Twilio Inc. (TWLO) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. I am Mark Murphy, enterprise software analyst with JPMorgan. And it's a great, great pleasure to be here today with Khozema Shipchandler, who is the CFO of Twilio, as well as Andrew Zilli, who is running both Investor Relations and Treasury at Twilio. So first off, gentlemen, thank you so much for taking the time.

Yes. It's a real pleasure to be here, Mark. Thanks for having us.

The pleasure is all mine.

[Operator Instructions] We'll try to get to some of that towards the end, if we can. Maybe we can begin with -- well, maybe we can begin with just kind of diving right into immediately the concept of customer experience transformation, this broader category. The -- what was crossing my mind was -- so we had heard this stat recently. It came from the JPMorgan IT team. About 40% of the spend in our budget is going to focus on modernization and that actually, most of that spend is going into applications that face the customer. And so this customer experience category has pretty broad uplift, right? I think it's most pronounced at Twilio. But HubSpot, ZoomInfo, Qualtrics, et cetera, in their own spaces, they're all at this conference, they're all doing pretty well. Why do you think the category is seeing such strong prioritization today?

Well, I've seen some of the reports on the other companies as a result of the conference, and I think they're really interesting. And I would suggest that many of the trends are the same as what we're seeing. And I'd say, Mark, it's easiest to understand through the lens of your own life. I mean just think about what you've experienced in the last 1 year. Every interaction that you need involves some sort of communications channel, and those interactions are much richer when they're delivered with a higher degree of specificity when those interactions know something about you. And what we're seeing a massive acceleration of generally is that the customers that we do business with that end up doing business with consumers like you and I, there is a very, very high need to produce really high-impact interactions with their consumer base. And by doing so, that means longer-lasting consumer relationships. It means higher ROI. It means more lifetime revenue. And it's these front-of-house applications that are the things that deliver that. And we're fortunate to be in a spot in which we're right at the heart of this entire category of customer engagement. That's what, as you know as a long-term follower of us, deliver fundamentally. And I think there's just so many unique ways that we can do that with our communications channels now with Segment, and we continue to fortify our portfolio. And so I think the pandemic has accelerated a lot of this, but these were trends that were long taking place and, I think, have a lot of durability and secular tailwind behind them.

The amount of activity in the front office side of it is incredible. I'm glad to hear you using the word durability, and I want to come back to that. The -- when we look at how those trends, Khozema, are manifesting in the numbers, you've had these recent growth rates. As we calculate it, it's been around 50% organically. You're reaching a run rate of $2.5 billion on the top line. So that combination, it's a true rarity. You don't see that combo, right, of scale and growth. And sometimes we wonder, what part of the flywheel do you see driving that? You've got -- on the one hand, you've got the cloud-native companies, DoorDash and Teladoc and WhatsApp, probably all doing pretty well. You've got the more traditional industries embracing Twilio, and you've had -- we heard from, I think, the CEO of Delta Air Lines. You've got Ford Motor Company. You've got Nordstrom for a long time. Can you give us a little update on just how those 2 sides of the business are firing?

Yes. I'll try to give you like 3 or 4 things, Mark, to really anchor against. I think the first thing, and I know it sounds a little bit generic but it is extremely true, is that there's just broad-based strength across the company. Meaning that we see across our customer base -- across the entirety of our customer base just a lot of activity. And I think one thing that I think some folks didn't really kind of understand about us going into the pandemic was that we have this diversity in our portfolio in terms of the exposure that we had to a variety of industries. And we're just seeing tailwind basically in a number of different categories across the patch. And I think to put a finer point on that, what's happened over the last year is that we've seen an acceleration in e-commerce in health care, for example. And on top of that, coming out of the pandemic, we expect to see some tailwind, for example, from the likes of rideshare, hospitality, travel, industries that are likely to positively benefit. And so we see kind of a broad-based strength, some durability as a result of recent use cases, some tailwind with some stuff that have been negatively impacted and we see that across the entirety of our product stack. So we have the broadest offering in the industry. We can deliver across every single one of our channels. We have a engagement offering vis-à-vis our contact center product that you know well, Flex. And then what I think puts the cherry on top for us and makes us very, very credible around this idea of customer engagement is we've now got a CDP, right? We bought the best one that was out there. We got a great team on top of a great product. And so we have something that we think is going to be really, really effective. And then finally, I would say, we're seeing all sizes, shapes and colors of customer become attracted to our ethos and our way of doing things. And what I mean by that is, is that as you know, we're very builder focused. We're very developer focused. We want developers to love the code that we provide them, the APIs, the building blocks that they're able to avail themselves of. And while that may be a little bit faster for a digitally native company, it's no less true for an enterprise. And I think that's an area that we certainly have been putting investment in and expect to grow further in. But we're really -- we've been in a lucky spot where we've seen kind of strength across the board.

