Twilio Inc Q1 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to Twilio's Q1 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Andrew Zilli, Vice President of Investor Relations and Treasury. Sir, please go ahead.

Thanks, Lee. Good afternoon everyone and thank you for joining us for Twilio's first quarter 2021 earnings conference call. In an effort to make our call more efficient, we are using a new approach today by posting our prepared remarks on our IR website and using today's call for Q&A only. In addition to our prepared remarks, our earnings press release, SEC filings and a replay of today's call can be found on our IR website at investors.twilio.com. Joining me today for Q&A are Jeff Lawson, Co-Founder and CEO; George Hu, COO; and Khozema Shipchandler, CFO. As a reminder, some of our commentary today may be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release. Additionally, some of our discussion and responses may contain forward-looking statements, which are subject to risks, uncertainties and assumptions. In particular, our expected business benefits and financial impacts from the Segment and ValueFirst acquisition, and the Syniverse partnership, including the associated transactions, our expectations around the impact of the COVID-19 pandemic on our business, results of operations and financial condition and that of our customers and partners is subject to change, and our ability to manage changes in network service provider fees that we pay in connection with the delivery of communications on our platform and the impact of those fees on our gross margin are subject to change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual financial results could differ materially from our projections or those implied by these forward-looking statements. A description of these risks, uncertainties and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-K, and subsequent reports on Form 10-Q. And our remarks today during the discussion should be considered to incorporate this information by reference. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law. With that, I'll hand it over to Jeff for a brief statement and then we’ll open the call for Q&A.

Thank you, Zilli. Before going into Q&A I wanted to acknowledge that over the past year fighting COVID-19, each country and region has had good times and bad times. While many places are trending well and we hope we can see the light at the end of the tunnel, the response to COVID-19 is of course not over and the tragedy of this pandemic remains an evolving situation even on a global level. So I wanted to take a moment to share my heartfelt sorrow and support for our colleagues, friends and families in India who we know are fighting a tremendous outbreak, along with our colleagues, friends and family in Brazil, Colombia and Mexico, and to remind you that this pandemic is not over, and will not be over until every country, every city, every community in the world is through it. We are truly in this pandemic together as a global community. Twilio has created several programs to help communities in the hardest hit regions providing additional matching funds to organizations such as Aid India COVID-19 relief program, Give2Asia and Direct Relief. It is more important than ever to help every country combat this pandemic and we hope that these efforts will help provide funds towards that cause and I invite everybody listening today to pitch in your support as you can. Thank you. Now, let's open the call for questions.

Your first question comes from the line of Meta Marshall from Morgan Stanley. Your line is now open.

Great. Thanks for the question and congrats on the quarter. Maybe a higher level question. I wanted to get a sense of what your customer conversations are like. I imagine a year ago it was 'help me get through the next two weeks,' to maybe six months ago it was 'help me get through COVID,' to now people are really starting to embrace digital transformation and think longer term. But just, you know, is that something that we just hypothesized or you're actually seeing in customer conversations and how does Segment change that conversation? Thanks.

Hi. This is George. Why don’t I start? We absolutely are continuing to see the conversations around digital transformation and digital acceleration. What I've talked to a lot of customers about is now that they see kind of the end of the pandemic in sight, they are not foreseeing that digital is going away for them. They’ve seen a lot of the transitions that have happened to digital, whether it’s telemedicine or digital relationships in financial services, and those are going to continue. And so they are looking for us to be strategic partners to help them move to the new world with technologies like Conversations and Flex and other things that we've been working on. In terms of Segment, people are very excited about it. I've had to bring it up in probably more than two-thirds of the calls that I’ve been on with customers in the last 90 days; we’ve talked about Segment and the opportunity there. I think people are very excited about the idea of delivering much more personalized engagement and the idea of Segment as a foundational component to that is very interesting to all customers. So we're excited about that and the opportunity for us going forward on that front as well.

Great. Thanks.

Thank you. And your next question comes from the line of Samad Samana from Jefferies. Your line is now open.

