Good day, and thank you for standing by. Welcome to the Twilio Q3 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is also being recorded. Without further ado, I would like to welcome one of your speakers for today, Mr. Andrew Zilli, Vice President of Investor Relations and Treasury. Sir, the floor is yours.

Thanks, Carol. Good afternoon, everyone, and thank you for joining us for Twilio's Third Quarter 2021 Earnings Conference Call. Our prepared remarks, earnings press release, investor presentation, 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, our outgoing COO, Marc Boroditsky, CRO, and Khozema Shipchandler, CFO. As a reminder, some of our commentary today may be non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and further information related to 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 our acquisitions, particularly Segment and Zipwhip, and our partnerships and investments, including the associated transactions, the impact of recent and future pricing changes on certain third-party platforms on us and our customers, our outlook for the quarter ending December 31, 2021, our ability to achieve our targets for non-GAAP gross margin over time, an annual growth rate over the next three years, and our ability to manage changes in network service provider fees that we pay in connection with the delivery of our 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. Our remarks during today's 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.

Thanks, Zilli. Before we begin Q&A today, I want to take a moment to thank our COO George Hu for the amazing contributions he's made to Twilio over the past five years. With George's leadership, we really figured out a developer-first go-to-market, which is an incredibly challenging feat given nearly no other companies have a go-to-market that's as unique or as efficient as ours. George has set us up on a new trajectory in building a tremendous team, starting with his direct reports all the way down the go-to-market organization, and I can't wait to see what you build next, George. I am also incredibly excited for Marc Boroditsky to be taking the charge and continue driving our forward progress. Marc has built the Twilio sales teams from literally zero to the powerhouse it is today, kept up the admiration and respect of the teams, and has a vision for how to continually evolve and grow our go-to-market with developers, enterprises, partners, and digital leaders. I'm excited for the next chapter, Marc. Now, on to the questions.

Thank you, sir. Our first question comes from the line of Meta Marshall from Morgan Stanley. Please ask your question.

Great. I appreciate the question and congratulations on the quarter. Understanding you had a couple of 100 basis point headwind from political traffic that contributed to the deceleration in organic revenue growth we saw in Q3, but what do you think is the biggest contributor to the slowdown in organic growth, and what gives you that continued confidence that you can grow 30% the next three years, a number we kind of understood to be an organic number? Thanks.

Yeah. Hey Meta, this is Khozema. I would say, first of all, I mean at 38% organic, we feel great about our overall growth performance in the quarter. Obviously, we're at about 65% on an inorganic basis. If you just look at the rest of the growth across industries, across use cases, across geographies, and across customers, we have a lot of confidence in the go-forward capabilities of the business. I would also add that we had a really strong quarter performance for Segment, and so when we put all those different pieces together, we definitely see our ability to continue growing at elevated levels for the foreseeable future and we feel really confident in our beliefs to deliver the 30% plus organic growth that we talked about last year over the next three years.

Great. Thank you.

Our next question comes from the line of Fred Havemeyer from Macquarie. You may ask your question.

Thank you very much. Could you talk about your overall M&A philosophy? How do you approach that build versus buy versus partner debate at Twilio? And then, generally, when you're looking across the landscape, the market landscape, how do you think M&A appetite is progressing in the CPaaS market and in the customer engagement market?

I think this is Jeff. I'll take the question. So first on your question on the M&A philosophy which has really remained unchanged in the history of the company, which is we gather our insights about the market, where it's going, and what our customers need from us. As a result, we have a roadmap for the things that we want to accomplish for our customers to unlock this vision of being the leading customer engagement platform, which I see as the greatest enterprise software opportunity of our time. When we look at the things that we're going to go build, whether it's teams we have to grow or technology yet to build, if we see a team out there which is amazing or we see a product out there that is exactly what we might build ourselves, then we might say, hey, we can achieve this vision faster by bringing that team or that product onboard and accelerating our ability to unlock value for customers; and that's really how we've always looked at it, which is does it accelerate our ability to achieve our vision of becoming the leading customer engagement platform. And I think there was a second question?

Yeah, the second question there is just generally, how do you see the overall M&A appetite for Twilio in this market and generally across the CPaaS market? Certainly there's been quite a bit of M&A from other CPaaS vendors out there.

