Twilio Inc. (TWLO) Earnings Call Transcript & Summary

Great. Good afternoon, everyone. I'm Derrick Wood, senior research analyst covering software at Cowen. And today, we have Twilio, Andrew Zilli, VP of Investor Relations, and thanks, everyone, for joining. As a reminder, if you do have a question, you can submit it through the web app, and I can ask the questions as we go along. And Andrew, thanks for joining us.

Absolutely. Glad to do it. And thanks, everybody, for joining as well.

Yes. So certainly exciting times with Twilio. There's no shortage of things to talk about, so let's get right in.

Maybe just a quick overview on the quarter. It was a good quarter. You guys talked about strength in April. You did have some differences between verticals in terms of what you saw. But how would you characterize how March and April trended for you guys and notable things you saw?

Sure. So I'll just start a little bit before that. Just I think it's an important background that when you look at kind of Q1 results, we were on pace for a very strong quarter in January and February. So even before all the COVID benefits and use cases came into play, we were on pace for a very strong result. We look at our usage and revenue on a daily basis, so we kind of saw that through the end of January, through the end of February. And then obviously, in mid-March, when we really started to see a lot of the COVID impacts and use cases crop up, we definitely saw a little bit of benefit there. And as we were looking at the various industries, use cases, customers, things like that, especially in light of trying to come up with our Q2 guidance, we did a lot of analysis around all these different use cases. Some of these, we think, are certainly going to continue, and we saw that through April. We -- again, being a usage-based model, we have the ability to keep an eye on all the trends that we were seeing up until the date of the earning call. So basically, until Tuesday night before we reported, we were looking at the usage trends. We were looking at use cases by customers, by industries, et cetera. And by and large, we continue to see net strength across the platform and in our usage compared to what our expectations were. I think there are certain areas like health care where we had a good amount of health care business previously. I think that was really accelerated in light of COVID. To be candid, I think we got pretty lucky with the fact that we happened to finish our HIPAA compliance work in February. That really started with video. But as soon as we kind of realized how significant this is all going to become, we accelerated the HIPAA compliance for SMS and voice and SIP Trunking as well. I think that really benefited us. And you've seen -- kind of in April, you saw us announce the deals with Epic and Zocdoc on the telehealth side. So I think we continue to see some good strength across the business. Obviously, those areas that were really heavily impacted like travel and hospitality, those stayed relatively depressed up until the date of the earnings call, which is not a huge surprise. I think it'll be interesting to see, as things progress now with cities and states starting to reopen, how quickly people are willing to jump back into an Uber or a Lyft or something like that and if that -- how quickly we see that traffic rebound or not. But I think by and large, we've definitely found ourselves in the midst of a lot of new use cases, a lot more opportunities for us to play a pretty significant part for a lot of these customers, whether it's existing customers we've been working with for a long time or new ones that came to us to help kind of spur some digital communications or help with the remote workforce around something like Flex. We feel like a lot of the use cases that we've seen and been involved with lately are definitely more long term in nature. There are certainly a couple of transitory things here and there. One of the things we've highlighted a lot is the entertainment media sector, where, of course, when shelter in place went into effect, turns out everybody signed up for streaming services. And so we saw a huge bump in traffic around those as we do a lot of the authentication for that. That started to already moderate towards the end of March, and so not something we really expect to have happen again. But by and large, kind of the core 6 use cases that George mentioned on the call, we expect those to continue in some form or another and many of these probably at more of these elevated levels for quite a long time.

Can you remind us what your expectations are on the travel/transportation? I think that there may have not been as big of an impact in March just given there were still like a lot of scrambling for cancellation activity and stuff. But in terms of kind of what your thoughts are on what went into guidance for assumptions there for Q2.

Yes. So again, we -- it was important to highlight, and I think it was something that was pretty misunderstood by The Street going into earnings, that those verticals, the travel, hospitality, leisure and ride share, represent less than 10% of our revenue. I mean I think that was something that a lot of people were really worried about. So even with the stark declines, it didn't have a huge impact necessarily. So when we -- we always -- again, we looked at those trends kind of through April and into those first few days of May, and we weren't really seeing them continuing to decline. They had moderated for the most part when we gave that guidance. And so we didn't expect a huge bounce back in the revenue from that in Q2. Like Jeff mentioned in the call, we did see a spike in certain areas around a lot of the cancellations and things like that as that was going on in March. But by kind of early April, it had really settled down at, obviously, a much lower level than kind of the pre-COVID levels we were seeing originally. And so we didn't really build in a lot of expectations for that to have a significant bounce back. We think obviously, over time, that traffic will return. But we also believe that it's probably going to take a little bit of time for airports to really open up and people to really get back on the planes and be okay sitting right next to somebody and wedged in the middle seat or something like that. So probably, maybe a little bit here and there from a turnaround, but we really didn't do anything or build in any significant expectations into our Q2 guide for a real big bounce back from that.

