Twilio - Nuggets from the Conf Call

Investment Analysis Clubs Saul’s Investing Discussions
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A lot of the conference call discussed technical details that I don’t understand. This is the good stuff that I culled from the call (paraphrased in places).
Saul

We continue to support efforts in to combat the scourge of robo calling. I’m sure you get continual stream of calls from unknown numbers with pre-recorded messages promising a wide variety of wonderful things. It’s gotten so bad that you don’t answer the phone you don’t recognize the number.

So we design our platform to prevent this type of activity. We do not want this business and we never have. We continue to work actively to deter bad actors from our platform. Our terms of service expressly prohibit it. We believe transparency is also important. So we launched a free service to allow consumers to look up any number to see where a call is coming from and help report suspected global calling.

Looking into the future, we believe that the next step is to put consumer back in control of their phone through tools to allow them to receive only wanted communication from trusted partners. We see a world where every time your phone rings, you can see who’s calling, not just the phone number but the name of the personal business and trust in the accuracy of that information. And a software running on your behalf can decide what to do with the caller types. In this vision, everyone receives the communications they want and none of the ones they don’t. It’s your phone and your call. We want to help everyone take back their phone. (Saul – this is very important and removes a big question about Twilio)

We have a once in a generation opportunity ahead of us to revolutionize one of the largest markets in all of IT communications, by moving it from its legacy and hardware to its future and software. It’s still day one of this journey and I couldn’t be more proud of our team and excited about the road ahead.

The organic growth for Twilio’s base revenue was above 60% year-over-year and Twilio SendGrid’s organic growth for the sub-period was 30% year-over-year.

Our dollar-based net expansion rate was 146%. This metric will not be impacted by the acquisition of SendGrid until we close Q1 of 2020, a year from now. Over time, it will decline a little bit, just given that these older cohorts are going to become a really large part of the mix.

Gross margins came in just above 58% up from 54% sequentially. The largest contributor by far was folding in higher margin revenue from SendGrid, which added about 3 points. On an organic basis, gross margins also increased a bit sequentially as the base variable mix improved.

And on that note, we recently got some clarity on the Verizon A to P offering we outlined a few quarters ago. As a reminder, Verizon is establishing a new A to P (or application to person) channel for long code SMS messages that will add a quarter of a penny fee for message to all businesses with A to P SMS messaging use cases. Verizon will be implementing this new offering in mid-May, and we’ll be moving customers over to the new service accordingly. We’ll be passing this fee through to our customers so this won’t impact the gross profit dollar received per message, but it will add to reported revenue, and thus will make the gross margin percentage seem smaller. (Saul – It will be pass-through revenue)

Overall, with the strong results we are seeing, we plan to continue to invest in the growth of our business given the tremendous opportunity ahead of us.

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Saul, thanks for highlighting TWLO’s pro-active position re: Robocalls.

Robocalls are about to become a much bigger consumer issue. Consumer Reports has decided to go to the mat on this topic, and is putting a lot of their advocacy muscle against it. It’s very important that TWLO do the right things here, because companies in that space are about to get lambasted.

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Saul,
I started writing a wordy post and just gave up.
Here is my short version of it: Does Twilio’s gross margins ever give you pause?

Looks like slight uptick from Sendgrid will be offset by Verizon/carriers, and mid-50s GM is the way to think about TWLO GM moving forward.

When you have spoken about the power of these new SaaS companies, most of your holdings have higher GM’s than TWLO.

With the concept being that these companies grow to a much greater scale and then can start just printing money and earnings when growth slows, does the lower TWLO GM poke a hole in that story at all for you?

I added a bit today, so I am still a TWLO long, but just curious how you reconcile their lower GM as they are a top 1-2 holding for you for a while now?

thanks,
Dreamer

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Does Twilio’s gross margins ever give you pause?

Looks like slight uptick from Sendgrid will be offset by Verizon/carriers, and mid-50s GM is the way to think about TWLO GM moving forward.