Hey, Fred, this is Khozema. I would say that we obviously have a really strong balance sheet and a lot of cash on it. I think the way that we look at it is exactly the way that Jeff described, which means we'll be opportunistic if an opportunity presents itself. I think we obviously have been acquisitive over the last several years. We did Segment, of course, last year around this time and then we've done some assets in more of the messaging space since then. But it's not like we see something in front of us that we necessarily have to do. We want to be selective about the opportunities and certainly see where valuations are today as well. But I think more than anything, we just feel great about the technology stack that we've already got; we're really confident, especially coming off of a really strong SIGNAL conference.

Your next question comes from the line of Rishi Jaluria from RBC Capital Markets. Your line is open.

Hey, guys. This is Rishi Jaluria from RBC. Thanks so much for taking my question. It has always been great to work with you and then all the best to the next chapter and Khozema, congrats on the promotion and new responsibilities. Just wanted to ask one question which is, from a macro perspective, seems like a really strong demand environment. But how should we think about the puts and takes of maybe some of the benefits that we saw from lockdowns last year potentially fading and maybe the return of travel and specifically business travel, especially given that most industries seem to still be having that put on hold. Just how are you thinking about stuff like that coming back? Thank you.

Hey, Rishi, this is Jeff. I'll answer. First of all, I agree with you. This is a strong environment for companies who are undergoing digital transformation and those transformations have been accelerated by the pandemic. And something that I think is really important to understand here is that this is not like a restaurant or the digital interactions that got put in over the course of the past year or two were a deviation from the future direction. It was just an acceleration. We're bringing forward a lot of the innovation that was going to happen. Think about telemedicine. You thought telemedicine might take a decade to adopt. And that adoption has accelerated. And that is going to continue, I believe, to be the trend. When I look at it, do you want to drive across town for every doctor's visit? No. You can see a doctor in 15 minutes on a video call and go back to work; that's a better experience. Same thing with curbside pickup and mobile ordering and all these sorts of things. This has been an acceleration of the natural digital transformation of the world. It's just going faster. When you see that environment exists, businesses are going to continue to drive those roadmaps because the competitive environment today means customers get accustomed to these efficiencies and these experiences, and that creates even more demand for digital. So I think it's a flywheel for how customers are now differentiating themselves digitally in those markets, and our customer engagement platform now enables this. When you think about it, like I had talked last week at SIGNAL, our big customer conference, about how the pandemic has accelerated so many companies. We talked to probably 250,000 customers about digital acceleration, the topic of accelerating their digital presence and their digital roadmaps. The big digital giants Amazon, Netflix, Facebook, Google, etc., accelerated, and that raised the stakes for every company to execute at a first-class level in the digital world. The platform that we're building, the customer engagement platform, is designed to give all of those companies the ability to listen to their customers, understand their customers using first-party data, and use that data to build a great understanding of the customer; personalize the journey to make it relevant, and therefore win their customers' hearts, minds, and wallets. When I talk to customers, everybody out there says, you know what I want to do? I want to acquire a customer once, I want to delight them with an amazing product and experience, and make them a loyal repeat customer for life. That's what Twilio enables companies to do, and that has been accelerated because of the pandemic, which is all part of this digital acceleration that we're experiencing. So yes, there's a strong environment out there, and I think that that is going to continue. I don't think this is an aberration. I think it's an acceleration.

Got it. Thank you.

Your next question is from the line of Samad Samana of Jefferies. Please ask your question.

Hi. Good evening. Thanks for taking my questions. Jeff, maybe one to kick off for you, and as you mentioned, the SIGNAL conference, the Company rolled out Engage, and you've rolled out Frontline long before that. I'm just wondering if you're starting to see as you've rolled out more of these solutions on top of the core platform, if you're seeing any difference in the adoption on day one from customers, or if you're seeing more bundling of the solutions upfront and how that's actually driving volume inside of the business as well?

That's a great question for Marc, our Chief Revenue Officer to take.

Thank you Jeff and thank you Samad for the question. Definitely affecting the adoption that we have seen in the recent quarter. As an example, Flex has inspired our partners to consider building the next generation of their offering for contact center on the Flex solution. Likewise, with the announcement of Engage last week at SIGNAL, I had a number of conversations with ISVs that are looking at changing their offering overall. Probably the one that aligns the most to your question, Samad, is the success we've seen with our partner Waterfall who has built a plug-in for Flex and made it possible for us to sell into more of the market. And this past quarter, we saw small companies that needed a full solution on day one adopt Flex as their first solution from Twilio, which gives us great confidence about the potential that Flex represents from SMB all the way to enterprise.

