Edited Transcript of TWLO earnings conference call or presentation 31-Jul-19 9:00pm GMT

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Thank you, and welcome to the team, Zilli. And thanks, everyone, for being on the call today. We celebrated an important milestone in Q2, crossing the $1 billion annualized revenue run rate with industry-leading growth at our size. I want to thank our customers who place their trust in us and helped us to reach this milestone, and thank you to Twilions around the world for relentlessly focusing on our customer success along the way. And while it’s the time to be excited about all the progress we’ve made and joining the exclusive ranks of cloud software companies that have reached this milestone, we see this as just the beginning. We have the opportunity to change communication and customer engagement for decades to come. This is day one, and we’re just getting started.

These results were driven by strength across our core platform. Our developer-first approach continues to drive success as every company becomes a software company and looks for new ways to engage with customers across multiple channels. And we believe no one is as well positioned as Twilio to support companies through this transition.

The second quarter was also our first full quarter with Twilio SendGrid, and we’re thrilled with the feedback we’ve heard from customers and the initial traction we’re seeing. While it is obviously still early in our journey together, a few customers are already seeing the value of combining e-mail with SMS for their customer engagement. We couldn’t be more excited about the combination of Twilio and SendGrid and the value we are creating for customers around the world. And just a couple of weeks ago, we introduced the new automation and e-mail testing features within the Twilio SendGrid Marketing Campaigns product. These new features provide frustration-free workflows and integrated tools to build e-mails across onetime campaigns and transactional e-mails. Congratulations to the Twilio SendGrid team on continuing to innovate on this product for our customers.

The integration of SendGrid continues to progress well as we combine our teams and drive to enhance our cross-selling opportunity. While this effort will continue through the remainder of this year, we’ve had some great cross-sell wins already, which George will talk about in a moment.

The SendGrid acquisition has been a big event for Twilio, but let’s not forget the other big news story, which is Flex. Our approach is resonating with many types of customers even in these early days. As we expected, the first implementations of Flex are among digital-native companies who are looking to build and move quickly, and we continue to make progress with these great early adopters. We’re also early in numerous sales cycles with larger enterprises that have large existing footprints to augment or replace. This is a huge opportunity in a market that is ready for disruption, and Flex has shown tremendous potential as customers have told us that we’re on the right path. We’re very excited about what’s ahead, and we continue to invest in new solutions because customer engagement that drives communication is an area customers have shown us is ripe for innovation. And this innovation is driving significant impact for organizations of all types as they look to find new ways to engage with their customers and improve their customer experience.

I’m going to steal a bit of George’s thunder here and talk about our relationship with the Veteran Affairs Medical Center, or the VA, which we expanded in Q2. You may recall we first discussed our work with the VA in Q1 of 2018 as we helped power their vet text platform that sends appointment reminders via SMS to patients. The ROI for the VA has been incredible, driving savings of more than $110 million from the ripple effect of reducing missed appointments such as lost facility time and doctor and nurse time. And because of this great success, the VA expanded its relationship with us in the second quarter with enablement of its new feature, Open Slot Management, which dynamically offers and reallocates canceled and available appointment slots to veteran patients waiting for an earlier appointment. This feature was tested at a small number of locations and is now being rolled out nationally to support veterans across the country.

I bring up this story and stories like this because this is why we started Twilio. By making communications more accessible for developers, we’re helping customers, like the VA, modernize which, in turn, is saving the government and taxpayers’ money while driving better health care experience for our veterans. And this is just one example of many. Organizations of all sizes and in all industries need to harness the power of communication, and we continue to deliver new ways to bring these companies and their developers into our tent and make them successful on the Twilio platform. And we are constantly looking for new ways to expose this vast array of companies to our platform and get them started on the path of innovation.

In May, we announced TwilioQuest 3, the next incarnation of our interactive, self-paced online learning game, which will be launched next week at SIGNAL. Inspired by the classics of the 16-bit era, this role-playing game helps developers and nondevelopers alike learn the power of code and how easy it is to build apps with Twilio. To date, more than 44,000 people have signed up for TwilioQuest, nearly 70,000 objectives have been completed and more than 5 million experience points have been earned by developers who’ve used TwilioQuest to learn Twilio.

We’ve also ramped up our enterprise hackathons where we go on-site at our customers’ offices to engage more employees and developers and help them build more solutions using the Twilio platform. In fact, in Q2, we held events with customers like U-Haul and a major airline, and we’re already seeing the impact on activity of builders inside those companies and several others. And we’re offering Superclasses, a self-paced day of hands-on technical training where engineers from Twilio product teams come together to teach best practices to our customers. What started at SIGNAL is now part of our Engage events around the world including in Nashville, Chicago, Melbourne, London and more. In fact, in the second quarter, we hosted developers across 9 events along with 2 online Superclasses, bringing this experience to developers we otherwise wouldn’t meet in person. And of course, we’ll be hosting another Superclass this year at SIGNAL with coding exercises, presentations, office hours and the ability to test brand-new Twilio products before they’re released to the public.

We’re continuing to expand our reach and bringing organizations of all sizes and all industries onto our platform because, from what we can tell, every company can benefit from better communications and better customer engagement.

I also wanted to give a quick update on the effort to help stop robocalling. I touched a bit on the scourge of robocalling in the last earnings call, and the efforts we’ve taken since inception to prevent this type of activity on our platform. Yet, robocalling continues to be an issue for all of us. Since our last call, the FCC, FTC and Congress have all taken additional steps to help stop unwanted robocallers from reaching consumers. And we’ve expanded our efforts as well, joining the Alliance for Telecommunications Industry Solutions, or ATIS, and serving on its Board of Directors, participating in its robocall working groups and supporting technical solutions like STIR/SHAKEN. And we’ll continue to work with lawmakers, policymakers and the broader ecosystem to find the right solutions. We’ll be talking more about this at SIGNAL.

