Twilio: Will Top Down Motion Succeed?
Twilio: Will Top Down Motion Succeed?
Core CPaaS is strong, but Flex, Frontline, Segment and Engage will depend on new selling motion
Recent changes in Twilio (ticker: $TWLO) leadership have given investors reasons for pause. Marc Boroditsky just announced his departure as CRO, after a 7-year run. This comes in the heel of George Hu leaving as COO back in October 2021. Leadership changes are commonplace, but throw in market volatility, thin gross margins, seemingly lower-than-expected Q2 organic growth number arising from tough comps, and a share price that is 70% off its peak, you have plenty of nervousness.
The good news is, fundamentals for Twilio remain intact, if one only observes underlying business momentum:
DNBR is edging back higher (revenue-based metric is a lagging indicator though) to 127%
Added another 12,000 active customer accounts in Q1 2022 – good momentum
International business continues to grow faster than overall pace
Organic revenue growth is maintained at minimum of 30% per annum, which likely assumes the same historical cadence for its core usage-based products
However, other metrics are not so clear. I do wonder how much traction Twilio is getting with Flex, Frontline, Segment and Engage (collectively, “New Offerings”), which are supposed to enhance overall gross margins, but they will need to grow much faster and larger to move the needle. So far, adjusted gross margins have not shown any meaningful breakouts beyond the 55-60% range. 10DLC A2P fees continue to mess up the numbers, which make monitoring gross profit margins across multiple quarters even more difficult.
New Offerings do perform better than overall business, but they are still small. Here is what we know so far:
Growth in FY 2021 was 66%, just outpacing total revenue growth of 61%
Percentage of total revenue between FY 2020 and Q1 2022 likely remained unchanged at ~12%
Flex grew the number of active agents by >90% in FY 2021
119% increase in consulting partners, to more than 500 in FY 2021
Twilio Segment delivered $201mn in revenue in FY 2021
New Offerings require a much different selling process than the bottoms-up, developer-first process that has worked so well for Twilio’s core products. Twilio needs partner and systems integrators to be involved for New Offerings. Accordingly, GTM is completely different, and Twilio has to earn plenty of love from big partners like Deloitte and Accenture, so that they will market Twilio to their C-suite enterprise relationships, which Twilio does not have (yet). This puts Twilio into a far different territory, one that is traditionally occupied by the likes of SAP, Salesforce, Microsoft and Adobe. Should a Deloitte partner push for a $2 million Flex deal for Twilio, versus a $20 million bundled offering by Salesforce? Clearly, the rules of engagement for New Offerings have changed for Twilio. To be successful with channel and partner sales, a technically superior product is not a must. Sales execution is.
And so, it is not surprising to see Marc Boroditsky get replaced by Elena Donio, who has a track record of enterprise GTM leadership on a global scale.
Further changes should be expected, if Twilio is to lean into making New Offerings the next phase of sustained hypergrowth for the company. Operating expenses to be incurred in selling New Offerings will also be different – a much larger scale is needed to reach steady state profitability. Even though New Offerings have much higher gross margins, operating expenses are also much higher – especially before it gets to scale – consistent with SaaS companies.
Make no mistake, Twilio has built a set of advanced and robust application services in recent years, but having an invincible sales platform is a must. This will take time to develop. So far, New Offerings are at least still outpacing topline growth of Twilio’s core businesses.
But if and when Twilio succeeds in enterprise sales execution to push New Offerings into wider adoption, expect a rerating of Twilio shares, even higher than their previous peaks.
(Author is long TWLO)
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