Twilio Inc Q3 FY2022 Earnings Call

Twilio’s 2022 Investor Day. I’m Bryan Vaniman, Twilio’s SVP of Investor Relations and Corporate Development. Thanks for joining us virtually today. We’re hosting our Investor Day in conjunction with SIGNAL, our annual customer and developer conference. Hopefully, you’ve had a chance to tune into some of the broader SIGNAL programming, including yesterday’s keynote where the team talked about how companies are using Twilio products to better engage with their customers, enhance lifetime value, and lower acquisition costs. We held our last Investor Day during our 2020 SIGNAL, and much has changed since then. We’re excited to have you with us today to provide updates on our business and the opportunities ahead. Before we begin, please remember that all financial measures are presented on a non-GAAP basis except for revenue, which is a GAAP measure unless specified otherwise. Reconciliations between our GAAP and non-GAAP results and additional guidance information can be found at the end of this investor presentation. The information provided today includes forward-looking statements about our future outlook and goals. However, we cannot provide a reconciliation of non-GAAP forward-looking information to its corresponding GAAP measure without unreasonable efforts due to the complexities involved in quantifying various items. These forward-looking statements are projections and expectations about future performance that involve risks, uncertainties, assumptions, and other factors described in detail in our most recent periodic reports filed with the SEC, including our latest report on Form 10-K and subsequent reports on Form 10-Q, along with any amendments, all available on our website and sec.gov. Forward-looking statements reflect our beliefs and assumptions only as of the date they are made. Actual results may vary significantly, and we have no obligation to update any forward-looking statements. Now, regarding the agenda, Jeff will start with the introduction and vision, followed by Eyal Manor, our Chief Product Officer, who will discuss our innovation and product strategy in detail. Then, Elena Donio, our President of Revenue, will share more about our go-to-market strategy, and Khozema Shipchandler, our COO, will conclude the presentation with a financial overview and a discussion of key metrics. After the presentation, we’ll take a short break, and then return for an executive Q&A session with today’s presenters covering the Investor Day session as well as our Q3 earnings that we released this afternoon after market close. Throughout the webcast, you can submit questions using the built-in Q&A feature, so feel free to send them in at any time. I’ll be moderating the Q&A, aggregating the questions submitted, and during the Q&A session, I will announce who submitted each question before reading it for the group. Lastly, we will post today’s presentation on our Investor Relations website after the event concludes. Now, with that said, I’ll hand it over to Jeff Lawson to kick things off.

