Twilio Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 12 speakers on the call.

Operator

Day, everyone, and welcome to the Twilio Second Quarter Earnings Conference Call. At this time, I would like to hand the call over to Mr. Brian Vanaman for opening remarks. Please go ahead, sir.

Speaker 1

Thanks, Lisa. Good afternoon, everyone, and thank you for joining us for Twilio's Q2 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. Twilio.com. Joining

Speaker 2

me today for Q and

Speaker 1

A are Jeff Lawson, Co Founder and CEO Elena Donio, President, Twilio Data and Applications Khozema Shifchandler, President, Twilio Communications and Hayden Miggiano, Chief Financial Officer. Due to an issue with our external website vendor, The prepared remarks were only recently posted to our IR website. Thus, the team will be reading these live at the outset of the call. 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 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.

Speaker 1

The information provided and discussed today also will 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 annual report on Form 10 ks and our subsequent quarterly reports on Form 10Q, 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. Actual results may vary significantly And we expressly assume no obligation to update any forward looking statement except as required by law. I'd also like to highlight that following our recent reorganization into Two business units, beginning this quarter, we will be reporting our revenue and non GAAP gross profit results in 2 segments, Twilio Communications And Twilio Data and Applications.

Speaker 1

With that, I'll hand it over to Jeff to open the prepared remarks.

Speaker 3

Thank you, Brian. We closed down a strong second quarter Over delivering on both our revenue and profit targets and generating record quarterly non GAAP income from operations of $120,000,000 We begin the second half of the year energized by the progress we've made to date in communications, confident that we've laid the foundations to reaccelerate growth In our data and applications business over time and optimistic about AI's potential to be an accelerant for Twilio's vision. We also remain committed to continuing to deliver against our profitability targets in any financial environment. We've made substantial strides On our path to GAAP profitability and have substantially increased the operating margin profile of our business. In Q2, We reduced GAAP loss from operations by over 50% year over year.

Speaker 3

We drove a continued reduction in stock based compensation And delivered $72,000,000 of free cash flow in the quarter. We are executing well against our commitments. And as a result of our Strong performance in the first half of the year. We're raising our full year non GAAP income from operations guidance to $350,000,000 to $400,000,000 A business transformation as big as what Twilio is taking on takes time. It requires tactical focus in the short term And a bold vision for what's possible in the long term.

Speaker 3

Twilio's Act 1, communications, has been a success in terms of scale and efficiency. Our communications business continues to deliver against the objectives we've set, driving efficient growth, while we target ongoing operating leverage in the coming years. And now we're building Act 2 based on our belief that Twilio's data asset when combined with the power and reach of our communications platform And Accelerated by AI can unlock value for businesses that we are uniquely positioned to deliver to our innovative combination of product offerings. While I don't expect the road ahead to be linear, we've embarked on a massive market opportunity, one that has the ability to transform the status quo For customer engagement. Now to where we are today.

Speaker 3

In communications, we delivered a strong quarter and are encouraged by continued signs of Stabilization across our customer base. The efficiency actions we took have proven to be the right ones and the business is delivering with a more streamlined operating profile. Following our largest email deal in Q1, the team signed our largest ever messaging deal in Q2, an exciting milestone for Twilio at this Scale. As a part of our efforts to focus on doing fewer things better, we also recently completed the divestitures Twilio's IoT and Value First businesses. The usage based nature of our communications business makes it sensitive to macro conditions.

Speaker 3

So the team continues to manage towards gross profit growth and driving leverage. Khozema will share where the team is focused on driving further efficiencies, While capitalizing on our growth opportunities for the second half of the year and beyond. In data and applications, We're continuing to focus on executing against our go to market rebuild efforts. We now have sales ramped in our most critical areas And we are optimistic that our bookings will improve towards the end of the year and that revenue growth will reaccelerate during 2024. Elena will share more about our progress here as well.

Speaker 3

In June, we previewed our vision for customer AI, which we have designed to layer predictive and generative AI capabilities Across our platform at every customer touch point. As I shared last quarter, I believe the real value unlocked for artificial intelligence We'll be pairing large language models with 1st party datasets. We believe this is where Twilio is most differentiated through our data asset Segment. Segment's customer profiles will become even more data rich with AI, accelerating our data and communications flywheel. By training large language models for customers with their data that lives inside Segment, Twilio will help customers enter the AI race multiple steps ahead of their peers.

Speaker 3

Twilio's ability to drive that level of differentiated customer value proposition has the potential to be a significant tailwind for our business. We're also excited to be building an ecosystem of partners and integrations including Google, Databricks, Frame AI and OpenAI To power some of customer AI's generative capabilities as well as AWS to power predictive AI use cases within segment. I can't wait to showcase several of the products that will advance our customer AI vision at SIGNAL on August 23, just a few weeks away. I'm proud of the team for navigating through a lot of change as we reorient the company over the last several quarters. This is a team that has executed well against our plans as evidenced by the speed in which they have adapted to the new structure of the business, driving greater efficiency And having delivered over $220,000,000 of non GAAP operating income to the 1st 2 quarters of 2023, Exceeding our financial targets and building a foundation that sets us up to continue to achieve our goals and capitalize on the tremendous opportunity ahead.

Speaker 3

I remain confident that we have the right team, the right plan and solutions to deliver meaningful value to our customers I look forward to sharing our progress today. Now I'm going to hand it over to Alayna.