Okay. Well, we certainly agree that you bought the best CDP, and I want to -- I'm going to come right back to that in just a moment. But I want to try to weave together some of what you're saying there, Khozema. Because I think at the conference that we've had going on in the last 3 days, I think across pretty much every software company, there's this question of, well, how do we know you're not a COVID stock, like Zoom or Shopify? The -- you hit a pandemic. This demand pulls forward and pretty soon, everyone is going to be vaccinated, right? And so maybe certain things will slow and maybe kids will go back to school. People will be back in physical stores. So I think part of our view has been, well, there is a lot of incremental category discovery, right, that happened during COVID, and it's just kind of opened everyone's eyes and these experiences are going to stick with us. But I don't know how to prove that, right?

Yes. Let's look at it through the lens of our own lives. I think that's the easiest way to do it, okay? So first of all, I sure hope our kids get back in school full-time in the fall. I sure hope that we're all eating in restaurants again. I mean we need that social contact. I think that affects some things around the margins, okay? It's not like either of those dynamics was like really drop-modeling our business in any way, shape or form. There will be some impacts around the margins for us. I think what's a lot more interesting is like let's think about telehealth, okay? Hopefully, you haven't had to see the doctor over the last year or so. But let's say you have, okay, and I have a couple of times. So primary care, I think, is a great example. The telehealth experience, it's incredible, right? I mean it's high ROI. It's on time. It's you schedule it when you want to. There's no waiting in a waiting room with other sick patients, and there's no driving halfway across town to be able to get scheduled for a physician. Let's take that one step further, right, like the interactions that you're now having with your pharmacists to build on top of the interaction that you had in a telehealth environment. So I think that's an example of a use case that's here to stay. But let's take a more pedestrian one, okay, like the interactions that we have with stores day-to-day. Like I don't know about you, I just don't anticipate that I'm going to go back into a grocery store again or that I'm going to go into a retailer again. That's not necessarily bad for their businesses, by the way. I think that's potentially a tailwind for their businesses. But what that means is, is that you're going to have to have these communications channels at the heart of the interactions because you can't make them work without the 2 parties like being in contact with one another. And it just so turns out that the stuff that we provide and now with the data layer, hopefully, delivers the highest impact, highest ROI. Or even like, no offense to you guys, but think about like retail banking, right? I mean I just think that's a very different experience going forward. I mean I bank with JPMorgan, and I think that I can't even think of the last time that I was in a bank branch, right? Because all of these products and services end up getting delivered in a digital fashion, and I just think that these are trends that are here to stay all because we become used to them. They're incredibly high ROI. They're much faster than they've ever been before, and we're still getting basically the same quality of product and service.

Yes. I don't even know if my bank branch is open. I couldn't even tell you if I can go in there. And the first time I tried to do telehealth, right, I used the One Medical app and I -- it was funny. There was an appointment available in 30 seconds, and I literally sat down with the doctor in 30 seconds. Yes, I don't think I'm going back. Could it be a bit of the opposite? Let me ask you this way. So as the economy reopens, do you think it's a net tailwind? Or is it, possibly, is it a net tailwind or net neutral for Twilio?

