Cloud communications software provider Twilio (TWLO) is set to release its third quarter fiscal 2025 earnings report after the market closes on October 30. According to projections from the Tiger Brokers app, Twilio's third-quarter revenue is expected to be $1.254 billion, marking a year-over-year growth of more than 10%, with adjusted earnings per share (EPS) anticipated at $1.08, growing by over 6% year-over-year.
Previous Quarter Review
In the second quarter of fiscal 2025, Twilio reported revenue of $1.2284 billion (a 13.5% increase year-over-year), a non-GAAP gross margin of 52.4% (up 1.2 percentage points year-over-year), a non-GAAP net margin of 5.5% (up 1.8 percentage points year-over-year), and an adjusted EPS of $0.84 (approximately a 17% increase year-over-year). Management continued its “profit quality first” strategy and provided guidance ranges for Q3 revenue and EPS, which the market interprets as moderate growth with steady profitability improvement. By business segment, communication-related revenue was the main contributor, at $1.153 billion (14.5% year-over-year increase), while “Market/Data and Applications” revenue was approximately $75 million (up about 0.4% year-over-year), demonstrating relative stability. The core communication product line sees a faster transition of cost changes to profits, whereas the data and application businesses are expected to provide stronger structural gross margin support post-product integration.
Current Quarter Outlook
Gross Margin Resilience: Dual Support from International SMS Costs and Channel Optimization
Recent previews by various media outlets and institutions have noted a periodical decline in international SMS costs, coupled with channel structure optimization, leading to gross margin recovery. The upward movement of the non-GAAP gross margin to 52.4% in the second quarter reflects this trend. If costs continue to moderately improve into the third quarter, the communications product line may contribute to steady profit increases even under a "stable volume and slightly strong pricing" scenario. With consensus expectations setting the non-GAAP gross margin at around 52.3% and non-GAAP net margin at approximately 5.5%, market attention focuses more on the sustainability and fluctuation range of gross margins rather than single-quarter revenue elasticity. Any renewed international rate volatility poses potential challenges to margin flexibility, hence the company's management of channels and pricing will directly impact third-quarter profit performance. Short-term, should the decline in SMS costs and channel optimization persist, the probability of maintaining the gross margin in the low 50% range is higher, offering EPS a chance to release elasticity even under low growth rates.
Product Mix Upgrade: Mail and Data-Driven Products Enhance Profit Structure
Previews emphasize that high gross margin products (such as mail, customer data platforms, and marketing applications) have a more significant marginal effect on profit margins and cash flow. Since the second quarter, the company has simultaneously focused on expense rate control and improvements in product mix, creating a “low growth, strong profitability” profile. It should be noted that "Market/Data and Applications" revenue in the second quarter was around $75 million, slightly increasing year-over-year but not yet showing clear signs of a growth restart. Most analysts believe that the growth in this segment relies more heavily on large customer capacity expansion, cross-channel bundled sales, and the efficiency of function integration. When large customers simultaneously upgrade usage and payment levels in mail, CDP, and marketing automation, gross margin improvements will more smoothly transmit to EPS and free cash flow. Three frequently tracked indicators for the third quarter include: changes in the proportion of high-margin products in new/expansion orders; whether the expansion pace of top-tier clients improves; and whether cross-channel reach capabilities continue to strengthen. If all three indicators improve in tandem, margin elasticity will expand, and the market's pricing of profit quality is likely to rise.
Operational Efficiency: “Resonance” Effect of Expense Rate and Cash Flow
The second-quarter improvements in net margin and EPS were driven by the simultaneous optimization of gross and expense margins, with third-quarter consensus forecasts expecting this trend to continue. Institutions generally emphasize "manageable expense rates and stable gross margin growth" as core valuation drivers, as they directly improve free cash flow and create room for distributable capital, thus enhancing volatility resistance and flexibility in capital returns. If third-quarter disclosures reveal that selling and management expenses stabilize or decrease while maintaining high-quality revenue structures, the market's certainty regarding medium-term profit paths will strengthen. On the other hand, short-term stock price volatility may increase if periodic cost increases arise from product investment cycles or new channel expansions. Based on the company’s Q3 guidance and current consensus, market pricing leans towards a scenario where “margin improvement can be realized,” and if the release centers around channel optimization, high-margin product penetration, and customer quality enhancement, providing specific quantitative metrics could trigger slight upward revisions to subsequent quarter EPS expectations.
