Additional thoughts on fast growing tech firms

I wish I would run across something straightforward that actually talked about the technology being used. In many ways this sounds like the sort of thing an Enterprise Service Bus (ESB) was intended to solve, i.e., a generalized means of communication between applications or parts of an application represented as services. When an ESB is added to a set of existing applications, then one tends to have to map whatever API the application provides into a service on the bus. Then, it is a fairly simple job of mapping these services together, e.g., telling the Order Entry system how to ask the Inventory system about product availability and how to send a Picking Slip to the Warehouse system. With the ESB software, which is available from multiple vendors, and a set of adapters for the APIs of popular software, there would still be a certain amount of set up work to get everything connected, although one could do this over a period of time. And, there would be on-going work to handle changes, although one would expect the company to pick up doing most of that work themselves.

But, I don’t see why the original setup shouldn’t itself be a profit center.

If there is a compelling value, the complexity is not a concern.

Value and complexity are not independent variables. After 30 years in IT, most of it in systems development and technology insertion, I’ve come to understand that in fact value goes down geometrically as complexity increases linearly. Inherent complexity cannot be removed, but it can be relocated. The primary objective of IT is to move complexity away from the end-user and internalize it within the applications (all the plumbing is there only to support the applications).

NEWR is a rather unique product, it is complex, but it provides a value proposition that is hard to dismiss. As more and more complexity is migrated to the IT environment, NEWR provides increasing value. It is near impossible to properly manage that which goes unquantified and unmeasured. NEWR puts quantification and measurement in place where there was none before, or at best only very crude tools are currently available which do not provide the granularity to be of much use. Current tools - state of the art prior to my retirement a few years ago, I’ve not kept up on more recent developments, although NEWR may well represent the latest development in the area of monitoring - help localize a problem after it occurs, but do not provide sufficient information to avert a problem in the making.

I pretty much agree with your comments about “scaling.” I think just a poor choice of words. Typically, for IT anyway, “scaling” refers to the ability of the system to sustain larger data and transaction volumes without breaking. If you’re familiar with a “denial of service” attack, it represents the inability of an internet based system to scale with a sudden massive influx of transactions.

1 Like

TWLO - too little CAP to maintain pricing.

Tinker, could you please explain your rationale here?

TWLO - too little CAP to maintain pricing.

If TWLO were unable to maintain pricing then you would expect to see gross margins come down. We have not seen that yet. Here are the numbers for the past 2 years:


        Rev   Cost of Rev      GM
Q2'15   38.0  16.8	       56%
Q3'15   44.3  19.6	       56%
Q4'15   51.3  22.5             56%
Q1'16   59.3  26.8	       55%
Q2'16   64.5  28.2	       56%
Q3'16   71.5  31.3	       56%
Q4'16   82.0  32.2	       61%
Q1'17   87.4  37.3	       57%

Gross margins have remained healthy and stable for the past 2 years. We will continue watch this going forward.

2 Likes

If TWLO were unable to maintain pricing then you would expect to see gross margins come down. We have not seen that yet. Here are the numbers for the past 2 years:

Chris:

We need a new name for you with all these numbers you spit out with great finesse…how about “The Accountant” :wink:

Most impressive and I am sure appreciated by this board with the enormous effort you spend for everyone’s benefit.

While I am not Tinker, I might add a little color to the CAP issue in that TWLO has priced services higher in the past compared to competitors (I think Bert mentioned this originally). Also, the fact that Uber could so easily move off their platform implies there is an element of this service being a commodity that would therefore commonly come under pricing pressure in the future.

I would also add that unlike other SaaS players that seem to find ways of adding software services that increase revenue (VEEV, TEAM, etc.), TWLO has been very weak in that regard or at least slow to the game. They therefore haven’t identified means of checkerboarding their revenue growth and harvesting more revenue from established customers.

Care to make a prediction on earnings at close today?

http://www.stockta.com/cgi-bin/analysis.pl?symb=TWLO&cob…

This stock probably still trades on emotion…so if they can dispel the “uber factor” from their growth projections, might get a bump. But I am with Tinker on this one (as I have consistently been on TWLO), until we see improved CAP, this seems ripe for pricing pressure.

What do you think?

1 Like

We need a new name for you with all these numbers you spit out with great finesse…how about “The Accountant” :wink:

Thanks but my childhood was a bit less traumatic that Affleck’s character’s!

Also, the fact that Uber could so easily move off their platform implies there is an element of this service being a commodity that would therefore commonly come under pricing pressure in the future.

