The One Flaw In Twilio's Solid Q3

Twilio Inc TWLO reported third-quarter results Tuesday in which the company lost 8 cents per share on revenue of $100.5 million.

Wall Street analysts were expecting the company to lose 8 cents per share — but on revenue of $92.55 million. Twilio guided its fourth quarter and full-year revenue above Wall Street's expectations.

The Analyst

KeyBanc Capital Markets' Brent Bracelin.

The Rating

Bracelin maintains a Sector Weight rating on Twilio's stock with no assigned price target. (See Bracelin's track record here.)

The Thesis

Twilio reported a "solid" earnings report in which:

Revenue rose 40.6 percent year-over-year.
Base revenue (excluding Uber) rose 63 percent.
New customer revenue rose 17 percent from the prior quarter.
Total customer count rose 35.6 percent to 46,731.
Average revenue per user rose 18 percent to $8,000.

The company reported a notable client win with Microsoft Corporation MSFT for authentication and AWS for Pinpoint.

But there was one flaw in Twilio's earnings report, Bracelin said: despite "robust" demand trends, the effect foreign exchange and Uber pricing trends had on the gross margin was a surprise. Specifically, gross margin dipped from 58 percent in the prior quarter to 53 percent. Nevertheless, investors should be "encouraged" by the company's revenue trends, which are expected to "drive a growth recovery" after the first quarter of fiscal 2018, Bracelin said.