Twilio Inc. (TWLO) Earnings Call Transcript & Summary

So thanks for joining us today at the Barclays TMT Conference. With me today from Twilio is Khozema Shipchandler, COO, all the members of the IR team from Twilio. So Khozema, how are things going on your own end?

Great. It's great to see you, Ryan. Thanks for having us.

Yes, I'm happy that we could connect. And look, it's -- like I said, the 8th fireside chat for me today. So I'm going to try to keep the activity level aside, but if investors do have questions, if I'm going down the wrong path or if you want to hear more about any individual points on the Twilio story. Please e-mail me at [email protected], we can get those in.

So Khozema, once again, thanks for being here today, lots of activity and interest around the CPaaS market as usual. How would you characterize the current strength of the API market, and kind of the road ahead?

I would say just generally, it's in great shape. I mean that the API economy is obviously something that we were one of the very early participants in. I think it's taken off in ways that we couldn't even have imagined many years ago when Jeff started the company. I think customers are always showing us new and creative use cases that we sometimes have to keep up with to adopt, and I think the real benefit of having a platform, and certainly one that is API-based that developers can connect themselves to get going with different use cases that they want to then offer them to their customers, their consumers, I think it's been incredibly powerful. And I would say on top of all of that, the most exciting thing for us, obviously, is having Segment as a part of the portfolio, being able to offer a product like a Twilio Engage, which I'm sure we'll talk about later, combining that with what we already had vis-a-vis Flex and Frontline. I think what's really interesting to us as we look forward is that we have really now the beginnings of the totality of how one of our customers would serve their consumers, all enabled through digital and being able to anchor it against data, importantly, first-party data that customers are willing to provide their companies that they do business with and care about, I think is really, really differentiating. So I feel great about the way that the market has shaken out, if we read about the prospects of the company. And I frankly think our best days are ahead of us.

No. It's a really good point. And I definitely want to talk about how Segment and Engage kind of have a holistic approach beyond just like individual point solutions or individual API use cases. But just getting started here, I'll touch on -- I feel like one part of the Twilio story that maybe investors miss is just the resiliency of your core business. Would you mind describing what drives the stability? And how it supports your insight into your future growth trajectory?

Yes. I mean I think the -- what's important to think about in terms of Twilio is just an overall business model and the way that the company is built and the way that we bring solutions to market is, is that you have a few different vectors, right? You have the anchor of the business -- let me actually go back even one more step. The business started with voice use cases that were deployed against software to make the experience super easy so that our customers could deliver a delightful experience on to their consumer base. And that was amazing. And it was almost like magic, right? And that then quickly migrated to a world in which SMS became ubiquitous is the channel that we all use as the mechanism to communicate with one another. And so not surprisingly, businesses rapidly adopted that as the mechanism as well. And a lot -- I think a year or 2 certainly was talked about in terms of this notion of like, well, what about in-app messages, there certainly is some of that, but the ubiquity of SMS as a mechanism to get your message across to consumers. And then I would say probably WhatsApp more internationally. I mean these are very pervasive things. And what's exciting for us is, is that, that original SMS, or increasingly now WhatsApp API, as a mechanism to get a message into a consumer's hands, that is like the land, if you will, in the software dynamic that we're very much excited about. If Jeff was sitting here, he would describe it as the end. And for us, ultimately, what that leads to is the ability for without us even doing anything, frankly, our customers being able to adopt new and other use cases from the original one that they started with. You see the evidence of that, obviously, in our expansion rate, and we have very, very little attrition. We always have had very little attrition on our platform while we've had increasing expansion rate. And that -- what that points to before we even get to some of the other stuff, is customers continue to grow either existing or on new use cases on our platform, and many of which all happen in the context of our messaging business, which has been doing great. But the end game, obviously, is if you can crack the code on messaging, get a customer up and running with it, that really opens the door for us to establish a relationship with our customers to be able to introduce them to an offering like a Flex, like a Frontline like an Engage so that they can do more -- increasingly more sophisticated things. I mean the end game for us is do we have an offering that our customers can use to develop a more enriching experience with their consumer base. If they're just blasting e-mails or if they're just blasting messages, that's not very intimate, right? Everybody can do that. But if they're able to deploy use cases in such a way that the individual on the other side of the transaction, and you experienced this in your own personal life, Ryan, where you feel special and you are doing it with an enterprise that you actually care about, that unlocks a long-term customer commitment. And that allows for our customers to increase their revenue while not annoying their consumer base, which is really, really important in the way that we do it versus perhaps some others, and then we're able to make a buck off of that as well. So the entirety of that business model is really the way that we go to market. And I think the messaging component is really the end. And the remainder of what I said is really the up, and that up ultimately leads us to higher margin rates, obviously, more software-like sales. And that part of the business has been growing at really, really elevated rates and we're excited about that, of course.