TWLO has announced that Uber will move some business away from TWLO but we will see if they really do that and how much is moved. I think they will keep a substantial amount of business with TWLO. I also think that Uber is a special case because they use so much of TWLO’s service and are overly dependent on TWLO. It’s smart of Uber to have other options for such a mission critical component of their business. I maintain my opinion that the Uber business is not important for the long term.

I would also add that unlike other SaaS players that seem to find ways of adding software services that increase revenue (VEEV, TEAM, etc.), TWLO has been very weak in that regard or at least slow to the game. They therefore haven’t identified means of checkerboarding their revenue growth and harvesting more revenue from established customers.

I tend to think of TWLO like a phone company. They get paid for usage of communication. Phone company have been able to add new services and in the early days the phone companies were very successful. We will see what TWLO can do in the future.

Care to make a prediction on earnings at close today?

What do you think?

This morning, I sold half my MULE position and put 2/3 of that into TWLO (now a 3.7% position for me) and 1/3 into SHOP. I don’t know what the stock will do after earnings but here’s what I will look for in the results:

  1. TWLO added 4000 new customers in Q1. I will look for TWLO to continue its rapid customer acquisition. I have noticed that TWLO’s customer growth has been about 2x higher in Q1 and Q3 than in Q2 and Q4 so if they add only 2500 new customers then I won’t be that concerned. If they add 3500 or more then I will be very pleased.

  2. We will see how much Uber business they lost and if they announce that any other big customers switched away. I expect that Uber business loss will be less than expected and I expect TWLO will beat their revenue guidance of $86.5M.

  3. I expect gross margins will remain at or near historical levels (around 56%). A big drop here would be concerning and cause me to reevaluate.

4 Likes

Also, the fact that Uber could so easily move off their platform implies there is an element of this service being a commodity that would therefore commonly come under pricing pressure in the future

Not sure if I agree yet that Uber “easily” moved off of the Twilio platform. I believe that they are in the process of transitioning and are still using Twilio in some way. We haven’t seen Uber results after starting to move away from Twilio and if it was successful.

I also read somewhere that smaller companies wouldn’t want to invest the capital and resources to move away from Twilio whereas, the larger companies will have that ability but not necessarily the want to move off of the Twilio system.

As long as Twilio continues signing up new customers, I will believe that the risk of companies moving off of their system is limited. Should see some numbers soon with this quarters earnings being the first since Uber reduced their usage.

JK

I suggest that evaluating the operating margin more than the gross margin will provide a better overview of the company’s potential profitability. Particularly given that these “high revenue growers/at a cost” generally show decent gross margin performance, but the most significant costs are captured in the operating margin metrics.

Here’s a handy link:

http://tinyurl.com/yah9znjv

Gross profit margin and operating profit margin are two commonly used measures of profitability. The difference between them is that gross profit margin only figures in the direct costs of production, while operating profit margin takes into account additional costs commonly referred to as “overhead.”

1 Like

I suggest that evaluating the operating margin more than the gross margin will provide a better overview of the company’s potential profitability. Particularly given that these “high revenue growers/at a cost” generally show decent gross margin performance, but the most significant costs are captured in the operating margin metrics.

Yes, putrid, I have. OpEx as a percentage is not dropping yet. We will want to see this as it would be showing of successful scaling.


	  Rev	   OpEx	        OpEx (% of Rev)	OpEx (% of rev excl SBC)
3/31/15	  33.365   26.614	80%	        
6/30/15	  37.954   30.587	81%	       
9/30/15	  44.262   33.604	76%	        71%
12/31/15  51.3	   37.053	72%	        66%
3/31/16	  59.34	   38.879	66%	        60%
6/30/16	  64.51	   47.16	73%	        65%
9/30/16	  71.533   51.524	72%	        61%
12/31/16  81.952   60.567	74%	        63%
3/31/17	  87.372   64.841	74%	        63%

Yes, putrid, I have. OpEx as a percentage is not dropping yet. We will want to see this as it would be showing of successful scaling.

First and most importantly, was the “putrid” term a Freudian slip for the TWLO stock or for his post? :slight_smile:

As Putnid is implying, TWLO operating income has Declined over the past 3 quarters…despite revenue growth. Not to put words in his mouth, but that would not be a trend one would want to be holding on to.

On a good note, at least SBC has been fairly low certainly as compared to abusers in this arena like TWTR (and not reflected in operating expenses as I recall).

First and most importantly, was the “putrid” term a Freudian slip for the TWLO stock or for his post? :slight_smile:

It must have been because it was totally unintentional!