Speaker 4

Thanks, Jeff. Twilio Data and Applications delivered 125 $1,000,000 of revenue in Q2, up 12% year over year with a non GAAP gross margin of 81.7%. During the quarter, we continue to execute against our plan to mature our sales organization, invest in new AI powered products and capabilities and expand our pipeline In an environment where buyers are facing increased budget scrutiny, I'm pleased with our progress to date, but we have more work ahead. Since last quarter, we've announced several exciting partnerships and new product capabilities that reflect our unique position in the market. In July, IDC ranked segment as the number one CDP by worldwide market share in 2022.

Speaker 4

We recently announced a partnership with Databricks to develop a bidirectional integration that will help segment customers unlock even more value from their data. Additionally, we're partnering with Google to bring generative AI into Flex and transform how brands personalize their customer interaction. Finally, we unveiled Customer AI, infusing generative and predictive AI capabilities into segment, Engage, Flex and Communications. Our SIGNAL conference is just 2 weeks away. We plan to showcase new innovation and an exciting roadmap built around our customer AI vision.

Speaker 4

Our software products are resonating in the market as evidenced by multiple notable customer wins in the quarter. A long standing communications customer that provides software solutions to health and wellness providers signed a deal in Q2 with Segment CDP To deliver personalized customer experiences, increase trial to pay subscription rates and drive improved patient outcomes. Follett, A leading provider of education technology will leverage our entire suite of segment products, including connections, protocols, Audiences, Journeys and Unify. We won this competitive deal because of Segment's faster time to value and the ease of use in leveraging Segment's API To connect to additional tools throughout their future as a customer of ours. Fortune Media, a multinational media company was a competitive win Due to the flexibility of segment connections and the power of our profile API, allowing Fortune Media to obtain a single view of their end users, Furthering the ability to personalize and improve the overall engagement experience.

Speaker 4

A large financial services company based in Israel Committed to a comprehensive contact center solution leveraging Flex and our conversations API for our custom built AI chatbot With seamless agent handoff, allowing them to scale while improving the customer experience. A Fortune 100 property and casualty insurance provider that we signed An 8 figure deal with in Q3 of 2022 scaled to over 15,000 agents during the quarter by leveraging new capabilities in Flex Allowing for enterprise scale. This FlexScale initiative, which was launched in limited availability in February, allows Flex to support customers scaling up to 30,000 agents concurrently in a single account. As I mentioned last quarter, we've made good progress with our transition to a dedicated sales model for Segment and Flex And we've rebuilt a specialized sales motion with highly skilled reps. Training and enablement was a key focus for us for Q2 and we delivered increased in person training sessions and Proved overall sales capacity across the board.

Speaker 4

I'm excited that for the first time in over a year, the majority of our segment sales team has been in seat for at least 9 months. We've seen early signs of traction with these efforts, including a strong increase in pipeline generation within Flex and significant improvement in segment pipeline conversion from Q1. Well, I'm encouraged by our progress and some of these early signals, we continue to navigate a challenging macro, which has led to some instances of Higher renewal contraction and lower expansion. Competitive churn has remained low and stable, but we're seeing instances of greater price sensitivity with Some of our small and mid market sized business customers. To address this, we're implementing initiatives designed to give customers, particularly small and mid sized businesses, More flexibility to start small, deploy quickly and expand to leverage more segment capabilities as our business grows.

Speaker 4

We feel good about the steps we've made to improve execution, but there's more work ahead to get our data and applications performance back to where we believe it should be. Going forward, we'll continue to focus on onboarding and ramping our teams, optimizing our marketing campaigns and driving more top of funnel activity. We'll also focus on giving our customers more accessible entry points to our products and delivering faster time to value. We believe we're laying a solid foundation for long term growth for the business I'm confident that this will lead to improve bookings toward the back end of this year. With that, I'm going to turn it over to Khozema.

Speaker 2

Thank you, Elena. Julia Communications delivered $913,000,000 in revenue in Q2, up 10% year over year With a non GAAP gross margin of 48.2%. As a team, we continue to focus on driving growth with a more streamlined cost structure And generating meaningful profits. I'm pleased with our team's ability to quickly adapt to the organizational changes we made earlier this year, Which is evidenced by the results we delivered in Q2. Once again, Twilio was named a leader in IDC's recent 2023 CPaaS Markets Gape report.

Speaker 2

Leveraging this leadership position, our go to market team has been focused on proactively driving Cross sell opportunities across our broad portfolio of communications products and we're seeing meaningful traction. As an example, last quarter we highlighted our largest email deal in Twilio history. And this quarter We signed our largest messaging deal ever with the same leading marketing automation company, bringing their total commitment to Twilio to more than $100,000,000 Additionally, a Fortune 500 Entertainment customer that has been using our messaging, account security and voice APIs recently chose Twilio To exclusively power a critical customer onboarding initiative, increasing their ongoing messaging spend with Twilio by $1,000,000 a month. We continue to see an exciting runway for efficient growth in our communications business against a $50 plus 1,000,000,000 TAM. And we believe our innovations in AI can help accelerate market share gains in the coming years.

Speaker 2

We are bringing AI ML capabilities to life in our core communications products, including the release of FraudGuard for VERIFI. In Q2, we signed an expansion deal with a leading employment company To enhance their multi channel, high touch customer relationship model via our messaging, voice and email APIs. FraudGuard was an instrumental component of this deal. We also piloted SMS pumping protection in the 2nd quarter, Which leverages AI to automatically detect and block artificially inflated SMS traffic via our messaging API. This product prevented meaningful losses on behalf of our pilot customers and as a result of the successful pilot, We've recently moved it into private beta.

