Twilio Inc. (TWLO) Earnings Call Transcript & Summary

All right. Perfect. Welcome, everybody. While everybody kind of clears away, I'll read the disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. No better way to quiet a crowd than reading some disclosures. All right. I'm Meta Marshall, I head up the Communication Software team here at Morgan Stanley. We are delighted to have Jeff Lawson, Co-Founder and CEO of Twilio, with us here today.

Thank you, Meta. Great to be here.

All right. So before we step into the changes that the company has made over the last 12 months, I just want to see how you think the value proposition of Twilio has evolved as you've moved beyond just channels to engagement tools. How can Twilio help customers transform their B2C communication and better monetize their own data and relationships. And how does this value prop continue to evolve over time?

Yes. Thanks, Meta. I think the -- essentially, the story of our company is informed by its customers, right? And the needs of customers continually evolve and, even more importantly, your understanding of those needs evolve once you get into the market. And so we started Twilio with communications because we said companies need to communicate with their customers better. And in doing so, what we learned was that the most valuable communications that they have actually are infused with an understanding of that customer because we kept asking how can we add more value to these communications? And the answer was always, well, the better we knew the end user, we could actually make smarter communications. And so that led us to taking communications, which is where we started, focusing more on engagement communications, i.e., the communications that actually help a company to build a relationship with its customer across its sales, its marketing, service, support and product, et cetera. And what that led us to is saying, okay, look, if customer data is the key to actually having those communications work, having a marketing message that lands, having a contact center interaction that has a bunch of context about who the customer is, about actually making the product itself personalized for every customer, if customer data is core to that, we kind of looked around into our customers and said, okay, great, how do we get access to that data? Like how do we -- what API might we build that will let you bring that data to us? And they said, we don't actually have that data either. Facebook has that data. We've got pockets of that data sitting all over the enterprise, but it's like nowhere where we could actually easily like feed it into a system that would help us build something a little smarter. We said, "Oh, that's interesting." That sounds like a big hairy problem to go solve. And company after company, we found that they did not have a handle on who their customers were, let alone how they were going to go build a digital relationship with those customers. Meanwhile, you go look at Amazon or Google or Facebook or these companies and they're like, well, they seem to have it solved, right? They just put a bug on the website of every company in the world and gather all of this data and build profiles about all of us and they can do a really good job targeting ads at us. But every other company, they're kind of at square 0 of really understanding their customers. And that is one of the biggest business impediments they have. And so -- and we looked over and you see Segment who solved this, so we acquired Segment. Said okay, great. We'll bring in together these 2 worlds. How do you communicate with your customers, how do you understand your customers, bring them together so that you start with a solid understanding of who your customer is, which is a story told by all these volumes of real-time data that are coming in about how customers use your product, how they browse your website, what they buy, what they scroll past, what they don't buy, all that stuff and signals, and then use those profiles about your customers to actually engage with them better. And that's the missing bit, if you think about financials of the company, there's a CFO. The CFO puts in a financial system. Everything in the company integrates with it so that you can produce financial reports on a daily, weekly, monthly, quarterly, annual basis. No one has a choice about whether or not they're going to integrate those financial systems. Yet when you look at the front office of a company, all of its customer-facing systems, it's the Wild West. Companies are a cobbled together collection of a bunch of different products that all see a little piece of the customer life cycle, a little piece of the customer data and behaviors but together, make no sense. They don't talk to each other. They don't work together. And this is why you have the worst experiences with a lot of companies when you try to do business with them. And we realize we can solve this problem. We can build that cohesive structure, kind of like the CFO has for the back office, where we can build it from the front office. And by the way, the benefit of doing that is so core to our customers' businesses because customer engagement, having this system work well of the customer journey is the core of how do you acquire customers, how do you service your customers profitably, and then how do you scale and grow those customers. It's essentially the customer acquisition cost and the lifetime value. And that's the fundamental value proposition of every digital company, acquiring customers efficiently, servicing them and growing them and building your lifetime value with those customers because they're loyal repeat happy customers. And we can do that in a way that no one else has solved. And so that's when our mission turned from communications, which it was for about the first 5 to 10 years of the company and evolved into customer engagement because we said this is a much bigger, more important, more strategic problem that, oh, by the way, uses a bunch of communications that drives the usage of our core products as we evolve in this direction. And so that's the journey that we're on.

Got it. I mean when you went into the communications business, you really created a market where there wasn't one before. But as we look at the engagement market, there's multiple participants in that market. So is it the ability to fuse all of that data together? Like where does the unique value proposition comes from there?

