Twilio’s share price jumped in after hours trading yesterday as the data and communications platform vendor not only beat its guidance for Q3 2023, but also raised its full year non-GAAP income from operations guidance. However, most of the company’s revenues are currently coming from the vendor’s communications side of the business – and it is focused on driving growth in its data platform, to ensure it can achieve its AI ambitions.
CEO Jeff Lawson recently outlined the company’s ‘Act Two’, which is focused on AI, particularly generative AI, and is being layered across the platform “at every customer touch point”. Twilio’s Segment product is key to this, which is a customer profiling and data platform, and sits within the vendor’s data and applications business.
However, whilst central to Twilio’s AI ambitions, the vendor’s data and applications business only accounted for 12% of its business in Q3 (albeit, up 9% year-over-year, standing at $127 million in revenue for the quarter). Meanwhile Twilio’s Communications business, which provides APIs for SMS, voice, email, chat and WhatsApp, accounts for 88% of revenue.
This didn’t deter investors, however, from looking favorably upon the results, given that Twilio beat estimates for Q3. The key figures for the quarter include:
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Third Quarter Revenue of $1.03 billion, up 5% year-over-year
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Third Quarter GAAP Loss from Operations of $109 million, a 76% improvement year-over-year
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Third Quarter Non-GAAP Income from Operations of $136 million; raised full year guidance to $475 to $485 million
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More than 306,000 Active Customer Accounts as of September 30, 2023 compared to more than 280,000 Active Customer Accounts as of September 30, 2022.
On the overall performance, Lawson said:
As you can see, the efficiency gains are rapidly showing in our quarterly results, reflecting the fundamental strength of our Communications business, which represented 88% of our revenue in Q3.
We expect these efforts to drive durable, efficient growth in our Communications business moving forward. But the real story is how, over time, we believe we can continue to grow the top line of our Communications business while controlling costs. With our more streamlined cost structure and continued innovation, we’re proving every day that this business can be a powerful driver of profit and cash flow for Twilio
Data and applications
However, Lawson spent time talking through the company’s strategy for its data and applications business, given Twilio’s focus on AI. The company has been rebuilding its go-to-market function for the business and Lawson said that whilst Twilio is focused on “driving improvements”, it has seen some initial “green shoots” and a “modest uptick in bookings in the third quarter”. But Lawson’s tone was cautious. He said:
Those are not yet where we want them to be. While this is a very small portion of our business today, only 12% of our revenue in Q3, we believe TD&A (Twilio Data and Applications) overall and the foundations of AI in particular are key assets for our future.
We are committed to success in this business as we work to reaccelerate growth, drive further progress on our go-to-market scaling efforts and undertake investments to take advantage of the significant AI opportunity.
And while we’ve seen some initial encouraging signals from our go-to-market rebuild efforts, we need to translate early proof points to further bookings reacceleration. This business deserves to grow faster and has all the ingredients to do so. I believe that reconstituting our old go-to-market playbook was necessary but not enough. We have to continue to evolve it as well, given a rapidly changing market.
And this AI opportunity is being focused around what customers see demanding of Twilio. Lawson said that buyers know that AI will rewire the core of their companies and that their workforce will need to change, particularly in terms of the skills required to deliver that change. He added that their need for data to power their AI ambitions will grow, which Twilio hopes will be aided by its Segment product. Lawson said:
Segment’s capabilities are foundational to CustomerAI. We’ve already announced the general availability of our first TD&A CustomerAI product, Predictions, which allows customers to create hyper-targeted audiences based on predictive traits like lifetime value, likelihood to churn or the propensity to take an action such as making a purchase, subscribing, et cetera.
We have more than 100 customers using predictions already and they’re quickly seeing results. One company has seen their cost of customer acquisition fall by 85% with more targeted advertising based on propensity to convert predictions.
This is the initial set of opportunities we are working with customers using Segment to get their customer data AI-ready and then activating on that data with Twilio Communications. This communications and data flywheel will empower brands to enter the AI race steps ahead of their competitors armed with the AI-ready data, the platform that will allow them to interact with customers informed by that knowledge, and enable them to glean more insights from each message, call and email interaction.
We believe this will improve their customer data sets and in doing so, help them deliver more effective, personalized customer communications.
My take
A strong quarter for Twilio – one that pleased the market. However, it’s clear that there is work to be done to ensure Twilio achieves its long-term AI ambitions. The opportunity is there, it now just needs to bring customers with them and articulate clearly by its data platforms are essential to the future of work and communication.
