Twilio Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 15 speakers on the call.

Operator

After the speakers' remarks, there will be a question and answer session. I will now turn the conference over to Brian Vanaman, Senior Vice President, Investor Relations. Please go ahead.

Speaker 1

Thanks, Sarah. Good afternoon, everyone, and thank you for joining us for Twilio's Q1 2023 earnings conference call. Our prepared remarks, earnings press release, investor presentation, SEC filings and a replay of today's call can be found on our IR website at investors. .Com. Joining me today for Q and A are Jeff Lawson, Co Founder and CEO Elena Donio, President, Twilio Data and Applications Kazemish Shifchandler, President, Twilio Communications and Aidan Biggiano, Chief Financial Officer.

Speaker 1

As a reminder, some of our commentary today will include non GAAP financial measures and key metrics. Reconciliations between our GAAP and non GAAP results and further information related to guidance, definitions and key metrics can be found in our earnings press release and the appendix of our prepared remarks, both of which can be found on our IR website. The information provided and discussed today also include forward looking statements, including statements about our future outlook and goals. These forward looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that are described in more detail in our most recent periodic reports filed with the SEC, including our most recent Annual Report on Form 10 ks and our forthcoming quarterly report on Form 10 Q, which are available on our website and atsec.gov. Forward looking statements represent our beliefs and assumptions only as of the date such statements are made.

Speaker 1

Actual results may vary significantly and we expressly assume no obligation to update any forward looking statement except as required by law. With that, I'll hand it over to Jeff for some opening remarks,

Speaker 2

Thank you, Brian. Before we hop into the call, I wanted to really take note of 3 things today. First, I wanted to note that the substantial actions that we took in Q1 are working. As you can see from our strong non GAAP operating profit results. 1 quarter in, we're really starting to show the profit potential for this business.

Speaker 2

We're also 1 quarter into our new structure. And as you can see from our Q2 guide, we're looking into continued headwinds as we built the sales capacity of our data and apps business And doing that in a very tough macro environment as well. But the good news is I see our leadership role continuing and even expanding in this environment And I don't see things like changes in our churn or losing share in the market. I see moderation in our consumer facing usage patterns as well as us lapping our peak crypto usage from last year. And these are some of the headwinds that we'll talk about.

Speaker 2

But through all of this, What I really want to do is to thank the Twilio team. We've been navigating a lot of change over the last quarter and I see Twilio's every day Navigating these changes with grace, with energy and understanding of the job that is to be done here. And it's truly energizing for me and for the rest of the leaders of the organization. That's really truly the Twilio magic in action. So thank you.

Speaker 2

2nd, I'm sure this is on people's minds. The AI platform shift is upon us. Like the PC to web transition, the web to mobile, this is the next Major technology shift in our society. Working with customers, we see many ways to activate customer data in segment across the whole customer lifecycle using artificial intelligence. Now we'll have more to say about this during the course of this quarter and of course at SIGNAL in August in terms of products, in terms of partnerships and in terms of customer use cases, really looking forward to that.

Speaker 2

And the third thing I wanted to mention today and lastly is go dubs. Now on to your questions.

Operator

Thank Your first question comes from the line of Mark Murphy with JPMorgan. Please go ahead.

Speaker 3

Thank you very much. So a question for Elena, you mentioned being in a strong position to actually reaccelerate Bookings later this year. And Khozema, in their prepared remarks, you're mentioning optimism And being able to reaccelerate growth as the year progresses. I'm wondering if you can just shed a little light on What is underpinning that positive thought process? And could it mean that Q2 might mark a bottom actually for the revenue growth rate or a local bottom for the revenue growth rate.

Speaker 4

Hey, Mark, it's Elena here. I'll start and then I'll pass it over to Khozema for some commentary on the First, let me just kind of walk you through the path to here to provide some context and groundwork for what's to come. First of all, I joined the company a year ago, exactly this week. And at

Speaker 5

the time, Jeff asked me to sort

Speaker 4

of re architect and rebuild our go to market muscle and motion. And what that meant was 2 things. 1, more substantively impacted communications and one on the data and application space. So we realigned, re architected our sort of resource map and went through some of the big cost initiatives that you've seen and you're starting to see the results of that. And that was primarily around Our go to market muscle in the comms space, at the same time, we were sort of reinvesting in the data and application space.

Speaker 4

And the job there Has been to rebuild and grow our talent base there. So we had some early in 2022, we had some turnover, some attrition, some changes in how we set up the sales team, which we then unwound and began to rebuild from there. And so that rebuilding effort has taken us the last few quarters. We're now fully hired for the most But we're not fully ramped. So we're all over that over the next couple of quarters is getting that field organization both at the AE level and the manager level fully ramped.

Speaker 4

So right now, our big focus isn't on enablement. It's on getting those reps from kind of their first deal to their 10th deal and really showing sort of what that team is capable of. I'm just back several investors just back from our delayed sales kickoff where it was very much a training focused event and enablement focused event. And having spent a bunch of time with our people across the last weeks, I feel really comfortable about the team that we have in place. That's a big reason for optimism,

Speaker 5

as you asked. I think We're also doing all

Speaker 4

of this work during a pretty tough macro time as we've also talked about. We're seeing evidence of that in a couple of areas. So We've talked in the past about things like cycle lengths, average selling prices, conversion rates across the funnel and a little bit of contraction. We're definitely seeing all of that at the same time that we're rebuilding, reengaging, reenergizing a field organization. So with all that said, I just want to close out with the things that Give us real optimism.

