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Not only did the two companies outperform their Q3 targets, but Twilio and Bandwidth also raised their FY 2024 guidance. RCS was top of mind for both, signaling confidence in its long-term promise tempered by doubts about near-term revenue impact. Bandwidth reported $ 8 million political revenue while Twilio reported $8 million increase in revenue from political messaging. Twilio, though, seemed to shrug off the use case. Notably, Branded Calling made it into Twilio’s investor deck. Both companies kicked off the “show me the money” quarter showcasing confidence, optimism, and discipline, setting the tone for the other reports to follow.
Disclaimer: This is not stock advice. Everything about the messaging business interests me, including asset pricing. Use your judgment to invest your money.
The Good
Robust Financial Performance: Both companies delivered strong results. Bandwidth had a record quarter, while Twilio exceeded its EPS estimate by 18%. In fact, Twilio will end the year with $600 million in free cash flow and is continuing at pace on its $3 billion share repurchase program. It also reported its best dollar-based net expansion since Q1 2023.
Double-Digit Messaging Revenue Growth: Messaging as a medium has seen double-digit traffic growth for some time, but whether revenue was keeping pace was less clear. Given that 99% of Twilio’s revenue stems from communications, with messaging accounting for the majority, it’s reasonable to conclude that Twilio’s messaging revenue experienced double-digit growth as well. Bandwidth, on the other hand, was more transparent, reporting that its messaging business grew by 32% on an LTM (last twelve months) basis and 56% on a YoY basis.
RCS Is Our AI: In the last round of earnings calls, RCS barely received any attention from my cohort’s reports, apart from mentions by Sinch and LINK. This time, however, RCS took center stage. Twilio revealed that a major US airline had partnered with it to develop new use cases. It also cited a recent customer survey, showing that 75% of its customers prefer branded communications. Bandwidth called RCS a “key pillar” of its messaging strategy. To emphasize this, John Bell, Bandwidth’s chief product officer, joined the earnings call to share more about the company’s vision for RCS. We will talk about the RCS unknowns later.
Branded Calling Makes an Investor Call: I have a confession—I rejoice every time an “engine bay” topic in messaging makes it to a board deck or an investor call. Too often, innovations made in the engine room stay there, leaving the Scottys of the world grumbling about how no one appreciates the hard work needed to make it all look easy. To all the Scottys, La Forges, and Torreses of messaging: I see you, and apparently so does the world!
I digress.
It was exciting to see Branded Calling and Twilio’s recent end-to-end test included in the investor deck. Not only is this a critical cross-industry initiative with the potential to make voice calling relevant again, but it’s also a clever way to restore trust in the voice channel.
Unlike text, voice has become an exclusively emotional form of communication. We call when we have something immediate, important, or urgent to convey. For the person receiving the call, the sound of an incoming ring always triggers an emotional response. Ideally, calling a loved one generates a positive feeling, but an unknown number almost always prompts a negative reaction. Technologies like Branded Calling can rebuild trust in this medium and, in doing so, revitalize it. Instead of tensing up and screening the call, consumers may actually want to answer, thanks to the killer feature: displaying the reason for the call in the caller ID. You will not only know that Home Depot is calling but why it’s calling.
The Interesting
Heterogeneity of Use Cases: Twilio and Bandwidth both showed growth coming from a large swath of use cases. For Twilio, the pandemic-fueled crypto business is a distant memory. It found growth in ISV from self-service improvements as well as cross-sell opportunities. Bandwidth, on the other hand, found growth in e-commerce, financial services, and healthcare. Both bellwethers, therefore, showed the core criticality of messaging.
Political Texting: Thanks to the protracted and dramatic US election cycle, political texting is significant business. Twilio has intentionally stayed away from this space, while Bandwidth has taken a proactive, pragmatic approach. In fact, Bandwidth expects to earn more than $20 million this year from political texting alone. This quarter, both companies reported generating about $16 million from political texting. See my write-up on The WSJ’s coverage to understand why this remains an explosive topic.
The Return of the Product Narrative: This trend has been building over the past few quarters, but it’s refreshing to see companies discussing new products and all that they’re doing. While there’s always a bit of marketing pizazz to these narratives, at a deeper level they show where all the R&D investment is going. The CPO typically owns this spending. A few quarters ago, Sinch’s Sean O’Neal provided a strong overview of Sinch’s product strategy. This quarter, Bandwidth’s Andrew Bell took part in Bandwidth’s analyst Q&A. Perhaps Inbal Shani will join a future Twilio discussion?
The Unknown
RCS Revenue Lift: Both Twilio and Bandwidth remained non-committal about the near-term revenue lift that RCS might bring. This uncertainty reflects several factors. First, both companies have been late to the RCS party compared to LINK, Sinch, or Infobip, which already offer established international RCS products. Secondly, the near-term impact of RCS on enabling new use cases versus cannibalizing existing mediums is still unknown. Third, in the US, the most valuable RCS market still, carrier-level pricing has not yet been announced. The simple business adage still holds true: You cannot sell what you cannot price, and you cannot price if you don’t know how much it costs.
AI Revenue Attribution: The same uncertainty applies to AI. While there is widespread excitement about AI and the potential for contextual, 1:1 conversations, both companies acknowledged that revenue directly attributable to AI will not materially impact their earnings for some time.
How Will Bandwidth Explain Political Texting Next Year? As an analyst pointed out during the Bandwidth earnings call, navigating either a shortfall from the decline of political messaging or moving beyond it in 2025 will be an interesting journey for the company.
Should Twilio CDP Be Tucked Back into Communications? I’ve wrestled with this question, and I’m sure Twilio’s own operational review has too. If context drives all communications and context comes from data, wouldn’t it make sense to roll back the split and integrate CDP as part of the communications business?
A few years ago, I was a Twilio buyer when its email, Segment, and data products were still new to its lineup. I tried to get my Twilio contact to sell me all three products, but the GTM effort fell short. He was too focused on selling me messaging—something immediate and tangible—and had little interest in discussing anything long term or complex. I wonder how much of that fragmented GTM still exists and how much could be resolved by a unified, product-led approach.
Finally
In Good to Great, Jim Collins asserts that for companies to achieve greatness, they must cultivate disciplined people, disciplined thought, and disciplined action. While Bandwidth and Twilio may not yet meet Jim’s stringent criteria for a great company—such as outperforming the stock market by three times over a fifteen-year period—their performance this year demonstrates commendable operational discipline and rigor. To make Jim’s list, they just have to do it for fifty-nine more quarters.