Despite Rally, Twilio Attractive
The platform-as-a-service firm continues to diminish its customer concentration risk, and we're raising our fair value estimate to $37 per share.
Twilio (TWLO) reported fourth-quarter results that were ahead of our expectations, as the firm enjoyed strong customer expansion and a more-muted impact from customer concentration. In particular, management noted that revenue from Uber is now small enough that fluctuations in Uber-specific revenue will not have a material impact on results moving forward. We are encouraged that Twilio continues to diminish its customer concentration risk, as revenue from top 10 accounts fell to 17% in the fourth quarter, down from 29% in the year-ago quarter. We maintain our no-moat rating, but we continue to see signs of increasing customer switching costs as Twilio pushes deeper into existing customer accounts, supporting our positive trend rating. After rolling our model forward, incorporating faster revenue growth, and lowering our long-term tax rate, we are raising our fair value estimate to $37 per share, up from $33 previously. Shares are rallying roughly 7% on the back of these results, but we still see more than 30% upside to our new fair value estimate.
Fourth-quarter revenue rose 41% versus the prior-year period to $115 million, roughly 10% ahead of our estimate and management’s prior guidance. The outperformance was tied to a number of large deals signed into the quarter, including deals with Domino’s Pizza and a Fortune 100 retailer, while the revenue decline from Uber was more muted in the quarter. Revenue from Uber and WhatsApp totaled just 12% of sales in the quarter, down from well over 30% at its peak. We believe this is a substantial development when compared with the growth Twilio was able to generate in 2017, and fourth-quarter base revenue rose 62% ex-Uber (up 40% inclusive of Uber). Most importantly, Twilio’s account expansion rate ex-Uber reached 136% in the quarter, signaling that customers are beginning to adopt Twilio’s cPaaS technology holistically to mitigate call center overload and reach customers via new channels.
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Rodney Nelson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.