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Last December, SoftBank paid $690 million for 10.1% stake in Sinch, a Stockholm-based company that helps companies communicate with their customers.
After analyzing Sinch’s industry and financial performance, and contemplating its future potential, and a February 4 conversation with its CEO, it is not hard to envision that Softbank will earn an attractive return on its investment.
Although you’d have to brave the Stockholm Stock Exchange to own its shares, I think Sinch — which competes with San Francisco-based Twilio — could be worth buying.
Softbank’s Investment In Sinch
Sinch helps companies communicate with their customers by providing cloud-based voice, video, and messaging services — dubbed omnichannel. In December 2020, Softbank bought $690 million worth of stock in Sinch — about 6.4 million shares, according to Capacity.
Why did Softbank invest? My interpretation is that it sees growth potential. CEO Oscar Werner told TechCrunch that Sinch was tapping an untapped opportunity to enable businesses to deliver the same kind of mobile messaging to their customers as people use when interacting with friends and family.
Sinch — which had been growing with help from acquisitions — said it intended to use the capital to buy more of them. For example, in May 2020 Sinch announced it would pay $250 million for SAP’s
Sinch’s Booming Communications Platform-as-a-Service (CPaaS) Industry
Sinch competes in the large, fast growing CPaaS market — which is expected to grow at a 34.3% annual rate from $4.54 billion in 2020 to about $26 billion in 2026, according to MordorIntelligence. With more people working from home during the pandemic, demand for seamless communications across video, chat, voice, file sharing and others has intensified.
Sinch’s Financial Performance And Prospects
Sinch, with a market capitalization of $9.5 billion as of February 5 — has been growing faster than the industry. In the third quarter of 2020, net sales increased 46% to $210 million while its organic growth rate was 35%, according to the company.
Sinch — which has enjoyed a 70% compound annual increase in its stock price since it went public in October 2015 — is profitable, having earned a 6% net margin during the quarter.
How Sinch Competes With Twilio and Others
Sinch’s most prominent rival is Twilio — which has enjoyed even faster growth in its stock and its revenues and led the industry in 2019 with 32% market share, according to Synergy Research. Since going public in June 2016, Twilio stock has soared at an 82.7% compound annual rate from $24 to $400 yielding a market capitalization of $64.2 billion.
Twilio is bigger and growing faster than Sinch. As CFO Khozema Shipchandler said, Twilio’s revenues grew 52% to $448 million in third quarter, according to Twilio’s third quarter 2020 earnings call transcript.
Twilio said that it expected slower growth in the fourth quarter of 2020. Shipchandler guided revenues in the $450 million to $455 million range — or 36% to 37% growth. Moreover, Twilio issued guidance of 30% annual organic growth through 2024 — which excluded Twilio’s $3.2 billion acquisition of Segment.
Sinch sees itself as targeting a different customer than Twilio. As Werner told me, “There are three or four global companies, 50 regionals and about 1,000 local ones. Twilio focuses on developers and they win the lion’s share of new developers. Unlike Twilio, we own a high quality international delivery network. Our customers are eight of the 10 largest technology companies and our service quality is high because they are not happy if text messages are delayed.”
Where Sinch Is Headed
Sinch — which generates revenue from selling connectivity and Software as a Service (SaaS) — is aiming at a collection of very large markets. “The addressable connectivity market for text messages is $18 billion, $15 billion for voice, and $4 billion to $5 billion for video. The SaaS market size is fluffy — the CPaaS layer is $5 billion.”
Sinch’s connectivity business has lower margins, 30%, than its SaaS does (80%). Sinch partners with communications services providers and marks up its costs on the basis of the number of minutes or messages sent. Sinch charges SaaS customers on “traditional number of monthly active users basis,” said Werner.
Sinch sees itself as offering investors a rare combination of rapid growth and profitability. As he explained, “Many technology companies tell investors to look at key performance indicators related to growth. They are not profitable and say they are [investing profits in more growth]. We were profitable from day one and never needed capital except for mergers & acquisitions. We generate $100 million to $150 million in profit and enjoy 80% cash conversion. We have oodles of cash.”
Sinch’s long-term growth will come from adopting new technology for new products and geographic expansion. As Werner explained, “[In June 2020] we acquired a company in India which is a big market. The company, ACL Mobile, sells to 50% of the private banks there and with our high valuation — 30 times EBITDA [Earnings Before Interest Taxes Depreciation and Amortization] — to their 10x EBITDA,” we can get a good return on our $70 million investment.
Sinch sees itself as being one of the two leaders in the CPaaS industry due its ability to win and keep customers who buy more over time. “We measure ourselves on service quality. Specifically, we want our customers to give us a high net promoter score; we want a high net retention rate; and we want them to buy more of our products over time,” he said.
Sinch aims to achieve that goal through excellence in operations. “We seek to assure that our network is always on — 99.999% uptime for systems and processes. We need good people who understand how to make the customer successful. We have to drive innovation — finding new use cases and partnering with customers to help them make their customers more successful. To do that successfully, we have to know the local operators,” noted Werner.
There is opportunity ahead in the CPaaS industry. He noted that in 2020 only 20% of global enterprises used CPaaS. By 2030, he expects 90% CPaaS market penetration. Why? “When someone receives an email, only 10% or 20% of them are opened. When they receive a text, they open 98% of them and read 95%.”
CPaaS will become more valuable to customers in the future. “The drawback of texts is a 160 character limit. There are new channels — like WeChat, Telegram, and Vibe that can send enhanced text messages that will allow you to learn about a flight cancellation and rebook your flight and hotel all from the message.”
It sounds to me like Softbank’s $690 million investment in Sinch could have a better outcome than its $18.5 billion investment in WeWork.
