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Twilio Inc. (TWLO) Q1 2019 Earnings Call Transcript

TWLO earnings call for the period ending March 31, 2019. Read More...
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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Twilio Inc.&nbsp; (NYSE: TWLO)
Q1&nbsp;2019 Earnings Call
April 30, 2019, 5:00 p.m. ET” data-reactid=”23″>Twilio Inc.  (NYSE: TWLO)
Q1 2019 Earnings Call
April 30, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”30″>Operator

Good afternoon and welcome to Twilio’s Q1 2019 Earnings Conference Call. My name is Chantal, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Greg Kleiner Vice President of Investor Relations and Treasurer, Mr. Kleiner, you may begin.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Greg KleinerVice President of Investor Relations and Treasurer” data-reactid=”32″>Greg KleinerVice President of Investor Relations and Treasurer

Thank you. Good afternoon everyone and welcome to Twilio’s first quarter 2019 earnings conference call. Joining me today are Jeff Lawson our Co-Founder and CEO; George Hu, our COO and Khozema Shipchandler, our CFO.

The primary purpose of today’s call is to provide you with information regarding our 2019 first quarter performance, in addition to our financial outlook for 2019 second quarter and full year.

Some of our discussion and responses to your questions may contain forward-looking statements, including, but not limited to, statements regarding our future performance, including our financial outlook, the potential benefits of our acquisition of SendGrid, impacts and expected results from changes in our relationship with our larger customers and vendors, our market opportunity and market trends, the growth of our customer base, customer adoption of our products, our momentum, the benefits of our business model, our delivery of new products or product features, and our ability to execute on our vision.

These statements are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should any of our assumptions, as outlined in our earnings release and the documents referred to in that release prove to be incorrect, actual Company results could differ materially from these forward-looking statements. Discussion of the risks and uncertainties related to our business is contained in our most recent Form 10-K filed with the SEC on March 1, 2019 and 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. Also during this call, we may present both GAAP and non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are available in our earnings release, which we issued a short time ago.

We encourage you to read our earnings release as it contains important information about GAAP and non-GAAP results, as well as the reasons why we present guidance for non-GAAP financial measures of income from operations and net income per share, but not the comparable GAAP measures. The earnings release is available on the Investor Relations page of our website and as part of our Form 8-K furnished to the SEC.

Finally, at times in our prepared remarks or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or quarterly or annual results. Please be advised that this additional detail may be one-time in nature and we may or may not provide an update in the future on these metrics.

I encourage you to visit our Investor Relations website at investors.twilio.com to access our earnings release, periodic SEC reports, a webcast replay of today’s call or to learn more about Twilio. With that, I’ll now turn the call over to Jeff.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”41″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Thank you, Greg. Welcome everybody to this quarter’s call. The core components platform voice, messaging and now email drove another quarter of strong performance in Q1. We continue to invest in innovation at all levels of our platform, empowering developers to help their companies that are engaged with their customers. And as George will outline in a moment, our go-to-market efforts are performing very well.

Q1 was the first full quarter of general availability for Flex. The feedback from our early customers has been great. As a developer myself, I know that when introducing a new product, the most important thing is getting the underlying architecture right. And our early customers are telling us that our application platform architecture is right. And we’re listening those customers and building on our roadmap for additional features and functionality based on their feedback.

This is also the first quarter that includes results, albeit only two months from our new Twilio road map division. The early reaction from customers is validating our strategy of powering the future of customer engagement all on one platform.

We believe we can create the un-questioned platform of choice for developers and businesses looking to transform their customer engagement, now covering all of their most vital communication channels, including email.

From an operational standpoint, our integration plans are on track. The Twilio SendGrid focus has been great, and both teams are eager to learn from each other, as we integrate our cultures and build our future together. The go-to market teams are engaged and we’re seeing signs of early traction in our cross-selling motion. One of the many reasons we were attracted to SendGrid was the similarities in our go-to market model, as the developer has always been the focus of both companies approach.

Together, in Q1, we hit an important milestone 5 million registered developer accounts. The product teams continue to innovate as well, having launched several new service and support offering, as well as announcing support for AMP for email, a new technology being implemented by Google to bring a dynamic and interactive experience to Gmail. And we’re hard at work integrating our back-end systems to create an even better customer experience.

We also launched Twilio for Salesforce, another prime example of how we are working to make it even easier for our customers to engage with their customers. Twilio for Salesforce allows businesses to easily add out of the box SMS capabilities, covering everything from one-to-one personalized interaction, alerts and notifications, campaigns and more to their existing workflows in Salesforce CRM. Interestingly, this product was originally conceived of by Twilio.org. The division of Twilio focused on social impact and serving social Impact organizations. They saw the opportunity to innovate to the more than 30,000 non-profits that use Salesforce to manage their relationships, with constituents, donors, and volunteers.

We are proud that every part of Twilio, including Twilio.org is focused on innovating for our customers. And when we do, the whole Company can benefit. We quickly noticed that traditional businesses were utilizing the product as well during the beta program. So we were excited to launch the product on the Salesforce AppExchange to get it in the hands of an even larger audience of potential customers.

We also contribute to invest in trust throughout the products stacked in this quarter as well. As you’ve heard me say many times, trust is the number one thing we sell. In Q1, our efforts on this front are evident in every layer of the platform. At the engagement cloud layer, we launched PSD2 support in our Authy two-factor authentication product. The second Payment Services Directive or PSD2 is a new banking regulation in Europe that requires time-based one-time passcodes for all online and over the phone payments above EUR30. The PSD2 requirement will be a big shift for businesses conducting commerce in Europe, and we stand ready to help them with this transition.

At the Programmable Communications Cloud layer, we continue to support efforts in the industry to combat the surge of global calling. If you’re like me, I’m sure you get a continual stream of calls from unknown numbers with pre-recorded messages promising a wide variety of wonderful things. It’s gotten so bad that if you’re anything like me, you don’t answer the phone, if you don’t recognize the number. Even John Oliver dedicated an entire segment of his show to the subject.

