Shares of Twilio (TWLO 22.54%) were rallying on Friday, up 22.4% as of 12:43 p.m. ET.
The communications platform-as-a-service company held its 2025 Investor Day yesterday, outlining new product innovations while also giving medium-term financial targets. Analysts and investors apparently liked what they heard.
Before the spike in interest rates in 2022-2023, Twilio generated massive generally accepted accounting principles (GAAP) losses as it paid employees handsomely in the form of stock-based compensation (SBC). A number of acquisitions, paid for in stock, also diluted shareholders.
However, as revenue growth slowed, Twilio understood it needed to pivot. In yesterday's presentation, there was a big focus on profitability. Management forecast double-digit revenue growth through 2027, with adjusted operating margins expanding from 16% in 2024 to 21%-22% by 2027. Management also forecast dilution from SBC below 3% by that time.
Furthermore, management noted if revenue growth slows relative to its model, the company can cut growth spending so margins continue to expand. Management sees cumulative free cash flow of $3 billion from 2025 to 2027, relative to the $650 million to $675 million it expects in 2024. Management also intends to return at least 50% of that cash flow to shareholders through share repurchases, authorizing a new $2 billion repurchase program.
And of course, no Investor Day would be complete without a mention of artificial intelligence (AI). Twilio noted 90% of the Fortune 50 AI start-ups use Twilio for their communications platform, with Twilio having generated $260 million in revenue from these start-ups to date. OpenAI also uses Twilio, with Twilio currently enabling access to ChatGPT through text and voice.
Twilio's market cap has leapt to $21.2 billion as of this writing, which is still not too demanding of a valuation relative to the $1 billion-plus free cash flow it envisions in 2027. While stock-based compensation will eat into that, management aims for less than $500 million in 2025 equity grants, down significantly from the $1.9 billion figure in 2022.
While Twilio isn't growing as fast as it has in the past, its pivot to focus on profits and free cash flow over the coming years is a welcome sign.
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