And speaking of SIGNAL, it’s coming next week. Our developer and customer conference takes place August 6 and 7 at the Moscone Center here in downtown San Francisco. We have some exciting announcements ahead, so please join us for 2 days of learning, networking and fun. I hope to see you there.

Before I turn it over to George, I wanted to mention a couple of other highlights from the quarter. In June, we added Jeff Immelt, former Chairman and CEO of GE and current venture partner at New Enterprise Associates, to our board. Jeff brings nearly 20 years of executive and boardroom experience to Twilio and will help guide us as we expand our enterprise and international business on our path to $2 billion and beyond.

Also in June, we received the Great Place to Work certification, with 94% of our employees saying Twilio is a great place to work. And 97% of employees are proud to say they work here. Thank you to all Twilions for creating such an amazing culture. It’s an extremely important part of our company, and I’m really proud of what we’ve created.

And with that, I’ll hand the call over to George.

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George Hu, Twilio Inc. – COO [4]

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Thanks, Jeff. Our go-to-market efforts continue to drive the strong growth we saw in Q2 as we execute on our core platform strategy as well as extending our reach to the enterprise and internationally. We remain focused on expanding Flex’ presence in the market as well as cross-selling Twilio SendGrid. Jeff highlighted some of the great things our marketing and developer evangelism teams are doing, so let me focus on the success we saw from the sales side in Q2.

One of our core themes has been expanding into the enterprise, and our investment there continues to bear fruit. This quarter, we formed a new relationship with Enterprise Holdings, the parent company of National, Alamo and Enterprise Rent-A-Car, which has more than 10,000 neighborhood and airport locations and more than 2 million vehicles in its global fleet. Enterprise is aiming to improve customer engagement by using new channels such as SMS, IVRs and social to ensure customers have a seamless experience before, during and after the car rental experience.

We also entered in a new relationship with a Fortune 50 retailer that is embracing a build mentality to improve their customer engagement, moving from buying 80% of their software to building 80% of their software. This is another great example of how every company is becoming a software company. The first use case will add SMS as a channel for order confirmation, tracking information, pickup and delivery alerts and the like. We look forward to supporting them throughout their journey.

Internationally, we expanded our relationship with the TransferWise, a money transfer company that moves more than GBP 4 billion every month. They recently added their new borderless service, which allows customers to hold over 40 currencies at once along with a TransferWise debit Mastercard. With the new PSD2 regulations, which we added support for in our Authy product last quarter, TransferWise turned to Twilio for 2-factor authentication via Authy push, SMS and voice. This is a great example of how Twilio continues to innovate and add value for our customers.

We continue to make progress with Flex, signing a new deal with TripActions, a technology-enabled corporate travel management platform. With their tremendous 5x year-over-year growth, TripActions found that they needed a new solution to scale and fit the needs of their business. TripActions is known for their customer centricity and proactive support and wants to deliver an excellent user experience starting with chat and voice, and they knew that they could accomplish that with a fully customizable contact center platform that Flex offers.

On the partner front, we launched our Twilio Build program last year to support our strategic ISVs and SIs who are building on our platform. We are beginning to see a large amount of inbound interest from the SI community in general but particularly as it relates to Flex, with some of the largest consulting firms seeing Flex as a disruptor to the traditional call center market. We have also been investing in our IoT business, and we’re seeing some really exciting use cases as cellular IoT continues to expand its reach. We started with traditional machine-to-machine use cases like fleet tracking, but we progressed into new markets like smart cities where we are now powering the disruptors whether it’s in micro mobility with Skip Scooters, who we formed a new relationship with in the quarter; or smart waste management with Sensoneo; or property management with Wello. The adoption of our IoT connectivity products reminds us of how our programmable communications cloud product inspire developers, enterprises to invent new use cases. In short, we are seeing increased traction and our focus on this offering starting to pay off.

As Jeff mentioned this was our first full quarter with Twilio SendGrid, and we are making great progress with our joint go-to-market efforts. In the quarter, we expanded our relationship with Klaviyo, an automated marketing platform and a great SendGrid customer. After hearing an interest from their customer to engage via SMS, they added programmable messaging SMS capability for product promotion, account identification and abandoned shopping cart use cases. While it’s still early, this is a trend that we’ll continue to see in the market, and we are well positioned as the platform to support marketing campaigns across multiple channels.

To close, we are executing well on our growth investments as we expand our presence in the enterprise and in international markets and continue to drive success for developers and companies of all sizes in multiple industries around the world.

With that, let me pass the call over to Khozema to discuss our financial results.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [5]

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Thank you, George, and good afternoon, everyone. We delivered another strong quarter of growth in Q2 as customers continue to choose Twilio as their customer engagement platform, and we saw great performance with Twilio SendGrid in its first full quarter. Let me take you through some of the details from the quarter.

Base revenue, including Twilio SendGrid, grew 90% year-over-year to nearly $257 million in the second quarter. Twilio’s stand-alone organic base revenue growth was 56%. Note that these results do not include any benefit from the A2P fees that we discussed in last quarter’s call as there was a delay in the implementation timing, which I’ll discuss later. Twilio SendGrid contributed approximately $46 million to base revenue, growing 28% year-on-year on an organic basis despite the difficult compare from the incremental GDPR-related volume they saw in Q2 of last year. Our dollar-based net expansion rate was 140% in the second quarter, a strong sign of the value that we are delivering to our customers. This is being driven by our investment in our go-to-market teams and our ability to drive success across our customer base with the expansion of current use cases or the delivery of new use cases. Also, recall that this metric will not be impacted by the SendGrid acquisition until Q1 of 2020.