Speaker 2

We also released Twilio Voice Intelligence into public beta, an AI powered capability allowing to extract data insights from their call recordings, unlocking process automation and data driven decision making at scale. A global financial services institution and a long standing programmable voice customer is one of our first major customers to adopt this product. Leveraging voice intelligence has proven to continually increase the quality of their customer service and ensure robust compliance. We're also continuing to focus on our sales assisted product led growth motion. And in Q2, we made great strides in returning to our self-service roots.

Speaker 2

During the quarter, we rolled out several updates to drive greater pricing transparency. We also implemented a decentralized solutions engineering team, Remove layers of leadership and specialist teams and arranged our international go to market team to be centrally managed. We are thoughtfully deploying our go to market resources to spend time on our largest existing and prospective customers to drive greater efficiencies and customer wins In the coming quarters. We are encouraged by our growth trajectory in Q2, but still see a choppy macro, which also means we have less visibility in this environment. We're seeing volume growth across a number of our verticals, but we are still experiencing volume weakness in a few verticals including social and messaging and crypto.

Speaker 2

On balance, we remain hopeful about Q3 and beyond, and we believe we have a good setup to continue to drive operating leverage And growth moving forward with a much more efficient go to market model. It is worth noting that we have made a commitment to our carrier partners To block unregistered U. S. Bound 10 DLC SMS and MMS traffic as of August 31.

Speaker 5

We expect this will have

Speaker 2

a modest negative impact on revenue growth in Q3 of up to 100 basis points and it could yield a potential headwind of 200 basis points to 300 basis points Growth in Q4. While the majority of our traffic is already registered, we are actively working with customers who are not yet compliant To get their traffic registered in advance of the deadline. I'm excited by the progress we made during the first half of the year as the team Successfully navigated the operational and organizational changes we implemented together with the challenging external environment. We're executing well and as volume stabilization continues, we believe we're in a strong position to leverage our scale, Large customer base and leading set of communications products to continue to win new business everywhere we can, While driving further efficiencies, we are confident revenue growth will reaccelerate over time. With that, I'll turn it over to Aidan to discuss the financials.

Speaker 4

Thank you, Khazema. We continue to execute on our plans to drive greater efficiencies across our business and establish an accelerated path to profitability. We made solid progress against our targets, delivering record quarterly non GAAP income from operations in Q2 And continuing on our path towards GAAP profitability. While we have more to accomplish, I'm pleased with the traction we've achieved to date and the results our team delivered in the quarter. 2nd quarter revenue was $1,038,000,000 up 10% year over year on a reported and organic basis.

Speaker 4

Communications revenue was $913,000,000 up 10% year over year. Data and applications revenue was $125,000,000 up 12% And IoT and Value First revenue was $25,000,000 and is included in our communications revenue for Q2. Adjusting for these recent divestitures, total Q2 revenue would have been $1,013,000,000 up 11% year over year. While the market remains dynamic, we saw continued stabilization of volumes across our usage based products throughout the quarter, which helped drive our revenue beat. As we referenced during our Q1 earnings call, our Q2 growth rate was negatively impacted by headwinds from customers in the crypto industry.

Speaker 4

Total Q2 organic revenue growth excluding crypto customers was 14% year over year. We anticipate a similar headwind in Q3 after which the impacts will start to moderate. Our Q2 dollar based net expansion rate was 103%. This is directly correlated to the overall growth trends we're experiencing across the business. Dollar based net expansion rates for the Communications and Data and Application business units were 103% 99%, respectively.

Speaker 4

Q2 non GAAP gross profit grew 13% year over year, representing a non GAAP gross margin of 52.2%. This is up 130 basis points year over year and down 10 basis points quarter over quarter, driven predominantly by product mix. Non GAAP gross margins for our Communications and Data and Applications businesses were 48.2% And 81.7 percent respectively. Q2 non GAAP income from operations was 120,000,000 representing a non GAAP operating margin of 11.6%. This is significantly ahead of expectations, primarily due to the revenue to maintain cost discipline across the business.

Speaker 4

Q2 GAAP loss from operations was $142,000,000 Which includes expenses associated with the February restructuring action, a loss associated with the Value First divestiture And a real estate impairment charge, all totaling $55,000,000 Stock based compensation as a percentage of revenue was 14.7% In Q2, excluding $300,000 of restructuring costs, down 120 basis points quarter over quarter. Lastly, for Q2, we generated $72,000,000 in free cash flow and this is an area of focus for us as we drive greater profitability in the business. We're delivering against the plans we outlined in February and the progress that we demonstrated in Q2 shows that The changes we made in the business are yielding the intended efficiency gains and profitability results. We've also continued to execute against our $1,000,000,000 share repurchase program that we commenced in February. We completed the first 500,000,000 repurchases in early July ahead of our original 6 months target.

Speaker 4

We intend to continue to make progress against the balance of our share repurchase authorization moving forward. While we feel confident about the strength of our competitive positioning and market opportunity, we're continuing to plan and run the business prudently Given the dynamic external environment. For Q3 guidance, we're initiating a revenue target of $980,000,000 to 990,000,000 Representing year over year reported revenue growth of 0% to 1% and 3% to 4% on an organic basis. The organic growth rate excludes our Value First and IoT businesses, both of which were recently divested. Also as mentioned above, These growth rates reflect a few 100 basis point headwind from crypto customers as well as the potential 100 basis point headwind associated with the 10 DLP registration Changes that Cosima highlighted.

Speaker 4

We expect Q3 non GAAP income from operations of $75,000,000 to $85,000,000 This takes into account approximately $10,000,000 of expenses for our SIGNAL conference, which will take place this month. Given our strong first half performance, we're raising our full year non GAAP income from operations guidance to $350,000,000 to $400,000,000 We made meaningful progress over the first half of the year, but there's still more work to be done. I'm confident that we're taking the right set of actions that will enable us to continue to drive focused execution and deliver increased value to our shareholders in the quarters to come. With that, I'll hand it back to Jeff for some final remarks before we transition to Q and A.

