Hey guys, I am relatively new to this board and have been following it daily for the last few months. I just stumbled across this article that was a bit concerning. Not sure if anyone else here has read it but basically he is talking about how several things should have been added to Twilio’s earning report and that the numbers change dramatically when you do adjust for stock based comp and the flow through of their business model.
He also does mention at the bottom of the article that he may add a short position in the next 72 hours.
What are your thoughts, are these aspects valid or is this an effort to short the stock?
I’m currently long TWLO
This is nothing new, the guy is arguing about stock comp accounting treatment, which you can apply to all fast growing companies that choose to fund growth using SBC instead of cash. He’s correct on a company wide perspective, since you need to account for the expense somehow, but on a per share basis the dilution is already accounted for in the divisor
Overall, the way to think about it is that the cost of equity for fast growing companies is lower than the cost of debt, and the market has not punished companies for compensating their employees in this manner during the explosive growth phase of the S curve. It’s not a new phenomenon at Twilio nor any other hyper growth company and the writer is deluding himself if he thinks he’s found an edge/peculiarity that no one else has discovered.
You’ll find bears (and bulls) on every stock here. Filter the noise. Learn to do your own analysis, and avoid panic over the latest upgrade/downgrade opinion pieces.
wordlessly watching, he waits by the window and wonders…
The author also doesn’t seem to be factoring in that Twilio payed for the SendGrid aquisition entirely with stock.
Alphalite (did I get that handle correct) mentioned that most of the writer’s argument is based on the use of SBC which he asserts to be excessive. In fact, it’s more or less normal. And, when applied as an expense against revenue, it’s tantamount to double accounting as it is also accounted for by dilution. The author completely ignores the dilution.
The author also suggests that the competition will force Twilio to absorb at least some of the zero margin pass through cost of SMS fees (at present it appears this is only relevant to Verizon). The author fails to specifically identify the competitors that will force this outcome, so far as I can determine, there are none.
The author also suggests that Twilio’s desire to combat robocalls is an empty claim as you can get an app such as Truecaller which will do this. However, if you look at the user ratings for Truecaller you will find it is less than effective with several writing that they uninstalled the app. In other words the author either failed to research the app he used as an example to prove his point, or worse, he did research it and didn’t like what he saw so he intentionally decided not to include it.
The only part of his piece that might be valid is that Twilio also removed the taxes paid on SBC from GAAP reporting. I took the author’s word for it without double checking the explanation from Twilio. This appears to be a valid concern as this tax is a real expense (I think, like I said, I didn’t check it). But it’s not hidden, all the numbers are there, if this is a valid concern, you are given the information needed to add it back into the non-GAAP reporting.
This article is a fairly typical short attack. A lot of pumped up arm-waving but not a lot of substance.
But, beware, that’s my take and I didn’t do an in depth analysis. I could be wrong. Best do your own research and reach your own conclusions. You can use my observations as a starting point, not an end point.
The only part of his piece that might be valid is that Twilio also removed the taxes paid on SBC from GAAP reporting.
I didn’t read the article but I think the author (and you) got this backward. GAAP makes believe SBC is an EXPENSE to the company. Therefore under GAAP the company shows LESS profit than they really actually made, and thus pay LESS taxes. (That’s less taxes than they show under adjusted earnings where they figure what they would have paid on their real earnings if GAAP didn’t make them reduce them because of SBC.)
So of course the company removes the extra tax they paid under adjusted reporting, when they talk about GAAP taxes, because they didn’t pay it - because GAAP made them remove those earnings as if they hadn’t made them.
Thanks for the clarification Saul. Yes, you are correct, I got it wrong because I agree that SBC should be subtracted from GAAP in order to give a more realistic picture of performance especially in that the dilution already accounts for it anyway.
I suppose the author, given his perspective that removing SBC from GAAP is inappropriate could argue that his analysis of the treatment of related tax is also inappropriate. Wrong IMO, but consistent.
The author was actually referring to payroll taxes related to SBC not income taxes on profits. I’m not an expert on US tax laws, but in my home country, SBC is deemed as taxable income to the employee, thus, the employer pays payroll taxes for that (ie real cash). The authors point was that it doesn’t seem appropriate to not recognize these real cash expenses in Non-GAAP earnings. I think he has a point here. However, after a quick research, I noticed that many companies do this in their Non-GAAP reconciliation, so at least the author’s attempt to suggest that TWLO is malevolently bending the rules in an unusual way is misleading.
I did a little research why companies add back payroll tax expenses related to SBC to their Non-GAAP earnings but didn’t find anything explaining it. From an economic point of view it seems like these real cash expenses should not be added back to Non-GAAP earnings. Any thoughts?
I agree that was also my take on it. The author referring to them removing the rather large amount of payroll taxes they paid on SBC. Since the company gave out so much SBC, I think it was something like 24% of their total quarterly revenue, the amount of taxes they paid was significant. And I am no expert either but weather other companies remove this or not, I would tend to think they should include it as their income becomes misleading without this added in.
I just wanted to make sure this article didn’t point out something so blaring that it would change the way we think about staying invested in this company.
I appreciate everyone’s responses