TWLO Shares Plummet

I think Tamhas articulates it well in that TWLO does not enjoy a significant moat. Admittedly the notion that does cause me concern is that Twilio’s customers ma do away with SMS communication outside the app and jus use in app messaging. Does that make sense and is it a fair concern?

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Once upon a time a stock dropped 60% overnight on a poor earnings report. Analysts called management everything from crooks to idiots. I doubled up and did very nicely. You really have to know your stock to do so. If you said “Wish me luck” you should not have bought the dip because in 9 out of 10 cases it’s a bad idea. Wait for a base to form and buy the upside breakout if and when it happens.

Patience grasshopper!

Denny Schlesinger

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Uber spend at Twilio run rate $10M/qtr and $40M/year, it can develop all in house in such a short order

That’s a lot to pay to TWLO, but this isn’t the only reason Uber is going in-house. Uber’s business is totally dependent on communications between drivers and customers. For such mission critical use cases, Uber cannot allow itself to be totally dependent on another single company. If something were to happen to TWLO even temporarily Uber’s business could come to a standstill. Or worse, what if Lyft bought TWLO to shut Uber down. Even a temporary interruption in Uber’s ride sharing service would be devastating.

One of the things that TWLO “sells” is its reliability. This is mission critical for TWLO for if its customers don’t believe TWLO’s communications are failsafe then they would not put their communications at the mercy of TWLO. This is not a new problem in telecommunications and more recently in cloud services like AWS. Phone companies, internet service providers, cable companies, web hosting, cloud data storage services, etc. all have to prove to their customers that their service is reliable. Some customers require 100% reliability 100% of the time.

Now the question is what other of TWLO’s customers are totally dependent on TWLO’s uninterrupted service and do they believe that TWLO is reliable enough to their satisfaction. I would think that cost is secondary to reliability and it is a competitive advantage (along with a higher likelihood of business continuity) that TWLO can use against its smaller competitors.

Chris

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If something were to happen to TWLO even temporarily Uber’s business could come to a standstill. Or worse, what if Lyft bought TWLO to shut Uber down. Even a temporary interruption in Uber’s ride sharing service would be devastating.

That is an excellent observation. Uber has almost no choice.

One minor tidbit that I’m still unsure of. I’m not certain Uber is pulling all of this in house and don’t believe it was quite clear. Terms such as “Dual Source” and “Multi Source” were used during the call. That could mean competitors of TWLO as opposed to Uber “in house” (which would also be a competitor but not one looking to sell their communications wares).

Take care,
A.J.

Chris,

You hit it right on the head again. Uber’s whole business is practically based upon Twilio. It is their #1 asset, as business critical as email or the telephone to any other business.

That is what makes this move even more perplexing by Uber (keep in mind Uber looks like they stole IP from Google for their autonomous car driving tech (tbd in court, but from what I have read does not look good for Uber there), Uber is working on flying cars (I don’t know what budget, but they are putting something towards it), Uber gave up on China, albeit they walked away with $1 billion dollars and a minority interest in the competitor that drove them out, and Uber has some real internal drama going on as we speak, not to mention more than $1 billion in cash burn per year…so not your usual operation), but this said:

Twilio has kept Uber up 100% of the time, with near precision, to my knowledge. Yet Uber wants to keep that same sort of reliability and precision by doing it themselves. Good luck. It sounds like a management decision that is made of avarice, to pull off what Twilio does for them (and keep it going in perpetuity - which may require a whole new division of people) and hope for the best. I cannot see how this makes any sense, EXCEPT, in the distorted viewpoint of the money, and culture of Uber.

Amazon burns through tons of money, but even they understand restraint and specialization. They are not going to spend tens of millions of to recreate what Twilio does (even though they seem to steal the best product idea from vendors, using their data, and then private sourcing the same type of product themselves - cherry picking (so I have heard, and I believe it), but not for an infrastructure.

Yes, this is business critical. Even more the reason to use the absolute best system and focus on what you do best.

It is the perception that hurts Twilio, and not the reality, as I don’t think a rational company would make this decision. But there is nothing rational when you can act like a deficit spending government (ie. this is the sort of thing that the U.S. government might do and justify because it is other people’s money), and only a corporation with access to that much free cash would do.

Long and short for Twilio, until such time as Twilio can demonstrate CAP (competitive advantage period), and that it is not a fungible commodity, the share price will not thrive. If it does make this demonstration, the share price will soar.

No, in my opinion, Twilio cannot get there on the back of little companies doing little projects. That is the point of why the share price is down. Twilio must become an enterprise company, and make sales into the enterprise (larger projects) in order to get where we would like them to be.