I think on balance, what we see is we see durability in the emergent use cases, and so I would call that generally tailwind. So think all those examples I just gave you: health care, e-commerce, financial services. And then we see additional tailwinds coming from the negatively impacted industries as a result of COVID: rideshare, hospitality, travel. How that exactly plays out, on balance, I can't exactly tell you. Obviously, the world is a complicated place, but we definitely see opportunity as a result of all those dynamics.

Okay. Okay. Is there anything else you're observing or want to convey about just health of the business inputs or state of global demand today, anything by geo or region? Or do you feel like that summed it up pretty well?

I mean I think it's a pretty good story for us overall. I would simply say, I think the other regions around the world, obviously, are going through a tougher time right now than the United States is, most other regions. And so, again, the timing of these things region-to-region could play out a little bit differently. I don't think it matters one way or the other to us really because we have a relatively small international footprint. We want to grow it. If anything, we have distribution limitations there that we can continue to grow into. And so I think international geodynamics play into our hand, and there's just so much more opportunity for us to go after. And I think if I were to call out anything in particular, I think we're just really, really excited about enterprise opportunities and what we can do there with our full product stack.

Okay. So maybe we can spend a moment just going back to the Segment acquisition. I was chuckling about it because back at the Analyst Day, I just -- I randomly happened to ask a question of why wouldn't you want to own a CDP someday or is there a chance you would, because you want to kind of take everything you know about a customer coming from a lot of different places, right, to create that best experience. And then I think it was a few weeks later you had acquired Segment, right, which is one of these CDP platforms. Part of what I actually did not understand was the -- to me, the Q1 revenue number from Segment was kind of a mind-bender because that's more of a subscription model. I had thought it would do something more like $30 million maybe per quarter, and it came in at $45 million. The -- and I know it's still small compared to the whole scale of Twilio. But any comment or thought on that? How did the subscription model grow like that?

Yes. Well, there's a lot to your question, so let me just take a step back for a second. I mean I think, first of all, we think the industrial logic of Segment plus Twilio is just a -- it's not just a home run. It's a grand slam. I think for us, having data capabilities married with communications capabilities is absolutely essential to deliver that rich customer experience. And I mean the second that we announced the deal, believe it or not, from a variety of companies in our peer group, I got calls from the CFOs saying, "Hey, look, my CEO is asking me about like how do we get these 2 capabilities together? I'm using one or the other. And is there any way that we can kind of get accelerated here?" So a tremendous amount of enthusiasm. I know our sales force is really eager to begin distributing the product as well, which we've kind of kept them at bay a little bit. And I think from a Segment perspective, as I said, I mean, we got a really, really terrific team. I think Peter Reinhardt is an excellent executive, and he built a really strong team. So there's a lot to love about what we can do there. And I would say it's different than SendGrid in that at SendGrid, we got a lot of those things, too. But fundamentally, we've got a channel, right, to complete the breadth of our offering. Here, we've got something potentially transformative in that we can really unlock the richness of that customer engagement experience not just in one of the communications channels but also on top of Flex, which I think is really exciting. In terms of the revenue, it's -- in terms of the revenue, look, the business is just doing really well. I mean I don't want to get into like historical comps or anything like that. Like we haven't provided that level of disclosure, but the business is really humming. We're seeing a lot of demand in the marketplace. I think we're starting to see many of our customers like want to start marrying joint capabilities. They've kind of worked on honing their SaaS model, their revenue model with respect to their reps pretty well over the last few years. And I think they worked out some of the kinks during COVID, and that business is really performing. And largely, we've left them alone because we didn't really want to over-tinker with it other than some stuff around G&A. And I think we'll start to do some broader integration here in the second half, maybe into next year.

Is there any -- maybe this is theoretical, but could there be any tailwind on Segment from privacy regulations? Because that -- this is another very big topic at the conference this week, IDFA, right, what Google is doing in terms of eliminating cookies. Because it just seemed to me that the data that Segment is pulling in is really the first party -- it's the good kind of data.

100%. I think you hit the nail on that actually and effectively answered your own question. But I think they're very much on the right side of this. I mean they are very, very strong data stewards. They're kind of a privacy-first company. I think even in the EU, some of the trends geodynamics also play in their favor. And so I do think data and data regulations is a potential tailwind for them, yes.

