Chit Chat Stocks - Twilio (TWLO) | Not So Deep Dive

Episode Date: October 26, 2021

Twilio is a cloud communications platform. The company allows software developers to programmatically make and receive phone calls, send and receive text messages, and perform other communication functions. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of Twilio. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (2:52) Industry | (11:48) Management & Ownership | (13:52) Valuation | (15:59) Earnings | (16:58) Balance Sheet | (19:28) Our Analysis | (22:02) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode. We have Ian Gray on this week and we're talking Twilio. Twilio was your pick, Ian. So I got to say, what made you choose this one this week?

So a couple of reasons. One is I own just, I actually own two shares. And so it's just been sitting as this tiny little position in my portfolio, but, but has been one of the best performers actually. So I wanted to kind of check in on that. And then also, um, working on a project right now where I'm using Twilio. So I wanted to take a deeper look at the stock. All right. Is that a, is that a starter position toehold still reading the filings? What are, what do you call that? That was a, I feel like I kind of like this company, but it's the valuations a little high and I'm just going to buy a couple of shares and probably buy more later and never bought more later. So definitely a mistake. Yeah. It's gone up too fast to dollar

cost averaging at a reasonable rate. I'm going to let Ryan introduce what Twilio does because I know a lot of people do if you're in the developer world, but if you don't, you're kind of like, all right, what the heck does Twilio actually do? Ryan will try to explain as best he can as a generalist. But first I have to talk about our sponsor, Potential Multibaggers. The aim of the Potential Multibaggers service is to find stocks that can go up 10X over the next 10 years or compound at 26% per year. Now, you may have seen on CNBC some not so great services that may charge a lot more than this service and not even know what companies are in that. And I won't name names for that, but that company that they were talking about, I can assure you,

Chris, who runs it, actually knows what that company does and many others. They picked Shopify at 77, C Limited at 54, many others. They have high growth picks. They also do buy and verify where they're updating. And we get the emails on this and they're updating at least once a week on stuff, news in the portfolio, analysis they're doing, all that stuff. It's a constantly updating service. And they got a lot of information out there that makes the price worthwhile if you're looking for a research service to go along with your growth investing style. So if you want to become a multi, you can go to Seeking Alpha and look for From Growth to Value. Google it. You'll find it very easily there or go to at From Value with no capitals on Twitter. All right, Ryan,

do you want to introduce Twilio? I will. And maybe I should mention that we, I guess if you're on YouTube and you're looking at this, we recently installed some foam sound panels. So if our audio is better, you're welcome. We got some complaints. They said we talk in an echo chamber. Not a It's the literal echo chamber, not the figurative one that everyone talks about these days. Yeah, so hopefully we've improved the sound quality for you guys, but I will get to what Twilio does. They are a cloud communications platform, and so they state, we enable developers to build, scale, and operate real-time customer engagement within software applications. So to try and use less technical terms, I should also mention that Brett and I are not developers.

Sorry, Steve Ballmer. We've given it our best try. Ian might be a little more advanced in that. But basically, they essentially offer a set of APIs for developers to use when building their app. So I guess for anyone that doesn't know what an API is, it's an application programming interface, which serves as sort of a building block for a larger code base. So I'll try to use an illustration that I think Jeff Lawson, the CEO, has used himself, which is say someone is building a ride sharing app, for example. This is kind of pertinent because Uber used to be a customer. Um, uh, think of the final code base as a completed Lego set.

Twilio provides lots of those Legos. Um, and it, it's, uh, it depends which ones you use, which functions you need. Um, you could use just one function. Um, and it ranges anywhere from like, uh, all communication functions. So, uh, you could use voice, video, email, text messaging capabilities, lots more. It's meant so that customers, which are developers, can help their app communicate with the actual customers of their app. It's kind of a backhanded way of saying that the end customer is interfacing with it, but Twilio's customers are actually the developers. And then all those, if you go in and you read the 10K and you look at all the products,

they group them into things like text, voice, SMS, email, stuff like that. And those themselves have a bunch of different subsets of solutions. So it's really this giant library of different functions that developers can access. Hopefully I'm getting that right. And I guess pricing wise, it's a usage based model. That's how they generate revenue. So if someone uses that SMS feature on a certain app. i mean that was the easiest one that people know about if you get a message from say doordash that your order's ready i think it would be twilio or a competitor where every time that message gets sent or every time say lyft uses them still but not uber they say your ride's here something like that or someone calls you through the app to say like i don't know where you are or something like that uh the developer lyft or doordash will pay twilio whatever it is quarters of a cent three Yeah, so very cheap, but it's, I mean, they're doing millions of them, trillions, I guess.

I'm going to let Ian explain a little bit more because he has actual evidence of, or experience with operating with the company. Yeah, so like you were saying, it's building blocks for developers. One way to think of it is kind of the picks and shovels, but for apps, it's a way that people can, that developers, as you're trying to build something, you actually can build it faster because you get best in class, basically code and software. that you can just plug right into your app so that you can focus on building whatever your app actually does. You can focus on the ride-sharing element of it rather than focus on the communication element of it.

