Twilio 2.0 Starts Now, Don't Miss The Train

Summary

• Twilio announced its Q3 2021 results last week and the stock got punished with a steep drop.
• I see a lot of "explaniorism" the desperate need to explain price drops and find what looks like fundamental reasons but give elements that are essentially noisy.
• We look at the so-called red flags: the COO leaving, lower organic revenue, lower EPS guidance and lower revenue growth for the next years.
• Twilio is transforming itself completely and is becoming Twilio 2.0. It has even written a new mission statement.
• Twilio Engage could be a real gamechanger and the more privacy rules (Apple's IDFA, for example) the better for Engage. The future looks bright.
• This idea was discussed in more depth with members of my private investing community, Potential Multibaggers. Learn More »

Steve Jennings/Getty Images Entertainment

Introduction

Last Wednesday, Twilio (NYSE:TWLO) reported its Q3 2021 earnings despite another beat-beat-raise quarter, the stock price dropped like a rock, down 19% from its Wednesday opening price.

I know such a drop can be the cause for fear or worry, but for me, nothing has changed, except that Twilio's stock just got cheaper. Let's first look at the results and then we go a bit deeper into the reasons why the stock price fell. We'll also look at how Twilio is expanding its total addressable market by going outside its current market as a CPaaS (Communication Platform as a Service).

The earnings results

If you would see the earnings and not the stock price chart, what would you think the price reaction would have been? Let me sum up the facts:

• revenue $740.2M +65.2% YoY vs. guidance of 50%-52% and a consensus of $681.09M, which would have meant +52.0% YoY, a beat of 8.7%, which is really high for a revenue beat.
• Organic growth 38% YoY
• Dollar-based net expansion rate (how much more customers that were already there last year and who didn't leave spent versus last year): 131%
• Customers: 250,000, up 20% YoY.
• Q4 guidance: $760M to $770M, 40% YoY growth and at the high end (which Twilio always beats) 2.5% higher than the consensus of $750.7M.

To be honest, without looking at the charts, I would have been pretty convinced that that stock would have traded upward or at least flat. But we have seen the reality: the stock price dove. This is the market, this is what happens and especially with highly volatile stocks. The question many ask then, especially with such excellent results is 'But why?'

Explaniorism

I have written about explaniorism before. It's a term that I have coined myself (I think, at least I have never heard it anywhere else). With that term, I mean that a lot of people, especially analysts, but also a lot of other commenters and a majority of investors, really crave an explanation for short-term price drops.

Of course, sometimes there are good explanations. If a company doesn't live up to the expectations, if there are accounting problems, if the company loses an important customer or reveals headwinds that will have quite an impact on the company's results in the future, that's not explaniorism.

Explaniorism is when those things are not there. There is no fundamental shift in the business, but the stock price drops and the 'explaniorectics' need an explanation, any explanation. So, of course, with such a violent drop in Twilio's stock price, plenty of explanations were floating around on forums. Let's look at them and put them in context.

The COO is leaving: that's a red flag!

George Hu, Twilio's COO (Chief Operating Officer) since 2016, will leave the company.

George Hu, our COO, is resigning from his COO role, effective today, and will remain with the company through the end of the year as a strategic advisor. After doing an amazing job scaling Twilio from a run rate of $300 million to nearly $3 billion, and building an incredible go-to-market team that can take Twilio far into the future

(Source, all the quotes and pictures that are in this article without an explicit source are from this source, the prepared remarks of the conference call)

I have a strong suspicion that there are trading algorithms that have as one of their rules "CXO is leaving = selling" (where X can be O, F, E...), especially if it's combined with the sentence 'effective today'. If that happens, very often there is a reason to be suspicious, as it often has to do with something that went terribly wrong and stepping down immediately is the only way left.

That initial sell-off can trigger stop-losses, which makes that the stock price often go down even more. It sounds stupid, but sometimes, that's just what happens. Of course, quant systems don't decide on one rule, but COO leaving combined with EPS miss (on a GAAP basis, as on a non-GAAP basis, Twilio beat the expectations by $0.15, positive $0.01, while negative $0.14 was expected)...

(George Hu, from the company's website)

But there is no reason to panic here at all. This is what Jeff Lawson had to say about George Hu leaving:

George and I have had an open dialogue about his desire to eventually move beyond a COO role -- something that he is absolutely ready for. George will take a well deserved break before pursuing that next step in his career. I wish him the absolute best and I can’t wait to see what he does next.