And then -- so when you go in -- the last question on Segment is when you're getting these discussions and inbounds from CFOs, et cetera, if you go in and you cross-sell Segment into them, is that actually going to drive the flywheel where all of a sudden it's kind of driving maybe more messaging because they're going to say, well, we have a deeper understanding of customers. There's kind of more you can do with it, more of these timely, relevant communications.

Yes, 100%, and it also unlocks other parts of the stack. And I think it does it, Mark, in the best possible way, meaning that you're now starting to get communications only that are tailored to you based on things that a company that you care about knows about you, is able to drive a revenue event or a promotion that you actually want versus like the standard blast type of stuff. So really enriching experience, highly desirable by a consumer. Everybody kind of wins, and the data is protected all the way through.

Okay. That's very clear. Any quick thoughts on 2-way messaging, Khozema? Because I felt like I had started to experience that in a couple of ways even maybe right before the pandemic hit. I checked into a hotel. I suppose I have given them my cell phone number at some point. And literally, as I open the door to my room, you get a text and it says, anything you need, turn down service, dinner reservations, anything like that, just text us here. It transformed that experience, right? I looked at it and said, well, this hotel is kind of ahead of the curve. And then it was happening with my car dealership. I was actually hearing from the mechanic in the back. Incredible. So if one message, right, instead of going one way, it becomes 25 messages or something like that, the revenue you could generate gets interesting. Why can't that become kind of a big chunk over time?

I think it can. I mean I just think it's early days, Mark. I mean you, I think, again, explained like why it could be such an interesting application of our tech stack. It's just -- it's early in the revenue cycle. We are seeing traction with customers. When I talk to our messaging team about it, they're seeing a lot of enthusiasm from the customer base. And I think one other that I would kind of loop in, it's not exactly conversations, but this frontline dynamic that we also rolled out at the last SIGNAL, that's really interesting because, I mean, you can kind of think of that mechanic that you referenced a moment ago as being sort of a frontline person that's got the actual view of like what's going on with your automobile. And that's part of the conversation that we, no pun intended, that we think we can also sort of unlock here. And so I think it's going to be a big part of it going forward.

Okay. Wonderful. Great to hear. Now I did want to ask you about -- we covered Segment. But more recently, Twilio had made a couple of other moves. You invested $750 million into this company, Syniverse. We -- which we think of as a messaging gateway, but I'm not really that deep in that. And then ValueFirst, digital media. You've announced your intent to acquire this company, Zipwhip. We've seen some interesting stats on the kind of reach that they have. What is the strategic rationale? Or could you help us maybe weave together these 2 or 3 moves that you made and help us connect the dots on why you're doing this?

Yes. I mean they all have their own unique reasons, which I'll go into in a second. But I would say there's a set of criteria that all these deals have to meet. I think, first of all, they've got to have pretty compelling financial characteristics, right? So that sometimes affects our choice of whether or not we're going to buy whole or do a partnership. And I think Syniverse happened to be an organization that we knew pretty well. I happen to know some of the folks in the Carlyle team really well. And for us, that was just like bringing together 2 great brands. We felt like they've done a great job in terms of really improving that business over the last few years, and having some ride-along contracts that allow us to really secure parts of our supply chain was really important. So that's Syniverse. I'd say the second criteria is about market entry and longer-term strategy. So I think ValueFirst is a pretty good example of that. I mean it's pretty small in the scheme of things. And clearly, India is a massive, massive consumer market that we want to be a part of. Tough market to do business in, in some respects. You've got to have a local operating entity. You've got to be on the ground. You've got to have local knowledge, know-how, understand how the carrier ecosystem works there. So you can build that or you can get in there faster and acquire a company. And we paid a relatively small price tag for that. And so we think that was a really terrific way to get into the world's second largest consumer market that also, by the way, happens to have a ton of innovation going on, right? So that's pretty interesting. And then I think Zipwhip for us was an opportunity to -- again, financially compelling, a good business, good team and it's -- it also fits into our kind of broader supply chain strategy. So as you're aware, knowing the business -- or the totality of our business quite well, like toll-free is one of the channels within messaging that customers avail themselves of. Long codes, short codes, toll-free, what have you. And it's a very valuable one, and there's a great technology that sort of underpins that with Zipwhip. And to us, it felt like a good asset to be under our ownership. We happen to know the company really, really well because we've worked with them for 5 to 10 years, and they have a great team. So that worked out pretty well, too, and they've got some really interesting software inside the company as well.