It just becomes a way to kind of focus on your core competency and let someone else design the other aspects. And so a couple of examples of other API companies would be something like Stripe, which is the building blocks for payments in an app or in a website. Plaid, which is the building block for financial data

if you're trying to pull in financial data into your app. And then Twilio is building blocks for communication. So one of my pieces of experience with it is I'm working on a project right now where we're trying to do some video conferencing, basically. And as a developer, I can have my app create some video conferencing rooms, but instead of having to build the whole thing from scratch,

I can use Twilio's framework for video conferencing. So I can use the way that they set up a room and their specific types of keys to open a room and gives me snippets of code to call the API to actually cause a video conference to happen. And so then it gives me a bunch of parameters basically to say, hey, this is how our framework kind of works. But we need to know before we open this thing, like this room, who the participants are, what resolution we want the video call to be in, different things like that. And so it gives a lot of flexibility to coders still.

but provides kind of that framework so you can start building something within it. A lot of, as you were mentioning, Ryan, a lot of other apps use it for its messaging interface, for normal calls, for things like that. And then one other piece of this is that in addition to the API and the code that it kind of, the snippets that it provides you, it also provides what are known as SDKs, software developer kits, and which kind of help you download the necessary necessary pieces into your code base and kind of gives you some instructions for lack of a better term of like how to do it they provide samples so you can see like what an app in action looks like using Twilio they also give you some

documentation about use this use that if you're running to this area you're probably doing this wrong and so that's where a lot of the value comes is that it kind of walks you step by step through the process of how to integrate it into your app. And then they also have some dedicated members of their Salesforce-type team that will assist you if you need help. And that's particularly with larger clients. But it provides just a lot of those tools so people can get set up using Twilio. In theory, for the project we're working on, we're using Twilio and haven't ever talked to someone at Twilio. So it's a pretty seamless sales process from that standpoint. Okay. I have some questions for you, but I'll save them for the anecdotal

evidence portion. But I'll dive into the history before we get to everything else. Twilio was founded in 2008 by Jeff Lawson, Evan Cook, and John Woltus. I believe I'm saying that right. I got a bunch of crap for not being able to say people's names correctly on Twitter. So I went to YouTube and actually looked this one up, heard it said by someone else. So if I'm getting that wrong, blame them. At the time though, it was based in both Seattle and San Francisco. So I think they were kind of working on it from two different places and it served the same sort of function that it does today. Obviously there's a lot more solutions, but as far as I know, there wasn't any major pivot in the business. And Jeff was a coder himself. Jeff Lawson,

he's still the CEO today. He started Twilio in his late twenties. I believe he had some entrepreneurial background even before that, but I'll let Ian get to that. And apparently in 2009, he attended some mixer called the San Francisco new tech meetup where he demoed the product. Apparently there's tons of these things. That sounds like, I don't know. Well, it sounds like it worked out well for him. I don't know. I couldn't, you know, those types of meetup stuff. It sounds the networking. So it just sounds like a tough place to hang out. You know, the yeah, but apparently there was a thousand people there and in

front of a thousand people, he was, he's not, I guess, he didn't want to explain the tech because it was pretty advanced at the time. So he tried to just demonstrate it. And so while he was talking about it, he coded a Twilio app right then and there, which provided basically conference call functionality from what I'm understanding. I'm kind of rereading this story from a Forbes article. And in a few minutes, he opened a line and let everyone in the audience call in from basically this Twilio functionality.

And that sparked a whole bunch of interest from investors. And then they had basically the stereotypical Silicon Valley story. I mean, this sounds literally like Richard Hendricks at TechCrunch Disrupted in season two. I don't know. If you guys have seen that show, then you know what I'm talking about. But it was pretty stereotypical in that sense. I think they raised $103 million in growth funding. They had a bunch of different funding rounds.

I think basically all the big funds, I saw all their names referenced in the Wikipedia document. They moved fast. They raised a lot of money. They moved really, really fast. Yeah. They got a lot of cash and they're able to burn through that cash and grow. And they IPO'd in 2016. Not much since then.

I guess there's been some acquisitions, but we'll talk about that. Yeah, it's been a lumpy, you know, stock price movements or whatever, you know, this chart isn't like straight up and to the right, but the long-term performance has been pretty solid over the last five, six years. I'll hit industry and competition quick. You know, industry is cloud communications is a very new industry. So it's kind of hard to identify like any of the size, I guess, competitors are pretty easy to identify where like you're competing directly with Twilio's SMS stuff, but the

industry that they are in, they're almost pioneering and building themselves is called communication platforms as a service. And the acronym, which I think is funny, uh, is called CPAS, uh, to try to go off the SAS name. I know that it's just made for a buzzword. So don't like you hear communication platforms as a service. I wouldn't think about that word and get confused. It's just cloud communication developer tools. It seems fairly simple to understand, but when they use the buzzwords,

