Contact: Scott Denne
Twilio has set itself up for the first venture-backed IPO of the year. The maker of communications tools and services for mobile app developers unveiled its prospectus showing solid revenue growth, mild losses (for a venture capital portfolio company) and a lack of long-term contracts that will make its future results challenging to predict.
The San Francisco-based company finished 2015 with $167m in revenue, an increase of 88% from a year earlier and a growth rate that’s 10 percentage points higher than 2014’s growth. Its losses increased to $36m from $27m. Losses, measured as a percentage of revenue, decreased to 21% from 30% as Twilio generated increasing revenue for each dollar of sales and marketing spending. Marketing spending will likely trend back up in the wake of the company’s IPO as it plans to invest in building its enterprise sales team to land more business within that sector.
Twilio will have to be successful in that strategy to keep growth near its historic pace. The company depends on a single customer for much of its revenue: Facebook’s WhatsApp accounted for 17%, or $28m, of last year’s sales. Meanwhile, its top 10 customers made up a combined 32% of its revenue – so aside from WhatsApp, those clients spent only an average of $3m on the platform. The average account outside the top 10 paid just $4,000 (some customers have more than one account). Unlike most SaaS vendors, the bulk of Twilio’s revenue – over 70% – is billed based on usage. Few accounts, including WhatsApp, have contracts with minimum spending levels – the company maintains just $6m in deferred revenue on its balance sheet.
The variability, lack of contracts and dependence on WhatsApp will weigh down the valuation and, we believe, push Twilio’s market cap toward the lower end of the spectrum among SaaS firms. The company seems to be aware of this and invented a non-GAAP financial metric (something that’s always worrisome to see) called ‘dollar-based net expansion rate’ that, no surprise, shows a growth rate that’s nearly twice that of its GAAP revenue.
RingCentral provides a good predictor of where Twilio’s valuation might fall when it hits the public markets. That company also offers voice and text communications services, although mainly to businesses. While RingCentral has a slower rate of growth – about 30% year over year – it posts more predictable revenue. As Twilio is seeking to do, it started at the low end of the market and has been pushing upstream. RingCentral trades at 4x trailing revenue and we would expect Twilio to fetch something in that neighborhood, giving it a market cap of about $750m on $192m in trailing revenue.
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