Hu was not as clear, but with what Lawson said, I think this can be read as a confirmation:

I will be taking some time off to spend with my family and then pursue what’s next.

And this sentence from Hu also doesn't show bitterness or so, to the contrary:

I will be cheering Twilio on from the sidelines, and I can’t wait to see what the company builds.

So, this could be a matter of ambition. George Hu is not just anybody. Before Twilio, he worked for Salesforce (CRM) for 13 years, in functions such as VP of Product Marketing, SVP of Applications, EVP of Products, and Chief Marketing Officer. In 2010, he became the COO of Salesforce. In 2014, he left (there too!) and started his own company, Peer, which was bought by Twitter (TWTR) and Hu moved to Twilio. It's simple: management comes and goes in companies. If Jeff Lawson would leave, that could be a dealbreaker for me, but not George Hu, despite the fact that he has done great work.

I also wonder if this move of Hu has to do with his previous job at Salesforce, for 13 years. Jeff Lawson says that Engage is not competing with Salesforce, as that is traditionally B2B and this would be B2C (more about that later) but nevertheless, over the longer term, if Engage is successful, it could eventually become a competitor to Salesforce anyway.

Hu's main merit was that he completely built out Twilio's go-to-market strategy. That will be taken over by Marc Boroditsky, Twilio's CRO. George Hu about Boroditsky:

I am glad to be leaving the go-to-market function under Marc’s leadership. I have long believed Marc would eventually run all of Twilio go-to-market, and I have been working with Jeff to prepare him for this day by expanding his responsibilities over time. Marc has been an amazing partner to me and I could not be happier for him. I have absolute confidence in Marc and the broader GTM leadership team to bring Twilio and it's into a wildly successful future.

Marc Boroditsky

Jeff Lawson about Boroditsky:

For those of you who do not know Marc, he has been the one driving our revenue organization to exceed expectations quarter after quarter now for the last four years. Marc will now report to me and assume responsibility for all of our customer- and partner-facing teams.

The go-to-market strategy was the most important part of Hu's role. The rest of his responsibilities will be taken over by CFO Khozema Shipchandler, who also becomes the COO of Twilio. It's impressive what Shipchandler does:

His responsibilities previously included finance, corporate development, information technology, cyber security, sourcing, real estate and business operations, and he will now also oversee the legal function. Khozema will continue to serve as the principal financial officer for the company.

Some will debate that it's not great that one person does so many things at the same time, but that could be solved in a few months. It looks like Hu only notified Jeff Lawson after Twilio's Signal conference in the week preceding the earnings release. Having to replace such an impressive COO is a work of months, not days. So, I'm comfortable with Shipchandler taking over for now, especially with the GTM strategy going to Marc Boroditsky.

Organic revenue was not good: red flag!

Another headline that tried to deal with the uncertainty surrounding the stock price drop is that organic revenue plummeted.

Maybe you have already seen this slide from Twilio's earnings slide deck because it circulates on quite a few forums.

Awful, right? 38% organic YoY growth. But don't forget that 2020 was an election year and that meant $23M extra revenue for Twilio in Q3 2020. If you exclude that revenue, organic growth would have been almost 43%. That's not that different from the other quarters: 46%, 36%, 48%, 43%, 48%, 54%, 47%, 50%. The last quarters were a bit higher because of the pandemic, but there is always lumpiness in the quarters. What do they have in common? They are always 35%+. Q4 2019, reported on February 5, 2020, was the lowest organic growth with 36%, lower than this headwind-quarter and you could have sold your shares. This is what you would have missed:

On top of that, Twilio's acquisitions are very important, as important as they have been for years now for Salesforce. Buying really good companies that fit into your ecosystem and that you can cross-sell is an art in and of itself. Marc Benioff, Salesforce's charismatic founder and CEO, is the king of this art but Jeff Lawson is starting to look like the prince more and more. Just focusing on 'organic' growth is a mistake, as the other parts of Twilio are quintessential for its future. This is a company in constant flux and mostly, in investing, that's often a great sign for growth companies.

And with these acquisitions, the company has started a whole new product, Engage, which opens the gigantic CRM market for Twilio. I have already written about that in the Overview Of The Week and I will go into it later in this article.

Lower revenue growth for the next years: red flag

There were others who said that management that guided for 'just' 30% annual revenue growth was the reason why the stock price plummeted. They are wrong too, because this is what management said (my bold):

When we look to 2022 and beyond, we remain very confident about our ability to deliver 30%+ annual revenue growth over the next three years.

