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Twilio (TWLO): $72.80
Market Cap: $13.28 B
Enterprise Value: $10.62 B
Key Insights
DocuSign (DOCU), Zoom (ZM), and Twilio (TWLO) were the software darlings of the pandemic era as they facilitated business interactions in a virtual world. By 2024, each of them have seen their stock decline sharply from those pandemic highs and now appear as probable acquisition targets in the cloud software sector. It was hard to imagine just three years ago that both Zoom and Twilio would see their sales growth decelerate to mid-single digits and that Zoom would be trading at a forward EV/EBITDA below 8.
We wrote about Twilio in our April 2022 Special Situations newsletter and I have reproduced below the reasons I was bullish about the long-term prospects of the company:
When shopping for gifts during Christmas last year, I happened to provide my phone number to a retailer and sure enough, I started getting text messages from them at an annoying frequency. When traveling back home last Friday, I also received text messages from United reminding me to check in for my flight.
These text messages are usually facilitated through a communication platform like Twilio that charge their corporate customers less than a cent per message and make the process of delivering these messages seamless.
Twilio has worked with mobile carriers across the world (34% of Q4 revenue was international) to ensure messages are delivered without a developer having to worry about working with different protocols across carriers. When I first read about Twilio in Fortune Magazine before its IPO several years ago, their business model made complete sense to me because I had written code that delivered messages to various mobile carriers and had to deal with the specific nuances of each large carrier in the United States. Twilio has set up 1,500 carrier connections in over 180 countries.
After the company went public, I noticed that founder and CEO Jeff Lawson was buying shares on the open market and purchased shares around the time of his 2017 purchase. I sold some shares during the crazy run-up in the bubble of 2020-2021 and then added to my position in 2022 after the bubble started deflating. I was early to this second purchase and should have waited to see if Mr. Lawson was buying before initiating a position.
Twilio is the largest company in the communication platform as a service (CPaaS) space and provides programmers with communications-related application programming interfaces, commonly referred to as APIs, that allow software applications to easily talk to each other. Programmers can use just a few lines of code provided by Twilio to start sending text, video, or email messages to end users.
CEO Departs
On January 8, 2024, Twilio announced Jeff Lawson’s immediate resignation as Chief Executive Officer and board member.
In addition, Jeff Epstein, a member of the Twilio Board and Lead Independent Director since 2017, has been appointed as Chair of the Twilio Board.
Founder at the Helm and Capital Allocation:
Jeff Lawson, who was previously the founding CTO of Stubhub.com and a Technical Product Manager for Amazon Web Services, founded Twilio in 2007. When AWS announced a 2-way SMS feature in September 2017, I was relieved to see that they opted to use Twilio under the hood.
Jeff is not only a good technical co-founder, the team at Twilio have been excellent capital allocators. The market sent the stock down after it announced its $2 billion acquisition of the email delivery company SendGrid in October 2018 but the acquisition made perfect sense to me as I had been a customer of SendGrid for several years.
The market eventually realized that the acquisition truly was synergistic, as it opened up another customer delivery channel for Twilio and access to a large customer base. The email channel has grown a lot for Twilio, with the company delivering 1.6 trillion emails in 2023.
Other examples of their astute capital allocation include a secondary offering of $1.54 billion in February 2021 when the stock was near an all-time high of over $440 per share; issuing $1 billion in debt in March 2021 at rates below 4% and a series of tuck-in acquisitions that have expanded their product offering.
The largest acquisition announced by Twilio was the $3.2 billion acquisition of customer data company Segment in October 2020, following persistent efforts by Jeff Lawson to convince Segment’s founder and CEO Peter Reinhardt to sell the business to Twilio. The company used its expensive stock when it was trading above $300 per share to close this all-stock transaction.
Dual Class Shares & Tech Companies
The adoption of a super-voting rights governance structure is prevalent among tech companies, like Meta Platforms (META), Shopify (SHOP), Zoom Video Communications (ZM) and Datadog (DDOG).
This governance framework presents challenges for potential acquisitions of tech companies, requiring approval from founders or CEOs. Additionally, the voting structures act as a deterrent to activist funds seeking rapid changes in market focus or strategy.
For Twilio, the company granted Mr. Lawson 20% of special voting rights through founder shares during its 2016 IPO, which remained active for seven years before expiring last year. That made him vulnerable to the possibility of investors voting against him remaining on the board at the annual meeting this year.
The timing of his departure after his special voting rights expired and the decision to also step down from the board points to significant discontentment.
Khozema Shipchandler, former President of Twilio Communications also its COO and CFO, is now the new CEO and a member of the Board. Mr. Shipchandler joined Twilio in 2018. Before Twilio, he served in a variety of operating and financial roles at GE.
Currently, Mr. Khozema sits on the board of Smartsheet and Ethos.
Reorganization, Layoffs, and Activist Investors’ Pressure
In February 2023, Twilio underwent a reorganization, by establishing two distinct business units: Communications, emphasizing its core messaging software, and Data & Applications, a newer unit enhancing customer engagement.
Twilio laid off employees in multiple rounds of restructuring since 2022: 11% in September, 17% in February, and 5% in December, leading to a total downsizing of 33% of its employees.
