TWLO Dec18 Q - All in.

Investment Analysis Clubs Saul’s Investing Discussions
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When Saul’s enthusiasm for Twilio got me back in (Aug 2018), I saw the potential, but I admit I was tepid. Still raw from a tough 2017, I said, “Probably won’t go higher than 5% here. I believe in the growth, but I can’t ignore the margins.”

Then I doubled my position in September. I was convinced on Twilio once again, and said, “Twilio dominates their industry. Hard to see them not continuing to grow and do great. …but I probably won’t add shares.” I kept it as a top 5 position ever since, but didn’t let it get above 10 or 11%. This quarter, I’m changing my tune. I may not be as bold as Saul (20%+? You’re a wild man in the best way!), but I’ve added more than 30% to my Twilio position in the past week or so. Their growth is simply staggering, and I think it’s only going to get better.

In fact, in my just-for-fun poll on Friday, 85% of you voted that Twilio would report $248m or more in Q1 2019. That would be at least 92% more revenue than in Q1 of 2018. Sure, it’s not all organic, but does anyone care!?

Now I agree, they need to reign in the spending. But all things in time. When a company can grow like this, I want them investing every cent they can to do just that. Plus, as revenue explodes, perhaps many of the acquisition costs have already been absorbed. We’ll just have to see. But the bottom line is, it’s too early to worry about the bottom line. Not when you can grow at this pace.

Q4 Notes
Revenue: 204.3m (up 77%)
Gross Margin: 53%
OpEx: 152m (up 89% - yikes! Let’s look for this to level off.)
SBC: 32m (approx. 16% of revenue…a little high. Hope it comes down over the next few quarters.)
Net Expansion Rate: 147% (WOW.)
Guidance: 225m at high end (74% growth – though not all organic)
Guidance for share count: 130m (a substantial increase and important to note)
Current Share price: 106.85
Market Cap using 130m shares: $13.9 billion
P/S: 21.4 (but if they grow at a 90% to 100% pace, that will fall FAST, even though growth is not all organic)

One analyst on the call pointed out: If I even take out the seasonal election benefit of $10 million, it looks like the average revenue per customer continues to grow at this 25% to 30% rate. You can read the responses but this seems incredibly positive to me. I’ve been calculating it myself and here’s the last few quarters:

Q1: $9,567
Q2: $10,305
Q3: $11,047
Q4: $12,712

So I admit Twilio isn’t perfect, but I’ve seen enough that I’m all in. What does “all in” mean? Well in addition to adding 30%+ to my position, I am upping my conviction in Twilio. They don’t just offer useful software to customers. They don’t even just facilitate customers’ sales like SQ or SHOP. No: Twilio actually becomes an integral part of their customers’ offerings. Truly special.

Bear

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Hey Bear - interesting summery.

I continue to hold Twilio and am comfortable with how it stands (2.5% holding). I’m tempted to add more if the pull back continues, however…

I’m wary about some of the points you mention including: OpEx explosion and complete absence of earnings leverage, high share count dilution and valuation.

A quick question on your raised conviction and going all in if you will?

How much of your thesis is based on the “hopes” for the negative factors coming good?

I ask this as I feel that several on the board have expressed an asymmetric and very selective set of hopes and expectations that require a perfect scenario to come true ie that Twilio continues to perform to type on the positive front (smashing growth guidance etc) and continues along a proven basis but on all negative fronts actually diverges from its historic track record and performs differently (reigning in OpEx, SBC, share count etc)?

What if Twilio continues to perform on all metrics positively and negatively along their historic trend? How would that fit with your thesis or conviction?

Thanks
Ant

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Hi Bear,
great write up… thanks for sharing.

Hi Ant,
You may be over estimating some of the negatives…

e.g. share count went from 100M to 130M as SEND acquisition was all stock…
Previous 4 quarters dilution has been reasonable, so I wouldnt worry about this one.

Also I would think that some of the SBC and Opex jump this quarter was related to closing the SEND acquisition and also offering new TWLO stocks to ex-SEND employees. Again, I think this will subside going forward.

TWLO is disrupting huge market for communication services incl phone, chat, video and now email: this thing can grow literally to multi-billions of $$… think of TWLO as Netflix of communication services… I wouln’t want to be scared out with acquisition related to negative bumps in numbers.