30%+ is not the same as 30%. And if you know Twilio's management a bit, you should know that they always guide very conservatively. If they guide for the next three years, it will probably be even more conservative. But if they guide for 35%+ growth and one year it would be 'only' 35%, the headlines would be that Twilio doesn't live up to its promise.

On top of that, this is the 'organic' growth for the next years. Of course, that includes the acquisitions of the past, but not those of the future. I would be surprised if Twilio doesn't acquire more companies in the next three years.

To round this off, if Twilio guides for 30%+ revenue growth and you look at the consensus estimates for the next two years (there's only one analyst who projects three years out, so we don't take this into account here) you see just 30% growth.

(Seeking Alpha Premium)

So, probably Twilio will beat that by quite a bit, as I'm pretty sure that Jeff Lawson keeps his own version of the margin of safety: the margin of prudent guidance.

I'll make a bold prediction here: Twilio will continue to grow at 30%+ for much longer than just three years. I can even see it grow 25%+ for the next decade or so and that makes the stock interesting. Twilio's valuation has basically been cut in half because of the results and the stock price drop.

Data by YCharts

EPS guidance is awful

When it comes to EPS, Twilio also beats the consensus by a wide margin again in Q3 2021. Non-GAAP EPS came in at $0.01 beating the estimates by $0.15. Do you know what the company had guided for? ($0.17)-($0.14), while the analysts had expected ($0.07). Analysts rerated their EPS guesstimates to the upper side of Twilio's guidance ($0.14) but Twilio beat the original estimate ($0.07) by a wide margin.

This is typical Twilio behavior. The company likes to guide low on EPS and then beats the hell of that guidance and the consensus. In almost every quarter, it beats the EPS consensus by more than 100%.

(Seeking Alpha Premium)

This time we see the same again. Investors very familiar with this company shrug or have a smile on their face, investors who know the company know that it's very conservative in its guidance and the company takes the bottom of what it expects. So, why would I worry about the EPS guidance? Twilio will probably beat its guidance by a huge margin again. On top of that, EPS are not important for companies growing that fast.

You should not forget that Twilio is a SaaS business that is usage-based, not subscription-based. That makes the business a bit more difficult to predict. That is also the explanation why the quarterly organic growth numbers jump up and down a bit. I rehash the same graph that I shared before:

46%, 36%, 48%, 43%, 48%, 54%, 47%, 50% and 38%. You see some deceleration and re-acceleration in those numbers.

Usually, I prefer to have DBNRR (dollar-based net retention rates) of companies because they look at what all customers spent last year, including those that left the platform in the last year and compare that to what these customers have spent this year. So, DBNRR includes churn.

But because of the nature of the business of Twilio, I completely agree with reporting the DBNER or dollar-based net expansion rate for Twilio. That only looks at how much customers that have not left the platform have spent more. If there is no election, several customers leave of which you know of they will come back with the next election. And Twilio's DBNER is very impressive.

(From the earnings call deck)

Being worried about this quarter and the next is not necessary if you know this context, I think. For Q4, 40% revenue guidance is given, excluding SendGrid and Segment. That would have been 47% without the $23M that came in extra last year because of the elections. Next year, there are already mid-term elections again and that will be a tailwind again. Put the numbers in a wider context, and I think you see there is not much to worry about.

The last element that I want to point out in this context is that Twilio has a net cash position of $3.6B, even after the multiple acquisitions. This company has a fortress of a balance sheet.

Engage: Twilio 2.0

On its SIGNAL 2021 conference, held a week before the earnings call, Twilio announced the launch of Twilio Engage. It's not there yet, you have to use some imagination, but I'm convinced that Engage will be a gamechanger and will boost Twilio's core business and its Segment division even more.

Twilio has had many shifts before but always in the CPaaS space, which stands for Communication Platform-as-a-Service. Its main goal as a company is to help businesses grow through customer engagement. The company started out with automated SMS texts, but has shifted to all kinds of communication: emails, phone calls, videos, helpdesk centers, even IoT communication (The Internet of Things) and much more.

Twilio works with APIs, which allow much more flexibility for developers to customize what they build. The developers are like bricklayers who don't have to bake their own bricks anymore (=building an app from scratch) or live in a pre-built house (=buying an app). Twilio provides bricks that can be easily stacked and adapted to your need and taste.

