Twilio's runaway spending

Investment Analysis Clubs Saul’s Investing Discussions
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I expressed concerns last Q: https://discussion.fool.com/however-i-just-cant-figure-out-why-t…

And they did NOTHING to assuage the concerns this quarter. I realize maybe I’m the only one who cares, and they’re spending a lot of money because they’re trying to change the world, etc, etc…but look at the magnitude of this!

OpEx (in thousands)
Jun18: 101,772 (up 68% YoY)
Sep18: 116,897 (up 53% YoY)
Dec18: 152,001 (up 89% YoY)
Mar19: 213,638 (up 128% YoY)
Jun19: 243,747 (up 140% YoY)

Well, sure, but they had an acquisition. Ok…but revenue isn’t up triple digits! Why are expenses?

Ok, but they’re paying for a lot of it with SBC.

Stock Based Compensation (in thousands)
Jun18: 21,006
Sep18: 22,741
Dec18: 31,986
Mar19: 58,324
Jun19: 70,740

…well, that (plus the acquisition and secondary offering) also means share count is ballooning!

Non-GAAP weighted-average shares used to compute Non-GAAP net income (loss) per share attributable to common stockholders, diluted
Jun18: 106,603,871
Sep18: 109,820,652
Dec18: 110,616,264
Mar19: 130,082,781
Jun19: 143,660,078

I’m not freaking out and selling all my Twilio, but I have certainly trimmed it…and more importantly, I just don’t see a lot of near term catalysts for share price appreciation. I mean they’re simply not growing at 60% or 70% anymore, or even close now including Sendgrid. In other words, Legacy Twilio revenue growth rate is over 50% but Sendgrid’s isn’t.

I’m curious what others think. Do you all see this suddenly changing and reaccelerating because of synergies? Or is this company likely to grow at more like between 40% and 50% moving forward? Perhaps all the spending I outlined above will bear fruit. So far, we’ve seen the opposite.

Bear

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Hi Bear,

For OpEx, aren’t you combining the OpEx for two companies there in March and June. They have acquired SendGrid which is still operating (not counting the OpEx costs of the acquisition itself, lawyers, accountants, etc). You have a much larger company here. And you are using the GAAP figures which include the SBC that they had to pay as part of the acquisition. Also they are coming out with one new product after another. I’m sorry but that particular concern seems way inflated to me.

Then you accuse them of using too much SBC, but you already included that in your earlier argument about OpEx, by using GAAP figures, so you are counting the SBC twice. And of course SBC rises when you make a major acquisition like that. Probably they had to give some shares to all the key figures and researchers that they wanted to keep to give them a share in the success of the combined company.

Then you are complaining that they have 30% more shares than they had in December… but they have 40% more company! They issued shares to help then buy the company. But you knew that! And the acquisition was necessary. They needed email to give a total experience. And trying to reinvent the wheel would have left them many years behind.

I just don’t buy those particular concerns. I have commented that I thought they overhyped the immediate revenue opportunity or Flex and Sendgrid, which left everyone a bit disappointed, me included. And I’m also disappointed in their organic growth rate this quarter. But those are separate issues than combining OpEx from two companies, and complaining about an increase in share count when you are well aware that they made big acquisition, and then freaking out about how high the share count has risen risen.

Just my opinion, and I’ve been very wrong before.

Best,

Saul

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Bear -

I noticed the same and it applies to non-GAAP as well.


												
												
Non-GAAP Operating Expenses							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2016							2016					0
2017	$54.96	$59.59	$61.42	$65.52	$241.48		2017					
2018	$75.65	$79.00	$89.29	$107.94	$351.87		2018	37.6%	32.6%	45.4%	64.8%	45.7%
2019	$132.96	$162.04					2019	75.8%	105.1%	-100.0%	-100.0%	-100.0%

					
Non-GAAP Op Ex % Revenues					
	Q1	Q2	Q3	Q4	YR
2016					
2017	62.9%	62.2%	61.1%	56.9%	60.5%
2018	58.6%	53.5%	52.9%	52.8%	54.1%
2019	57.0%	58.9%	0.0%	#DIV/0!	0.0%

I’m not exactly sure what to make of it yet and will likely to hold off on making any decisions until after the SIGNAL conference.