it can make it seem a lot more complicated than it truly is. There's an internet research firm that I found that is forecasting this category to grow at 33% rate through 2024 to $17 billion. I have no idea whether that's going to be anywhere close to correct, but I think whenever you read these, and I always see them hyping up the growth rate to be really high for an industry, it's never going to be correct. But I think they're always going to be directionally right, at least most of the time. So this is a large and growing market. Well, it's not too large, but it's a fairly large and really fast growing market. They do have a lot of competitors though, because building something as simple as this SMS product, which is not just what Twilio

has uh it's fairly easy to do so you have message bird vonage api i guess they're making a comeback with this stuff the the you know that makes sense because they used to be a phone company right cinch plivo and then many many others there's a lot of them out there i'm sure with all of twilio's products they have dozens and dozens of them they're competing with central i think is one maybe yeah i i couldn't include all of them here i would have had a list that would have gone on for two minutes. So I just wanted to include some here. There's a lot of competitors because it's pretty easy to build, but there's reasons. We'll probably talk about the Twilio's one, but that's for later in the episode. Ian, do you want to talk management and ownership here?

Yep. Jeff Lawson is the co-founder and still remains the CEO. There's a couple of really good interviews, one on Invest Like the Best that he was interviewed on. And then also there's an interview on The Molly Fool that was really good. And I think I'd recommend digging into those, but I'll give you a couple of the little highlights. He owns about 3% of the company, which is about $2 billion. So a pretty hefty stake in Twilio. He was one of the early product managers at Amazon Web Services. And so he's been around the tech world for a while and on the cutting edge of some products like that that are outsourced to other companies. He was also the original CTO at StubHub. He's a serial entrepreneur. He's got lots of good

stories in his interviews about companies that didn't pan out, the early days at Twilio, what they did. He also seems to think a lot about culture and leading his company well. He wrote a book called Ask Your Developer that I've heard great things about, and it's next up on my reading list to read. And then one of the other interesting things, and this was in the Invest Like the Best interview, but they've got a lot of non-generic core values. They try and do things that are unique to Twilio. And so one of their core values is draw the owl. And, um, it's related to an old kind of one of the original memes of the internet. And I'll let you go listen to that episode because it's a, it's a good story and I don't want to butcher it, but it's a, it's a, we've

got a lot of interesting kind of values like that. And then also this has about 80% institutional ownership at this point. So it is, it is well known in the investing community. It's something that has um been had a fairly widespread uh approval and uh by the investment community yeah and he is very positive the uh the annual letter and stuff you know most of that stuff is very dry whenever you read something like that he was very positive he had a lot of exclamation points it almost sounded like an athletic coach trying to hype up his team of developers but like less less uh strange like steve ballmer used to do which is why we made that joke before but like more, it seemed more, I don't know, sustainable, not as crazy, but I'll have the valuation of the

stock market cap is about $65 billion. So quite a large market cap. Ticker is TWLO trailing price to sales of 28.7. So if you're thinking, yeah, this business looks good. I've never heard of it before. I wonder what it's trading at. I'm sorry to disappoint you. It's extremely expensive trailing price to gross profit might even make it look even worse. It's at 56.7. So very expensive their trailing price to operating cash flow. And earnings are going to be both north of 100 or negative since they are really close to breakeven. Honestly, not something to worry about here, except if you're going to calculate some sort of burn rates, stuff like that. 11.2 million options in RSUs outstanding versus 177 million shares. So not crazy,

but definitely some dilution that's going to impact it. And I think Ryan will get into that and kind of what their dilution rate has been because they make a lot of acquisitions. So you kind of look at their growth and gross profit per share, sales per revenue per share, stuff like that. But that's all I got for valuation. Ryan, do you want to hit earnings? Yeah. Their second quarter revenue was 669 million. That was up 67% year over year. Some of that was inorganic, I believe, thanks to the acquisition of QuickWhip. I think I'm getting ZipWhip. I think that was integrated. If not, I apologize. Not a whipped cream company. No, it's not a whipped cream company, but it currently puts them on an annual revenue run rate of $2.6 billion.

Their dollar-based net expansion rate is 135%, or it was in Q2. I guess for anyone that doesn't know what dollar-based net expansion rate is, it's basically they're just taking the revenue from the annual active customers that were… I've been around for more than 12 months. Yeah, that were there a year prior and how much revenue they're spending with the company. And so, in other words, the existing customers are spending 35% more in revenue, or they're generating 35% more revenue to Twilio. And that doesn't include, obviously, new customers. They do have roughly 50% gross margins.

We'll talk about why. I think a lot of people would imagine that it's a little bit higher just due to the nature of the business, but there is something that's kind of hindering that a bit. I think Brett mentions that in one of his lowlights, so I'll save it for then. But they are operating at a gap loss. Both operating income and net income are pretty negative. I didn't feel like calculating it because it would have been maybe a misleading number. And so they are actually slightly cashflow positive. the only caveat I'll add there is they spend a ton on stock-based compensation. And this isn't like, it's a feature, not a flaw. Like they're trying to, they're trying to make all their employees owners.

