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Twilio – Moving Into Another ‘Segment’ (NYSE:TWLO)

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Twilio (TWLO) has seen an eventful month of October so far with the company announcing both quarterly results and a big deal in the first half of the month. Both events were welcomed by investors, pushing shares up to a high of $340 per share as it seem very long ago when this was just a $25 stock early in 2018.

While such a move is only in part explained by actual revenue growth, let alone bottom line margins, the reality is that Twilio seems to become a stronger business by the day. While I think that Twilio is a very strong and well-run business, valuations have priced this potential in, and perhaps more.

About Twilio

Twilio has a mission to fuel the future of communications, at least that is how the company describes its long term goal. The company claims that millions of developers use Twilio to unlock communication to improve human experience. The company does this through a range of communication channels including voice, text, chat, video and e-mail. The distinguishing feature is that it does this through APIs which are simple enough for a developer to incorporate, but robust enough to power demanding applications.

With customer expectations on the rise and the cost of human customer service being high, while quality of that not always great, a robust offering here can both save meaningfully on costs while boosts the output for organizations at the same time. The nature of these solutions, with communication shifting from human towards intelligent automation has furthermore seen a boost of course in these times. With Covid-19 resulting in businesses being closed and the e-commerce part of business thriving, it is very obvious that the long term trends and potential has meaningfully accelerated as the result of current events.

About Growth

Based on the brief description above and the leadership position which Twilio has in this field it is very evident that it operates in a robust market opportunity. The segment is showing solid growth and Twilio is taking the full benefits of this.

The company has seen very steady growth in recent years. From a revenue base of $167 million the company grew sales by 67% in 2016 to a quarter of a billion on which it still reported a GAAP loss of $41 million. Sales rose another 44% to nearly $400 million in 2017, with growth accelerating to 63% in 2018 as revenues topped $650 million. Growth in 2019 was driven by the $2 billion purchase of SendGrid and this boosted the growth number to 79% last year, with revenues coming in at $1.13 billion.

While revenues are up a factor of 6-7 between 2015 and 2019 there is a small caveat to that growth as losses, stock-based compensation and the SendGrid purchase caused quite some dilution. The total share count was up a factor of 2.8 times over this period, implying that revenues per share were up about 2.5 times which is far less than actual revenue growth, although revenues are still up close to 30% per year!

About the losses: the GAAP operating loss of $41 million in 2016 (equal to about 15-20% of sales) has only grown to $370 million in 2019, equal to about a third of sales. While the loss of $2.36 per share based on GAAP accounting was in part driven by amortization charges and acquisition related costs, the company managed to fabricate a $0.16 per share profit on an adjusted basis, although it excluded $1.85 per share in stock-based compensation expense. This is a real expense, as is evident in the discussion above.

Shares started the year around $100 which gave the company a near $15 billion equity valuation. Adjusting for net cash and with the company guiding for 2020 sales around $1.48 billion this year, shares traded at just below 10 times sales.

These multiples look reasonable, especially in comparison to recent technology IPOs having taken place late summer/early autumn, yet this was of course ahead of Covid-19 which has not just provided a boost to the underlying business, it sent the shares a lot higher as well!

Impact Of Covid-19

Early in May the company reported its results for the quarter ending at the end of March, so the operational impact of Covid-19 was yet to be seen. Nonetheless, sales were up 57% to $365 million as the company withdrew the full year guidance as a result of the situation. The company guided for flattish sequential revenues trends (in absolute terms), as that suggested an anticipated slowdown in revenue growth, seen up around 34% on an annual basis.

Early August it was evident that the guidance was far too conservative with sales up 46% to $400 million, as the company again guided for flattish sales on a sequential basis. With shares rising on the back of these numbers, the company tapped the equity markets just a few days later, selling more than 5 million shares at $247 apiece, with shares essentially up 150%since the start of the year.

So what does the situation look like? Truth be told is that the company will probably exceed the full year sales guidance quite easily, although the question is if this is actually the result of Covid-19, or despite Covid-19. The company has been conservative in its guidance, and hence I am not surprised to see revenues trending at an annual rate of $1.6 billion already, yet investors have priced in massive potential gains.