So in case of any doubt, we design our platform from the beginning to prevent this type of activity. We do not want this business and we never have. We continue to work actively to deter bad actors from our platform, starting with our terms of service that expressly prohibit this type of activity to platform level take up, like rate limiting, verifications, artificial intelligence, and more. We believe transparency is also important. So we launched a free service to allow consumers to look up any number to see where the call is coming from and help report suspected global call.

Looking to the future, we believe that the next step is to put the consumer back in control of their phone through tools to allow consumers to receive only wanted communications from trusted parties. We see a world where every time your phone rings, you can see who is calling, not just the phone number, but the name of the person or business, and trust in the accuracy of that information. And then you or software running on your behalf can decide what to do with the call or text. In this vision, everyone receives the communications they want and none of the ones they don’t. It’s your phone and your call, we want to help everyone take back their phone. More to come on this for sure, but we’re continuing to innovate on behalf of our customers to help bring about this future.

And our efforts around trust also extend to the super network as well. Phone numbers are a key component for many of our customers, as they expand around the world. But the regulations governing the use of phone numbers often differ by country, by number type, and by how they are used. In many cases, these regulations were written well before companies like Twilio or even Internet itself existed.

In order to help our customers adhere to this million of regulations around the world, we are working with regulators and national carriers, as we build phone number compliance functionality into our platform as an automated service. We are partnering closely with our customers to support their applications and innovative use cases at global scale, while minimizing the regulatory overhead they have to manage.

We believe that by innovating on the regulatory front for our customers, we can allow them to continue to grow rapidly in markets around the world, and this presents yet another opportunity portfolio to differentiate our product in the eyes of our customers.

So before I hand the call over to George, I wanted to acknowledge the consistent efforts of Twilions around the world to make our customers successful. We have a once-in-a-generation opportunity ahead of us to revolutionize one of the largest markets in all of IT, communications. By moving us from its legacy and hardware to a future in software, it’s still day one of this journey and I couldn’t be more proud of our team and excited about the road ahead.

George, let me turn the call over to you for an update on our go-to-market efforts.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”63″>George HuChief Operating Officer

Thanks, Jeff. The go-to-market team performed very well again in the first quarter, driving another quarter of strong growth. Our focus remains on adding more coverage and executing on our plans to increase our presence within the enterprise, with partners, and internationally. We continue to see success with our Engage roadshow program, bring developers and businesses together, and we currently plan to more than double the number of events in 2019.

On the international front, we took our first steps to enter Latin America and Japan by hiring new leaders in each geography. We also began to execute on the cross-sell opportunity for Twilio SendGrid in the quarter, certifying reps, building pipeline, and closing some early deals across the combined customer basis. Overall, the initial results are encouraging, but we are still very early in this opportunity.

Let me also touch on a few of our wins from the past quarter. We signed a significant expansion with Just Eat in the quarter. Just Eat is a leading global hybrid marketplace for online food delivery, connecting more than 26 million active consumers and restaurants across 13 countries. This new deal will expand to their usage of our voice and messaging products across several new countries and positions us to support their continued success around the world.

A leading insurance and support company with more than 100 million customers around the world signed a new deal to modernize their IVR to provide a more conversational customer experience. This company will be using a variety of our products across voice, messaging, task router, autopilot, chat, and video to get customers answers faster and through the channel that they prefer.

We also signed a new deal with Beat, part of the FREE NOW Group, the ride-hailing joint venture of BMW and Daimler. In addition to being available in Greece, Beat is the fastest growing ride-hailing app in Latin America. Currently available in Peru, Chile, Colombia and Mexico, with more launches to come this year. They will be using our voice and messaging products to communicate with drivers and passengers alike.

We added one of the big five banks in Canada as well, with millions of personal banking, business, public sector, and institutional clients. This bank will be using a combination of our Authy and messaging products to provide an improved authentication experience for customers using their online banking platform.

Last but not least, we continue to make progress with Flex. Signed a number of deals, including a new relationship with Green Dot. Green Dot is a financial technology leader and bank holding company with more than 50 million customers across their various products and business lines. Green Dot is looking to reinvent their contact center and create a world-class mobile customer experience. They will be using Flex and AutoPilot to create a more intelligent and automated way to communicate with their customers.

Overall, we continue to see strong results from our go-to-market investments. And we will execute on our strategy to reach more developers and businesses, both here and abroad.

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

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Khozema ShipchandlerChief Financial Officer” data-reactid=”73″>Khozema ShipchandlerChief Financial Officer

Thank you, George, and good afternoon everyone. The business showed continued strong growth in the quarter, which at our scale is indicative of the success we’re driving for a growing set of customers. Obviously, the acquisition of SendGrid impacts some of our metrics this quarter. So let me walk through some of the detail for a moment.

As a reminder, the acquisition closed on February 1st, so we got two months of contribution in Q1. Base revenue was $220.9 million in Q1, it’s also worth noting that all of the acquired Twilio SendGrid revenue falls into this category. While we won’t be reporting the precise Twilio SendGrid contribution on a go-forward basis, the results were consistent with the guidance laid out on the last call.

Breaking those two components apart, the organic growth for Twilio’s base revenue was above 60% year-over-year and Twilio SendGrid’s organic growth for the stub period was 30% year-over-year. Our dollar-based net expansion rate was 146% in Q1. These results are a testament to not only the success we’re driving for our customers, but the performance of George’s team driving deeper and more strategic relationships with our existing customers.

Please keep in mind that this metric will not be impacted by the acquisition of SendGrid until we lap the close in Q1 of 2020. We ended the quarter with 154,797 active customer accounts, with Twilio SendGrid contributing more than 84,000 to the account. Our top 10 active customer accounts contributed 14% of total revenue in Q1, compared to 20% in Q4 of 2018 and 18% in Q1 of 2018.

