Twilio Inc. (TWLO) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Welcome to the conference. I'm Mark Murphy, software analyst with JPMorgan. And it is a wonderful honor to be here with Jeff Lawson who is the founder and CEO of Twilio. First of all, Jeff, thank you for making the long trek out here. Thank you...

The longest trek was actually getting down from the seventh floor. The elevators were...

That can be the case.

Yes.

I've encountered that myself. So welcome to the conference. Maybe you could begin by just giving a very brief introduction of yourself and Twilio for the benefit of anyone out there in the audience who's not aware.

Yes, absolutely. So everybody, I'm Jeff Lawson, I'm the CEO and Co-Founder of Twilio. Twilio is a customer engagement platform. We allow companies to understand their customers and then connect with their customers across all the different parts of a business that talks to a customer, whether it's sales, service, marketing, support. We're building this platform that allows companies to understand customers based on every data point that a company has about his customer, everything they buy, everything they scroll, every visit, every click. And then use that to go create more engaging interactions over e-mails, calls, texts, every touch point a company has with their customer, be able to make those into greater lifetime value-creating conversations with those customers. So we're the leader -- where we started is in communications. We're the leader in this market called CPaaS, which is Communications Platform-as-a-Service. We power over 1 trillion interactions between companies and their customers last year, between calls, texts, e-mails. And then we acquired the leading customer data platform called Segment that has powered over 10 trillion data points between companies and their customers in the past year. And now we're marrying those 2 together to build this customer engagement platform.

So we helped take the company public back in 2016. At that time, less than $300 million in revenue. We -- the business boomed every year, all the way through the pandemic. You're approaching $4 billion in revenue today, over 300,000 customers. The -- when you look at where we stand, the economy has slowed, right? The cost of capital has changed pretty materially. You've done some substantial layoffs. You split the company into these 2 divisions. From your perspective, where do you think we are in the evolution of Twilio? And can you help us maybe to envision where you see this business heading a couple of years down the road?

Yes, absolutely, right? So we've got this more mature $3.5 billion Communications business. And the goal we've set for that Communications business is to throw off a substantial amount of profit. So where we are -- in terms of the company, that was where we started 15 years ago. It's a large business, and we expect that it can trough a substantial amount of profit, and we're focused on that with that part of the business. Now the flip side is our Data and Applications business is a newer set of products, it's about $400 million, and those are in market capture mode. And so we're really focused on scaling up the go-to-market activities for the data and applications business in order to grow that side of the business much faster. And so we split the business into these 2 business units to be able to separately pursue those 2 goals, right? Efficiency and growth for comms as well as market capture and higher growth for our data and applications business. That was a change that we made early this year, February of this year, when we did a restructuring of the business and split into these 2. Now I believe that this helps us to go accelerate our ability to achieve this goal that we have of building this 1 customer engagement platform. Because you think about talking to your customer over one of these channels and actually understanding them and knowing what to say and being really smart about how you engage with that customer, right, those are 2 sides of the same coin. Because if you have a channel open with a customer in terms of being able to talk to them, you don't know what to say, guess what, customers close that channel. They're like you're irrelevant, stop, unsubscribe, go away, right? And so these are 2 sides of the same coin. And now you think about, where are we going? Well, we're going into a world where artificial intelligence, and I'm sure that's the buzzword everyone's weaving into their presentations today, but look, it's absolutely true that the amount of excitement out there in terms of customers, buyers, but also what's going to be possible, like we have reached that inflection point. I'm absolutely confident. And I'm a software developer by background. I'm a technologist. I've been doing -- I've been in the industry for 30 years. And I think this is the next big platform shift. And I think a lot of other people are saying this, too, I'm not alone in this, that this is the next platform shift, a shift like PC to web or web to mobile. Well, AI is going to be the next platform shift. And what that implies is that when the platform shift occurs, every market experiences this like a reset button moment where what buyers want, what customers want, changes based on now what is possible. And the decisions that you made 2, 3, 5, 10 years ago about your technology stack or the decisions you made are suddenly all up for grabs again. Like that's what happens in a platform reset moment. You saw it when mobile came out where what was possible changed all of our expectations about getting into a stranger's car or renting someone's spare air mattress or whatever like, all sorts of new things became possible that you didn't even imagine. And therefore, where you'd stay when you wanted a vacation or how you got around town, completely changed. Now that's the consumer world in a B2B world. What it does is it resets all of the technology decisions that a company has made. And you say suddenly, well, now we're going to optimize for a new set of things that are possible that obviates a lot of the decisions that we made a while ago. And I think that is happening now for all different categories of B2B software and we have an amazing set of assets to go into companies because the data that we have about our customers -- customers, their end users, to me is the most important thing that companies are going to need as they think about building out AI to go serve those customers. Like I think about a world where, let's say, you've got a variety of AI doing a number of tasks for your customer, whether it's sales, service, marketing, where like all of those fields are going to get revolutionized because of what machine learning can do. And in any one of those scenarios, if I'm like, I've got an automated thing that is trying to do marketing or sales or service for a customer, and in one universe, that thing does not know anything about who it's talking to. "Hello. Hello, customer. How can I help you today," right? Versus the version of that where they know exactly everything there is to know about that customer because you've been able to take every data point about that customer, coalesce it into 1 golden profile and then use that profile to teach the language model, whatever AI it is, to understand that customer and to serve it differently, you're going to get a very different outcome. "Hello, Mr. Murphy. I see you are a longtime customer, who has a high likelihood of churn, how can I help you today?"

