TWLO Math not adding up

I have cut my TWLO holding by 30% this morning after seeing the earnings announcement.

Things I didn’t like:
Reporting a headline of Q1 Total Revenue of $233.1 million, up 81% year-over-year
To get to 81%, you add 2/3 of a quarter of revenue from SendGrid in the numerator and 0 in the denominator. Perhaps that is GAAP ( would love for some color if someone knows ) but it seems pretty misleading. I would say that their effective revenue growth was ~55% if you factor in 2/3 of SendGrid’s 2018 Q1 revenues in the denominator.

It sounds like SendGrid should have good synergy and pay off as an acquisition, but I expect TWLO to be much less attractive going forward from a growth story perspective for two reasons. If you take a company growing at 60% and add a company growing at 30%, there is a pretty good chance that will dilute the overall growth percentage. Second, in their announcement, they have Q2 Non-GAAP weighted average shares outstanding (millions) of 140 shares vs 96 a year ago. I know some do not care about valuation, but if you look at something like Growth/PS, it’s going to look much worse in the near term.

I’d love to be shown the error of my thinking, but I wouldn’t be surprised to see the stock price take a bit of a breather here.

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Things I didn’t like:
Reporting a headline of Q1 Total Revenue of $233.1 million, up 81% year-over-year

That is pretty standard – I don’t see any foul play there.

However, on pretty much everything else, I agree with you. The growth acceleration to 77% last Q was one-time (as they said last Q it would be), and 60% (Twilio) + 30% (SendGrid) isn’t nearly as impressive.

What I haven’t seen anyone say, but is pretty alarming, is how much Operating Expenses were up. Last year in Q1 they spent 94m. This year it was 214m. Hopefully some of that is due to one-time acquisition expenses, but I did not see them say so in the CC yesterday. And even if so, that increase is still jaw dropping.

Bear

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Bear,

If we look at the Op Ex from adjusted basis, excluding SBC, Acquisition Related Expenses, the % of Op Ex over Rev in Q1 2019 is fairly similar to Q1 2018

Adj R&D 21% vs. 23%
Adj Sales & Mkting 23% vs 22%
Adj. G&A 13% vs. 14%
Adj. Op Margin 1% vs. -4%

The main drivers of the increase in GAAP Op Ex is the increase in SBC/related payroll ($65M vs. $18M), Aquisition Related Cost $12.5M, plus the normal increase of business.

Now, is it OK for SBC and share counts to go up that much? That’s a dif discussion.

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If you take a company growing at 60% and add a company growing at 30%, there is a pretty good chance that will dilute the overall growth percentage.

Be careful here, that is not how math works. You can’t just average ratios since the denominator matters. The following statement: ((a / b) + (c / d)) / 2 what are are suggesting is NOT the same as the this statement: (a + c) / (b + d).

Make sure if you do this, you account for the fact that SEND has different baseline rates (previous quarter revs).

Hope this helps!

B

Now, is it OK for SBC and share counts to go up that much? That’s a dif discussion.

When cashflow is tight, SBC/share-count is a good choice.

Denny Schlesinger

Wasn’t the share count increase due to the all stock transaction associated with Sendgrid?
A

dopple can you give me your twitter handle or other means to PM you. I want to share some thing with you.

Yes, it is GAAP to report the revenue contributed by a company that is acquired. There’s nothing “misleading” at all about this.

Twilio’s growth rate will be outsized for the next three quarters as the comparative will be sans-SEND. Starting in Q1 2020, comparatives will be more meaningful, but it’s also entirely likely that TWLO will
make another acquisition, and another a year after that, leading to more and more revenues.

TWLO stated clearly on the CC that organic growth was >60%.

Non-GAAP weighted shares outstanding were 130M in Q1 (not 140M, as you point out), but would have been 116M without the shares issued to buy SEND (send was all-stock acquisition). So, this is less reckless dilution than it is just a savvy financing.

Lastly, “if you look at something like Growth/PS, it will look much worse in the near term,” is specifically wrong. Long term (Q1 20 and beyond) centeris paribus, revenue GROWTH will be lower than without SEND, but that’s rather foolish to deride, as total revenues will be higher.

Eric Przybylski, CPA

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Ant: I think the acquisition was about 26MM shares, based on the press release from last October.

Twilio (NYSE: TWLO) and SendGrid today announced that they have entered into a definitive agreement for Twilio to acquire SendGrid (NYSE: SEND) in an all-stock transaction valued at approximately $2 billion. At the exchange ratio of 0.485 shares of Twilio Class A common stock per share of SendGrid common stock, this price equates to approximately $36.92 per share based on today’s closing prices.

( $2B / $36.92 ) * .485 ˜ 26MM

Eric: What I said was that their Q2 shares outstanding was projected to be 140MM. It appears that their outlook is diluted shares, so I should have compared it to about 110MM to start the year, leaving me scratching my head over only 4MM.

I’m not trying to rant over evils of dilution, but I think that when you look at that 81% headline, it’s good to be aware that there were 95MM shares a year ago, and next announcement there will be 140MM. Not what I would consider an apples to apples comparison.

Doppel,
Two points, one trivial and the other not.

I also calculated the total share issuance for SEND to be around 26M shares ($3B valuation at closing) but take note that the outstanding shares will be time weighted for when in the quarter the shares were issued.

Second, and more importantly, is that you’re looking at both data points negatively (e.g. 81% growth is overstated due to SEND, and large share increase due to SEND).

You can’t take both sides of this one. In exchange for all those new shares, they got a bunch of new revenue. Of course they got something in return.

Think about it like this. If TWLO issued the same number of shares as SBC for some new TWLO employees that created an email product to replicate SendGrid’s product, and that new product created the same revenue for TWLO that SEND contributed, the effect on the financials would be EXACTLY the same, but we’d instead be calling the growth “organic” and I’m sure this thread would have never even started. The nature of Organic vs. acquired revenue doesn’t matter nearly as much as the fact that total revenues went up 81%.

Eric

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