Twilio (TWLO)

Customer engagement platform Twilio (NYSE:TWLO) reported Q4 CY2025 results exceeding the market’s revenue expectations, with sales up 14.3% year on year to $1.37 billion. On top of that, next quarter’s revenue guidance ($1.34 billion at the midpoint) was surprisingly good and 3.9% above what analysts were expecting. Its non-GAAP profit of $1.33 per share was 8.2% above analysts’ consensus estimates.

Company Overview

Known for the clever "Twilio Magic" demo that had developers creating functioning communications apps in minutes, Twilio (NYSE:TWLO) provides a platform that enables businesses to communicate with their customers through voice, messaging, email, and other digital channels.

The first shift towards voice communication over the internet (VOIP), rather than traditional phone networks, happened when the enterprises started replacing business phones with the cheaper VOIP technology. Today, the rise of the consumer internet has increased the need for two way audio and video functionality in applications, driving demand for software tools and platforms that enable this utility.

Twilio competes with cloud communications providers like Vonage (owned by Ericsson), Bandwidth (NASDAQ:BAND), and Sinch, as well as customer data platform competitors including Salesforce (NYSE:CRM), Adobe (NASDAQ:ADBE), and Microsoft Dynamics (NASDAQ:MSFT). In the contact center space, it faces competition from Five9 (NASDAQ:FIVN), NICE (NASDAQ:NICE), and Genesys.

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Thankfully, Twilio’s 23.5% annualized revenue growth over the last five years was solid. Its growth beat the average software company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within software, a half-decade historical view may miss recent innovations or disruptive industry trends. Twilio’s recent performance shows its demand has slowed as its annualized revenue growth of 10.4% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.

This quarter, Twilio reported year-on-year revenue growth of 14.3%, and its $1.37 billion of revenue exceeded Wall Street’s estimates by 3.6%. Company management is currently guiding for a 14.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 7.7% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Twilio is extremely efficient at acquiring new customers, and its CAC payback period checked in at 1.1 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Twilio’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 108% in Q4. This means Twilio would’ve grown its revenue by 8% even if it didn’t win any new customers over the last 12 months.

Twilio has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.

For software companies like Twilio, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Twilio’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 48.9% gross margin over the last year. Said differently, Twilio had to pay a chunky $51.06 to its service providers for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Twilio has seen gross margins decline by 0.3 percentage points over the last 2 year, which is slightly worse than average for software.

Twilio produced a 48.5% gross profit margin in Q4 , marking a 1.8 percentage point decrease from 50.3% in the same quarter last year. Twilio’s full-year margin has also been trending down over the past 12 months, decreasing by 2.2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Twilio has done a decent job managing its cost base over the last year. The company has produced an average operating margin of 3.1%, higher than the broader software sector.

Analyzing the trend in its profitability, Twilio’s operating margin rose by 4.3 percentage points over the last two years, as its sales growth gave it operating leverage.

This quarter, Twilio generated an operating margin profit margin of 4.2%, up 3 percentage points year on year. The increase was encouraging, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Twilio has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 18.7% over the last year, slightly better than the broader software sector.

Twilio’s free cash flow clocked in at $256.1 million in Q4, equivalent to a 18.7% margin. This result was good as its margin was 10.9 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

Over the next year, analysts’ consensus estimates show they’re expecting Twilio’s free cash flow margin of 18.7% for the last 12 months to remain the same.

It was great to see Twilio’s revenue guidance for next quarter top analysts’ expectations. We were also happy its revenue outperformed Wall Street’s estimates. Overall, this print had some key positives. The market seemed to be hoping for more, and the stock traded down 1.7% to $107.17 immediately following the results.

Updated: February 12, 2026 at 9:14 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Twilio.

Twilio isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its gross margins show its business model is much less lucrative than other companies. And while the company’s efficient sales strategy allows it to target and onboard new users at scale, the downside is its expanding operating margin shows it’s becoming more efficient at building and selling its software.

Twilio’s price-to-sales ratio based on the next 12 months is 3.1x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $145.03 on the company (compared to the current share price of $108.69).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.