Now, you've got my attention.

You know what I mean, right, and all sorts of things. And the interesting thing is the last generation, the mind naturally goes towards, oh, a conversation for, say, service and support, right? Our minds, as consumers or as businesspeople, often go towards, like, well, that's an obvious use case for this technology, right? Well, when you think about those interactions, it used to be that you would build it out very intentionally. You'd be like, okay, this decision tree and that company would say, oh, well, if they say this, then you're going to say that. And they kind of model these interactions out very tightly because that was how the technology worked, right, they called it intents. What's your intent? Your intent is to buy. Your intent is to change your flight. Your intent -- and you narrowly model these very discrete activities. Well, now you just hand all the context of that customer to a large language model. And it's just going to figure out. And that's the amazing thing that changed in the last 6 months with the advent of these large language models. And so the it-figures-it-out world that we're now in, changes everything.

And you have 10 trillion of those data points in Segment, I believe you said earlier.

Yes. Last year alone, yes.

And last year alone. Okay. So I didn't even have to ask you about AI. We went there naturally. But I want to come back and double-click on that in a few minutes. Before we do that, I can hear the excitement in your voice, right? And I've known you a long time. You personally bought Twilio shares years ago in the [ 20s ]. You did that again recently at a little higher level. The company has authorized a $1 billion share repurchase program. You used it pretty actively, right, in Q1. The stock is trading around 1.5x revenues. You have $16 a share in cash. You have much more than that per share in NOLs. So it feels a bit washed out. Where do you see investor disconnects at this point in time that are kind of driving -- that are driving your buying...

Given the fact pattern you just stated, wouldn't it make sense for why we'd be buying and I'd be buying? Just saying.

Yes.

What's the disconnect? I think it's...

So when you sit down and speak with investors, what do you think at this level they're underestimating, if I could rephrase it.