We ended the quarter with nearly 162,000 active customer accounts. Our top 10 active customer accounts contributed 13% of total revenue in Q2 compared to 14% last quarter and 17% in Q2 of 2018. Gross margin came in above 59% in the second quarter, up slightly from Q1. This was primarily driven by having 3 months of benefit from Twilio SendGrid in the quarter versus only 2 months in Q1. Additionally, with the delayed implementation of the A2P fees, we didn’t experience the expected impact to gross margin in the quarter. These are great results, but it is important to remember that expanding gross margin is not our strategy today. We remain focused in revenue growth and gaining market share as we have since going public. Historically, we said we expect gross margins in the mid-50s. But with the benefit from SendGrid, we expect to see our margins in the mid- to high 50s for the foreseeable future. And keep in mind, there are other items that can cause fluctuations in our gross margins including product, country and customer mix, network service provider fees, FX and more.

Let me quickly touch on the new Verizon A2P channel, which I referenced a moment ago. The launch was delayed despite our earlier expectations of a mid-May timing. As we have discussed, we plan to pass this fee through to customers, which will add to revenue but depress gross margin rate, but we don’t expect any impact to the gross profit for message. Accordingly, the guidance we provided in our first quarter call included revenue of $1.5 million for the expected impact over the second half of Q2 and $8 million to $9 million for the full year. However, due to the implementation delay, we didn’t recognize any A2P-related revenue in Q2. The latest information we’ve received suggests the implementation is still delayed. But due to the uncertainty around the exact timing, we are now adjusting our guidance to remove any expected revenue benefit for Q3 and the full year. If and when these fees are implemented, we will provide the benefit to revenue on the respective quarter’s earnings call. I would also reiterate my commentary from the last call that we do believe it is likely that the other carriers will ultimately implement similar plans, but we do not have any updated information on the timing of such plans.

Finally, consistent with the commentary on our last earnings calls, we expect to generate a modest non-GAAP operating loss in Q3 due to SIGNAL, which takes place next week. Keep in mind that SIGNAL was held in Q4 last year, which will also impact the year-over-year compares for both quarters. Our strategy remains to reinvest in growth to take advantage of the opportunity ahead of us while operating the company slightly above breakeven. With that in mind, we expect to return to a modest level of non-GAAP profitability in Q4.

To close, we delivered a strong second quarter, and our focus on growth investments is setting us up well for the second half of the year and beyond.

And with that, we’ll open it up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Nikolay Beliov with Bank of America.

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Sui Ying Cheong, BofA Merrill Lynch, Research Division – Analyst [2]

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This is actually Jacqueline Cheong on for Nikolay. Two questions for you. One, why is the expansion rate down from 146% in Q1 to 140% in Q2? And the base revenue guide up — was only slightly up on a larger Q2 beat. Is that due to tough second half comps and Verizon? Or is there some other reason in the business?

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Khozema Z. Shipchandler, Twilio Inc. – CFO [3]

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Yes, let me take the — this is Khozema, thanks for the question. Let me take the second part first, and then I’ll get to the first part in a moment. So in terms of the second part of your question, in terms of the base rate and the overall raise, so the way to think about it is, is that, in essence, we kept the guidance effectively the same but, at the same time, we took out about $9 million of Verizon revenue from the year, right? So if you kind of think about it on an apples-to-apples basis, we’re effectively raising for the year with that out of the year, and so we feel pretty good about the inputs to the business and how our growth is progressing, but that’s really the mathematical reason for that.

In terms of the first part of your question, I mean in terms of the expansion rate overall, I mean we put rate at about 140%. I mean I think it’s a real strong testimony in terms of the way that our business model’s progressing. DBNE is one of those metrics that has fluctuated a little bit up and down in the past, but I think it’s been reasonably consistent with prior periods. It is down a little bit relative to the prior quarter, but then again, I mean I think we feel really good about the inputs to the business. We’ve always said that the expansion rate will fade a little bit over time just given the fact that we’ve got older cohorts that are starting to grow at a slower rate, but that’s pretty consistent with our prior commentary.

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Operator [4]

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Your next question comes from the line of Bhavan Suri with William Blair.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division – Partner & Co-Group Head of Technology, Media and Communications [5]

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I guess maybe I’ll start first with just Flex. I think, George, you touched a little bit on Flex here in the quarter. I guess I’d love to understand what kind of demographics of the customers are you seeing as the early sort of Flex adopters, I think, in sort of patterns and trends. And you also talked about sort of Shopify and a few others like that. But sort of — those are very early sort of white glove-type customers. Of the people you’re targeting, guys who sort of got further up the pipeline, is there any sort of trend or pattern or commonality among customers, size, type of company, things like that? I’d love to get a little more color on what you’re seeing there, sort of guys closing in on the pipeline.

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George Hu, Twilio Inc. – COO [6]

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Yes, great question. I mean I think that’s a great question because certainly we are seeing right now the early wave of adopters. And those companies tend to be digital disruptors, disruptive companies, builder cultures, more nimble companies looking to explore new technologies. And I think TripActions is a great example of that. Also, we are also targeting enterprises. But as Jeff mentioned, those are going to be longer sales cycle, and we are having those conversations as well. But kind of the early wins are more of that digital or early disruptive company-type builder culture.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division – Partner & Co-Group Head of Technology, Media and Communications [7]

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Got it. Got it. That’s helpful. And then I guess just to follow up to the previous question there, Khozema, not so much on sort of the — taking the Verizon piece out. But as we think about it, the beat through last year — and I know you’ve told us the beats can’t be sort of the exception on size we saw last year. But I was wondering, as you thought about your guidance philosophy and you’ve been there a little while now, has that changed at all in terms of how you’re guiding or think about visibility given sort of — even if we take that out, the level of the beats or the level of beats above are just maybe marginally more muted than they were last year. So just wondering if there had been a change in philosophy or how do you think about visibility or if it’s just a natural sort of law of large numbers type of thing playing out.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [8]

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Yes. Hey, Bhavan, thanks for the question. So again, I’d just emphasize again the lack of the Verizon element to the year that we took out, that we previously had. And I would say, look, overall, no real change in philosophy. I think the inputs to our business continue to remain really strong. I think one dynamic since last year is, is that our ability to forecast the impact of customer growth keeps improving. And so I think you’re just not seeing the significance of the beats, maybe it’d be the same as they were previously as we’ve really started to grow out our sales machine. I think the other dynamic is, is that — well, I talked about the Verizon piece already. So that’s really the gist of it.

