Twilio’s Segment Acquisition Appears to Have Backfired

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Communication Platform as a Service (CPaaS) player Twilio (NYSE: TWLO) is having a rocky start to the year. A recent investor action forced the exit of its founder and CEO Jeff Lawson and more recently, the lower outlook for the rest of the year did not please the analysts either.

Twilio’s Financials

Twilio’s fourth quarter revenues grew 5% to $1.08 billion, ahead of the market’s forecast of $1.04 billion. It ended the quarter with a GAAP loss of $362 million. Adjusted earnings came in at $0.86 per share compared with $0.22 per share a year ago. It was also significantly better than the analyst?estimate?of $0.58 per share.

Communications revenue was up 5% to $1 billion. Segment revenue, earlier known as Data & Applications grew 4% to $75 million.

Among key metrics, it ended the year with more than 305,000 active customer accounts compared to more than 290,000 as of December last year. Dollar-Based Net Expansion Rate of 102% for the fourth quarter was lower than previous year’s 110%.

Twilio ended the year with revenues growing 9% to $4.15 billion and an adjusted net income of $2.45 per share compared with $0.15 per share reported a year ago.

Twilio expects to end the first quarter with revenues of $1.025-$1.035 billion and earnings of $0.56-$0.60 per share. The revenue outlook was significantly lower than the market’s expectations of $1.05 billion for the quarter.

Twilio’s Worries

The company has had a turbulent start to the year that stemmed from the?$3.2 billion acquisition of Segment completed in 2020. Segment was known for its customer data platform that enabled both developers and organizations to integrate customer data from every customer touchpoint and record system, thus empowering marketing and sales and services leaders with meaningful information. The data that it gathered was used to garner insights needed to enhance customer engagement.

At the?time of the acquisition, Twilio planned to leverage Segment to deliver a solution that would allow businesses to make their customer engagement across all channels more personalized, timely, and impactful. However, Twilio’s investors believe that it failed to live up to those expectations. Analysts weren’t thrilled with the $3.2 billion price tag, which they believed was a significant premium to pay. Additionally, Segment has been a?drag on the performance of Twilio’s communications business.

Earlier this year, activist investors at Anson Funds and Legion Capital proposed that they would like to sell off either the Segment unit or the whole company. The actions resulted in the exit of CEO and founder Jeff Lawson. Lawson also stepped down from the Board of Directors position and was replaced by?Khozema?Shipchandler, another long time Twilio executive.

While he has not announced plans to sell off Segment, Shipchandler?has confirmed that Twilio would look deeper into the non-performing business. Under his leadership, Twilio is expected to increase the integration of AI with its communication tools to deliver more personalized experiences. Twilio is also looking at continuing to manage its cost structure. Last December, Twilio had announced plans to reduce its workforce by 5%. It is still early days for the new CEO, but the market has already turned on the stock and it fell 9% in the after-hours trading session.

Twilio’s stock is trading at $58.59 with a market cap of $10.6 billion. The stock had climbed to a 52-week high of $78.16 in?December last year, having climbed from the 52-week low of $45.02 that it had fallen to in May last year.

Disclosure:?All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article. I am an investor in this company.

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