Thanks, Bryan. Hello, everybody, and welcome to Twilio’s 2022 Investor Day. I’m Jeff Lawson, Twilio’s Co-Founder and CEO. And look, I’m going to get straight down to business because I know there’s a lot of discussion among the investor community around Twilio. I’m accustomed to Twilio being hard to classify because we don’t fit cleanly into one box or another. But this is also part of what’s given Twilio a unique opportunity in the market. Here are some of those dynamics. I mean we’re a developer-led, API-first company. We have both a usage-based pricing model and a more traditional SaaS-based pricing model with our software products. We have a platform approach versus a solution approach. We have both a product-led and enterprise go-to-market motion, and our messaging products have a markedly different gross margin profile than many of our other products. So as you can see, we have a number of unique elements to our business that don’t easily map to any single comparable. So I hope today’s presentation will help to shed more light on our business, our opportunity, and our path forward. So let’s get to it. There are really four things that I want to focus on today. First, I want to discuss our messaging product. It’s strong and can become even more efficient as it grows and I want to show you how we intend to do that. Second, we see an even bigger opportunity with customer engagement even though it’s early for us, but I want to give you visibility into our path here. Third, I want to talk about why these two things—communications and data—are better together as a customer engagement platform and why we’re going to win. And last, I want to outline our focus on operating leverage and profitability as a key priority for myself and the company. Okay. First, messaging. I know there’s a lot of discussion about gross margins and look, I get it. I acknowledge that historically we’ve guided to a 60%-plus gross margin in aggregate for Twilio and that we’d achieve that level by mixing more and more software into our revenue mix. But the telecommunications ecosystem and our business has changed since we set that goal. So I want to shed some light on what’s driving our recent decline in gross margins and why as a business we’re more focused on driving gross profit dollars. Messaging is the biggest and fastest-growing portion of our communications portfolio and has been the key contributor to our recent gross margin decline. Carriers charge a fee to access their customers and we pass that fee along both in the U.S. and internationally. And internationally, it’s generally higher. Those fees have gone up over time as this space has matured and taken off over the years. The international market has operated this way for several years and more recently in the U.S., those fees we call 10DLC fees were introduced because we passed these through to customers at no additional margin, our gross margin percentage has dropped. Furthermore, our international messaging traffic has seen strong growth, which has put further pressure on our gross margin percentage. We’ve outlined these dynamics in our recent earnings calls, but here’s the important part. Our gross profit per message has actually increased over the last few years and we believe that’s what really matters. Khozema will walk through this in more detail in his section. So, net-net, we believe that gross profit per message is a more meaningful signal for Twilio, even more so than gross margin percentage. So, we’re going to give you that visibility today. Now with that principle in mind, I want us to go grab as much messaging volume in the world as we can with a stable gross profit per message. And when we do that for you all to say, 'hey, that was the right decision,' but we can be far more efficient in generating that gross profit. So off of those aggregate gross profit dollars, we intend to continue driving leverage, which means that more and more of those dollars will drop to the bottom line over time and then drive the whole business with positive and increasing operating profit. As Khozema will tell you, we expect to drive incremental non-GAAP operating profits year-over-year starting in 2023 and beyond. These are the goals that we’re orienting around—top-line market capture and bottom-line profitability. The gross margin percentage in the middle is really not what we’re managing the business for. And then we can use our growing leverage in communications and the large customer base—more than 280,000 customers—as the launching point for Twilio’s Act 2 in customer engagement. So that’s what I want to talk about next...

Hi, I’m Eyal Manor, the Chief Product Officer at Twilio. I’ve joined Twilio exactly one year ago. Before that, I spent 14 years at Google driving innovative products to scale. I first helped build the ads business to reach phenomenal growth. Then I led the large portfolio of Google Cloud platform products from inception to a scale of $19 billion in revenue. Since joining Twilio, I’ve hired senior product and engineering leaders, the best in the business, from companies like Salesforce, Meta, and Microsoft, all extremely experienced at scale with background in data and API. I joined Twilio because of its focus on innovation. Twilio has fundamentally changed the way businesses communicate directly with customers. It is Twilio’s builder mentality and track record of delivering exceptional products that attracted me and I’m honored to be a part of its leadership team. Today, we’re going to talk about Twilio’s customer engagement platform and its strong foundation in both communications and data, which is the way of the future. Our ability to bring together the leading CPaaS solution and the leading customer data platform in market share for IDC is what will allow us not only to transform the customer engagement space but to win it. Importantly, you’ll hear how we’re going to deliver it for our customers and investors, and that’s by focusing our investment on the highest impact product areas for the future, where we know Twilio can add differentiated value, positioning us to win in the market. Since its founding, Twilio has been at the forefront of innovation and has repeatedly capitalized on secular trends. Twilio virtualized the complexity of telcos and democratized communications for every developer. With Twilio, businesses could finally text consumers or make calls at scale easily. With the explosions of online services, companies had to respond rapidly to changing customer expectations. Some customers prefer texting or chat while others preferred email or voice. So introduced Flex, a programmable contact center built for this new world of tailored experiences and omni-channel communication. More recently, we’ve seen customers expecting personalized experiences. This is where data comes into play to create a unique profile of each customer; data must be unified across the customer journey for personalization at scale. So Twilio acquired Segment, the industry-leading customer data platform. This brings us to our most recent launch Engage; Twilio Engage brings together the unified profiles and the communication layer for marketers to build data-driven customer experiences. And this is just the beginning. While all of these solutions create immense value on their own right, together they make up Twilio’s future for the customer engagement platform. The combination of communications and data make Twilio greater than the sum of its parts. Our customer engagement platform is how all of our industry-leading products come together. With one single unified platform, we’re able to maximize the value unlocked for our customers. Our platform combines the deliverability and reach of Twilio’s CPaaS offering with a data-first foundation of our CDP to create a differentiated offering. This provides businesses with the power to build one-on-one relationships at scale through real-time context and intelligence, low-code orchestration, easy-to-use APIs, and extensible software products like Engage and Flex that give business users the power to meaningfully connect with customers on any channel. I talk to our customers every week and I hear that these are the critical elements a business needs to create ideal experiences with their customers. This innovation is redefining how the industry views data-driven customer engagement.

