Twilio Inc. (TWLO) Earnings Call Transcript & Summary

Welcome, everybody. We're getting close to the end, and we're delighted here today to have Jeff Lawson, CEO of Twilio. I'm Meta Marshall, I cover the communications software space here at Morgan Stanley.

Jeff, it's a delight to have you here as we were just commenting. We closed this down 2 years ago, and we're reopening it back up. Twilio is going through this transformation towards evolving and optimizing B2C communication. As you have thought about it, and I've heard you talk about it multiple times, how much of the journey that Twilio is on, as what you set out to do when you founded the company, versus how much of that is just what you perceived as weakness in the market or evolution as you went along?

Yes. Thank you. First of all, I just wanted to thank you for having me. And I'm just looking around and seeing so many great bunch of folks that I know. It's good to be back. And I remember right before the pandemic, I believe it was here. And I had allergies and it's that time of year when the allergies start popping up again, right? And I was, like, sniffling and sneezing and COVID was like no one had ever known anyone who had COVID and it was like mysterious. And people were like backing away from me. And so it's good to be back on the other side of it. So as far as Twilio's evolution goes, it is really interesting, right? We started Twilio back in 2008, out of the need that I had experienced because I'm a serial entrepreneur. I am a developer, and I had started multiple companies before Twilio. One was in the educational content space, the second one was StubHub and the third was a bricks and mortar retail business. And at every 1 of those businesses, there were really 2 things in common. One, we were using the power of software to build great experiences, great product experiences for our customers. And to me, that's always -- you get to listen to customers, build something quickly, get feedback and always iterate your way towards a better and better and better product. And that's why software businesses can get better and grow is because you can respond, like you can be agile, and that's the amazing thing about software. But the second thing we needed at every one of those companies was to build a great relationship with our customer and you do that by communicating with them. And so every time we have these amazing ideas. So wouldn't it be great if, at this moment, in our customers' journey, we were able to let them call us and get automated access to information, automatically text them and let them know this is happening. Wouldn't that be an amazing experience? And we said, "Yes, but what about software developers? What do we know about making a phone ring." It's magical. And so you talk to people like Cisco or AT&T or whatever, and they would tell you that, "Oh, yes, if you racked up a bunch of hardware and you brought in a bunch of phone lines from carriers and you brought in a bunch of professional services, you could eventually get this idea brought to life, but it's going to be millions of dollars. It could be years later because that's how long it takes to do these things." And we just sort of realize, this is not at all what software is about. This is the full opposite of software. So we started Twilio to really take all of those customer engagement technologies, so voice and messaging, and chat and video, and like all those communications and put them in the hands of the world's software developers. And a funny thing happened, we started to look at how they were using this technology. And lo and behold, they were using it to engage with their customers, to build better customer relationships, which is exactly the problem statement we started with, but we kind of went down into the stack and enabled them with this technology. And the amazing thing about having a platform versus a solution, when you have a solution, you've solved a particular problem, customers with that exact problem come to you and buy, and customers with a different problem, don't really come to you. And so you never really learn all that much. Whereas, when you're a platform and what you build can be used for so many different purposes, customers paint this amazing picture for you of the big unsolved problems in their business. Because by the very fact that they're picking up the platform and using it instead of buying some solution that's out there indicates that there's no solution. Like it has to be built. And so when you see 10 million-plus developers on our platform, 250,000 companies on our platform, all building better bridges to their customers, better ways of engaging their customers, you have to ask, "But, why? How come none of the "solutions" out there are solving this problem such that so many companies and so many of their developers have to go build something." And when you start to realize is that in the world of business, and this is especially true in B2C companies, the way you differentiate in the eyes of your customers by building a better product and product experience, building a better relationship. And the more you can understand about your customer, and then the more you can tailor that customer engagement journey to them, the more delighted your customers are. And this is a big unsolved problem. Nobody has really figured this out yet. And if you just expect that you're going to turnkey your way towards a solution that, by the way, all of your competitors have also turnkeyed, by definition, you're undifferentiated. And so in the back office, think financials or ERP or HR software, it's like, yes, you want to turnkey. In fact, best practices are what you want. But when it comes to your customer, the company that listens to their customer better, the one that turns those insights into actually better product experiences and better customer engagement, those are the companies who win. And so our platform has this amazing ability to naturally lead us towards the big unsolved problems. And as a result of that, we layered on act 2 of Twilio, which is our customer engagement platform, which is built on top of all of our communications APIs, is what is the software that companies use to actually make those communications happen? Like if the communication itself is the what that we started our first decade powering, the why is the second thing. What are we saying to the customer? Why are we saying this to the customer? Did it work to actually build a happier customer relationship? And when you think about it, that gets expressed by the marketers, that gets expressed by the service people, that gets expressed by the salespeople. Apparently, that gets expressed is a hard expression to say over and over again, I challenge you want to say it repeatedly. And that's what led us into the markets that we're in, marketing is our Engage product. Flex is our contact center product for service. Frontline is our product that is increasingly used for salespeople and any employee from the front line. And weaving those together into a holistic customer journey because it's underpinned by 1 platform is the thing that companies have really been missing. Because you can go out and buy a bunch of stuff, try to plug it together, it doesn't usually work out too well. You can go build a bunch of stuff. But again, integrating it is really hard, even if you build it, but let alone build -- like innovate it with the stuff you bought. And so what you really need is a platform that provides the basis of it. What we realize is the communications is one part of that platform. But the other missing part of it is the customer data and knowing who your customer is, as told by all the data that they give off.