Yes. Well, it's interesting -- you're right, Meta like when we started in 2008, there were no companies that did communications. There were no carriers in the world. There were no equipment manufacturers. There were no -- Cisco didn't exist yet. Obviously, it was a very crowded market then everybody said it was a difficult market to operate in, but we had a fundamentally different value proposition than anyone else out there. We were turning it into software. We were making it available as APIs, allowing innovators to go take those APIs and go build things that never existed before. And in doing so, unlock tremendous value that nobody had seen as an opportunity before we came along. And I think there's a similar story unfolding in this world of customer engagement. As you said, there's a lot of companies in the customer engagement space, no doubt, some of them very large. But most of those companies, their roots are just like the carriers, their roots were in copper wires and fiber optics, not in like developers and innovation and stuff like that. Well, the same thing is happening in customer engagement, where the companies that are in that market today are their bases is in B2B, right? So think about large CRM companies whose symbols might be CRM, right? Their heritage is in sales automation for B2B, which everything -- in that world, everything you know about a customer is what a salesperson has typed into like the notes field. That's the sum of the B2B companies' understanding of its customer base. Where is the deal cycle? I don't know, let's go check the notes. But in B2C, when I go to amazon.com, you think someone -- like there's a sales rep who creates an opportunity that Jeff might buy a spatula today. No, of course, not. The story of me, their customer, is a story told through volumes and volumes of real-time data and the machine learning systems that act on it, recommendation systems that put better products in front of me, et cetera, et cetera. It's a completely different problem domain. Despite the fact that companies have tried to like kind of bundle them together, it has not worked. Nobody has solved these problems. And that's why when I talk to customers, all of them say like, yes, we don't have the system that you speak of, we don't have and we want, right? Because we can't make sense of our customer. Our data is in all these silos of all these SaaS applications and in-house applications that can't talk to each other. And so this is the opportunity that we're going to go -- that we're going after, which is really focused on the B2C market in companies that have millions and millions of customers, not like thousands or tens of thousands. And the story of those customers is told with real-time data and volumes and volumes of it as opposed to like handwritten notes about a relationship. It's a very different problem domain. And I think it's a wide-open market.

And do you think macro accelerate that need because customer -- because your customers realize they need to make these transformations and they can't wait or it almost kind of freezes them in place?

We've pivoted our messaging quite a bit in the last year because of the macro environment. And the amazing thing, so Segment is our core data platform. That was an acquisition we did in 2020, the leading customer data platform in the market. The problem they solve is they can take data out of all these different systems. They have 400 different integrations out of the box to work, putting it all together, build one customer profile and do all of that in real time. It's amazing technology. We've been named the leader in this space multiple years running by IDC, and it's just -- we're used by Fox Sports during the Super Bowl. And during the Super Bowl, they're ingesting 1 million events a second across all their digital channels to understand who all their viewers are. And Segment is able to make sense of that for them. Like these are amazing, amazing technology. In the past, we talked about it like, well, once you understand your customer, you can engage with them better, and that's true. But that's kind of this [ handy way they ] engage, innovate all the things, story, that works well in a high-growth period like the last decade. But [ we have ] these amazing stories about how customers have taken Segment and by understanding their customers better, building out these essentially segments of customers, no pun intended, and then using those to go get more efficient in their ad buying and acquiring customers more efficiently. And when you double click on the details, you learn about the customer stories like Domino's Pizza in Mexico. They put in Segment and because they understood their customers better, they could acquire -- they saw a 700% return on ad investment because they put in Segment. Or Allergan, the drug maker who sells BOTOX, who's built a direct-to-consumer play to go build relationships with the users of BOTOX to drive repeat usage. And they put in Segment to understand their customers better, to target their customers better in advertising and saw a 42% decrease in their customer acquisition costs, 42% decrease in customer acquisition costs. I mean, marketing teams kill for a 3% decrease in customer acquisition costs, a 42% decrease is like unheard of. So these are amazing case studies. So we've completely pivoted our messaging around this to saying not just like happy customers are a nice thing to have, which, of course, they are, but pivot it to the reason why happy customers are better is because you can acquire customers more cost effectively and then keep them and have them spend more over time as a result of it. And so all of our messaging has turned into CAC and LTV stories about how do you get more efficient in your customer acquisition and then unlock more revenue and more profit from those customers, which is the message that customers now want to hear.

Got it. So maybe moving on to kind of business...