Customer Structure and Demand-Side: Points of Verification for Large Customer Expansion and Cross-Selling
A key operational focus in recent quarters has been enhancing cross-selling and product stickiness with major clients, particularly in coordination with mail, CDP, marketing automation, and contact center solutions. This quarter's focal points include whether high-quality new or expanded major client contracts appear, and whether more reusable solutions are formed in cross-channel reach, personalized marketing, and data governance scenarios. A preference for more comprehensive solutions among large clients aids in increasing contract value and lifecycle revenue, enhancing revenue predictability and cash flow stability. An increase in the bundling rate of mail and data products will accelerate the transition of product mixes from "traffic-oriented" to "data/application-oriented," thereby solidifying overall gross margins and pricing power. Correspondingly, the market’s tolerance for revenue growth improves, anchored primarily in profits and cash flow as validation, confirming the operating framework of “achieving high-quality profitability with low growth.”
Pricing and Rate Volatility: Risk Management and Elastic Hedging
Rate fluctuations and price elasticity in communication scenarios significantly perturb the revenue side. Experiences from past quarters indicate that channel optimization, compliance, and routing management can mitigate the impact of rate volatility on margins. The third quarter will still require attention to regional rate changes, compliance requirements adjustments, and strategies shifts by major channel partners. If the company can continue managing international SMS costs and high-margin product penetration along both pathways, it could hedge against cyclical fluctuations via structural improvements. Control over pricing authority is also reflected in delivering differentiated product values, for example, in capabilities for identity verification, anti-fraud, accessibility optimization, and data governance, forming a “measurable effectiveness” competitive advantage in key vertical scenarios that enhance negotiating space and stabilize the profit center.
Cash Flow and Capital Allocation: Verification of Sustainability
The market has a high level of focus on the sustainability of third-quarter cash flow. Profit margin improvements and expense rate controls are prerequisites to boosting free cash flow, yet the stability of cash flow also depends on the quality of receivables, contract structures, and payment cycles. If, in the third quarter, the company continues securing cash recovery with stringent credit and risk control policies, and improves operating cash conversion rates with a higher proportion of high-margin products, capital return potential will be more resilient. Meanwhile, capital allocation mainly focuses on balancing core and buyback policies; the clearer the profit path, the stronger the sustainability and flexibility of buybacks. Investors will also track management’s latest statements regarding capital expenditures and potential mergers/acquisition integration rhythm in the earnings call to assess medium-term capital efficiency.
Analyst Opinions
Regarding third-quarter outlook and rating updates, positive views dominate. Several institutions slightly raised target prices or maintained an overweight/buy rating following the second-quarter results, largely based on the clear improvement in gross margin trajectories, controlled expense rates, and enhanced stability in profitability and cash flow. Some maintain neutral positions, citing that growth in the data and application segment remains moderate, requiring clearer recovery signals. Mainstream viewpoints focus on:
If international SMS rates continue to fall and channel structure optimization persists, a slight outperformance of non-GAAP gross margins is possible, with EPS elasticity more visible; this quarter's profit quality is expected to continue improving.
Based on the "better-than-expected" second quarter, the third quarter is likely to slightly exceed consensus expectations, focusing on whether high-margin product penetration and expense rate control can release further operational leverage.
Numerous institutions maintaining a buy/overweight rating believe the company's “profit-first” strategy is clear, with cash flow and buyback continuity supporting valuations; even if revenue maintains low single-digit growth, as long as gross margins continue rising, EPS and free cash flow can still underpin the stock price center. Simultaneously, some research reports indicate two uncertainties: growth acceleration in the data and application segment remains unmaterialized, limiting short-term impact on growth rate, and if international rates rise periodically or product investments cycle up, short-term profits may be pressured. Overall, analysts remain cautiously optimistic about third-quarter profit quality and cash flow resilience.
Conclusion
The main theme for the third quarter is “low growth, strong profitability.” The market consensus aligns with the company guidance, with a key focus on whether gross margin resilience and expense rate management can continue to work in tandem. International SMS costs and channel optimization have set the lower boundary for gross margins, while high-margin product penetration dictates whether profit structures can be further optimized. As long as the share of high-margin products in new and expansion orders continues to rise, coupled with the advancement of large customer cross-selling, the certainty of EPS and free cash flow will increase. For valuation, sustainable improvement in profit margins is more impactful than revenue acceleration; once quantitative validation is provided on margins, expense rates, and cash flow in earnings and management statements, market confidence in subsequent quarterly profit paths will strengthen further.
This content is generated based on tiger AI data and is for reference only.