I had to wait to reply to this post as I added to my Twilio position after it reported on Tuesday and needed to comply with Motley Fool trading restriction policy before posting.
I wanted to add a bit to what Saul said regarding guidance.
I don’t even look at guidance any more because these companies all guide as low as possible so they can beat guidance by a bunch and raise guidance every quarter. It’s a waste of time.
- When a company gives guidance for the following quarter and is giving that guidance on a date well into the quarter it probably already has a pretty good idea where it will finish the quarter. One of my favorites in this category is Arista Networks. The company does not give full year guidance and only guides for the current quarter. This past quarter Arista reported on Thursday, February 14th, and issued guidance only for Q1. In essence this is six week guidance!
Maybe 40 years ago before companies had access to instantaneous data on shipments and order information you might be able to say there was some risk to that forecast. Now with the up to the minute info that most CFO’s have access to Arista & Twilio are essentially predicting what will happen in the next six weeks when they issue guidance mid-quarter.
- Someone already mentioned this & I would like to elaborate specifically from the sales side of things.
Twilio management has to be cognizant of “integration issues” when they issue guidance based on the merger with Sendgrid.
Having participated, a time or two, in sales integration of two companies coming together can enlighten one as to the fun and games that exist when two companies combine and quotas have to be assigned to folks in two sales teams that are becoming one.
First, like two snorting herds of buffalo, the sales team from each individual company begins to engage with each other. There is a lot of stomping, kicking, and marking of territory that goes on. Feeling each other out trying to figure out who is who in what will be the new zoo.
At the end of this management decides the best way to make this all work strategically is to provide lower quotas or higher incentives in the short-term. It is a short-term tactic to try and achieve a long-term objective of sales force synergy and customer satisfaction. It does not cost the company very much to do this and reduces the risk of problems with merger integration.
Management must give guidance to the investor community that is consistent with the overall company budget and quotas that will be assigned across the company’s sales organization. It does not have to be exact but it can’t wildly divergent from the internal company plans for growth.
So my guess is that the guidance we received from Twilio management for the full year of 2019 is consistent with the quotas that are being established within the company now. As the company goes forward and each successive quarter goes from a “forecast” to an “actual” management may update guidance to a higher growth rate.
The bottom line is there is no sense in throwing further turbulence into a mix of trying to get two sales teams to join forces with quotas that may appear unrealistic just to appease the appetites of Wall Street analysts. So the company issues annual guidance consistent with internal metrics and moves on.
As I said upfront, I added to my position on the weakness. (Now Twilio is 2.5% of my portfolio and 4% of the cost basis of the portfolio.)
Frank - long ANET, long TWLO, see profile for all holdings