Speaker 4

Number 1 that Jeff talked about in his kickoff, we're seeing certain great customer wins amidst all of this. I had a couple in my prepared remarks. Cricket Wireless, he was current Twilio customer, became a segment Engage customer. Web Health, a large BPO becoming a sizable Flex customer. We've had a couple of other really key wins in the financial services space Across this quarter and last.

Speaker 4

And so we're seeing great strides there as well as great strides in our innovation agenda. Our product teams are Really taking down a lot of the roadmap, delivering a lot of new capabilities from Segment Unified to FlexUnify, which ties together Flex and Segment with some customer wins across each of those as well. So team, just our enablement journey is in full swing, Our product delivery is in full swing and bringing down some pretty exciting customer wins. Those are the things that give me faith that we'll begin to see ourselves Climbing out of the trough that I think was in part self inflicted as we talked about throughout last year and in part driven by the headwinds in the economy. I'll let Khazema talk about the corollary on the comp side.

Speaker 6

Hey, Mark. What I would say is, 1st of all, I totally echo Elena's enthusiasm about the path ahead of here. I think there's a lot to be excited about. Our sales kick off was same time that we kind of did them together and so there's a lot of energy among the sales rep force. So just to maybe go to that first.

Speaker 6

First of all, sales rep productivity remains Quite high. As Elena mentioned, we did a lot of work on cost structure, but even in spite of that, I think we feel very, very good about rep productivity. Second thing is that we are maintaining share in what is continues to be a tough kind of macro environment. And we feel good about like a lot of our most recent customer wins. We talked about 2 deals, in the script specifically where they were our largest ever on email and silent network authentication.

Speaker 6

So I think those are indicators that customers are continuing to we're continuing to win with our customers. They're continuing to grow with us, albeit at slower rates than where they were. And 3rd and perhaps most importantly, especially as you look at our financials is, like we have a really tough comp relative to last Crypto was really outsized in the way that that part of the impact in our business grew and we're kind of hitting the peak points in as we're lapping that. And so I think just naturally as we come out of the next couple of quarters, you're going to see just natural acceleration in the growth rate as a result of that. I would hesitate to call it bottom.

Speaker 6

I mean, it is very dynamic, obviously. And so I don't think we're necessarily prepared to say that, but I think we're very, very excited about the setup for the back half of the year and especially with our Energy Group customers.

Speaker 7

Wonderful. Thank you so much.

Speaker 2

Thanks, Mark.

Operator

Your next question comes from the line of Meta Marshall with Morgan Stanley. Please go ahead.

Speaker 8

Great. Thanks. Appreciate it. I just wanted to you mentioned kind of Anniversary and peak crypto, but if you could just give a sense of what verticals you're seeing the most headwinds? And then just on the communication side, like what does reduced marketing budgets mean?

Speaker 8

Is that we cut certain use cases? Do we just kind of send fewer emails or is it just simply from a reduction in transactions? I think or the bounce back would evolve. Thanks.

Speaker 5

Hi, Meta. This is Aidan. I'll start and I'll hand it over So just to talk about some of the industry headwinds, we've called some of them out in the past and we continue to see headwinds persist on the social side, Consumer on demand, e commerce and in particular crypto. So those continued in the quarter. And as it relates to crypto, again, as Khozema said, we saw volume on our platform kind of in the Q2, Q3 ish time frame last year and that's creating a few 100 basis points headwind year over year on the growth.

Speaker 6

Yes. I mean, I would largely echo, what Aidan said. I mean, I think as she mentioned, Crypto was pretty significant last year. And so as we lap that, I think we feel pretty good about our ability to come out of that. I think The marketing spend that we referred to was much more on kind of the customer side, if you will, not necessarily on our side.

Speaker 6

And so, obviously, some of our products end up serving use cases that are marketing related. And so as customer marketing volumes have business a bit more significantly upfront. We talked about the dynamics. Anita, I mean, you know the company really well. And on the way up, like we react very, very quickly and on the way down, unfortunately, we react very, very quickly.

Speaker 6

So as things kind of moderate, I'm really optimistic that we'll be able out of it pretty fast. And otherwise, it's kind of business as usual. I mean, Aidan called out some of the industries, but otherwise, we continue winning, we continue expanding and we We maintain our share and we're not seeing really any pricing pressure out there either. So feel pretty good otherwise.

Operator

Great. Thanks. Your next question comes from the line of Michael Turrin with Wells Fargo Securities. Please go ahead.

Speaker 3

Hey, great. Thanks.

Speaker 7

I appreciate you taking the question. Just on guidance and what's assumed given there are A number of moving pieces mentioned in the prepared remarks. Can you just maybe walk through what you're assuming in terms of The macro and what you're seeing in expansion rates, is this a consistent environment that's assumed? And then just also thinking through the progression of Expected benefits from those might start to play through. Thanks very much.