I think that's one of their first like core values in their 10 K, which is be an owner. And so they grant equity when they hire new employees. And then there's also an equity portion part of, of the compensation. So 42% of revenue was spent on stock-based compensation this quarter for for reference, total share dilution over the last five years has been roughly 18% a year, but revenue growth per share has still compounded at about 38% during that same timeframe. So still good growth, but they do tend to be pretty loose with that stock using it as currency. Definitely want to use gross profit per share. I think that would be the number one metric

I would want to use. There could be others, revenue per share too. All right, balance sheet liquidity? What do you got, Ian? Yep. They've got $6 billion in cash approximately. It's actually one of the higher cash balances we've seen recently, and it's about almost 10% of their market cap. So lots of cash. They've also got about $4.5 billion in goodwill, which is a result of all their acquisitions. That's just a reminder for anybody who doesn't know. Goodwill is added to the balance sheet for any premium paid over book value. So if the book value of an acquisition is 500 million, but they pay a billion dollars, then we add 500 million to goodwill to the balance sheet. And it basically just stays in the balance sheet, unless at some

point Twilio feels the need to quote unquote, write it down to say, this acquisition actually wasn't as valuable as we thought it was. And so then we have to write it down. And then it's a hit to earnings. For a high growth company like Twilio, we typically don't care as much about those hits to earnings because they don't have any earnings anyways, or gap earnings. But that's that's that you will notice they have a fairly sizable chunk in Goodwill. They've also got nearly a billion dollars in debt. These are senior notes that are half due in twenty twenty nine and half of them are due in twenty thirty one. So fairly long maturities and the interest rate on those are three point six to five percent and three point eight seven five percent respectively.

And so fairly low interest rates. rate. I see this as cheap money. And they kind of mentioned that they are going to continue to make acquisitions in the future and expect cash. And I assume that they're expecting cash is going to get more expensive to borrow in the future. And so this is kind of a way instead of diluting in the future that they may be able to use cash for some of those acquisitions and just get access to fairly cheap money. Because I assume that whatever hurdle rate they're trying to get over is going to be above the 3.875% that they're borrowing it at. So I think they are trying to make a strategic move here,

add even more cash to the balance sheet, and kind of be ready to go out and continue to make maybe even bigger and bigger acquisitions. Yeah, it looks like they did sort of a follow-on type equity offering in the second quarter because I'm looking at the earnings release and it says proceeds from a public equity offering $1.8 billion roughly. So it looks like they really are kind of using that as growth cash. The other thing I would mention is that Q2 number did not include the ZipWhip acquisition.

So I was wrong on that. That has not been integrated into the financials yet. But they have a big segment acquisition. So some of that is inorganic growth. Okay. Any other things to hit before we get to the second half? Nope. Let's hit an ad break.

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And in the morning, get fresh waffles with their free Bright Side breakfast. Or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. Okay, welcome back. Next up, we have Anecdotal Evidence.

I don't have any. Ian, you kind of talked about this. But what are your thoughts about the product? How do you like it? Can I call you a developer? or are you just a half, I don't know. I'm a wannabe developer. I'm a wannabe hacker, right?

I can kind of figure things out and kind of put things together, but I'm really slow and I'm not really that good yet. So I think it would be an insult to the developer community if I call myself a developer someday, maybe. You're code curious. Code curious. That's a good way to put it.

I like it. But from my experience, and I haven't been on this project I've been working on, I haven't been the primary person working with Twilio, but from what I can tell, and I have worked with it a little bit, it works really well. There's a lot of good documentation. I think it's probably been the easiest API to work with out of the APIs that we've used. And one of the good things about it is they've had a lot of good sample projects that we can kind of go into the sample projects, see how something's working and kind of test on there

before incorporating it into our own app. And so that's been a good, really good as a developer to kind of figure it out and then it also seems like almost absurdly cheap as a customer it's like a no-brainer to think about having to build the whole thing from scratch versus being able to just use their some of their pre-built um you know using their api it just it really makes a lot of sense as a as a customer as a developer so maybe this wasn't your decision necessarily uh but did you guys consider any other communication apis what was kind of the draw towards twilio did you Well, you're a stockholder. Yeah, I just I really wanted to put take money out of one pocket and put it into the other pocket. So that was the big reason. But no, I think I had been I'd heard of Twilio before I had kind of I did a little bit of research on it to see if there was any other options out there. but this seemed to have, particularly for what we wanted to use, had the best tools,

the best documentation. It seemed like for us, we're really trying to focus on speed and trying to get up and going as fast as we can. And it seemed like using Twilio was going to be the best way to do that. All right. One more, one question for you. Do you think they have pricing power? I think they do because, and I'll, and I was going to mention this in my highlights, but I'll go ahead and mention it now. The switching costs on something like this i think are are fairly tremendous and that's speaking like i said is is code curious and not a full-blown developer but um they watching watching us implement this and tie this into all of our all of our code right to untangle it and try and pull it out and insert

something else would be a big project and i think most companies unless it's some company like uber that's making a strategic decision to do it and has a lot of developers at their behest, they can really put a whole team behind it. It's something that once you're using it, it would be really, really hard to change, at least from what I've observed so far. And looking at Uber's operating expenses,

