Twilio

Investment Analysis Clubs Saul’s Investing Discussions
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Twilio (TWLO) reported … The top line 41% growth is good, of course, but continues to slow. The more concerning thing is that Gross Margin only grew 26% YoY, while OpEx grew 33%. Result? Oper Loss was 13M in Q4 last year. This year it was 20M. They’re losing more and more money even as revenue grows! Yikes!

So of course, shares were up 16% on Wednesday. Ha. Actually that worked out for me because I’d bought a few cheap Call options…just thinking that any decent to good news could cause this beaten down dog to bounce. I was lucky…I guess even a broken clock is right twice a day. But I will NOT be taking possession of the stock, and do not recommend holding it. Next quarter could be very discouraging if the margins do not improve.

And by Fridays close the stock was up 35% on the week.

Bear, I’m not sure we are talking about the same report. I think you are missing that this was the peak quarter for Uber’s influence, but the bad comparisons will drop off within six months. If you look at the rest of Twilio’s clients, revenue from them is growing 62% you. Here are my notes on the quarter:

Earnings of -3 cents beats by 3 cents

Total Revenue of $115 million, up 41%, beats by $11.5 million

Base Revenue of $105 million, up 40%

Dollar-Based Net Expansion Rate of 118%

We are kicking off our tenth year as a company with fabulous momentum. I’m very proud of the team for our fourth quarter performance, but my excitement lies in the foundations we’ve laid for the next ten years of Twilio,” said Jeff Lawson, Twilio’s Co-Founder and CEO. “We are poised for a stellar year ahead, built on our relentless focus on customer success, quality, and software-fueled innovation.”

Quarter Highlights

Total revenue - $115 million, up 41%, and up 15% sequentially.

Base revenue of $105 million, up 40%, and up 14% sequentially…

Adj loss from operations of $3.9 million, down from a profit from operations of $0.1 million a year ago.

Adj net loss of $0.03 , down from breakeven the year before.

Full Year Highlights
Total revenue - $399 million, up 44%

Base revenue of $365.5 million, up 49%.

Adj loss from operations of $20 million, down from a loss of $12 million in 2016.

• Adj net loss of $0.19

48,979 Active Customers, up from 36,606 a year ago.

Conference Call:
Base revenue was up 40% yoy, but up 62% excluding Uber.

Dollar based retention rate was 118%, but 136% without Uber.

“Q4 was the toughest comparison for Uber results, so this drag should lessen as we move pass this peak through 2018”.

Competition: Our competitive dynamics have not changed materially. We have a very fragmented competitive environment, where there is no one or two single competitors that are worth pointing out.

Saul

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I think you are missing that this was the peak quarter for Uber’s influence, but the bad comparisons will drop off within six months. If you look at the rest of Twilio’s clients, revenue from them is growing 62% you.

Hi Saul,

Yes but it’s kind of like the Twilio revenue dropped to near-nothing, but the Twilio expenses did NOT! YoY in December:

Revenue is up 41%
Cost of Revenue is up 61%!

Another way to say this is that Revenue (sans Twilio) was up 62%, and Gross Profit only up 26%! Yikes!

Shopify’s revenue was up 71% and Gross Profit was up 78%.
Talend’s revenue was up 36% and Gross Profit was up 37%.
Hubspot’s revenue was up 39% and Gross Profit was up 44%.
New Relic’s revenue was up 35% and Gross Profit was up 37%.
Arista’s revenue was up 43% and Gross Profit was up 46%.
Twilio’s revenue was up 62% (sans Uber) and Gross Profit was up…26%???

I’ll give you one potential positive for Twilio: Gross Margin stabilized at 52% sequentially. Problem is, that’s down from 58% a year ago, and I’m concerned it includes seasonal help. The CFO who is leaving predicted it will stay at or above where it was this quarter. If so, then maybe in a couple more quarters Twilio’s Gross Profit growth will look much more like these other companies. If not, look out.

My money will be with the companies who are already growing gross margin faster than revenue.

Bear

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Warren Buffett has a few basic rules when he invests,and of course tech is not where he invests, but still applicable. One such rule is that if you do not have pricing power you have nothing.

Twilio appears to lack pricing power.

They did seem to have small but positive cash flow this quarter, which is a positive sign. The one criticism against Twilio, since before the IPO, was lack of pricing power. Many, myself included, argued otherwise. It seems however we were wrong.

Higher volume can trump pricing power. That is a great equation when it works. Does not seem like higher volume with lower prices is bringing in greater gross profit at any reasonable rate.

It is hard to argue against Bear’s point. But am interested in those that have a good point to make that differs with Bear.

Tinker

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Here’ what Bert wrote about gross margins in December:
Last quarter (Sept), gross margins were 52%, down from 56% a year ago. Some of the decline stemmed from the loss of Uber revenues and some stemmed from a shift in international traffic and the strength of the Euro. The results were a bit below guidance due to foreign exchange effects…

Here’s how I see it:
Uber, who had been a huge client (20% or more?) decided to withdraw and do their own thing last year, and their percentage is now down to about 5%. This has camouflaged that the rest of Twilio’s business has been growing over 60% per year. This last report was the worst comparison, because Uber was all in a year ago (Dec 2016 quarter), and is almost all out this quarter (Dec 2017). From now on comparisons start getting markedly better, as Uber’s share of revenue in 2017 was less each quarter, so by the end of this year Uber will be almost irrelevant (as they were only 5% in Dec 2017). Twilio’s growth rate, dollar-based retention rate, etc will show it. Twilio also has one of the three highest Promoter Scores (2nd, as I remember). That and a 136% retention rate certainly imply that their customers like their product. This has finally sunk in which is why Twilio was up 35% last week.

Saul

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This is also the third quarter in a row where Base-Revenue ex-Uber was up over 60% YoY. AND their dollar based retention rate ex-uber is even better at 136% for 4Q17.

Twilio is in the ‘Strong Buy’ column of my portfolio. TWLO (and BOFI) is on my short list.

Bear and I had this same mini-convo on growth percentage vs. cost of revenue over on the TWLO RB board after they reported last quarter.
http://discussion.fool.com/1069/im-a-few-weeks-behindjust-read-t…

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One last post from me on Twilio, and then I will just have to agree to disagree with those who are back on the Twilio train. Bert wrote about them yesterday, so get it while it’s available. Or get it on mobile later, I suppose.

https://seekingalpha.com/article/4148559-twilio-real-hyper-g…

I feel that Bert’s arguments regarding their moat are weak, and I think his handling of the gross margin issue is a bit hopeful. It still could be that Twilio does ok from here, but in my eyes it’s certainly not a slam dunk, and even in the best case I think it gets beat by other investments. So good luck to longs – I probably won’t be betting against you – just going elsewhere with my money.

Bear

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