Today I thought I would take a look at Twilio (TWLO), a company who’s stock is up 6x since its IPO and what seem to be their drivers of value.
Industry Twilio operates within the unified communications and communications platform as a service market, which allows companies to use Twilio to contact customers via Text, Voice, and email in an automated fashion. A use case in this, and one of Twilio’s largest customers, is WhatsApp who uses Twilio to send automated text messages to verify customers on their platform. A similar example is with Uber. The overall market size for Twilio and its peers varies all over the place, with some showing as little as $3.5B up to $32T. One research report from Gartner show sthe unified communications marekt is $40B, with most of the growth occuring in cloud services rather than on-prem solutions. This fits in with Twilios recent acquisition of SendGrid, which augments their programmable solutions for Voice, Video, and Messaging with email solutions as well.
Revenue
In their most recent quarter, Twilio states that they have 162k active customer accounts (active accounts that have generated >$5/revenue in the last month). Given that their quarterly Base Revenue was approximately $257mm, that translates into a quarterly spend of $1,600/customer, or an annualized $6,300/customer. This number is a blended result of Twilio and SendGrid, which they closed their merger on February 1st of 2019. On a stand alone basis, Twilio earns ~ $11,600/customer/year, while SendGrid is earning $1,900/customer/year. Both companies have been steadily increasing pricing per customer, which on a combined basis is up 22% year-over-year.
Looking forward, the company has given guidance of $276 - $278mm and $1,064 - $1,068mm of Base Revenue for Q3 and FY19, respectively. Two key metrics then factor in here. On a combined basis, revenue per customer has grown at a 3.4% CAGR and number of customers have grown at a 7.2% CAGR since 1Q16. Their guidance target fits well within these ranges.
Customer Value
One minor diversion here that we can pull from Twilio’s financials is their customer lifetime value partly from slide 18. The gross contribution per customer has been increasing steadily from $2,150/year to $3,650/year. Given their Dollar Net Expansion Rate is >140% (implying customers are spending 40% more than the same period 1 year ago), I am eschewing the simplified model and using an H-model to give credit for a near-term high growth rate and a long-term stable growth rate. Even with a relatively short high growth period, the value of each additional subscriber (~$50k) greatly outweighs the meager $1,500 customer acquisition cost. Assuming $48k, net of subscriber acquisition cost, the value of their customer portfolio is worth ~$7.5 - 8.0B.
Costs
From a cost perspective, Twilio is fairly stable with Cost of sales being ~44%, Research and Development ~24%, and Sales and Marketing ~25% of Base Revenue. The bulk of their cost of sales is related to fees paid to cellular providers to pay for connection costs. Likely they will see some margin improvements across the board as they’re able to centralize equipment and software between their platform and SendGrid (and whatever usual synergies are expected). One interesting note is that Twilio noted most of their growth will come from abroad, which will require additional employee and cost burdens as the company moves globally (the company only has 25% of its revenue internationally today).
Capitalization
Twilio has about $22B of total capital in the company. The substantial bulk of the funds come from their outstanding equity ($21B) with the remaining $1B coming from a 0.25% Sr. convertible bond due 2023, which is convertible at $70.90/share. Given the company has been operating so far effectively as a breakeven business, the company has another 3+ years before needing to address the convertible bond, which will likely convert into equity. Additionally, the company is sitting on $1.9B of cash and marketable securities.
Returns
Overall the market has been very supportive of Twilio’s strategy, with the stock up 32% YTD (through their Q2 reporting) and 160% year-over-year. This has led to a number of articles coming up that the company is overvalued. One way I’ve looked at it, is the invested capital as a multiple of the value of their customer portfolio. Around the time of their IPO, Twilio was valued at 2x their customer base (invested capital of $3.3B vs. $1.6B for customer portfolio). Today the company is around 2.5x. This does reflect that it is an expensive time to get into the stock (particularly compared to 12/31/17 when it was 1x). Implicitly, the market must be placing a higher value on the growth opportunities in the business and what Twilio will be able to generate.
TL;DR Twilio’s recent acquisition of SendGrid gives the company the platform to be a truly unified communications company, providing email, voice, and text services to their customers. Investors expectation of combined growth has increased substantially, with a lot of opportunities to cross-sell between the platforms. Support here.