Gross margins came in a little bit above 58% in Q1 compared to 54% in Q4 of last year. The largest contributor by far withholding in the higher margin revenue from Twilio SendGrid, which drove a positive uplift of about 300 basis points. On an organic basis, gross margins also increased a bit sequentially as the base variable mix improved in Q1 and the large international customer that contributed materially to the Q4 results returned to a more normal spending pattern in Q1. On a go-forward basis, the story remains largely the same. You should continue to expect some fluctuations in our underlying gross margins.

Our priorities remain the same. We are focused on growing the business around the world, rather than maximizing gross margins in the near term. We continue to see things that could impact our gross margins by product, country, and customer mix, network service provider fees, FX and more.

And on that note, we recently got some clarity on the Verizon A2P or application to person, offering we outlined a few quarters ago. As a reminder, Verizon is establishing a new A2P channel for long-code SMS messages that will add $0.0025 fee per message to all businesses with A2P SMS messaging use cases. Verizon will be implementing this new offering in mid-May. And we will be moving customers over to the new service accordingly. We will be passing this fee through to our customers and we do not expect this to impact the gross profit dollars received per message, but it will impact the gross margin percentage.

So for Q2, you should expect about a 50 basis point drag given the mid-quarter change and roughly a 100 basis point drag our overall gross margin percentage on a go-forward basis. This should also add about $3 million to $4 million in revenue per quarter on a go-forward basis. This is incorporated into the guidance provided today and added about $8 million to $9 million to our 2019 revenue forecast in total.

In addition, while we don’t have any information to share about potential actions by the other US mobile carriers at this point, I think it’s reasonable to assume that the others will implement similar offerings over the course of time. As an example, we saw similar progression in the short codes segment over the past several years. Given that Verizon has approximately one-third of US mobile subscribers, a similar move by all of the remaining US mobile carriers would result in an additional 200 basis point drag to gross margins in total, if and when the scenario plays out. However, we have not assumed anything on this front in the guidance provided in the earnings release today given the speculative nature of this commentary.

Finally, I wanted to provide some additional color about the quarterly progression of operating income, inherent in the guidance we provided today, so you can set your models appropriately. On the non-GAAP operating line, we currently anticipate being slightly profitable in Q2, modestly in the red for Q3 due to our big customer event signal falling in August this year and then back in the black for Q4. Overall, with the strong results we are seeing, we plan to continue to invest in the growth of our business given the tremendous opportunity ahead of us.

Thank you, everyone. Operator?

Questions and Answers:

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”86″>Operator

(Operator Instructions) Your first question comes from Mark Murphy with J.P. Morgan. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Mark MurphyJ.P. Morgan — Analyst” data-reactid=”88″>Mark MurphyJ.P. Morgan — Analyst

Thank you very much and congratulations. If you can put it into robo calling, I think that you deserve a Nobel Peace Prize. So it’s great to hear about that. I wanted to start by asking you, it looks like Twilio is going to exceed $1 billion revenue run rate during Q2 and obviously we understand the law of large numbers is going to start to apply, but does the pipeline currently give you decent line of sight to eventually reaching $2 billion in revenue or do you think that these abnormal growth rates can continue all the way to that $2 billion level over time?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Khozema ShipchandlerChief Financial Officer” data-reactid=”90″>Khozema ShipchandlerChief Financial Officer

Hey, Mark. It’s Khozema. Thanks for the question. I mean, obviously, we’re not going to guide beyond ’19. What I would say is that, I mean as you pointed out, we do see the $1 billion run rate certainly in the year and we feel really good about the results and the momentum of the business right now. I think those numbers do get larger over time. And so, I think the growth rates will probably fade a little bit as we get larger and larger, but we continue to make investments in the growth of the business because we feel like we’ve got pretty good and elevated multi-year growth outcomes.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Mark MurphyJ.P. Morgan — Analyst” data-reactid=”92″>Mark MurphyJ.P. Morgan — Analyst

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”94″>Operator

Your next question comes from Ittai Kidron with Oppenheimer. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Ittai KidronOppenheimer — Analyst” data-reactid=”96″>Ittai KidronOppenheimer — Analyst

Thanks, guys, and congrats on good quarter. A couple of questions from me, Jeff, on SendGrid, it’s great to hear that the integration is moving smoothly. Maybe you can talk about today versus three months ago, how do you feel about the potential realization of the synergies between the two businesses. And then, Khozema, maybe you could talk about application services. Any color there on the growth rates and the contribution of those products to revenue?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”98″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Thanks for the question, Ittai. This is Jeff. So first of all, we’re very happy with the progress so far on the integration, despite only being a few months post close. The first thing we’re focusing on is getting — onboarding 500 SendGrid employees making sure they feel at home at Twilio. Then on the go-to-market front, we’ve have started to execute the cross-sell motion that we talked about the past of selling SMS and broader messaging product to the email customer base and even though we’re just starting that cross-sell and it’s going to take some time to manifest, I think our hypotheses there are pretty good. And I think that the idea of the customers, one platform strategy and one product that can solve many messaging needs that they have is a good one.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Khozema ShipchandlerChief Financial Officer” data-reactid=”100″>Khozema ShipchandlerChief Financial Officer

Hey, Ittai, it’s Khozema. Just on the app services, that’s not one that we are going to break out every quarter disclosed. I think what we do see is really strong traction there. It’s that category still growing faster than the overall business and I think what we’ll do is, probably provide an update in the future here when we crossed another one of our internal milestones.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Ittai KidronOppenheimer — Analyst” data-reactid=”102″>Ittai KidronOppenheimer — Analyst

Very good. Good luck, guys.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Khozema ShipchandlerChief Financial Officer” data-reactid=”104″>Khozema ShipchandlerChief Financial Officer

Thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”106″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”108″>Operator

Your next question comes from Heather Bellini with Goldman Sachs. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Heather BelliniGoldman Sachs &amp; Co. — Analyst” data-reactid=”110″>Heather BelliniGoldman Sachs & Co. — Analyst

Great, thank you. I wanted to spend a little bit of time on Flex. Jeff, you said a few months ago that this is a year of pipeline build for the most part, that’s what we should be expecting. But I was wondering if you could share with us, given your comments on it on the call, how is it going versus your expectations? And where you did win in the quarter, you mentioned one deal in particular, but what are the other solutions they were looking at and what were the reasons that Twilio won? Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”112″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Yeah. Thank you, Heather. I think the key thing for Flex, which is as a V1 (ph) product is to get the architecture, right. Get the core differences between the usual monolithic app that people bought in the past, versus our application platform approach. And the idea that companies and their developers want to take a contact center that’s in the cloud and fully customize it to meet their workflows and to get the efficiencies by making the contact center work exactly they wanted to. That core of the product is correct. And that’s what the market is telling us based on this excited response that we’re getting.

And so, as we hear from customers, if you think about the first customers we have, the thing that I’m looking at is those customers are happy and use the product and it’s the platform approach that they want. And so, as far as like other products they’re looking at, I mean, some of them are coming from an on-prem legacy world, other companies are being trying to move to the cloud. Sometimes you get net new use cases that they’re just spinning up like a new channel like chat is the impetus for them to bring in any platform to be the basis for the growth. So it’s no one story, but broadly speaking, it’s customers coming from the legacy world, generally on-prem approach. That’s where most of the market spend here, and that’s where the most complex requirements are that really require all that customization. And if you listen to the analysts out there, they say 85% to 90% of the market is still on-prem in that legacy world, and that’s part of the spend that we’re going after.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Heather BelliniGoldman Sachs &amp; Co. — Analyst” data-reactid=”115″>Heather BelliniGoldman Sachs & Co. — Analyst

Great, thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”117″>Operator

Your next question comes from Brent Bracelin with KeyBanc Capital. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brent BracelinKeyBanc Capital Markets — Analyst” data-reactid=”119″>Brent BracelinKeyBanc Capital Markets — Analyst

Thank you for taking the question. Wanted to follow up possibly with George or Jeff around just the SendGrid opportunity and specifically the cross-selling and where we’re at. Obviously, SendGrid brings a pretty large installed base, over 80,000 customers. Again, I know it’s very early, but where is the low hanging fruit? What parts of the overall kind of SendGrid base are you targeting and what’s been again very early feedback?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”121″>George HuChief Operating Officer

This is George. So I think we’re on track in terms of our pipeline building for the cross sell. Obviously, we just got started. I think the thing that honestly we’re excited about is using the data that we have around what the segment customers are doing the use cases they’re doing to intelligently focus our go-to-market efforts around obvious opportunities to expand the portfolios. For example, if we see people doing very time-sensitive account notification, let’s say on email, that’s great opportunity for us to go in and talk to them about — talk to them about SMS is a better alternative, for example. And also vice versa cross selling email to the Twilio base. So for both directions, we have — we’re on track is what I would say, in terms of our pipe building the circles. And so, yeah, I think that’s — it’s looking good for us right now versus the plan we set out at the beginning.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brent BracelinKeyBanc Capital Markets — Analyst” data-reactid=”123″>Brent BracelinKeyBanc Capital Markets — Analyst

Helpful there. And any idea on the sales cycle for cross-selling at this point or again it’s just too early to tell?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”125″>George HuChief Operating Officer

I think you’re going to see it — we’re seeing it’s varied. We are seeing some quick wins more actually on the email side. But also some of these are going to be just more of our typical sales cycle lines. So I think it’s going be varied just like for our core business, the sales cycle lines are varied.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brent BracelinKeyBanc Capital Markets — Analyst” data-reactid=”127″>Brent BracelinKeyBanc Capital Markets — Analyst

Great. Makes sense. Thanks for the additional color.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”129″>Operator

Your next question comes from Michael Turrin with Deutsche Bank. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael TurrinDeutsche Bank Securities Inc. — Analyst” data-reactid=”131″>Michael TurrinDeutsche Bank Securities Inc. — Analyst

Great, thanks. Good afternoon. I know you’ve been busy investing and continuing to build out the Twilio go-to-market engine. Last year you called out some go-to market enhancements, which drove some more pronounced upside on some of the quarterly results. And just wondering if there’s anything there, which we should be cognizant of as we’re lapping some of those efforts as we move forward throughout the year this year?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”133″>George HuChief Operating Officer

I think in terms of the go-to-market investments, I think that you — as I said in my prepared remarks, we are continuing to execute the plan. We laid out a vision of how we’re going to invest in coverage, especially in — around enterprise partners and international and all that is continuing to move forward with good performance and strong growth. So I think continued strong growth is the message there. In terms of performance versus expectations, I think we’ve talked about in the past that we’re — I think we’re just getting better about understanding the impacts of our go-to-market investments and I think that’s making us generally speaking better around forecasted impact of it over time.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael TurrinDeutsche Bank Securities Inc. — Analyst” data-reactid=”135″>Michael TurrinDeutsche Bank Securities Inc. — Analyst

Thanks. Helpful color, George. And then on gross margin, provided some useful color there on the prepared remarks, it came in above our expectations for the quarter? Can you talk more about the drivers specific to the quarter? And then to recap some of the impacts coming on throughout the year. It sounds like 100 (ph) basis points of headwind from the Verizon A2P fee for the year, is that right?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Khozema ShipchandlerChief Financial Officer” data-reactid=”137″>Khozema ShipchandlerChief Financial Officer

Yeah, Michael. Hi, this is Khozema. Thanks for the question. So SendGrid is really the largest driver in there. It’s about a 300 basis point lift in terms of gross margins. I think the other one that we called out is that, there is that large international customer that we specifically identified in the fourth quarter, that went into kind of a more normalized mode, if you will, in the first quarter. And so, we got a little bit of a lift there. And then just, I think the strength and base in general provided some additional juice.

