Twilio (TWLO)

Customer engagement platform Twilio (NYSE:TWLO) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 14.7% year on year to $1.3 billion. Guidance for next quarter’s revenue was optimistic at $1.32 billion at the midpoint, 2.3% above analysts’ estimates. Its non-GAAP profit of $1.25 per share was 17% 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 performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Twilio’s sales grew at a solid 25.9% compounded annual growth rate over the last five years. Its growth beat the average software company and shows its offerings resonate with customers.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Twilio’s recent performance shows its demand has slowed as its annualized revenue growth of 9.2% over the last two years was below its five-year trend.

This quarter, Twilio reported year-on-year revenue growth of 14.7%, and its $1.3 billion of revenue exceeded Wall Street’s estimates by 3.8%. Company management is currently guiding for a 10.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.7% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Twilio’s billings came in at $1.31 billion in Q3, and over the last four quarters, its growth slightly lagged the sector as it averaged 13.5% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in acquiring/retaining customers.

Twilio reported 392,000 customers at the end of the quarter, a sequential increase of 43,000. That’s quite a bit better than last quarter and quite a bit above the typical growth we’ve seen over the previous year. Shareholders should take this as an indication that Twilio has made some recent improvements to its go-to-market strategy and that they are working well for the time being.

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 sales cycles stem from its strong brand reputation and self-serve model, where it can onboard many small customers with little to no oversight. These dynamics give Twilio more resources to pursue new product initiatives.

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 Q3. This means Twilio would’ve grown its revenue by 7.5% even if it didn’t win any new customers over the last 12 months.

Trending up over the last year, 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 49.4% gross margin over the last year. Said differently, Twilio had to pay a chunky $50.61 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 improve by 0.8 percentage points over the last 2 year, which is slightly better than average for software.

In Q3, Twilio produced a 48.6% gross profit margin, down 2.5 percentage points year on year. Twilio’s full-year margin has also been trending down over the past 12 months, decreasing by 1.6 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 2.3%, higher than the broader software sector.

Looking at the trend in its profitability, Twilio’s operating margin rose by 12.2 percentage points over the last two years, as its sales growth gave it operating leverage.

In Q3, Twilio generated an operating margin profit margin of 3.1%, up 3.6 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.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and 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 16% over the last year, slightly better than the broader software sector.

Twilio’s free cash flow clocked in at $247.5 million in Q3, equivalent to a 19% margin. This result was good as its margin was 2.4 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Twilio’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 16% for the last 12 months will increase to 18.8%, it options for capital deployment (investments, share buybacks, etc.).

Companies with more cash than debt have lower bankruptcy risk.

Twilio is a profitable, well-capitalized company with $2.46 billion of cash and $1.09 billion of debt on its balance sheet. This $1.36 billion net cash position is 6.6% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Twilio’s strong growth in customers this quarter. We were also glad its EPS guidance for next quarter exceeded Wall Street’s estimates. Zooming out, we think this was a solid print. The stock traded up 4.6% to $118.10 immediately after reporting.

Updated: December 4, 2025 at 9:11 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’s business quality ultimately falls short of our standards. Although its revenue growth was strong 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 customers generally do not adopt its complementary products.

Twilio’s price-to-sales ratio based on the next 12 months is 3.8x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $138.04 on the company (compared to the current share price of $125.18).