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Twilio (TWLO +4%) is twirling higher following news last night it will join the S&P MidCap 400 prior to the open on August 19. There were also a lot of 13F filings last night. Viking Global (Andreas Halvorsen) disclosed that it sold 256K share in Q2, which closed out its position in TWLO. However, investors seem to be focusing more on the S&P addition.

• This was some needed good news for Twilio after the stock gapped lower last week following its Q2 earnings report. Twilio develops APIs that are used by its customers to plug communication abilities (phone calls, text messaging via SMS, video etc.) into their apps. When you are communicating with your Uber driver, you are using Twilio.
• Twilio beat handily on Q2 EPS with more modest upside revs. However, Twilio was able to notch its third consecutive double-digit top line growth at +13.5% year/year to a record $1.23 bln. That followed five consecutive quarters of growth below 10%, so that has been good to see.
• Revenue for its much larger Communications (messaging, voice) business grew 14% to $1.153 bln. Messaging revenue growth accelerated for the fourth consecutive quarter, while Twilio was able to generate double-digit voice revenue growth for the first time in two years. Strong uptake among AI startups in its self-serve business contributed to the acceleration in voice revenue growth. The company also operates its Segment (customer data platform) business. Revenue in Q2 was flat yr/yr at $75 mln.
• Twilio's Q3 guidance spooked investors with downside EPS but upside revenue. Usually, when we see that combination, it means margins are a problem area. That seems to be the case with Twilio as Q2 non-GAAP gross margin fell to 50.7% from 53.3% a year ago although non-GAAP operating margin improved to 18.0% from 16.2%.
• While it was good to see Communications grow nicely in Q2, it carries a lower gross margin profile than Segment. Drilling down a bit, Communications growth was led by accelerating messaging and voice growth. However, messaging is lower margin and it was the primary driver of Twilio's overall gross margin decline in Q2 with FX playing a smaller role. Twilio is taking steps to stabilize and improve gross margins, including price increases in both messaging and voice in the US.

Clearly, investors are pleased to see Twilio make it into the S&P MidCap 400. This will require funds that track this index to buy shares. It is also a big milestone for the company and raises its profile. However, investors want to see better results from its operating business, especially in terms of margins. Also, sales for Segment have stagnated. Investors want to see that business on more of a growth trajectory as the goal has been to integrate Segment with its other offerings, but slowing growth is making some question if that will be a future driver of the business.