No. I appreciate that context. Yes, and maybe to it is what you just described sounds like a higher priority, higher logic, more software-enabled-type use cases, right? And I guess as you think about your 30% long-term growth target. And some of the -- like the details you just mentioned, if you have good insight into how customers grow across your platform, right, grow into multiple use cases. I guess what kind of gives you confidence for that long-term number kind of based on what we just described?

Yes. Let's maybe just go back one step on the 30% and -- which will perhaps hopefully give you even more conviction that we can deliver that number, and certainly underscores my conviction in that number. So when we originally put that number out, it was part of the Investor Day that we did on the heels of the 2020 SIGNAL, which was pre segment, right? And so we weren't including segment and the dynamics of that. Obviously, it will become part of our reported organic as we go forward. But the idea was that we had an FP&A model, a 5-year forecast that we were looking at that we update constantly. We're constantly obviously looking at the revenue line, what it would cost us to deliver on that revenue. And we saw very clear line of sight to a multiyear framework that allowed us to deliver 30%-plus organic revenue growth each year for the next 4 years at that time. So we're obviously -- you're into it. We've decidedly been above that 30%, and we constantly refresh that framework. I think the only difficulty that we've created in any of this is that we've massively overdelivered relative to that first year's 30% goal. Nevertheless, we look at it and say, okay, we're now off of a much higher base, has anything changed? And the answer flatly is no, that we continue to see our ability to generate, on a just Twilio basis, Twilio classic, whatever you want to call that, pre-segment basis, our ability to deliver 30% organic growth over a long-term format. I'm not putting out new guidance today, obviously, but we have 3 years left in that story that we constructed last year, and we have very, very high confidence in our ability to deliver those numbers. With Segment in the bag, obviously, that's sort of the cherry on top, and allows us to generate perhaps even additional growth beyond that. But we feel really, really strong about that 30%. Now in terms of the data that I look at that ultimately underpins that, we have great data in terms of customer usage, customer behavior. We have an FP&A team that's obviously constantly running scenarios around sales capacity, customer use cases. What if there was something idiosyncratic that were to happen in terms of attrition, which is never something that we've really experienced on our platform with customers. What if expansion rates were to come down markedly? What about tough compares? All this sort of thing, like what are all of the various factors. Barring some extreme event, and I would suggest that we just went through one with the pandemic, so it have to be even more extreme than that. We just don't see a scenario in which we're not able to deliver on 30% organic growth over a multiple year time frame. And well, I'll just leave it there. We have very, very strong conviction in that forecast. We did not put a 4-year commitment out there lightly. And we definitely believe that we can deliver it. Now I'm sure the next question that you're going to ask, and so I'll just take it on, is so what about Q4? And I think with respect to Q4, we feel good about the setup for Q4 as well. We're obviously in the middle of it, so I don't want to get too far ahead of myself here, but we feel good about the guidance that we put out when we started the quarter. I think there's always this question about to what degree can you beat the guidance that you put out. I'm not going to get ahead of that either. But we feel really, really good about the guidance that we put out there. The targets that we put out were meant to be annual, nevertheless. I mean, obviously, 4 quarters makes it annual. And so we feel good about the way that Q4 looked when we put that guidance out there. We feel good about the setup over multiple years. Q4 does have some tougher compares just given the very historical action that took place last year. But in spite of all of that, there's no change in certainly my narrative, my belief in this business' ability to deliver that elevated growth over multiple years.

So I mean, I think -- I appreciate the color there. And yes, you've been very consistent in terms of your conviction with that long-term growth rate, and I appreciate you adding more there. On any given quarter, obviously, you're trying to get the highest revenue growth rate that you can. But do you think it really matters if one quarter dips below 30% on organic basis, like do you think that's any meaningful indicator of your long-term trend? Or do you think in general, we should just look at this on a yearly basis given the usage model, and some of the quarter end fluctuations that you just mentioned.