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Operator [9]

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Your next question comes from Michael Turrin with Deutsche Bank.

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Michael James Turrin, Deutsche Bank AG, Research Division – Research Analyst [10]

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I wanted to spend a little bit more time on Flex and partners. With implementations moving along, is there any more color you can add in terms of where we are in terms of engaging and expanding with the partner community? And then secondarily, how important are partners in helping bring Flex to market, especially on the larger enterprise side where it sounds like that’s kind of the next opportunity after this biller-driven culture that is flowing through to start?

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George Hu, Twilio Inc. – COO [11]

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Yes, I think it’s a great question. And partners are critical to our Flex strategy. It’s one of the reasons why we’ve been investing in our ecosystem. In fact, we just brought over a fantastic new VP of our SI community over from Salesforce, so we’re really excited about that. And I think we’re expecting what we — or we’re seeing what we expected to see, which is that our partners are getting up to speed by learning how to deploy the technology. They’re doing it successfully. And we have a lot of lighthouse accounts now being deployed by partners, with multiple partners in our geos being developed right now so that we can have the coverage we need. And eventually, we’d like to grow to even larger sizes of transactions and partner sizes. So good progress, good momentum. And if you’re coming to SIGNAL, you can meet many of these partners. They’ll be there. Great companies like Perficient, Presidio are continuing to grow. And those early names I threw out earlier are growing and developing, so everything is on track.

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Michael James Turrin, Deutsche Bank AG, Research Division – Research Analyst [12]

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And just can we spend another minute on PSD2? That’s the second quarter you’ve mentioned that. Any update in terms of time line and demand. Are vendors aware this is coming? Is this similar to GDPR? And are they also aware you can help them in meeting this directive?

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [13]

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Yes. This is Jeff, I’ll answer. I mean PSD2 obviously presents us with an opportunity because you’ve got — you’re essentially regulating authentication of transactions, and we’ve got a great solution for — with our Authy product. And so of course, our go-to-market teams are using that as a vector to let companies know that we have a solution in the market. TransferWise this quarter was the customer we mentioned on the call who adopted us for PSD2. And I think this growth presents a great opportunity for us, yet another vector for more customers to adopt Twilio.

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Operator [14]

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Your next question comes from Heather Bellini with Goldman Sachs.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division – MD & Analyst [15]

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Hey, Jeff, I was wondering, there’s so much debate in the market going back and forth about robocalls. And I know you’ve done blog posts, and you’ve talked about it before. But can you just give us an update on the revenue exposure? Just I think it would benefit a lot of people who are even listening in. And then I just have 2 follow-up questions on Flex, if you don’t mind.

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [16]

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Yes, absolutely. So Heather, it’s funny you say there’s a debate going. I don’t even want a debate, I just heard people saying it’s bad. As far as exposure to Twilio, virtually nothing. We’ve made our platform for — since inception to not welcome those types of customers onto our platform. And so we are an open platform. So I can’t say that it’s absolutely 0, but we’re vigilant about ensuring that people who do adopt Twilio, if they have the wrong motivations or using us wrong that we don’t allow them to continue to operate as quickly as possible.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division – MD & Analyst [17]

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Can you just share with people how you’re able to do that, to get them off the platform if you do find them because that’s the other thing we hear a lot about? I’m sorry but — sorry to ask for more elaboration there.

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [18]

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Yes, sure. I mean as far as the mechanics, we have a terms of service and acceptable use that allow us to just shut off those customers.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division – MD & Analyst [19]

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It’s more kind of — how many have you touched on. Yes, exactly.

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [20]

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Yes. You can look at the metrics, and you see sort of things like answer rates and call durations and use some AI to look at those traffic patterns. We also have an operations teams that’s obviously looking at these cases. And it’s really just a matter of pattern-matching for people and machines to see the patterns that exist in those behaviors and to weed them out.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division – MD & Analyst [21]

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Okay. Very helpful. And then on Flex, my questions were, one, I guess, do have any pipeline goals that you can share with us for the year? You’ve always said like 2019 would be the year of pipeline building. And then I’m wondering if you could share with us kind of how long the implementations are taking. And if you kind of think about the competition, now that the product has been in the market for longer, are you seeing any change in who you’re coming up against in RFPs?

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George Hu, Twilio Inc. – COO [22]

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This is George. So we’re not going to comment on our pipeline targets. But on the second part of your question, certainly, we are seeing deployments that are coming in the kind of months category I would say because we have to remember that app — Flex is an application platform that developers are building on. It’s not a SaaS product. So we’re seeing time frames in the months roughly, depends obviously on the customer. And in terms of the competitors we’re seeing, I would say it’s not materially changed. I mean a lot of our customers are comparing us against legacies. Some are comparing us against SaaS products. It really just depends. I wouldn’t say we’ve seen a really meaningful shift there.

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Operator [23]

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Your next question comes from Mark Murphy with JPMorgan.

