2023-10-19 08:30:00 ET
Summary
- After providing you with a brief review of Twilio's Q2 2023 earnings report recently, I wanted to take time to analyze Twilio's competitive positioning.
- It's a very fascinating business in that, despite what the share price would suggest, it is the 800lb gorilla in the customer engagement industry.
- It holds such a strong market position that even its competitors want to do business with it, and I will explore this assertion with you today in depth.
- In short, I do see the issue the market has taken with Twilio, and it's an issue that continues to vex virtually all San Francisco-based software businesses, e.g., STRIP, SQ, CRM, UBER, and others.
- It must execute its business model with vastly greater efficiency. It has the dominant market position. It must simply evolve in this respect, and the market will very likely once again award it a fair to premium valuation as opposed to its current substantial discount to fair value.
Exploring The Analogy
I recently shared that I saw Twilio (TWLO) as something akin to a mini-Microsoft (a micro-Microsoft, if you will), but within the customer engagement management industry instead of the productivity software industry, and I wanted to take a moment to on elaborate this thinking with you today.
The impetus behind creating this note for you was a question that I received recently within the community of investors that I serve:
Community Member: Thoughts on Braze (BRZE), Louis?
Louis: It's a great question. We have produced work on Braze in the past.
My general thinking on Braze has been that its competitive positioning is likely no better than the competitive positioning of Twilio or Okta (OKTA), yet it has traded at about 50% of these companies' enterprise values, while generating 10-20% of their gross profits.
I'd add that Braze is a customer of Twilio, and "Twilio Engage" is a customer engagement platform that competes with Braze's platform as well. Similarly, Zendesk (now private) is a customer of Twilio, and Twilio competes loosely with Zendesk via its contact center offering.
In a sense, Twilio is a micro-Microsoft in this realm of business (the customer engagement management industry). It is the giant in this realm with more resources than its competitors by a mile, as well as a more vertically integrated platform where customers can consolidate their entire customer engagement strategy into one software suite.
Instead of going to Five9 (FIVN), Braze, Twilio CPaaS, this or that CDP, and Zendesk for a comprehensive customer engagement strategy, enterprises can go to Twilio and receive CDP, CPaaS, contact center, and customer engagement software to operate their customer engagement strategy.
Quite astoundingly, and, honestly, really... only a genuine act of God could obfuscate these realities, the market has lost this narrative.
Eventually, Twilio will get the ship righted. I published my recent Twilio quarterly review today to main Seeking Alpha. While working through it, I was reminded of these realities. Twilio Engage, based on the valuation dynamics of Braze and Klaviyo, should over time become a $10B+ enterprise. Zero reason outside of execution it should not mature into this over 10-20 years.
(I give it such a long time horizon because it was only made generally available in 2022.)
Twilio CPaaS (undisputed category-defining leader here, with room to grow).
Twilio Engage (competing with Braze and Klaviyo which are apparently worth $10B+ in EV today).
Twilio CDP (Segment is undisputed category-defining leader here).
Twilio Flex (20% TAM penetrated, 80% still to go).
We have $3.7B in cash; $1B in convertible debt in early 2022, and Twilio now generates free cash flow.
I still think TWLO is a $20B enterprise value business as of today, but execution has been so, so rough that the market won't give it even a fair valuation. The market has priced it at deep value as punishment for the aforementioned execution (as well as financial profligacy and inefficiency, which has become a hallmark attribute of San Francisco-based businesses these days, though I am hopeful that this changes during this period of dramatically higher rates).
In short, I'd buy Twilio here over Braze or Klaviyo, Twilio's issues notwithstanding.
As I noted in this exchange with my community member, Twilio has vertically integrated the entire software-defined customer engagement stack into one platform, eliminating the need to work with five different vendors to execute a comprehensive, data-driven, communicative engagement strategy.
Today, let's explore each component of its vertically integrated stack:
- Twilio Communications Platform as a Service (CPaaS)
- Twilio Engage (Customer Engagement Platform)
- Twilio Segment (Customer Data Platform)
- Twilio Flex (Cloud-Native Contact Center)
Twilio CPaaS
Twilio's CPaaS business packages various versions of communications infrastructure, such as SMS sent through cell towers, into a simple, seamless API that developers can easily insert into their application's code. For instance, when you order a pizza from Domino's (DPZ), Twilio's API is employed to create the text that notifies you that your delivery driver is on their way.