Speaker 5

Yes. I'll start with a bit on the Q2 and then this is Aidan by the way, And then go a little bit into some of the traction for the year. So it's largely macro as you think about the Q2. So the market continues to be pretty dynamic And we're feeling the impacts of a broader slowdown. And so you see that reflected in our guide.

Speaker 5

I think the other thing that's important to remember is that the majority of our revenue comes from our communications business, about 85% of our revenue. And as Khozema just said, that's a consumption model tied to consumer activity. So in that business, We are dealing with a combination of macro as well as the tough comparisons that we just talked about on crypto. And so again, that's creating a headwind year over year as it relates about our efforts there to ramp up the sales force and really enable the team further. And we're also doing that in a tougher macro cycle.

Speaker 5

So I'd say on the communication side, it's a combination of macro, some tough comparisons on the software side, it's a mix of our efforts to rebuild macro and we factored all of this into our guide. So I'd say some choppiness on growth in the short term, but Despite that, we're focused on what we can control, which is delivering profit in any environment. As we think about the rest of the year, we're not going to guide Quarter to we're going to continue to guide quarter to quarter. We're not going to guide beyond the Q2 at this point. Again, given the that most of our revenue is communications and usage based makes it a little bit tougher to call.

Speaker 5

So like in light of that, we'll continue to plan conservatively guide quarter to quarter. I think the other thing to consider is as the macro recovers and the consumption based model comes back, our growth will improve, our DD and E will improve alongside it and we'll be well positioned On

Speaker 2

the other side with a much more efficient cost structure.

Speaker 7

Appreciate the detailed answer. Thank you.

Operator

Your next question comes from the line of Ryan McWilliams with Barclays. Please go ahead.

Speaker 9

Just one housekeeping piece. How much potentially is the potential sale of your IoT business Potentially taking out the Q2 guide. And are there any products or geographies where you're currently deemphasizing revenue as part of these go to market changes? Thanks.

Speaker 5

So as it relates to this is Dana and Brian. Thanks for the question. So as it relates The sale of our IoT business, it's a relatively small contributor on revenue. It's been kind of the mid to high single digit millions. We'll provide Some more of that as we go forward.

Speaker 5

It will be adjusted out of our organic calculations going forward as well. So you'll get an apples to apples comparison on revenue growth, A relatively small contributor overall. As it relates to any specific regions, no plans to deemphasize Revenue in certain geos.

Operator

Your next question comes from the line of Ittai Kidron with Oppenheimer and Company.

Speaker 10

My question is for Elena. I was wondering if you can kind of double click on the

Speaker 11

data and application business. And more specifically, when you look at the growth of the

Speaker 10

unit in the Business and more specifically when you look at the growth of the unit in the quarter, help us understand what products are growing faster versus below this average Segment Engage Flex, marketing, which ones are growing faster than the 19% you delivered versus lower? And then Since we don't have the historical data on this, maybe you could talk about what deteriorated the most over the last 2, 3 quarters And what part perhaps you expect to recover the fastest over the next 2, 3 quarters? Thank you.

Speaker 4

Sure. So we don't break out product by product. And just I'll remind you a couple of things. 1, a number of these products are new. So the UNIFY product, Engage, like a lot of those things have only been in market for months to a handful of quarters.

Speaker 4

And so We're excited about the momentum and the progress, but we shouldn't expect to see those meaningfully impact Not out product by product. I would just say and reiterate something I said earlier that the real path out of The real path to reacceleration and the real path out of this deceleration comes down to 2 things. Number 1 is making sure that our team In seat and enabled. We're putting a lot of emphasis on that. And then number 2 is just playing through the tough macro environment and really Making sure that we're setting ourselves apart from what's happening in the competitive landscape and ensuring customers that even in a Time of belt tightening, this is a really good investment and it makes each of your marketing dollars work harder to meet this question earlier.

Speaker 4

That's really what we're playing for right now. But at the end of the day, like I would say a lot of the same themes are hitting both our Flex and Segment products largely. And we're working on ramping and building the team to work through that.

Speaker 10

When you look into the next quarter guide, is there another So I'm just trying to understand the drag on the next quarter. How much of that is the communication business versus the data and applications business?

Speaker 5

Yes. Hi, Ittai. This is Dana. I'll take that. So we don't provide guidance by business unit on revenue.

Speaker 5

But As you think about the Q2, you can generally assume that the slower growth is attributable to both businesses. So I would say given the much larger size of communications, it obviously

Speaker 11

has a bigger impact

Speaker 5

on our consolidated growth. It has a bigger impact on our consolidated growth.

Speaker 9

Thank you.

Operator

Your next question comes from the line of Taylor

Speaker 4

Just looking at the 1Q Rev, so 1Q rev declined sequentially and the 2Q guide, I think even if you strip out IoT assumes something similar. I know you mentioned that there hasn't been much change in churn. So can you just provide more color on the drivers there? It seems like it might be some seasonality, but if that's the case, As we look throughout the rest of the year, any other seasonal patterns to keep in mind?

