Story Stocks^®

Twilio (TWLO +23%) is making a huge move following a bullish Investor Day presentation last night. It offered slight upside guidance for Q4 revs, but more importantly, it offered some bullish longer term guidance on margins and free cash flow. TWLO develops APIs that are used by its customers to plug communication abilities (phone calls, text messaging via SMS, video etc.) into their apps. When you are communicating with you Uber driver, you are using Twilio.

• Twilio explained that it was founded back in 2008 and the original kernel was Voice API. It took a voice capability and democratized it for every single developer to be able to use software, to be able to place a call. However, Twilio has grown a lot since then and has made many innovations. TWLO said its innovation velocity has really sped up in recent years. In the last year alone, it has launched 251 unique SKUs, and expects to do even better in 2025.
• The basic point is that the Twilio flywheel is spinning, both for developers as well as for enterprises. And it's starting to include increasingly higher margin software products that are additive to its communication stack and that will ultimately be used to fulfill on this vision of communications, plus contextual data, plus AI.
• Twilio has been struggling a bit in recent years, which caused some activist investors to push management to refocus priorities and operate more efficiently. A few years ago, TWLO was posting huge yr/yr revenue growth, but that slowed to low-to-mid single digits in recent quarters. TWLO got back to near double-digit growth in Q3 after stabilizing the revenue line over a few quarters after it had fallen for a few quarters. For Q4, TWLO guided to +11% growth last night, so that was good to see.
• TWLO talked a lot on the call about providing more AI-driven capabilities like traffic intelligence on top of its trusted, simple and smart platform. TWLO is using AI to make every customer engagement better and to help customers be more productive. TWLO has AI helpers for developers to help them write code and implement the APIs faster.
• In terms of guidance, what stood out was TWLO saying it expects non-GAAP operating margin in the 21-22% range over the next few years. In Q3, it was 16.1%, so that is a sizable move higher and will flow nicely to the EPS line. TWLO also said it expects $3+ bln plus of cumulative free cash flow between now and 2027. It has guided to FY24 FCF of $650-675 mln, so that is a big jump in the 2025-27 range.

Overall, it was a bullish Investor Day presentation for Twilio. After some struggles in recent years, the company seems to be turning a corner. Management offered some pretty substantial guidance both in terms of margins and FCF for the next few years. That was music to investors' ears following some struggles in recent years. And finally, with its communications base, we see AI as a natural fit to expand its capabilities and TWLO sounds like it's full steam ahead in that regard.