Twilio Inc

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Twilio is a cloud communications platform that provides communication services, allowing developers to easily embed messaging, voice, and email capabilities into their applications.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Twilio operates in a dynamic and rapidly evolving market, offering a unique platform that addresses the growing need for seamless communication in the digital age. They essentially provide the building blocks for communication features, such as SMS, voice calls, and email, that many of us encounter daily on various applications.

Twilio’s revenue is primarily derived from usage-based charges. The more customers use their services the more revenue they generate. This means revenue can be volatile but can also grow extremely quickly if a company takes off and many customers use the products they built using Twilio. In this context, their revenue is mainly driven by three factors:

Active Customer Accounts - Twilio defines an active customer as an individual or a unique entity that has recognized revenue during the period, so their revenue is heavily tied to customers.
Dollar-Based Net Expansion Rate - this is a measure of the company’s growth among its customers. This measures both increased spending from already existing customers, and new customers coming into the platform.
Revenue per active customer - As the active customer base grows, this is the metric that helps drive revenue growth. As time goes on, companies tend to add more services that can increase revenue from existing customer bases.

Looking at their latest financial reports, Communications is their larger business segment, with Data & Applications representing a smaller portion of their revenue; however, Data & Applications is growing significantly and represents their higher growth opportunity.

The growth potential is substantial as the market for cloud communications continues to expand, especially with more companies focusing on improving digital engagement with their customers. However, this space is quite competitive, and several other companies offer similar services.

Competitive Landscape

The cloud communication industry is crowded and the competitive landscape is intense. Major competitors include:

Bandwidth - they operate a global communications network and cloud platform. They have a very similar business to Twilio.
Vonage - a cloud communications player, focused on APIs, unified communications, and contact centers.
MessageBird - an omnichannel communications platform with chat, voice, and video solutions.
Amazon Connect - Amazon’s cloud-based contact center offering that competes with some parts of Twilio’s offerings.

The main competitive points where the players battle each other are:

Pricing: Although many companies in this area offer “per-use” pricing, pricing varies on factors such as volumes and additional features.
Features - Companies try to outdo each other by offering features such as AI capabilities.
Global reach - Companies are trying to expand their global network so that their customers can use their services in various different places.
Developers experience - This is crucial for all these companies, as the ability to attract developers to build using their platform makes them more desirable.
Reliability - This is important for all telecom products, any network interruptions should be avoided as much as possible.

While all the competition seems troubling, one important thing to note is that their TAM(Total Addressable Market) in the Communication Platform as a Service(CPaaS) industry is still very large, and it still has a lot of growth potential.

Moat Analysis: 2/5

Twilio has some competitive advantages, but those are not insurmountable, which creates a situation where they have a narrow moat but that moat is not very strong.

Looking at the economic moats framework we can come to the following conclusions:

Intangible assets - A big part of Twilio’s moat comes from the fact that developers choose their API as their preferred method of implementation, which creates an advantage in terms of brand and a user base that is already familiar with the platform. However, there is nothing unique about the technology itself, other companies can also create very similar platforms.
Switching costs - Because many developers are familiar with how to use Twilio and the fact that many companies are so entrenched in the platform and the ecosystem, it would be costly and would take time to switch over to a different platform. However, other companies provide easy migration tools, so the switching costs are not very strong.
Network Effect - They do not really have a network effect. Even if they had 100X the users they currently have that will not make it much more attractive for a new user.
Cost Advantages - Twilio does not have any real structural cost advantages. Their infrastructure does not allow them to produce cheaper than the competitors.

These characteristics make their moat narrow, since they do have some competitive advantages, but it also means that their competitive position could be easily encroached upon by more savvy competitors.

Legitimate Risks to the Moat

Twilio faces several risks that could erode its moat:

Increased Competition: The emergence of new competitors or the intensification of competition from existing players could erode their market share and pricing power.
Technological Disruption: Fast-paced technological changes could render Twilio’s current offerings obsolete, requiring significant investment in new capabilities, or even outright changing the landscape.
Pricing Pressures: Increased competition or lack of differentiation could lead to pricing pressures that erode margins and value.
Reliance on Strategic Partners: Because their model is to sell via APIs and not directly to end users, they are heavily reliant on their current relationship with their strategic partners, such as cloud providers and other technology companies.
Customer Concentration: Reliance on a few large customers for a disproportionate amount of revenue could hurt the company if such customers decide to move on.
Economic Downturn: If their current and potential customers have decreased spending power or do less projects, that would also affect Twilio’s revenue negatively.
Macroeconomic Risk: As a global company, changes in foreign exchange rates, trade laws, and local regulations all affect their business. Political uncertainty might also have an impact on their business.

Business Resilience

Despite these risks, there are several factors that should lend to good business resilience.

Recurring Revenue Model: Being usage-based, Twilio does not rely on large contracts, which means they are not tied up in long-term promises that have uncertainty about the value delivered.
Diversified Customer Base: As they serve a large number of companies, they are not as prone to loss when one or a few companies decide to leave.
Large Addressable Market: The communications as a service (CaaS) market is expected to grow a lot in the upcoming years. If Twilio can maintain its market share, this is a big positive.
Established Market Presence: The company is the leader in the space and is used by numerous companies.
Focus on Innovation: Their continuous investments in new technologies, such as APIs related to artificial intelligence and analytics should also help provide a competitive edge.

Financial Analysis

Twilio is primarily a growth stock, which implies their main focus is generating revenue growth in the short to medium term. At first glance, they do have impressive revenue growth over the past few years.

They are also not yet profitable. The company has seen significant losses. One reason for those large losses has been the aggressive nature of their growth, as they have focused on gaining more and more customers, and are still making many acquisitions and investments in the business. Another thing to consider is that a big part of their expenses is stock-based compensation (SBC), which is not a cash expense. Also, they are expensing R&D and are not capitalizing it.

Their gross margin has also been increasing since they have been shifting more and more focus into high-margin segments, such as Data & Applications.

Looking at their balance sheet:

They have a sizeable amount of cash and marketable securities to be able to have more flexibility and to pursue opportunities.
Their current liabilities are larger than their current assets which might be concerning, although this is mostly due to deferred revenues which will turn into revenues over time.
On the liabilities side, they have manageable amounts of long term debt, although they have been doing considerable acquisitions using debt in recent years. Overall, their balance sheet is not as pristine as other tech companies but is more in line with other growth companies.

Understandability Rating: 3 / 5

While the core of what they do is not particularly hard to understand, their business model and revenue dynamics can be a little complicated to a layman. The use of complicated metrics and heavy reliance on strategic partners make their business less easy to understand and it falls at a 3/5.

Balance Sheet Health: 3/5

Their balance sheet is mostly good but still has some concerning characteristics which makes its health a little worse than others. The fact that they are not yet profitable makes their balance sheet a 3/5 instead of a 4 or 5.

Recent Concerns / Controversies and Problems

In 2022, Twilio faced criticism for the large amounts of layoffs they announced and their poor communications around the decision. They have been trying to become more lean, and to lower expenses. They have also recently restructured their reporting structure into communication and data & applications to focus on their growth segments.

As they have been doing lots of acquisitions, there are now concerns on integrating these acquisitions. The management seems confident in their ability to do so.

They recently stated that they are “fully committed” to GAAP profitability by the end of 2027.

They are also heavily investing into AI-related APIs, which they feel, can generate increased revenues going forward.

They also seem to be facing some headwinds, with customers reducing expenses in response to the current economic slowdown. In one of their recent earnings calls, the management said ““the recent slowdown in our enterprise business is more pronounced than we anticipated.” However, they do expect long term growth going forward.