Thinking…thinking…thinking…

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For OpEx, aren’t you combining the OpEx for two companies there in March and June.

Yes. Revenue went from 148m to 275m YoY (up 86%), and OpEx went from 102m to 244m (up 140%). That was the main point of the post.

But those are separate issues than combining OpEx from two companies, and complaining about an increase in share count when you are well aware that they made big acquisition, and then freaking out about how high the share count has risen risen.

I’m confused at where I lost you. I acknowledged the acquisition. And I explicitly said, I’m not freaking out and selling all my Twilio. Again, my point was simply that expenses are up a lot more than revenue including expenses and revenue from the Sendrgid acquisition.

I have commented that I thought they overhyped the immediate revenue opportunity or Flex and Sendgrid, which left everyone a bit disappointed, me included. And I’m also disappointed in their organic growth rate this quarter.

So you’re concerned too? What do you expect going forward? I’m struggling to see how Flex and Sendgrid are going to make a huge difference going forward, reaccelerate total revenue, or something like that. What do you think? Will they eventually pay off? Neither they nor any of the other new products seem to be driving exceptional growth right now.

Bear

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and more importantly, I just don’t see a lot of near term catalysts for share price appreciation.

Signal conference is this coming week. Sometimes big things get announced at these annual events. If you’re considering selling, why not wait a few days to see if they announce anything big?

Chris

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Hi again Bear,

Well the acquisition was just over a quarter ago, so they have probably been busy training the Sendgrid sales forces to sell Twilio products to their customers, and the Twilio sales force to sell Sendgrid to its customers. Those aren’t overnight changes. But it is to be remembered that Sendgrid about triples the number of total customers so that if they can cross-sell products there is a lot of potential there.

As far as Flex, the way they were talking about how excited everyone was with the beta, I thought they’d have more Flex revenue than they do now, but it’s a longer sales cycle because it means changing the way BIG companies run their call centers.

And let’s not forget that part of that increase in shares was from a secondary that brought in a billion dollars, and let’s not forget that the Twilio stand-alone growth rate this quarter was 56%, which certainly isn’t chicken-feed, and that they have a 140% dollar based expansion rate, not considering Sendgrid at all in that, and that they are purposely running the business at just over breakeven (no losses) and ploughing the rest into taking over the world.

As far as what I expect going forward, damned if I know.

Best,

Saul

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Twilio is supposed to be operating as a separate entity with its own CEO. For this reason I question if they are really doing effective cross selling activities or training. Throwing leads over the wall to the other division may be the extent of their “synergy” and I’m guessing they aren’t training both companies on the others product if they are a separate company.

Also any acquisition related cost should be excluded from non-GAAP earnings and opex related to the acquisition should be broken down in the footnotes of the earnings statements.

I am not sure how long we should give to judge the success of synergy of Sendgrid and flex. It’s what I was banking on this year for twlo. I sold my shares a month or two ago as part of my consolidation efforts.

I am not sure what’s to be gained by having the companies run separate. I have worked at a large corporation that would buy a lot of other companies. Sone would be an immediate integration. Others would be run separate or quasi-separate for a while because they promised management of the new company they would be separate and they’d keep their jobs, only to be blended in and cutting of management a few years later.

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Correction-I meant Sendgrid is being run as a separate entity and the CEO is still running the company. A post edit feature would be nice!

Given all this it makes me wonder the likelihood of Sendgrid really contributing to strong growth especially after a full year of their numbers being part of the total revenue.

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Running Sendgrid as a “separate” company does not have anything to do with what synergies they may pursue between the two “separate” companies. Separation is largely a matter of accounting, not necessarily operations. I worked at a Fortune 50 company that made many acquisitions and a few divestitures while I worked there. I was involved in a few of both activities due to the implications related to information management.

I can tell you unequivocally that acquiring a “separate” company that maintains it’s separate identity and to a large extent its existing management team had absolutely zero relationship to operational synergy. The acquired company was more or less “arms-length” from an accounting perspective, but was rapidly integrated with respect to operational functions, information management and even to a large extent, functional applications related to day-to-day operations.

This level of integration had a pronounced impact on divestitures. Yes, the accounting and financial aspects were straightforward, but the information ownership and management was a sticky wicket. So much so that it was the main impediment to a rapid close of the sale.