Okay, that's helpful. Khozema, I don't want to put you on the spot with a math question, but I appreciate it. I still have a follow-up. If I adjust for political revenue in the low 40s organic growth, one, I just want to see if that's correct. And then the guide implies, again, low 30s if you take out political revenue. How should we maybe contextualize that with that go-forward 30% plus growth as well as you look forward?

Thanks for the question, Samad. Believe it or not, I actually tend to do a little bit of math on the fly. I think the setup that you gave is about right. I think we continue to see elevated growth across the businesses as we talked about earlier. The reality is that we gave 65% inorganic, 38% organic. I think if you do the math that you just implied, you're in the ballpark that you described. The guidance that we put out for Q4, we feel really good about — we see a nice setup certainly for Q4. And as we look out based on a lot of things that Marc just referenced a moment ago as well as some of the things that Jeff talked about relative to SIGNAL, we see a tremendous amount of opportunity in front of us and have a really, really strong conviction that we can deliver 30% plus over the next three years. So I think we just feel really, really good about broad-based strength across the business.

Great, I appreciate you all taking my questions. Thank you.

Sure. Thanks, Samad.

The next question is coming from the line of Derrick Wood of Cowen. You may now ask your question.

Thanks for taking my question. George, good luck in your next endeavor. Khozema, I know it's probably early, but anything you want to share in terms of what your early priorities will be as you move into the COO role? And then — you've had a new CRO for a year, Marc, I know you're on the call. Should we assume, from a direct sales, go-to-market standpoint we shouldn't anticipate too much change or should we be thinking about taking the time to make bigger tweaks to the model?

Maybe I'll go first, Derrick, and it's Khozema, and then I'll turn it over to Marc. So I think from my standpoint, in large part, the role is an expansion of additional responsibility. I see it more as a continuation of things that we've already been doing. I think in general, I want in the role to really help the operating team win as much as possible, as efficiently as possible, as fast as possible, integrate the infrastructure and support inside the company so that all of our great teams inside the go-to-market and engineering teams can innovate and then obviously distribute all the great products and services that we've got. So I don't think there is really a sea change in the context of my role. I'm obviously super excited to take it on. I'm humbled and privileged to be able to help manage the team and win. Marc?

Thanks Khozema and thank you, Derrick, for the question. A little background. I've been at Twilio now for seven years since the acquisition of our previous company, and as Jeff referenced in his preamble, it was just a handful of sales reps at the time here at Twilio. George joined five years ago and I had the great privilege to build out the go-to-market model that he's been executing on since, and as you identified Derrick, we're expecting to continue forward with the strategy that we have today. We've got a fantastic team in place. We're well-positioned to continue to execute against the already successful execution that we have with developers. We're continuing to progress our success in the enterprise, and we're expanding our overall international footprint. As I mentioned earlier as well, in the example that I gave, we're making great progress with our partner communities, engaging them to build out the business together.

That's helpful. If I could follow up on the financial question back to you, Khozema. Your gross margins have certainly been topical with investors, interesting slide you gave on the bridge to the A2P fees, but could you just take a second to really unpack that and what's been causing the pressure, how we should be thinking about gross margin in the next few quarters and what it's going to take to get to that 60% long-term target? Thanks.

Yes, thanks for the question, Derrick. I think the bridge with respect to the A2P fee dynamic at least is self-explanatory. If you can see it, it impacted our gross margin relative to what we would otherwise have reported were it not for those fees. More broadly, what we have seen is honestly a fantastic problem, which is that our messaging business has been growing at really accelerated rates. We gave you some information last year, for example, during our Investor Day that illustrated the relative gross margins of our different products and services. So as the messaging business grows at this accelerated rate, it makes the overall margin rate dip a little bit, which honestly is a trade that we're more than willing to take given the fact that we are focused on gross profit dollar expansion so that we can continue to invest in the business. In terms of the latter part of your question, and the 60% plus target, I mean, we still have a lot of conviction in that 60% plus longer-term framework. I think where that's going to come from is the accelerated growth that we're seeing in our application services category. Segment is obviously the most recent example of that. The performance of Segment was strong sequentially coming off of Q2 into Q3, and that gives us a lot of confidence that that business will underpin a lot of different things we want to do with the rest of the business. We're also very excited about the progress of Flex 2. So I think it's a combination of those things that gives us confidence in that long-term target.

Your next question comes from the line of Michael Turrin of Wells Fargo Securities. Your line is open.

