Can someone explain one aspect of their business model to me? Their cost of goods sold is rather high at 45% and hasn't shown much operating leverage - no bueno. They explain that this is mostly payments to "network service providers"...would this mean the carriers? If so, what options are available to Twilio to lower these costs as a percent of revenue? This is the only aspect of the business model that concerns me. I read that Bandwidth.com actually owns a CLEC in order to lower these costs, might Twilio be able to do the same? Any help much appreciated.
Investors need to understand that internet application service providers aren't software companies, and that it isn't reasonable to expect software-company margins (selling CDs for hundreds of dollars) from services providers.
Companies like New Relic, Twilio, etc. have real costs to operate their infrastructure, especially so in Twilio's case where they likely have to make payments to the downstream network operators (not sure on that last point, I assume, but would love to be corrected if I'm wrong)
One thing they do is send out international bulk SMS to their users, probably through large SMS aggregators. This has a cost per SMS that's pretty hard to get around.
> There are a lot of industries with a much higher COGS that do fine.
But not many that have such a ridiculously high PE ratio. One of the main reasons tech businesses (specifically SaaS) can command such a high valuation is because their gross margins are amazingly high (some up to 90%, on average around 70-80%), which means 90% of their revenue can be reinvested back into growth (S&M and R&D). I think it's certainly fine to discredit Twilio when looking through the lens of publicly traded SaaS businesses (they're on the low side of gross margins), but if you compare to other industries, you're right, it's a very healthy business.
Yeah, Twilio is actually really expensive compared to Plivo, Bandwith & Nexmo. Which they've managed to achieve with many years of high quality service and marketing.
