Twilio Inc. (TWLO) Earnings Call Transcript & Summary

Hi. I'm Rich Valera. I cover communications technology for Needham & Company. And I'll be hosting the next session here with Twilio. And we're happy to have with us Chris Nasson, who is their Director of Investor Relations & Treasury. I'm going to be doing the fireside chat. We're also going to be polling the audience for questions. You can submit questions online via the portal you are watching this through. So we encourage you to do that now or throughout the presentation. And we'll read those and get them addressed by Chris. And with that, Chris, welcome.

So just to sort of level set, I mean, Twilio, I think, was one of the biggest positive surprises in the tech earnings cycle, at least in my coverage universe. A lot of concerns going into the print regarding your exposure to kind of challenged verticals and subsectors, and it seems like it turns out that you had some pretty positive offsets to that. So just maybe to level set the audience, if you could kind of give us your view on kind of what transpired during the quarter and how that sort of made you think about your outlook?

Yes, sure. So appreciate it and thanks for having me here. So yes, the business performed well in Q1. Yes, I think it's important to note that there was really little to no impact from COVID in the first couple of months of the quarter. Q1 was shaping up well with broad-based strength across our business. COVID impacts were really only in the last 2 to 3 weeks of March. And the verticals, just to your point, some of the verticals displaying weakness were predominantly in the more heavily impacted industries of travel, hospitality and ridesharing. These verticals combined have contributed less than 10% of our revenue over the past several quarters. Our team has really done an excellent job in diversifying our customer base across industries, use cases and with our continued international expansion. Now some of the experience we saw in offsetting benefits, the primary areas where this was really in light of COVID were education, entertainment, health care and retail. Some of the specific use cases were around telehealth, the programmable video products, the mass notifications and remote contact center work in the health care space. Within education, we saw strong demand from customers using our video for distance learning and mass notifications, helping to keep parents, teachers and students updated via SMS given the quickly changing environment. Also retailers with a more traditional brick-and-mortar presence, they needed to engage digitally with their customers via contactless deliveries and curbside pickup. Now while we believe some of these use cases will moderate post-COVID in areas such as entertainment, we also believe that there are longer term more structural changes in consumer behavior like around telehealth and distance learning as well. So we're optimistic for the future and being able to go deeper into those verticals.

That's helpful. So telehealth is certainly an interesting one. It's driven a lot of, I think, incremental certainly video demand, and you guys saw that prior to a recent announcement you had with Zocdoc. Can you go into that announcement? What that -- what do you think that is, how meaningful that could be for Twilio?

Yes, actually telehealth is really an interesting vertical for us. So historically telehealth and programmable video has been a small portion of the business, but it's really been our belief that Twilio is purpose-built to help the industry. To best address the needs of the many different health care workflows, our team worked really hard over the past 18-plus months to address criteria predominantly around HIPAA compliance and to meet those specific demands. So we announced HIPAA compliance back in February on our video products. And in partnerships with Epic and Zocdoc, for example, this would not have been possible without it. Specific to Zocdoc, Twilio is really helping to power their doctor-patient video consultations. And our programmable video is very akin to the core SMS and voice products where it enables businesses to embed our API into applications and websites with the high-quality and customizable solutions they've come to know and leverage Twilio for. One other thing I would add in light of COVID is, we had plans for other products with HIPAA compliance later on in the year, and we accelerated those for HIPAA compliance with SMS, voice as well as SIP trunking now. And we really continue to be excited about the future health care vertical, and we look forward to partnering and helping with customers in the future.

That's great. And I just want to remind users once again since we don't have any, that you can submit questions via the portal, so just FYI. So Chris, I don't know how much you can say on this but I'm sure folks are interested to know how things have been trending thus far in 2Q. You mentioned first quarter, you only had a few weeks of COVID. Now we've got about a half quarter worth of COVID under our belts, how are things trending?

Yes. So I think you're right. Unfortunately, I can't provide much of an update outside of what we said on the call regarding usage. As a reminder just for everyone listening in, that we did continue to see a small net increase in usage relative to our expectations, which was as of the day before we reported earnings on May 6. I think as our Q1 numbers showed that Twilio has a very resilient business model with a broadly diversified customer base. We'll look to provide obviously more updates when we report Q2.

Right. And then just speaking to your guidance, you obviously had a quite strong Q1 that was above where the Street was expecting, guided above the Street for Q2, and then withdrew the guidance for the year. Just wanted to maybe talk through the thought process behind that given the strength that probably seemingly you were trending ahead of where the Street had been for the full year but just what the thought process is behind pulling the guidance.

