Twilio Inc. (TWLO) is a Hedgeye Technology Best Idea Long.  

We created a profile of Segment as part of our summer themes work on API-First companies (CLICK HERE for full presentation) and we present the updated salient elements below. TWLO is a leader in the API-First category and seems to be picking away at strategic inorganic opportunities within the landscape.

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Overall, this is a good acquisition. It takes Twilio up the stack from pure infrastructure software provider, enables them to control more of the customer engagement layer, and plants a foothold into broader enterprise data strategies. Historically, outside of Twilio’s relatively new Flex Contact Center offering, Twilio has focused on enabling developers to build applications which benefit its customers’ end users (e.g. a rider  receiving a text from their Lyft driver or a WhatsApp account verification message). By incorporating Segment, Twilio will now allow developers to enable their internal stakeholders to use and make decisions with the data being generated from their company’s end users. From a financial perspective, the acquisition is also projected to be both growth and gross margin accretive.

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KEY POINTS:

• Deal terms imply LTM revenue ~$160MM for Segment, versus ~$105-115MM in the prior 12 months.
• Segment headcount is recently growing much slower after a 10% headcount reduction in May due to COVID-19 fears.
• Segment is the leader in the Customer Data Platform market, which has gotten more attention recently with the entrance of Salesforce & Adobe.
• Segment moves customer engagement data from all existing end-user facing applications (web, mobile, etc.) to users of internal applications across different departments via a single API. It removes the customer pain point of repeated development flywheel each time a new internal application is introduced.
• Segment was already one of the most popular ETL tools in an AWS re:Invent survey back in 2016.
• The company had recently suffered from turnover in engineering, and some negative internal politics.

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As it relates to the broader software ecosystem, if companies like TWLO-Segment can derive customer profiles by stitching together elements of the API universe, it might mean that Customer Experience Management companies such as MDLA (whose entire differentiating factor is the integration of data sources for the purpose of customer profile creation) are a step out of tune. And even customer data profile companies such as ZoomInfo (ZI) may also not be arriving at the party with the right repeatable mechanism, especially given their nature of reselling 3rd party data as opposed to only selling their own. Adobe and Salesforce have both been investing in creating competing offerings to Segment which validates this market, and may mean Salesforce will be forced to acquire someone like Zapier to underwrite the seamless integrations across customer data platforms. We would not be surprised to see TWLO back in the market for another acquisition in the coming quarters, this time perhaps more closely related to their IoT or edge aspirations.

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Innovation in equity research.

Ami Joseph
Managing Director 
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Yosef Vaitsblit
Director
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It’s a kids song. The point of the song is: there are all types in this world. I think we know which type MDLA is today, and why the founders have run so far from this ship.

Medallia Inc. (MDLA) is a Hedgeye Technology Best Idea Short.

Leslie (MDLA CEO) is predictable. This acquisition of Stella Connect keeps 4Q above 20% revenue growth. Stella is a perfect MDLA acquisition: raised $50MM+ over 12 years, acquired for $100MM, and MDLA CFO pretends MDLA can "make Stella great again". MDLA needs one more to get them there for 1Q22. But the next one will be smaller ($10MM annual revenue; should cost $50-60MM) and Leslie will be sure to remind all of us that he only does technology tuck-ins.

MOST IMPORTANT ELEMENTS FROM EPS:

• Reported Billings grew 21% Y/Y. But not if you strip out the M&A impact. Then it’s 11% Y/Y.
• Subscription Revenue grew 25% Y/Y. But not if you strip out M&A impact. Then it’s 14% Y/Y.
• SaaS Billings grew 25% Y/Y. But not if you strip out M&A impact. Then it’s 13% Y/Y.
• & Using calculated Deferred Revenue, rather than reported, plus stripping out M&A impact to revenue in the Q, gets 9% Y/Y Total Billings Growth.

OTHER ITEMS TO KNOW:

• The Magic number is flat Y/Y, no improvement despite revenue up. That’s what happens when you acquire revenue: it comes with a cost structure.
• Net Cash is down 27% (-$113MM) despite the company raising $90MM of capital in 1H21 from the revolver, stock options exercise, and proceeds from share purchase plan.
• But don’t worry, there is some growth…in headcount. Up 30% y/y (our estimate).
• Just a few short months ago Leslie was promising no M&A and now the company is doing its largest deal (@$100MM), by a factor. When pressed, the CFO wouldn’t give the contribution figures or size of the acquired asset once again reminding us that the contribution would be “minimal”.
• We can extend an olive branch on decent customer additions in the mid-market and traction in the employee experience module – but these are both taking form on small bases and have net lower $ impacts than the core of the business.

BOTTOMLINE:

Not every company has to be a growth company but if you aren’t a growth company, then you should be profitable, and the acquisitions you make should make you more profitable. The problem for Medallia is that they are not buying high quality businesses. Leslie is buying zombies. He is filling revenue holes as opposed to buying things he can leave alone and let grow.

In the same 30 seconds Leslie told us that MDLA has solved the challenge for a high degree of integration at scale...and also that his company likes to acquire small things in the space which by definition aren’t integrated with his 'highly integrated' software 'at scale'. What we think is happening underneath: MDLA is short on growth, there isn’t a path forward, they are buying their way into it, hoping to dupe another McDermott into overpaying for a pile of overfunded, underperforming assets. Unfortunately for them, there is a ways to go in the short before that can become a reality.

Press.

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Innovation in equity research.

Ami Joseph
Managing Director 
Twitter
LinkedIn

Yosef Vaitsblit
Director
Twitter
LinkedIn