Hey there. Thanks. Good afternoon. I appreciate you taking the questions. George, I certainly wish you the best. I know from just a number of these calls, you've been instrumental in things like instrumenting the go-to-market and the partner initiatives there. Can you just maybe broadly as a team talk more about continuity just on the go-to-market side, given we're heading into the year-end? We can appreciate that Marc has been with you for some time, but maybe just adding additional context for investors and that evolution and just the confidence in sustaining the tremendous pace that the business has been able to perform at for a number of years now.

Thank you Michael. This is George. Thank you for the kind words. It is difficult to be leaving, but I'm so incredibly excited about Twilio and its future, especially coming off of an amazing SIGNAL. I talk to so many customers that are just excited about this customer engagement platform vision and Segment. What gives me confidence is how tremendously upbeat we should be. I've been working with Marc now for a number of years, about four years. Marc has really led this entire sales machine and delivered quarter-after-quarter; it was an incredible year, raising the bar and continuing to challenge the sales organization. I know that he will continue the job going forward, there will be continuity, and I think that Marc is also going to evolve the organization and take it to the next level. I also want to gratefully acknowledge Khozema who's going to be an amazing COO of Twilio. He's been an amazing partner to me, he's one of the smartest people I've ever worked with, a great leader and he's going to do phenomenal things for the next chapter in Twilio.

Thank you, George. And Michael, thank you for your question. Right now, the expectations are very solid around the team and how we're going to be progressing into the plan that we have in place. This plan has been developed over the last five years with George and me. When George joined, he brought expertise that is very familiar to me from my previous enterprise experience and he supported us in building out a plan that allows us to reach the enterprise from our self-serve models and helped us to build out the overall global footprint and ultimately our partner initiative. All these things have reached great stages of success. I am very confident for the team that's in place that we will continue that trajectory.

That's all very helpful. If I could just ask a follow-up to gross margins — they were actually slightly up. I know you've gotten a couple of questions here, Khozema. Given the international business is now a third of overall, are we at a point where Segment or some of these newer areas are starting to provide counterbalance, or anything else you'd call out? You also added a slide on gross profit growth. Is that a metric we should highlight in these conversations around these dynamics?

I would say the inclusion of the gross profit slide is not an indication of anything new. We've been saying for a while now that we're focused on gross profit dollar expansion; it gives us lots of fuel to reinvest back in the business. We just thought it would be helpful in terms of positioning and color. Same thing goes for the gross margin slide which is meant to provide context other than obviously the A2P fees that impacted the quarter and you can see that in the bridges that we provided. Generally speaking, like I said earlier, people think about it as a "problem we have" in the sense that we have this incredibly fast-growing messaging business, which makes the overall gross margin of the company dip. But to your point, whether it's some of the newer acquisitions like Flex or Segment, we do have a number of things that can provide fuel for gross margin improvement over time. We're not crystal clear on the timing today, but we do have a lot of confidence in our longer-term framework of 60% plus over time.

Thank you.

Thanks, Michael.

The next question comes from the line of Ittai Kidron from Oppenheimer & Co. Please ask your question.

Thanks. Jeff, I'd like to start with you on Twilio Engage. Super excited for that announcement. I guess, help me think about the ramp here. I know when Flex came out it was conservative, but it clearly did very well out of the gate. You have already an established customer base here with Segment. Is there an opportunity for this business to ramp faster than one would think? And do you need to make any adjustments on the go-to-market approach in pushing this product?

I can't give forward-looking projections about ramp specifics, but I can highlight a few things. Number one, there's a lot of demand in the market for this data-first play. Digital growth and digital personalization — how businesses are building — is a tremendous opportunity. That opportunity is actually accelerated by changes in privacy like IDFA and third-party cookies going away. Those changes are, in my view, on the right side of history and they create a tailwind for solutions that start with first-party data. Twilio's approach is an antidote to those changes: a personalization and marketing system that starts with first-party data, helping a company make sense of the signals they get from their customers, and then using that to personalize across every touchpoint — marketing, contact center, sales, messaging, voice, email, in an app, on the web, etc. That's how companies win. The second point is that Engage is a natural synergy with not one but two of our go-to-market motions. It's a natural up-sell from our messaging products because it makes messaging even more powerful, and it's a natural up-sell from Segment, which allows customers to act on data. I'm really looking forward to bringing this product to customers if it rolls out GA in 2022 and seeing how customers adopt it.