In terms of the balance of the year, I mean, I think the way that we see it playing out right now based on what we know is that, based on Verizon, we see about a 50 basis point drag here in the coming quarter. Beyond that, you know just really in the interest of transparency, we were trying to provide some additional color around what other carriers may or may not knew through the balance of the year and we’ll just have to see how that plays out, but that’s not really factored in your guidance for now.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael TurrinDeutsche Bank Securities Inc. — Analyst” data-reactid=”140″>Michael TurrinDeutsche Bank Securities Inc. — Analyst

Got it. Thanks. Congrats on the strong results to start of the year, guys.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Khozema ShipchandlerChief Financial Officer” data-reactid=”142″>Khozema ShipchandlerChief Financial Officer

Thanks, Michael.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”144″>Operator

Your next question comes from Nikolay Beliov with Bank of America. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Nikolay BeliovBank of America Merrill Lynch — Analyst” data-reactid=”146″>Nikolay BeliovBank of America Merrill Lynch — Analyst

Hi, thanks for taking my question. One part of the business, we have not discussed in a while is the ISV business, the independent software vendor business, Which, I believe, a couple of years ago was 20% of revenues, growing in line with the overall growth rate. Can you please give us an update here, to the extent that you can? And as you guys move up the application stack, could you handle potential conflict with your own ISV customers?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”148″>George HuChief Operating Officer

Yeah, this is George. So we continue to work very well with ISV/solution partners. And part of our broad-based coverage strategy, I talked about enterprise partners and international, we view ISV squarely in the partner realm and so we’re growing our team there that’s working with all the ISVs from small up — start-ups all the way through strategic ISVs. And I would say that the continued strong growth we see across the board also applies to ISVs as well.

In terms of the specific question — the second part of your question. I think there is no change in what we’ve stated in the past, which is that Flex is a place for customers with the build mindset. And for customers that want to buy an off-the-shelf solution, we work really well with our solution partners that have built Twilio components into their contact center solutions.

I think one thing that is a positive sign is, we are seeing — we are getting inquiries from more and more ISVs that are asking about potentially leveraging Flex components into their solutions. I think we’re early days, those are going to be long conversations, because these are obviously big strategic decisions for these companies, but I’m excited to see at least that level of inquiry for ISVs around Flex.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Nikolay BeliovBank of America Merrill Lynch — Analyst” data-reactid=”152″>Nikolay BeliovBank of America Merrill Lynch — Analyst

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”154″>George HuChief Operating Officer

You’re welcome.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”156″>Operator

Your next question comes from Alex Zukin with Piper Jaffray. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Alex ZukinPiper Jaffray &amp; Co. — Analyst” data-reactid=”158″>Alex ZukinPiper Jaffray & Co. — Analyst

Hey guys, congrats on a great quarter. Maybe the first one for Jeff. Just as you continue to integrate SendGrid, can you talk about whether — kind of where the synergies are from SendGrids product roadmap toward your application services category? And then I have just a quick follow-up on dollar based net expansion for Khozema.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”160″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Absolutely, Alex. First of all, the app services is a technical concept. App services is parts of our product that have a pure software component i.e. no carrier component. And so, technically SendGrid will follow the app services category. But technical definition aside as we define it once in Analyst Day a few years ago. As a broader strategy, you’ve got email delivery as an API that swaps in really nicely with our Programmable Communications Cloud where we have a voice API, SMS API, chat API, video API and now the email API. So, as all the different channels later in, including things like Facebook Messenger and WhatsApp, the email is a critical part of that story, it makes a ton of sense. The developers need API for email just like they need APIs for (inaudible).

Then at the layer above, at the engagement cloud that’s where we see this opportunity to bring application platforms, you take the major application use cases that every company uses to run their business in the front of house of their business and provide them a way to use our APIs, that accelerates our abilities to deploy it. So that’s where the Flex comes in for the contact center side of things. And SendGrid has a product called marketing campaigns that actually works for the market in a similar way.

And over time, I think what you see is the marketing campaigns product that SendGrid already have will become more and more APIs centric and we’ll able to have some of the capabilities like you see in a Flex, as far as being more of an application platform. They originally built it as more of an application itself. And we’ll turn it into more of an applications platform for our developers to use it as well. And so that fits in really nicely with the strategy of the engagement cloud to the single system that a company can use for all — to manage all of their customer touch points on that customer journey, whether they are selling to that customer, marketing to them, servicing them out in the field, servicing them with customer support. There’s always different touch points companies have that we see companies leveraging Twilio to improve with better communications and in every one of those categories, the possibility of an application platform to accelerate and bring more customers onto a platform, exists.

That said, our biggest priority in the engagement cloud is making Flex success. And marketing campaigns is already a product that’s in the market and we feel strongly that’s a great product. But for the perspective of the application platform, our major focus is on Flex as opposed to a major move in the marketing campaigns product in the short term.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Alex ZukinPiper Jaffray &amp; Co. — Analyst” data-reactid=”165″>Alex ZukinPiper Jaffray & Co. — Analyst

Got it, that’s super helpful. Thank you, Jeff. And then just on dollar based net expansion, the 146% was again very strong in the quarter, particularly versus the year ago period, but on a sequential basis, it was roughly flat down maybe 1%. Have we reached kind of a sort of a new peak in this metric, and kind of how should we expect that to trend through the year, at least until we start getting into the SendGrid compares a year from now?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”167″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Yeah, thanks, Alex for the question. I think over time, we do expect it to trend down a little bit. It’s not something that we guide to per se. I mean obviously at 146%, we feel pretty good about where the figure landed and feel like it’s a good testament to the business model and it had been in the 140s for some time, but I think over time, you are going to see that it does decline a little bit over time just given that these older cohorts in particular are going to become really, really large as a part of the mix.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Alex ZukinPiper Jaffray &amp; Co. — Analyst” data-reactid=”169″>Alex ZukinPiper Jaffray & Co. — Analyst

