With Twilio under pressure from activists, Segment could go up for sale

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Twilio’s foray into the customer data (CDP) sector could see a quick conclusion. The former startup offers communications software services through APIs and has expanded its product presence in recent years through the acquisition of companies like Segment, which added CDP capabilities to its broader portfolio.

Today, in the wake of the company’s growth slowdown to a virtual standstill at the end of 2023 and the sound output Founding CEO Jeff Lawson, Twilio is performing “a thorough operational review” of the asset, according to its recent earnings call. When asked by an analyst whether the review could result in a sale, the company stressed that the segment had strategic value, but that it was approaching its review of the company “with an open mind.” This doesn’t necessarily bode well for Segment staying with the company much longer.

During the final quarters of Lawson’s tenure at the helm of the company, Twilio came under pressure from activist investors Anson Funds and Legion Capital to sell assets to strengthen shareholder value. Twilio’s stock price soared to more than $400 per share in 2021 before falling to $72.27 on Wednesday before the company shared its fourth-quarter performance. The stock price fell another 15% on Thursday to $61.15 per share, suggesting investors weren’t thrilled with the report.

It remains an open question at the moment whether Twilio will actually sell Segment, but if so, activists are betting it will increase the parent company’s value by focusing on its core communications business.

Twilio’s history with Segment

When activist investors begin to surround a company, one CEO who has had this experience said the first thing to do is determine whether they may be right, or at least partly, in their assessment. This requires an ability to step back and see what they are complaining about.

In this case, it’s a significant acquisition and whether it was the best place to invest resources. Ah, but hindsight is always 20/20, right, especially in this case. Think back to October 2020, when we were at the height of the pandemic, and Twilio had a healthy market cap of over $40 billion. With all this value and the goal of expanding its market, Twilio spent $3.2 billion. to acquire the segment.

Segment was a high-flying startup that raised over $283 million. Its last round in 2019, a year before the acquisition, was a $175 million Series D with a post-money valuation of $1.5 billion, according to PitchBook. It was also a time when businesses were really starting to understand the value of customer data by aggregating it into a single view, and Segment was one of the leading startups to take on large incumbents like Salesforce and Adobe.

But it was fair to wonder, even back then, what Segment’s place would be within a company whose core business was creating communications APIs. The consensus was that Twilio wanted to help customers create powered by data customer-centric applications to leverage data stored in the CDP segment to provide a new growth path for the business.

It seemed like this growth path was within reach, a way to expand the company’s markets beyond the communications API sector. This actually made sense until the market changed quite dramatically post-pandemic and Twilio’s stock price plunged.

With its market capitalization falling, Twilio found itself with an asset that wasn’t really pulling its weight, making it vulnerable to complaints from activist investors about its place in the company. The question is whether the activists are putting the company in an impossible position.

What is Segment worth?

In its latest earnings report, Twilio moved its “Flex products and marketing campaigns” to its Communications business area, leaving its former Data and Applications unit significantly reduced and now operating under the Segment name. This also includes some non-industry efforts, like the company’s Engage products.

According to in Twilio, its segment unit generated revenue of $75 million in the fourth quarter of 2023, up 4% from the year-ago quarter’s result of $73 million. Its gross margin fell 80 basis points to 74.4%, posted a non-GAAP operating margin of –24.6%, and saw its dollar net expansion rate improve 2% to 96%. compared to its fourth quarter 2022 parameters.

In simpler terms, the segment is not experiencing strong growth, is seeing revenue quality decline slightly, and continues to see spending from existing contracted customers. (Twilio took a segment-related charge in its most recent quarter: $286 million related to “intangible assets related to developed technology and customer relationships,” which it added did not included none of the segment’s “reporting unit goodwill.”)

Given the segment’s known underperformance — in its call for resultsTwilio’s new CEO Khozema Shipchandler said the segment is “not performing at the level it needs to be,” later adding that its main priority is “mitigating churn and contraction” — and a market more conservative for technology valuations currently compared to the end of 2020, it is unlikely that Twilio can hope to obtain the $3.2 billion spent on the company back in a sale. This perspective was floating around since even before the company made segment metrics stand out better. Now, with more data, we can be more precise.

The segment business unit at Twilio generated revenue of $295 million in 2023, up 7% year-over-year. If we expect the segment to see the same growth this year, the business unit will close 2024 with revenue of approximately $316 million.

With this growth rate in hand, Segment would likely be valued similarly to other slow-growing software companies. Market data analyzed by Jamin Ball’s altimeter indicates that software companies growing 15% or less per year are worth about 4.4 times their next 12 months’ revenue. At this multiple, Segment is worth around $1.4 billion.

One could argue that even this figure is a bit high, given that the segment has very negative operating margins, even on an adjusted basis. Some companies in its growth category have better profitability ratios, so we might expect Segment to achieve a multiple on a sale that’s slightly lower than the median figure calculated by Ball.

At the same time, the value of the segment will not necessarily be measured directly from its potential value in the public market. If a buyer is found with a particular need or use for what Segment offers, Twilio might be able to command a slight premium. But no matter whether you adjust up or down, the segment’s growth rate and revenue base give it light unicorn value by current metrics, and nothing close to what it sold for .

It was easier to value software companies at higher levels when growth was faster and money was cheaper. Indeed, when the agreement was covered by TechCrunch, we noticed that by the standards then in force, it did not seem too expensive. The segment was also growing at over 50% at the time, a figure that has declined significantly in the years since. Either way, it’s tough to buy a company when software revenue multiples are in the upper teens, watch it decelerate, and then try to make your money back when the multiples are at a figure are the norm.

Valuation challenges aside, an additional $1.4 billion in cash might not be much of a game-changer for Twilio. The company is now worth about $11 billion, has more than $4 billion in cash and equivalents and debt worth less than $1 billion. So, with more cash, it could extinguish its debts and strengthen its stock buyback program, but this money does not seem transformative for the parent organization, given that it is cash rich and low in debt.

That’s the conundrum: Investors want stocks and news that could support Twilio’s stock price. They pushed for Segment to be sold to help improve the value of their holdings. But the segment has only limited value today, and the company is forced to choose between potential strategic gains from keeping a foothold in the CDP business and divesting a loss-making asset that would see its base income erodes. It’s a difficult situation to live in.

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