Yes, right, obviously, we had a good strong Q1 results. And as mentioned earlier, we continue to see a slight increase relative to our expectations through April. We remain cautiously optimistic, I think, about the business but we really can't predict the future, and there's just to many unknowns in the macro environment. The shock and velocity at which COVID impacted the world, there's just too many potential second, third or fourth derivative impacts that may not have flowed to the economy yet. We're not necessarily taking a specific view on the macro. And then given that backdrop, we really believe that the most prudent course of action was to provide guidance for the second quarter, adding in a little bit more transparency insight into what we were seeing as a result of COVID but also withdrawing our full year guide. One other point I'd like to add is that with regards to guidance is our Q2 guide does now include A2P fees, which were implemented on February 1 and added about $4 million to revenue in Q1. We will continue to quantify that impact through the remainder of 2020. It is a direct [ pass ] to the customer, is a gross profit dollar neutral impact.

Got it. Yes, familiar with that. So there is a question from the audience, have there been any notable share shifts at some of your customers? If so, what would you say caused them?

I wouldn't say there's any notable share shifts across our customer base outside of the one that we have called out from time to time around WhatsApp, where as they are a variable customer without a committed contract, it's a customer that we are always working hard with and diligent to win that business. And sometimes, we have more success relative to others but nothing else, I think, broadly speaking to call out.

Got it. Then I would to get one in here now on political. So that was a popular topic coming into the year for you guys. Historically, even midterm election cycles have proven to be pretty big incremental revenue generators for you, particularly in the second half of the year. So just wanted to get a sense of what you've seen to date on political spending, and if you think that the COVID sort of lack of face-to-face imposition is maybe going to help or hurt that.

Yes. So we're definitely not breaking out political traffic separately at this point. We did see a healthy amount of political use cases in the first quarter. As you can imagine with many of the events and rallies being canceled, staying in touch with constituents via e-mail, messaging and voice becomes ever more important. We have not changed our assumptions necessarily around political traffic for the remainder of 2020. Based off of future usage and its impacts, we may or may not break this out.

But is it safe to say you're expecting stronger political in the second half than the first half still?

I think using 2018 midterm election as a proxy, it builds throughout the year. And I think also very intuitively, it's a presidential election, more dollar allocated towards the campaigns. And so we would expect it to build throughout the year as well as quarter with more meaningful in Q3, and then it's really the most amount of traffic, again using historical comps, in Q4.

Got it. So we have a few more questions in the queue here. So I'm going to go after a few of these. Can you give some color around the split of your sales by product and key trends, drivers by product? And I'm not sure if they're referring to kind of the 3 stacks of your pyramid or how they're thinking about that but any color you can give at all on sort of granularity in the business there.

Yes. So generally speaking, our go-to-market team is not oriented towards one product versus the other. We do have certain specializations primarily around e-mail and Flex. Given the historical go-to-market teams in SendGrid and e-mail marketing campaigns as well as contact center buyers being different, so adding them over contact center experience. But generally speaking, the majority of our sales force is not incentivized to sell any one product over the other. I think some of the other engineers [indiscernible] were speaking about the stack of our Super Network or programmable communications cloud, engagement cloud. Many of those products inherently each vertical or each layer of the stack have overlap. So for instance if you buy a phone number, it's going to be in the Super Network. And then you add in voice connectivity, API or SMS within the PCC.

Right. Makes sense. So contact center came up as an area that was positively impacted on the quarter, we think, because of COVID. And I guess there's maybe 2 pieces to that. One is your Flex, which is kind of your application, and then there's contact center customers that maybe hit some incremental traffic on your network. Can you give us just sort of your thoughts on what transpired there, and then kind of give us an update on where Flex stands pipeline-wise, et cetera?

Yes. Sure. So [ definitely ] I think as you alluded to [indiscernible] we saw benefits from existing contact center customers with increased usage. There's a lot of demand, especially in municipalities. And even initially in the onset of COVID around -- with the airlines, for instance, with a lot of cancellations, confirmations and rebookings, things of that nature. Longer term, I think we really continue to be encouraged by the demand from the market from a wide variety of customers. It's really clear that customer engagement is a vital to the business strategy and that those legacy solutions are inadequate. That's been more evident recently because nearly every on-prem contact center needed to be reconfigured to support some type of distributed workforce. I think specifically on some of the recent wins we announced in the quarter, we discussed the City of Pittsburgh enabling 311 operators in light of the heavy demand from COVID; Nubank, the largest fintech in Latin America with a multi-thousand seat Flex deal. We also had AB InBev, a Fortune 150 conglomerate. Yes. I would say though, it's important to note that the current environment hasn't necessarily changed the timing for some of the really large and most complex contact centers as they make their shift to cloud, right. We continue to innovate and add new features with Flex Dialpad or mass outbound dialing feature, which went into public beta in Q1. We think we're on a great trajectory, and our approach continues to be validated by the market. But I don't necessarily believe that there's going to be a dramatic change for those large contact centers in light of COVID.