Got it. Perfect. Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”171″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”173″>Operator

Your next question comes from Bhavan Suri with William Blair. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Bhavan SuriWilliam Blair — Analyst” data-reactid=”175″>Bhavan SuriWilliam Blair — Analyst

Great. Congratulations, guys and thanks for taking my question. I guess just to touch on the first one, which is as you think about the engagement cloud, you think about now having email, text and Flex, which are different ways to reach customers and engage with them. How do you think about sort of layering on two pieces, the workflow engine obviously and an orchestration layer. Workflow from the perspective of there’s certain things that are best done through text, done through email, certainly that’s a complex process. I want to offload that to a IVR then call center at some point. And then sort of orchestrating that workflow, so the customers deploy that. How is that sort of how you think about sort of the deployment of that, the roadmap for that into the product. And is that something customers asking for today?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”177″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Thanks, Bhuvan. This Jeff. So as far as like the orchestration layer goes, and you see out in the studio is a product that companies or customers can use to build those sort of orchestrations out. As far as IVRs or bots or even just logical flows of how the communications work. And as a general story, I guess, around those types of features, we listen to customers, and we hear what customers need us to do, whether you need to take the platform to make it easier for them to build the kind of customer engagement they want. And so a further roadmap of orchestration and workflows like that’s what customers are telling us. Their biggest pain points are, those are things that we consider, but generally speaking, our roadmap is defined by customer need.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Bhavan SuriWilliam Blair — Analyst” data-reactid=”179″>Bhavan SuriWilliam Blair — Analyst

Got it. Then one more sort of technical question maybe for George here. You touched on partners and ISVs, but I just want you to touch on the var channel a little bit, which has been really strong for the traditional legacy contact center guys with the var channel for fiscal buy et cetera. Have you seen any of them and my assumption is yes, but sort of some color on sort of how many of them any large, or sort of working with Flex or it’s hard to say, hey, we can do more complex and interest things with Flex and the kind of legacy solutions. How is that traction with the var channel with the legacy guys going? Love to get some color there. Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”181″>George HuChief Operating Officer

It’s a great question. We definitely are seeing interest from vars for Flex. Obviously, as I said, we are just generally early days in the overall Flex effort. But we’re seeing enough interest right now that we are making some infrastructure plans to enable ourselves to better support this new channel parcels. So it’s going to take some work on our side to be able to do all things we’d expect, billing, et cetera to support these guys. But we’re seeing enough interest that we’re evaluating all that right now, so that’s the part that we’re doing now.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Michael TurrinDeutsche Bank Securities Inc. — Analyst” data-reactid=”183″>Michael TurrinDeutsche Bank Securities Inc. — Analyst

We’ll stay tuned. Thank you, guys. Congrats.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”185″>Operator

Your next question comes from Meta Marshall with Morgan Stanley. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Meta MarshallMorgan Stanley &amp; Co. LLC — Analyst” data-reactid=”187″>Meta MarshallMorgan Stanley & Co. LLC — Analyst

Great, thanks. Understanding it’s kind of building your own Flex, but may be just on a go forward basis, would you intend to kind of offer details around trials going on or hours of free time that are being used? I guess just what metrics do you kind of intend to give to give a sense of what pipeline is building on Flex? Thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”189″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Yeah, I think, in general I mean it’s not something that we’re going to provide a lot of forward guidance on, or metrics really until it becomes a more meaningful part of the business. I mean, obviously, we’re really excited about the progress in terms of the product and the traction with some early customers. But I think, for now, it’s just not going to be part of our underlying disclosures in terms of product detail.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Meta MarshallMorgan Stanley &amp; Co. LLC — Analyst” data-reactid=”191″>Meta MarshallMorgan Stanley & Co. LLC — Analyst

Got it. Thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”193″>Operator

Your next question comes from Rishi Jaluria with D.A. Davidson. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Rishi JaluriaD. A. Davidson &amp; Co. — Analyst” data-reactid=”195″>Rishi JaluriaD. A. Davidson & Co. — Analyst

Hey, guys. Thanks for taking my questions. Going back over to SendGrid, just wanted to understand. I mean, they had a growing business on the email marketing side. And I know there’s a little bit of discussion about this before and especially how it can integrate it with Flex, but is there a potential to bring that technology on to the core text and voice side and kind of create the text and voice marketing API? Thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”197″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

I think — Rishi, this is Jeff. I think what you see is customers want to have one platform and one messaging strategy. And so one of the hypotheses for the acquisition of SendGrid is to be able to take higher level products we have things like Flex or marketing campaigns and have them span multiple channels. You see this is a major value proposition already in Flex where Flex isn’t just a voice product, but it also includes things like chat and SMS, and video, and sort of all the channels that we have, including WhatsApp and Facebook. And so at the engagement cloud layer, one of the key things that customers want is an omni-channel strategy, I think for every one of these customer touch points. And I think marketing would be no different.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Rishi JaluriaD. A. Davidson &amp; Co. — Analyst” data-reactid=”199″>Rishi JaluriaD. A. Davidson & Co. — Analyst

Got it. Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”201″>Operator

Your next question comes from Jonathan Kees with Summit Insights Group. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jonathan KeesSummit Insights Group — Analyst” data-reactid=”203″>Jonathan KeesSummit Insights Group — Analyst