Okay. So now I'll just add, it's compelling to hear you're just verifying that these all have solid financial characteristics. We've had a few questions come in from the audience. 2 of them happen to be pretty similar. One asking about -- and I don't know if you're prepared to speak to this or not, but I'll ask anyway. What kind of EBITDA margins could be possible down the road when growth is more steady state? I suppose it depends on what they mean by steady state. And another one, kind of asking about a terminal EBIT and free cash flow margin.

Yes. I mean I think they're reasonable questions to ask. I think our perspective on it is this, is that right now we're just fundamentally dialing the business for growth, right? And it's not that we can't be profitable. It's not that we don't want to be profitable. All of that in due course, and we definitely have our eyes on 28% plus operating margins over time. We're just not putting a time frame on that. And I think if we go right back to the first part of the conversation, I think you can see why. I mean if we can continue to sustain elevated growth rates kind of in this range that we've been able to put up over the last few quarters, and we've committed during our Investor Day that we think we can do 30% plus over the next 4 years, then I think it's an ongoing conversation with investors, of course, and we do listen. But for now, I think investors have largely applauded the moves that we've made relative to growth and dialing our OpEx that way instead of letting it drop to the bottom line. But that doesn't mean that we won't be profitable, can't be profitable. It's a choice that we make every day that we wake up. But right now, this is a really strong return on reps. We're innovating on our products. And so that's kind of the way that we dial the business.

Okay. Maybe we can go into Flex for just a moment. You've got this product. It's aimed at complex contact center implementations. And I think recently, we've noticed you kind of mentioning there's a little more pull-through there. There's a little more energy coming from the partner ecosystem, which is always good to hear. You've -- I believe you've had Nike using Flex. You talked about a Fortune 1000 retailer. I believe Lyft and eBay. So part of my question is, are you racking up enough referenceability now at this point on the heels of all this? And I would think now you could feed in some of the Segment data, right, into Flex. Is there something happening there where we would look back and say, well, Flex was truly hitting its stride in 2021 and going into 2022?

Yes. I mean I think generically, yes to all the questions that you just asked, but let's go to it in a little bit more detail. I think what we saw in the pandemic is that there's just tremendous energy for not just a cloud-based contact center but one with programmability in it. And I think what -- as we obviously named the product very purposefully, what our customers are asking for and all the conversations that we're having with them is they want capabilities that they can add to, that they can potentially subtract from. They want the building blocks. They want, fundamentally, the contact center experience to be one that they're fully customized on so that they don't look, sound, feel like their competitor down the street. And they want that to be a really differentiated experience with their consumer base. And I think what Flex obviously allows is the ability to do all those things as well as route faster, improve workflows, use a moat of technologies with our AI stack to just get there faster. And everything that we've seen during the course of this pandemic year has been a tremendous amount of enthusiasm for the product. Whether '21 to '22 is like, per se, the inflection year, I mean, we're growing at very elevated levels, certainly better than our corporate average, if you will. We showed you some of these characteristics at our Investor Day. So you have a sense as to how our application and services category is growing and growing faster than the rest. It's just that the rest of our business is growing really fast, right? So for it to really show up in our financials, based on our current trajectory, something else would have to slow down, which is not what we want. It's not what you want. It's not what anybody wants really, right? So I think in due course, all these things will happen. As it relates to Segment, I think Segment is really additive to Flex, right? For all the reasons that I talked about earlier in terms of unlocking that really rich consumer experience, now imagine that contact center experience with data, data informing those ML models so that it can really improve workflows inside the interaction. Potentially, you never even have to talk to an agent. You can handle all of these to be text, and it's all routed in a way that neither you nor I sees it and that interaction just happens very seamlessly. So CDP, definitely a big capability. Glad that we bought the best one, which is Segment.