Great, thanks for taking my questions and congrats on the strong quarter. Maybe the first on the enterprise sales hiring side. You know I saw in the prepared remarks that the company has caught up, but maybe how should we think about the hiring from here and how the productivity ramp looks for the new direct enterprise sales rep hires?

Yeah, we are absolutely on track with our sales hiring. We continue to invest in capacity to match the frankly incredible opportunity that we see in front of us. In terms of productivity, that has continued to be strong and the ramp times are consistent. So we haven't really seen a significant shift as we added capacity, which I think really speaks to the demand out there and the size of the opportunity.

Great. And then maybe just a follow up on the decision to split the R&D organization that was discussed and how we should think about that impacting the innovation cycle going forward?

Yeah, thanks for the question Samad. So we’ve got a very broad set of products and a very broad customer base all around the world. We thought the way to best serve the broad set of customers and the broad set of products was to break it up into three units: our Twilio Core Communications Platform, our Data Platform and our Core Platform. We've got great leaders for a lot of these things and you can see a lot of synergies between all the things we are doing in communications, which is the core business, many of the things we are doing with data with leaders from Segment, and on a core platform it's about how we build internally and all the platforms that support the growth of our engineering units. By dividing and conquering, we think we can actually tackle more, continue our track record of innovation, and continue to serve our customers at scale. I'm really appreciative of Chee and everything he’s brought to the company and looking forward to building the next great set of products with the great set of leaders we have and the ones we are going to hire.

Great. And just as an aside, we love the new reporting structure. It allows us to spend more quality time with the management team rather than listen to you guys read the script to us. So I really appreciate that, and appreciate the additional time with you all.

Fantastic.

Thank you. Your next question comes from the line of Fred Havemeyer from Macquarie. Your line is now open.

Thank you very much for the time here. You know I'm interested in some of the acquisitions and investments that you previously have been making, including Syniverse and ValueFirst. Can you help us understand how these acquisitions, investments and partnerships could help your overall cost structure, both domestically and internationally? And secondly on this topic, can you tell us about how these investments could benefit your customers across areas such as pricing and also reliability of services?

That’s a good question. I’ll start. From a cost structure perspective, obviously having a local presence in markets and being able to do some consolidation within our supply chain is always going to yield some cost synergies and so we definitely have an eye on that in terms of some of the ways that we're looking at it. Beyond that, if you look at some of the more recent things, whether it's in Mexico or India, that also gives us an enhanced geographic footprint. So it allows us to better see consumer demands in some of those markets as well. From a pricing perspective, I wouldn't say there's a big change in pricing relative to M&A. M&A obviously remains a competitive pricing landscape, but I think we feel good about the way that we're positioned and I think this allows us to continue to geographically expand.

Great. Thank you.

Thank you. Your next question comes from the line of Brent Bracelin from Piper Sandler. Your line is now open.

Thank you and I’ll echo comments appreciating you on your new format. It’s super-efficient and super helpful. Maybe Jeff, I'll start with you. We are six months now into the Twilio-Segment combination here. My question for you: what are you most excited about and most pleased with during the first six months of the integration here? I know it's early, but we're seeing some interesting personalized messages come out, some interesting Flex-Segment integrations. And secondly, what are you most excited about, now that you know what you own here, looking out over the next couple years?

Thank you for the question. The nuts and bolts of integration are hard, but they are going really well. I've been really pleased by the great cultural fit we can weld together and the teams can see the opportunity and the way we approach customers in the market. Super happy with Peter, the leadership team at Segment and all the folks who joined Twilio with that acquisition. Talking about the opportunity ahead, we are seeing this come up in so many conversations with customers. Before we had Segment as part of our portfolio, we might not have organically had these conversations, but now Segment is here and it's becoming a major part of what we're discussing with customers because every company seems to be struggling with how to build one picture of their customer based on data that is spread across many systems. They have separate systems for marketing, contact center and commerce, and across business units, especially after acquisitions. The question is how to build that profile of your customer and understand the story told by all the data—how they use your website, mobile apps, what they bought, what they returned. That story resonates because customers see the problem but don't know how to act on it, and that's where Twilio comes in. How do you build engaging communications—marketing, sales, support or in-product—and tailor them dynamically to each customer to optimize their chances of becoming repeat buyers and loyal customers? That's something we see so many companies wanting to do and struggling with, and they look to us for help. When I look forward to what we're going to build with Segment, I see tremendous surface area across pretty much every industry to help them solve this problem.