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Mark Ronald Murphy, JP Morgan Chase & Co, Research Division – MD [24]

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Jeff, if you look broadly across your base of about 150,000 customers, can you compare and contrast the pace of activity you’re seeing with SMS text notifications versus in-app types of notifications? And I’m just curious if they’re finding that in-app is not feasible to try to reach their broadest audience, or are they somehow examining it?

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [25]

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Yes. Thanks, Mark. I mean I think the SMS has been a really powerful medium for companies to reach their customers for a very long time because you don’t require a user to download a mobile app, you don’t require them to push okay when you have the notifications alert. What you need is their phone number and their permission, and you’re able to reach pretty much 100% of your customer base. And that’s a really powerful medium to reach customers no matter what OS you’re on, no matter what country you live in. And so while it does depend a bit on the use case, what we saw — when push notifications first came out in, what, 2010, I think there was this question of like, “Oh, well, is that going to replace SMS?” And I think time has proven out that people are declining push notifications. However, thoughtful, meaningful SMS embedded into business processes and into contact flows, especially 2-way, is a fantastic way for companies to engage with their customers, and that’s been driving the tremendous growth that we’ve been seeing in SMS now for more than a decade.

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Mark Ronald Murphy, JP Morgan Chase & Co, Research Division – MD [26]

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Okay. Great. And as a quick clarification, Khozema, if we were to adjust for your removal of the incremental A2P revenues for this fiscal year, it looks like you are actually raising revenue guidance for the year by almost $20 million. I just want to clarify if that seems like an accurate way to think about it.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [27]

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I think if you do the total, that sounds pretty close. I think if you look at base, it’s probably closer to high single digits.

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Operator [28]

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Your next question comes from Brent Bracelin with KeyBanc.

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Brent Alan Bracelin, KeyBanc Capital Markets Inc., Research Division – Former MD & Senior Research Analyst [29]

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I guess the first one, for Jeff or George, it sounded interesting that you landed a Fortune 50 retailer. My question here is how prevalent is this concept of aggressively moving towards a build versus buy? Going from 80% buying to 80% kind of building seems like a pretty big, material move. Is this kind of an anomaly? Or do you think there is more active discussions and dialogues that you’re having with customers that this can be more of the norm over the next couple of years? And then I have a quick follow-up for Khozema, if I could.

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George Hu, Twilio Inc. – COO [30]

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Yes. I wouldn’t say that this particular customer’s — the magnitude of this shift is the norm, but I do think that — we’ve been saying for a long time now, and I think it’s really true, that every company is becoming a software company. And I do think there is an aggressive demand for — actually, it’s globally, for innovation through software. And we’re riding this wave of customer engagement and digital transformation that, by and large, companies realize, to differentiate themselves, they need to build software. They can’t just use something off the shelf. And they also have very custom processes in their companies that — and legacy systems they have to integrate with that required software development. Now some of that’s happening through SI. Some of that’s happening in-house. But I think companies are realizing that the promise of, “Hey, let’s just buy a cloud app, deploy it and it’s going to give me a differentiated perfect solution,” is just not reality. So I do think that is a trend that we are benefiting from. And I think one of the reasons we’re so excited about our future is that this marriage of customer engagement, demand plus the energy around building differentiation, I think we sit at the intersection of those 2 really important trends.

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Brent Alan Bracelin, KeyBanc Capital Markets Inc., Research Division – Former MD & Senior Research Analyst [31]

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Helpful color there. And then I guess just as a follow-up…

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [32]

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I’m just going to add to it. I mean I think that’s one of the core hypotheses that Twilio has operated under since our inception is that as we have an increasingly digital world, every company needs to become a software company. And we’ve seen that borne out. If you look at the brands that are on our earnings calls that we’re talking about or brands — companies on our website that you see of our customers, it is increasingly every kind of company. And it’s fascinating because you see it born out of competitive dynamics, right? So when one company takes this approach and starts building and creating great customer experiences, then other competitors in the market will feel they need to actually have a great customer experience, too. And so it is a matter of natural evolution, I think, of the market, of every company needing to compete in a digital world and having to hire developers and to build their way into the future. And so I just think it’s a really powerful trend that’s kind of why I want to put a little exclamation point on it because it is certainly one that you see headlines on. I mean I haven’t read a headline in 15 years of like such and such company is outsourcing all of its IT. That’s a headline from 2000, not from 2019.

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George Hu, Twilio Inc. – COO [33]

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Yes. And just to back up what Jeff just said, I think in this specific example, this new customer’s #1 competitor has been a Twilio customer for a long time and also has been building solutions. So I think it’s not a coincidence that this customer now has seen that and is moving on to Twilio because they see some of this energy in the market.

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Brent Alan Bracelin, KeyBanc Capital Markets Inc., Research Division – Former MD & Senior Research Analyst [34]

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Very helpful color. I guess as a follow-up to this increasing kind of build versus buy decision, Khozema, the base business did cross over $1 billion run rate for the first time. And while I don’t know a lot of billion-dollar businesses growing at a 50%-plus organic growth profile, I was just hoping you could walk us through the growth levers, how you’re thinking about just growing that base business given you’ve crossed over now that $1 billion kind of run rate threshold, and how should we kind of think about your ability and the levers to sustain kind of high growth, maybe not 50% growth, but how do you sustain growth at that level?

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Khozema Z. Shipchandler, Twilio Inc. – CFO [35]

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Yes, thanks for the question, Brent. So I would — those are broader questions, so let me give you a few answers. I think the first thing is, is that, in general, I mean we feel great about the diversity of the customer base. So one of the things that we pointed out in the discussion earlier is, is that as we look at our top 10, I think that was a number that was more concentrated in the past. And as the go-to-market machine with George has really been unleashed, I think we’ve seen more and more use cases across a broader range of customers, and just the diversity of that base has been really, really good for us. So I think that’s one.