These enterprise projects offer greater value, higher margin, higher switching costs, and real money.

I read the transcript, and Twilio did not mention any specific enterprise wins, but it did mention that there were quite a few in multiple industries, many name brand in nature. SO THAT IS WHERE I AM LOOKING AT TWILIO.

This said, took my wounds, only $4,600 one day loss, very small amount, but no one wants to lose $4,600 on a stupid move, but no sense having it dominate one’s life.

I want to see Twilio start disrupting call centers for enterprises. Then we are talking something worthwhile to invest in from here.

Tinker

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One other thing I would add is that it isn’t as easy to make these telecommunication products as people think. The people that are developing the products do not know all the different protocols and how to set them up. I worked for a telecommunications company and another telecommunications company was trying to set up a voip switch. The voip switch was produced by Lucent telecommunications but they had fired all of their TDM engineers and brought in software engineers. I worked with them for a whole year off and on and they were asking simple questions, such has how long should the delay between an off hook and dialtone be? Now this is something they should have been able to look up in their own knowledge base and they were asking a competitive company to explain how to set up their switch. They finally ended up scrapping the switch and moving on.

So while UBER may want to do this on their own, doesn’t mean they will be able to do it. They may spend millions of dollars, waste lots of time, and eventually find that they are unable to get it to work. IF I was invested in uber (I realize they are not a public company) I would be worried about what this might do to their customer service. Sometimes it is better to pay someone to do something that is not in your expertise.

Andy

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So while UBER may want to do this on their own, doesn’t mean they will be able to do it.

Andy,

Would you think that Uber has tested whatever technology they plan to implement? You know far more about this than most I’m sure. Is it your opinion that it really can’t be put to the true test until it is in use?

It seems strange that a company as reliant on perfect communications as Uber is would roll the dice. I’d assume they’ve already made sure a replacement would work. But I don’t claim to be right about that assumption.

Thanks,
A.J.

A.J.
I think they are going to use twilo and a competitor and try to get theirs working. Maybe I am wrong but I have not heard that Uber has their own system up and working yet. But reading this article it would seem to me that uber does not have their system set up yet.

William Blair’s Bhuvan Suri commented in a report that Twilio’s announcement was “unexpected” as Uber is looking to shift to a multi-sourcing vendor program to optimize its communication needs by use-case and geography.

Uber is looking to find a vendor (or vendors) that can satisfy its price and quality requirements. The analyst believes Uber was already using Nexmo’s technologies prior to the change as many larger businesses tend to dual source.

But at the end of the day, Uber has now added several new vendors which has a “direct negative impact” on its usage of Twilio.

So if you are asking if they have tested other vendors product I would say yes they definitely have. But I am not saying they wouldn’t have tested their own product if they had it, I am stating I doubt they have their own product yet.

It makes sense to me that Uber would want different vendors supplying them service. Most call centers that I have seen always have a vendor and then another for back up. You never want to put all your eggs into a basket. But all the call centers I have seen have never gone out and try to build out their own infrastructure.

So that is where I am coming from A.J. I just do not think UBER has their own communications service built out.

Andy

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So that is where I am coming from A.J. I just do not think UBER has their own communications service built out.

The prompt feedback is much appreciated, Andy.

A.J.

Regardless of whether or not they’ve built their own service already, they are using something else. Based on the numbers given in the conference call, Uber has gone from 17% of revenue to 12% of revenue, which is a drop of $4M in real terms.

George

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Regardless of whether or not they’ve built their own service already, they are using something else. Based on the numbers given in the conference call, Uber has gone from 17% of revenue to 12% of revenue, which is a drop of $4M in real terms.

George

Right George so instead of growing at 47% the worst case is they grow at 41% since we do not know exactly when the Revenue went down last quarter. They lose 26% of market cap and are growing at 41%. Seems like an overreaction by a lot of investors. How many companies grow their revenues at 41%?

So Uber uses them but they want to use other vendors also. Twilo hasn’t lost Uber they just have to share them. This goes on all the time in the tech industry. If Uber was my company I would have done this a long time ago.

Andy
I could be wrong but this seems ridiculous to me.

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Right George so instead of growing at 47% the worst case is they grow at 41% since we do not know exactly when the Revenue went down last quarter. They lose 26% of market cap and are growing at 41%. Seems like an overreaction by a lot of investors. How many companies grow their revenues at 41%?

Hi Andy,

I think there are other issues you are underestimating:

First, this makes oh-so-clear that Twilio isn’t the one-and-only who can do this, and that there are other competitors in the field too (and that they are good enough so that Uber is willing to trust them with the family jewels). That means other enterprises will look more carefully at these competitors more seriously too, for sure.