When you have spoken about the power of these new SaaS companies, most of your holdings have higher GM’s than TWLO.

With the concept being that these companies grow to a much greater scale and then can start just printing money and earnings when growth slows, does the lower TWLO GM poke a hole in that story at all for you?

I added a bit today, so I am still a TWLO long, but just curious how you reconcile their lower GM as they are a top 1-2 holding for you for a while now?

I have written about the TWLO GMs a while back. I was comparing them to companies like AYX that have GMs >90%. Most SaaS companies have 70-90+% GMs. TWLO is a bit different. It’s GM’s have been stable in the mid-50s. TWLO’s management has spoken about a long run target of around 65%. The reason is that for now they are trying to get more and more customers. That reasoning didn’t make 100% sense to me because many other companies are growing like made AND maintaining higher margins.

TWLO is a different king of company and I think that TWLO has the potential to grow revenue a lot more within their install base. This is playing out and supported by their >145% $BNR rate.

Of course, it would be better if they had higher GMs. Nevertheless, I’m maintaining my position because of TWLO’s dominance, the growing TAM, expansion into new use cases.

Chris

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We continue to support efforts in to combat the scourge of robo calling. I’m sure you get continual stream of calls from unknown numbers with pre-recorded messages promising a wide variety of wonderful things. It’s gotten so bad that you don’t answer the phone you don’t recognize the number.

So we design our platform to prevent this type of activity. We do not want this business and we never have. We continue to work actively to deter bad actors from our platform. Our terms of service expressly prohibit it. We believe transparency is also important. So we launched a free service to allow consumers to look up any number to see where a call is coming from and help report suspected global calling.

Looking into the future, we believe that the next step is to put consumer back in control of their phone through tools to allow them to receive only wanted communication from trusted partners. We see a world where every time your phone rings, you can see who’s calling, not just the phone number but the name of the personal business and trust in the accuracy of that information. And a software running on your behalf can decide what to do with the caller types. In this vision, everyone receives the communications they want and none of the ones they don’t. It’s your phone and your call. We want to help everyone take back their phone. (Saul – this is very important and removes a big question about Twilio)

We have a once in a generation opportunity ahead of us to revolutionize one of the largest markets in all of IT communications, by moving it from its legacy and hardware to its future and software. It’s still day one of this journey and I couldn’t be more proud of our team and excited about the road ahead.

With that - It may take a small nuclear bomb do get my shares.

Cheers
Qazulight

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If Twilio figures out a way to stop robocalls, then I see its TAM growing exponentially to everyone w/ a cellphone. I currently pay a couple of bucks a month for the app RoboKiller, but it doesn’t work well. It only stops about a third of the BS calls and still lets through unknown numbers. I’ve also researched if Apple has a solution to this problem and could not find anything beyond turning your do not disturb to 24/7 and only allowing your contacts to call through. So my do not disturb is on in this manner and robos still get through! If Twilio can solve this damn problem, they’re going to have more customers than Microsoft Word.

BTL
Long TWLO

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I have written about the TWLO GMs a while back. I was comparing them to companies like AYX that have GMs >90%. Most SaaS companies have 70-90+% GMs. TWLO is a bit different. It’s GM’s have been stable in the mid-50s. TWLO’s management has spoken about a long run target of around 65%. The reason is that for now they are trying to get more and more customers. That reasoning didn’t make 100% sense to me because many other companies are growing like made AND maintaining higher margins.

TWLO is a different king of company and I think that TWLO has the potential to grow revenue a lot more within their install base. This is playing out and supported by their >145% $BNR rate.

Of course, it would be better if they had higher GMs. Nevertheless, I’m maintaining my position because of TWLO’s dominance, the growing TAM, expansion into new use cases.

Chris

Thanks Chris…good points.
I guess I am approaching this as a math problem tied to valuation.

