Twilio's Successful IPO: Things To Watch Out For

| About: Twilio (TWLO)

Summary

While Twilio's customer list is impressive, which could be one of the reasons for its successful IPO, all is not so rosy.

There are a few issues that need to be tracked.

They include the status of its contract with Whatsapp (its biggest customer), legal disputes as well as competition and profitability.

According to Dealogic, there have been just 34 IPOs so far this year, compared to 72 last year. There have been only three tech IPOs so far and the market response has been lukewarm to all but Twilio, which went public last week on the NYSE under the ticker TWLO.

Twilio's Offerings

Twilio enables developers to build, scale and operate real-time communications within software applications. Twilio was founded in 2007 by Jeff Lawson, Evan Cooke and John Wolthuis. Its mission is to "migrate 150 years of telecommunications history - that 150-year-old hardware - into a future that is in software." They are able to do this through their relationships with more than 100 telephony carriers around the world and by building a platform that is able to route phone calls and text messages in the cloud. Read more in my interview with CEO Jeff Lawson last year.

Its developer-first platform approach consists of Programmable Communications Cloud, Super Network and Business Model for Innovators. The Programmable Communications Cloud software enables developers to embed voice, messaging, video and authentication capabilities into their applications. The Super Network is a software layer that allows customers' software to communicate with connected devices globally. The Business Model for Innovators empowers developers by reducing friction and upfront costs, encouraging experimentation and enabling developers to grow as customers as their ideas succeed.

As of March 31, 2016, more than 900,000 developer accounts had been registered on its platform. Its customers include new age providers like AirBnB, TaskRabbit, Uber and Lyft to more traditional retailers like the Home Depot.

Twilio's Financials

Twilio makes most of its revenue by charging customers for using its products nd charges a monthly fee if a customer purchases a telephone number. It recorded revenues of $49.9 million in 2013, $88.8 million in 2014 and doubled it to $166.9 million in 2015. Net loss was $26.9 million in 2013, $26.8 million in 2014, and $35.5 million in 2015. The number of active customer accounts with at least $5 of revenue was 25,347 at the end of December 2015.

Its largest customer is Facebook's Whatsapp, which accounted for about 17% of its revenue in 2015 and 15% in the first quarter. WhatsApp uses its Programmable Voice products and Programmable Messaging products in its applications to verify new and existing users on its service. However, it should be noted that it does not have a long-term contract with Whatsapp.

For the first quarter, revenue was $59.3 million and net loss was $6.5 million. The company had 28,648 active customers as of March 31, 2016, compared with 19,340 in the first three months of 2015.

Competition
The market for cloud communications is rapidly evolving and is quite fragmented and competitive as barriers to entry in some segments is relatively low. It faces competition from legacy on-premise vendors, such as Avaya and Cisco (NASDAQ:CSCO) and smaller vendors like Sinch, Nexmo and Plivo.

Legal Disputes

In April 2015, Telesign filed a lawsuit against Twilio alleging that infringement of three of its patents: U.S. Patent No. 8,462,920, U.S. Patent No. 8,687,038 and U.S. Patent No. 7,945,034. The infringement allegations relate to its Programmable Authentication products, two-factor authentication use case and an API tool to find information about a phone number. In March, 2016, Telesign filed a second lawsuit alleging infringement of Patent No. 9,300,792 relating to its Programmable Authentication products and two-factor authentication use case.

Twilio was venture funded and had raised $234 million in all from investors including Fidelity, T. Rowe Price, Redpoint Ventures, Draper Fisher Jurvetson, Bessemer Venture Partners, Union Square Ventures, K9 Ventures, 500 Startups, SV Angel, Lowercase Capital, Mitchell Kapoor, David Cohen and Founders Fund. Its last funding round was held in July 2016 at a valuation of $1.1 billion at $11.31 per share.

Twilio's IPO was priced at $15 a share and it raised $150 million by selling 10 million shares. At $15 a share, Twilio has a market capitalization of $1.2 billion. Its stock is currently trading at $34.04 with a market cap of $2.8 billion.

While Twilio's customer list is impressive, which could be one of the reasons for its successful IPO, all is not so rosy. There are a few issues that need to be tracked - status of the contract with Whatsapp, legal disputes as well as competition and profitability.