Is this generally true? I have no way of knowing. My experience is anecdotal with no statistical validation. Take it for what it’s worth.

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Running Sendgrid as a “separate” company does not have anything to do with what synergies they may pursue between the two “separate” companies. Separation is largely a matter of accounting, not necessarily operations. I worked at a Fortune 50 company that made many acquisitions and a few divestitures while I worked there. I was involved in a few of both activities due to the implications related to information management.

I can tell you unequivocally that acquiring a “separate” company that maintains it’s separate identity and to a large extent its existing management team had absolutely zero relationship to operational synergy. The acquired company was more or less “arms-length” from an accounting perspective, but was rapidly integrated with respect to operational functions, information management and even to a large extent, functional applications related to day-to-day operations.

Not in my experience. Maybe your company is different. But I have been involved with several Fortune 500 companies that maintained separate entities that literally competed with one another. So you can’t make that comment as a rule of thumb that applies to all companies or Twilio. I would be interested in knowing if the sales reps are being crossed trained and compensated for each other’s product lines.

I could not find whether Twilio and SendGrid will still be billing separately or combined. I did see one comment that immediately after the acquisition, SendGrid raised prices. This was the email they received:

“As a valued SendGrid customer, we would like to inform you of an upcoming price change to SendGrid’s Essentials plans, effective January 1st, 2019. This change reflects ongoing investment in our infrastructure, products, and services, ensuring that we continue to provide you with a best-in-class experience.
Your Essentials 40K plan price will change from $9.95 per month to $14.95 per month. Please note, this pricing will be in effect for new customers on December 1st, 2018, but as an existing customer, we’re providing you with additional notice in case you have any questions. Your January bill will reflect these changes.”

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Here is a job listing for a Twilio Account Executive-Email.
https://www.glassdoor.com/job-listing/commercial-account-exe…

At Twilio SendGrid we’re focused on developing and expanding our world-class, cloud-based customer engagement platform. Twilio SendGrid is a company that is empowering the world’s developers with modern communication in order to build better applications. Twilio SendGrid is a fast moving, lean company where every team member has a huge stake in the company’s success.

The Commercial Account Executive role at Twilio SendGrid is pivotal to the success of the organization. It is an exciting opportunity to be part of a highly motivated sales team in an extremely fast-paced and rapidly changing environment. The ideal candidate is ambitious and seeks a challenging work environment, as well as possesses the desire to contribute to the growth of a company that is changing an industry.

Looking through their job listings it seems to me the operations are separate down to the sales level. This suggests to me, if you are a Twilio rep, if there’s a SendGrid issue/opp, you send it to your counterpart at SendGrid. Thus there is probably little to no cross-training going on.

https://www.glassdoor.com/Jobs/Twilio-Jobs-E410790.htm

Also if you want to use SendGrid, you have to create a new account. However apparently you can send emails in your Twilio dashboard.

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The SendGrid acquisition is interesting. It comes back to a basic premise which (I think) underlies almost all of the stocks discussed on this board:

“Where are we in the digital transformation of the world?”

If you think we’re mostly done, the SendGrid acquisition is stupid (IMHO). If you think we’re just getting started, then SendGrid acquisition was a must (IMHO).

The only way the SendGrid acquisition makes sense (to me) is if they are targeting businesses who haven’t solved the communication problem already. They do make sort of reference to this in the CC:

  • “Fortune 50 Retail company moving to building software instead of buying it”,
  • “Every company is becoming a software company”,
  • “If one company does it (develops their own differentiated solution), every company needs to.”

SBC seems a bit outrageous to me, but fresh from my NTNX debacle I have no opinion :slight_smile:

cheers
Greg

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I asked Bert about the overhyping of Flex and about the cross training with Sendgrid. Again, if yo are in this space with any seriousness and don’t subscribe to Bert’s newsletter, as well as MF Rule Breakers and MF Stock advisor, I think you are out of your minds. The potential payback is so much higher than the cost that it is ridiculous.

Here’s an excerpt from Bert’s response:

Well, I agree that Flex was over hyped more than a little but then again, this is a software company and that is what they do… Flex was just into General Availabilty last quarter. So, it has been in the market for 120 days-maybe, probably less than that…

The answer to your question regarding SendGrid is that they ARE cross-training. Part of the overall integration issue has to do with product integrations. Over time, you would expect that e-mail is just a tab you can buy on their omni-channel platform. But at the moment, they are cross training because there are nuances to selling e-mail…

There was more, but that should help.