Great, thanks for taking my question. I’m just curious as the new features that you released last quarter, the one with Salesforce seems like it’ll be, the most likely to move the needle, and correct me if I’m wrong there. I’m just curious in terms of how are you going to approach this here? In terms of sales, are you just going to do your traditional method of working with developers, or are you going to work with Salesforce sales teams in terms of going into the current customers and getting them to sell this feature going outside of the traditional developers’ channel? Thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”205″>George HuChief Operating Officer

This is George. I think from my time at Salesforce, my experience is that you have to push these mostly yourself, but there are sales forces. They have thousands and thousands of solutions that they are being asked to push every day. So the reality is the most — the interest in this, the activity is going to come from our developers who want to connect Twilio to Salesforce and also through our own kind of go-to-market channels. I think the good news is that obviously many of the customers we deal with are Salesforce customers, and I think that this connector will have, we hope significant usage and opportunity with deals. So we’re very positive on that, but it will come mostly through our distribution channels, not theirs.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jonathan KeesSummit Insights Group — Analyst” data-reactid=”207″>Jonathan KeesSummit Insights Group — Analyst

And if I could just follow up real quick that — this product is certainly more about your customers right now, so much by Salesforce your small investments that are happening guys?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”209″>George HuChief Operating Officer

I’m sorry, could you please repeat the question? I didn’t hear it very clearly. I apologize.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jonathan KeesSummit Insights Group — Analyst” data-reactid=”211″>Jonathan KeesSummit Insights Group — Analyst

Sure. This product was more developed based on feedback from your customers, like an input from Salesforce —

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”213″>George HuChief Operating Officer

Yeah. Well, absolutely, this came from our customers, nothing to do with any investment from them, yes.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Unidentified Participant — Analyst” data-reactid=”215″>Unidentified Participant — Analyst

Jonathan, this is (inaudible). One of the things that I really like about the Twilio for Salesforce product is that, it came actually at Twilio.org. And so as you think about every part of Twilio, you see customers and innovating it’s another great example of that.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jonathan KeesSummit Insights Group — Analyst” data-reactid=”217″>Jonathan KeesSummit Insights Group — Analyst

It sounds like it. It sounds like it. Super. Thanks a lot guys.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”219″>Operator

Your next question comes from Catharine Trebnick with Dougherty. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Catharine TrebnickDougherty &amp; Company LLC — Analyst” data-reactid=”221″>Catharine TrebnickDougherty & Company LLC — Analyst

Thanks for taking my question. Quickly you just launched Twilio SendGrid, the expert service this quarter. Any plans, it looks like there’s deep expertise to help out your customer base. Any plans maybe to train those individuals to help with the cross-selling of the Twilio products into that customer base? Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”223″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

We already have worked very closely with the existing SendGrid customer facing teams to train them on identifying cross-sell opportunities. This will be a part of it. But probably the main driver will be the existing people in place not the new people we’re bringing on to focus on just this part of expert services. So that’s where we are right now.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Catharine TrebnickDougherty &amp; Company LLC — Analyst” data-reactid=”225″>Catharine TrebnickDougherty & Company LLC — Analyst

All right, thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”227″>Operator

Your next question comes from Dmitry Netis with Stephens, Inc Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Dmitry NetisStephens, Inc. — Analyst” data-reactid=”229″>Dmitry NetisStephens, Inc. — Analyst

Hey, thanks guys. Thanks for squeezing me in here. Couple of questions. One on — a lot of the cross-sell questions on SendGrid Twilio or Twilio have been asked. But just curious to see — and I could appreciate the holistic sort of approach for one collaboration cloud where you have multiple channels. But are there any customers moving to SMS faster than — moving to SMS versus the email or vice versa, in those cross-sell opportunities that you’re chasing? Is there — can you delineate that at all, or is it about equal impact from one set of customers moving to email from SMS and then vice versa from SMS to email?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”231″>George HuChief Operating Officer

I think it’s surely there are too many conclusions from the data we have. But I would say, we’re seeing interest in both directions. I think that the dollar value of the ASPs that we see for the Twilio products are greater than the email product. So our belief is that in the long-term there’ll probably be a greater revenue opportunity in that direction, but we’re seeing interest in both directions.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Dmitry NetisStephens, Inc. — Analyst” data-reactid=”233″>Dmitry NetisStephens, Inc. — Analyst

Okay. Thanks, George. And then secondly, I wanted to follow-up on this A2P Verizon disclosure you guys put out as it affects your margin, as well as revenue. Appreciate being transparent about it and sort of given us a framework how to think about it. What I wanted to sort of double click on is actually the revenue impact. If I heard you correctly, you said that this will be a positive impact, right, to revenue in 2019, of about $8 million to $9 million, while a negative impact to margin. So how does that — what gives you confidence there’s a positive impact to revenue? How do you sort of come up with that? Are you assuming any price erosion, price discounts with that or not? If you could sort of double click on that and explain your thinking there, that would be super helpful.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Khozema ShipchandlerChief Financial Officer” data-reactid=”235″>Khozema ShipchandlerChief Financial Officer

Sure, Dmitry. Hi, it’s Khozema. It’s actually much simpler than that. It’s literally a pass-through fee to our customers and so it carries zero margin. And so just think about it as we’re adding the same number to the numerator and the denominator and so that’s the margin rate drag that has no impact whatsoever on gross profit.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Dmitry NetisStephens, Inc. — Analyst” data-reactid=”237″>Dmitry NetisStephens, Inc. — Analyst

But what you expect Khozema that if there is a carrier tax that you’re passing through to your customers to customers, particularly the high volume ones might come back to you and ask for a discount?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Khozema ShipchandlerChief Financial Officer” data-reactid=”239″>Khozema ShipchandlerChief Financial Officer

It’s not what we’ve seen and I think again we don’t have a lot of experience with it because we haven’t on through the process yet, but that’s not what our anticipation of how it will pay out is.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Dmitry NetisStephens, Inc. — Analyst” data-reactid=”241″>Dmitry NetisStephens, Inc. — Analyst