Interesting, big problem, but certainly the opportunity. Khozema one quick one for you; AT&T and T-Mobile joined the price increase party that I think Verizon kicked off last year. How should we kind of think about the framework around what type of growth rate that could have an influence here on Q2? It looks like the guide did not include any sort of impact on that price increase. You have two carriers, instead of one raising prices. So just trying to think through how should we think about that impact in Q2 or should we just wait a quarter and wait until we see actually what happens. Just curious to hear your thoughts and guidance here on that price increase.

We left it out of the guide on purpose, just so that it wouldn’t be confusing and we wouldn’t have to deal with all the puts and takes. So you should look at the guide as being clean and excluding those impacts. I would say, you should largely expect them to be in the ballpark of what we saw previously with Verizon, but we’ll provide a lot more detail on that when we do the Q2 call and we’ll give you the exact numbers at that time.

Got it. Makes sense, thank you.

Thank you. Your next question comes from the line of Alex Zukin from Wolfe. Your line is now open.

Yeah, I'm going to— instead of asking my typical dollar-based net expansion question to Khozema I'll do just two very big-picture product questions. Jeff, maybe just for you first. If we take a step back and zoom out and we look at the components of your business, you're now getting into a point where you're able to do potentially intelligent messaging solutions where you can have a customer send a message when a certain action takes place like a cart is left abandoned. The value-added component of that message for that customer is a lot higher than potentially some others. I guess the question is, are you able to now start thinking about different pricing or different unit economics, depending on the type of message that you're helping a customer deliver?

Thanks Alex. I think there are two ways of thinking about that. One is our role as a platform: as a platform you support many different use cases. Even within messaging, there are different use cases and different messages may have different performance characteristics. Some customers might value speed of delivery while others might value bulk deliveries. When you think of Segment in the product itself at the platform layer, you get a lot of flexibility. In order to actually do a specific use case, you often have software that's powering that use case or integration—the business logic of that intelligence is a different value proposition from the platform itself. For example, integrations into shopping carts and the business logic of that integration are separate from the platform. That's what we're building with Flex: a contact center value proposition on top of the platform, and you see similar with our marketing campaigns product. When you think about our core communications platform, the economics are tied to the underlying capabilities of the platform. When you look at the engagement platform that sits above it, the economics are more closely tied to the value proposition created by the software. Part of Twilio's unique value proposition is building a product and go-to-market approach that aligns how our customers use our products with what they need. As a platform play you still need white space for customers to make it theirs, and that's what they value. They want to build on top of their platform. That flexibility enables outcomes they can't get with other vendors and enables developers to be our biggest champions inside accounts. Those are important things for us to continue to consider.

That makes perfect sense. And then another big-picture question: if you think about the rise of IDFA and the potential demise of third-party cookies, our thesis is that we're entering a world where the notion of CDP for first-party data will rapidly accelerate in strategic importance. You guys mentioned—George you mentioned that Segment is now in two-thirds of your customer conversations. Is this future world something you contemplated when making that acquisition? Are you now reaping even greater strategic benefit? Talk to us about how you think about Segment in this new world, both integrated with the rest of your solutions as part of the platform, but also on a stand-alone basis with respect to strategic impact.

This is Jeff. I'll answer, unless George, you want to?

Go ahead, Jeff. I'll chime in.

My point of view is yes, we did think about the importance of first-party data and how every company has to become great at digital engagement, and you can't necessarily rely on some of the sloppier ways of acquiring and re-engaging customers when there's less third-party data available. The CDP market as a standalone becomes more important not just because of the plurality of systems companies have to integrate, but because externally it's getting more complex to target and reach your own customers. So it becomes even more important that once you meet a customer you do a really good job of continually engaging them, because reacquiring that customer is getting harder and harder. Companies have to treat their existing customers incredibly well, and those relationships are getting more valuable. Integrating that and creating journeys that achieve that using Twilio's customer engagement cloud is the next level of benefit on top of the core CDP.

