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Twilio ’s foray into the customer datum ( CDP ) patronage could be lead for an early conclusion . The former startup offers communications software package services via genus Apis , and in recent yr dilate its product footprint through the skill of companies like Segment , which supply CDP capabilities to its big portfolio .
Now , in the viewing of the party ’s growthslowing to a near halt in belated 2023and the exit of itsfounding CEOJeff Lawson , Twilio is executing “ an extensive operational reexamination ” of the asset , agree to its late earnings call . ask by an analyst if the review could result in a sales agreement , the company stressed that Segment has strategic economic value , but that it is approaching its review of the business “ with an subject mind . ” That does n’t necessarily bode well for Segment to stay part of the company much longer .
During the last quarter of Lawson ’s tenure atop the companionship , Twilio came under pressure from activistic investors Anson Funds and Legion Capital todivest assetsto bolster up shareholder value . Twilio ’s own percentage price soared to more than $ 400 per share in 2021 before falling to $ 72.27 Wednesday before the party share its fourth - quarter performance . The stock Mary Leontyne Price was off another 15 % on Thursday to $ 61.15 per portion , suggesting that investor were n’t thrilled with the news report .
Whether Twilio will really sell Segment is an undetermined question correctly now , but if it does , militant are betting that it will increase the value of the parent fellowship by focusing on its core communications business .
Twilio’s history with Segment
When activist investors start circling a company , one CEO who went through the experience say that the first matter to do is to visualise out if maybe they ’re correct , or at least partly right-hand , in their assessment . That takes an ability to maltreat back and see what they ’re plain about .
In this case , it ’s about a big learning and whether it was the best place to put resource . Ah , but hindsight is always 20/20 , is n’t it , peculiarly in this case . suppose back to October 2020 when we were at the height of the pandemic , and Twilio was moneyed with a sound market crownwork of over $ 40 billion . With all that value and an eye toward spread out its food market , Twilio went out and spent $ 3.2 billionto acquire Segment .
section was a luxuriously - flying inauguration that raised over $ 283 million . Its last round in 2019 , a year before the acquisition , was a $ 175 million Series D at a $ 1.5 billion post - money valuation , per PitchBook . It was also a time where companies were really beginning to empathise the value of customer data by bringing it into a individual horizon , and Segment was one of the top startup go after large officeholder likeSalesforce and Adobe .
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But it was fair to ask , even at the time , where Segment would accommodate inside a company where the core business was building communication APIs . The consensus was that Twilio wanted to help customer builddata - fueledcustomer - centric lotion to take vantage of the information lay in in the Segment CDP to furnish a new outgrowth route for the troupe .
It finger like that growth course was in range , a way to expand the company ’s markets beyond the communications APIs business . It really made sense until the marketplace change over pretty dramatically post - pandemic and Twilio ’s stock Mary Leontyne Price steep .
With its market cap dropping , Twilio was pull up stakes with an plus that was n’t really displume its weight , making it vulnerable to activist investor complaints about where it fits in the business . The question is whether activists are putting the company in an impossible position .
What is Segment worth?
In its most late pay story , Twilio moved its “ Flex and Marketing Campaigns products ” to its Communications line of business , leaving its former Data and Applications unit much slimmed and now manoeuvre under the Segment name . It also include some non - Segment efforts , like the society ’s Engage products .
Accordingto Twilio , its Segment unit generated $ 75 million worth of tax revenue in Q4 2023 , up 4 % from a $ 73 million result in the year - ago fourth . Its gross tolerance fall away 80 basis points to 74.4 % , post a non - generally accepted accounting principles operating margin of – 24.6 % and saw its dollar sign - based nett expansion pace improve by 2 % to 96 % compared to its Q4 2022 system of measurement .
In simpler terms , Segment is not grow much , is witness its tax income quality decline slightly , and is still assure spend from existing customers contract . ( Twilio took a cathexis relating to Segment in its most recent fourth : $ 286 million regarding “ developed technology and client kinship impalpable assets , ” which it lend did not include any of Segment ’s “ report whole goodwill . ” )
Given Segment ’s have intercourse underperformance — in itsearnings call , Twilio ’s new CEO Khozema Shipchandler said that Segment is “ not do at the tier it needs to , ” adding later that its main antecedency is “ mitigating churn and muscle contraction ” — and a more materialistic market place for tech valuations at nowadays compared to late 2020 , it ’s dubious that Twilio could trust to getthe $ 3.2 billion it pass on the companyback in a cut-rate sale . This linear perspective has beenfloating aroundsince even before the company substantially - surfaced Segment ’s metric . Now with more data , we can be more exact .
Segment ’s business unit at Twilio father $ 295 million Charles Frederick Worth of taxation in 2023 , up 7 % class - over - twelvemonth . If we anticipate that Segment will manage the same emergence this year , the business whole would close 2024 with about $ 316 million in gross .
With that increment pace in mitt , Segment would in all likelihood be valued likewise to other , slowly growing software businesses . Market data study byAltimeter ’s Jamin Ball indicatesthat software companies that are grow at 15 % or less per class are worth about 4.4x their next 12 month ’ tax income . At that multiple , Segment is deserving about $ 1.4 billion .
You could argue that even that figure is a bit productive , have that Segment has stiffly negative operating margins , even on an set basis . Some companies in its outgrowth bucketful have better gainfulness ratios , so we might expect Segment to earn a multiple in a sales agreement that was slightly lower than the medial figure that Ball calculated .
At the same time , the value of Segment wo n’t necessarily be value directly from its potential public - market place Charles Frederick Worth . If a buyer can be found that has a especial need or utilize for what section extend , Twilio might be able-bodied to juice a light agio . But no matter whether you adjust up or down , Segment ’s development rate and revenue understructure give it a light - unicorn time value by current metrics , and nothing close to what it sell for .
It was easy to value software commercial enterprise at higher levels when growth was faster and money tatty . Indeed , when the dealwas continue by TechCrunch , we observe that by then - current norm it did n’t seem too expensive . section was also rise at more than 50 % at the time , a anatomy that has dramatically come down in the intervening long time . No matter , it ’s operose to grease one’s palms a company when software system taxation multiple are in the high teens , see it slow down , and then try on to get your money back when exclusive - digit multiple are the norm .
Apart from valuation dickering , another $ 1.4 billion in immediate payment might not really change the plot for Twilio . The society is worth around $ 11 billion today , has more than $ 4 billion in cash and equivalent , and under $ 1 billion worth of debt . So with more hard currency , it could eliminate debt and bolster its portion buyback program , but the money does n’t seem transformative for the parent org , given that it is immediate payment - fat and debt - light .
This is the conundrum : Investors need action and news that could pad Twilio ’s share price . They have buttonhole for Segment to be sell off to help improve the value of their holding . But Segment is only so valuable today , and the company is stuck deciding between potential strategical gains from observe one foot in the realm of CDP and strip an asset at a loss that would see its gross base erode . That ’s a tough smirch to be in .
