[ad_1]
Twilio’s entry Customer Data (CDP) business may be headed towards closure soon. The former startup provides communications software services via API, and in recent years has expanded its product footprint through the acquisition of companies like Segment, which has added CDP capabilities to its large portfolio.
Now, in view of the growth of the company Slowing to near stop likely in late 2023 and its exit Founder CEO Jeff Lawson, Twilio, is conducting a “comprehensive operational review” of the asset, according to its recent earnings call. Asked by an analyst whether the review could result in a sale, the company insisted that the segment has strategic value, but that it was reviewing the business “with an open mind.” It is not necessarily a good sign for the segment to remain a part of the company for a long time.
During the last quarters of Lawson’s tenure at the company, Twilio came under pressure from activist investors Anson Funds and Legion Capital. asset disinvestment To enhance shareholder value. Twilio’s stock price soared from more than $400 a share in 2021 to $72.27 on Wednesday before the company shared its fourth-quarter performance. The share price fell 15% to $61.15 per share on Thursday, suggesting investors were not thrilled with the report.
Whether Twilio will actually sell the segment is still an open question, but if it does, activists are betting it will increase the value of the parent company by focusing on its core communications business.
Twilio’s history with Segment
When activist investors start circling a company, a CEO who has gone through the experience said the first thing is to find out if they are right, or at least partially right, in their valuation. This requires the ability to step back and see what they are complaining about.
In this case, it’s about a large acquisition and whether it was the best place to put resources. Ah, but hindsight is always 20/20, right, especially in this case. Think back to October 2020 when we were at the height of the pandemic, and Twilio was boasting a healthy market capitalization of over $40 billion. With all that value and a vision to expand its market, Twilio went out and spent $3.2 billion to get segment,
Segment was a high-flying startup that raised over $283 million. Its last round in 2019, a year before the acquisition, was a $175 million Series D at a $1.5 billion post-money valuation, according to PitchBook. It was also a time when companies were really starting to understand the value of customer data by bringing it into a single view, and Segment was one of the top startups after big incumbents like salesforce and adobe,
But it was fair to ask, even at the time, where the segment would fit inside a company where the core business was building communications APIs. The general consensus was that Twilio wanted to help customers build data-fueled Customer-centric application to leverage data stored in Segment CDP to provide a new growth path for the company.
It felt like a path to growth was within reach, a way to expand the company’s markets beyond the communications API business. This actually made sense until the market changed dramatically after the pandemic and Twilio’s share price dropped.
With its market cap declining, Twilio was left with an asset that wasn’t exactly pulling off its weight, leaving it vulnerable to complaints from activist investors about where it fit in the business. The question is whether the workers are putting the company in an impossible position.
What is the value of the segment?
In its most recent earnings report, Twilio moved its “Flex and Marketing Campaigns products” into its communications line of business, leaving its former data and applications unit much smaller and now operating under the segment name. This also includes some non-segment efforts like the company’s Engage products.
According to twilio, its segment unit posted revenue of $75 million in Q4 2023, up 4% from the year-ago quarter result of $73 million. Its gross margin fell 80 basis points to 74.4%, non-GAAP operating margin recorded -24.6% and its dollar-based net expansion rate improved 2% to 96% compared to Q4 2022 metrics.
In simple terms, the segment is not growing much, is seeing a slight decline in its revenue quality, and is still seeing spend from existing customer contracts. (Twilio took a charge related to the segment in its most recent quarter: $286 million regarding “developed technology and customer relationship intangible assets,” which it said did not include the segment’s “reporting unit goodwill.”)
Given the known poor performance of the segment – in its earnings callTwilio’s new CEO Khozema Shipchandler said the segment is “not performing at the level it needs to,” later adding that its main priority is to “reduce churn and attrition” — and compared to the end of 2020. There is currently a more conservative market for technical valuations. It’s doubtful that Twilio can hope to meet It spent $3.2 billion on the company Back in a sale. This approach has been To hang about Even before this, the company had presented the metrics of the segment in a better way. Now with more data, we can be more precise.
The segment’s business unit at Twilio projects revenue of $295 million in 2023, up 7% year-over-year. If we estimate the segment will manage similar growth this year, the business unit will close 2024 with revenues of approximately $316 million.
With that growth rate, the segment will be given the same importance as other, slower-growing software businesses. Market data analyzed The altimeter’s jammin’ ball indicates Software companies that are growing at 15% per year or less are valued at about 4.4x their trailing 12 months’ revenue. At that multiple, the segment is valued at about $1.4 billion.
You could argue that figure is a bit rich, given that the segment has negative operating margins even on an adjusted basis. Some companies in its growth bucket have better profitability ratios, so we might expect the segment to earn a sales multiple that was slightly lower than the average number calculated by Ball.
Also, the value of the segment will not necessarily be measured directly by its potential public-market value. If it finds a buyer that has a specific need or use for the segment’s offering, Twilio may be able to command a slight premium. But no matter whether you adjust up or down, the segment’s growth rate and revenue base give it a mild-unicorn value by current metrics, and nothing close to the price it sold for.
When growth was fast and money was cheap it was easy to value software businesses at high levels. Actually, when the deal Was covered by TechCrunch, we noted that it didn’t seem very expensive by then-current standards. At that time the segment was growing at a rate of over 50%, a figure that has declined dramatically in the intervening years. No matter, it’s hard to buy a company when software revenue multiples are in the high teens, watch it slow down, and then try to get your money back when single-digit multiples are the norm.
Apart from valuation dickering, another $1.4 billion in cash may not really change the game for Twilio. The company is worth about $11 billion today, has more than $4 billion in cash and equivalents, and less than $1 billion in debt. So with more cash, it can pay down debt and boost its share buyback program, but the money doesn’t seem transformative for the parent organization, given that it is cash-rich and debt-light.
That’s the conundrum: Investors want action and news that will drive up Twilio’s share price. He has lobbied to sell the segment to help improve the value of his stake. But the segment is only so valuable today, and the company is stuck deciding between keeping one foot in the CDP realm and the potential strategic benefit from selling an asset at a loss that would destroy its revenue base. It’s a tough place.
[ad_2]
Thanks For Reading