Speaker 3

Thank you, Aidan and team. I just wanted to close by reminding folks, if you haven't already heard enough Through our prepared remarks that indeed our annual Signal Conference is coming up on August 23. And customer AI, which we preceed in June, It's going to be taking center stage and I'm really excited to be sharing the product details behind customer AI at SIGNAL. And customer AI, the set of capabilities that it brings will help bring together our leading communications platform and our leading customer data platform With AI in the middle. So I can't wait to see what customers build on top of customer AI.

Speaker 3

And with that, why don't we turn it over to your questions?

Operator

Thank you, sir. We'll go first to Meta Marshall, Morgan Stanley.

Speaker 6

Great. Thanks. And Jeff, you may have just alluded to this that we'll hear more at SIGNAL. But I just wanted to get a sense of how Kind of the increase in AI visibility or capability has changed the roadmap for Twilio And just where are customers and the knowledge of how they want to actually approach some of these AI projects? Are they to the point where they know what they want to implement?

Speaker 6

Or is Still kind of an education phase. Thanks.

Speaker 3

Yes. Thanks for the question, Meta. I talked to a lot of customers. So what I define Is that customers are still very much in a learning mode and planning for the future mode, but not necessarily in a deploying things actively mode. And so I think it's a really constructive conversation.

Speaker 3

When I look at customer AI and what we can do with artificial intelligence, I think this is the glue that brings together Segment and Twilio Communications into this one customer engagement platform that we've been talking about for quite a while. And I think AI is arriving even sooner than we thought in terms of generative AI to be able to bring a lot of those benefits to the table. We're already seeing the benefit of a bunch of AI, whether it's Verify with our new FraudGuard product, in some of our compliance and authentication products. But I think this is like This isn't even 1st inning. This is like still doing warm up pitches in terms of the AI game here.

Speaker 3

So we're really excited though to bring some new products to market as well as to really speak to much more detail about the vision for customer AI At SIGNAL, but I think this is a massive accelerant in our ability to deliver value between data and communications and can become a great tailwinds for company.

Speaker 6

Great. Thanks.

Operator

Next question is Taylor McGinnis.

Speaker 4

Yes. Hi. Thanks so much for taking my question. Maybe just on the data and app part of the story. So If I'm trying to bridge, the gross margins were down 250 basis points year over year and then you reported an NRR of 99% in that segment.

Speaker 4

I know you talked about some greater renewal contraction and some price sensitivity. But just as we look ahead, like do you see, I guess, more risk to the gross margins in that segment? And then just in terms of the top line, when we think about the 12% growth you just reported, that's still well above like the 99% NRR. So any direction or color you can just give in terms of how you see that business progressing throughout the year and if there could be a trough in the level of growth that we could see? Why don't I start, Taylor?

Speaker 4

This is Aidan. I'll go through gross margins and then I'll hand it over to Leila Talk about DB and E and revenue growth. So, you're right that TD and A margins were down year over year. That's actually primarily driven by Accounting, in particular accounting for capitalized software. So the initial capitalized software balance following the acquisition of Segment was written off, And that's typical post an acquisition.

Speaker 4

That boosted the gross margins in the 2021 2022 period. And as Product development and innovation has been ongoing post acquisition. That balance is building back up to a more normalized level. So now that we're kind of 3 years Our approaching 3 years post acquisition that should start to normalize, but that's really what's driving the year over year decline. The business is still obviously very high margins at 80 2%.

Speaker 4

And there are always the pluses and minuses period to period, but we feel pretty good about that gross margin rate. We don't see it moving materially in the future. So So why don't I hand it over to Elena with us? Sure. I'll hit a couple of comments on growth.

Speaker 4

Our current growth is really reflective of bookings that have happened in prior And we've talked over the last couple of quarters about a deceleration in booking performance, Which is now coming to bear in the revenue line, which we expect to inflect and turn back off as we see bookings improve this year. So We've talked a lot, I think historically about the work that we're doing to improve that bookings trajectory, everything from building out, Hiring, enabling and preparing that team to go out and win in the market, and also, working to make sure that we're breaking During a top economic climate. So, a couple of other things impacting growth are turning to traction numbers. They've been impacting us A little more than we'd like in the near term. We have some segment customers that are rightsizing their spend levels, Mostly as their own businesses have contracted over time.

Speaker 4

We see some instances of sensitivity, particularly in the SMB space, Where those customers at times have had some viability issues. And so all of that taken together, so some good traction And our bookings performance and some increased customer contraction in churn, though not competitive, but It's sort of a signal of what's happening in the market. Our growth has been sort of moderated here in the near term. I want to reiterate that we do expect bookings to continue to improve as that team comes online and we break through the top macro And that revenue performance will follow into next year. Great.

Speaker 4

Thanks so much and congrats on the quarter.

Operator

Your next question is Mark Murphy, JPMorgan.

Speaker 7

Yes. Thank you very much. So, because just given that the messaging business is usage based and therefore it is macro sensitive as you noted, can you just comment on the Stability that you're seeing there, specifically, I'm just wondering, should we read that as stabilizing around 10% year over year growth or Stabilizing around $900,000,000 in quarterly revenue or do you mean something else there? And then Can you just comment on whether that trending continued to improve at all in June July?

Speaker 2

Yes. Hey, Mark. Good question. So maybe just start off with kind of the first part. So what we see overall is that volumes Have stabilized and we're not trying to imply really either of the things that you said either that we're going to turn in kind of regular 10% revenue growth Quarter is nor that we're going to see the business kind of flat line.

