excludes the impact of any future acquisitions.
“It’s an active decision that we’ve made historically to invest rather than drop to the bottom line,” Lawson said in an interview. “Now at the scale that we are at — run rate over $3 billion, growing at the rate that we are — it is a good time to start focusing on long-term profitability.”
Alongside the path to profitability, the company also said Wednesday that it expects “organic revenue” — sales excluding any revenue from acquisitions — to continue to grow at 30% or more for the next three years.
“This is a tremendous number,” said Lawson. Look for “another company at the revenue scale that we are at in the software industry. You would be hard pressed to find one.”
What Bloomberg Intelligence Says:
“Sustained momentum in Twilio’s core business on higher usage and upsell at current customers, along with a still substantial opportunity for new logo wins, could back gains of more than 30% in 2022.” — Matthew Martino and Amine Bensaid, BI technology and media analysts
Click here to read the research
Still, there are some metrics that may worry investors. Organic growth has been on a roller coaster. It increased 39%, on an adjusted basis, in the fourth quarter, roughly in line with the prior quarter, but still well below the high of 54% at the end of 2020. And in the current quarter, Twilio expects organic growth of as much as 34% year-over-year.
“At the scale of our revenue, these are fantastic growth rates,” Lawson countered. “We don’t have anything to apologize for.”
Fourth-quarter revenue jumped 54% to $842.7 million, compared with analysts’ average estimate of $768.6 million. Sales will be as much as $865 million in the period ending in March, the company said.
Wall Street analysts remain bullish on Twilio’s future. Much of that optimism is centered on Segment, the customer data platform provider that Twilio purchased in 2020 for $3.2 billion. It was the company’s biggest acquisition to date and the most-watched by investors.
The addition of Segment is expected to enhance the bulk of Twilio’s product portfolio. It effectively functions as a repository of continually updated first-party customer information that businesses can use to improve marketing and support, with the ultimate goal of driving increased loyalty and higher sales. For example, it acts as the connective tissue between scanning the website of your favorite department store for a new shirt and the marketing message you receive soon after that advertises a sale on it.
The timing of the deal was opportune, given Apple Inc.’s stricter data privacy restrictions and Google’s adjustment of how it uses web-tracking software. At the same time, the acquisition of Segment plunged Twilio deeper into competition with larger vendors like Salesforce and Adobe. A key difference between Twilio and its rivals is the ability for developers within businesses to more easily build customized programs on top of the company’s base tools.
“How do you differentiate yourself in the eyes of your customer and build a customer experience that is different from your competitors? That is an area that companies have to build or customers will walk,” Lawson said.
There are also smaller headwinds facing Twilio that could undermine growth or force a revamp of operations. For example, its continued expansion overseas will be a costly one, analysts say, given the higher price for text messages in regions like the European Union.
Some investors remain skittish over the tight relationship between Twilio and Amazon.com Inc. Twilio runs predominantly on Amazon Web Services. And Rick Dalzell, a close confidant of Amazon Chairman Jeff Bezos, sits on Twilio’s board of directors. In the past, that partnership wasn’t much of an issue. But AWS is gradually becoming more of a direct competitor to Twilio with products like call center software Connect. Lawson, however, sees no need to distance itself from the e-commerce giant.
“Everyone in technology is friends, partners and competitors,” said Lawson. “That’s just the nature of the technology universe. I don’t think about it.”
(Updates with closing share price in the second paragraph.)
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