Twilio S&M spending analysis

Referring to my earlier post I tried to dig into Twilio Sales&Marketing spending patterns.

First, let’s take a look at the raw numbers of S&M spending(these are Non-GAAP):

	Q1	Q2	Q3	Q4	Sum
2016	12,69	17,04	14,44	15,96	60,13
2017	18,77	23,46	22,81	24,45	89,49
2018	28,67	32,15	39,97	48,9	149,69
2019	53,43				

Sequential Growth

	Q1	Q2	Q3	Q4
2016		34,28%	-15,26%	10,53%
2017	17,61%	24,99%	-2,77%	7,19%
2018	17,26%	12,14%	24,32%	22,34%
2019	9,26%	

That’s very interesting. You see that in 2016 and 2017 the spending patterns are somewhat similar. Especially worth mentioning is the sequential decline in s&m spending between Q2 and Q3. But then in 2018 the company really ramped up its spending substantially compared to previous years. That obviously helped to spur growth, as the company went from 54% yoy rev-growth in Q2 2018 to 67% in Q3 and 77% in Q4. Looking at it from another angle, let’s compare the first half of the year S&M spending with the second half:

	H1	H2		Seq growth
2016	29,73	30,4		2,25 %
2017	42,23	47,26		11,91 %
2018	60,82	88,87		46,12 %
2019	53,43	0		

So definitely the company accelerated its spending. Importantly, though, the company also translated this accelerated spending into more revenues, which you can also see from the fact that S&M expenses as a percentage of revenue remained relatively stable:

S&M spending as a percentage of Revenue:

	Q1	Q2	Q3	Q4	Full Year
2016	21,51%	26,22%	20,06%	19,46%	21,63%
2017	21,57%	24,44%	22,58%	21,26%	22,43%
2018	22,22%	21,72%	23,65%	23,97%	23,03%
2019	22,93%				

(Q1 2019 could potentially be a bit skewed bc of the SendGrid acquisition but I didn’t adjust the numbers and haven’t looked into it yet. Just to keep in mind.)

My last piece of analysis relates to the sequential incremental S&M spending in dollar terms:

Incremental S&M spending:

	Q1	Q2	Q3	Q4
2016		4,35	-2,6	1,52
2017	2,81	4,69	-0,65	1,64
2018	4,22	3,48	7,82	8,93
2019	4,53			

Again, it is a good illustration of what we already saw from sequential growth patterns. The accelerated spending in Q3 and Q4 2018 is even more visible here in my view.

To put this incremental spending into perspective I also added incremental revenue:

Incremental Revenue:				
	Q1	Q2	Q3	Q4
2016		6	7	10
2017	5	9	5	14
2018	14	19	21	35
2019	29			

Let’s put these two together:

Incremental S&M as a percentage of revenue:

	Q1	Q2	Q3	Q4
2016		72,50%	-37,14%	15,20%
2017	56,20%	52,11%	-13,00%	11,71%
2018	30,14%	18,32%	37,24%	25,51%
2019	15,62%			

It’s hard for me to spot a trend here except for what we already learned. Q3 and Q4 2018 are definitely outliers. The low Q1 2019 number could be impacted by the SendGrid acquisition.

However, finishing up, I have a last (slightly cautionary) table to share. I will call this the incremental S&M efficiency score; it is calculated by dividing the incremental revenue by incremental S&M spending (so basically incremental S&M as a percentage of revenue in reverse):

Incremental S&M efficiency score:

	Q1	Q2	Q3	Q4
2016		1,38	-2,69	6,58
2017	1,78	1,92	-7,69	8,54
2018	3,32	5,46	2,69	3,92
2019	6,40			 

What this table tells us is that, for example, every incremental dollar put in S&M in Q4 2017 yielded 8.54 dollars of revenue in that quarter. In Q3 2016 and 2017, the numbers are negative bc Twilio spent less sequentially. Which leads to an important point: Obviously, the marketing spending of one quarter cannot be directly linked to the revenue of one specific quarter. Therefore, all this analysis has to be seen with a grain of salt – it’s an approximation at best. Still, you can see that when the company increased spending drastically in Q3 and Q4 2018, that didn’t yield so much additional revenue, which could be interpreted as a warning sign. Then again, Q1 2019 saw an above average efficiency score which could point to the fact that the increased spending in H2 2018 is starting to show traction in early 2019. We’ll have to wait and see.

I was inspired to make this deep dive by the article I linked earlier. There, the author wrote about Twilio that “they have adopted a developer first go to market strategy. This means the secret sauce here is developer evangelism, SEO spend, and great API documentation and support.” I wanted to look into how much Twilio is really buying their revenue and if they are improving or not.

What’s the takeaway? For now, everything looks ok to me. The company increases S&M spending → revenue follows. That’s how it’s supposed to be. Of course, ideally, you would want S&M spending as a percentage of revenue going down sooner than later. That is not happening yet. Actually, if you look at the yoy comparisons S&M spending went up slightly every year from 21.6% in 2016, to 22.4% in 2017, to 23% in 2018. Again, not ideal but not something I’m losing sleep over at the moment. I’m curious to see how this dynamic plays out in the rest of 2019 and will definitely keep tracking these numbers.

What do you think about that all? Much work for little insight gained? Or did you also see some interesting patterns? Curious to hear feedback.



I think it’s a good look at the spend, nice work.

I might suggest you could expect at least one quarter lag between incremental spend and incremental revenue.

Also hard to tell what they are spending on, in terms of the spend coverage to determine effectiveness. The holistic view you have is really what matters, but internally I am sure they are doing analysis to find the sales funnel weakness.

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Non-GAAP S&M expense: 

	Q1	Q2	Q3	Q4	Sum
2016	12,69	17,04	14,44	15,96	60,13
2017	18,77	23,46	22,81	24,45	89,49
2018	28,67	32,15	39,97	48,9	149,69
2019	53,43		

GAAP S&M expense: 

	Q1	Q2	Q3	Q4	Sum
2016	13,42   18,16   15,87   17,82   65,27
2017	21,12   26,15   25,78   27,62   100,67
2018	32,82   37,75   45,95   59,04   175,56
2019	71,61

Niki, I used your non-GAAP numbers here, but I noticed that GAAP and non-GAAP diverged by an 8.5% differential in 2016, a 12.5% differential in 2017, and a 17.3% differential last year. The 34% in Q1 is probably due to the acquisition. But still, the trend here is not encouraging.

Honestly, Q1 was a startling quarter. Revenue grew a great deal less than we expected (…) and expenses grew faster than ever, and much faster than revenue – even including the acquisition! I’m surprised no one’s more concerned…I guess Twilio’s taught us not to worry because of so many quarters of such success since the Uber fiasco.

Twilio is still a top 2 position for me, but I did trim it quite a bit after earnings, and I’m going to be watching them like a hawk going into next quarter.