Yes. I would add what you said slightly. I don't think -- we're not maximizing the company for quarter-to-quarter. I mean obviously, I realize that we made commitments to investors, and we want to uphold those. So I'm not trying to play cute with that either, so please don't take that the wrong way. But importantly, we are building a company for the long term, and we [Audio Gap] CEO, who is very long-term minded. But in the short term, I mean obviously, you don't get to [Audio Gap] I don't know if you can still hear me, I got a message that my Internet's unstable. Obviously, you don't get to the long term without getting through the short term, and so we're mindful of that. But in any given quarter, yes, you're going to have a little bit of up, you're going to have a little bit of down. It's exciting when you have a quarter that's maybe at a 50% organic, and it's maybe a little bit less exciting [Audio Gap] but out there, we're growing much faster than certainly any company that I can think of at this vintage at this scale, and we have really deep conviction about our continued ability to do that. And I just would not read anything into any given quarter. We're a usage-based model as well. I think sometimes people forget that. You're going to have a little bit of bounciness from time to time. But the diversity of the customer base is super strong. Even the top 10 is very, very resilient. We've never been stronger with larger enterprises and we have a really, really kicka** set of products that we think takes us very far.

[Audio Gap] just because it at least broke up a little bit on my end. But I guess the gist your message was essentially what you finish with, which is you're really confident about the long-term growth trajectory, not concerned about any given quarter, and it can fluctuate given the usage model. Was that a fair takeaway?

Yes.

Okay. Just given that last quarter, I think that's what investors are -- I guess having a hard time with now are going to be close with as they expected a certain beat over a percentage. And I know that's not what you guide to, but I guess, in the most recent quarter, given those expectations versus historical expectations for your quarters, was there anything that surprised you or was different or might have overly impacted that third quarter total revenue?

There's no one thing I would call out per se that really stuck out. I would say you're always going to have a little bit of noise in a usage-based model, as I said, from period-to-period. I think in general, what you are going to see, which is not news really is that hopefully, as we exit the pandemic, like some of the things that were sort of on the fringes in terms of like vaccines or contact tracing. I mean, obviously, all of that stuff is going to reduce because our experience of those things is reducing in daily life. And so not surprisingly, you would see less impact in our revenue base. But those things were always relatively small and around the margins on what we do. But you'll see some of that stuff flush out over time. I don't have any particular concerns about the way that Q3 played out, a little bit of a tougher comp relative to what we saw last year, especially with the election. But I just don't personally get overly animated about it. Again, we have deep conviction that we're going to be a 30% grower over many, many years. The next 3 we're on record of saying that. We're on record as repeating that a number of times, and reaffirming that. And I just think that that's the setup that we see going certainly into 2022 and then beyond, and feel good about where we are today.

Yes. And just to kind of close the loop there. Like you mentioned you're still seeing strong results with your large customers of your top 10 customers. It did dip down a percentage just on a usage-based model like that can have an overly impact on one given quarter. As they're just trying to close out like maybe kind of what happened in Q3 or what like was different than investor expectations. Anything worth noting there just before we move on to Engage?

Not really. I mean I think, again, usage-based business model, we've been very strong with enterprises, especially G2K. And I would say I know the focus of your question is top 10. But if you look at our non-top 10, it's been -- it's never been stronger. And what I see when I look at a dip in the concentration with any particular category is an increase in the diversity of our customer base, which I think longer term is really what investors want versus it being concentrated with a particular set of customers. So nothing really to see there. Nothing that I'm certainly animated about. And I think these things work themselves out over time.

Excellent. And then just before Engage, one more -- it's always one more from sell-side guys. But I've been framing your fourth quarter of 2021 as similar to the fourth quarter of 2019, right? Like you saw a step down from 2Q 2019 to 4Q 2019 on a year-over-year growth rate basis, just as you went against harder comps from the second half of 2018, right? And I think the setup reminds me of that now just -- and even more so given maybe some COVID benefits, but also like you said in the presidential election. Do you think that's a fair comparison? Or do you think maybe there's a better example there?

Yes. I do think it's a fair comparison. And I think if anything, it will probably be slightly exacerbated by the fact that it was a presidential election versus the midterm election. And so that comp does become harder. But we'll obviously provide disclosure on that. So folks can see exactly how that was impacted.

And just to kind of rewind the clock. Your first quarter of 2020, you saw revenue growth reacceleration, but there wasn't much COVID revenue in that number at that point, right? I mean it was really towards the end of the quarter. So that was kind of separate in the first quarter of 2020.