Thanks, Eyal. I joined Twilio six months ago into the President of Revenue role, but I’m not brand new to Twilio. Prior to taking this role, I was a member of the Board for just over six years. So I’ve had some cycles on the journey with our customers, our products, and with our team. I changed seats because I love the business and the opportunity ahead and because I have a huge appetite for this particular stage of evolution and associated type of work, leaning into the transformative software solutions that are still in their early days while delivering more efficient scale for our communication solutions. And that’s what’s really top of mind for me right now. What excites me most is the massive opportunity we have in our market. Our software solutions are unlocking new value for our customers, providing them with the data and insights they need to truly know and engage their customers. And combined with our communications products, they allow our customers to deliver the right message or email at the right time informed by those insights. We know that our software solutions require solution-oriented selling and deep customer relationship building, and we’re now being much more deliberate about developing those skills, those customer relationships, leveraging the trust and reputation we’ve built while solving new and broader problems for our customers. And finally, we’ve made some recent changes to our go-to-market model to continue to grow our messaging products much more efficiently, relying more on digital self-service capabilities, automation, and better calibration of our talent to the work to be done. Despite the short-term headwinds that Jeff mentioned, I feel extremely confident about our long-term opportunity and I’m excited to talk through the details of how I think we’ll get there.

Thanks, Elena, and thanks to all of you for joining us here today. My name is Khozema Shipchandler, and I’m Twilio’s Chief Operating Officer. Before getting to the meat of the discussion, I wanted to quickly reflect on a few key things that are top of mind for me as COO, which you’ll hear reiterated throughout my presentation. First, as a company, we are laser focused on driving disciplined organic growth. Over the past few years, we’ve oriented the company more towards growth at the expense of profitability, in an effort to execute against the significant market opportunity ahead of us, which allowed us to capture share. While we continue to be focused on driving attractive levels of growth going forward, we will do so in a balanced fashion. In addition, we maintain a strong balance sheet, which provides significant flexibility as we continue to evaluate our broader capital allocation strategy and the trade-offs between organic investment, strategic M&A, and potential capital returns to investors. However, our predominant focus in the immediate term is continuing to accelerate organic growth in our software portfolio. Second, we are committed to delivering non-GAAP operating profitability starting in 2023 and to meaningfully growing our operating margins each year thereafter. While I know there have been a lot of recent questions regarding our gross margin trajectory, as Jeff highlighted, our plan has us delivering non-GAAP operating profit in 2023 irrespective of the short-term gross margin volatility. I’ll explain why this is the case later in the presentation. Finally, as a business, we’re focused on delivering consistency and repeatability in performance and metrics. We began this effort earlier this year by tightening our guidance policy to give investors a better sense of where we expect our results to come in. And we’ll continue by giving more consistent metric disclosures for the areas that matter.

Questions will be taken through the built-in Q&A feature during the webcast, and we will read them aloud in the session. See you soon.