Jeff said it really well. We're having a lot of these conversations with customers who are interested both in the stand-alone CDP story and the potential for intelligent engagement when you have customer data and engagement channels together. There's potential both stand-alone and integrated, and that's one of the things we're excited to build on going forward.

Alright. Congrats. Just amazing execution as always.

Thank you.

Thank you. Your next question comes from the line of Derrick Wood from Cowen. Your line is now open.

Hi. Thanks for taking my questions and congrats on a great quarter. We get a lot of questions from investors on how to think about consumption growth trends across various use cases as the economy opens up. So Jeff, is it great to hear what you're seeing from the COVID impact on use cases in travel, hospitality, ride-sharing and then get a sense of how the opening of the economy impacts some of the use cases that got catalyzed by COVID. Really trying to get an understanding of how those net out as we navigate through the opening of the economy and maybe put that in context with how you guided for Q2, which assumes flat at $10 million in sequential revenue.

Absolutely. So you have two categories. Roll the clock back to a year ago: we have a category of digitization of lots of interactions, which was the secular trend of digital transformation and got accelerated by the pandemic. Many of the things we are seeing—ordering online and picking up in store, telemedicine—were on a path anyway and just got accelerated. Consumers have been retrained to expect new types of experiences and those will continue because of competitive dynamics and because companies will make those features better and easier. Then we have the category of industries negatively impacted by COVID, like travel and hospitality, which saw declines in 2020 and now are starting to recover. We see signs of recovery—people returning to travel, getting vaccinated—and as those industries return, we will continue to see usage and volume return. Those industries also need to rebuild trust with consumers, and that leads to new engagement strategies as companies reengage and reacquire customers. So we're seeing the return of old use cases and new engagement strategies companies will use to build trust and loyalty.

Yeah, I guess that's right to present on the revenue guidance. I've gotten some questions on the sequentials—it's flat to slightly up. Historically you've seen some good sequential seasonality in Q2. I know you may have conservatism in there, but any other puts and takes to call out for Q2?

Let me add to what Jeff said and then I'll directly take your question. In general, our guidance contemplates a world where COVID is starting to wane. I certainly don't want to take anything away from the impact globally, but generally speaking, we're looking at things as if COVID is starting to wane and we see durability and positive industry impact as we see recovery in the industries that were negatively impacted. We see general strength in the business broadly diversified across industries, geos and company shapes and sizes. As it relates to Q2 specifically, we feel good about the guide. We're still up in the quarter based on the guide 47% to 50%. The world is complicated and there are a lot of moving pieces, so we'll wait and see how things exactly play out, but we feel good about how we guided and the long-term prospects for the business in the short and medium term.

Right, yes 50% growth—pretty amazing. So congrats again and thanks a lot.

Thanks Derrick.

Thank you. Moving on, your next question comes from Ryan MacWilliams. Your line is now open.

Thank you. I'd like to ask the question about DBNE cloud-based expansion questions, but knowing that this metric can fluctuate, especially with the things we'll compare year-over-year. Anything to comment on here with the things in the quarter and maybe any read-throughs in the following quarters as well? Thanks.

You certainly hit one of the nails on the head. DBNE is still really, really strong at 133%. If you look sequentially, you don't have the political dynamic this year—it's a non-election year—so that will direct it down a little bit. We've also lapped the right-to-carrier-fees adjustment a year ago, so that's going to have a little impact. On a normalized basis you might think about the 130s being a reasonable reference, but we feel great about the printed number, 133%, and we're really happy with how our expansion rate has been going.

Thanks and just from my perspective, it's great to see how Twilio helps support global vaccine distribution. From a financial perspective, could vaccine distribution delivery materially impact results along the quarter?

I wouldn't say it impacted our financials materially. As I said earlier, we are looking at the world in which COVID is starting to wane and we see broad-based strength across the business. Any one use case is relatively diminished in the overall results.

I appreciate your time. Thank you.

Thanks.

Thank you. We have a follow-up question. Your next question comes from Michael Turrin from Wells Fargo Securities. Your line is now open.

