Disappointing earnings results from Twilio yesterday, sending its share price -18%. Once again gives reason to most of the board leaders hare to had exited their position at least a few quarters ago. Saul frequently underlines the importance of opportunity cost of capital – that is, the “cost” you pay by staying in a suboptimal position. Well, Twilio’s share price today is exactly the same price as it was a year ago today. Perhaps it’s more shocking to read that Twilio’s share price is -16% YTD (that is, 37% worse than the S&P 500!).
There are some (me included) that hung on to Twilio because of how phenomenal the company is – ah leader in pioneering the API economy, a culture that hangs their customer’s shoes in the office to remind employees to “walk in their customer’s shoes”, a CEO with an evangelical developer following. Yet, by following this board (and Saul in particular), I’ve learned that no matter how incredible the company may be – it doesn’t necessarily mean that it is the best use of our capital. And well, the results speak for themselves. It’s OK to be an admirer of a company without being an investor of it.
(1) Organic revenue growth, which had accelerated from Q2 to Q3 the past two years, was down from 50% YoY in Q2 to 38%
(2) Dollar-Based Net Expansion Rate at 131% was the lowest its been in 7 quarters
(3) Operating expenses rose 64% YoY (similar rate than last quarter), leading to non-Gaap gross margins of 54%
(4) The departure of George Hu (COO), the #3 highest compensated executive at the company who had been in the company for almost 5 years
(5) Negative operating cash flow (-$20M) for the first time in 2+ years
(6) Revenue guidance of 39%-40% YoY next quarter (compared to guidance of 50%-52% last quarter!)
In retrospect, there have been several ‘opportunities’ to exit Twilio. The first one being when Lawson (CEO) highlighted accelerating growth without mentioning it was because of acquisitions; the second one being after the promise of expanding gross margins never game; and the third one being after customer growth last quarter was a meager 2.1% QoQ.
So in summary, it’s clear that my judgement was clouded by the passion for the company. Not to the extent that I didn’t see these issues; but rather I found them simpler to justify. This point is well explained in the Knowledgebase:
“Not accepting that an investment could be a mistake as it continues to go down is a dangerous error, and could be very expensive. A big problem investors have is getting attached to their previous decisions and not being willing to consider that they may have made a mistake…I try to always pay attention to criticism of a stock, to reevaluate my investments, and to get out if it turns out that I’ve made a mistake, or if the situation has changed…
**Sometimes changing your mind in the face of new evidence, and selling when necessary, is the most important thing you can do.**If you are wrong, you can always buy back in. I think that being willing to change my mind in the face of new evidence is one of the most important skills I have. And learning that it’s okay to change your mind when appropriate is one of the most important things I try to teach on this board. Let me remind you that I sometimes make mistakes getting into a company (big mistakes, on occasion), but that I am willing to consider the possibility that I was wrong, and change my mind when I see that I actually was wrong. And that that is very important. Although I realize that I make mistakes, I don’t regret my decisions. I figure I did the best I could at the time. And sometimes I make mistakes getting out too. So what! I can’t be right all the time.”
So, for anyone new in the board – welcome, and I hope this incentivizes you to read the knowledge base for the first, fifth, and fiftieth time. If you’re planning to invest your money, why not invest your time first to improve your returns by an order of magnitude?
Please read this before posting https://discussion.fool.com/we-are-having-a-board-emergency-3492… and visit https://discussion.fool.com/rules-of-the-board-revised-edition-3… to maximize your learning of the board