Very good. Maybe a follow-up for you, Khozema, on the retention rates. Maybe you can walk us through a little bit, perhaps of the puts and takes of that metric going forward. I know you still have the political activity, which, I guess, would weigh on that number next quarter. But I think you also are going to celebrate the anniversary of Segment, which will be included. I don't remember if Segment was above or below average on that standpoint. Can you help us think about what would be the right way to think about how net expansion rate is going to change over the next, call it, three, four quarters?

There are a couple of things there, Ittai. First of all, we feel great about the 131% expansion rate. The business is growing at really elevated levels and that expansion rate is in the range of where we've been over the last several quarters, so really good progress. We don't guide on expansion rate, as you know, so it would be premature for me to talk about exactly where I anticipate that ending up in Q4 and beyond. I will say that Segment will be included in our results as part of the first full quarter after the anniversary of the acquisition, and we'll include those results at that time. But we'll have to wait and see for that quarter to report.

Very good. Good luck.

Thank you, Ittai.

Our next question comes from the line of Parker Lane of Stifel. Please ask your question.

Thanks for taking my question. Jeff, I was wondering if you could talk a little bit about the stickiness of the incumbent platforms in the CRM markets. And when you look at the B2C component there, how much appetite do you think there is for disruption of those legacy platforms, particularly as some of your competitors out there in the newer markets are launching their own CDP offerings? Thanks.

Thanks, Parker. We're really excited about Segment which is the number-one CDP in the market, and we're excited about what we can build on top of it. When I look at the market, I see a huge gap for a platform that helps B2C companies really understand their customers and execute on that understanding by personalizing every part of the journey and empowering their employees. The CRM market is strong, but many CRM systems are configured for B2B sales workflows and are not designed for the data-first, high-volume personalization needs of B2C companies. The opportunity we're going after is helping B2C customers manage and act on large volumes of first-party data across all their touchpoints, which is a fundamentally different market and one that is largely unsolved today. That's the opportunity for Twilio's customer engagement platform.

The next question comes from the line of Mark Murphy from JPMorgan. You may now ask your question.

Yes. Thank you very much. Jeff, question on Twilio Engage. What do you see as the differentiation or the line of demarcation there? If we compare it to some of your partners who provide cross-channel experiences where they're using push and in-app and SMS and email events, I believe some of them then send their messaging traffic to you. Could you help us compare and contrast?

Thanks, Mark. That landscape is very diverse and there are many companies doing interesting things. What we're seeing is customers asking for a data-first approach to growth. An approach that starts with data and then moves into understanding the customer, building segments, and then acting on that data. That's where Segment has always played and strengthened. Ultimately, customers ask if Segment can be used to build journeys and then run campaigns. Segment allows marketers to create deep segmentations and use all the data points to measure the effectiveness of campaigns. Engage is designed to help marketers optimize for what actually drives revenue, not just opens and clicks. So the differentiation is the data-first approach — having great first-party data to drive personalized action across channels, and measuring real business outcomes.

I think I understand. I had a quick follow-up, maybe for Khozema or Jeff. The sequential organic growth in revenue was a bit less than some prior quarters, although interestingly, I think the same thing happened a couple of quarters after you acquired SendGrid in Q3. Could you touch on that — is that voice or video or something else? And given you're reaffirming the 30% plus growth for three years, can we presume you have visibility into a better sequential build into Q4 or early next year?

Yeah, Mark, it's Khozema. I wouldn't read too much into product mix dynamics. I think we feel really good, honestly, about the sequential growth and the overall growth of the company at our scale and based on our product set. As we talked about earlier in this call, we announced SIGNAL and the tools that will provide us going forward. We feel fantastic about the overall growth prospects of the business. In terms of the 30% plus, we provided guidance for Q4 and we feel really good about that. We see continued strong growth into the future and the 30% plus that we provided last year we certainly see on an organic basis over the next three years.

The next question comes from the line of Matt Stotlar of William Blair. You may now ask your questions.

Hey, guys. Thank you for taking my questions. One, just looking at the revenue growth performance in the quarter. If you look at the relationship between dollar-based expansion and expansion rate, which has been incredibly consistent, when you look at the difference between that and your organic growth, that relationship essentially gives you some sense of the incremental revenue that you're generating from new customers in any given quarter. This quarter, that contribution seems to be the primary source of the step-down in organic growth. Sequentially, you go from 50 to 38. Can you talk about anything that you're seeing in terms of what might be driving that lower contribution from revenue from new customers on an organic basis this quarter or anything you're seeing in the market that can help us make sense of that?

