In my recent post How PaaS Impacts The Stock Prices Of SaaS Companies, I mentioned an equation:
Some numbers: Let us say, a SaaS platform vendor succeeds in facilitating 100 small companies to achieve $10M in ARR each. That would add up to $1 billion ARR cumulative. 30% of this, or $300 million ARR comes back to the company as platform fees. This, conceivably, amounts to a $3 billion market cap enhancement for the PaaS vendor.
The reality often is somewhat different.
Let’s take the example of Twilio’s PaaS. Uber was Twilio’s largest client, and accounted for 12% of its revenue, when suddenly, they made a decision to distance themselves from the platform vendor. A May 2017 report from TechCrunch articulated:
A good report on revenue wasn’t enough to keep Twilio stock from taking a dive in after-hours trading. What at first glance appeared to be a positive story very quickly divulged into a financial nightmare. Shares in the cloud communications company have fallen 30 percent in after-hours trading, attributable to lower than anticipated guidance.
On the earnings call, CEO Jeff Lawson addressed the unexpected guidance by explaining that Uber, one of Twilio’s largest customers, will be reducing its use of Twilio over the next year. This is a major hit for the company because Uber accounted for 12 percent of its revenue in this quarter. Twilio expects this number to fall off over the next year as Uber moves away from Twilio as its principal communications infrastructure provider.
Nine months later, Twilio started showing compelling revenue growth WITHOUT the heavy risk of one customer producing an outsized amount of revenue.
Former top client Uber moving its cloud communications development in-house used to be a significant data point for Twilio and its investors, weighing heavy on both the top and bottom lines. In this report, revenue growth excluding Uber worked out to 79%, and the Uber-less net expansion rate stopped at 148%. In other words, the lack of a big Uber contract isn’t hurting Twilio’s year-over-year comparisons a whole lot these days. This will be the last time Twilio bothers to report these Uber-adjusted figures.
Obviously, there’s a lesson to learn from Twilio’s Uber fiasco: it’s better to have 100 clients, each producing a solid chunk of revenue, than one client producing 12%.
Thus, I like companies like Shopify, Atlassian, and now, also Twilio, who have a diverse set of developers building apps on their platforms.
Shopify, for example, has paid out over $100M in app fees to developers in 2019, which implies, they’ve probably made over $200M themselves off marketplace revenues for the year. There is no indication that one app developer dominates the platform.
PaaS platforms should work extra hard to empower the long tail such that thousands of developers produce modest revenues, rather than one dominant player.
This segment is a part in the series : PaaS