Speaker 5

I'll start here and then if Selena and Khozema want to add, they can. You're right. Churn overall has been relatively consistent. Where we are seeing some impacts is we are seeing a bit higher contraction. Again, really we think due to just lower spending on the part of our customers and we attribute that to The macro.

Speaker 5

On the expansion side, we are seeing that at a bit lower rates than where we've been historically. And again, we think that's Customers being budget conscious, scrutinizing their spend and that's really a function of the macro. One area where we are seeing a little bit of an impact on new business, Elena has already talked about it, but is on the data and application side. And as she has mentioned, we expect to gain traction there over the years. We ramp our sales force and we expect bookings to reaccelerate towards the end of the year.

Speaker 5

So just gives you a little bit of color. In terms of how to think about revenue for the rest of the year, we're going to continue to guide quarter to quarter just given how dynamic the macro is. So only a thing I'll call out, which we have already is that we do have some

Speaker 2

tough comparisons here in the second quarter.

Speaker 4

I would just say to give a little bit more color on contraction for Twilio data and applications. I think the good news there When we see contraction, it is not that we're seeing competitive loss or competitive takeouts and things like that. It's really just Customers' belt tightening, their marketing spend going down or their transaction usage, for example, on segment or utilization on segment Just going down because they are contracting. And so we take heart in the fact that the product is Extremely valuable, extremely usable, but they're as customers are going through tough times with their own, We see that show up in some of the contraction numbers that we're seeing. So feel good competitively, but we've got obviously a Contraction happening that is a newer dynamic over the past few quarters.

Speaker 4

Appreciate the color. Thanks.

Operator

Your next question comes from the line of Derrick Wood with Cowen. Please go ahead.

Speaker 7

Great. Thanks. This is for Khozema. One of the questions we had was whether growth in consumption from the base would be impacted by The sales restructuring, since you were taking so many reps out of that business. Given the net revenue retention rate down at 106, How much of that pressure is coming from the macro versus how much is kind of the pullback in your own growth investments?

Speaker 7

And Yes. As you look at a few months into your new low touch structure, what do you feel like is working well? What do you feel like you'd like to see some improvements on?

Speaker 6

Yes, that's a good question, Derek. I would say in general, I would attribute it almost all to macro. I think the reduction in investments that we made on the sales and marketing side, I think that they were difficult decisions obviously that we went through. And Obviously, there was impact to employees and we feel bad about that. But I do think that with the Going into it and now with benefit of hindsight that it was absolutely the right thing to do, and that we're seeing the benefits of the efficiency.

Speaker 6

You can see those Fall through the bottom line. And I think in terms of any impact on DB and E and or overall growth, like we're just not seeing it right now. So What I would say is working is that kind of in this BU structure, I think having reps aligned to A certain set of products that are very tightly aligned to an economic buyer on the other side that matches the product set. I think that has been hugely impactful for our business. I know Elena would say the exact same thing about her business as well.

Speaker 6

And so I think adopting this BU structure in that way is proving to be very, very useful. I think the 2 other things that I would call out specific communications is, as a result of those reductions, we Much more towards a self-service, product led growth oriented go to market motion. And I think we're definitely seeing a lot of Early successes there. There are various aspects of the experience, like onboarding, like compliance, like cross selling, like Getting additional products into the bundle, that we're just working on making a lot easier for customers so that they can adopt. Twilio really at a speed that they want to be able to operate at versus us having to gate any of that.

Speaker 6

So I think that's been quite good. I'd say, we probably tilted a little bit more towards marketing dollars versus kind of rep Oriented dollars, and so I think that's worked pretty well too. It's obviously all a work in progress still, but I feel really good about where things are headed and cautiously optimistic about where things are going for the back half of the year.

Speaker 7

Got it. Thanks for the color.

Speaker 2

Thanks.

Operator

Your next question comes from the line of Nick Altman with Scotiabank.

Speaker 12

Just building on Derek's question, it sounds like you guys haven't seen Much pressure on the growth side of the equation from the communication side from the headcount reduction and some of the go to market changes. And so I'm just wondering, can you maybe parse out for us like how significant those changes were on the communication side? I mean, I know you guys talked about sort of this reversion to low touch model. But is there any way to sort of give more granularity around What's the split of quota caring reps focusing on data apps versus communications? And then just as that sort of progresses throughout 2023, how will you guys sort of measure that impact and make changes, so to speak, like If the communication side sort of sees further growth decel, will you start to sort of allocate more reps to that side of the business?

Speaker 12

Just Any more granularity around that would be super helpful. Thanks.

Speaker 7

Sure. So this

Speaker 6

is Khozema. I can start the answer and then if Elena wants to add some additional color, She will. But I think what's important to remember as we went through the restructurings that we did over the last 6, 8 months is that They were almost entirely impacting the communications business. There were impacts to other G and A categories, But otherwise, they were almost entirely impacting the communications business. And so as you think about the cost that came out of the business, it was really largely out of communications.