This is Khozema, Matt. I can talk about it from a financial perspective, and then maybe Marc can talk about it in terms of customer adoption perspective. I'd say there's nothing specific I haven't unpacked in terms of new customer growth. In the quarter, we had very strong additions in terms of new customers. We had a great expansion rate in the quarter. We had strong overall revenue growth both on inorganic and organic basis. I think the math you're trying to do is directionally accurate, but there is a certain amount to unpack that could be done offline. In general, we feel great about the overall prospects of the business. We feel great about the setup for Q4 and have a lot of conviction in our 30% plus organic revenue growth over the next three years. Marc, do you want to add from a customer adoption perspective?

Certainly Khozema. Matt, thank you for your question. From an adoption standpoint, we added in Q3 across all aspects of the business. We have a very diversified business that is relevant in a variety of economic conditions, which has allowed us to deliver these strong results. Even more encouraging, especially on the heels of SIGNAL, is the reaction that we're getting to the messages we shared today. As Jeff elaborated around the customer engagement platform, customers see the value. We're fully engaged in the progress we're experiencing with Flex and there is excitement around a data-first model; everybody's looking for ways to handle new challenges around first-party data. We've heard really solid excitement that gives us confidence around the business.

That's helpful. One more on gross margin. You signed a new commercial agreement with Syniverse earlier this year, which seemed like it would provide a tailwind to gross margin. Is that something embedded in the results this quarter or can you talk about how to think about that going forward?

On Syniverse, there's nothing really to talk about yet. We do expect that investment to take place before the conclusion of the year, but it's not reflected in these results yet, Matt.

Got it. Thanks again.

The next question comes from the line of Catharine Trebnick of Colliers Securities. Your line is open.

Hi, thank you for taking my question. Can you break down who you think your biggest competitors are at this point with the newly announced Twilio Engage? Thanks.

Hey Catharine, this is Jeff. I'll take the question. Our competitive landscape has always been diverse. There's not typically one competitor across all scenarios because of our unique developer-first approach. Developers bring Twilio into a wide variety of companies to solve many different problems, which leads us into companies in ways that are different from traditional vendors. Going forward with the new products in our customer engagement platform, we see a new category being created. There are products in the market addressing parts of this need, but customers are asking for a data-first approach that starts with great first-party data and enables action. We're building new products — Engage, Flex, Frontline — to solve the problems customers tell us they have. These pillars together form our customer engagement platform and address an unsolved problem for B2C companies: how to understand customers and engage with them across channels and teams.

All right, thanks. I'll ask more on the next call. Appreciate it.

The next person to ask the question is Pat Walravens of JMP. You may now ask your questions.

Great. Thank you. Hey, Jeff, as we're looking into 2022 and hopefully it's pretty different than 2021 was. I am curious what you think your top two or three strategic imperatives are?

Thanks, Pat. We've been progressing on the Twilio customer engagement platform. One of our priorities was making sure we brought Twilio Engage to market and we gave a strong introduction at SIGNAL. I'm also prioritizing the company and our teams, because these are difficult times with the pandemic. It's really prioritizing team productivity and growth; our team has grown tremendously through the pandemic. And of course, prioritizing our customers: their challenges are evolving and we want to help solve those challenges. The privacy changes and other shifts in the market mean companies need to build better first-party approaches and Twilio is positioned to help. So the three big areas are products, teams, and customers — the right things for a CEO to focus on.

Great, thank you.

Our last question comes from the line of Taylor McGinnis of UBS. Please ask your question.

Hi, thanks for taking my question. With gross margins flat this quarter relative to last and given all the A2P fees you guys had this quarter, how much of that was potentially driven by a mix shift from slowdown in messaging versus maybe more durable factors and efficiencies that you guys might be seeing? Was that just all mix shift related or is there something else driving that?

Hey, Taylor. I wouldn't say there's any one factor exclusively. We continue to see strength in the messaging business; there's not an underlying story of slowdown for that product set. We also feel excited about the performance of Segment and we continue to see growth in our application services category. Any given quarter product mix dynamics, international mix, and customer dynamics will influence the gross margin rate. For now, we're really focused on gross profit dollar expansion. Over time, we intend to work the gross margin number up, driven by mix shift toward higher-margin services and application services, and we remain confident in our longer-term target of 60% plus gross margins.

Great, thanks.

Very well. Thanks everybody for joining today. That will end the call for us. I look forward to chatting with you throughout the rest of the quarter.

Thank you again for participating. This concludes today's conference call. You may now disconnect.