I wouldn't characterize it like that. I mean I'm right up the first quarter of 2020 because I think people were really down on Twilio then. And obviously, we delivered a very different performance ever since then. I don't think -- I mean COVID wasn't really a thing until Q2. And so I don't think it really clipped our Q1 results plus or minus. Probably the first thing was impacted was a little bit of ride share, but I still don't think COVID was in the consciousness of most people. So I don't really think that's going to make a difference one way or the other. I mean we weren't contact tracing or anything like that. The vaccine wasn't even on the horizon. And I mean the one thing that I will say that I personally never felt more confident about that we've talked to you all a lot about is that -- again, when you look at the longer-term picture here, some of the acceleration that happened as a result of the pandemic, particularly in industries that we're dying to do something relative to digital transformation. I think that's really where a lot of the tailwind lies. So you get temporary bumps as a result of either the ephemeral things like contact tracing or vaccines. You get recoveries and stuff like the rideshare folks who are definitely back up and running. And obviously -- I mean, personally, I'm using those things a lot more. But when you look at things like health care, financial services, retail. I mean I think the easiest way to think about it is like just through the lens of your own life, I mean we're more or less back to normal. I wouldn't say 100%, but it looks like you're in a city today, and things are, generally speaking, opening up. And I think the tailwinds associated with those use cases are very strong. And through the lens of your own life, you -- I'd be stunned if you told me that you've gone back to the old ways of doing things, and you've not used rideshare, you've not used delivery services, that you're going into retail environments, et cetera. In fact, I think quite the opposite is true where digital is enabling all of these things, in particular, health care financial services where I think we're very excited now than doing things like which I had to do this morning, we're literally having to go to a lab to get blood drawn, you can do a lot of that through TeleMed now and online transactions. And I think that's really exciting.

Yes. And to drive more usage of those use cases. Engage is kind of the next step in terms of that digital customer engagement. At the beginning, you alluded to how with Twilio and Engage and Segment, you could really facilitate the whole customer journey for an organization via the Twilio platform. But I guess can you just kind of elaborate on that, like how customers are adopting that today and maybe what that looks like?

Yes. I mean, it's obviously pretty new, right? We just launched it. But I'll talk about sort of the premise. And I would certainly suggest that we feel like we're executing well on it, and just executing overall in not integration in the M&A sense, but just kind of the integration of the products of what Segment brought to the table with Twilio. I mean think about it this way, okay? So in that same consumer experience that you have every day, there's a big difference between when you get blasted a promotion or a coupon or what have you. Instead, if your retail experience can be such that the company that you care about that you're doing business with, they know not just that you're Ryan MacWilliams, but they know your purchase history, they know your demographics. They know where and how you shop. They know that potentially you stranded a purchase in an online store. They know what you like, and they can direct you to other offerings, like that starts to become -- with data, by the way, that you've decided to give them versus that's been scraped off of the web. That suddenly becomes a much more intimate experience between you and a company that you care about. And what's interesting about it is that, yes, sure, it's a revenue event, okay, for the company. But it's actually revenue that you don't mind giving them because it unlocks an experience that, in many cases, you had in the online -- or excuse me, in the offline world, in person, that wasn't fully instantiated in the digital environment. And now using the combination of Segment with -- which has rich data capabilities and it's able to grab all that data from the myriad of systems where this is super confusing for our customers, combined with a set of core communications channels that gets that information in your hands, it makes for a really, really interesting consumer experience. And that is really what the end game is, right? And by the way, it can be even more enhanced. So that in and of itself is pretty interesting, but it can be even more enhanced when you start to combine it with the customer service experience that we're delivering vis-a-vis Flex, right? Now imagine that all of that is taking place. Now all of a sudden we send you a link, we get you online. Hey, Ryan. It's great to hear from you. We know you were talking to all these folks. And we're going to get you exactly what it is that you asked for. Right now, it will be at your house apartment, office, whatever in an hour. Or imagine that we're able to combine it with our Frontline capabilities where you're literally experiencing that transaction in real life. And through a combination of the Frontline person, hence the name, that's interacting with you as well as a digital experience over here. They're able to bring it all together to really unlock that special consumer experience for you. Like that's really, really sticky for the relationship between you and the organization that you care about doing business with, it's incredible for us to be able to unlock for our customer base and it's hugely differentiating. And it takes what could otherwise be a flat SMS transaction and super sizes it into something that's really powerful. And by the way, it's great for investors too, because it allows us to take a decent margin on a messaging transaction and really up level the mix and the shift of the business over to more software-based sales, which I think is good for everybody.