Speaker 2

I'd say it's probably kind of closer to being in the middle of that somewhere. While we've seen volumes stabilize, we haven't necessarily seen them inflect up, but obviously we're encouraged by the quarter that we just Put up in Q2. I'd say across the board, we've generally seen that most of the sectors in which we operate have seen pretty good Revenue and volume growth. There have been a couple of downs, which we called out in the prepared remarks. Notably, we have Seeing some contracting activity in messaging and social meeting social messaging.

Speaker 2

And I think that had it not been for some of those items like we would have seen obviously pretty decent growth in the quarter beyond where we ended up landing. Think we also called out some of the 10 DLC dynamics that are coming up in Q3, Q4. We think that's kind of a good thing obviously for the industry Over the long term, but that's kind of the way that I would characterize it is that volumes stabilized. We're not seeing them inflect quite up yet. But based on our execution against sales targets, we're very encouraged about how that translates into financial results for Nick.

Speaker 7

And Khozema, just super quick follow-up because you mentioned it. Does that headwind from blocking unregistered traffic continue at 200 basis points to 300 basis points Into 2024, I'm just trying to understand. It seems like it widens from Q3 to Q4 and then does it presumably kind of moderate a little bit in 2024?

Speaker 2

Yes. Another good question, Mark. So the way to think about it is, is that basically the way that we have made the agreement with the carriers is that eightthirty one is the deadline. And so you're just not going to see the impact in Q3 in the same way that you would in Q4. That's kind of the discrepancy between 100 bps in quarter versus 200 to 300 bps in the next quarter.

Speaker 2

I think the other dynamic that you want to think about is that the vast majority of Traffic is already registered and compliant. And so I think as we get into 2024, like we're not really talking about the impacts, but we think it'll kind of more or less It's normalized.

Speaker 8

Thank you.

Operator

The next question comes from Michael Turrin, Wells Fargo Securities.

Speaker 7

Hey, great. Thanks. I appreciate

Speaker 8

you taking the question. If we just look at The revenue upside you delivered in Q2, it's more pronounced than we've seen in a number of quarters. I'm wondering, is most of that just tied to the stabilization mature you're making on the usage side and results that are coming in ahead of what you're expecting? And then just if there's any commentary you can add around if those usage trends at all Changed as the quarter progressed, meaning did we start at a lower point and potentially build back up? Or is that stabilization holding somewhat consistent?

Speaker 8

I think that color is just useful as we all just try to parse through what's ahead here. Thanks.

Speaker 4

Thanks, Michael. So to answer your first question in terms of the larger piece, so we came in about 5% ahead of the midpoint of the guidance range. That is, as you say, it's largely as a result of the volume stabilization that we noted. So we saw that we called it out in May. We saw that Volume stabilization continued through the rest of the quarter and that's really what drove the outperformance.

Speaker 4

And we're pretty encouraged by that. I mean the market is still very dynamic. It's So usage based business for the vast majority of our business. So we are susceptible to changes and we'll continue to plan prudently as a result. In terms of the volume trends, so what I would say is relatively constant throughout the Q2, but A different trend that we saw kind of coming out of 2022 and in the early stages of Q1.

Speaker 4

And so we felt pretty encouraged by the fact that it was relatively constant across the months in the second quarter.

Speaker 8

That's helpful. Thank you.

Operator

The next question comes from Ryan Coons, Needham and Company.

Speaker 2

Thanks for the question. I have one for Khozema on the communications side. As you think about kind of the journey into more and more automation, can you give us an idea kind Where you are today in terms of automation, where you expect to be, say, a year from now in terms of Deal screening, onboarding, delivery execution, just any color on that journey

Speaker 3

would be helpful. Thank you. Yes. Hey, Ryan, I just

Speaker 2

want to clarify one part of Do you mean automation visavis the kind of description that we gave back to kind of our product led growth kind of self serve roots?

Speaker 3

Yes, how do you? Okay.

Speaker 2

Yes. So I would say, for the most part, like we obviously took a number of like really Significant headcount actions right in the latter part of 2022 and then the beginning part of 2023. And so The way that we think about the business going forward is that we continue to see like a lot of growth potential for the business in the future and we want Basically, kind of stabilize our costs. And I think the way to do that is largely going to be through automation. Jeff talked about AI and the promise of a lot of the things that We do.

Speaker 2

From a customer perspective, I also think there's a lot of those things that we could do internal to the company as well in terms of aiding with some of that automation. There are There are a number of areas that we're starting to explore, in currently and I think that that could be really interesting. For the most part, I would say that we've Seeing really good profit generation in terms of the business. I think we continue to see additional profit generation As we move forward, and I think in large part that's going to come through some combination of additional growth and then just being able to hold the cost line and probably generate Productivity in the cost line and the bulk of that will largely come through automotive or automation efforts. Sure.

Speaker 2

That's helpful. Just a quick clarification. Would you say maybe you're halfway there in terms of what you want to see operationally or for the most part you're there? I wouldn't say we're there. I mean, I'd be a little bit careful about qualifying exactly where we are on the journey.

Speaker 2

Personally, I mean, I do see a lot more For us to drive volume leverage. And so I think we'll just kind of play through and see where we go into next year.

Speaker 3

Sure. Thanks so much.

Operator

Kashuram Dan, Goldman Sachs has the next question.