Perfect.

And that's why we bought Segment last year. And so with understanding your customers, the data, engaging with them as the communications and the platform that marries those 2 together to make every communication impactful, make every communication on the right channel at the right time with the right message to help move that relationship along, that is really a giant unsolved problem in the world. And so that's the one our platform is addressing. And the interesting thing about it is, yes, it's kind of full circle the way we started because that's what I wanted. When I was starting a bricks-and-mortar retailer or StubHub or this education company, but customers let us there from the initial insights that we started with, which was communications is the really hard part. It turns out the whole thing is hard. And companies cannot just buy turnkey solutions and get it right. It really is a combination of a platform element, but also bringing out multiple buyers, multiple parts of the org chart, all under 1 common platform.

Great. That's super helpful. When -- in the midst of COVID, you guys put out the survey that said, digital transformation initiatives have been pulled forward by 6 years. And part of this discussion is you were trying to evolve B2C communication, trying to evolve the relationship with the customer. As we're now kind of emerging from COVID and customers are continuing along this journey, is there any place where they get hung up, where they need the most help kind of continuing on this evolution? And where is Twilio evolving the platform to help them?

Yes. Well, look, I mean, as everything has moved increasingly to digital, and what you saw in the pandemic was everyone's digital businesses got accelerated like -- let's start with the digital giants, by the way, Amazon, Netflix, Google, like these businesses got accelerated. Obviously. Do you buy more on Amazon today than you did 2 years ago? Probably. But so did everybody else's businesses, right? So the number and quantity of e-commerce were doing it. The number of digital medical experiences that we're having, the [ number ] of curbside pickup you can do, the order ahead, the food deliveries. Behavioral change in consumers has happened. And so that's accelerated everybody. And what's interesting is we did the survey and like, on average, people thought their road maps were accelerated by 6 years. That didn't mean that they got 6 years' worth of work done in 1 year. But what it meant is customer adoption grew so much faster than they thought it would, and they're playing catch up. And the digital experiences we have now are growing faster. In fact, I think if you're a bricks-and-mortar retailer, COVID was arguably an actual net positive to those businesses. Now it seemed at the onset like it was going to be very bad for those businesses. Obviously, it's bad for society and all sorts of things. I don't want to get into that. But for just a business standpoint, it seemed like if you're a bricks-and-mortar retailer, a pandemic would be a really bad thing. But I think what it forced them to do is to get their digital act together because it was -- you had to. They also like, we'd be out of business in 6 months if we don't get them. And so by doing that, I think it put them in a much stronger competitive stance versus, say, Amazon or other e-commerce companies versus if the pandemic hadn't happened. And now we're supporting those companies as they're building out their road maps. And one of the hardest things that has happened in the pandemic is these companies have thrown themselves at digital, is understanding your customers harder than ever before. So now you look at our road map, there's a reason why our customer data platform Segment is the #1 CDP in the market and growing incredibly quickly, it's because there's really 2 tailwinds. Number one, as companies got digital, they bought a bunch of stuff. They built a bunch of stuff. They threw it all out there. And then understanding your customer got even harder than before because you had little bits of data about your customers spending all these different systems. And now they have to reconcile that and say, "Okay, so our e-commerce system, and our marketing system, and our ERP system and our -- like, all of these things don't talk to each other, therefore, we don't understand them," that's like, we're going to keep marketing you the same irrelevant things. I often tell the story of, yes, I got to wear a black wool T-shirt almost