How many of you flew in and drove up the 101 and our billboard for the last 10 years on the 101 has said ask your developer. Anyone notice what it said today? Save 40 -- or save 62% on your customer acquisition costs, okay? Like that's not an accident. Like that's responding to the 2023 economic environment that we have changed our messaging in order to appeal to the thing that our buyers now are motivated by.

Got it. So I mean, speaking about efficiency, how has the last year and just kind of the investor focus on profitability changed how you realize that value proposition of Twilio? And has it made you more focused on milestones than you were before? And what would you say to investors' criticisms at times that it took too long to get here?

Yes. Well, look, every Silicon Valley or technology company, right, you start off, you've got this big, the Internet is your market, so there's huge market opportunity, and you raised venture capital in order to go capture that opportunity faster than you could just on an organic basis. And so pretty much every technology company that you've ever invested in started out as an unprofitable company for some amount of time. And at some point, they make the transition from unprofitable to profitable. And the only question is when, when do they do it? And this is what I have always thought of for Twilio. We had some folks that when we were, say, $100 million of revenue, said you should be profitable. A company like -- almost philosophically like a company at $100 million of revenue should be profitable. Is that right? I don't know. I didn't agree with that. I thought that we have a very large market to go tackle. We've got a lot of work ahead of us. We have a tiny share of a huge market. This isn't the time to be throwing off profit. This is the time to be investing and growing. And look, we did. And over the past several years, we've grown from a $100 million company that we were, give or take, in 2015, to a $4 billion revenue company that we are today. And I think that's the right decision to make. But now as I sit here today and I say at $4 billion of revenue is now the right time to become profitable? You can ask the question again. And it seems a lot more plausible that you take a company of $4 billion of revenue should be profitable than a company at $100 million. But the point I'm trying to make is it's somewhat arbitrary where you say the time is to make that transition. But the thing that I look at that tells me that this is the right time, aside, obviously, from investor sentiment because of the nature of the market and the macro factors make profitability so much more important in this environment is the fact that I see there's a lot of opportunities for us to be more efficient inside the company. We've grown incredibly fast. We've been 15 years in a hyper growth mode. With that, we've captured markets. We have grown to nearly 300,000 active customers, $4 billion in revenue, but that -- there's a cost to it. It's a waste inside the company. And so now is it the right time to go in and say, okay, where can we be better? Where can we be more efficient? Where can we actually serve our customers better? Because we actually are -- we streamline ourselves and take out some silos and some bloat and some layers and things like that. They're like, yes, actually, this is the right thing to do. And so I sort of tell that story, so you can get into my head just a little bit as a CEO thinking about, how do you grow, capture a market, maximize the company's long-term potential to go win in a very large market, but also pick the right time and ways to instill greater and greater discipline in terms of spend, in terms of ROI and things like that. And that's the transition that every technology company goes through at some point. The only question is when. Sometimes it's as a private company, sometimes it's as a public company. Sometimes it's in a bull market, sometimes it's in a bear market. But I bet if you look at it more happened during the bear markets than during the bull markets. And so the important thing though for, I think, you all to think about is, as a company, can we be as successful in the new market realities as we were in the old market realities. Because as I told the company when we did our second round of layoffs, I said, look, Twilio is a company that in the last game, that was a bull market with a low cost of capital, a lot of expansion going on in the global economy. We made great use of those environments -- of that environment and that set of conditions to go win. And I think we did. And now we're going to use the new market conditions, the new game that has emerged and the rules of that and the constraints of that, and we're going to go now win in this environment. But we've got the scale. We've got the customer base. We've got the products. We've got leadership in multiple product categories that we're in. That's the point of the bull market days is to go achieve that position. So that when the music stops, you are in the best position to survive and thrive in the next era. And here we are. And so that's what we're going to go do. And by the way, I think our actions, hopefully, I mean, you all judge for yourselves, but our actions show that we are taking that transition very seriously. A month ago, we announced several substantive actions that we're taking. We did a layoff that combined with the layoff we did last fall was a 25% reduction in force. We have formed 2 business units to execute better on efficiency and growth in the 2 sides of our business. We have instituted a large stock buyback. I personally bought in the market. And a number of other things we've done, like cutting back on perks and all this kind of stuff, as you can imagine, to really get the company into fighting shape for the new environment. And I think those are the substantive actions that our investors have told us we should be taking. And so when I look at what we've done, we've done a lot. We are still in the mode of like of implementing a lot of that stuff, rolling it out. And these are big changes. But when you think about a company, it takes some time to roll those things out. But these are big substantive things. But they come about because of the very frank conversations we have with investors.

