Customer engagement expert Twilio (TWLO 1.08%) just made a small but telling change to its business plan. The development platform provider is shedding its Internet of Things (IoT) business, also known as the Twilio Wireless unit. The company is leaning into its core strengths right now, while passing the IoT torch to a microcap called KORE Group Holdings.
Twilio's IoT diet plan involves KORE sending over 10 million shares of its common stock, or roughly 11.5% of the IoT solutions specialist's issued and outstanding shares. With KORE's current share price of $1.48, the deal's total value stops near $15 million. While this may seem like small potatoes compared to Twilio's $3.83 billion revenue in 2022, it's important to look beyond the simple dollar signs.
Handing over the IoT keys
The IoT business may not be Twilio's bread and butter, but management always took it quite seriously. In the Q2 2021 earnings call, for example, Twilio CEO Jeff Lawson expressed optimism for the future of IoT, citing Twilio's Super SIM platform as a game-changer for global IoT device deployment. This software-based system reduces the risk of missing out on future networking improvements in the IoT world:
"Imagine you've got an IoT humidifier, or truck, or garbage dumpster, or trombone, you don't want to have to remanufacture that thing every time you get better connectivity technology," Lawson said. "You want to be able to continually silently upgrade it in the background. That's what Super SIM enables companies to do."
Lawson picked some interesting examples (IoT trombones?) but there's nothing silly about the point he's making. That's still a valid and useful service, but Twilio will now let KORE take the IoT wheel. As promising as the IoT operation may be, this move will let Twilio double down on its core customer engagement platform and communication services with one less distraction.
The deal gives KORE a talented IoT team, a solid customer portfolio, and the much-talked-about Twilio Super SIM. Mind you, I'm not entirely convinced that Twilio's IoT business is in the best possible hands here. KORE is a deeply unprofitable business that has been around since 2002 but entered the public stock market a mere 18 months ago through a SPAC merger. I admit that Twilio's software-based connectivity solutions are a great fit for fit KORE's business model, but its financial platform is too small and unstable. Microscopic penny stocks are always risky investments. You should let KORE prove the long-term business value of this deal before making any significant investments in it.
The quest for a leaner, meaner operation
So, what does this mean for Twilio investors?
In the grand scheme of things, the deal's financial impact may not be substantial. A $15 million investment in the tiny KORE Group business is a drop in the ocean next to Twilio's quarterly sales in the billion-dollar range. However, the strategic shift could pay off in the long run. By offloading its IoT business, Twilio can devote more resources to its core offerings, while still benefiting from its stake in KORE. And if KORE turns out to be a fantastic steward of its newfound assets in the long run, maybe the partnership could bloom into a wholesale takeover. In that case, Twilio already owns 11.5% of the potential buyout target.
Also, every penny helps. $15 million of extra sales with no associated expenses to speak of? Sure -- that would have been more than enough to offset Twilios' annual tax expenses in 2021 or 2020. I'd take that deal any day of the week.
In the end, while Twilio investors might not see an immediate financial windfall from this deal, the strategic realignment could bear fruit down the line. After all, sometimes you need to lighten the load to climb higher and faster. That might be just what Twilio needs in order to climb out of its recent slowdown and build a consistently profitable business model.