Speaker 6

In fact, to say it a little bit differently, in the data and applications business, as Elena mentioned in some of her remarks earlier, In fact, what we're trying to do is make good investments right now because we see a really big opportunity going forward. And we think we'd be remissed, quite frankly, if we weren't investing through the cycle. And so in a way, like we're trying to optimize for profit On the communication side, while continuing to optimize for growth on the data and application side. We haven't historically given a Split of rep count or anything like that, like between businesses or how that splits necessarily between products. What I would say about that though is we did definitely make reductions in rep count as it related to our communications business.

Speaker 6

I mean that was Part of kind of getting ourselves much more towards a self serve oriented motion. We retain reps on strategic accounts, obviously, those that Our kind of larger spenders, more enterprise like. And then we continue to grow our rep count in the data and applications business. So Hopefully that provides you with some additional color. I can't go exactly there in terms of the rep split.

Speaker 4

Well, I would just add because we Sam and I partnered on this together and we started orchestrating this move when I was still in the Had a go to market role. Like I would say we looked at what is the ROI of each cohort of sellers and supporting roles within the go to market organization and really took a close look at where a rep in was yielding Discontinuous growth and where it wasn't, we cut that out and we made a concerted effort to make sure that Sort of everywhere we are at injecting human capital, we're seeing a return for it. And that's how I think about the fitness level that we've created across go to market now in both communications and data and applications.

Speaker 6

Yes. And I guess just last thing I would add Nick is that in spite of all these changes that we've kind of undergone in Communications business. We've maintained share. Customers have stayed on the platform. We haven't seen any elevated churn And we continue winning with some really material accounts.

Speaker 6

So that to me is a significant number of proof points that things are moving in the right direction. There's obviously more work to do. But starting off the year with strong profitability, which

Speaker 11

Great. Thank you.

Operator

Your next question comes from the line of Samad Samana with Jefferies. Please go ahead.

Speaker 11

Hi, good evening. Thanks for taking my question. So I wanted to ask maybe on the software side of the business and I was a little bit late, so I apologize If this has already been asked, but just as you think about the I know you're investing for growth, but if you think about the bookings trends even as maybe customer spend on marketing is a little bit less, just How should we think about the changes and how that's driving maybe leads into the pipeline, the type of conversation that you're having? Is it changing the nature of where customers are viewing you versus just maybe the near term financial results which have been impacted by all changes? And then I have a follow-up.

Speaker 4

Great. I'll take that. It's Elena here. So we don't disclose our booking metrics, but we did say in prepared remarks and probably throughout the first question That we are seeing headwinds of a couple different flavors. I think the first thing for you to take away is that, of the sort of work we're doing to rebuild, Reorient and specialize the organization like that work is still in progress.

Speaker 4

And so while we're making great strides there, we've hired the team. We've got dedicated Sellers in place for both segment and Flex, and that's what makes up the Twilio data and applications business or software business as you called it. The heads are in seat, but they're not fully ramped. And that's what we're working on over the next couple of quarters is making sure that these reps Are ramped and fully productive and have what they need to be successful. So we're working through that.

Speaker 4

We expect to hit that stride over the next couple of quarters, but that we're also doing that during a tough macro time period. You mentioned marketing And things like that. And that is exactly the sort of customer messaging breakthrough that we're seeking to have and making sure that customers continue to allocate budget to these kinds because we think that they're particularly helpful in this kind of a time where we're producing things like a return on ad spend that's higher than it would be without segment. And so that messaging is

Speaker 5

really important right now, but

Speaker 4

at the same time we do see substantive like we do see headwinds from a MAPRA perspective. So customers adding people to the sales cycle, adding approval levels, which will elongate sales cycles. We see a little a small decrement in average selling price and things like that. And so we're playing through that period of time, but We feel good about the wins that we're seeing and innovation that we're laying down in order to, number 1, play through this Number 2, prepare ourselves really well for, as spend comes back online, we think we're 1st in line to go take it.

Speaker 11

Great. And then maybe just a follow-up. There's been some scuttlebutt. Google recently was talking about, rolling out something called passkeys, which is Meant to kind of limit the amount of 2FA that you need and or changing just the nature of passwords in general and maybe accessing different apps and websites. I'm curious if you guys have any thoughts on maybe what the opportunity is for Twilio.

Speaker 11

I know 2FA has been a revenue driver in the past And just how you guys are thinking about that and maybe what you're doing, as how we get authenticated evolves over time. And if you have any thoughts on that, that would be great.

Speaker 2

Yes, absolutely, Samad. This is Jeff. I'll answer that one. So the way I think about authentication these days is Basically, there's typically multiple forms. There's something you know, there's something you have, etcetera.

Speaker 2

And that's what we've come to understand as best practices for how to authenticate yourself. And pass keys are really evolving the evolution of passwords, right? And they're easier to use, they're more secure, you can't reuse them. There's a lot of advantages to using this for instead of a password. But the it's like almost like as if the computer is generating the password for you as opposed to you having to type it in and remember it is a way to Maybe simplify the notion there.

Speaker 2

But what it doesn't do is provide you any information about who is this customer? Like, how do I identify? How do I know who they are? And that's things where like an email address or a phone number actually provide a notion of a Person and their identity as opposed to just a way to have a shared secret or some way to reauthenticate yourself. And so these things typically work together.