Okay. I appreciate that. Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Khozema ShipchandlerChief Financial Officer” data-reactid=”243″>Khozema ShipchandlerChief Financial Officer

Sure.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”245″>Operator

Your next question comes from Will Power with Baird. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Charles ErlikhRobert W. Baird &amp; Co. — Analyst” data-reactid=”247″>Charles ErlikhRobert W. Baird & Co. — Analyst

Great, thanks, is actually Charlie Ehrlich on for Will. I was hoping you could talk a little bit about the customer adoption you’re seeing in Europe or EMEA, especially since hiring ahead of the EMEA business a little while back. Has sales meaningfully picked up in that region since then or is it still a little bit too early to tell? Thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”249″>George HuChief Operating Officer

Hi, Charlie, this is George. I think we’re very pleased with the growth and the traction we’re seeing in EMEA since David has taken over. Just Eat is a great example of that. And I think the best data point I can give you is that, we’re continuing to add capacity and coverage in EMEA and adding it more aggressively before David joined. So I think that’s a sign of our belief in the opportunity and the momentum in the market.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Charles ErlikhRobert W. Baird &amp; Co. — Analyst” data-reactid=”251″>Charles ErlikhRobert W. Baird & Co. — Analyst

Great. Thanks, George.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”253″>George HuChief Operating Officer

You’re welcome.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”255″>Operator

Your next question comes from Nandan Amladi with Guggenheim Partners. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Nandan AmladiGuggenheim Securities, LLC — Analyst” data-reactid=”257″>Nandan AmladiGuggenheim Securities, LLC — Analyst

Hi, good afternoon. Thanks for taking my question. You talked a little bit about SendGrid, but I have a sort of platform level question. Given that product has a structurally higher gross margin, presumably you don’t have termination fees associated with it. Is there any benefit to physically integrating SendGrid with the rest of Twilio, are there any plans to do that? And how closely will the roadmaps of those two sets of products be aligned?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”259″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

This is, this is Jeff. I’ll answer the question. If I understand the question — actually, I’m not sure I understand the question correctly. Can you repeat it?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Nandan AmladiGuggenheim Securities, LLC — Analyst” data-reactid=”261″>Nandan AmladiGuggenheim Securities, LLC — Analyst

Oh, sure. No, I was something asking — are there plans to integrate the SendGrid code base with the traditional Twilio platform? Is there any real benefit to doing that? And if so, how closely will the future roadmaps be aligned?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”263″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Well, I think in general we want the product experience of a customer of either Twilio or SendGrid. We want the customer to have a unified and great customer experience. And so in the fullness of time, we want customers to have one account, have one bill and be able to use any of our individual APIs as easily as you might use video or voice or SMS, you can use email, as well as able to use any of the channels in any of the products that we build above the API layer. So in the engagement cloud layer, you should be able to use any of these products seamlessly with one customer account, one bill and one great customers and that’s what we’re working toward.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Nandan AmladiGuggenheim Securities, LLC — Analyst” data-reactid=”265″>Nandan AmladiGuggenheim Securities, LLC — Analyst

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”267″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

Thanks, Nandan.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”269″>Operator

Your next question comes from Mike Latimore with Northland Capital. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Mike LatimoreNorthland Capital Markets — Analyst” data-reactid=”271″>Mike LatimoreNorthland Capital Markets — Analyst

Thanks. Great quarter. As your volumes grow and new verticals open, are you seeing the influence of the CIO on deals increase or does it really kind of still remain heavily developer levered?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”273″>George HuChief Operating Officer

I think that what we’re seeing as we move up stack with Flex and other engagement cloud solutions is more engagement with higher level of decision makers, not just like the CIOs what I would say. I had significant prospects in our office last week, they flew here from Atlanta and they had both their CTO, as well as they are head of — they’re actually two heads of products, both heads of product in the room and then one developer of course there in too. So I think that kind of continues to speak to our — I think uniqueness of our model, continue to bring the developer along and that’s a unique asset for us in the sales motion, but the people in the room are continually up-leveling. And I think we saw that with our attendance, and our signal, and our VIP track last year. And we’re seeing that lay out in more and more the types of people we’re able to engage. But I wouldn’t focus exclusively on the CIO.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Mike LatimoreNorthland Capital Markets — Analyst” data-reactid=”275″>Mike LatimoreNorthland Capital Markets — Analyst

Got it. And how about the Twilio wireless product. You didn’t mentioned that, but how does the pipeline look there?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”277″>George HuChief Operating Officer

I think that we continue to have good momentum for the products and I’m glad you asked about it. And it’s the product we continue to be excited about and we just continue to build pipeline and that product is on track. So excited about it.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Mike LatimoreNorthland Capital Markets — Analyst” data-reactid=”279″>Mike LatimoreNorthland Capital Markets — Analyst

Thanks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”281″>Operator

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

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Duration: 53 minutes” data-reactid=”283″>Duration: 53 minutes

Call participants:

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Greg KleinerVice President of Investor Relations and Treasurer” data-reactid=”285″>Greg KleinerVice President of Investor Relations and Treasurer

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jeff LawsonCo-Founder, Chief Executive Officer and Chairman” data-reactid=”286″>Jeff LawsonCo-Founder, Chief Executive Officer and Chairman

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George HuChief Operating Officer” data-reactid=”287″>George HuChief Operating Officer

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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Nandan AmladiGuggenheim Securities, LLC — Analyst” data-reactid=”304″>Nandan AmladiGuggenheim Securities, LLC — Analyst

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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Transcript powered by AlphaStreet” data-reactid=”307″>Transcript powered by AlphaStreet

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.” data-reactid=”308″>This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twilio. The Motley Fool has a disclosure policy.” data-reactid=”317″>Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twilio. The Motley Fool has a disclosure policy.

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