With Twilio Engage, Twilio now goes outside of pure communication for the first time. Twilio’s Founder and CEO, Jeff Lawson had this to say in regards to the launch of Engage:

In today’s digital world, the most innovative companies are able to use their data to deliver exceptional, personalized customer engagement. That should be something that’s achievable for every brand, not just the biggest tech companies. It’s only possible with the best data, the best communication layer, and a building blocks approach to software — which is what we’re bringing together for the first time with Twilio Engage. Our vision is to democratize personalization, so companies of every size can.

This is a very important new path for Twilio, as it goes into CRM (customers relation management). It's a direct consequence of the company's $3.2B acquisition of Segment. Jeff Lawson:

The major difference between Twilio and everyone else is that everyone else is trying to sell you an app.

With this launch, Twilio wants to disrupt the gigantic CRM market from the bottom up. Segment, acquired in October last year, is crucial in this new initiative. It is a company that collects and analyzes data about the customers of a business.

Segment didn't want to sell to Twilio and it took a year before they even wanted to start talking. Jeff Lawson explained his vision of Twilio and Segment together constantly to Segment's management. The reason why Segment changed its mind about the acquisition? According to Segment co-founder and then-CEO Peter Reinhardt:

I started to notice customers using the same words that Jeff had been using.

This comes down to the fact that customers were begging Segment to just have the insights in their data, but that they also wanted to reach out to the customers with the knowledge that they had found.

When Twilio bought Segment, it identified four sectors it could move into. One of them was marketing, which has now already come to fruition with this launch. The three others are customer services, product, and sales. Marketing seemed like the first logical step to venture into. Again Reinhardt:

What we noticed is that most of the data that Segment brings to bear today is used for marketing, and most of the communications that Twilio sends are used for marketing. That became the most natural overlap point.

You want a product that is fitted for each and every customer, but in such a way that the company can still manage that. Engage will give that possibility. Engage will have a personalization algorithm that will help in predicting which messages are suited for the profile of a customer. You can compare it to Netflix recommending certain movies or series for you or Amazon's suggestions when you are shopping. If we see how big Salesforce has become with CRM (it has a market cap of almost $300B), this is a very exciting launch.

Twilio won't go head-to-head with Salesforce, though. It will be consumer-facing, not B2B. But eventually, these two may meet each other. Another company that could have some overlap with Twilio is Zoom (ZM) which is also building a communications platform, but more focused on B2B. Jeff Lawson:

Contrast that with B2C businesses: there is no salesperson typing notes, nor is there a "source of truth" about the customer. The sum of all the data points the company can see is the emergent source of truth.

Twilio also changed its mission statement from 'Fuel the Future of Communications' to 'Unlock the Imagination of Builders' to reflect that it's becoming Twilio 2.0, which goes beyond just communications into new territories.

With Apple's IDFA strictness (Identifiers for Advertisers), where consumers have to sign in for ad targeting instead of sign out, companies like Facebook (FB) and Snap (SNAP)) have seen an impact on their ability to reach customers; Twilio can solve that problem because it can integrate 1st-party data and immediately couple communications solutions to that. That's what Engage will do and the phase-out of cookies and Apple's sign-in for IDFA will be strong tailwinds. As Jeff Lawson remarked in the prepared notes of the conference call:

To me, this represents the biggest, and most exciting, enterprise software opportunity of our time because I see multiple tailwinds at our back. Secular shifts, brought about by digital disruption, by the digital acceleration of COVID, and by societal changes in privacy are all pushing customers toward what Twilio has to offer.

... However, the communication layer is the last mile of customer engagement -- transmitting the message is just the last step. What you say, to whom, when, and on what channel -- that's the intelligence component, and it's incredibly hard to get right. That's the next phase for Twilio -- helping customers deliver more relevant and impactful messages, not just more of them.

The fact that Big Tech has created such big monopolies is a big opportunity for players like The Trade Desk (TTD) and also Twilio. Jeff Lawson on the questions he gets from CEOs about Big Tech.

Can I let them sit between me and my customers? Should I have to pay a transaction fee to keep re-acquiring my own customers from the few Digital Giants who have all the relationships? Or...should I be building my own, deep, and unbreakable customer relationships? The answer, of course, is the latter... Great businesses know that the key to winning is to own their data, own their customer relationships, and ultimately, own their future.