Okay. And in Q1, you had a really strong net new customer number. I think on an organic basis, by far the biggest you've ever had. Was there any theme as to what were the stronger areas?

I think we were -- again, we were kind of seeing some pretty good strength through the first couple of months of the quarter anyway, and it was pretty broad based. I can't really point to a single use case or a vertical that we were seeing. We -- there's not really a great -- a reason why necessarily, but Q1 tends to be a pretty strong new customer adds quarter for us in general. I think it was then accelerated by COVID, right? We did have a lot of new customers that signed up with us that were not historically customers. And so even something like Epic. Epic was never a customer of Twilio before this. And that deal was actually driven by a developer internally at Epic. So we did see a lot of new use cases come on, and I think some of it was -- I think a majority of them hit in those kind of 6 core use cases that we talked about. So it was a pretty strong net adds quarter kind of pre-COVID still, but I think that was probably what caused a little bit of the extra bump, was just companies that had never really worked with us, maybe had never even heard of us. And suddenly, digital communications really became a very key component to how companies were going to handle this. And so I think we got kind of an elevated boost from the market environment to bring in a lot of new companies.

For sure, I think -- I can imagine your market awareness has gone up quite a bit over the last few months in Main Street and on Wall Street. So...

Yes. Although I still got -- when I told somebody where I worked the other day, I got confused for Trulia, the real estate company. So we still have that. So it's not quite there yet, but I think it's getting better.

So yes, let's dive into some of the new use cases you're seeing. I know you had a press release on the state of New York, I think, or the city of New York on COVID-19 tracing. I think there's not much you could say about it, but maybe what would be helpful is to understand you've got the Flex side and then you've got your kind of core SMS and voice services, which I think the latter people are very familiar with. But can you just talk about what -- the functionality really that Flex provides as a contact center platform and maybe who you're competing against and why you win?

Sure. I think this is -- it's been kind of a really interesting story with Flex over the last year or so. And I think I described it to somebody earlier as a roller-coaster ride of emotions from Wall Street's standpoint. It's kind of gone from, wow, this is amazing to we're not really sure about this, and I think it's kind of gone back and forth a lot. And for us, we've been pretty consistent in saying we know that this is going to take a while. We know that it's going to be a slow grind because the enterprise contact center space just doesn't move that fast. But I think this is the power of the platform that we've built, is when we came out with Flex, we said this is going to be a great inbound contact center solution, right? And that's really what we built Flex for based on what we had seen customers building on Twilio. And that -- we went out. We won some great deals with that approach. And then we started to hear a lot of feedback from customers and partners. And I'm sure you probably heard it the same way, and I'm sure other people that did channel checks did, that there were some core functionality that was missing. And one of those was an outbound dialing option. And we're like, oh, okay, well, that makes sense. We've kind of thought about this as an internal or inbound thing. Outbound makes sense. So we just -- we obviously just released that in Q1. But we started to see customers take it in even different directions now. We announced kind of late last year that Southwest was using Flex. But rather than for a kind of traditional contact center, they were going to use it as their IT helpdesk for their internal customers. I think it was around that same quarter we announced that a Fortune 100 company was going to use Flex as the backbone of a conversational commerce tool. Now we're seeing it used in New York as the -- some of the contact -- for some of the contact tracing. I think that speaks to -- again, this is probably why we called it this, but the flexibility of that platform, right? It can really handle a lot of different things because it's so customizable. And so we're obviously still really targeting the major contact centers that are out there. The ones with tens of thousands of agents is really -- we've kind of drawn the line of 1,000-plus seats is really who we're going after. And so because of that, from the competitive environment, we're really kind of running into your -- the big 3 cloud or on-premise contact center vendors. So you're looking at Cisco, Genesys and Avaya. Those are kind of the primary companies that we're really running up against as we go into those markets to try to make that move to the cloud. For the other cloud vendors, it's not to say that we never run into them, but it's actually pretty infrequent for the most part, whether it's Five9s or Zendesk. We respect a lot those companies. They're great companies. But we come at the market from very different ways, right? Those are your typical kind of prepackaged, out-of-the-box applications, kind of ready to go and work great for companies that don't really need a lot of customization or anything like that. And we're really going after the high end, where even if you go into a 20,000- or 30,000-agent contact center, you're -- and you find a Genesys implementation, it's not an out-of-the-box Genesys implementation, right? It's something that's been highly, highly customized. And so that's really where we're going. And I think the Five9 CEO has said it a couple of times, and I think he's right, that if we go up against each other in a deal, one of us is probably in the wrong place. And I think that's a pretty accurate description. We've really come at it from more of the true platform approach where you can build the software to fit your business. So I think we're -- we've gotten a really good foothold in the market. I think you -- or if you've listened to the calls the last few quarters, you've heard a pretty big change in the customers we're talking about, right? It went from the real digital native companies like Shopify and Lyft and TripActions, who have a lot of that development talent, to companies like Allianz and CompuCom and Southwest and AB Inbev. And importantly, we're not always winning the entire contact center business from those customers on day 1, right? AB Inbev, we're in a department of AB Inbev. On some of them, we are. We talked about Nubank in Q1, and they're shifting several thousand agents onto Flex. So it can definitely vary, but I think we've gotten to -- ourselves and the product into a really good position to be able to win a lot of these deals. We've got a lot of the table stakes features in place, not all. There's still definitely work to do there. And I think probably by the end of this year, we'll feel like we're at a spot where we can say we have pretty much all the table stakes features in place. I think our partner ecosystem has stepped up and played a really big part in this. George mentioned that in the first quarter, roughly a little bit more than 40% of the deals we signed for Flex had a partner involved. So that's a really encouraging sign for us. We still have some work to do there in hopefully onboarding a global SI to join the Flex ecosystem. But I think by and large, we've definitely made some really tremendous steps in the last year, and I think we're on a really good path with Flex.

