- Twilio is expected to be the first unicorn to go public in 2016.
- Unlike other unicorns, Twilio does not compromise profitability for growth entirely.
- Investors looking for a sustainable business with rapid growth and responsible spending should wait for Twilio’s IPO.
The cloud messaging and VoIP vendor, Twilio, has filed its S-1 with the SEC seeking to raise $100M from the public after it raised $240M in five private funding rounds between 2009 and 2015. Twilio might not be a familiar name to many investors. However, the services and functions that Twilio offers its clients are very well known worldwide. Twilio enables its clients to add communication features like text messages and voice and video calls to their apps and the company’s clients list includes prominent companies across all sectors of the economy such as the American Red Cross, Uber, Facebook (NSDQ:FB), WhatsApp, Coca Cola (NYSE:KO), Nordstrom (NYSE:JWN), and many others. Use cases for Twilio’s technology are broad; for example, WhatsApp uses Twilio to offer users in-app VoIP voice and video calls, while Coca-Cola uses Twilio as an internal communication method among its field service technicians.
Twilio has more than 28K active customers, and it successfully monetizes the popularity of its services as it has increased its revenues at a massive pace of 86% year-over-year while keeping a steady gross margin as presented in the chart below.
Unlike many other tech unicorns (some of them are already publicly traded), Twilio does not compromise on profitability for growth, and while the company increases its operating expenses each quarter to support the growth, it has lowered the OpEx to Rev ratio to improve profitability. On the same note, Twilio modestly increased the SBC and reached a reasonable SBC to OpEx ratio of 8%, which is significantly lower than many other tech companies. The low OpEx and SBC levels and the downtrend in these items is driving a drastic improvement in the company’s adj. EBITDA margin, as shown in the chart below, which highlights the company’s commitment to become profitable.
Twilio raised more than $240M in five funding rounds between 2009 and 2015, and it currently holds more than $100M in cash with no debt on the balance sheet. In its latest Series E funding round that took place in mid-2015, Twilio raised $130M at a $11.5 share price under a $1B valuation—quite small compared to other unicorns but a significant tech IPO with no doubt.
Since Series E took place, Fidelity has re-evaluated its Twilio shares a few times, and its current figure of $14.3 suggests an increase of 24% in the company’s valuation from mid-2015 until now. The higher valuation of $1.24B reflects a reasonable revenue multiple of 6.4, which is better than that of other unicorns that have gone public in recent years and other rapidly growing tech companies that are already publicly traded. A premium of around 20% is more than acceptable for the IPO of a tech startup and will satisfy the VC-backers from all rounds. I expect that $14.3 will be roughly the mid-range of the initial price, and actual demand will help to adjust the final IPO price.
The concern about a macroeconomic event that will have a global impact and the recent weakness in tech stocks performance drove many unicorns and tech companies to remain private. Investors worry about a unicorn bubble that is about to push them to look beyond the top-line performers and search for value creation and sustainable long-term growth. In that sense, Twilio is just what many tech investors are looking for right now: a hot and trendy unicorn with incredible top-line growth alongside strong products and a clear path towards profitability. I admit that the comparison to SecureWorks (NSDQ:SCWX) and Nutanix is inevitable as SecureWorks was the last significant tech IPO that disappointed big time and Nutanix was the last unicorn to file for IPO only to delay it to an unknown date a few months later. However, Twilio is significantly different from these companies both in its strong market positioning and financial performance. Twilio outperforms both companies on both the counts.
Twilio is an attractive IPO investment not just because it has an impressive top line growth, well-known customers, or rapidly growing customer base (50% CAGR) but because it does all of that while improving margins, and it keeps SBC at a reasonable level and doesn't over-use it. Twilio generates an increasing amount of revenue but doesn't forget that a sustainable business needs a solid base to be built on for the long term and has improved adjusted EBITDA margin and net loss margin quarter-over-quarter and year-over-year. There are very few tech companies (and unicorns) that think the same way and operate responsibly, which highlights Twilio’s business and financial performance. Tech investors that are looking for a long-term sustainable business that grows rapidly while striving for profitability and has a reasonable valuation should wait for the Twilio IPO.