Speaker 5

Hi, thank you very much. Curious to get your take on how you characterize the outlook For potentially accelerating bookings growth and how that might translate to better revenue growth rate for 2024. Can you talk about the demand signals that you're seeing at the front end of the pipeline from an external perspective and some of the things that you're You've seen better from an internal perspective, of course, with the realignment of the organization, you have better footing with your internal What are the things that encourage you as you see the demand signals outside in conjunction with some of the operational improvements that you've made internally It make you feel better about second half looking and potentially better growth in the years ahead. Thank you so much.

Speaker 4

Kash, just so we're clear, was that a question for one of the business units in particular?

Speaker 5

You could take it for both units or in aggregate. Thank you, Elena. Appreciate it.

Speaker 4

Okay, great. Yes, sure. Why don't I hand it to Jose and Elena, they can cover their respective business

Speaker 2

Yes. I would say, Kash, like the way that kind of I answered the prior question, like we've done a lot obviously to make The sales motion a lot more efficient in the communications part of the business. We obviously took some material headcount actions and I think on balance like we're seeing really, really Profitability, which is what we committed to investors. And I think we're at least encouraged by some of the growth that we've seen, particularly in Q2. I think the signal in Particular that we're watching inside the company to kind of more precisely answer your question is that we are hitting our sales targets.

Speaker 2

Sales targets obviously take some time to show up into revenue. Based on our ability to continue hitting sales targets And based on what we've seen, I'm certainly more encouraged that that translates into financial results into 2024. I think it ends up being a pretty good setup. As Aidan alluded to, like it's obviously a kind of a choppy environment and this being kind of the usage side of the business like we're going to plan prudently in terms of that. Certainly not going to add any cost back into the business, but we feel pretty good about the setup based on The way that we've hit sales targets, the way that we've stabilized the team, the way that we have generated profit through a pretty tough external environment.

Speaker 2

And I'd say that's pretty good setup going forward. With that, why don't I turn it over to Lena to talk about TDA?

Speaker 4

Sure. Let me hit a couple of high points and then if there's your question had a lot of dimension So if we missed anything, please do feel free to circle back. But we're really focused on the data and application side of the business, on the It's the things we can control. We're focused on making sure that we've got the right folks in seat, the right process, the right methodology and the right enablement. And I feel really good about our progress there.

Speaker 4

We are starting to see some improvement in the pipeline as well. Top of Fennel continues to be really So we think there's a robust demand environment out there. We are starting to see some improvement in things like conversion through the pipe. And so Lots of work left to do. It's not exactly where we'd like it.

Speaker 4

But again, I've talked in historical quarters about this being in a bit of a rebuild. We feel good about our progress against that rebuild mode. And again, we'll see bookings continue to improve this year, which will translate into revenue next year in 2024. So I think there's reason to be optimistic Here, but there's also a long road ahead as we continue to work toward that improvement in net new business acquisition. At the same time, Working on making sure we're managing through churning contraction and that we've got a lot of reasons for customers to embrace that, deploy quickly and stay a good long time.

Speaker 4

And so we're doubling down on our efforts there as well.

Speaker 5

Got it. Would you consider hiring to meet the what could be improving demand environment as you go 24.

Speaker 4

Personally, in TD and A, I'll let Khozema talk about how he feels about that question from a comps perspective. We have just gotten to the point where our reps are largely onboarded and ramped. I really want to see those productivity metrics Getting up to where we'd like them before we layer on the next degree of headcount as teams expand to new markets and things like that.

Speaker 2

Yes. And I basically agree with Elena on the communication side. I think we're in a spot where we like the way that we've sized the team, the efficiencies that we've gotten out of it. As I alluded to earlier, I still think there's additional volume leverage to be gained there. If we saw really accelerated market opportunity, it's not off the table, but it's not

Speaker 3

on the plan. Thank you so much.

Operator

Your next question is Nick Altman, Scotiabank.

Speaker 9

Awesome. Thanks guys. Maybe one for Jeff or Elena. You guys have called out this $100,000,000 customer, which is a pretty monumental deal. And A big theme this year is sort of around this notion of vendor consolidation.

Speaker 9

And historically, some of your larger customers had maybe multi source CPaaS vendors. And so I wanted to ask 2 parts around this specific deal. 1, was this sort of a deal where the customer Sort of consolidated CPaaS relationships and kind of went all in on Twilio. And then maybe as a second part, is this sort of a strategy that you're leaning into this year? And could you just provide maybe any color around what's the sort of level of customer appetite for these sort of consolidation deals?

Speaker 9

I think that'd be really interesting. Thanks.

Speaker 2

Yes. Hey, Nick, this is Khozema. It was actually a communications customer. So I'll answer Your question. I think the short answer to the first question is, yes.

Speaker 2

It was an opportunity for us To help one of our really important customers consolidate their spend all on to Twilio across a number of channels. I think what was Particularly a differentiating feature of this deal was our ability to kind of optimize traffic patterns. Like I think that's a really important aspect of the way that some of these like really sophisticated customers want to do business. They want to make sure that the right signals are reaching They're customers at the right times and that effectively ends up meaning like a kind of prioritization and queuing process That we're really good at. I think in terms of strategy going forward, we're certainly looking at any opportunity where we have the ability to Consolidate spend and constantly take share.

Speaker 2

I think we do have a lot of those opportunities, across the board, frankly, whether it's With different customer segments or even internationally. And so I think that is going to be a part of the strategy that you'll see from us going forward. And let me add one other point actually, but not at the risk of price. Like I think that's one thing that we've done a pretty good job of holding firm is Making sure that we don't take price downs, making sure that we show discipline in terms of gross profit so that Always hurdling, so that we generate op profit. I think you can kind of see that in our gross margins, and I think you'd find that we're generally priced higher than the competition.