Speaker 2

And if you think about our Verify product, Twilio Verify is actually it does the identity verification of Saying you are who you are proving you are who you say you are, but it also does the work of saying and this customer Has this phone number and therefore like I know who that is. I can talk to them at that phone number. When they come back To be, I know who they are. And so I think that FIDO and WebOS N, which PassKey is basically, for all intents' purposes, the same thing. It's a way of essentially presenting a password that is more secure, but it doesn't provide a sense of identity.

Speaker 2

Who is this person? Here's an email address, a phone number, something you can use to actually contact them and uniquely identify them in the world. That's what we offer. So these things actually work well together. And we've been evolving our offering in terms of things like verify that offer silent network authentication as well as other forms of identity verification like through WhatsApp, all wrapped up into one really nice product and that product is selling really well.

Speaker 2

If you'll see, we had a very large Fortune 100 Entertainment company that we sold the largest Verified deal 2 as well as a very large, AI company that we sold Verified to, in this past quarter. And so The product is selling very nicely even in

Speaker 9

an environment

Speaker 2

where FIDO and WebAuthn have been getting a lot more traction for a number of years.

Speaker 11

Great, Jeff. That's very helpful. Thank you so

Speaker 2

much. Absolutely.

Operator

Your next question comes from the line of Matt Staudler with William Blair. Please go ahead.

Speaker 9

Hey, guys. This is Alex Fasty on for Matt. Thanks for taking my question. I just wanted to speak about the partner channel. If you could talk to any updates you might have there, especially with the GSIs and regional SIs, how are you enabling those partners?

Speaker 9

Do you have any thoughts on expanding the Partner contribution going forward? Thanks.

Speaker 4

I will take that one. It's Elena here on the data and application side. We see a big role for partners, both today and going forward. We've got a fiber and ecosystem of partners and particularly Partners on the SI side, not just global SI's, but regional as well. And so, I'd say that the community is performing well in the segment ecosystem as well as Flex.

Speaker 4

Those tend to be different partners. We also have a couple of others that I wouldn't Within the AWS ISV Accelerate program, which connects AWS sellers into our sales process, we're seeing some good deals from that. And then on the Flex side, we've got several partners that sort of span just the SI world, but Also build product side by side with Flex as well. And so I'd say that we are I've said over the past Couple of calls actually that this is an area of focus and investment for us. I think we're seeing some good green shoots there, lots, lots more to do.

Speaker 4

I don't know if Seamus has anything to add

Speaker 2

on the comp side. No, we're good. Thanks.

Operator

Your next question comes from the line of Fred Havemeyer with Macquarie Capital. Please go ahead.

Speaker 13

Hi. Thank you. I wanted to ask about some of the segment wins that you were talking about there. I think the selection of customers was actually Quite interesting. You have a healthcare company, you have a database company, you have a wireless company that has a more expensive relationship with Twilio.

Speaker 13

So could you talk about perhaps some of the use cases that these companies are using Segment for? And Where those companies are finding value right now with Segment?

Speaker 4

Segment's super interesting. We talk a lot about B2C And there's definitely fantastic brands that are direct to consumer or have a big consumer element to what they do that Are really out there working to find, identify, engage, acquire, and just better nurture those kinds of relationships in a way that is cost effective, really fast and pithy And give them the ability to do things that they can't do with their traditional kind of cobbled together CRM infrastructure. That said, we do have a percentage of our segment customer population that's also B2B. And so people that play in both B2B and B2C that are finding ways to sort of cross pollinate their own channels and their own customer identity is using the power of Segment. And so, we see customers do everything from sort of the core sort of data platform use cases and really using us for things that are quite simple, but hard to pull off.

Speaker 4

And then we have customers and a growing set of customers that are Adding on capabilities, so Engage, for example, and our new unified capability that we talked about in our prepared remarks. So Those are a couple of things that we're doing. I think long game, we expect the customer data platform to sort of be at the center But for there to be a lot that we do with that. And so from Engage, for example, actually engaging your customers, getting out via our different communications channels to utilizing segment information to have better experiences with Flex in the call center or in a digital sort of in app communication mechanism that a customer might be using with Flex. So We see a ton of extension capability here, with that CDP as the center.

Speaker 13

Elena, thank you. I think as a follow-up question, I was noticing the top 10 customer accounts are now down to about 10% of total revenue. I wanted to ask, is that a function of just diversification of Twilio's revenue base? Or is there anything to read in there in terms of How your top customers are also trending their own usage of Twilio?

Speaker 5

Hi, this is Aidan. I'll take that. Yes, it's largely a function of continued diversification. We are well diversified across industries, across customers. And so that continued.

Speaker 5

I'd say in terms of lower usage, we have seen that generally across the communications and The DNA business and that's again largely a function of the macro, but as it relates to

Speaker 4

the top ten, it's continued diversification.

Speaker 9

Thank you.

