I know a lot of folks are still interested in TWLO, and rightfully so, as a major building block for software apps.
After seeing its reaccelerating revenue, I put it on the watch list. But after glancing over last quarter’s numbers, I don’t see much appeal, even with the reinvigorated top line.
Deloitte added as premier system integration partner
expanded WhatsApp partnership
My stance: Lots of good trends at first blush: Reaccelerating revenue! Fantastic NER! Customers still growing strong!
But the bad trends greatly outweigh. Adj Gross Profit is growing slower than top line. Adj Gross Margin, already terrible from being a communications middle-man, is DROPPING. Operational income moved a pitiful 300bps.
Zero sign of operational leverage - which is a no go for me.
Okay, terrible is a little strong, but it’s under 70%, which stands out as “poor” in SaaS. In this case is is EVEN MORE CRITICAL to see margins rising to assure this company can get more profitable as it scales. Snowflake is showing this; Twilio is not.
PSA: Just to be clear, when Muji says ‘last quarter’ he means the quarter that reported in October, not the one that will be reported in a couple of weeks.
To fill in a bit of detail on dropping Gross Margin, for what it’s worth, in the latest conference call, CFO Khozema Shipchandler had this to say:
"Third-quarter non-GAAP gross margin was approximately 55% and was negatively impacted by 130 basis points from A2P (Verizon) fees. As you’ll recall from our recent Analyst Day, we discussed that gross margins would be negatively impacted in the short term as the growth of our messaging product has been reaccelerating, a trend that continued in Q3.
To reiterate, this is a trade-off that we will gladly take as it adds gross profit dollars, which we can continue to reinvest, delivering elevated levels of growth. Gross margin was also negatively impacted by about 100 basis points from foreign exchange, primarily from the euro appreciating relative to the U.S. dollar."
The question is whether this is a short term blip or beginning of a downtrend. CFO says short term.
Going forward, a big part of the bull thesis for me is the Segment acquisition, which should tend to skew the overall gross margin higher over time.
Muji, thanks for your write up. You make good points about the margin being subpar compared to our favorite board stocks and slower adj gross profit growth.
I had come to similar conclusions, mostly because of TWLO’s lower gross margins and revenue “only” growing around 50%, that our other stocks would outperform TWLO and that TWLO was not worth owning.
I made this decision in early 2020 when I sold out my entire position. I rebought a small position before Q2 earnings, thinking there would be a “usage bump” (since TWLO’s revenues are usage based), only to be wrong about the Q2 usage bump. So I sold out of TWLO again in the summer (after Q2 earnings).
Here’s why I think maybe I was wrong to sell TWLO. TWLO’s performance last year was way better than DDOG, and it was also better than DOCU.
2020 Performance
TWLO 228%
DDOG 163%
DOCU 209%
I am aware the above evidence is not a smoking gun. Just because stock X outperforms stock Y in some period does not mean stock X is definitely better. But it also might mean that. Perhaps the market values TWLO’s lower margins and lower rev growth more than DDOG and DOCU. There are any number of reasons this could be true, perhaps a bigger TAM? I will hopefully be looking into it further, but in the mean time I recently just reopened a 1% position in TWLO.
TWLO revenue has seasonality as well as usage based component… both can be good for a quarter and change on a whim another quarter.
Q3 had upside due to both election and also new use cases for curb side pick-up and such for retailers… also some video set up for telehealth.
Share price reflects high expectations…
Q4 is probably expected to surprise on higher side thanks to (1) elections and (2) holiday shopping period…
I worry what happens to Q1 revenue guidance as well as actual at the end of March. Elections gone, retail subsided in Q1, telehealth may wane specially for TWLO users… quite a bit of concerns.
Long term, surely TWLO looks very strong. Even though its relatively low grower in 40s and 50s %, it certainly has proven that it can continue to grow >30% CAGR for long time with both organic and M&A strategy.
I think with the pandemic means that people still need to be tested and vaccinated… and crucially get appointments, reminders and results there is still plenty that needs to be communicated in Q1, Q2 and these will be use cases that requires top quality execution…