Got it. One concern we've heard from investors is the most basic of your service, and I don't know if you call it the Super Network, but basic connectivity, basic SMS or voice is relatively fungible amongst competitors. And it's kind of easily shift -- shares can shift easily amongst competitors. What is your response to that in terms of the differentiation you can offer to a competitor because of your platform for basic connectivity? And what's your success been historically of moving some of those customers that start off with basic connectivity sort of up the stack to the higher value-added stickier parts of the platform?

Yes. So I think at its core, the Twilio platform is really designed to offer digital engagement, software agility and cloud scale. Customers building on Twilio value the high quality and reliability of our Super Network, which ensures communications are sent and received in one channel and users that are anywhere in the world. I mean Twilio's platform reduces the operational complexity internally as well as externally in the telco world and really democratizes the communication space for software developers. And then as the communication just becomes even more fragmented like SMS, voice, e-mail over-the-top communications, businesses as well grow their footprint across geographies and channels. Having a single platform to build on greatly enhances the speed to deploy many different use cases. We often see customers start with a single channel or use case, and they have some level of success, and then they continue to build others as well as growing their own revenue, growing their own customer bases. And also the elasticity of the model, whereas they're having success on a certain use case, they continue to -- we obviously benefit from that. And if not, they're able to more quickly and easily redeploy their efforts elsewhere into a different use case or a different strategy on our platform as well. I think a great indicator of this is our dollar-based net-expansion rate, which was 135% in Q1, removing the impact from the additional month of SendGrid revenue given when the deal closed. With that said, I think the job is never done, right? Twilio's definitely an R&D-centric company, that we continue to innovate around different channels and use cases with Flex, Conversations, Marketing Campaigns, but we're really ensuring that our customers can be as successful as possible and trying to find, as new age -- newer communication channels become more prevalent, to able to enable our customers to leverage those.

Got it. So Twilio was well known early on in its life for its developer-led go-to-market, right? You guys basically marketed directly to developers with a variety of different types of events, very successful, very efficient go to market. But as you look to engage with enterprises, you pivoted to have sort of add a direct sales capability there. Can you just give us a sense of where you are today on kind of compared to where you want to be, and just kind of the lay of the land in your go-to-market today?

Yes. Sure. So first, I'd say our developer ecosystem is still extremely important. I think it's going to be a vital aspect of the Twilio story going forward, right? We really work tirelessly to ensure the developers of the world can efficiently and effectively deploy their use cases. But to your point on enterprise sales, I think we really need to continue to invest in that area, right? Our focus has been on hiring more enterprise sales reps with solution selling experience, international expansion as well as Flex specialists. We're continuing to see sales productivity and efficiency remain high, which really gives us the confidence to continue to invest there even amid the macro backdrop with what everyone is contending with today. I think one other area probably, like as we mature, we will look to start verticalizing a bit more in certain areas. Our customer buying behavior is a bit different. Two specific call-outs that make sense in that are health care, given some of the HIPAA compliance as well as the financial services industry. I think they're both 2 that are worth pointing out.

I'm sorry, what was the second one?

Financial services.

Got it. Financial services, yes, that makes sense. Got it. And I think this kind of dovetails with my next question because I think one of your areas of investment was sales. But entering 2020, you had laid out a number of investment priorities. You said it's sort of time to invest for growth. Can you say where you are on those? And has anything changed with respect to those initiatives since you laid them out?

Yes, sure. So 2020 is an investment year for Twilio really across the P&L. From an R&D perspective, we virtually opened an R&D center in India. We're continuing with our hiring plans there. We've already onboarded a number of employees who are currently working remotely. Go-to-market hiring plans as well, continuing focus on getting enterprise sales reps, international expansion and Flex specialists, we're going forward with those plans and nothing really has changed. Now areas where we have seen savings from, such as travel and office expenses, we plan to reinvest those savings back into the business where we just really truly believe that it's in the best long-term interest of Twilio and our stakeholders to continue investing through the cycle based on the opportunity we see in front of us. Yes, I think these investments will really help us emerge stronger after the pandemic subsides and while continuing to deliver elevated levels of growth. We're highly confident in how we're allocating capital and the ROIs, the return.

