Twilio (NYSE:TWLO) announces Q3 2019 results Oct. 30 after the markets close. With an average positive surprise of 163% over the past four quarters, Twilio stock could use another positive surprise after losing 24% since the end of July.
First, let’s get the analyst expectations out of the way.
In Q3 2019, analysts expect non-GAAP earnings of $0.01 from $287.6 million in revenue. The company expects non-GAAP earnings of 1-2 cents from $287.5 million in revenue at the midpoint of its guidance.
Compared to last year’s third quarter, analysts expect the communications platform as a service (CPaaS) company to grow sales by 70% thanks to a big contribution from SendGrid, the email specialist it acquired in February for $3 billion.
Q2 2019 was the first full quarter with SendGrid’s results included in Twilio’s earnings. It managed to grow revenues by 28% during the quarter to $46 million or 17% of Twilio’s overall sales.
A Closer Look at Twilio Stock
As a result of its acquisition, CFO Khozema Shipchandler said in Twilio’s second-quarter conference call that the company’s gross margins should be in the mid-to-high 50s for the foreseeable future, which is very good news for those who would like to see it deliver GAAP profitability in the near future.
In the second quarter, it lost $94.6 million on a GAAP basis, up from $24.0 million in Q2 2018.
As I mentioned at the top, Twilio’s averaged a positive earnings surprise of 163% over the past four quarters. However, it’s important to note that’s based on a 400% surprise in Q1 2019 (actual earnings of five cents versus a one-cent estimate) and a 250% surprise in Q3 2018 (actual earnings of seven cents versus a two-cent estimate).
If Twilio keeps up the pattern of a big surprise and then no surprise, investors could be in for a very good showing when it announces this week. That’s very good news for Twilio stock.
What Could Go Wrong?
I don’t think there’s anything earth-shattering that could implode Twilio stock.
However, as it continues to expand its international footprint, expenses related to headcount will be higher, which could have the effect of increasing GAAP losses compared to Q3 2018 and Q2 2019.
Two things to keep an eye on when Twilio reports are the number of active customer accounts and the dollar-based net expansion rate.
Thanks in part to the SendGrid acquisition, Twilio’s active customer accounts in the second quarter increased by 182% to 161,869 from 57,350 a year earlier. The top 10 accounts accounted for 13% of its revenue in the quarter, down from 14% a year earlier, and 17% in Q2 2017.
Owners of TWLO stock will want to see the total accounts much higher and the influence of the top 10 accounts lower.
As for the dollar-based net expansion rate (defined as the revenue from active customer accounts excluding variable customer accounts in Q2 2019 to the same group in Q2 2018) it was 140% in the second quarter, 146% in the first quarter, and 147% in Q4 2018.
The company expects that the dollar-based net expansion rate will continue to slow as Twilio gets larger. It’s a natural progression. I wouldn’t read into any number that’s released on October 30.
The Bottom Line on Twilio Stock
I’ve been following Twilio for more than two years. I’ve continued to like how management’s building its business. The SendGrid acquisition filled a big hole, and I expect that it will be profitable on a GAAP basis before not too long.
Unless something unforeseen is brought to light on Oct. 30, I expect earnings will be a good news story for its shareholders.
If you don’t own TWLO stock but you like it, I’d buy before earnings. If you own it, I’d continue to hold. It’s a great stock.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
