My take on theTwilio acquistion of SendGrid
My Initial Impressions
First: Twilio is growing 60% per year. What do they need to acquire an email company for?
Second: Jeff Lawson is a gifted guy who has brought them this far. He knows more about what’s best for the company than I do. So I went to the:
SendGrid Investor Presentation where I learned:
They have been adjusted profitable for the last eight quarters.
They are a SaaS company growing revenue at 40% last year.
Their annual revenue is roughly a quarter of the size of Twilio’s so they are definitely a smaller company.
They have 75,000 customers (growing 35% yoy), and process about 45 billion emails per month! No customer with over 2% of revenue.
Their S&M spend is about 25% of revenue (like Twilio) while most SaaS companies spend an average of 54% of revenue.
They have an average of less tha 0.01% down time.
They have a 94% delivery rate versus an 80% industry average.
They have 39% international revenue.
Large customers are about one third of revenue (and rising) with their percentage increasing and a small churn rate.
Small customers are about a third of revenue too (but falling) and a higher churn rate.
Net dollar retention rate is 114%, inspite of churn among smaller customers.
In 2016 they grew revenue at 37%
In 2017 they grew revenue at 40%
Last quarter revenue was up 32%, they were operating cash flow positive and free cash flow positive, and gross margin was 75.3% up from 73.1% a year ago.
I may have made some minor mistakes in copying, but this is approximately correct. All sounds good so far, so I read the
Twilio Conference Call transcript about the Acquisition
"The rationale is quite simple, by adding the leading email API provider to the Twilio family, we believe we can create the unquestioned platform of choice for developers and businesses looking to transform their customer engagement…
The two companies have a great deal in common. We share the same vision, the same model, and the same values. We share the same vision to create powerful communications experiences for businesses by enabling developers to easily embed communications into the software that they are building.
Since the launch of our Engagement Cloud, we are increasingly having higher level, more strategic conversations with executives about how to reinvent their customer engagement. And more often, these discussions are touching upon email as well…
This has become even more apparent since the launch of Flex, our contact center application platform, as email is consistently one of the top requests from customers in our Beta program….
Our two companies have a powerful financial profile. If you annualize the Q2 2018 Non-GAAP results for both companies, you get revenue of $734 million, gross margin of 59%, and an operating profit of $18 million…
Our two companies have a powerful financial profile. If you annualize the Q2 2018 Non-GAAP results for both companies, you get revenue of $734 million, gross margin of 59%, and an operating profit of $18 million."
The CEO of SendGrid said that having an all stock deal was important to them as they want to participate in the future growth of the value of Twilio stock.
And someone asked Why pay so much? If we gave you $2 billion, couldn’t you have built something similar?
Jeff Lawson responded “Well, I think the value that we see in this combination is the sizable customer base that SendGrid has…. And so in addition to the technology here, there’s also the sizable customer base momentum that SendGrid has that makes this combination particularly powerful to create the unquestioned leader in the space. Sure, anything with time and money is possible, but it just pushes out the timeframe for you to get that value and we see this is as an opportunity to accelerate our lead in the market and to create that platform for customer engagement that will just be unquestioned as the leader.”
And the CEO of SendGrid said “The complexity in building that e-mail infrastructure at scale to be able to deliver 45 billion emails per month to ISPs with various sophisticated machine learning systems that sit at the edge of their networks to ensure that a customer’s email makes it into the inbox is not trivial, and that’s taken us nearly a decade to build out, to get the coverage and the long tail of these inbox service providers around the world, and I think a huge part of why each of us respectively never went into the other market, we looked over at building a super network with hundreds of carriers globally around the world and that looked very difficult to do, and I think the same is true on the other side.”
Made sense to me. Then I saw that Bert had written on it for his subscribers. I shouldn’t give out any details of his post, except to say that he was quite positive.
Finally, an announcement that SendGrid will pay a break-up fee of $69 million to Twilio if they change their mind. This meant to me that they really want this deal. It also meant that Twilio felt they were getting a good deal too, for them to insist on this.
My Conclusion: I feel positive about the deal and if Twilio wasn’t my largest (and oversized) position, I probably would have added to it this morning.
Hope this helps,
Saul