every day, and I buy them from the same company, yet they keep trying to market to me like women's hats. I'm like, why can't you see the only thing I've ever bought from you is black T-shirts? Why are you selling me women's hats? It's because these systems aren't integrated. The e-commerce system and the marketing system are just -- the marketer runs this system, someone else runs this system and they just blast at irrelevant, stupid stuff to me. And then you multiply that by all the systems that companies have, you get an n squared problem, which is like the complexity to understand your customer is the number of systems you have squared because they all need the base. They all start to integrate with each other. And that's a problem that Segment the CDP solves. And so that's the first thing is this problem got harder as companies -- the accelerator got pressed towards digital during the pandemic, which is really interesting. Then the other thing you throw at this is, okay, everyone went on in digital, fantastic. Oops, the IDFA change happened in Apple's world. The cookie changes are happening. Privacy laws got passed. It's getting harder to actually grow your business digitally because all the tricks you thought you knew about how this Internet business worked suddenly stopped working. And by the way, those changes are on the right side of history. Consumers should demand privacy. Therefore, it became even more important that you take all the information that customers willingly give you, and I'm not talking about address, phone number or whatever. I'm talking about like what products they browse on your website? What do they buy? What do the return? What things do they click on, and use that information really intelligently to then make the future journey ever smarter. And think about the companies who do this incredibly well, Amazon. Your -- my Amazon home page, it's completely different, right? Netflix. Your My Recommendations are -- that's why when my kids go on Netflix, my Watch Stuff, it's really annoying, right, because now suddenly you've got Disney stuff in your fee, right? And -- or like Facebook, right? It would be ridiculous to think you and I would have the same fee, right? So companies that do this well are rewarded by us using their products more. Because what do we say? We say, "Oh, they really understand me. Oh, this is more relevant to me. Oh, I like this." That's why Amazon is so effective across selling us. And when companies don't do it, you're like, "Okay. All right, let's go to Amazon." And so every company is trying to figure out, okay, how do I take all the information that I know about my customer and use it to make my products more relevant, more personalized and do it real time. By the way, there's no use in looking at what you browse on their website and then 2 days later, cleaning, understanding, you need to do it in real time. That next page needs to be smarter about me. And so every company is realizing they have to do this, lest, they end up having to pay the tax to Amazon to Google to Facebook, right? If you don't do this well and everyone goes to Amazon first to buy anything, what do you do? You got to probably stuff in Amazon and pay them a cut. Or you got to go buy ads on Google to go reacquire your very own customers, right? I mean you think about companies spend money to advertise their own brand name because your competitors can compete against you basically. And so if you have to pay a cut to Apple or to Google to Amazon, it's like 30% of your revenues just to keep -- stay in business because your company reacquiring your own customers, how is that a sustainable business model digital? Now the answer is you have to acquire a customer once and then serve them incredibly well. So when I want shoes, I go to nike.com first. I won't go to Amazon first. And that's -- that's the challenge every company has, but that's also the opportunity because the CDP is how you understand your customer.

Perfect. I mean a question that I often get is that discussion that you're having is not maybe a developer-answered question or maybe they may implement the solution, but that's not maybe the person that you're turning to, to answer that question. And so that discussion is much more of a higher level, almost Board level of discussion. And so how do you see this tie-in between your messaging business, this in and up strategy that you guys have with that discussion that's very much taking place on how do we evolve this customer conversation?