Two activist investors, Legion Partners and Anson Funds, secured stakes in the company and have been pushing for either the sale of Twilio as a whole or the divestiture of its underperforming data and applications business.
In May 2023, Legion Partners met Twilio (TWLO) officials several times, urging the cloud computing company to make changes to its board and consider divestitures. Legion had held at least six meetings over the past few months and has discussed topics including improving cost structure, balance sheet and strategic alternatives The Information reported. Legion’s engagement was led by Sagar Gupta, who left the firm in October for Anson Funds, where he amassed a similar stake.
In November 2023, Anson Funds built a stake in Twilio and sent a letter to the enterprise software company’s board, pushing for the sale of the entire business.
As reported by CNBC, Twilio enlisted Qatalyst Partners to provide counsel in its response to a cohort of activist investors. Qatalyst, known for advising Segment during Twilio’s acquisition in 2020, has been involved in addressing activist-related issues for several months.
Valuation
Twilio, which went public at $15 per share in 2016, reached an all-time high of $443.49 in 2021, with a peak enterprise value of $70 billion. Currently trading at around $72, the enterprise value is $10 billion, and there is $2.87 billion of net cash on the balance sheet.
The stock declined due to slower revenue growth and shrinking gross margins. Twilio fell short of its ambitious growth targets, abandoning its 30% annual organic revenue increase by 2024. Revenue growth of 42% in 2021 decelerated to 30% in 2022. Twilio encountered hurdles in retaining customers due to its reliance on usage-based fees instead of more stable subscription plans. Rising carrier fees further squeezed its margins, with telecom companies imposing charges for third-party app access to their networks.
The company trades at 3.25 forward sales and a forward P/E of 34.01.
The company has traditionally been conservative with its guidance and has handily beaten revenue estimates for 20 straight quarters.
Third Quarter 2023 Results (Press Release) (Investor Presentation)
Share Repurchase Program
In February 2023, Twilio announced a share repurchase program, allowing the company to buy back up to $1 billion of its outstanding Class A common stock.
Twilio has completed over $620 million in repurchases, equivalent to more than 62% of the total authorized amount. Most of this buyback has helped offset the impact of stock-based compensation which represented 18% of its revenue in the last quarter. Twilio expects stock-based compensation as a percentage of revenue to decline modestly in the fourth quarter.
The company plans to continue repurchasing shares in subsequent quarters, aiming to fulfill the remaining balance of its authorization. The program is set to expire on December 31, 2024.
Conclusion
Any goodwill Jeff Lawson had earned for building Twilio from nothing to a $10 billion company including excellent capital allocation decisions during the pandemic bubble appears to have been sacrificed at the alter of growth. The company’s decision to lay off a third of the company and turn free cash flow positive translated to slower growth.
The company is targeting GAAP profitability by 2027, but challenges in the company’s growth trajectory could potentially delay this timeline.
As a long-term shareholder, I am not pleased with this change in management and think it is very short-sighted. However the way things are lining up with the involvement of activist investors and Mr. Lawson’s departure, the company is likely to become a target for an acquisition or the spin-off/sale of an underperforming division. I still believe Twilio’s core business is valuable and plan to remain long the stock.
Sudden Departures
CEO
CFO
General Counsel
Others
Appointments
1. Wendy`s Co (WEN): $18.98
On January 18, 2024, the Board of Directors of the company appointed Kirk Tanner as President and Chief Executive Officer of the company, effective February 5, 2024.
| MarketCap: $3.91B | Avg. Daily Volume (30 days): 2,788,208 | Revenue (TTM): $2.18B |
| Net Income Margin (TTM): 9.13% | ROE (TTM): 50.97% | Net Debt: $3.59B |
| P/E: 20.42 | Forward P/E: 17.24 | EV/EBIDTA (TTM): 14.64 |
| P/S (TTM): 1.86 | P/B (TTM): 11.42 | 52 Week Range: $17.71 – $22.19 |
2. Target Corp (TGT): $139.20
On January 16, 2024, Target Corporation appointed Michael J. Fiddelke to the position of Executive Vice President and Chief Operating Officer, effective February 4, 2024.
| MarketCap: $64.26B | Avg. Daily Volume (30 days): 3,182,360 | Revenue (TTM): $106.89B |
| Net Income Margin (TTM): 3.40% | ROE (TTM): 30.87% | Net Debt: $17.63B |
| P/E: 17.73 | Forward P/E: 15.22 | EV/EBIDTA (TTM): 10.29 |
| P/S (TTM): 0.60 | P/B (TTM): 5.14 | 52 Week Range: $101.87 – $176.01 |
3. Johnson Controls International (JCI): $55.02
On January 16, 2024, Johnson Controls International announced that Marc Vandiepenbeeck, the company’s current Vice President and President, Building Solutions will succeed Olivier Leonetti as Chief Financial Officer.