So even before you made some of those changes. I think you had identified that maybe some of the software sales were not growing or your sales -- software sales were not kind of as effective as you wanted them to be. And so you were making changes within that organization. Is some of that as simple as changing the messaging more to the ROI like you did on the 101? Or what changes were you making -- what changes have you made? And what kind of traction are you seeing with those changes?

Well, yes, so you can look at some of the changes we made, like last month on our earnings -- around our earnings call, we made a bunch of those changes I just mentioned. But that was not the beginning of it, right? So we did a reduction in force back in September, midpoint last year, we divided our sales teams to better execute on our software opportunity. . So just so you all know there's like 2 sides to Twilio now, communications, and data and applications. And the data and applications side of our business all drive communications when those things win in the market. But there's some differences to the go-to-market approach for a software business versus a usage-based API business. And mixing that stuff all together in the same bag of the sales rep and in the same go-to-market motion was not favoring the sales of software. And so realizing that, we divided it out to have separate sales forces so that we could dedicate capacity and focus to the success of Flex, our contact center product, and Segment and Engage, which is our data and our marketing automation product. And so that's really like a continuation of the changes that we've been making as a result of the learning from our execution if that makes sense.

Got it. That makes sense. How did you view kind of company management changes that were made? And just where is your time spent most effectively today?

There's really 2 things I'm primarily focused on now. One is since we have made a shift to business units. So I'm a big believer in like layered management is the best way -- is the most effective way for people to actually run the company together. So what I mean by that is if you've got like a leader with 1 skill set, their direct reports should have complementary skill sets. Then you go a layer below them, they should actually be the complementary skill set to that, which is the same as the one above. And like when you layer the skill sets of teams, I think you end up with really good ideas, you end up with more rigor, less -- everyone agrees with each other, but also you kind of fill out the skills that are needed to accomplish things. And I kind of observed that in my prior structure for the company, when I have functional leaders, I had a head of go to market, a head of R&D, a head of finance, a head of HR, my skills are focused quite a bit on product and engineering. But when I hired a Chief Product Officer, which we'd had for the last several years, my job is to hire a great person and then kind of get out of their way. So I'd end up with a great head of product and I'd be more arm's length from it all. Now that we have organized into business units. I have a head of communications and I have a head of data and apps. Those are financial business leaders. So with myself as a product leader, I can actually go in and work with them and their reports on the product strategy and the delivery of that, which is something where I add a lot of value. So I'm getting a lot more involved in product, which I think is a good thing. The other thing I'm spending a lot of time on is selling Segment. The world needs CDP, a major bank that isn't Morgan Stanley. We announced on our earnings call last month, has put in Segment across the entire bank. When a bank of that size -- you can Google it. When a bank of that size standardizes on your product, that's a sign to the world like there's something happening here. We are providing tremendous value. And we are still in the very early days of this market for customer data platforms. So I am spending quite a bit of time going out and working with customers to help bring awareness of the CDP into the C-suites as well as getting deals closed which is what our -- what we need to do in terms of pulling through software because we have a $3.5 billion communications business that needs to get more efficient. So that's where our communications group is focused on, driving profit out of the $3.5 billion communications business. And then give or take, a $400 million software business that needs to be growing faster. So my business unit over there, they are all focused on growing the software business as quickly as they can. And so I'm doing a bit of both. I'm helping on the product side of communications to build -- make sure our teams are building the software that allow us to get more efficient, building automation, more product-led growth, actually, the roots of Twilio are in product-led growth, helping us return to those roots, so that we have to spend less on distribution to get the growth that we've seen in the communications business at scale. While on the software side, focusing quite a bit of my energy, I'm just getting in front of customers, selling it.

Got it. Another topic of this conference has been AI. I know in the past, you've kind of talked to it or around it about the Flex portfolio, but there's obviously a lot of ways to bring it within the entire Twilio portfolio. You're obviously always kind of on innovations edge. Just where do you see opportunities to bring AI into the Twilio portfolio?