Hey there. Thanks everyone, I appreciate you taking the questions. George, the Deloitte hackathon you mentioned in the materials stood out as interesting. I’m wondering if you could talk more about what events like that could open up and how they can help with the push into targeted verticals, specifically healthcare seems interesting there, but anything you can add around context is helpful.

Thanks for the question. We’ve had a hackathon program we've used successfully in the enterprise area directly with customers and now we're doing that with partners. When you're building momentum with a large systems integrator, a lot of what you need to do is get people internally aware; these are complex organizations with many groups and evangelizing the power of Twilio is important. Bringing these hackathons is a really good way to extend our reach, especially among developers and thought leaders within an organization, whether it's a customer or a partner like Deloitte. Many times these hackathons yield interesting IP or the beginnings of interesting IP on both customer and partner sides. With an entity like Deloitte, the opportunity to create vertical IP is very interesting, especially around Flex, which is a big focal point for our SI discussions. There's usually a significant path between a hackathon and real IP, but we’re excited about the opportunity to create vertical IP, repeat the path, continue to evangelize, and accelerate our enterprise playbook. I've been really excited about the potential of this partnership and we're already seeing traction.

Yeah, makes a lot of sense. Just quick for Khozema. Can we go back to ValueFirst for a moment? Curious if there's more you can add on what that adds internationally. I know that's been one of a few focus areas. And then anything you can add on any contribution—timing or expected impact—would be helpful.

Very de minimis contribution in the current quarter, and it will be relatively de minimis going forward as well, so we're not calling it out financially. ValueFirst fits into a broader trend we see in supply chain: when we see a unique asset that gives us an interesting entry into a geography—India is an obvious example, and Mexico is another—that's why we did those deals. We gain local teams and capabilities. From a financial perspective, it's an add to the portfolio but nothing that should have an outsized impact on our financials.

Helpful. Keep up the pace. Thanks everyone.

Thanks.

Thank you. Your next question is from Mark Murphy from J.P. Morgan. Your line is open.

Oh hey. This is Pinjalim on behalf of Mark. Congrats on the quarter, guys. Jeff, on product strategy: how do you think about accelerating usage of Twilio core communications by developers? Do serverless or Functions represent an important strategy to drive speed to market for developers, or is Studio the way to democratize usage beyond developers? Now that you have Segment, can you tap into a broader customer engagement solution? Would love to hear your thoughts around that.

Absolutely. We're really pleased with the adoption of Twilio and all our products by developers. Developers continue to pull us into a wide variety of opportunities. I don't necessarily draw a straight line that low-code/no-code automatically increases developer adoption; low-code/no-code are tools. When the problem fits well into a low-code/no-code approach, developers and non-developers will use it because it allows them to build solutions faster and more reliably. We've seen a lot of uptake of Studio for certain types of workflows, while other things that are more embedded or complex are still built with code. We're committed to a road map that leverages low-code/no-code for the right tasks, while continuing to support traditional development. That includes taking things like Flex, which accelerate customers' time to deploy solutions but still give them flexibility to invoke Functions or use Studio to build IVRs or chatbot flows and plug them into the right spot. We're using low-code/no-code effectively and have a matching roadmap to unlock more use cases and customers, while developers continue to adopt Twilio across solutions, including many who prefer to write code.

Hey, guys, it seemed like there might have been a problem with Jeff's line earlier, so I just jumped in to note that we heard the tail of that but he's back now. Thanks.

Can you hear me? Can you hear me now? Yeah—my phone was connected to my car and someone turned on the car, so a lesson learned about conference calls and connected phones. Back to the point: low-code/no-code is a tool that, if it allows you to build your use case faster and more reliably because it's hosted and you don't manage the infrastructure, then developers will use it, as will so-called citizen developers. It's the right tool for the right job. We've seen Studio uptake for some workflows and classic code use for others. Flex accelerates deployments and still allows invocation of Functions or Studio as needed. We're committed to this multi-pronged approach and are happy with developer adoption across our products.

Understood. Thank you.

Great. And that will do it for today's call. I really appreciate everybody joining today and look forward to catching up with you throughout the rest of the quarter.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.