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Twilio - delivering the message on profitability

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

Innovation cash kings of the next decade - In our new series we look at the companies that are ‘pivoting to profit’ and are at an inflection point of converting customer-driven innovation into shareholder value. This week we take a closer look at Twilio.

This is the third article in the series, you can read the other articles here:

Shopify – the engine of ecommerce refocusing on its core

Uber's road to profitability

Airbnb: booking beds and profits


Whether you're receiving an SMS update about your food delivery status, being prompted that your Uber has arrived, getting a reminder for tomorrow's dental appointment, or being alerted to unusual banking activity, there's a good chance that Twilio – the global leader in cloud communications – is behind that text message. Its pervasive reach (over 144 billion messages delivered in 2022 alone) has redefined the way businesses communicate with customers, making Twilio the unsung hero in countless daily interactions.

You may well have engaged with Twilio’s products in other ways: the company’s range of real-time communication solutions span text, voice, video, chat, email, and more, all facilitated by Twilio’s “Super Network” of more than 1,500 global carriers that businesses plug in to it via flexible and easy-to-use APIs. All of these interactions generate huge amounts of customer data, which Twilio helps companies utilise with a range of data management products including its industry-leading customer data platform Segment, facilitating deeper insights and more personalised customer interactions. The combination of both messaging and data products differentiates Twilio from peers and, importantly, is tangibly value-additive for its business customers: improved customer engagement (via enhanced data insights and targeted interactions) helps businesses expand and unlock addressable markets, all while reducing communication costs by up to 90%.

Twilio’s scale and IP, in addition to the network effects of its “Super Network”, has allowed it to capitalise on this value generation to expand its footprint. In the last five years alone, Twilio has grown active customers nearly seven-fold while revenues have amplified almost tenfold. Profitability, meanwhile, has taken a backseat in this pursuit of growth, with the group investing aggressively to build, enhance, and acquire technologies to cement its market leadership position. However, echoing a trend increasingly common among tech peers, Twilio made a pivot last year, placing renewed emphasis on balancing growth with bottom-line performance.

Starting with the “basics”, last autumn Twilio began cutting costs, and to date has significantly reduced headcount (down 28% over the past three quarters) and sizeably curtailed stock-based compensation. These actions have led to more than $300 million in annualised cost savings – a good start, but Twilio’s management has been candid in acknowledging the need for further change. Acting with the type of agility we like to see in innovators, management opted for a broad-based operational shake-up, exiting some non-core businesses and splitting the group into two key divisions: Communications (encompassing its messaging solutions) and Data & Applications (including data-focused units such as Segment).

This operational split has enabled Twilio to take a two-pronged approach to pursue both profitability and growth. Much of its cost-reduction efforts are focused on its Communications business where, recognising its market leadership status, it is focused on more product-led growth and thus scaling back sales and marketing expenses. Meanwhile it is funnelling investment towards the Data & Applications business, where management recognises the best opportunities for growth so is aiming to speed up technological development and aggressively grow market share.

Twilio’s pivot has had an immediate impact. As of its latest Q2 2023 update, it had reduced GAAP operating losses by 50%, generated record free cash flow, and delivered its third consecutive quarter of positive (and expanding) adjusted operating income. Critically, this has not come at the expense of growth. While tough macro conditions have meant revenues have been somewhat muted in recent quarters (largely due to the usage-based model of its Communications business), Twilio is not seeing new competition nor ceding market share, active customer numbers are still growing, record-size contracts are being signed, and the customer funnel remains healthy.

Where to from here? The group is well positioned to grow in a more profitable way as its leaner Communications business recovers alongside macro sentiment. Meanwhile, focusing growth in the higher-margin Data & Applications business should enhance profitability and cash generation at the group level. Further, given that data is the lifeblood of AI, its timely operational re-focus and investment in the data business means Twilio is optimally positioned to benefit from the rise of generative AI. As outlined at its recent “Signal 2023” conference, Twilio has entered into an array of exciting partnerships with the likes of OpenAI, Google, Databricks, and AWS to support a suite of new products including CustomerAI, helping unlock further value for Twilio’s customers from its swathes of customer data. While the pace of adoption is hard to predict, it is clear Twilio remains an innovative leader that is well positioned to (profitably) capitalise on the myriad opportunities ahead.

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KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

The Funds managed by the Global Innovation Team:

May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. May have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on a Fund's value than if it held a larger number of investments. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income. The risks detailed above are reflective of the full range of Funds managed by the Global Innovation Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.

DISCLAIMER

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.

James O'Connor
James O'Connor
James is a fund manager of the Liontrust Global Innovation, Liontrust Global Dividend and Liontrust Global Technology funds. He joined the team in 2023 and is a fund manager with 9 years of industry experience, having previously worked in global equities at Neptune Investment Management and Liontrust. James holds an MSc in education research from Oxford University and the equivalent of a first class A.B. degree in psychology and economics from Harvard University and is a CFA Charterholder. He also currently plays for the England men’s national team in netball.

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