Second, what does this do to the perceived path toward profitability? Before this occurred it looked like they would hit breakeven in 2017. Now, they are guiding to an adjusted loss that is double the loss of last year (a loss of 28.5 cents compared to a loss of 15 cents). It really pushes out the timeline to breakeven. That’s not good news.

Best,

Saul

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Second, what does this do to the perceived path toward profitability? Before this occurred it looked like they would hit breakeven in 2017. Now, they are guiding to an adjusted loss that is double the loss of last year (a loss of 28.5 cents compared to a loss of 15 cents). It really pushes out the timeline to breakeven. That’s not good news.

They said on the call that the target breakeven date is now Q3 2018 instead of Q4 2017.

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The problem is, if the competitive moat is decreasing so that Twilio is becoming a fungible tool, not quite a commodity, but just one of multiple multi-sourced options, then Twilio will no longer be able to charge a premium, and Twilio will no longer go into every deal with a big S on their chest and close sales as the only company that can provide superior services and product. This whole thing has an entire ricochet effect throughout the entire business.

Prior to earnings everyone assumed Twilio had a large lead on the competition. Afterwards one broker uttered that “we believe Twilio still has a lead” but it was stated in a more modest manner.

If Twilio’s competitive moat is declining rapidly, then so is the long-term value of the business, and projecting to profitability in Q3 2018 is not likely to have much credibility, much staying power, nor lead to sustainable cash generation.

That is the problem.

Does anyone here have any clue if Twilio’s competitive advantage has declined? That is the question the market is asking. They are not concerned with some loss of Uber business itself, as Uber may be crazy, or an outlier, but whether or not it singles a real change in the competitive landscape in this market.

Tinker

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Second, what does this do to the perceived path toward profitability? Before this occurred it looked like they would hit breakeven in 2017. Now, they are guiding to an adjusted loss that is double the loss of last year (a loss of 28.5 cents compared to a loss of 15 cents). It really pushes out the timeline to breakeven. That’s not good news.

Hi Saul,
Right they are predicting profitability in Q3 2018 now instead of Q4 2017. A lot of the smaller companies will not be having more than one company doing their communications, so why not go with the best (Twlo). While all of the enterprise customers will most likely have at least two different companies. I think they have a narrow moat based on their brand and after getting them on the platform you will not want to move off it due to training issues.

But like I said, I think UBER had to do this because this is key to their business. When something is key to your business you would not put that in the hands of another company. They are not saying that Twlo is bad they are just saying we need a back up just in case.

That is my view and is why I bought more. If they drop down to the low 30’s in growth then I will think about selling it off.

Andy

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Does anyone here have any clue if Twilio’s competitive advantage has declined? That is the question the market is asking. They are not concerned with some loss of Uber business itself, as Uber may be crazy, or an outlier, but whether or not it singles a real change in the competitive landscape in this market.

I don’t recall the following question being asked on the conference call:

What is the churn? We no the net customer additions was about 3700 last quarter. It has accelerated. But we don’t know how many customers left or reduced their spend. WE know the net spend per customer is increasing. Management has said, though, that Uber is a special case, that is a special case in the amount of business they do with TWLO and a special case in being able to leave TWLO.

If TWLO is replaceable or is their offering is on par with the competition then we would expect to see customers switching or the spend per customer dropping. This is not happening yet as far as we can tell.

Chris

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This video of Jeff Lawson on Cramer is excellent: https://youtu.be/JgWgUWcQB2c

Thanks to PineappleShell for posting on the TWLO RB board.

Saul summarized the worries of many:

First, this makes oh-so-clear that Twilio isn’t the one-and-only who can do this, and that there are other competitors in the field too (and that they are good enough so that Uber is willing to trust them with the family jewels). That means other enterprises will look more carefully at these competitors more seriously too, for sure.

Second, what does this do to the perceived path toward profitability? Before this occurred it looked like they would hit breakeven in 2017. Now, they are guiding to an adjusted loss that is double the loss of last year (a loss of 28.5 cents compared to a loss of 15 cents). It really pushes out the timeline to breakeven. That’s not good news.

But I am undeterred. I’m sticking with Twilio. We’ve seen a lot of examples where a company, even a category leader like Twilio, grows even as competitors grow right along with them – even without commoditization and margins going to crap. In the video, Lawson makes it clear that Whatsapp has actually already been doing what Uber is starting to do. There’s nothing wrong with spreading the love around. That doesn’t mean there’s any reason to think Twilio will miss out altogether, on Uber or on other large opportunities. A positive spin would be that it could perhaps even help them get in with a client who uses a competitor already.

Anyway, just wanted to share the video.

Bear
long TWLO

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