Based on a share count of 142 million by the end of the second quarter, or about 147 million in the aftermath of the August equity issue, shares represent a $48 billion valuation here and now at $326 per share! Even after accounting for net cash balances, this valuation still exceeds $45 billion, which based on the second quarter revenue rate reveals that valuations have jumped from about 10 times forward sales to 28 times annualised sales while growth has not even accelerated! While the company managed to grow adjusted earnings from $5 million to $14 million on a quarterly basis, that number remains highly distorted with stock-based compensation as high as $78 million, still causing large economic losses.

To further bolster its offerings the company announced its largest acquisition to date halfway October, spending $3.2 billion to acquire Segment in an all-stock-deal to take ”advantage” of high valuations. The deal is kind of interesting as Segment allows developers and companies to break down silos of data, to unlock the full potential of that data, information and create optimal solutions for customers. Other than that Twilio is willing to give up a 6% equity stake in exchange for the company, what was pretty much all the information provided in the press release.

The associated conference call revealed a little more information including Segment’s approximately 75% gross margins, revenue growth North of 50% as management basically admitted a roughly 20 times sales multiple was paid. That suggests that the deal even looks cheap, at least on a relative basis and that is what counts if you pay in stock.

With shares up essentially $25 dollar in response to the deal, the increase in the valuation is equal to about the price paid for Segment, marking a clear vote of confidence by the market on this deal.

This comes on the back of the gross margins, growth and valuation multiple dynamics. Moreover, is probably the anticipated widening of the moat, as Twilio no longer is just about communication, but first establishing communication to from thereon expand offerings to drive customer understanding and meaning, making it far more valuable service provider to companies.

Final Thoughts

Needless to say, I am very reserved for the simple fact that the huge advancement in the share price have exceeded actual growth by a very comfortable margin, which actually is not comfortable for shareholders. At the same time, Covid-19 demonstrated the resilience and acceleration of the business model and offerings. Consequently, I like the (acquisition) strategy to move into adjacent sectors following dominance in the communication market, very much.

With this being a dangerous short or potentially still an M&A target, despite the >$50 billion valuation here, I would not dare to bet against this company easily. This should not be confused with the conclusion that a reasonable risk-reward can be seen here.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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European stocks fall as healthcare, construction sectors drag By Reuters

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© Reuters. The German share price index DAX graph at the stock exchange in Frankfurt

By Sruthi Shankar

(Reuters) – European shares fell for a third straight session on Wednesday, as losses in healthcare and construction stocks countered a lift from encouraging earnings from consumer giant Nestle and telecoms equipment maker Ericsson (BS:).

The pan-European STOXX 600 () fell 1.0%, in sharp contrast to Asian markets and Wall Street futures that steadied on hopes of a fresh U.S. stimulus package.

Most European sectors slipped, with healthcare stocks () proving the biggest drag, while banking stocks () were supported by rising U.S. and European government bond yields.

Nestle (S:) lifted its 2020 sales forecast following a quarterly beat, but shares inched lower after early gains.

Sweden’s Ericsson (ST:) jumped 5.5% as higher margins and China’s 5G rollout helped the company beat quarterly core earnings estimates.

“Earnings have been generally well above expectations, and guidance has been a positive surprise,” said Patrick Moonen, principal strategist in the multi-asset team at NN (NASDAQ:) Investment Partners.

“But there are other elements that are currently at play and may have a bigger impact on the market performance than earnings.”

Moonen pointed to many European countries reimposing mobility restrictions following a surge in COVID-19 cases that could weigh on fourth-quarter economic activity.

The STOXX 600 has struggled to break out of a trading range since June, when it recouped a large part of the early pandemic-driven losses. The benchmark is still about 16% below its all-time high.

London markets underperformed, with the exporter-heavy FTSE 100 () hit by a surge in pound after bullish Brexit comments. ()

Vivendi (PA:) rose 2.9% after the French media group reported a bigger-than-expected quarterly sales and unveiled plans to list its most-prized asset, Universal Music Group, in 2022.