This is what that other Jeff, Jeff Green from The Trade Desk calls the open internet, in contrast to the walled gardens like Google (GOOG) (GOOGL) and Facebook, that make money from the data of companies. Jeff Lawson too has seen this very well and that's why I like Engage so much. Jeff Lawson thinks messaging customers directly will impact advertising profoundly:

We believe that messaging is such a cost-effective channel, that when used wisely with good targeting, has the opportunity to displace ad spend in general and re-targeting and re-engagement in particular

Twilio is doing here what all great companies have done before: become so essential for customers that they never want to leave, expanding the platform's products at lower and lower costs to improve profits over time. I think Engage will be key in this respect, but it won't be Twilio's last expansion.

Conclusion

It's very important to understand that Twilio is a platform and platforms are extremely powerful. Think of the App Store or Shopify (SHOP), which has become the standard platform for small to huge independent merchants. It's extremely hard to become a platform, but once you are a platform, the switching costs are very high, but financially as mentally, and the expansion costs for the company become more and more profitable.

Therefore, it makes no sense to just look at a quarter. Look ahead. The analysts project 30% growth in 2022 and 2023, but that is because they don't take innovation into account. They judge on what is, not on what comes. If Twilio would still be what is it would still only be an SMS platform, with a relatively small TAM (total addressable market). Instead, it has become a monster force in communication, the clear leader in the space and it's ready to change again.

In the meantime, keep growing!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CRM SHOP TTD TWLO ZM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[dblinder]

Twilio is a disaster on the decline. What a nightmare the last 3-weeks have been as it lost 1/3 of its value.

[From Growth to Value]

@dblinder
I'm not a trader but a long-term investor. The more it goes down, the better for me.

[Let The Led Out]

@From Growth to Value new all time low!!! This is great news right!?

[From Growth to Value]

@Let The Led Out
Could you please stop trolling all my articles?
Get a life, man (I'm sure you are a man, women are smarter than that and yes, I'm a man).

[Ventureshadow]

This stock is in a downtrend coming off a peak. Charts suggest it will continue falling until $250. It might not stop there but that is a potential stopping point. I try to fight FOMO by resolving not to buy falling stocks.

[From Growth to Value]

@Ventureshadow
To each his own. Personally, I don't believe in chart reading. I have read several trading books, but I see a lot of astrological beliefs that you just have to assume are true. I'm keeping an open mind, though. If chart reading would be successful, people could simply make money by following the rules. But there are so many opaque rules that you can explain everything. That's just my opinion and I'm extremely open to what people do. Everyone has his or her own situation, background and time horizon.

[Ventureshadow]

@From Growth to Value If momentum means something then charting has predictive value. Both SA and Value Line use momentum strongly in their evaluations and claim great but not perfect success. Both claim that simply following their ratings (i.e., their rules) is profitable.

Rising vs falling, bollinger bands, changes in daily stock volumes, and commitment of traders charts have proven predictive value. The predictive value of charting is limited but definite, and it is not like astrology.

Some people take charting to extremes beyond credibility. It can become excessively complexified. This does not discredit everything about charting. I do not consider myself a chartist but I sure study charts before buying and selling.

[Jane Wang, econ prof]

Good commentary into a company that is harder to understand, since it is not consumer facing. Thank you.

[From Growth to Value]

@JaneWusleepmed
Thank you!

[Edward Strover]

Thanks for an interesting article. Agree with you that it's impossible to know what valuation the market will assign to a company on any given day and impossible to know which algos are programmed to sell on a CXO resignation or a slowdown in organic growth.
What's not in data is corporate culture and understanding the opportunities being taken by management. Your story of how Segment went from disinterested to joining Twilio is fascinating. Jeff Bezos has said that he wasn't much interested in people's reaction to quarterly results because they were the result of decisions taken 2-3 years prior. Let's see how the other two Jeffs do in 2-3 years time.

[From Growth to Value]

@Edward Strover
Thank you very much!

[Peled111]

Great article
Twlo is a buy
Thank you

[From Growth to Value]

@Peled111
Thank you for reading and your kind words!

[pomps909]

@From Growth to Value thanks so much for the informative write-up. I tend to be a value oriented investor mostly due to the lack of time to research and understand/project trajectory for growth companies. Generally, for example in the tech space I prefer to own funds and let the experts help me in this area. Twilio is an exception for me - it is one of the few the growth companies where I own shares directly because the value of what they can offer to their customers is very compelling - and they're demonstrating an ability to scale. I saw this market reaction as an opportunity. Really appreciate you fleshing out what the Segment acquisition means for Twilio.