Well, I think there's 2 things. One is, I think there's certainly disappointment in our guide because we guided to a low growth guide in Q2. And I think part of this is we are -- with a usage-based model, so the $3.5 billion of communications revenue is a usage-based model that in an economy, it will mirror in some ways the economic activity of what's going on outside of the walls, right? So during the high-growth era of the last decade, right, we were able to show industry-leading dollar-based revenue expansion and growth numbers at our scale. And now we're seeing the flip side of that, which is the headwind does disproportionately impact us in terms of seeing less economic activity outside of our walls. I was just telling the story upstairs to some buy side about how I was trying to buy the new Zelda game. And I went to Best Buy and I got a text message that the game that is going to get delivered. But I had to get on my flight and it hadn't come in time, so I canceled it. And I got another text message saying, you canceled your order, right? So that transaction equals to text messages. So if there's less transactions going on in the world because consumers are not spending as much at say, a retailer, it would be fewer communications, right? It kind of makes sense, right? The communications that are coming at the customer is often a function of how much transaction volume is going on out there. So we will see an accelerated headwind during this period of time. But then I also look at it and say, okay, well, 2 things are going on. One is when the macro economy turns, then we -- I have the opportunity to see an accelerated tailwind again, which is, I think, one of the benefits of the platform and usage-based model. And number 2 is during this period of time, we are seeing the -- we are seeing all of the core KPIs of the business for communications look really good, like we are not losing share. We are not feeling price pressure, like our pricing power is holding up. So these are all the things that you want to see during a period of time like this to say, hey, is the business fundamentally healthy, but yes, there's some macro headwinds? Or is there anything else going on? And we took a look at -- we called out several industries. First of all, crypto, right? So we disclosed last year, 3% of our revenue is crypto -- was from crypto companies, not is crypto. And to have an industry that represents 3% of revenue, just completely implode over the course of 6 months, like, obviously, that sucks and that's going to present a headwind for you, which we're certainly seeing. We've also talked about how we're going to lap most of that in Q3 of this year, and that represents a 300 bp headwind of growth for us, right? So there's that. Then we looked at the other industries. We called out retail. We called out social media. We called out a couple of others. And we kind of like -- what we did is we squared away. Here's what we're seeing in the usage patterns. And then we went and looked at the top 5 companies in each one of those sectors and what are they saying in their public earnings calls? Like we compared and these things squared away really well in terms of what growth rates are they talking about a year ago versus today? And what were we seeing a year ago versus today? And so we look at these industries and we'll say, yes, so there's some macro headwinds going on, but we're well situated to be able to capture that. So when we look at our medium-term growth target that we put out of 15% to 25% year-over-year over the medium term, where medium term is [ 25% ] through 2027, we feel very confident that we are going to be able to hit those growth rates because of really 4 reasons. Number one is we are seeing our usage volumes stabilize. So through the end of last year and the beginning of this year, we saw continual degradation of those usage volumes, right, in terms of, hey, this is what we think the platform is going to be doing in terms of volume, but the actuals that are materializing are less. And so we have to keep bringing down our estimates of what's going to happen, right? Well, now we are seeing those stabilize as we get into -- as we're in Q2, which feels good. Second is what I mentioned in terms of the core KPIs of the Communications business being solid, right? We're not losing market share. We're not losing to competitors. We're not seeing price erosion or anything like that. In fact, if anything, we look at our publicly traded comps, we are much larger and growing faster in terms of our Q2 guide or Q1 results than anyone else out there. So if anything, we're taking share in this market. Again, good things to see. Third is we are working on the go-to-market investments for our Data and Applications business. Those are coming together nicely, it's still early, but we're really invested in the reconstitution of our go-to-market for our Data and Applications business post our restructuring. And that is going very well. And then fourth is obviously the tailwinds that AI and all the things our customers want to do with AI now that are driving a lot of the conversations with our customers, I mean, I see a tremendous opportunity ahead. So those are the 4 reasons why I look at it, and I'm just like, look, we put out this 15% to 25% annual growth goal for the medium term. And I think investors out there are saying, well, are you really going to be able to do that because we guided to single digits for Q2, which I get it, that sucks, but we are confident in this medium-term guide because of all those reasons I just gave you.

Jeff, when you -- you made this comment here that you're seeing usage volumes stabilize as we're in Q2 and I just want to clarify. You're talking about core SMS, text? Are you talking about e-mail? Are you talking about video?

Yes, communications.

You're talking about the whole aggregation, the entire communications platform.

Yes.

Okay. So you've been operating, as you've just described in this quite challenging business climate. Software companies are seeing that left and right all over the place. But very quietly, under the radar, you have announced some customer wins that we think are rather head-turning. You had -- you closed your largest e-mail deal ever in Q1, right? One of the largest Verify deals. You closed a Flex deal with Sanofi. Largest Silent Network Authentication deal to date with a Fortune 100 company. What do you think we should read into that? How -- why are there companies that are leaning in with some of these larger commitments even during this environment?

Yes. And a large Segment deal that we announced in -- on our Q4 earnings call with JPMorgan.