I think it was probably a mistake for them. But I'm an Uber hater, but Ryan, Ryan. I'll ask the last question, which is would you have started the project if you didn't know Twilio existed? like was that part of the reason you're like oh this makes it so much easier to kind of build something like this uh so that's a good question i think we probably would have started the project still but it would have been um that would have been one of the big issues that would have been

one of the things that we really spent a lot of time trying to figure out okay can we make this work can we really do this it would have been a big hurdle to overcome and i think a hurdle that we would have questioned whether we could get over um whereas with twilio um we could focus on some other hurdles and kind of knowing that that was going to work, right? We didn't really have questions about whether that was going to work. So it definitely added a lot of confidence to the project. All right, let's move to future growth opportunities. Ian, what do you have for us? I'd like to touch on international expansion. This is something that they've talked a little bit about on the recent earnings calls. In the most recent quarter, international revenue

represented 32% of revenue, which is up from 27% the year prior. Its growth is outpacing US growth and doubled year over year in the international. And a piece of that was related to an acquisition that they made that had a lot of international revenue, but they were still growing very quickly. And according to the CFO, it is one of their focused areas of investment. And it makes sense to me. It's logical. There's some language and barrier investment, I would imagine, in some markets because of trying to provide documentation in all of those markets, which is probably why they don't have a higher percentage of international international revenue already. But the great thing is you don't really need a sales force

for all the sales to companies. The self-serve really makes it easy for smaller companies to interact with Twilio. And I would imagine it makes it easy to continue to have really high growth numbers in those international markets. Yeah. Most of the time when a company says international expansion, if it's like a shoe company or something like that, you're like, you got to roll your eyes and be like, I don't know. But this seat so easily can just move around the world it's kind of amazing in that way and if we look at we just covered toast stock and their big thing is we're going to eventually move international and that just think about how much more difficult it would be for them if you've heard listen about uh the business of toast which

is similar square i guess ish square seller if uh you don't you have to you know get the hardware out there you have to get you know boots on the ground talking to people i mean it's way harder twilio would just moves right right through the internet i mean it's so easy um but ryan what do yet. And it's not even like a lot of those companies, international growth is basically just theoretical. Like this is happening. It's, I think the leading contributor to revenue for them. There's like no friction, no friction there too. It's just kind of so easy. Yeah. I guess I'll get to mine, which is the Zipwhip acquisition. So this was just the most recent acquisition they made. It was for 850 million in an equal blend of cash and stock.

Apparently, Zipwhip operates a very similar business model to Twilio, except its sole focus is on toll-free messaging. So I went to the website, kind of checked them out. They're actually based in Seattle. The reason I figured that out was because I looked at all the customer success stories, and they're all like local Seattle companies. So I guess, one, there's a local gym here called F45 Gym. And let's say they wanted to let a customer know when their training session was. They can just send out automated text using Zipwhip's solution. They also have an API that helps text-enable companies' landlines.

So a lot of those older, more legacy-style companies with those landlines, they can kind of bring them up to speed, more to the digital age. And then I guess more broadly, I think there's a lot of these niche communication API companies that do one thing really, really well. And it seems that their strategy just is gobbling up a bunch of these. and it might also be a testament to it is it is more difficult to build these apis than we think it is because this is a company with twilio is a company with tons of developers that is choosing instead to spend a billion dollars to acquire the companies it sounds like building that library might be tougher um and so using their size advantage to continue making these acquisitions hopefully at the right price um is the good way to go and they've made a few of these send grids

another one. I'm not sure exactly what they do, but Segment, which I guess you're about to talk about, has been a bigger one. Yeah. I find it interesting that it's $850 million equal blend of cash and stock, but that's on top of them raising $1.8 billion in stock. So I find they're like, all right, our shares are expensive. Let's raise some money, $1.8 billion. And then they get to acquiring this. I don't know when the timing was. Zipwhip could have been before this. But then they get to acquiring Zipwhip and they're like, well, our stock's still expensive. I guess just use that you know we were thinking of raising money to acquire companies but the stock's still crazy expensive so they announced the zipper boxes they announced it a while back uh so it

could have been closed it closed in july and then it looks like uh i'm not sure i'm not i'm not seeing the equity offering yeah okay so the zip whip was uh okay maybe they acquired zippo with stock and then they're like hmm this is nice we can acquire with our expensive stock and then then later they're like, all right, this might've happened forever. Let's raise $2 billion. But either way, that's just, you know, kind of how they tend to do things. And they do acquire companies. So this will be my future growth opportunity. They acquired Segment for $3.2 billion recently. I think it was less than a year ago or about a year ago. I'm forgetting, but not too long ago. And it's a pretty big one. So it is like Twilio, but for customer data,

and it's pulling from all the different sources a company might have and then putting it into one place. So it's trying to simplify that process, sort of like the communications that Twilio was doing. Although there's a lot more to it than what I'm explaining. I'm basically rereading the press release. It looks like a good combination here where you could easily upsell to customers because a lot of times, for example, I won't spoil what Ian's project is, but if you're a consumer facing project like Ian's and plenty of others out there, you want customer data and it's kind of hard to get. So they're using Twilio's other products, adding on segment for a cheap price seems like a very, very easy upsell. And then in the press release, Lawson, who was