Off topic a bit here - regarding your comment "
That initial sell-off can trigger stop-losses, which makes that the stock price often go down even more"

I use stop losses as what I could best describe as a hedge against meaningful corrections - understanding there is risk of orders not triggering near market close. Also accept that sometimes I'll sell out of a holding prematurely. I'm curious as to your thoughts around this strategy as I've seen mixed opinions? thank you again.

[From Growth to Value]

@pomps909
Hi and thank you for your very generous comment. I'm glad that you like the article.

As for your second question: I never use stop-losses. I see stop-losses as something for more short-term-oriented investors and I'm a long-term investor. I know my holdings so well that I don't mind the volatility as long as I see that the initial thesis is intact.

The price says nothing about the value of a company. Or actually, it does, but over the longer term. I don't time, I just dollar-cost-average into positions slowly (6 months to 18 months usually). But this is typically something that I think everybody has to decide for themself, as everyone has a different personality and situation.

All the best
Kris
From Growth To Value

[pomps909]

@From Growth to Value Can't argue at all with your logic and greatly appreciate your perspective. Clarifying the strategy a bit - I wouldn't likely deploy this strategy under a different environment. I want to stay invested in a time where valuations are at all time highs. No one can predict exactly when a correction will occur, but there are many reasons to have caution with market setting all time highs daily, rising inflation, FED tapering strategy, rising interest rate expectations, etc. Under this environment the approach protects much of the realized growth in my portfolio - and when/if there is a meaningful correction I'll be sitting on considerable cash position to re-enter at lows. This is particularly important to me due to my proximity to retirement which is in an 18 month window.

[From Growth to Value]

@pomps909
There you have it. That last sentence is very important! Every situation is different.

[John W in IT]

One of TWLO's closest competitors, VG reported API business grew 43%, DBNR rate 129%. CPaaS is still growing, the next three years growing 30+% is very doable.

[From Growth to Value]

@John W in IT
Yeah, I agree. I think it will be quite a bit higher, actually. And then on top comes the non-organic revenue.

[ARNOLDMUSCAT]

@Persaltish This Community does not mind opposite views, we actually encourage debate as it makes us revisit the data and recheck our convictions. Not reading an article and making a comment is stupid unless you are a prophet.

I took the time to read some of your reviews, you have been a member since 2008 and most of your reviews are negative, hopefully, your investment portfolio is not as well. You suddenly got active and commented a lot in the last week or so???.

If you don't like the share unsubscribe from the alerts and save yourself the anguish of not reading an article you don't like and spend time on the ones you do.

Only one last comment is that you incorrectly meant you "agree", well that also doesn't add up if you didn't read the article. Move along or add to the conversation.

On the funny side: Disclosure: I/we have a beneficial long position in the shares of CRM SHOP TTD TWLO either through stock ownership, options, or other derivatives. I wrote this COMMENT myself, and it expresses my own opinions. I am not receiving compensation for it (other than from MY WIFE. I have no business relationship with any company whose stock is mentioned in this article.

[From Growth to Value]

@ARNOLDMUSCAT
Haha, thank you for comment, Arnold, and that really funny last part!

[ARNOLDMUSCAT]

@From Growth to Value I love to laugh at people who arent ... well he said enough on his own

[Fabien Hug]

Thanks, I'll buy back tomorrow.

[xaghra]

Lots of things I didn't understand about this missive!!!
But if I picked up something, it's that yearly sales are around 2.6 b and the stock has a market cap of 54 b. That's, what 20x sales!!!
The last quarter, sales increase were less than the previous quarters...
One of these days, all these companies that sell for more than 3x sales are going to implode...
They are all fighting for the same dollar under the Kool Aid drink called ' the internet of things '...
One more point,
Every time I hear the words ' customer service ' I want to scream!!!
When I buy something whether an item or a service, I only want it to work once it is set up!!!
Telling me that you have ' great customer service ' just means that I shall have to call you often: and I don't want that... I don't even want to know you exist!!! I just want things to work, like you promised...
If it's not ready for prime time get it fixed first then tell me why I should buy what you are selling...
Anyway, according to my voodoo chart: it says 150 is the next stop...

[From Growth to Value]

@xaghra
When I don't understand something, I read it again until I do but I'm not commenting randomly. Twilio offers customer service technology, that makes it easier for companies to explain their product in case you read the manual like you read this article. :-)
"More than 3x sales going to implode" That really made me laugh. I think the humor of such remarks is generally underappreciated.

[Let The Led Out]

@From Growth to Value very astute observation. Definitely made me laugh too!