Yes, it's a great question. Like there's -- AI has been a topic for obviously a number of years. But we are at a point of inflection right now. It doesn't feel like that, right, with the large language models, like there's a point of inflection of what these models can do but also what they can't do. And so it's a very exciting time to be building here. I think it's still early for enterprises to be frank. But what's -- when you look at the landscape of things, these large language models are able to make incredible predictions of language and to accomplish tasks that humans can do in terms of language. So it's obvious to look at, oh, well, these have contact center conversations, can they have sales conversations with my customers? Can they do support? Can they write marketing copy? Can they even generate the marketing images? Like all these types of things they can do. And I think a lot of those things will come to fruition in the coming years. But what's most interesting to me is when you think about like if every company is going to have access to large language models, because open AI and any number of entities are going to open up these APIs. And those language models will basically consist of 3 layers of knowledge. There's the knowledge about the English language in the world. And you get that by training these models on the Internet and Wikipedia and everything else and like that's what OpenAI has. The next layer is details about the company that AI is representing. And that's where you feed it, the website and the facts and the knowledge bases and all that kind of stuff. And that will be easy because we have -- every company will be able to solve that. Like there'll be a lot of ways to solve that, but it won't be super hard. But then the third layer on top of that is the like, okay, the world, the company, the customer. You're going to have to tell the model, who am I talking to? Meta, here's how you pronounce it. Here's what she bought, right? She's a new customer. She's a lifelong customer. She's a high-value customer. Oh no, she's about to churn. Here's our purchase history. Here's the prior interactions we've had with her, all that context for who Meta is. The bot's going to need to know. Otherwise, it can have a great conversation with you about Wikipedia, but it won't actually have any business value. That's the data that Segment has. That's our customer data platform. We're the leader in this market. So the opportunity for us is to win in the CDP and then apply everything a company knows about its customer to go build the language model addition, augmentation that allows it to actually be useful when it's talking to a customer. And we are super in the early days of this. I was actually with the team just the other day. They were testing out the ability for it to build a model. The use case they picked was can it give me a price for a flight? And they were feeding it a bunch of data, like pretending like you were interacting with an airline and saying, could you book a flight with a large language model. They were trying to convince it that when you don't know the price of a flight, call this API to go get that knowledge. Instead, the large language model insisted on making up a flight and its price. Like, yes, it's $450 to fly on Flight 482. We're like what is -- that's bull****, where did you get that? That's what large language models are doing today. But look, that will get solved, [ become hallucination ]. That will get solved in the coming years as these models get more sophisticated. And I think that the key thing as it is doing that, we will be building the like -- and here's how you bring together everything you know about your company and your customer on top of that large language model as the foundation of then how it becomes useful to an enterprise, but that whole category of customer-facing interactions.

Got it. Are there any questions from the audience? All right. Perfect. Maybe as a last question, just where does Engage kind of fit on to this. We spent a lot of time talking about all of the data and building out kind of the leading CDP platform that you have, but where does it go from there to kind of developing the campaigns on top of that?

The original hypothesis of why we acquired Segment was the fact that like you bring together your knowledge about the customer and the communications of the customer and you bring those two together. And the hypothesis to my conversations I had with the CEO of Segment, he said, look, our customers who put in Segment pull all these data sources, pull them together, do all this work to build this profile about their customers and then they say, now what? Like what do I do with that data? Like it's only valuable if I do something differently because I understand my customer. And the answer of what customers were asking from him is build the customer journey on top of this. Tell me everything I know about this customer puts them here in this journey. They are just about to adopt this product. They've been successful with that product. Therefore, we should save this and do something that activates that understanding of my customer to push them propel them to the journey. And that thing that you tell -- the action you take is almost always an ad, it is an e-mail, it is a text message, it is a -- some form of communication to that customer. And that's why I need you, Twilio. And so Engage is our first product that brings together, here's the customer and what are you going to do when you know this stuff about them, you're going to trigger a campaign to go send them a text message, that e-mail, that phone call, you're going to do something differently because you now understand the customer better and that reaching out and touching the customer is what Twilio does. And so it's the first product that really brings together the best of Segment and the best of Twilio into one pane of glass for primarily for marketers. And that's just the first of many such things that we're doing. And I think what we've seen so far is a really good ability to take a customer who's using our CDP, and we've talked about we have tens of thousands of customers in our data and apps business. And then say, "Oh, by the way, what do you want to do with that data?" And sell them Engage. And the product has only been in GA for 4 months, but we announced on our earnings call, said large bank had already adopted it, among many other customers, right? So we're off to an early start. The product is in market for 4 months, but we're already seeing that cross-sell from like the CDP customer who's built those profiles to now activate the data that's in those profiles to use the rest of Twilio's channels is starting to come together really nicely. So really excited about that.

Great. Well, Jeff, thank you so much for being here today.

Thank you, Meta. Thank you.