Saul

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Docusign is a very good example of new products that companies promulgate with great fan fare.

Pure Storage the same.

Docusign has the new product category system of agreements. The CEO says it will revolutionize the company with $25 billion market opportunity, doubling the TAM, etc.

Pure brings forward with Nvidia partnership its AI optimizing platform FlashBlade. First of its kind, amazing.

The problem is, is that most of these products, no matter how great, usually take much longer to take off, and have small impact on the top and bottom line, disappointing in the end.

If one of the above products for Docusign or Pure really took off then so would the share price (see Mongo with how well and extraordinary Atlas took off, or Square’s app that now outnumbers Paypal’s in downloads).

The same is going to happen to Twilio and Flex. In the end, unless it really, really, takes off in a tornadic fashion, it will turn into just another product category for Twilio. However, if it is that rare product that really does take off then the share price will move. I would expect Flex will be a successful product that won’t be very material however for a few years.

Twilio could surprise us. That is the normal way of new product launches and market acceptance however.

Tinker

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Twilio is announcing Crisis Response and Prevention initiative, Verified by Twilio, to restore trust in the phone call AND Twilio Conversations( most probably another competitor for Slak?) And still not getting much love from investors.

Are we going to see a delayed response or there is no extra love left for Twilio?

Any thoughts?

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I think our main problem with basically all of our cloud stocks is that the major hedge funs are sitting out right now during such global unrest and market volitlity. They capped their gains in already when we saw that steep drop and none of our stocks have recovered since. MDB worries me the most as it was my largest position and now isn’t gaining any momentum. It’s hard to know what to do. In the past these would be amazing buying opportunities, but without the hedge funds participating I find it hard to believe we will start some real momentum again soon. Of course the fundamentals of our companies haven’t changed and so I would believe in the long run they will recover but who knows when that will be and if they will recover from what base. Unfortunately right now the macro conditions are just too intense for us to ignore and say oh our stocks will recover no matter what because the fundamentals are strong. Without big money buying our stocks they aren’t going to move far.

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Inphanint,

How do you know what the hedge funds are doing? I can tell you that if your thesis is right, you needn’t panic. I have lived through numerous “catastrophes” and am still standing.

Thanks,

Gordon

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Certainly, and I’m not selling my portfolio. I didn’t mean to give the wrong idea. I still have 86% in stocks, 2% options and 12% cash.
At the end of the day I don’t KNOW what all hedge funds are doing. This is just based off an article from a hedge fund on what they and others are doing and their prediction.

https://www.google.com/amp/s/amp.ft.com/content/be67a38e-b85…

Some are saying the global issues with a currency war and trade war are the biggest events weighing on the economy since the Great Depression. So obviously I’m on alert and worried but I do believe in our companies as well.

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Some are saying the global issues with a currency war and trade war are the biggest events weighing on the economy since the Great Depression. So obviously I’m on alert and worried but I do believe in our companies as well.

There areas many opinions as there are bellybuttons! What’s Masanari Takada’s track record? Do you remember when Abby Cohen was famous?

Successes and failures

She is famous for predicting the bull market of the 1990s early in the decade, and was named Institutional Investor’s top strategist in 1998 and 1999.[2] However, she developed a reputation as a so-called “perma-bull”, receiving criticism for continued bullish predictions after March 2000 as the stock market entered a dramatic decline.[9]

Her reputation was further damaged when she failed to foresee the great Bear Market of 2008. In December 2007, she predicted the S&P 500 index would rally to 1,675 in 2008, the most optimistic of 14 Wall Street forecasters. The S&P 500 traded as low as 741 by November 2008, 56% below her prediction. On March 8, 2008, Goldman Sachs announced that Cohen was being replaced by David Kostin as the bank’s chief forecaster for the U.S. stock market.[10]

https://en.wikipedia.org/wiki/Abby_Joseph_Cohen#Successes_an…

Denny Schlesinger

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In the most recent CC they mentioned that the two sales teams are being cross-trained and have already made some cross sales.

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