[heung]

I think c. Wood bought at 310 sth a quarter ago

[raining2009]

Nice article! One of the best I read for TWLO
I agree with you about TWLO but I judge from some other perspectives.
1) In essence, what does TWLO do and what problem it solves and what value it creates for society.
In essence, TWLO connects the corporation to customer. For example, google connects people to information. Facebook connects people to people. TWLO connects corporation to customer. And customer is most important asset for any company, so from any perspective or just instinct, this is really a huge and fundamental / core area for any company, large or small.

2) I indeed have concern to Segment, it is a new industry, meaning it is a difficult to solve problem, if easy, there should be already lots of companies working on it.
But there is potential for Segment. On TWLO's platform, if company A can only get user data transacted with company A, then this is not that powerful. But if company A can get user data collected from that user's transaction with other companies and use that data to target users, then TWLO as a platform can become huge, similar to FB which has all kinds of users data.

3) The key to any growth company is the dynamic moat - whether the company can continuously innovate and adapt to changing environment. It also means whether the company can find the 2nd growth curve before its main growth driver slow down.
The key to achieve the dynamic moat is the company must have the culture to constantly listen to and pay attention to user's needs, and build features and continuously evolve the features based on customer's (unmet) needs, which is exactly what TWLO does from CEO's words.
And Jeff's day one attitude also helps its dynamic moats.

It may not a ten-bagger, but definitely worth the bet considering its low valuation now.

I see too many people focus on the profit, actually the profit is the least important thing (even though TWLO's gross margin is in the low end).
As long as the company can continuously create crazy value to the society and make the whole society more prosperous and benefit everyone's life, the profit will follow, sooner or later.

[From Growth to Value]

@raining2009
Thank you for reading and your interesting thoughts.

[Persaltish]

I haven't read the article but I disagree with everything in it.

[From Growth to Value]

@Persaltish
wow, what an open mind! Congratulations!

[canyon]

@Persaltish
I looked up your post in the reverse dictionary - it said Mute-Worthy. If you're not going to contribute, why would we bother reading you comment?

[Prudent Top Sawyer]

Twlo was always loss making now it is busted growth. Forsee a price of 20$ at best in a year or 2. So s

[ikoskela06]

@Prudent Top Sawyer When entire companies information warehouses sit in Segment repositories and they operate based on custom analytics reports from Segment and their communication systems use Twilio, especially with the trend towards remote/virtual organizations, Twilio is smart for going after market share vs profitability. They will easily have pricing power later.

[From Growth to Value]

@Prudent Top Sawyer
hahaha! You're really funny! Why not $2?

[From Growth to Value]

@ikoskela06
Exactly.

[ikoskela06]

I am a Chief Information Officer at a small-to-mid-sized tech/media company. We've been users of Twilio and Segment since before the acquisition, which I was thrilled about when I heard the news. Segment has so many advantages over other analytics platforms (and works with AWS Redshift). If there are smart, they will also acquire Mode and round-out their portfolio. I initiated a new position today because this article made me aware of the price drop. Years from now, I see AWS buying Twilio since both have very modular/API/tool-based platforms and philosophies. We will see.

[From Growth to Value]

@ikoskela06
Thank you for your comment. It would be a huge acquisition, especially if you talk about years out. $200B? I don't see it happening. Jeff Lawson has an AWS past (one of the first to work there) but I think he's too stubborn to work for someone else. :-)

[canyon]

@fromgrowthtovalue

Nice summary! Now, apply some financial concepts to exactly what you're saying ...and I've been saying, too :)

IF (if = execution risk) TWLO can accomplish what you write, it moves from a no margin API/CPaaS business to a CRM SaaS business. Use the DBNNR (most recent is 131%) and create some estimate of future "new" revenues to model SaaS... then apply a SaaS margin (not a zero or negative API/CPaaS one) like a mix of Adobe and Salesforce for CRM SaaS and apply a P/E (not a P/S) to it.

IF TWLO can pivot to SaaS then TWLO can explode (and prove wrong all those that are stuck with "Buy BAND or Vonage for better valuations" or "TWLO can't keep that P/S into the future", etc.).

[From Growth to Value]

@canyon
Twilio could be profitable if it wanted. It invests in growth, exactly what you should do in such a market. It's like AWS: investors were not happy with it because it was so expensive to build. Look at it now. Twilio is following that path. Don't forget that Jeff Lawson was hired at AWS when the project was still a secret project in Amazon. He knows what he's doing. P/Es are completely worthless for growth companies. If you bought based on P/E ratios, you would have missed all FAANG stocks, maybe with the exception of Apple in the last few years.