Yes. Okay. Good to hear about the synergy kind of across all these core platform elements. The -- switching gears for just a moment, and we probably only have just a few minutes left. But this -- the topic of the A2P fees has been on people's minds. Verizon had introduced those sometime back in the future, and we now have AT&T and T-Mobile kind of following suit in the immediate near term. I guess the question is do you think that -- is that going to end up being kind of a one-shot deal where they implement those fees and it's done? Do you think there could be a couple of waves of that? And just how do you feel about the ability for Twilio to absorb that and for your customers to absorb that?

Yes. I mean I think if you look back on the Verizon experience, what we said then is effectively what we experienced, that, of course, customers don't love it, right, any time they have to pay a little bit more money that affects their bottom line to some degree. With that said, messaging remains an incredibly high ROI channel. And so we didn't see any drop-off really of any sort as a result of the implementation of that fee. And again, people consider these things as a part of what's going to happen to ultimately protect the consumer. These fees are well intentioned in the way that they're being rolled out. Obviously, we want to protect the consumer, too. The whole channel becomes less reliable and lower return if you and I are constantly receiving a bunch of garbage, right? So in many respects, we all want this. With respect to T-Mo, AT&T, I mean, I think it's more or less kind of bearing out to be the same. I mean it's not kind of fully rolled through all of our customers yet, if you will, so time will tell. But I think our expectation is, is that the same dynamic where customers never love like having to pay an increased fee, of course. But we think it's going to be a relative low friction, especially considering the much higher ROI of message.

Okay. So the -- if I understand what you're saying, basically, the monetization and the return is so high on this messaging channel. That's why this market is exploding, right, the way that it is, that it's kind of a rounding error as some of these fees inch up a bit.

Yes. That's right.

And so -- okay. Maybe, Khozema, to finish the discussion here, you had mentioned frontline earlier. I think from the moment I heard the description of what that product was, I think it was Jeff who was talking about it, I've been very intrigued by the potential to have -- I guess, we're thinking of it as a modern app, right, putting into an app format that's going to connect from these frontline workers with consumers, right? And I think -- again, it -- I think for me, it was that experience of having the auto mechanic. I think he was changing the tires, and I was in a meeting across the country. I think he said, "You might want to change the brakes." And so just like that, right, without any phone calls, I said, "Okay. Great. Go ahead and do it." But just -- there are more non-desk workers than desk workers. So -- and -- but I -- we also know it's very early with this product. How do you see that one progressing? Is there any update on the testing or the feedback from customers?

Well, the feedback has been fantastic. I mean I think the promise of it is high. I'd put it in sort of the same category as conversations where it's a little bit early days. But I think, again -- I mean, if you just put your -- well, you've experienced it literally. But I mean I think consumers want this, right? I mean they want the person that they're interacting with right then and there to have all of the capabilities in their phone to be able to solve their problem. And if that can be delivered, whether it's in a retail store, whether it's by a driver, whether it's when you're in an airport, whatever the -- I mean, well, take the airport thing all the way to its logical conclusion. That could be at the desk. It could be while you're checking in. It could be while you're getting your bag. It could be while you're on the plane. I mean every single one of those people at some level is a frontline worker. And if that individual with whom you're interacting with at that moment in time can solve your problem, I mean, that's amazing value being delivered back to you. And very, very likely that you're going to go back to that experience and that customer to repeat the buying experience.

Okay. Well, love that vision, and I can't thank both of you enough, Khozema and Andrew, for joining us here today. And kind of, frankly, batting cleanup on the TMC Conference for software, it has been absolutely thrilling just kind of watching the way this business model has been blossoming and frankly, booming. So thank you for helping to put a finer point on a lot of these comments, and hope you have a wonderful evening.

Our pleasure. Great seeing you, Mark, and be safe.

Likewise.