always very energetic, like I was saying, said that data silos are the enemies and he italicized enemies. So I thought that kind of sums up the reasoning for it. He loves like, again, I think he talks a bit like a football coach, which is pretty funny to me. But let's move into highlights and lowlights uh ian what do you like and dislike about this company like i mentioned a couple minutes ago high switching costs are where the highlights start for me it's just it really seems like that's going to be a a hard thing to to pull out of a code base once once you've put it in and especially as as you become more and more dependent on it as a business um i also think well first i'll say that's probably slightly less relevant for huge companies but still a problem um as we

saw with Uber. Someone can do it. They can develop their own communication system, but it doesn't seem like it's necessarily a good value proposition for a lot of companies. The other big piece of it for me is that I really like Jeff Lawson and his vision. I like hearing him talk about his stories. Maybe I'm getting a little bit biased just because he's a good convincing speaker, but he pioneered an API company before it was really popular. Now everyone is trying to build API companies. He mentioned some of the struggles he had with initially fundraising before people kind of understood it, that they wanted him. They said, just create an app, right? Why are you giving tools to other people? And he's like, no, this is going to be big. And I think he was right

about that. He seems to be the type of guy who could really effectively lead the company for another 10 plus years. A couple of lowlights for me. I think there is some acquisition risk, though they do seem to manage that well. But there's always when you're acquiring as many companies as they are, there's always the risk that you make an acquisition that really doesn't pan out and hurts the growth and hampers the company culture and hurts the stock for years. So that's something to be aware of. I also am a little bit kind of concerned that they're just now becoming profitable. They've been around for a while and I don't, you know, it's always a hard thing about how much do you spend to kind of fund growth and they've been growing a lot. So it's

hard to knock them with the rapid growth that they've been seeing, but it would have been nice to see them be profitable maybe a little bit earlier. But then additionally, with kind of the lower gross margin that we were mentioning earlier at about 50%, I'd like to see what a mature EBITDA margin looks like for a business like Twilio. If they've got a 50% gross margin, how much of that actually translates to the bottom line once they kind of get out of as much of a growth mode as they're in right now. Yep. All right, Ryan.

Well, I guess for starters, I really like the consumption-based business models. I think that really it's kind of a win-win both for the company and the customer. and then I guess even in a sense, the end customer as well. And it just kind of helps these companies scale. It's better than a per seat model. I'm not sure how Twilio would even implement a per seat model, but I would also say that after reading the first 10 pages of the 10K, you basically just get an overview of all the different products

and all the different layers within the products. And you start to realize how size can be a big advantage because it kind of just builds on itself. and if you're the biggest player and they were sort of the early leader to the space they can spend tons of money organically so for example 42 of their headcount is in research and development to add new solutions then they can also acquire and just kind of contain the space whereas it's almost like a like a small company just doesn't have the resources to build a library that's as good as twilio's or extensive yeah they i mean they can probably just build one you know

one at a time and Twilio is reinvesting, it's almost like a runaway train where if they're reinvesting at the similar rate, which again, you know, you kind of get worried about what the profit, but when's the profitability is going to show up, but if they continue reinvesting and they have like products to build for people, it'll be almost impossible for a small company to catch up. Now could someone like AWS catch them? Probably. But like, that would still take time.

Yeah. The I guess the low light, there really aren't a lot of low lights for me. I don't, just as a rule of thumb, I don't like when companies use equity as a large portion of salaries, because I think that's kind of a double-edged sword. They're a bit loose. They're a bit loose. They are. I mean, 18% a year.

Yeah, but they've still been able to grow on a per share basis at a really incredible rate, but there's sort of a momentum thing, which I'll talk about, which is like, I think for employees generally at most companies, equity-based compensation, and I've talked about this before, they view it retrospectively, which is like, if things aren't going well, if growth slows, what happens to morale? Like if half your salary is dependent on the stock. You're leveraging your stock price, which I think is risky. It's risky. Yeah. That would be the only low light for me. Yeah. All right. Highlights for me, I agree with all you guys in your highlights. The one thing i like is that they are basically building out their own market and you can you

can be like why is that a big positive but i think it's a big positive because i'm going to use an example of shopify so shopify they weren't the first to doing this type of stuff uh that they do you know with e-commerce websites but basically they built out the modern industry of however however it is now and when you think of online websites everyone around the world or at least anyone that's in touch with that thinks of Shopify. Twilio is in a very similar boat. And that's why I think they have the, I hate this term, it's a very cringy term, but mind share advantage over developer, which Ian exemplified when he was explaining nicely how the product works. So that gets your products very ubiquitous in an organization and it kind of

is a self-fulfilling prophecy. And they just seem great at deploying this stuff. I'm kind of going off of what other investors say that know about this industry a lot better, but it seems like from what people are talking about, any sort of research reports I read, that Twilio is one of the best out there at deploying and building software. Lowlights for me is the structurally lower margins due to them having to use other networks to communicate. And again, we're generalists here. So I think, and I could be wrong, is because they have to pay the people that are actually

sending the messages, stuff like that. Is that correct again? Or do you know? I'm not sure exactly how their profitability works on that. The carrier network? Some, I think it is the carrier networks. So the SMS might have lower margins. So if they have less of that as percentage over time,

margins will probably rise from 50% to maybe 60, 65%. But I think as an investor, if you're thinking about investing in this company, you have to realize that they have structurally higher cost of revenue. Their gross margins are not going to be like a SaaS player that typically has 80% or 90%. Well, a lot of shared dilution for me.