Another is, is that we have really good contribution across all the different product lines. And so I wouldn’t, per se, point to any one of them as being a particular outlier. I think we’ve seen great growth, for example, of course, in messaging and voice. But at the same time, I mean we’re really excited about some of the newer products, and we’ve had a lot of discussions about Flex, for example, but there’s also wireless. And obviously, with the addition of SendGrid, we’re quite excited about the growth from that business as well.

So I think from our perspective, whether or not we’re able to kind of sustain it at that high 50s growth rate, I mean I think we feel really good about the inputs to the business in kind of their entirety, and we feel great about crossing sort of the $1 billion run rate mark. But in general, I mean we feel like we’re going to be able to continue to grow the business really across all fronts. There’s a lot more work that we can do on the product side. Internationally, certainly, is one thing I didn’t touch on but I think we’re excited about, too. But in general, I think we feel great about where things are headed.

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Operator [36]

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Your next question comes from Ittai Kidron with Oppenheimer.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division – MD [37]

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I guess, Khozema, I just want to go into the net expansion discussion, which we started the conversation with. I think you’ve made a comment that clearly it’s very healthy, but you also expect it not to decline materially going forward. You’re now going into the second half of the year where you have very tough year-over-year comps in the expansion rates, so help me understand how you can kind of keep at that level or you should see, at least nearer term, a little bit more — a greater moderation in that figure just given the year-over-year comps here.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [38]

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Yes. Maybe just to comment on the first part of the question, I did not say that I expect it to decline materially, so I just want to clean that piece of it up. In general, I mean I think the way that we think about it is, is that the expansion rate overall, it’s an industry-leading rate at 140%. It’s down a little bit, no doubt about that. But I think at 140%, we feel like it’s a really strong testament to our business model. And the fact that we’re able to maintain it at that level at our size and scale is really profound. So I think in general, I mean if you look at the expansion rate historically, it’s fluctuated a little bit. It’s gone up and down. It’s been incredibly strong over recent periods. A year ago, for example, it was 137%, so it’s up a bit from there.

I think in general, I mean our go-to-market model has been incredibly strong. We’re driving deeper relationships with customers. The one thing that we’ve always said and maintained over the last several calls is, is that, that expansion rate will fade over time. It’s not that it’s going to be a precipitous drop, but it will fade over time. And that’s just the kind of the law of large numbers kicking into the way that the business is going to grow, but I wouldn’t take that as anything other than the business is just becoming a lot larger. But in general, we feel great about our growth prospects.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division – MD [39]

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Very good. Just a follow-up, I don’t know that you’ve mentioned it on the call, maybe I missed it, but what was the non-U. S. revenue in the quarter? What percent?

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Khozema Z. Shipchandler, Twilio Inc. – CFO [40]

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Non-U. S. revenue is 29%.

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Operator [41]

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Your next question comes from Will Power with Baird.

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William Verity Power, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [42]

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Yes, just a couple of questions. First, maybe just to circle back to SendGrid and the integration progress, great to hear some of the examples of the cross-selling opportunity, but I wonder if you could just kind of qualitatively help us understand kind of what inning we’re in, in that cross-selling opportunity. As you think about go to market from the legacy SendGrid team and developers and Twilio on the enterprise side there, kind of what percentage of those folks are actively selling either e-mail or SMS depending on the organization? And kind of what’s the road map from here on that front?

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George Hu, Twilio Inc. – COO [43]

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Yes, this is George. We’ve made, I think, excellent progress in terms of integration. We’re on track with our plan when it comes to how we’ve been planning to integrate our go-to-market forces. We today have a sales force that is able to sell the full range of Twilio and Twilio SendGrid products to our customers. And we’ve also brought in the existing SendGrid go-to-market teams to create one unified customer experience. We’re not all the way there yet, but I think we’re certainly on track from what we planned, and I think you’re seeing that in some of the data points we’ve given you. And I’m very, very pleased with the team and what they’ve accomplished.

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William Verity Power, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [44]

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Okay. Great. And maybe George actually, just maybe a follow-up for you on some of the earlier comments on IoT. I wonder if you could talk about — or how you’re thinking about the size of that market opportunity. It sounds like we’re in very early innings, but when can that become more substantial? And what does 5G potentially mean to that? Does that open up more conversations? Are you starting to see that yet?

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George Hu, Twilio Inc. – COO [45]

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I think we’re — well, let me take a step back. I think at a big picture level, obviously, very excited about the opportunity in Programmable Wireless. We’re seeing many of these early adopters come and build on the platform. I think that we are fulfilling on the promise that — what Twilio really stands for, which is opening up the innovation potential of a major communications space to all developers, not just the biggest companies in the world. So we’re seeing companies of different sizes, but especially really innovative and newer companies, building on the Twilio platform and choosing us, and we are investing in the product. And I think you’ve seen that at SIGNAL, and we’ll talk about it more at this SIGNAL. But we’re just on, I think, a very healthy trajectory, so we’re excited to share some of those wins on this call.

In terms of the effect of 5G, I mean obviously for the customers that we’re having these conversations with, we are talking to them about all the evolution we’re seeing in the market, including 5G. We launched some of our products that are taking advantage of some of the innovation in the market like our narrowband IoT product we talked about last SIGNAL. So it’s definitely an evolving market, but obviously some of these things like 5G are still early. We’re not — we’re more having conversations at this point but certainly a very exciting space, and we’re fired up about the opportunity.

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Operator [46]

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Your next question comes from Meta Marshall with Morgan Stanley.