This product has largely driven the incredible growth of Twilio's customer base, which recently eclipsed 300,000.
Twilio's Customer Growth
Barchart
Quite notably, smaller customer engagement platforms, such as Zendesk, Klaviyo, and Braze, use Twilio's CPaaS API, despite Twilio offering a competing product, e.g., Twilio Engage or Flex.
In my eyes, this clearly indicates that Twilio has a very dominant product that developers love to the extent that they'd rather ignore this conflict of interest rather than use a competing product.
Twilio Is Widely Recognized As The Best CPaaS Vendor
Importantly, Twilio CPaaS provides the necessary communications infrastructure API to create a true customer engagement experience. Without Twilio's API, Klaviyo and Braze could not communicate, i.e., engage, with their customers.
And, again, Twilio has vertically integrated this into its customer engagement stack; whereas, its customers do not offer it.
Twilio Engage
Twilio Engage was released in 2021, and it's essentially a competitor to Klaviyo. That is, it's a platform that creates and automates customer engagement strategies for businesses to interact with their customers in a compelling, personalized, revenue-generating manner.
The platform incorporates customer data, leverages AI/ML, and generates personalized customer engagement strategies at an infinite scale. It identifies unique engagement patterns between a customer and a brand, and it leverages those unique engagement patterns to create personalized marketing campaigns, promotions, and interactions.
Notably, this requires both a CPaaS platform (and, as we know, Twilio has vertically integrated the best) and a CDP, and Twilio purchased the industry-defining CDP, Segment, in 2021, alongside the unique engagement software that defines the Klaviyo and Twilio engage platforms.
As I mentioned, if Braze and Klaviyo are worth ~$15B in enterprise value today, then Twilio Engage should become a $10B+ business in the decade or two ahead, and, of course, this is just one line of business within Twilio's diversified conglomerate.
Data Bridge Market Research
Twilio Segment
Twilio purchased Segment in 2021, and, to say the least, it has not gone well.
That said, Twilio Segment is a high-quality platform, which has been recognized as the best CDP in its industry prior to the Twilio acquisition.
But, while there have been speed bumps for the acquisition, it's likely that Segment eventually gets on track, especially considering its use case is so obvious and seamless within Twilio's vertically integrated platform.
Data Bridge Market Research
Twilio Flex
Sitikantha Panigrahi: All right. Thanks for taking my question. My question on Contact Center again. That is -- that's a huge opportunity considering like 80% legacy still here to move to cloud. And you are starting from a clean slate, just building yourself in-house. So Eric, how are you trying to differentiate, I mean, among other cloud vendors right now in the Contact Center space. And Kelly, should you think about this Contact Center next leg of growth? Is this adoption should be like Phone what we have seen in the last few years?
The last component of the full customer engagement stack is a cloud-native Contact Center, and Twilio offers its Flex platform.
As the above quote suggested, there's still a long runway for growth in the cloud-native contact center industry.
Going Multi-Product
Twilio's dominance or possible dominance granted it begins to execute with efficiency and focus, is, of course, an attractive facet of the business. However, I would say there's more to this vertical integration than meets the eye.
As I've explored with you often over the last couple of months, the act of "going multi-product" and vertically integrating those products into one seamless, compelling ecosystem is arguably the greatest engine of wealth creation on earth.
In my recent review of Monday's (MNDY) Q2 2023 as well as the business broadly, on the subject of going multi-product, I wrote,
In my recent review of Axon (AXON), I detailed the idea that Axon has a series of products that are all connected within one ecosystem. That is, Axon has multiple products that it can use to sell to many different buyer personas, i.e., different customer prospects. While they are all connected, creating a compelling Walled Garden Ecosystem (embedding moat, locking in customers), they are all also distinct and can be sold as such. This duality allows Axon to both sell to more prospects and lock its prospects into its ecosystem once it's wedged itself into their wallets/businesses/agencies, which fuels value creation for the business and shareholders.
[Similarly, as I detailed for you today, Twilio has a series of products that are all connected within one ecosystem, i.e., the Customer Engagement Platform ecosystem, within which Twilio offers a CDP, CPaaS, CCaaS, and customer engagement product respectively. As with Axon's ecosystem, while they are all connected, creating a compelling holistic platform, they are all also distinct and can be sold as such. This creates a very compelling engine of value creation, granted Twilio executes with some modicum of efficiency and aggression. ]
The combination of having both multiple products to sell and having an ecosystem in which multiple products connect to each other in a compelling way that creates huge value for customers is what continues to drive the exceptional growth at Axon (Axon has continued to grow above 30% despite the fastest interest rate hiking cycle in American history).