And how do you -- I mean, I think you partnered with Salesforce. I mean what does it look like in kind of a joint deployment with you guys and them?

Yes. We do have a -- we announced Flex CTI integration with Salesforce. We also have a similar thing with Zendesk as well. And it's essentially to make it easier for customers that might be using both companies to embed their existing CRM data into Flex. So people have seen the interface for Flex. You can have the call queue up on one side. And on the other side, as you click an email or click a phone number or something like that, it can pull up your CRM data on the right side so you have more of that historical context of who the customer is, what they've bought from you, et cetera. So we have a native CTI integration with both of those companies to allow joint customers to have a kind of more integrated experience.

I thought the Comcast example was pretty interesting. They're using video for -- so they don't have to dispatch people to your house, and they can help fix problems remotely via video. How is video playing into -- I mean, it seems like a novel idea. Is that something that you think that could really proliferate? And how is video going to become a part of contact center?

Yes. I think video is an interesting area for us. It's probably not one that most people on the call have really heard us talk much about. We've had it for several years. It's a relatively small part of the revenue today. It doesn't -- it's certainly nowhere near the size of messaging or voice or email yet. But I think it's an area that we have been kind of focused on. Obviously, we started our HIPAA compliance around video because we knew that telemedicine was something that the health care world was moving to. We want to be able to become a major player in that. But I think more broadly, we started to see a lot more interesting use cases around video in the last few months. I think the Comcast example is a great one to embed a video solution, and I think that's an area that kind of falls in with what I was starting with, that -- that's something that we think will probably continue, right, not just for Comcast but for a lot of companies that have field service needs. There's probably a lot of situations where you don't really need to send a technician out, right, where you can probably flip on a video and walk somebody through the steps, especially if it's somebody who just has to reset a modem or something like that. There's not necessarily a point in sending a technician out. So I think that's a great use case. And we are starting to see more companies embed video into their customer service solutions. ING Bank is a customer of ours we've talked about who is actually sort of one of the driving forces behind our development of Flex because they were building a contact center using Twilio and they actually use our video product in their contact center as well. So I think there's a lot of interesting kind of new use cases around video, whether it's health care, whether it's customer service. We talked a little bit about the educational side of things with distance learning and the more virtualized learning environments that we're helping power. We've seen some interesting -- even on the nonprofit side. There's a company called Be My Eyes that pairs people with visual impairments, whether partially blind or fully blind, with people that can see, and you can actually engage over video to help those people, whether it's read directions on putting something together, reading a recipe, something like that. And it's a great use of our video functionality. So it's something that I think where there's probably a little bit of a renewed focus internally for us to really think through more of the video use cases because I think it's been a good product but not a big product. And I think it's an area that we are going to continue to focus on more and more and continue to add features and functionality to it. It's a -- similar to the rest of our products, it's a very customizable product. So it can be branded as needed. So if you use the Comcast example, you don't know you're using Twilio video, right? It sits there as Comcast. So I think there's a lot of functionality that we provide that some other vendors probably don't. But I think for us, it's something that I think we're really excited about that can become a bigger part of the business. And from a financial standpoint, it's great because it tends to have gross margins that look more like SaaS, right? So kind of every dollar of our -- of video that we sell tends to be margin accretive for us. And so if that can become a bigger and bigger part of our overall revenue, it will obviously have a little bit of an upward move for the gross margins.