And you're right. And that's a good thing, by the way. That's an intentional thing. We want what we do to align to the executive priorities of a company where there is big budget, where there's attention. That's a good thing. The number of C-level meetings that I and my team have had in the past several years is way more than we have in the early days of Twilio, not just because we've grown bigger, but also because what we do is more relevant to the executives than our customers. That's a good thing. And the way we think about it is what we call our in-and-up strategy, which is that developers bring us in to the company. So we make what we do incredibly easy for developers to adopt. We want them to adopt it, run Twilio in the tool belt of every developer in the world, so they bring us in. And then they become our champions inside these accounts. But as we move up, we're moving up to the value chain. Instead of selling just, say, messaging or e-mail, we're selling contact centers and marketing solutions, right? We're also moving up the org chart because we're getting in -- we're brought in by developers and then our sales team navigates their way to hire and hire decision-makers. And so the in and up is a really powerful thing. And I know this because when I talk to our sales executives, there's a story that I've heard so many times now that I can't even count. They're like, in my last company, I used to go in and I had my great PowerPoint presentation, and I'd sell to some business decision maker with the budget. And the decision maker will be really excited, "Oh, this is fantastic." And they turn to the usually IT people in the room, and they'd say, "Oh, can we -- is this possible?" And you get the IT person, arms folded, "No. No, it will never work, can't do it." And so you've got this objector in the room they have to overcome, and they can really throw monkey wrench into the deal, right? And at Twilio, when we go in, we're talking to the business -- line of business owner and they're like, "Oh, this is really cool." And they turn to their developers, "Is this possible?" The developers are like, "Not only are they possible. We already built it, check it out." And they can actually show off the prototype, and get people using it and get people really excited. And that often manifests for us as like a lot of our sales deals, there's no competitor in the deal because it's not like an RFP and let's do the song and dance. It's like the developers built it. The executives are excited for the business outcome. And the question is really, how do we get this live? How do we scale it? How do we pay you? Are you secure? Those usual types of questions they have to run through with a big enterprise. But it's not like, "Hey, let's just start from scratch and let's just believe a PowerPoint deck is so powerful." When a business decision maker doesn't have to trust a PowerPoint deck, they can trust their own team who are saying, "Not only is it possible, look, we've already started building it." And that is a game changer for a sales cycle.

Got it. Okay. Perfect. Maybe just turning to kind of the competitive discussion that happens around Twilio, whether it be enterprise software vendors who are making CPaaS announcements or just CPaaS vendors expanding their portfolios. What do you say to concerns that the space will be a hard space to make money in?

That's been the concern since day 1 of Twilio, it's about all I can say, right? Like communications, when we started the company, "Oh, communications. Oh, it's commodity. Oh, it's horrible." I like -- and I was like, there's a huge unserved market here. And this is one of the largest industries in the planet. And that's the opportunity. That's the intersection of those 2. And I think we are no stranger at Twilio to competition. In the early days, we had a lot of people actually stand up competitive things, and they said, "Oh, look, we're just as good as Twilio like --" they always would compete on price, first of all. They would always say, "Look, we're just like Twilio, but cheaper." And it turns out that things customers want is -- look, customers always want to pay the right price, don't get me wrong. But what they really want, they want security, they want reliability, they want scalability, and they want a road map that takes them where they want to go. And that's what we really have focused on. And so in some ways, as people enter the market, of course, you can always say, validates it, yada, yada, which it doesn't. But you see a huge market shifting in the direction of Twilio, which is, yes, more developers getting involved, companies needing the things that we're selling and us bringing it together in a very unique way. And I think that's the super power, really, of Twilio is that when we start -- we've started with building blocks, then we see customers, we hear from customers what they need, and we build from there. And what's interesting is you look at Twilio like we have been first to do many things. We were the first company, we launched the voice API, and then we launched messaging. And it was like, what does SMS have to do with voice? We're like, guess what? These things go really nicely together. Messaging is now a bigger business than our voice business. We're the first company to bring an e-mail in the story. We're first company to bring the contact center in the story. We acquired a CDP, right? So I think what you really see about us is our actions are driven by first-hand insights into what customers need. And that's why Twilio has always been at the forefront. That's why we're the leading CDP. That's why we are always doing things that are multiple steps ahead of anyone else in the space. And I think that's what happens when you're a leader is you get the advantage of customers coming to you first, giving you the first bite at the apple and showing you their big unsolved problems. And that's why we've always approached the market. So net-net is we're no stranger to competition. There's always been competition, usually a pretty similar story from whether they've been small or big. And I think our formula works quite nicely.

Got it. I would love to spend more time with you just on the market. But just given kind of the mood of investors at this point, I just want to spend a second on how you guys are thinking about profitability versus growth. And has there been any change over time and how you thought about that balance?