Appreciate that. Just going to take another question from online here, kind of related to prior questions but maybe a little twist. What are your sales and marketing staff doing in the post-COVID environment? Historically, they did sell via direct sales, online trade shows, direct mail. How have their activities changed with, I guess, with the lack of in-person in the current state?

Yes. Well, first, we're obviously very fortunate to have our customers or potential customers coming to us and looking to digitally transform their businesses. Not necessarily everyone's going to be swayed by not having an in-person meeting. And so that flipping them over truly has been successful. I think also, frankly, people have more time, right, with work from home. And it's been something that's impacting everyone or it's not like there is some outlier in a certain vertical or in a certain part of the world that we're trying to penetrate. And I think as we're all trying to deal with this, it's business as usual, if you will, for work from home and flipping those meetings to virtual. So we're still having great conversations with folks. Our engagement events we talked about earlier that we host for developers and get people excited about the platform, those have all been switched over to virtual as well. We saw one of the highest attendance rates ever for an engagement we held in late March or early April. And then we also are going to get to have our existing customer base and spend even more time focusing on that and what they're trying to deploy and how they're trying to operate in this environment.

Got it. Another question from the audience, you mentioned you do a lot of work with one of your big customers, WhatsApp. Is this because you're expanding your footprint there? Also, what specifically does Twilio do for their platform?

Yes. So when I mentioned doing a lot of work, we're working very hard for their business. WhatsApp uses us for one use case and one use case, which is account verification. So if you are a first-time user downloading the app or if you get a new phone or delete the app by accident, WhatsApp needs to verify that you are in ownership of that phone number. And so they will send you a PIN code via SMS. And they have a multi-sourcing arrangement where they have essentially an algorithm built where they wait and award traffic off of a variety of different factors. And we work really hard to be successful at getting traffic and getting and gaining their business.

Got it. Appreciate that. Another one from the audience, can you elaborate on key competition, including open source solutions available to developers?

Yes. So I'd say the competitive landscape still remains really fragmented where I would say when we look at the game film at the end of every month -- end of every quarter, it's quite varied across use cases, across geo, based off different customer types as well. I don't think anything has really shifted in that regard pre or in light of COVID stats. We still look at ourselves as the largest in the space and offering the most omnichannel and highly scalable solution there is. And we continue to be successful with our customers.

Are there any competitors you'd call out as being the most significant or just not so much?

I don't think so. I think it's a large market, a large opportunity. I think there's different players that are having different levels of success. But overall when we look at it, there's not one that we'd call out as particularly more meaningful than others.

Got it. I wanted to just address robocalls. That's been a topic that's popped up certainly in the past regarding the amount of robocall traffic on your platform. Can you just give us the latest on that, and specifically what you guys are doing with respect to the SHAKEN/STIR initiative to try to reduce robocall traffic on networks?

Yes, sure. So first, the TRACED Act, which was passed by Congress. They signed the law at end of 2019. Twilio worked closely with public policymakers and our colleagues in the communications industry on the content of the legislation as it works its way through both houses of Congress. The law is really aimed at aiding efforts among law enforcement authorities, government agencies and the communications industry to frankly stop the bad calls and hopefully restore customers' faith that they will receive a call if they really want. There was a strong emphasis on the implementation of SHAKEN/STIR protocols and in consumer protection efforts, mostly enhancing consumer protection efforts. Now we expect to see a dramatic change in the robocall landscape hopefully in the coming months and years. In a way, that benefits consumers and businesses trying to reach those consumers, and Twilio is really powering many of those communications. Twilio now sits on the Board of ATIS as well as USTelecom, which are both organizations who are advising on new technologies and advising on further legislation to combat robocalls. We've also recently joined the Industry Traceback Group, which is where some of the major stakeholders in the telco industry come together to actively trace and identify the source of illegal robocalling in an effort to prevent them. Most recently in Q1, we also joined the state attorneys general anti-robocalling coalition. And we started assigning enterprise calls using the SHAKEN/STIR protocols in our effort to continue to fight against illegal robocalling.

Got it. That's real helpful. Well, that is it for my questions, and I think we're actually also out of questions from the audience. So with that, Chris, I think we're going to wrap it up. Very much appreciate you joining us here this afternoon.

Yes, happy to help. Thanks for having me.

Thanks, Chris.