Speaker 3

Great. Thanks guys. Thanks Nick.

Operator

We will now hear from Derrick Wood, TD Cowen.

Speaker 1

Great. Thanks. Khazam, I'll stay with you and maybe kind of on that last topic around gross margins. And I'm just wondering if Kind of within your restructuring efforts, if you've made any notable changes around kind of incentives for sales teams or other business leaders to focus on driving gross margins? And I guess whether you have or not, are there Gross margins and I guess whether you have or not, are there levers you can lean on to help drive more improvements in gross margins in the near to medium term?

Speaker 2

Yes. Hey, Derek. The way that we've reoriented our sales to pay on a gross profit basis. Now there's one caveat to that. We're only going to take a gross profit deal if we can see that it hurdles And generates our profit.

Speaker 2

So we're clearly not going to take margin that ends up resulting ultimately in a bottom line loss. And so That is an important change that we made in the compensation plan for our reps. I wouldn't say necessarily that we're biasing the business, especially in the communication side to necessarily generate higher gross margin. Like I think we do have opportunities in terms of Cross sell, for example, I mean, I think there's a lot that we can do, for example, in terms of selling more voice or email as just as examples into messaging customers. We'll continue with that as part of the strategy.

Speaker 2

I think the idea though really is ensuring that the unit economics of every one of these customers is solid, That those of the business overall are solid. And as long as we can go and efficiently get incremental gross profit dollars, we'll do that.

Speaker 8

Great. Thank you.

Speaker 2

Thanks, sir.

Operator

Up next is Matt Stottler, William Blair.

Speaker 2

Hey, guys. This is Alex on for Matt. Thanks for taking my questions. One for me on the international strategy. With the new SaaS First strategy, what if any implications are there for the international business?

Speaker 2

And how do you expect international revenue to trend as Percentage of total revenue going forward?

Speaker 3

Can you explain what

Speaker 2

you mean by SaaS first?

Speaker 7

Yes, just the software the split of

Speaker 2

the business and the software focused strategy.

Speaker 4

So I'll take a crack at this one and then if anyone else wants to jump in, they can. It's Elena. I'll speak first to our data and applications business. We operate in a number of international markets. We haven't seen market change in the balance between U.

Speaker 4

S. Versus International bookings growth, for example. And we're committed to the markets that we serve. We're not Looking to open up into new markets in the very near term. We think there's an enormous TAM right here in our core market.

Speaker 4

And the good news is that there's demand across all of our international markets. We see Improvement in performance across sort of each of those theaters. And so And we're able to service those markets as well from

Speaker 3

a software

Speaker 4

perspective in terms of sort of everything from Functionality capability to our standards on privacy and data protection and things like that. I don't know, Ko or anyone else, if you have anything else to add.

Speaker 2

I'll just add on the communication side. I mean, I think we continue to see a lot of opportunity internationally. I mean, that's Historically been, a set of markets that we've been under penetrated in from a communications perspective. And so there's a lot of additional growth. And I think what We found is that a lot of the customers in those markets are actually not being serviced by anybody.

Speaker 2

And so I think there's a lot of open field running there. In addition to that, as you may remember from our Investor Day last year, the unit economics are actually quite good as well internationally. And so we think there's a lot of Gross profit dollars out there to go and consume. And so I think similar to Elena, like it's not like we have to open up necessarily in 10 more markets. We want to be very Cost efficient about the way that we do it, but we do see a lot of opportunity out there and we're going to continue winning it.

Speaker 4

Maybe I'll just add one more thing. This is Aidan. If you're asking because you've seen the international percent of revenue come down slightly quarter over quarter, that's just really largely a function of the crypto You know, dynamics that we've been talking about a lot of that, volume concentrated internationally. And so I wouldn't read too much into it if that's where you were

Speaker 3

going. Got it. Perfect. Thanks guys. That's helpful.

Operator

Next question is Alex Zukin, Wolfe Research.

Speaker 10

Hey, guys. Thanks for taking the question. I guess maybe, Jeff or Elena for you. You called out reacceleration in revenue for next year. Is that attributable to First of all, is that aspirational?

Speaker 10

Is that a comment on a particular quarter that you see that happening next year? And if we look at the data and apps business, like do you see is that business going to trough in Q4 given the bookings commentary From before and you see that reaccelerating in the early part of next year. And how much, if any, would you expect kind of AI Driven revenue or products or initiatives to kind of contribute to that next year? I have a quick follow-up.

Speaker 4

So let me take a let me take a the first point here and then if Jeff wants to add anything on the AI side, Absolutely that as well. So we're not committing to specific timelines on the reacceleration in terms of When in 2024 it happens, but what I will say and growth is always aspirational. We definitely are looking forward to that happening. But I'll say that it will be reflective of bookings improvements that we're going to see this year. And that is a big It's a function of the rebuild that we've been undergoing and the addition of our ramped wraps and the So coming up the curve with those individuals that are newly in seat.

Speaker 4

And so the bookings are happening now, happening Towards the back half of this year as well that will translate in 2024. So hope that's clear, but we're not doing a quarter by quarter review.

Operator

And then I can speak

Speaker 3

to the AI part of your question. Look Segment is the centerpiece of our customer AI strategy, Because that is where the proprietary data sets of our customers live. It is the sum of what they know about their customer And therefore, how they're going to unlock the value in that data to go personalized by every touch point they have with their customers. And now with generative AI, you can do it so much more efficient So much more in an individualized basis that it opens up tremendous new opportunities. Now that said, I think that AI As a monetization like vector for the company, I think it follows, right?