Is that same with Flex as well?

Yes. Similar. Sort of anything that really doesn't have a telco component. So when you look outside of the SMS, MMS, voice, those 3 primary ones, a lot of the other areas tend to have more of those SaaS-like margins. So Flex, email, video, Authy, Studio, TaskRouter, a lot of that stuff looks more traditional software.

I imagine, I mean, that whole application services bucket, given kind of what we're talking about now, ought to be growing faster than overall growth, which helps on the gross margin side?

Yes. Absolutely, it is. We haven't given an update on the size of that. We probably will do something around that at our Analyst Day later this year. But it is growing faster. Now obviously, messaging is still the biggest part of the business, so that carries the most weight today. And as more messages get sent internationally, it can really affect what the gross margin trends look like. But over time, as that application services becomes a bigger percentage of revenue, it should help that mix. And that's why we've said over the longer run, we think gross margins north of 60% are very achievable as that product mix changes.

The -- who do you compete against in video? Is it Zoom? And I guess since it's not over the Super Network, which is a differentiator for you guys on the core, what is the differentiation that you guys bring?

Yes. I mean I don't know that I would say we really compete against Zoom because I think they tend to be a little bit different use cases. I think Zoom is great for a lot of things, right? We're obviously using it right now. But I think if you're, like, really embedding video into an application like Comcast did or like Epic is doing, I think we -- the API approach that we have really makes that pretty easy. As to who we compete against, Zoom is always, obviously, in the video space. There's also TokBox, which is part of Vonage now. Amazon Chime, they have a video solution as well. I think where we really come into play is again kind of the flexibility and customization aspect of what we offer. We have very high video quality, which is obviously very important, and great uptime and reliability statistics is part of it. And so I think that, in combination with the fact that we offer sort of the full communications layer, right, so it's not just a video solution. You compare video with SMS and with voice and with email and kind of see your entire communications channels across a single platform, really gives us a lot of benefit there.

And on the telehealth -- telemedicine side, I mean, is it your view that market is just kind of ready to explode? I mean I actually saw on CNBC some projection of the market going from like $2 billion in 2020 to like $500 billion in 2025. I don't know how real of a number that is.

I mean really...

But, like, you guys are at the center of it in a lot of ways. So, I mean, are you -- I'm sure you're leaning into it right now.

Yes. I mean health care has taken on a pretty prominent role inside of Twilio these days. Obviously, again, we've been working on HIPAA compliance for the better part of 18 months. So we knew that we could play a pretty significant role in the HIPAA -- in the health care world. And we've been working with health care companies for a while now. We had some companies that were using us for telemedicine, things like -- companies like Doctors On Demand. We've been working with the VA and people like that on health care for vets and appointment reminders and things like that. But HIPAA compliance obviously opens the door to a lot more use cases. And so in addition to that, we actually also hired a woman earlier this year named Susan Lucas Collins, who used to run the global health care practice at Salesforce, and she's now over at Twilio running global health care for us. And so while we haven't -- we don't have a verticalized product or a verticalized sales team necessarily, we are starting to, if I'm going to steal the language of my former employer, build in that kind of ability to speak the language of your customer, right? And so bringing somebody like Susan in who knows the health care world really, really well can really meaningfully up-level our ability to play a significant role there. And so it's kind of the first time that we've hired somebody in a role like that to really own a vertical, but I think it shows the importance of health care and what we think we can do with that. And obviously, being able to power both SMS and voice and things like that with HIPAA as well really opens up the door to a lot of opportunities. So I think telemedicine and like the video side of that is obviously going to play one part in this, but there are still going to be doctors' offices and appointment reminders and things like that. But as you can start to maybe enable more communications over things like SMS that are HIPAA compliant, right, it can still save time from having to go to the doctor's office or pick up the phone and call somebody, right? You might be able to get test results just sent to you via text. So I think there's a lot of opportunities for us to do that. And I think there's definitely something that we think health care is going to be a really big vertical for us over the long run.

Speaking of hiring, I mean, given all these new opportunities, what -- has that accelerated the pace of hiring intentions? Or where do we sit today in terms of the pace of hiring?