And then I worry about that, and Ryan kind of talked about how Twilio's scale gives them maybe so they're not a commodity, but I worry about each product kind of being a commodity, and it's just a continual race adding new products over time. And it gets tougher to get into a defensible position outside of the switching costs that Ian was going through. But I'm not too worried about that. That was just kind of something I was thinking of. Let's move on to Boldcase. Ian, what do you think has to go right here for Twilio to be a good investment? I think for Twilio to be a good investment, it's got to continue to add these ancillary services, whether it's ones that it develops itself or it acquires.

And then it also grows with its customers. I think it's really easy to see how it benefits from a continued tech sector growth and innovation and period of just a lot of growth for these types of companies, whether it's consumer-facing companies or B2B companies. But I think it's just really easy to see how the story plays out. If all these people who are using Twilio and using it as the building blocks for all of the popular apps and websites and software in our world, that it just can kind of grow with the tech sector, really. Okay, Ryan? Yeah, I basically have the same thing, which is sustained 130% dollar-based net expansion rate over the next five years. If they're able to hit that, this should be an investment that works out. they've previously guided for 30% plus revenue growth over the next four years.

That's every SaaS company though. That's every investor presentation. But, but them, I mean, they have the track record that they're doing. Yeah. And there is sort of a limiting factor once they, something I've kind of thought about is like, are they susceptible to how much the general market grows? Like how many new entrepreneurs, because like, is there sort of a customer saturation point. I have that in my bear case, yeah. But if they can generate 30% revenue growth from their existing customers,

then they don't really have to worry about that. And so I put here, if they can generate a 25% revenue CAGR over the next decade, revenue per share CAGR, this will be an investment that beats the market. I think you could say that for nearly any company, but- Oh, snowflake, toast me.

I guess maybe not some, but it seems reasonable. Like it seems like it's something they could do. Yeah, I'm similar here. I'm going to do it a little bit of a different framework, but if you plan to hold it for a long time, I think you need to expect $25 billion-ish in annual revenue by 2030 to expect reasonable returns.

And reasonable for me is usually like someone, you know, nine, 10%, it's kind of what people are expecting when investing in an individual company. And if you believe Twilio's business quality is high and your expected returns or what you want to get is lower, like four or 5%, You don't have to expect this much growth, but that would require a 28% annual growth rate from

here to then. I think they could probably do it. For reference right now, they're doing about 2.6 billion in revenue, I think. So that'd be a large amount of growth, but I mean, it's been really strong so far. The other thing I'm thinking about is we talk about like possible market saturation. You just kind of have to grow with the category, but the more intuitive and easier to implement their solutions are, I think the more people feel incentivized to build new products. That's why they're building their own.

That's what I mean by building their own category. Yeah. I guess a bear case, Ian. Yeah, for me, the bear case is something structurally changes in programming. For one reason or another, APIs fall out of style, maybe because of low-code tools

or some other disruption, but the way that people program now radically changes in the future. If that happens, I think Twilio could be at risk. I don't think there's a really, I used to be a bigger believer in a lot of the low-code tools. I've become a little bit less of a believer, but I think that would pretty negatively impact Twilio's business. Interesting. Yeah. That's always been a theory, right? Like everyone says it, like there's a news article like once a year, like low-codes coming,

watch out, but it hasn't materialized, right? Not in any sort of meaningful way, right? Every single major tech company in the world still has thousands hundreds of thousands of programmers right so there's a there's just there's lots of lots of programmers in the world who are all doing great things and i think one of the things from working on this project that i've realized and i've talked to a couple of developers about this is that um they're just low code is great but there's no reason to use low code for for them it's faster just to build it themselves right just to actually code they understand the language they can code it and then it gives you even more customizability than than a low code solution does and so um i like i said i don't think that's a

huge risk but it's it's something i'm aware of that's something i was thinking about was like so we used wix works as no code website yeah but that's the solution but that's for not developed for our website but it's like that was basically but it's a very simple model to replicate whereas building something new from scratch is i imagine would be hard to do with no code well here's the key difference here's the key difference between wix and twilio wix customers are just the population in general like you know the two of us twilio's customers are developers and like wix isn't no code with their products there are no code on the front end almost like i don't know lift or doordash or whatever you don't you know what i mean you can't understand i'm getting

there it seems like the but you just can't build it's hard to make anything customizable from a base like if you're trying to build a totally new concept right right you can't do it with someone else's concept i guess that is the downside of wix or something like that is that it is less customizable yes my bear case in general i can't think of since i'm not a developer i don't really know if like i i guess there's the idea that there's like some structural flaw that creates slower than expected growth. If there is slower than expected growth, this is probably going to be a painful investment because it is priced. The market expects it to grow, but I can't picture what would cause that. The only real downside for me is like, this is,

