Q2 CPaaS Earnings Review, and the Klaviyo S-1 Filing
Efficiency is the name of the game
The Q2 earnings for the companies I watch were much better than Q1. There’s at least a lot more green on the board and only one with both QoQ and YoY decline (we’ll go into that a bit later).
Three learnings from Q2 earnings:
It is a bumpy ride: “Tough macro-economic conditions” seems to be the unifying chorus in all investor calls. All companies agree—the market is an unyielding, unforgiving task master and that’s not changing anytime soon.
Everyone is spending creatively: I once heard a city mayor say, ”creativity starts when you cut a trailing zero from the budget.” These CPaaS players are showing not only robust operational discipline with headcount and G&A cuts (which, for the most part, are behind them) but also creativity in how they’re spending on GTM and product initiatives:
Customer focus: In selling off its IoT and ValueFirst businesses, Twilio walked away from a sizable book-of-business that wasn't core to its vision. Bandwidth continues its march to move upmarket, jettisoning lower ARPU customers. Upland is continuing to take the hits of sunsetting licenses that aren’t core to its business model.
GTM efficiencies: Be it cross-selling, inside sales, or product- or sales-led growth, companies are deploying any and all tools to bring in revenue. Twilio landed its biggest messaging client ever, at a $100M order. This was already a client from its email business. Twilio Communications is going back to its product-led roots, while Twilio Data is fully ramped with its sales-led model. Sinch is also seeing early traction in cross-selling and Bandwidth is doubling down on its voice + text selling proposition. The need for disciplined investing in the business means these companies are getting creative in attracting and retaining customers.
Trends are stabilizing: The CPaaS market, and the SaaS space in general, was white-hot thanks to cheap money, pandemic-fueled growth, and M&A deal heat—none of which were sustainable. When these levers disappeared, the market, of course, punished the companies mercilessly. While nowhere near their pandemic levels, valuations have stabilized. And the good news is that both investors and operators are accepting this reality, and one can expect M&A activity to pick up. Given the tax implications the end of the calendar year enforces, Q4 will be telling.
The Upland Enigma
Upland Software seems to be one that might be looking for an M&A opportunity. While its growth is diminishing (as the management team expected), Upland’s GM is the highest, and its QoQ and YoY operating profits are relatively healthy. It also built a CoE in India to drive product growth. But as an analyst pointed out on the call, it’s been a year and there hasn’t been any big product news.
Twilio, Bandwidth, and Sinch are showing strong “Act II” momentum from investments in product and technology. LinkMobility is showing a good Consensus-style operating model. For now, Upland has demonstrated neither.
Product-led growth is a long slog, and unless Upland shows trends of reversing shrinking growth, the market may lose patience. I suspect the management team knows this. However, its healthy GM and OPEX might make them ripe for a Vista/Thoma Bravo PE-type sale or a rollup to another entity. We’ll see.
Finally
Maybe what Jason Lemkin observed for SaaS applies to CPaaS as well, and everyone in our space also has gotten radically more efficient. Part of that is also better expectations. Perhaps the >130% NDR was never really sustainable, and the NDR range of 105–110% is the new normal?
Klaviyo S-1 Filing
SMB marketing juggernaut, and the star integration in Shopify filed its S-1 on Friday. The biggest news is the 56.5% YoY TTM revenue growth. By any yardstick, that’s great, and in this environment, stunning. At ~73% GM on $472M in 2022 revenue, it checks all boxes in my simple checklist: 1. Simple, easy to understand, and sticky product. 2. High growth rate. 3. High GM. 4. An entrepreneurial management team. At a rumored ~$50M/year, SMS is a small part of its revenue, but this will grow. What’s more, the high margins are despite Klaviyo eating up carrier pass-through fees.I’ll unpack this more in the future. Incidentally, Instacart too filed their S-1.
Have a great week,
TJ
Great analysis TJ!