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Meta A. Marshall, Morgan Stanley, Research Division – VP [47]

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Just diving a little bit more into Flex, you mentioned augmenting kind of in a way and then entry into customers. I’m just wondering if there’s any kind of easier use cases that you’ve found and kind of pitching in some newer customers, understanding it’s early days. And then maybe second, just any customer interest or any impact to business from the rollout of RCS chat. That’s it for me.

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George Hu, Twilio Inc. – COO [48]

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I’ll talk — this is George, I’ll talk about Flex, and I’ll touch on RCS just a bit. Although Jeff maybe want to — may want to expound on RCS some more. Certainly, look, I think when you have an innovative product like Flex, there’s just natural points that are easier for customer adoption, greenfield use cases, use cases where companies are naturally outgrowing their previous generation of technology. I think that’s — I think a TripActions, excuse me, is a great example of the latter. And those are the ones you’re going to see faster traction on, and I think those are some of the ones we talked about already. And over time, I would expect that we would see more of like replacing legacy use cases. But the early adopters are going to be the ones in more — in the mode of new deployment or outgrowing previous technology. In terms of RCS, we’re definitely having conversations, but I wouldn’t say it’s a big needle-mover at this point. Jeff, I don’t know if you want to add anything to that.

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [49]

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Yes. I mean I think what you can think about with RCS is it is the biggest change to SMS that’s occurred in, what, 40 years, which is it is essentially the same dynamics as SMS, but it adds a lot of new capabilities, the channel, that enable you to do new things such as transact on the channel with recommended actions, buy buttons, photo carousels. I mean it really turns messaging into essentially an app replacement for a whole lot of use cases. And so we think this is going to further accentuate the power of messaging for companies to engage with their customers. When you cannot only, for example, send notifications or do a 2-way chat with the customer, it actually presents them with the option 2 and buy it now right here or to send them images and maps. And really, if you think about all the companies that have mobile apps that you don’t download but you would engage in a lightweight chat with when you don’t have to download anything to be able to accomplish many of the same goals, such as making purchases or engaging with support, getting returns, getting information, whatever it is, that’s the power that RCS and some of these other new channels are going to bring to the world of messaging. And I think that there is something of a secular trend forming of messaging becoming a more and more important medium for companies to engage with their customers.

And RCS will take some time to play out because you have carriers who have to roll it out, you have handsets that have to support it, you have OS upgrades or handset replacements that consumers need to do to get full support. And so it’s going to be this very somewhat messy matrix actually of carrier support and handset support of who actually can benefit from it, and that’s where a platform like Twilio comes in very — as a convenient solution for our customers because it means that they can take their SMS that they’re doing with us today. And as each individual user is capable of taking advantage of RCS, upgrade that conversation to the most feature-capable capabilities of that particular customer. And so we can bridge customers in a very seamless way as the leader in the space with SMS and bridging our customers into the world of RCS and beyond. And so it’s a very — we’re very optimistic that this is going to be a fantastic medium for our customers, to further engage with our customers because they can do more powerful things.

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Operator [50]

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Your next question comes from Rich Valera with Needham.

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Richard Frank Valera, Needham & Company, LLC, Research Division – Senior Analyst [51]

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A question on Flex. I know it’s early days, but I’m wondering if you could characterize what a typical engagement process looks like for Flex, any sense of the timing from sort of engagement to a sale. And then if you could give any color on whether customers are tending to prefer the usage-based model over the traditional sort of per user model?

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George Hu, Twilio Inc. – COO [52]

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Good questions. So obviously, we — since we GA-ed the product in the fourth quarter of last year, any transactions that we’re talking about in Q1, Q2 time frame are going to have sales cycles that are typically in the couple of months’ range, typically, weeks to months depending on the customer scenario. We are working on longer-term ones. Obviously, those are not — longer sales cycle, we’re not going to be able to talk about at this point in time. And can you remind me the second part of your question again?

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Richard Frank Valera, Needham & Company, LLC, Research Division – Senior Analyst [53]

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The use — the pricing models. Customers are leaning towards the traditional or the usage base.

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George Hu, Twilio Inc. – COO [54]

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We’re seeing both actually. It’s interesting. We’re seeing truly like interest in both options, both are viable, important options in the marketplace. And we’re getting an interesting level of traction, I would say, on the agent hour model. And I think it’s in line with kind of the general brand and value prop that Twilio has in the marketplace so very excited to see that.

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Richard Frank Valera, Needham & Company, LLC, Research Division – Senior Analyst [55]

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Just a quick follow-up if I could on the modeling question. The bridge between the unchanged non-GAAP income from operations of $5 million to $8 million and the higher EPS, is that just interest income? If you could just clarify what the bridge is there.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [56]

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I didn’t hear the last part of the question, I’m sorry.

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Richard Frank Valera, Needham & Company, LLC, Research Division – Senior Analyst [57]

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The bridge, your non-GAAP income from operations, I think, is unchanged quarter-to-quarter for the year at sort of $5 million to $8 million. But the EPS went up and just trying to understand the bridge there.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [58]

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Yes, it’s basically other income.

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Operator [59]

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Your next question comes from Nandan Amladi with Guggenheim Partners.

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Nandan Girish Amladi, Guggenheim Securities, LLC, Research Division – Senior Analyst [60]

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So this might be a question for Jeff or George, kind of a philosophical one. Historically, you have marketed to developers more of a grassroots kind of effort. Now with these prepackaged products like Flex, you’re not only selling to enterprises but you’re also engaging a system-integrated community. So how is your go-to-market motion and as a result your marketing — data marketing efforts changed?