Company A does $800m in rev, grows 50% y/y, mainly recurring sub-based revenues, GM of 60%.
Company B does all the same, but at 85% GM

The only way Company A should be more valuable than B would be based on TAM/SAM/CAP or however you define future upside. Growth rate is part of this, as you know, but you can grow 300% y/y, but if your TAM is “only” $1b, then your upside as a mkt cap should be limited.

It seems you fall into the view that TWLO will make up for it with overall revenue and TAM?
I tend to agree, but always good to hear opposing views.

I would be lying if I said I was a true long-term 5-year+ type of investor. Doesn’t mean I won’t wind up owning TTD or others for 5 years when all said and done, but that isn’t the plan or focus for me. So as long as the market doesn’t seem to mind TWLO having a lower GM than say AYX or others, I will continue to hold and/or add.

My ultimate concern with GM was if/when the P/S for TWLO would start tracking more with their GM compared to peers and less with their Growth rate compared to peers, but that may never happen.

Dreamer

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It seems you fall into the view that TWLO will make up for it with overall revenue and TAM?

Dreamer,

Yes, but not only TAM. It also needs to show evidence that it’s growing into the TAM quickly. The growth rate has been good evidence of that.

Twilio Flex is an example of a new communications offering that is new and could be huge. I would expect TWLO to introduce more such things in the future. This will further increase its TAM and support continued growth. It also provides optionality.

Also, TAM is great but only if it can dominate as TWLO currently is. If a competitor can get traction it could reduce GMs and extend the sales cycle as prospective customers take more time to evaluate and compare offerings from alternative vendors. We want companies where the customers know that they need TWLO.

I don’t expect GMs to go above 65% in the long run. But I expect that the TAM to be huge and growing. I think of TWLO as a modern day AT&T. My investment thesis depends heavily on an ongoing lack of strong competitors to TWLO.

Chris

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I think of TWLO like SQ, when it comes to gross margins.

SQ has pass thru revenue to Visa and Mastercard, which lowers the overall gross margins.

TWLO has pass thru revenue to Verizon, which lowers the gross margins.

Overall it doesn’t affect the gross profit.

I would like to see TWLO have an adjusted revenue like SQ, and break out the revenue without Verizon.

Jim

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The acquisition of Sendgrid has caused the revenue growth of Twilio to slow to about 53% YoY, according to my estimates. This is a huge decline from the 77% revenue growth announced last quarter, and is likely why TWLO closed 6% lower today.

Here’s how I calculated this. Last year,

1Q 2018: $129M Twilio revenue + $32M Sendgrid revenue = $161M combined revenue

This year, Sendgrid, if it grew 30%, would have contributed 32*1.3 = $42M if it had been acquired on Jan. 1. But it was acquired a month later, so I’m estimating it contributed 2/3 of $42M, which is $28M.

But to compare the 3-month period of 1Q 2019 to 1Q 2018, let’s add back the $14M that Sendgrid would have contributed in Jan. to the $233M total revenue that Twilio just reported. Then Twilio would have reported 233 + 14 = $247M revene. Subtracting, we get:

1Q 2019: $205M Twilio revenue + $42M Sendgrid revenue = $247M combined if Sendgrid had been bought on Jan. 1

So the revenue growth rate of the combined entity can be estimated to be 247/161 = 53%

If Sendgrid had not been acquired, Twilio by itself would have grown 205/129 = 59%.

Also, the latest report shows gross profit of $126M against revenue of $233M, which is a Gross Profit Margin of 54%. That’s not really that great, when we look at the GMs of our other SaaS companies. And, yes, that’s because it has to pay a telecom carrier for the phone and SMS charges.

Ron

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nice work rdutt.
But Twillo would not have purchased Sendgrid if they did not think synergies would increase the revenue/return of the combination beyond what each would show alone. Of course they could be wrong ,sellers usually know the warts on their product better than buyers. And I suppose the sale of a company is a bit like an auction, the winner knows he paid top dollar, more than anybody else thought it was worth.