Twilio is a company that I’ve been watching for a while now. Following the recent selloff, I initiated a small position that I will look to increase over the next few months.
I read the Q4 earnings call, including the prepared remarks, and despite the slow path to profitability, management has prioritized growth which I am ok with for now. Revenue is growing at a fast pace and management expects it to continue.
Based on Twilio’s 2021 revenue of $2.8 billion and a $28.2 billion market cap, Twilio is currently selling at a price-to-revenue multiple of 10x. Although this is still pretty high, revenue is expected to grow at a rapid rate over the next three years. This revenue growth will compress the multiple over time.
There will likely be more volatility ahead, but Twilio looks intriguing as an investment at this stage and predicting the bottom is too difficult.
Here are my notes from Twilio’s Q4 2021 conference call:
Revenue grew 61% year-over-year and organic growth was 42%.
Twilio has a long-term target of achieving a 20% non-GAAP profit margin over time.
“We accomplished a lot in 2021 and here are a few numbers that give you a sense of the scale of our platform: we processed nearly 1.7 trillion API requests on the Twilio platform, Twilio Segment processed over 10 trillion events, we delivered 1.3 trillion emails, including more than 13 billion on Back Friday and Cyber Monday, and we sent nearly 127 billion messages.”
- Jeff Lawson
Companies are embracing first party data and CDPS because of the privacy landscape related to IDFA.
4th quarter dollar based net expansion rate was 126%.
U.S. 10DLC carrier fees reduced gross margin by approximately 350 basis points in Q4.
Jeff says that Twilio’s “in and up” strategy is to bring in customers through messaging and email, then build on those relationships to grow their footprint with broader adoption and higher value products.
“We intend to become the software player that digitally connects every business to their customers to introduce true personalized engagement and relationships in the next chapter of the fab. We are builders.”
- Jeff Lawson
Khazomea, Twilio’s COO, mentioned that the path to profitability over the short term is going to come from operating expenses. I hope that Twilio cuts stock compensation, it’s too high in my opinion. I will be keeping an eye on this. Stock compensation was $632 million in 2021, 22% of 2021 revenue.
He also mentions a lower rate of investments for growth in the second half of the year but they will still invest in other areas of the business. Growth is the priority for Twilio.
They are expecting 2022 to be the last year of non-GAAP operating losses. Non-GAAP operating profits are expected to start in 2023.
Twilio is expecting improvements in gross margin in the medium to long term.
Management has confidence that they will be able to deliver on their 30% plus organic growth rate over the next three years.
Assuming Twilio hits on this 30% organic growth estimate, this would be a rough projection of their future revenue, not including nonorganic growth:
2021 Revenue: $2.8 billion
2022 Revenue (est.): $3.64 billion
2023 Revenue (est.): $4.73 billion
2024 Revenue (est.): $6.1 billion
Twilio’s market cap at the close of market on 2/18/22 is $28.2 billion, therefore, price-to-revenue multiple projections would be:
2021: 10x
2022: 7.7x
2023: 6x
2024: 4.6x
Twilio made an investment in Synaverse. Synaverse is a company that cell phone providers such as AT&T, Verizon and Sprint use to route text messages. Sending a text message from an AT&T customer to another AT&T customer is easy, but sending a text message from an AT&T customer to a Verizon customer is more difficult because it requires translating messages from one protocol to a different protocol. Syniverse helps the cell phone providers accomplish this.
International messages on Twilio’s platform increased a lot, but these have a lower gross margin than U.S. messages. Twilio still likes the excess gross profit that they bring.
Twilio mentioned that gross margins will bounce around a lot in the short term. This is kind of their plan since they want to bring in new customers with their communications platform at first and then upsell and cross sell them with other services in their platform.
Twilio’s messaging business grew at 52% organically, a very high growth rate.
The following factors give Twilio confidence that they will achieve their 30% growth rate target:
·Twilio has lots of global 2000 customers but there are other global 2000 customers that they don’t have.
·The customers that they do have are already spread out in different industries and are massively wide.
·Twilio also has upsell and cross sell opportunities, and international market opportunities.
Twilio changed their mission last year. Jeff says their mission now is to unlock the imagination of the world’s builders.