Twilio’s (TWLO) recent results suggest a business that is thriving in the pandemic era. The company’s Q1 result was nothing short of stunning, with Q1 revenue growth up to 57% year over year. While it was a little surprising that Twilio withdrew its full-year 2020 outlook in spite of such a dominant performance, investors in the business shouldn’t be concerned. The company’s business is arguably in better shape and more dominant than it was at the start of the pandemic.

Source: Twilio Q1 Report 2020

The New Operating System for The Digital Economy

There are many elements that go into making a digital experience. These include the user interface, website or application design and navigation and checkout functionality. However, it’s the APIs (Application Programming Interfaces) that Twilio’s provides that bring digital experiences to life.

The company’s voice, text, video, email and chat APIs make the difference in a digital experience static, versus one that is dynamic and interactive. Twilio’s solutions provide the intelligence, plumbing and functionality to help enterprises know when to bridge between the digital and physical worlds to bring in additional resources to help customers navigate a company’s digital experience.

Source: Twilio.com

Solves a major pain point for developers in creating digital experiences

In any investment that I assess, I like to understand the pain point that a business is solving for. Specifically, how big it is and what the alternatives are.

Twilio greatly accelerates the time that it takes for developers to digitize their solutions. The company’s core plumbing communication APIs lead to less time and effort on the part of developers to code and program core communications capabilities into their applications. Developers can simply integrate Twilio’s prebuilt code to enable these functions.

Twilio also abstracts the need for companies to work directly with wireless carriers to procure these functions at favorable rates and lessens the burden on carriers to negotiate individual deals with companies to be able to access communications functionality. That means developers can focus on their core application functionality and provide the best user experience.

Enables “Smart digitization” in a pandemic era

Enterprises far and wide are realizing that they need a more effective means of engaging with customers in an environment where physical interactions have come to a virtual standstill. The need to remain relevant is forcing legacy businesses to innovate the customer experience model to facilitate service interaction. However, for many legacy businesses, their digitization efforts have had to be manufactured on the fly. This creates the potential risk of botched digital experiences and customer confusion.

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Twilio provides an especially valuable signaling role for legacy businesses about the efficacy of their digital experience, allowing them to quickly course correct if a high volume of agent-assisted interaction is required in navigating a digital experience. This provides enterprises with the ability to pivot to a scalable sales motion, without the risk of a poor implementation leading to lost sales as they navigate a “new normal”.

Has That Intangible Element of “Customer Love”

Twilio has found very broad adoption across a range of verticals, use cases and customer types, giving credence to my view that it is the new operating system for the digital economy. Customers include major internet scale providers Airbnb (AIRB), Box (BOX), Twitter (TWTR), Salesforce (CRM) and Yelp (YELP). Its customers keep consuming more Twilio services each year, evidence of customer love for the company, with Twilio’s Dollar-Based Net Expansion consistently at levels around 140%, towards the top end of expansion rates across all SaaS players.

Source: Twilio Q1 2020 Earnings report

Powering a range of new secular growth initiatives

Twilio is not only helping legacy businesses who now have a sudden urgency to undertake digital transformation move forward, it is also riding the coattails of a variety of disruptors who are changing the way that services are delivered. New services have exploded as consumers in lockdown have taken to Instacart (ICART) and DoorDash (DOORD) to enjoy online grocery and online food delivery. There’s a high likelihood that these trends will continue for the long term and that Twilio will be a major beneficiary as the business that’s powering these experiences.

Twilio has its fingers in several digital health plays. The business powers the video-enabled Dr. On Demand telehealth service. The business also recently scored up a win from Epic Systems. Epic Systems provides health records for almost 250 million people and is leveraging Twilio’s programmable video service to allow health providers to have virtual video visits with patients.

The surge in online commerce has benefited businesses like Shopify (SHOP) and MercadoLibre (MELI), and is likely to lead to a permanent step function increasing demand. Twilio powers the Shopify customer support experience through its Flex programmable contact center product, as well as enabling seller and merchant support for MercadoLibre by way of Twilio Voice.

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The interesting thing as far as Twilio’s future growth is that the secular initiatives which largely accounted for the company’s dominant Q2 revenue growth are likely to result in permanent increases in demand for the business. Legacy customers now looking to also digitize physical experiences will power a new wave of growth for the business.

Developer ecosystem and programmability a major competitive advantage

One of the understated elements of Twilio’s market positioning is the company’s robust access to a large and extensive developer ecosystem of over 5 million developers, and an extremely programmable, easy-to-use solution. This is a significant competitive advantage that Twilio has over others, because it means that the company has access to a constant pool of innovation and the core ingredients to enable completely customizable, new use cases which can be implemented rapidly.

This is something that shines during times of crisis. Recent examples of this are Comcast’s (CMCSA) innovative approach to reimagine the technician service delivery experience. Comcast integrated Twilio voice and video into its application experience to enable customers to show technicians their communication set-up and allow a technician to actually guide the customer through issue resolution via video. The city of Pittsburg was also able to move their emergency call center operators to work at home, using Twilio Flex in just 4 days.

Having access to such an extensive developer community allows Twilio to harness a large external talent pool to deliver innovative experiences on the platform and novel ways to solve new problems, which, in turn, get more broadly adopted and become best-of-breed as far as best practices to solve industry challenges go. This, in turn, facilitates additional enterprise usage of the platform and further developers into the ecosystem. It’s a virtuous cycle that feeds off itself. While other competitors and API offerings exist, they lack the flexibility and programmability of a Twilio solution.

Carrier dependency and customer DIY attitude the major weakness

Twilio’s relationship with the wireless carriers is a double-edged sword for the business. On the one hand, the carriers deliver Twilio critical inputs that allow it to deliver transformative digitization for its customers. The company gets the advantage of the use of such carrier infrastructure and billions of dollars in capex investment without the inherent network and capital costs of having to maintain and run it.

Conversely, this exposes to Twilio to a high dependency on carriers in pricing negotiations and new API availability. The company is partly reducing such dependencies through its own higher-margin products, such as Twilio’s Flex contact center product.

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While the carriers largely lack the developer ecosystem and distribution capabilities to productize a competitive offering, their dominant influence as an input into Twilio’s business model always raises the uncertainty of competitive pressure on margins. Smaller, less sophisticated API providers always represent a threat in displacement of lower-value customers. However, their relative lack of global reach, developer-friendliness and inability to customize mean that they’re not a material threat to Twilio’s core higher-revenue customers.

The company also has the slight risk of very sophisticated customers wanting to “do it themselves” and recreate some of the core communications programming. Uber (UBER) was an example of this a few years ago. Generally, unless such functionality is core to the value proposition of a business, this risk is relatively minimal. However, where it does occur, it has the potential to impact Twilio’s higher-revenue generating customers.

Valuation and Outlook

Twilio’s valuation multiples, like many high-growth stocks, are at all-time highs, near 27x trailing sales. What needs to be kept in mind, though, is that there is likely to be permanent demand uplift that accrues to Twilio’s business, which should see higher revenue growth for an extended period of time as secular growth use cases like multifactor authentication, e-commerce support and on-demand healthcare expand and legacy businesses digitize. Twilio’s Q2 results will provide additional insight into this. I remain long-term bullish on the business, though periodic volatility may provide better points to enter.

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Disclosure: I am/we are long TWLO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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