| MarketCap: $37.50B | Avg. Daily Volume (30 days): 5,420,990 | Revenue (TTM): $26.79B |
| Net Income Margin (TTM): 6.90% | ROE (TTM): 11.59% | Net Debt: $9.40B |
| P/E: 20.45 | Forward P/E: 15.08 | EV/EBIDTA (TTM): 13.06 |
| P/S (TTM): 1.41 | P/B (TTM): 2.27 | 52 Week Range: $47.57 – $69.48 |
4. Eaton Corporation (ETN): $241.57
On January 11, 2024, Eaton Corporation announced Olivier Leonetti would succeed Mr. Okray as Executive Vice President and Chief Financial Officer on February 5, 2024.
| MarketCap: $96.46B | Avg. Daily Volume (30 days): 1,300,695 | Revenue (TTM): $22.61B |
| Net Income Margin (TTM): 13.24% | ROE (TTM): 17.38% | Net Debt: $7.73B |
| P/E: 32.34 | Forward P/E: 24.04 | EV/EBIDTA (TTM): 22.39 |
| P/S (TTM): 4.28 | P/B (TTM): 5.25 | 52 Week Range: $153.30 – $246.95 |
5. General Dynamics (GD): $261.18
On January 5, 2024, General Dynamics Corporation announced Senior Vice President, Human Resources and Administration Kimberly A. Kuryea will transition to Senior Vice President and Chief Financial Officer, effective February 15, 2024.
| MarketCap: $71.33B | Avg. Daily Volume (30 days): 1,118,706 | Revenue (TTM): $42.27B |
| Net Income Margin (TTM): 7.84% | ROE (TTM): 16.63% | Net Debt: $7.35B |
| P/E: 21.73 | Forward P/E: 17.54 | EV/EBIDTA (TTM): 15.40 |
| P/S (TTM): 1.70 | P/B (TTM): 3.35 | 52 Week Range: $198.84 – $260.01 |
1. Wendy`s Co (WEN): $18.98
On January 18, 2024, The Wendy’s Company announced Todd A. Penegor resigns as President and Chief Executive Officer of the company, and will resign from the Board effective February 5, 2024.
| MarketCap: $3.91B | Avg. Daily Volume (30 days): 2,788,208 | Revenue (TTM): $2.18B |
| Net Income Margin (TTM): 9.13% | ROE (TTM): 50.97% | Net Debt: $3.59B |
| P/E: 20.42 | Forward P/E: 17.24 | EV/EBIDTA (TTM): 14.64 |
| P/S (TTM): 1.86 | P/B (TTM): 11.42 | 52 Week Range: $17.71 – $22.19 |
2. Leidos Holdings (LDOS): $110.16
On January 17, 2024, Leidos Holdings announced that Jerald S. Howe, Jr., will be leaving his role as General Counsel effective April 1, 2024.
| MarketCap: $15.15B | Avg. Daily Volume (30 days): 633,430 | Revenue (TTM): $15.16B |
| Net Income Margin (TTM): 0.97% | ROE (TTM): 3.79 | Net Debt: $4.46B |
| P/E: 103.20 | Forward P/E: 14.62 | EV/EBIDTA (TTM): 12.51 |
| P/S (TTM): 1.00 | P/B (TTM): 3.65 | 52 Week Range: $75.70 – $111.54 |
3. Ametek (AME): $162.74
On January 16, 2024, AMETEK announced that William J. Burke, Executive Vice President and Chief Financial Officer, intends to retire effective April 2, 2024.
| MarketCap: $37.56B | Avg. Daily Volume (30 days): 819,011 | Revenue (TTM): $6.49B |
| Net Income Margin (TTM): 19.68% | ROE (TTM): 16.51% | Net Debt: $1.49B |
| P/E: 29.48 | Forward P/E: 24.10 | EV/EBIDTA (TTM): 19.75 |
| P/S (TTM): 5.80 | P/B (TTM): 4.50 | 52 Week Range: $130.88 – $165.52 |
4. Target Corp (TGT): $139.20
On January 16, 2024, Don H. Liu, Chief Legal & Compliance Officer announced that he intends to retire in 2024.
| MarketCap: $64.26B | Avg. Daily Volume (30 days): 3,182,360 | Revenue (TTM): $106.89B |
| Net Income Margin (TTM): 3.40% | ROE (TTM): 30.87% | Net Debt: $17.63B |
| P/E: 17.73 | Forward P/E: 15.22 | EV/EBIDTA (TTM): 10.29 |
| P/S (TTM): 0.60 | P/B (TTM): 5.14 | 52 Week Range: $101.87 – $176.01 |
5. Synchrony Financial (SYF): $37.97
On January 16, 2024, David P. Melito, Chief Accounting Officer and Controller of Synchrony Financial notified the company of his intention to retire effective July 2, 2024.
| MarketCap: $15.45B | Avg. Daily Volume (30 days): 4,178,553 | Revenue (TTM): $7.66B |
| Net Income Margin (TTM): 29.21% | ROE (TTM): 16.72% | Net Debt: $1.72B |
| P/E: 7.32 | Forward P/E: 7.00 | EV/EBIDTA (TTM): N/A |
| P/S (TTM): 1.18 | P/B (TTM): 1.17 | 52 Week Range: $26.17 – $39.34 |
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Disclaimer: I am long Twilio (TWLO). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.