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Hey Nilvest

Yep I absolutely get the potential for TWLO and suspect one of the IAAS/PAAS players willlook to take them out in the future as they fulfil the TAM potential.

On the negatives, I don’t necessarily believe that they will be be all bad going forwards but just interested to understand how these have been considered by folks given that “hope” is not a strategy.

Ant

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From David Skok’s blog

Ron Gill, NetSuite:

As soon as the product starts to see some significant uptake, investors expect that the losses / cash drain should narrow, right? Instead, this is the perfect time to increase investment in the business. which will cause losses to deepen again.

So I think TWLO is doing the exact right thing now to increase CapEX.

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that they will be be all bad going forwards but just interested to understand how these have been considered by folks given that “hope” is not a strategy.

Big concern I have is if TWLO team has learned lessons from Uber. If spend on your products become too big for your client’s bottomline to impact, client will be motivated to reduce that cost and… if a handful of clients do that with one other vendor, you suddenly have a large, formidable vendor.

This is something to monitor, although it is hard for us outsiders to keep a tight watch.
TWLO certainly have large number of competitors, just not as good as TWLO in product and/ or marketing / selling. So it is easy to get there… but it seems a little far from here!

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How much of your thesis is based on the “hopes” for the negative factors coming good?

I ask this as I feel that several on the board have expressed an asymmetric and very selective set of hopes…that require a perfect scenario [on the positive front]…but on all negative fronts actually diverges from its historic track record and performs differently (reigning in OpEx, SBC, share count etc)?

  1. There’s a balance. If the situation on the positive front isn’t as “perfect” as we expect, I would expect more improvement on the negative front (just as I have with Shopify, though they have not delivered).

  2. I disagree regarding revenue – there is no need for a perfect scenario. Twilio’s management are constant sandbaggers, and they just turned in $650m in 2018 revenue and guided for $1.077 billion. That’s 66% growth (though not all organic). So when they beat significantly, as they are accustomed to doing, the total growth rate should probably continue to accelerate, or at the very least hold at 70%+. That’s not the perfect scenario at all – it’s very conservative. Perfect would be for it to keep accelerating to 90%, 100%, and beyond. I don’t think that’s impossible or even improbable, but neither is it necessary.

  3. If they don’t reign in SBC, I’m fine with that. I think they will, but it’s not that big of a deal to me.

  4. The share count hasn’t been a problem. It was 86.1 million 2 years ago, 93.2 million a year ago, and 110.6 million now (even after their secondary offering in May 2018). I assume it’s only going up to 130 million in Q1 because of the SendGrid acquisition which closed on Feb 1st.

  5. I do agree with you that if OpEx continues to soar, it would be a problem. But isn’t it reasonable to assume the increase has something to do with a) the acquisition, b) seasonal factors, c) preparing for more incredible growth, and the like? Here’s what OpEx (I’ll use GAAP to be completely transparent) has been the last several quarters:

Dec17: 80m
Mar18: 94m
Jun18: 102m
Dep18: 117m
Dec18: 152m

Graph that trend, if you like. It’s not a steady increase; rather, the December quarter looks like an outlier. We’ll see what happens, but yes, if OpEx in March is 200m, I’ll be concerned. I think it will be closer to 152m. Maybe not down, but not continuing to skyrocket.

Call that selective or hopeful if you will. I think it’s rather reasonable.

Bear

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They touched on spend a bit in the Q3 19 call. Here’s what the CFO said. Looks like Q4 and Q1 should see pressure, but it should go back to normal after.

You will also notice in the statement of cash flows about $30 million spend on acquisitions in the third quarter. The majority of this was for the Ytica acquisition Jeff mentioned earlier. We also purchased a small computer support to our growing Programmable Wireless efforts. These acquisition had a material impact to our top and bottom line results in the third quarter and expect that to be the case again in the fourth quarter.

we will be moving into new headquarters starting in the first quarter of 2019. Financially, this will have a couple of impacts. In CapEx, you should expect about $40 million of buildup costs split mostly across the next three quarters, at the operating line the fact that we’ll be paying double the rent will likely push us close to break even on the operating line for Q1. Like most other businesses, we pay this seasonal cost from payroll taxes. 401(k) match payments and the like in the first quarter of the year. And the actual rent situation will put incremental pressure on operating expenses in Q1.

https://www.fool.com/earnings/call-transcripts/2018/11/06/tw…

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