it's kind of the plane analogy where if a plane hits stall speed, it's going to crash. This is kind of a company where if you're not running on your own cashflow and you're using your stock as currency, you can't really hit stall speed. You have to, you have to keep growing and you kind of have to, you're, you're setting yourself up to have to grow at the rate you're estimating. Agreed. Agreed. And yeah, good thing. People do not care about margins right now. Cause I think that is something that's my big concern. It's kind of a bear case. I think you guys, you guys mentioned the growth slowing. So I had that too, but you also have margins never materializing. There is a continued elevated spend in sales and marketing, but I think it was

surprising, really, because I thought like, all right, they don't even need to market. Like Ian, you had the example. Toilet wasn't marketing to you. You just found it. I think that the CPAS model should lead to less need for S&M spend, especially with that hybrid tension rate that Ryan was outlining. But it was 72% of gross profit last quarter, which is just not sustainable. Again, maybe as growth slows, it'll all be good. But that's a tiny bit of a concern to me that is all their growth relying on this S&M spend? I don't know. I doubt it. And then lastly, companies that rely on the growth of new startups, IPOs, I mean, we want Ian's project to succeed, but the base rate is that most of them fail. And right now, you can never say the peak because

you can't call the top on something. It's really hard to do that. But it seems like right now, and it's great as a person, it's cool seeing people starting businesses, all that stuff. it's a bit cyclical though like but think of how what they would think about how much they would get hurt in an 010203 period i don't think new starts is really what's driving all the revenue though it's like if one if 10 companies started today and nine failed they would grow with the one that succeeded yeah but right now a lot of companies i believe are getting propped up by VC money. A lot of that VC money is flowing into Twilio. If that cycle ever changes, it might not. I think it's just attached a bit to the business cycle. Now, obviously,

they're growing way faster than the business cycle, but I think that's a concern for me. All right. More or less interested, Ian. Yeah. Before I dive into that, I just wanted to make a quick note on cost of revenue and gross margin. So in their 10K, they say that cost of revenue consists primarily of fees paid to network service providers, but other things that it also includes are cloud infrastructure fees, some customer support, employees, and then also data centers and hosting equipment. So like you said, Brett, it is primarily fees paid to network service providers for making those types of text messages and calls and things of that nature. Right. Because every SaaS company has like the AWS fee, but they have this extra one.

right all right you want to get more or less interested yep so i am a little bit more interested i think you know as we were talking about the valuation is steep um i i don't know but it's it's just it's one of those businesses that i could definitely like you said see hitting a 20 to 30 percent kager for the next um five to ten years and and i think it's it's reasonable to assume that i think it's a well-run company but it is priced like it so um it's not one that i'm i'm running out the door to purchase right now but i think it's a i am more interested i it's a great business all right ryan uh it does seem like a great business but i think developer developer technology in general is not my sweet spot and i have a hard time buying anything that

isn't in my sweet spot at what looks like a premium valuation yeah i mean i'm in the same boat it adds like you got to talk about the risk on a personal level something like this i require require, and I think Ryan's in the same boat, I require a higher expected return if I'm right, because there's that uncertainty. I don't know the market too well. And yeah, I'm more interested in this company because it seems like one of the best businesses out there, you know, compared to MongoDB, Stripe, Shopify, whatever, all these companies that are on the consumption-based model, it seems very, well, Shopify, some of the subscription, but whatever. I mean, it seems fantastic. This seems like one of the best businesses out there. And it was on my

watch list in like 2017, 2018. I saw what it got down to like four times sales and like an idiot, I never owned shares. So that's a bit disappointing. But there's a difference between four times sales for a company like this and 28 times sales. And if you don't think so, again, we always say, we'll buy it for you right now and sell it to you at 280 times sales. But that's to say this evaluation is too high right now. So I'm more interested, but I mean, And it just seems way too expensive for my taste. This could 100% be one of those stocks that you look back on and you've said it was overvalued for like 20 years.

I know, but it's, yeah, I think you could, okay, look, there's a difference between four times sales and 28 times sales. And there's also a difference between four times sales and 10 times sales, like, and at the size it was like back in the day, the market cap was a lot smaller. This is a $65 billion company at 28 times sales. it's a lot different than a company at 28 times sales at $5 billion market cap. I think that kind of comes into play as well. I mean, they could grow out of it. I mean, they're growing at a rapid rate and it seems like it's almost unmatched. I don't know.

Ian, do you have anything else for? Nope. All right. I think that's going to do it. We have stock for next week and it's mine. We're going to do another one that I think we're not going to do a home builder. We're going to switch it up and do one that I think will be popular but hopefully people are not tired about because we have i think we may have talked about it like 18 months ago we have not done a deep dive on it peloton uh get a good update on them heading into the holiday season they've had a tough 2021 and a lot of news um i say anecdotally i just joined a gym so you should probably be bearish but um we'll get to that and more uh on two weeks from now that's going to do it for this episode thank you all for listening

remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.