Third-quarter profits for companies on the STOXX 600 are expected to drop 34.8%, according to Refinitiv data, a slight improvement from the 36.7% predicted at the start of the earnings season.

Of the 29 companies that reported so far, 75.9% have topped earnings expectations.

Gold miner Centamin Plc (L:) slumped 20.7% to the bottom of STOXX 600 after cutting its 2020 production forecast.

Construction companies also took a knocking, with Assa Abloy (ST:), the world’s biggest lockmaker, falling 3.9% after it reported a drop in quarterly sales.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Japan stocks higher at close of trade; Nikkei 225 up 0.31% By Investing.com

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© Reuters. Japan stocks higher at close of trade; Nikkei 225 up 0.31%

Investing.com – Japan stocks were higher after the close on Wednesday, as gains in the , and sectors led shares higher.

At the close in Tokyo, the added 0.31%.

The best performers of the session on the were Takara Holdings Inc. (T:), which rose 7.67% or 83.0 points to trade at 1165.0 at the close. Meanwhile, The Japan Steel Works, Ltd. (T:) added 7.40% or 157.0 points to end at 2280.0 and Pacific Metals Co., Ltd. (T:) was up 5.92% or 95.0 points to 1701.0 in late trade.

The worst performers of the session were NEC Corp. (T:), which fell 2.25% or 130.0 points to trade at 5640.0 at the close. Yahoo Japan Corp. (T:) declined 1.82% or 14.0 points to end at 756.0 and Olympus Corp. (T:) was down 1.79% or 37.0 points to 2027.0.

Rising stocks outnumbered declining ones on the Tokyo Stock Exchange by 2348 to 1140 and 212 ended unchanged.

The , which measures the implied volatility of Nikkei 225 options, was unchanged 0% to 20.83.

Crude oil for December delivery was down 1.08% or 0.45 to $41.25 a barrel. Elsewhere in commodities trading, Brent oil for delivery in December fell 1.14% or 0.49 to hit $42.67 a barrel, while the December Gold Futures contract rose 0.35% or 6.75 to trade at $1922.15 a troy ounce.

USD/JPY was down 0.35% to 105.12, while EUR/JPY fell 0.09% to 124.58.

The US Dollar Index Futures was down 0.26% at 92.812.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Iberdrola’s Avangrid to buy U.S. firm PNM Resources for $4.3 billion By Reuters

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2/2
© Reuters. The logo of Spanish utility company Iberdrola is seen outside its headquarters in Madrid

2/2

By Isla Binnie

MADRID (Reuters) – Spanish renewable energy firm Iberdrola (MC:) announced plans to expand in the United States on Wednesday with a deal to buy utility PNM Resources (N:) through its U.S. unit Avangrid (N:) worth $8.3 billion including debt.

Absorbing PNM into Avangrid will create the third-largest renewable energy operator in the United States, with business spanning 24 states, Iberdrola said in a statement.

On Tuesday Reuters reported that the deal was being discussed.

PNM’s board unanimously approved the $4.3 billion offer to its shareholders of $50.3 per share, the filing said. Iberdrola expects the deal to close in 2021 and start boosting financial results from the first year.

Green energy targets and increasing investor interest in protecting the environment have buoyed Iberdrola and other renewables-focused utilities.

The pandemic has also seen U.S. utilities look harder at consolidation to cut costs and spur investment.

Active in New Mexico and Texas, PNM gives Avangrid a route to expand its regulated business beyond the U.S. northeast.

PNM could also benefit from Avangrid’s renewables experience as it works to cut emissions.

Iberdrola said the merged company would have assets worth $40 billion, generate core earnings of around $2.5 billion and net profit of $850 million.

This is Iberdrola’s eighth deal this year as part of a 10 billion euro ($11.85 billion) investment drive in which it has already bought assets in France, Australia and Japan.

CEO Ignacio Galan said his strategy consisted of: “Friendly transactions, focused on regulated businesses and renewable energy, in countries with good credit ratings and legal and regulatory stability, offering opportunities for future growth”.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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