[canyon]

@From Growth to Value
Using P/E is appropriate for a SaaS company that has sufficient earnings. TWLO isn't that yet (so not yet appropriate to use P/E), but if one wants to attempt to see where this goes in the future, that's IMO the way to do it. Not, like many are doing, using current P/S and claiming that revenues must be some ungodly high amount in 2025 for example.

[From Growth to Value]

@canyon
I think gross profits/sales will learn you much more than PE at any point for growth.

[B00timer]

Good article, I have a better understanding of TWLO's business and prospects.

[From Growth to Value]

@B00timer
Thank you for your compliment!

[DJHLS]

I think the red flag or at least yellow flag is that the costs of revenue are rising proportional to the revenue. You would expect that higher revenue increases profitablitiy due to sclae effects.

If You don't see scale effects revenue growth isn't really meaningful.The main question is, why You don't see the scale effects.

[From Growth to Value]

@DJHLS
The cost of revenue as a % of revenue has been between 45% and 50% since 2013 (on an annual basis). So, it has not really gone up. One of the reasons is that the acquisitions ask for integration costs. You are right that it's something to watch, revenue growth should be put in context. At this moment Twilio prioritizes high growth and I'm happy with that.

[canyon]

@DJHLS
You are rear view mirror looking at an API/CPaaS company.
You should forward look at a SaaS company. Understand the vision.

[DJHLS]

@canyon May be You have any substantial arguments instead of vilifications? If so tell please tell us more about Your visions.

[antoncretu]

"I have a strong suspicion that there are trading algorithms that have as one of their rules "CXO is leaving = selling" - HaHaHa :)
Agree with you overall (for this one :)), good company at a fair price (now), impressive growth (still).
Though I'm not that much enthusiastic about their Engage:
- I can't see synergies with their core CPaaS
- The CRM market is much more fragmented. Even for B2C, I'm not sure about their bragging of "revolutionary". For ex. I've been receiving for years now personalized ads either by mail (SMS is NOT a good option btw, I hate that), or different banner / alerts in different sites / apps (eg. Yahoo Mail), and I'm pretty sure these were not based on "teams of data scientists interpreting data signals", but it was also automatic (some 3rd party app took the data and matched it with vendor's ads)
Thanks and good luck!

[From Growth to Value]

@antoncretu
Thank you.
As for Engage: I see a lot of overlap. Which other company can couple the insights with direct communication in the way Twilio can? I think you go from Twilio's legacy business (SMS) but the company has all solutions. And it's exactly the opposite from a third-party app taking your data. I'll give an example. I often buy 501 jeans in an online shop. That shop has my first-party data. Maybe a new color of 501 jeans comes out. They can contact me with that specific information. They could also start seeing patterns in my behavior. For example: I buy a new pair of jeans every 8 months on average. They can then give me all of the jeans available in my size (I'm quite tall). This is a simple example, but I think it shows how this goes. It's not the usual junk, it's personalized based on your real needs and desires.

[antoncretu]

@From Growth to Value
1. "Which other company can couple the insights with direct communication in the way Twilio can?"
Not sure if it does not matter - overly simplistic, a developer would have in an app something like this:
IF GetDataForCustomer(each customer in my database) = "501 jeans" THEN
SendAdByMail(that customer, "501Jeans")
Now, if the first line (that IF) comes from Twilio API (the 2nd line suppose is from TWLO) or from another party, it does not matter for the developer. Maybe (maybe), I could see for that company a cost reduction, it doesn't have to pay 2 API providers (TWLO and 3rd party), but only TWLO, although pretty sure that IF will add up to the price they will pay to TWLO.
2. Yes, it's exactly the same right now (I think), without Engage (but with other apps) - that shop will see that I buy 501 jeans once per year, and they are sending me once per year an ad to buy 501 jeans. I also think that those other apps (digital ad specialized apps, I don't have an exact one in my mind right now, maybe $TBLA) can insert some banners / alerts in some of my apps, like Yahoo Mail. So...what's new with Engage?

[From Growth to Value]

@antoncretu
I totally agree that my example is overly simplistic. My point is that Engage can give much richer data and a lot companies are using Twilio already for direct communication. You still see it too much from 3rd-party data and too much from 'ads', I think. This is about creating a personal bond with a few brands you really like, not about being spammed.

[WayneCDN1876]

I would never invest in a company like Twilio, but, damn, that was a great trade to buy at $280.00