Twilio Buys CDP Segment for $3.2 Billion

Friday afternoon brought an unconfirmed Forbes report that communications platform Twilio is buying CDP Segment for $3.2 billion. (The all-stock deal was officially announced on Monday.)  It's Twilio’s third acquisition this year, following much smaller deals in January for telephony platform Teravoz and in July for IoT connector Electric Imp.  It comes two years after Twilio’s $3 billion purchase of email platform SendGrid.

The deal is intriguing from at least three perspectives:

Valuation: the $3.2 billion price is impressive by any standard. Segment’s current revenue isn’t known, although one published estimate put it at $180 million for 2019.  That sounds a bit high for a company with 450 employees at the time, but let's go with it and assume $200 million for 2020 revenue.  This has Twilio is paying 16x revenue, which is less than the 20x that Salesforce paid for Mulesoft ($6.5 billion on roughly $300 million) but in line with the 15x that Adobe paid for Marketo ($4.7 billion on $320 million)  or 14x that Twilio itself paid for SendGrid ($2 billion on $140 million when the deal was announced; the $3 billion price reflects the subsequent rise in Twilio’s stock). Note that these prices are well above the run-of-the-mill SaaS valuations, which are below 10x revenue.

Twilio: the SendGrid acquisition marked a major movement of Twilio beyond its base in telephone messaging to support a broader range of channels. If they’re to avoid the fragmentation that has plagued the larger marketing clouds, which also grew by acquisition, they need a CDP to unify their customer data. The big clouds (Oracle, Adobe, Salesforce, Microsoft, SAP) all chose to build their CDPs internally, but Twilio is much smaller and lacks the resources to do the same in a timely fashion. (Even the big clouds struggled, of course). On the other hand, Twilio’s surging stock price makes acquisition much easier. So buying a CDP they can deploy immediately gains them time and a mature product. It also offers entry to 20,000 accounts that might buy other Twilio products, especially given Segment’s position at the heart of their customer data infrastructure.

Of course, if Twilio really wants to compete with the marketing clouds, it will need to support other channels, most notably Web site management and ecommerce. Note that vendors beyond the clouds are pursuing the same strategy, including Acquia (which bought CDP AgilOne), IBM-spinoff Acoustic, MailChimp, and HubSpot. So the strategy isn’t unique, but it may be the only way for companies like Twilio to avoid being marginalized as apps that depend on major platforms controlled by other vendors. By definition, apps are easily replaced and are therefore easily commoditized. That’s a position to escape if you have the resources to expand beyond it.

CDP Industry: Segment is/was the largest independent CDP vendor, although Tealium and Treasure Data are close. Other recent CDP acquisitions were mostly mid-tier vendors (AgilOne, Evergage, QuickPivot, Lattice Engines, SessionM). Of these deals, only AgilOne seemed central to the product strategy of the buyers. Segment’s decision to sell rather than try to grow on its own may signal a recognition that it will be increasingly difficult to survive as a general-purpose independent CDP. We’ve already seen much of the industry shift to more defensible niches, including integrated marketing applications and vertical industry specialization. There’s certainly still a case to be made for an independent CDP as a way to avoid lock-in by broad marketing clouds. But there’s no doubt that the marketing cloud vendors’ own CDPs will grab some chunk of the market, and more will be lost to CDPs embedded in other systems (email, ecommerce, reservations, etc.), offered by service vendors (Mastercard, Vericast, TransUnion, etc.) and home-built on cloud platforms like Amazon Web Services and Google Cloud.

Given these pressures, we’re likely to see additional purchases of CDPs by companies who are trying to build their own complete marketing platforms, including Shopify, MailChimp, HubSpot, and a number of private-equity backed roll-ups. Faced with a daunting competitive situation, many CDP vendors will be interested in selling, even at prices that might not be as high as they once hoped.

Ironically, none of this bodes ill for the fundamental concept of the CDP itself. Companies will still need a central system to assemble and share unified customer profiles. It is indeed the platform on which the other platforms are built. Whether their CDP is stand-alone software or part of a larger solution doesn’t really matter from the user’s perspective: what matters is that clean, consistent, complete customer data is easily available to any system that needs it. Similarly, companies will still need the skills to build and manage CDPs.  Marketing, data, and IT departments will wrestle with customer data long into the future, and the winners will be best positioned to achieve business success. 

SDL Buys Marketing Automation Vendor Alterian for $107 Million

So, it turns out that while I’ve been obsessing over vendor selection workbooks, our friends at marketing automation vendor Alterian up and got bought last week by language technology vendor SDL for about $107 million. Why didn't somebody tell me?

I’m most familiar with SDL as a Web content management vendor, although their financial statements show that just over 75% of their revenue comes from manual and automated language translation. The company had more than $300 million revenue last year and is nicely profitable.

Alterian hasn’t been doing so well lately, with about $55 million revenue for the past year and cash-basis loss around $6 million. Management has also been in flux: CEO David Eldridge resigned in April, a new CEO Heath Davies was named in July, and president and co-founder Michael Talbot resigned in October. The company was nearing the end of a 100 day restructuring plan that dropped its headcount from 440 to 260.  It had also taken several red-flag accounting actions including restating revenue, changing its revenue recognition policy, and taking large asset write-downs.

You math whizzes out there will have already noted that the purchase price is just under 2x revenue, compared with the 5x-ish prices paid a year ago for Unica and Aprimo. Whether this puts a damper on the prospective valuations of other marketing automation vendors is hard to say: Alterian was obviously struggling, and its main business model was to license its software to marketing service providers rather than selling it directly or via Software as a Service. On the other hand, Alterian did have some SaaS components to its business, notably SM2 social media monitoring (formerly Techrigy).

Alterian also had a bold vision of extending beyond traditional campaign management and analytics to include marketing resource management and web content management as well as social media. I’d still argue the strategy was correct, but that Alterian didn’t have the financial resources or market clout to execute it. Certainly its costs got ahead of its revenue: at 440 employees on $55 million revenue, it had just $125,000 revenue per employee, compared with the $200,000 I consider standard (see my post from last January on revenue ratios -- even at that time, when Alterian had just 370 employees, it was already below par.)

SDL’s chairman is quoted as saying that “The marketing analytics, campaign management and social media were the big attractions” of Alterian, so presumably the company will keep those businesses. The content management piece, about 27% of Alterian sales, will presumably be merged with SDL’s much larger Web content management business.

The big question for the marketing services providers who are Alterian’s primary customer base is how SDL will treat them, since they are not SDL’s current core clients. That’s more than a little scary, especially given the dearth of alternative mid-priced marketing automation systems for consumer marketers. (See my list of B2C vendors from September and my discussion of the differences between B2B and B2C marketing automation from October.)

On the brighter side, I can argue that the Alterian acquisition supports my long-standing contention that marketing automation and Web content management will eventually coalesce into a single system. Any gloating is restrained by the fact that Alterian had already combined the two and didn’t succeed. But this probably just shows that deep pockets will be needed to pull off the combination in a world where the competitors are heavyweights like IBM, Oracle, Adobe, SAS and Teradata.