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Jeffrey Lawson, Twilio Inc. – Co-Founder, Chairman & CEO [61]

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This is Jeff. I’ll take the philosophical portions of it, then maybe I’ll let George talk about the go-to-market implications, if there are any. But in essence, I don’t see this as having changed. Our approach is still really to engage with developers first and to get developers onboard with Twilio. And then they bring us into accounts of all sorts of different varieties, whether it’s the tech disruptors that were many of our early customers or now even bigger enterprises who are building software and hiring the same developers, developers are really where our go-to-market and awareness often starts. And I think you see this born out in most of these deals that we’re talking about. Even the Fortune 50 companies, the developers are often the ones who are saying, “Hey, Twilio is the answer to how we can solve this problem. Let’s get started.” And oftentimes, it starts by building that prototype with very little friction. And so we get the momentum going in these accounts.

Now when you have a bigger customer, a Fortune 50 customer, less likely that they’re going to say, “Great, we just want to put in our credit card and go live.” Usually, there’s a sales process and contracts and MSA to sign and things like that. And of course, we’re going to engage in those conversations. But often, it’s the developer who first brings us in.

Now you asked about Flex as well, and I would just say that Flex is still a developer product. And while developers are not going to single-handedly purchase the contact center, the developer again becomes a big influence around the decision. When you’re looking at this world of, “Gosh, we’ve got to integrate all these systems together. We’ve got to create this great customer experience. We need developers. We need code to do that.” And the developers can say, “You know what? I’ve heard about this Flex thing, let me go give it a try.” And again, they can provision a Flex instance very quickly, self-service. They can build a prototype with very little friction and show the business what’s possible. And then that often begins the engagement, begins the conversation with the customer about how to bring Flex into their environment and to roll it out in a bigger way, which again leads to a sales conversation.

So that will be my take, is that we’ve layered sales and a sales motion to, a, target the enterprise and to focus on customer success. But it comes on the back of the developer momentum that we’ve always had, and we continue to have grow.

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George Hu, Twilio Inc. – COO [62]

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This is George, I agree with Jeff. I also see us augmenting that with some new motions to reach developers that historically we haven’t reached before. And I’ll tell you a story. Yesterday, I got a friend of mine who texted me and said, “Hey, my company just asked me to spin up a Twilio app by end of day today. And I just want to let you know that.” Because he knows I work at Twilio. And I kind of — I called him later that day, I was like, “So tell me the story. What happened?” And it turns out that this — what had happened was that our sales team that they work with this account, in fact, I met one of the executives of this customer at one of our Know Your Customer dinners, and that this was an example where it’s kind of the opposite of our typical deployment mode, which Jeff talked about, which is that the developers inside this corporate IT department had not been exposed to Twilio, interestingly enough. And because we had worked with them at the enterprise level, there was kind of a buy in at the enterprise architecture level, they want to use Twilio, and then the message is given to the developers, and they were starting to use it.

And we’re seeing that motion also to augment this amazing bottoms-up motion that Jeff talked about. In fact, we’ve done some enterprise hackathons, which Jeff mentioned, in some of our customers to kind of — to add to that kind of motion. So I think that one of the exciting things — I think there’s a whole world of enterprise developers that we have not yet reached with our traditional motion. I think it gives me optimism around more upside potential for the company. And I’ve kind of always been waiting to see when this friend of mine would start to use Twilio. And yesterday was the day. So I think that this go-to-market motion that we’re layering in is bearing fruit, and it’s not only augmenting the bottoms-up motion but also creating new motions inside the company for organizations where the developers are more kind of wanting to adhere to corporate standards. So I think there’s really exciting opportunities ahead of us.

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Khozema Z. Shipchandler, Twilio Inc. – CFO [63]

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A great salesman, George. Like wait — wait for them to tell me they’ve discovered Twilio.

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Operator [64]

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Our final question will come from Rishi Jaluria with D.A. Davidson.

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Hannah Rudoff, D.A. Davidson & Co., Research Division – Research Analyst [65]

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This is Hannah on for Rishi. First, it’s great to hear Flex is doing so well so far. I was just wondering if there are any major lessons that you took away from your second quarter of having it generally available and if there’s anything that surprised you there.

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George Hu, Twilio Inc. – COO [66]

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Yes. I think that we’re always learning about the product. I think that one big lesson was how to effectively start to bring partners, for one of the previous questions, into the motion and bringing them in earlier. I think that was a good lesson learned that we’re starting to apply better in the second quarter. I also think that we’re getting, I think, much better at understanding kind of the — how to make a customer successful frankly. And we’ve started to build up some of our own internal teams when it comes to solution architecture or Expert Services to help certain customers. So I think we’re getting better with our success formula. I think we’re getting better in terms of our sales targeting and where we’re finding the motion, but I think it all sits in the backdrop of we think we’ve got a great value proposition in the market, and we’re excited about the interest we’re seeing.

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Hannah Rudoff, D.A. Davidson & Co., Research Division – Research Analyst [67]

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And then I just want to go back to international performance, which you briefly mentioned. Last quarter, you mentioned hiring new leaders in Latin America and Japan. And I was wondering if you could comment on how those 2 regions are performing and then general international performance maybe strength in specific regions you’re seeing.

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George Hu, Twilio Inc. – COO [68]

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Yes. I think that obviously, we have hired and built — invest internationally is one of kind of the 3 kind of major distribution initiatives we talked about beyond our coverage strategy, which is enterprise, international and partners. So we’ve hired great leaders like David Parry-Jones for EMEA. We’ve got a great leader in Asia Pacific that’s homegrown. And we hired another great leader for Lat Am recently. So I think we’re starting to see that our investment in coverage and in leadership in those areas is working. Obviously, it’s set against the backdrop of like strong growth in North America as well. So it’s nice to be in a business where we’re growing across multiple product lines, multiple geographies. But definitely, we are investing in international, and we’re excited about the early results.

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Operator [69]

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There are no further questions at this time. Thank you for participating in today’s conference, you may now disconnect.