Speaker 2

Fred, this is Jeff. You asked about some use cases for Segment. And I thought I'd expand, so I think there's a few that are interesting that thought it'd be worth sharing because one of the really cool things about Segment and having this customer data is like a great platform, Once the customer puts it in, I think they find that there are multiple like many benefits of having the customer data in a spot, Having it clean, having it good governance over it and then ways in which you can activate it across many different parts of the customer lifecycle. And so I was talking to a global Fortune 100 this morning about A segment opportunity may rattled off like 5 different use cases from CRM to personalization across properties to tracking their customers across multiple acquisitions they had done and knowing if a customer in one Customer base was the same as the customer of other product customer base, so they could do more effective cross selling and more effective retention of those customers. And so I think in M and A cases, for example, there are great opportunities because you have different identifiers for customers.

Speaker 2

There's one customer that I think is a great, meat use case that I really like, which is they brought in Segment, so that they could personalize their IVRs. And the idea was, the thing they had seen was if you are trying to log in, say to the website or a mobile app and you consistently can't log in, Your password is not working. They can see that in real time usage segment and flag your profile as someone who is likely Having a password problem and when you call in, which is probably at the scale of this customer happens, I don't know, 100,000 times a day or whatever. They will put the first thing in the IVR is having issues logging in, press 1. It was ordinarily you have to go like 10 menus deep to get to that one But for you, because they saw your behavior on the website is clearly having trouble logging in, they dynamically reprogram that.

Speaker 2

I mean, like These are the kinds of use cases we see customers building across many different parts of their customer lifecycle, marketing, sales, product service support that allow customers to serve their customers better. And that's why I think data as a platform in segment is such a great product.

Speaker 7

I guess maybe just the first question is, The gross margins in the quarter were actually better, I think than we anticipated. I think that was the best performance in the last Since Q1 of last year, international didn't go down as a percentage of the total revenue. Was there something else that you're maybe walking away from business more that had a lower gross margin in the quarter? I know that we're not guiding to it, but at least from a trendlining perspective, how should we think about that? And then I've got a quick follow-up for Jeff.

Speaker 5

Hi, Alex. This is Aidan. Yes, so it was 52.3% in the quarter and that was up sequentially about 170 basis point. So that was positive. Although I would say, we'll continue to see variability on this line.

Speaker 5

And so it's largely a function of the mix of products and Also within the messaging business, the mix of geography where the traffic terminates, which is a little bit different than the international percent of revenue that you're looking at, which based on customer headquarters. And what we saw this quarter relative to last quarter is there was a different mix in terms of where Traffic was terminating and that drove the better gross margin overall. As we think about Going forward and how to think about this, we're really orienting the business more to gross profit dollars and to gross margin rates, given the strong unit economics, in particular, in the messaging business. And so that will continue to be our focus as we move forward is really orienting the team to gross profit dollar generation. And as long as we can do that with the right cost structure, we think that's good business to keep doing.

Speaker 7

Got it. And then maybe, Jeff, one for you. You talked about AI and generative AI with respect to segment and CDP. I guess one common question we get is, the notion of bidirectional messaging, conversational messaging seems like That trend is having a massive moment right now in the marketplace. Can you maybe talk about The puts and takes and the potential tailwinds to the communication side of the business from, Generate dotai, what you're seeing in customer conversations that you're having, existing or new around that.

Speaker 2

Yes. So just to give you a quick backdrop, I mentioned at beginning of the call that generative AI is the next platform shift in technology. And by the way, it's not in technology, it's actually in society. And if you think about the when these shifts occur, like the PC or the arrival of the PC, then the PC to the web and the web to mobile, right, You can see the kind of disruption that occurs market after market when these transformations happen. In fact, it's interesting, there was a Wall Street Journal headline today that says, is this the iPhone moment?

Speaker 2

And I think absolutely, I would answer yes. Yes, it is. Now there's an interesting question though. If you remember the early days of say the web where companies were Trying to figure out what do we do? Do we give a brochure on the site?

Speaker 2

Remember when companies used to say like we're not allowed to link off of our site because there's a legal problem with that? Everyone was like what? So people have to figure out how to use these new technologies in the corporate setting. And I think that's what the conversations I'm having with customers now are exactly that, Right. Is this ready for an enterprise use case or is a bot that I put in front of my customer going to start like talking, Saying stuff that I don't want to say, right?

Speaker 2

Is it going to start having a dialogue with my customers about God knows what? Or are they going to stay on topic and talk about my products, my services and All that kind of stuff. And so I think that's where a lot of the work is going right now. And I think there's really good questions that are getting answered Every day that work we are doing, work others are doing in terms of like how to keep These large language models on topic and bright boundaries for them, so that they are useful in a corporate context. And that stuff is getting resolved, I think pretty quickly.

Speaker 2

And so the I'll put you into

Speaker 9

a conversation I had with

Speaker 2

a customer recently, which I think is indicative of What I think is going to happen. It was I was talking to a customer, a very large financial services company. And they were telling me how they had spent the last 7 years Building out all of the intents to have a bot for their service use cases that could contain customer calls, right? Containment is the Didn't ask you to reach a person. They said, well, this containment was after 7 years of work or whatever was about 40%.