Similarly, Monday has seemingly defied gravity (interest rates create gravity for valuations and sales growth rates) by continuing to report 40%+ quarterly sales growth, while its software peers have seen their growth rates collapse in fairly dramatic fashion.
For both Axon and Monday, I believe it's the unique configuration of their businesses that has made this possible:
- Organically create multiple compelling products that can be sold to different buyer personas/prospects. For instance, perhaps a prospect already has a Body Cam product. Well, Axon has a software suite, a vehicle/fleet camera, an industry-defining Taser, a drone product, and more that it could offer to the prospect. The prospect may ultimately say yes, choosing to buy one of those other products, resulting in Axon wedging into the customer's wallet/business/agency. From there, Axon could delight the customer with its initial wedge product and, over time, demonstrate the value of that wedge product within its entire, vertically integrated, comprehensive "Walled Garden Ecosystem." The customer may start with one product, then, seeing the value of the entire ecosystem around that product, choose to lock themselves into Axon's Walled Garden where they believe they could receive more value. Similarly, a prospect may not want Monday's work management product, but that same prospect may buy Monday's sales CRM. From there, Monday could delight that customer with its sales CRM product and, over time, demonstrate the value of that initial wedge product within its entire, vertically integrated "Walled Garden Ecosystem," which includes an app marketplace, a work management product, and a developer product, all atop a configurable and scalable platform architecture.
- Importantly, the combination of multiple products and the Walled Garden Ecosystem that those products create is what creates the nucleus of growth and value creation, and Monday and Axon have very masterfully executed this business model. Twilio ( TWLO ) needs to take notes!
Indeed, Twilio should take notes, as it has the ingredients. It simply needs to execute the business model.
Concluding Thoughts
In working through Twilio again over the last month or so, I have been yet again reminded of the high-quality underlying business and the components thereof. The strategy is so vividly clear, and Twilio's comprehensive platform approach is likewise vividly clear.
The right and effective strategy is there, and then some. Twilio simply needs to execute better, and it will achieve incredible success in growing both its CPaaS business and its software business in the decade ahead.
We can see how Twilio is something akin to a mini-Microsoft in the Customer Engagement industry.
- Twilio CPaaS: No customer engagement competitors offer this
- Twilio Engage: Competes with Braze and Klaviyo, which represent ~$15B in enterprise value, in the Customer Engagement Management industry, which itself is set to grow rapidly in the decade ahead. This is very high margin software sales.
- Twilio Segment: Segment was formerly recognized as a defining platform in this industry, and this industry has a long runway for growth ahead. This is also high margin software sales (usage-based).
- Twilio Flex: The cloud-native contact center TAM is only 20% penetrated thus far, suggesting that Twilio Flex has a long runway ahead of it to grow and capture market share (alongside the likes of Five9 and Zoom (ZM))
Twilio's sales motion should mirror the prevailing narrative we hear so often for companies like Palo Alto Networks (PANW) and Microsoft (MSFT):
It's the season of vendor consolidation.
Why work with Five9 or Zoom, Klaviyo or Braze, this or that CDP, and Vonage or Since when you could just pick Twilio and have an optimized, vertically integrated customer engagement platform all from one vendor?
It's a no-brainer to go with Twilio to this end! Astoundingly, this narrative has been lost over the last year, but, eventually, software sales growth and CPaaS growth will reaccelerate into the giant TAMs in which they're growing, and I believe the market will be reminded of this narrative, and valuation re-rating will occur to the upside for Twilio.
With ~$3.7B in cash and ~$2B in gross profit generation and newfound free cash flow generation, Twilio should dominate the customer engagement industry in the decade ahead. All of the pieces are in place for this to occur and for Twilio to materially accelerate growth in the decade ahead.
I remain confident that the company can execute this, and I remain confident that all of America's defining businesses born of the innovative culture of San Francisco (e.g., (STRIP), (CRM), (UBER), (SQ), TWLO, and (ASAN), to name a few) will find the religion of efficiency. All of these companies, like the city of San Francisco, clearly need to restructure their cultures, whereby they get on the right track comprehensively.
Thank you for reading, and have a great day.
For further details see:
Twilio: A Micro-Microsoft