And I know before you mentioned Segment could be a gateway into some of those G2K customers. It's kind of what you just described also, more aligned towards that market opportunity.

I don't think it's limited to G2K. I think it's got incredible traction with digital natives. It's got -- the G2K is very interested in it because CMOs have struggled with this for a very long time. Like there's just not been an available technology that can do all this. And the G2K also happens to have this myriad of systems sitting behind the wall that they don't know how to get data out of so it's just very attractive to them. But I just wouldn't limit the opportunity set there. It's also been great with digital natives.

Awesome. Yes. This speaks -- so you mentioned in your prepared remarks at the beginning, where it's like outbound and inbound, and there's a whole lot of data that goes around with those messages and that opportunity. Just had some questions come in on Twilio Engage. How should we think about the pricing model of Engage? And what should we do to track the success of this product?

Yes. So in terms of the pricing model, I mean, I think we're still kind of working out the mechanics. But today, the way this segment is sold is more of a traditional SaaS-based product, as you're probably familiar with, and we haven't really tinkered with that. I think that -- there has been some desire on the part of customers to potentially adapt that to more of a usage-based model, but very early days. I wouldn't read anything into that. My sense is, is that when we first put Engage out there in the hands of kind of GA-based customers, the fashion which we'll do it is a SaaS product combined with the usage-based product, much in the same way that we've done with Flex. And we've seen great uptick with Flex in that fashion, and I expect the same thing with Engage. I think in terms of the milestones, these are my words, maybe not the words of the question that came in, but the milestones of progress, I think what we'll probably do is through various venues, whether it's an Investor Day or other forums, just kind of share the progress on the calls that we do and talk about the customers that we're adopting. And once we get to that point, start sharing some of the financial figures we assisted with it as well.

Excellent.

I've got maybe time for one more and then I got to run.

Works for me. Just when it comes to like the recent acquisition Twilio has made, I mean that's kind of been a point of for investors now because, I mean, I thought you did a good job of explaining what your organic growth rates are, and stripping all that out and making it a lot clearer. But I guess could you remind investors kind of how we should think about your organic growth projections in conjunction with like potentially continuing acquisitions?

Well, I will reiterate that I stand very much behind the 30% organic growth that we believe we will deliver over the next 3 years that had never contemplated Segment or any of these other smaller deals that we've done subsequently. So with or without the acquisitions, this business is a very, very powerful growth engine, and we know that we can deliver continued growth over a long-term format. Relative to the acquisitions that we've done, I think they're a little bit different, so it's worth maybe breaking them into 2 camps. I think one is Segment and SendGrid. I mean SendGrid is a little bit older now but very strategic to the nature of what we're trying to bring to our customers. SendGrid was obviously a completion of our omnichannel offering while Segment is much more strategic than that even because of [indiscernible] data capability that I thought we had a great conversation about a moment ago. The other acquisitions for starters are materially smaller than what we're talking about here. A couple of them -- they're all messaging, basically. A couple of them are fortifying the supply chain, and that allows us to, a, expand into some interesting markets. I would certainly suggest that Mexico and India having the large consumer exposure that they do are markets that we, as a company, want to be in, to be able to offer all these great things we talked about in the form of consumer experiences. The Zipwhip deal gives us access to the 800 channel, very highly valued and had some attractive financial characteristics. Anything else -- I mean, look, we obviously are not going to talk about like any details around M&A. We're certainly open for business. But on the flip side, that money is not burning a hole in our pocket. We're very content with the portfolio that we have today. We're very, very content as I've said a number of times, with our ability to grow organically on a 30% from what I said a year ago, excluding everything that I just said a second ago. But I think these additional deals give us some additional firepower and optionality, and that's kind of where we are.

Thanks, Khozema. Looks like they turn the lights off on me in my office. So I think it's time to wrap it up. But I appreciate you give additional commentary behind your growth targets and your conviction behind them. I think this is really helpful today. So many investors are circling back to this over a webcast. Please refer to e-mail me at [email protected]. You can get any questions you have over to Khozema and the rest of the Twilio team. Khozema, thanks again.

Great. Thanks, Ryan.