Speaker 2

And so 60% of the calls made through your Q and A. And I asked and we're talking about large language models and I said, do you think you're going to keep that investment Or do you think you're going to start from scratch in the large language model world? And the customer said, no, we'll keep that investment, but hopefully large language models will help us move it forward from 40% Up from there. And through the course of the conversation, we talked a lot about what's possible in the architecture of these new language models and how they can work with segment customer data and things like this. And at the end of the conversation, I asked again, do you think you're going to keep that 40% investment you made over the last 7 years that got you to 40% containment?

Speaker 2

And the customer said, no, it's coming in the garbage can, right? Like every decision we've made for the last 7 years about what's possible Is now like a relic of the past and is re up for relitigation and potentially new approaches, new vendors, New ways of implementing it because the large language model world just upends what is possible. And I think that is why it is a gift In terms of creating new opportunities for companies like Twilio, who is helping our customers activate their customer data across Customer lifecycle, take CRM, which has historically been this like kind of sleepy area of like just a database, not activated, make it useful across many different touch points. Large language models are an absolute gift and I'm very happy that we bought Segment when we did because the data that is in Segment Enables a company to customize these interactions based on who they're talking to, the end user, the customer of our customer. And that is very powerful.

Speaker 2

So anyway, this is day 0 of large language models, and you'll be hearing more from us in the course of this quarter. Obviously, we have SIGNAL in August and I would not be a responsible technology leader if AI wasn't prominently a part of what we're talking about at SIGNAL. So, we'll have more coming and I hope everybody joins us at SIGNAL in August. Perfect. Thank you, guys.

Operator

Your next question comes from the line of Citi Panigrahi with Mizuho. Please go ahead.

Speaker 14

Hey, guys. It's Phil on for Citi. Thanks for taking my question. In your prepared remarks, you guys noted a Flex Win with a major financial services company. Would love to learn a bit more about this win.

Speaker 14

Was it sourced through an SI partner? And how well is Flex Position to compete with the other CCaaS vendors.

Speaker 4

Yes. So a couple of things. We I don't believe that one was partner sourced, but it's a deal we've been working on for a few quarters. They are It is a legacy takeout, and it is sort of a contact center specific use case. But I would say, like, because you asked about Flex, That's really not our only use case.

Speaker 4

We're starting to see sort of a coalescing around 3 or 4 key things that we see really playing well in the market. So first is sort of this in app digital communication, in app digital concierge kind of capability. And we see a lot of great direct to consumer brands And utilizing Flex in that way. Secondly is sort of a high touch contextual sales kind of moment and we see certain large retailers and some other financial institutions playing in that area. And then lastly is sort of our core contact center use cases in the service and support area.

Speaker 4

And this Example that you mentioned happens to live right in that area and that's the one that was in our prepared remarks today.

Speaker 9

Okay, thanks.

Operator

Your final question comes from the line of Michael Funk with Bank of America. Please go ahead.

Speaker 9

Yes. Thanks for squeezing me in here. 2 if I could quickly. So, Aidan, one for you if I could. On the operating margin guidance For 2Q, I saw you called out a number of factors pressuring that sequentially.

Speaker 9

However, I would have thought the full quarter of headcount reduction potentially positive mix shift would have offset the reversal for example you called other things. Are there other factors going into that?

Speaker 5

Thanks for the question, Michael. So we try to be pretty transparent about this in the prepared remarks because we are expecting to be down quarter over quarter. So I gave a lot of information there and I recognize it's a little bit counterintuitive given the timing of the restructuring in the first quarter. So let me just like walk through some of the pieces and I'll talk about what will continue beyond the second quarter as well. So First, the first quarter benefited from a $12,000,000 one time accrual reversal related to the sunsetting of our employee sabbatical program.

Speaker 5

That won't repeat in the Q2 or beyond. We guided to lower quarter over quarter revenues, which directly impacts our gross profit as well as our operating profit. And then we expect a number of different cost items to be a headwind quarter over quarter. First, merit goes into effect in the Q2 as it does every year. And so that will obviously go into effect Q2 and for the rest of the year.

Speaker 5

We're moving some employees, you talked about this in the prior We're moving some employees to cash bonuses from equity based awards. This is for a subset of our employee base, but it will help moderate stock based compensation expense growth going forward, but that in the period presents an OpEx headwind. We've also made some changes to our incentive compensation structures communication sales team to better align to Twilio's financial goals. And while that doesn't result in any difference in cash being paid to Specific sales executive, there's a bit of a difference in accounting in terms of what is incurred in period versus what is deferred over time. And so that creates a little bit of a headwind.

Speaker 5

And then lastly, we do expect more normalized levels of marketing and travel spend in the Q2. I'd say we're pretty light in the Q1 just post the reorganization as teams are settling into the new structures. We just didn't spend as much as we had planned we would. And so all of those items More than offsets the full quarter benefit of the restructuring actions that we announced in February, but we're still guiding to 65 to 75. We raised the low end of our guide for the year to $275,000,000 to $350,000,000 and we're tracking really well and up to date.

Speaker 9

That's very helpful color. I appreciate it. Thank you.

Operator

This concludes the conference call. Thank you for participating. You may now disconnect your lines.

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Earnings Conference Call
Twilio Q1 2023
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