Speaker 3

I think that's probably what you're seeing in most companies out there, which is AI is In its earliest stages now, buyers are interested in hearing what we have to say. They are interested in the products we're bringing to market. But obviously, those products are brand new because generative AI really just started hitting a stride of utility in the last 6 months, right. And so no one's got mature products yet really to speak of. And so that speaks to where the whole market is In this journey, but from my conversations that I invite with customers, they are liking our vision.

Speaker 3

And I think that can turn into sales of segments as companies start to get their data ready For what the coming AI future has for them. And that will be a key part of our selling value proposition going forward.

Speaker 10

Got it. Got it. And then, Kim, maybe for you, just on free cash flow, you guys are doing a great job on the operating income front, you raised that number for the year. How should we think about that op income to free cash flow conversion both this year, but realizing this year has some one time Maybe even more so next year, that will be super helpful.

Speaker 4

Yes, thanks Alex. It's Aidan. So as it relates Free cash flow. So maybe just to talk a little bit about the performance in the quarter. So we generated $72,000,000 in the quarter.

Speaker 4

That number actually included $30,000,000 of restructuring payments. So adjusting for those non recurring payments, we generated about $100,000,000 And that's a record free cash flow quarter for us. So really kind of posting those results. And it's really a function of like when you look at the drivers, It's really the higher profitability of both the non GAAP line as well as lower restructuring costs. As you think about going forward, so we're not going to put out Any new kind of framework in terms of how to think about it?

Speaker 4

I will just say there's always some level of timing and variability in cash flow. So I wouldn't The fact that performance is necessarily linear, but it's a huge focus for us. We'll continue to look for avenues to both drive efficiency out from a cost As well as growth free cash flow profile of the business over time.

Speaker 10

Perfect. Thank you. I don't know why it's good, Kim. Thanks, Katie.

Speaker 4

No worries, Alex.

Operator

The next question is Philip Leithead, Mizuho.

Speaker 11

Hi, there. This is actually Siti Panigrai from Mizuho. My question is Elena, when you look at data and application, you have kind of products scattered to different kind of LOVs, you have Flex more on customer support and engage more on marketing. Are you seeing any demand specifically in a particular segment? Are you more Optimistic about any particular segment.

Speaker 11

And as you're executing on your go to market, how are you rebuilding your sales folks? Is it more one Same sales guys targeting all these products or are you building different verticals? Any color would be helpful.

Speaker 4

Sure. So we when I let me just start with like a little bit of the history. We started talking, I think 4, 5 quarters ago about The need to sort of rebuild the sales team in a specialized manner. And so that meant having individuals that were very, very familiar With each customer and who they are and what they need from us, what they expect in the software offerings, how they think, how they buy. And so we have a team specific to Segment in the CDP space.

Speaker 4

That organization focuses predominantly on So the data buyer, which is oftentimes part of a product organization in a consumer space And the marketer. And that's really sort of part and parcel to the segment buyer is. In Flex, we're talking about a contact center buyer. But more and more we're Excited about how these two themes come together in a customer experience umbrella, and how Segment is really positioned So well to operate within the context of Flex, to provide, for example, a world where an agent has access to the latest and greatest customer information as they're doing their jobs. So while we have teams that are focused on those specific buyers, we think underneath the hood where Everything comes together in front of that end user.

Speaker 4

They're both really, really useful. And so we spent time over the last couple of quarters Making sure that they're interoperable and connected, and we're starting to see that pay off in terms of customer interest and demand in that capability. I think you started off a little bit with what that rebuild has looked like. And so again, we started this a number of quarters ago, Essentially going out to the market and rehiring from these specialized sales organizations that we just, for example, in segment Across the threshold where the majority of those reps are now what we consider ramp sales equivalents and are sort of beginning to operate at Full quota, full quota potential. So again, this is really the key to making sure that we reaccelerate bookings as we'll See here in the back half of the year and again that will translate into revenue next year.

Speaker 11

Thanks for the color.

Operator

Our final question today comes from Rishi Jaluria, RBC Capital Markets.

Speaker 7

Wonderful. Thanks so much for squeezing me in. I wanted to go back to the topic of AI and your opportunity there. Maybe can you drill a little bit into how you feel you're more versus your peers to really capitalize on the AI opportunity, both when it comes to kind of the pure play Communications Providers as well as others within kind of the broader CDP landscape when it comes to segment. Thanks.

Speaker 3

Look, I just think the combination of communications, workloads and the data Asset of the CDP is the killer combination, right. When I think about communications alone, Right. Communications needs to get smarter. Most of our customers do not want to just send out more communication. They want to send more effective communications.

Speaker 3

And so as we move the company from a company that sends communications to one that sends more effective communications that requires data And that requires personalization and understanding of who the recipient of all those messages are. Now you go look at segment And Segment is the leading CDP in the market for IDC. It has amazing real time technical capabilities. It has ETL, reverse ETL profile capabilities. It is really the compostable CDP, every part of that compostability He's right there in the segment product.

Speaker 3

And so we can address a great many parts of that market, while customers are building up They're data assets that are going to power AI. And so we're bringing together these two parts of the company in a way that is Ordinarily differentiated. I mean, I don't see any other communications company with a CDP. And I think to go forward to build value as a company, communications Has to have data and it has to be unlocking better communications, not just more communication. And then the flip side in the CDP, we have the most advanced CDP in the market.

Speaker 3

And so I think on both sides, we have a very differentiated product. And then you bring them together and nobody has that capability.

Speaker 10

All right. Wonderful. Thank you so much.

Operator

And everyone that does conclude today's Twilio earnings call. We would like to thank you all for your participation. You may now disconnect.

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Earnings Conference Call
Twilio Q2 2023
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