Well, we've always seen this as a generational opportunity. I think to transform how companies build for their customers, their entire front office and how they go win the hearts, minds and wallets of their customers, that is a generational opportunity. And in the B2C realm, this is an unsolved problem. No one has solved this problem yet. Every company is out there to go figure it out for themselves, build it themselves, buy a bunch of things and hope for the best. No one has solved this. So we have been big believers in investing in this growth. And I still believe that, by the way. But I also think that at the scale that we're at now, $3 billion in revenue, that it's time for us to be profitable. So we declared that next year, we're going to achieve profitability in 2023 for the calendar year, and stay profitable thereafter. And look, you can tell, I'm someone who believes strongly in building, in experimentation, in going and capturing markets, finding unserved markets and serving them. I believe strongly in that. So you can imagine that I like investing in finding new areas. We've launched a lot of products. But I also think there's discipline in doing that within our financial envelope that we're aligned with our investors on. And I think that it's reasonable to expect that a company at our scale can continue to grow at a great pace, but also do so profitably. And so that's where we're landing. And so we're excited for that commitment. We're excited for the work that we now do to become a profitable company. I think it's the right thing for the company to do. And so that's what we've committed.

Okay. Perfect. And then just one last question in terms -- before we turn back to market opportunity is just a question from investors has been around kind of the deceleration we saw on the domestic front over the past couple of quarters. And just how we should think about kind of the U.S. versus the international opportunity?

Yes. Absolutely. Well, the U.S. is our largest market. So obviously, you've got a little bit of -- a lot of numbers in there. The biggest thing is messaging is obviously a big part of our business. In the U.S., there's been this change in the ecosystem to what's called 10DLC, I won't bother you with all the details, but really, this is about trusted communications. And this is about making it. So when you get a text message from, I don't know, a pharmacy or your kid's school, you know that it's authentic. If your pharmacy text you, "Hey, your prescriptions or do you want to refill?" "Hey, what was that prescription again?" You want to be like -- you want to know if you're talking to the pharmacist and not somebody. But right now, you get text messages from businesses, what are they? They're a 10-digit number or like a 6-digit number, claiming to be the pharmacy, claiming to be your kid's school. You're like, I hope, maybe, or a phone call. We don't answer our phones anymore. We get all these calls from 10 digit numbers. You're like, "Is this my kid's school? Is this the pharmacy? Or is this just a robo dialer or a hacker or some fraud scheme going on," right? And so the ecosystem needs trust. So we need to attach identity to these phone numbers. We need to verify the identity of like who those customers are, and then we need to pass it through. So when you get a text message, it doesn't say from plus 1 415, something, something. It says, no, no, this is coming from pharmacy. It's coming from the school. And there's a green padlock on it that says -- and you trust it. And that will open up so many more avenues of interest in commerce that can be done over these channels. But it's a bit of a painful evolution. And so there's been some friction that's been added now because we have KYC that we need to do with customers and things like that. So there's been retooling our product, and the whole ecosystem has been retooling how to do that. It has not been without pain. And so we are working every day to remove friction from that process, but I think it has impacted some of our domestic growth.

Okay. Perfect. And then maybe last question, just management turnover over the past couple of quarters. At the same time, you've had some very encouraging new hires. Just how have you managed through these transitions? And are there any kind of key areas that you're focused on in hiring them?

Yes. I mean it's a natural evolution of the company. Obviously, you hire executives, it's exciting. And there's also a natural time for executives to leave. To me, the important thing is that you do so in a thoughtful, planful way. We've done that -- a very good job of that. So George's transition, who is our COO, out last year, was a very planful transition. We promoted Marc to the CRO role about a year ahead of time and gave him many of those responsibilities. We started handing the COO responsibilities to Khozema, our now COO, well ahead of time so that when we made that change, we had [ Kho ] taking on the COO title as well as Marc taking on the revenue responsibilities. And so it's a very thoughtful, planful move. Similarly, like our GC, Karen decided that she thought it was time to move on. We did an almost year-long transition as we had sought her replacement. Onboarded her replacement, a very smooth handoff to Dana who's now our new Chief Legal Officer. And so again, I go back to like transitions happen and how thoughtful you are on those transitions, how well the team comes along for the ride and how much the knowledge transfer happens. Those are the things that matter. And I think we've been doing a great job on that.

Okay. Perfect. Well, I could ask you about 85 more questions. But last, we're out of time. So Jeff, thank you so much for being here today. I appreciate it.

Thank you, Meta. Thank you, everybody. Appreciate being here. Nice to be back in person.