Yes. We're continuing to hire as we kind of originally planned at the beginning of the year. We really haven't slowed things down. We said on the call that we were slightly behind our plans in Q1. That was actually primarily driven by the fact that the third parties we use for background checks were so backlogged because they were actively trying to get their employees to work remote and get everything set up that they couldn't get any background checks in time. And so we couldn't get offers out to the people we wanted. So we feel really good about our ability to kind of catch up and get back on plan in the second quarter. We are seeing tremendous amounts of applications come in. And I think it's a great thing for us in kind of this position of strength to be able to have our pick of the litter essentially and really bring in the most talented people that we can. So we're continuing to hire and go to market. We've really primarily been focused on bringing people in that have enterprise sales experience, contact center sales experience. We're continuing -- we opened up our center of excellence in India for our R&D teams. While we have the office and we are paying for a lease there, obviously that office has not opened officially yet. So we opened it virtually. But we're continuing to hire people in India for the R&D side of things. So we're not really slowing down. We're seeing a tremendous amount of interest. I think the one thing probably has changed a little bit from the hiring standpoint is just the idea that specific roles have to be located in specific regions or offices. I think one thing that has come out of all of this COVID stuff and all the work remote is you don't really have to have a certain person in a certain office at this point, right? We -- I think this has kind of proven that people can be remote and still do their jobs. And so we've been kind of pushing back on certain roles where it was originally thought like this job has to be in San Francisco. And I think if we're able to do that, it opens up the talent pool quite a bit more when you're not kind of restricting yourself to a certain region. Also allows us to hire people in lower-cost areas and help us scale a little bit more. So like one example is we just hired a new global controller, and he's going to be based out of Colorado rather than at our headquarters. So I think that's kind of going to be an interesting trend where you might see more of a distributed workforce going forward and will help us -- again, it will give us more opportunities to hire people but also help kind of manage the costs over the long run and really help us scale.

Yes. Interesting new world.

Very.

So yes, I mean, so education has opened up. I mean health care has, education has, state, municipalities, mass notification, even like contactless delivery and curbside pickup, I mean, that's kind of a new trend. And there's like fast food restaurants. Chipotle and stuff are now starting to do delivery. I mean -- so is that another area that -- I think contactless delivery was highlighted as one of the key new areas. What -- how has that opened up new types of companies?

Yes. I think that's definitely an area that we think is going to continue on going forward because I think if you've had any experiences with it -- I mean I've had a few and it's been great. When I -- when we decided to shut our offices, like I didn't have a home office set up, so I went -- need to buy a monitor and a keyboard and all this other stuff. And it was kind of around the time that Amazon was saying, hey, it might be 2 or 3 weeks. Like we can't guarantee the Prime deliveries at this point. And so I jumped on to Best Buy's website and threw it on my card. And they said, we'll have it ready for you in an hour. And I got a message that said it's ready, just swing by and tell us your name. And I did that. I had everything in the back of my car. I think I was in the parking lot for a total of about 2 minutes and drove off and I had everything. And I think now that I've experienced that, I'm like -- there's this part of me that's like why would I wait 2 or 3 days for Amazon to ship me something if I could just go have that experience. There's also -- my brother and I were driving back from somewhere recently, and we stopped at the Habit Burger, kind of your fast food example, right? And it was the same thing. Like I put the order in online, and I got a text that said, we received your order, it'll be ready in about 10 minutes. Got another text that said, your food is ready. Just text us when you're here and let us know what car you're in. And I did that, and 30 seconds later, our food was out to us. And I actually looked that up, and the phone number that I got that text from was a Twilio phone number. And so I think there is -- whether they were using it directly through us or through kind of an ISV that has built that functionality on top of us, I think that's an area that's going to continue on now that we've all experienced that at some level. Like I didn't have to sit through a drive-through. I just got to pull in and get my food and get back on the road. And so that -- there's things like that where, in the retail side, the contactless delivery, more of the continued work on mass notifications, the distance learning, kind of all of that stuff, we feel like, in some form or another, is going to continue on now that we've all had that experience, right? We don't think any of that is really just going to disappear again once COVID goes away. And I think we're going to be a pretty big beneficiary of a lot of that standing true. And if you go to our website, you can go to twilio.com/covid and you'll see a bunch of templates and tutorials and trainings and customer stories around each of those use cases that we've spun up really quickly to help companies who need to do it onboard even faster.

Well, great. I feel like we could just talk forever. So many exciting things. Great job. Awesome to hear, Zilli. Good to see you. Unfortunately, we're out of time. So thanks, everyone, for joining. Great presentation. We'll talk to you soon.

Yes. Thanks, everyone. Thanks, Derrick.