Beyond Twilio's IPO success: Rapid growth and significant risks

The cloud communications platform vendor raised a load of cash, but its prospectus document outlines both rapid growth and significant risks.

Cloud communications platform vendor Twilio has successfully launched its long-anticipated IPO. Despite its arrival amid concerns around overvaluation of so-called "unicorn" tech startups, the IPO managed to raise $150 million at a per-share price of $15--higher than expected. Moreover, Twilio's stock began trading at $23.99 on its first market day, suggesting the IPO could have been priced even higher.

Twilio has positioned itself as a tools vendor for next-generation collaboration and messaging apps, as Constellation Research VP and principal analyst Alan Lepofsky notes.

"Fuelled by the growing understanding and comfort of openly sharing information, dozens of new software vendors are creating collaboration platforms," Lepofsky says. "Rather than starting from scratch, they can leverage the APIs from Twilio to text, voice or video chat to their applications. Similarly, custom applications developed inside companies can leverage these tools, allowing them to add communication directly into their apps, allowing them to focus on the workflows and business processes and not recreate the wheel for the comms part."

Along with the APIs, Twilio's platform includes what it calls Super Network--a software layer that provides intercommunication with networks throughout the world, freeing customers from the task of negotiating deals with carriers in various regions. Twilio runs "substantially all" of its cloud infrastructure on Amazon Web Services, with 22 data centers in seven regions, according to the prospectus filed with its IPO.

Twilio had 28,000 "active customer accounts" as of March 31, the document states:

With our platform, our customers are disrupting existing industries and creating new ones. For example, our customers have reinvented hired transportation by connecting riders and drivers, with communications as a critical part of each transaction. Our customers' software applications use our platform to notify a diner when a table is ready, a traveler when a flight is delayed or a shopper when a package has shipped. The range of applications that developers build with the Twilio platform has proven to be nearly limitless.

Twilio is also counting on developers to drive its growth and apparently is off to a solid start in that respect. As of March 31, more than 900,000 developer accounts had been registered, the prospectus says:

Because big ideas often start small, we encourage developers to experiment and iterate on our platform. We love when developers explore what they can do with Twilio, because one day they may have a business problem that they will use our products to solve.

Twilio's well-known customers include Uber and WhatsApp. The latter, however, represents a significant risk to Twilio's business, as the prospectus admits:

We currently generate significant revenue from WhatsApp and the loss of WhatsApp could harm our business, results of operations and financial condition. In 2013, 2014 and 2015 and the three months ended March 31, 2016, WhatsApp accounted for 11%, 13%, 17% and 15% of our revenue, respectively.

While we expect that the revenue for our largest customers, including WhatsApp, will decrease over time as a percentage of our total revenue as we generate more revenue from other customers, we also believe that revenue from WhatsApp may continue to account for a significant portion of our revenue, at least in the near term. WhatsApp has no obligation to provide any notice to us if they elect to stop using our products entirely and, as such, the contribution from WhatsApp could decline to zero in any future period without advance notice.

Twilio's growth plans include a greater focus on enterprise customers, according to the prospectus. It also has plenty of runway for expansion around the world--just 15 percent of its business today is international, according to the prospectus.

It remains to be seen where Twilio's fortunes go from here, but one possible side effect of its successful IPO could be, as some observers have speculated, a rush of other tech startups going public.

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